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Larry Summers Call for Bigger Deficits in the Short Run as Part of the Long-Run Deficit Reduction Deal


Time is of the essence: The truth is that the expected impact of the deal over a 10-year period will not be its most important aspect except in the context of the current media cycle.... Agreements reached now are subject to revision, potentially radical revision following next year’s election. Businesses are basing their investment decisions on the size of their current order books, not their guesses of fiscal policy in 2015. Consumers are deciding whether or not to spend based on how confident they are that they can hold on to their jobs.

Here is what is not getting its due attention. Decisions about spending and taxing over the next year or two will have a significant impact on job creation over the next year.... Suppose any proposed deal could... [add] an extra 1 per cent to gross domestic product growth over the next year.... Assume the impact falls from 1 per cent to 0 per cent over the course of a decade. The consequence would be an increment to GDP of 0.5 per cent or about $1,000bn over the period. That would represent close to 4m job years. And it would reduce deficits by about $400bn....

Is there scope for adding fiscal measures that would contribute 1 per cent of GDP or more over the next year and a half? Absolutely.... [Expansionary] fiscal policies have larger than normal effects... continuing payroll tax cuts, maintaining support for unemployed workers, and accelerating infrastructure maintenance could add closer to 2 per cent [to] GDP growth over the next year and a half.

Usually the media and Washington take too short a view. Now is the rare time when all need to remember that you only get to the long run through the short run...