Kristina Peterson: Summers, DeLong Push for More Government Spending
A temporary boost of government spending can help spur an economic recovery when interest rates are near zero, a former top economic adviser to President Barack Obama argued in a paper released Thursday at a Brookings Institution conference. The view advocated by Lawrence Summers, Obama’s first National Economic Council director and now a Harvard University professor, and University of California at Berkeley economics professor J. Bradford DeLong in Thursday’s paper isn’t likely to be welcomed by those pushing to immediately slash the federal budget deficit. Earlier this week House Budget Committee Chairman Paul Ryan (R., Wis.) introduced a budget plan he said would spend $5.3 trillion less over 10 years than the president has proposed, narrowing the budget deficit by $3.3 trillion over the decade. That’s exactly the kind of economic prescription that Summers and DeLong caution against. Imposing an austere budget on an economy still struggling to recover from a financial crisis could be “self-defeating” in both the short term and the long run, the pair said.
Instead, they advocate a temporary spurt of government spending when interest rates are near zero, since it is so cheap for the government to borrow money and the central bank has little left in its arsenal to spur growth. The Federal Reserve’s most recent actions may argue against that, since the central bank has taken many other steps since it lowered its key short-term rate to near zero, including buying bonds and providing longer-term guidance on interest rates.
Summers and DeLong emphasize that the fiscal stimulus is only effective when interest rates are super low and in a weak economy, when the spending is needed to soften lingering effects from a recent financial crisis. “While the conventional wisdom rejecting discretionary fiscal policy is appropriate in normal times,” in situations resembling the current U.S. economy, additional government spending “will ease rather than exacerbate the government’s long-run budget constraint,” Summers and DeLong wrote. In weak economies struggling to recover from a financial crisis, the government can generate more growth from each dollar of spending when interest rates are very low, because the Fed is unlikely to raise rates to snuff out inflation, the paper argued. The fiscal stimulus may also be more effective than in normal times because it is helping to mitigate the effects of a recent recession, which could otherwise hamper the economy’s ability to return to its full potential.
It’s important that the stimulus actually boost spending — not just increase the deficit — for the economy to reap a benefit, Summers and DeLong stress, just before launching a brief defense of the often-criticized fiscal stimulus package passed by Congress in 2009 when Summers worked in the Obama White House. The paper cites a string of economists who suggest “that a very substantial fraction of the fiscal stimulus enacted in the 2009 Recovery Act translated rapidly into increased spending.” Summers and DeLong caution that their paper isn’t an argument against putting the country on a long-term sustainable fiscal path. But they argue that for the current U.S. economic condition, and other countries mulling severe budget cuts, a fresh boost of spending may be more effective right now.
