Larry Summers, the former treasury secretary and economic adviser to President Barack Obama, said the Republican tax plan that’s now being negotiated in a House and Senate conference won’t help a U.S. economy that’s still running on a short-lived “sugar high.”
Government spending is too low compared with commercial output to help U.S. workers to be more productive, he said in a Dec. 11 op-ed for the Washington Post, echoing remarks from earlier this year.
In January, he had said market gains were unsustainable as the Dow Jones Industrial Average crossed the 20,000 mark. Since then, the stock benchmark his risen 22 percent to close today at 24,386.03.
The market's rise to record levels has been attributed to the GOP plan to cut the corporate tax rate to 20 percent from 35 percent, among other reductions. After the House and Senate agree on a final tax bill, it will be sent to President Donald Trump to be signed into law as early as this month.
But Summers doesn't see the plan as helpful to workers or the federal government.
“There will be no meaningful and sustained growth in workers’ take-home pay without successful measures both to raise productivity growth and to achieve greater equality. Only in this way can we achieve healthy growth,” he said. “The tax-cut legislation now in conference committee on Capitol Hill exacerbates every important problem it claims to address, most importantly by leaving the federal government with an entirely inadequate revenue base.”
He cited findings from the bipartisan Simpson-Bowles commission that said the federal government needed a revenue base equal to 21 percent of gross domestic product, a measure of total U.S. economic output. The GOP plan only adds up to 17 percent of GDP, or a difference of $1 trillion.
“This will further starve already inadequate levels of public investment in infrastructure, human capital and science,” he said. “It will likely mean further cuts in safety-net programs and cause more people to fall behind. And because it will also mean higher deficits and capital costs, it will likely crowd out as much private investment as it stimulates.”
Summers, one of the principle architects of Obama’s economic recovery plan after the financial crisis, took home $5.2 million from D.E. Shaw, a hedge fund in which he was a managing director, and $2.7 million in speaking fees from several financial companies that received TARP government bailouts, the Washington Post reported in 2009.
Summers said U.S. economic growth doesn’t appear to be sustainable because of pockets of weakness.
“It is hard to imagine that, with 4.1 percent unemployment, the economy can continue creating anything like 200,000 jobs a month, given that normal growth in the labor force is about 60,000 people,” he said. “From the demand side, this year’s growth was driven in significant part by a more than $6 trillion increase in household wealth from the stock market rally. Even if the market holds its level, similar wealth increments cannot be expected on a regular basis in the future.”
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