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Summers: New Stimulus, Tax Cuts Now

Tuesday, 07 Oct 2008 09:36 AM

Former Treasury Secretary Lawrence Summers says a fiscal stimulus program must be added to the $700 billion financial bailout to prevent the economy from sinking into a deep morass.

“In the current circumstances, the case for fiscal stimulus — policy actions that increase short-term deficits — is stronger than at any time in my professional lifetime,” Summers, now a Harvard professor, writes in the Financial Times.

“Unemployment is almost certain to increase — probably to the highest levels observed in a generation.” Job losses hit a 5½-year high last month, when the unemployment rate totaled 6.1 percent.

Monetary policy can’t bring the economy back by itself, partly because interest rates already are low, with the federal funds rate at 2 percent, Summers says. So the Federal Reserve doesn’t have much room to ease further.

In addition, the economy is in too much trouble for monetary policy to work alone, he maintains.

“Experience around the world with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.”

So, government spending and tax cuts are necessary to put people back to work and buoy the economy, Summers argues.

Certainly, the government shouldn’t forget about the budget deficit, he writes.

“Nothing in the short-run case for fiscal stimulus vitiates the argument that action is necessary to ensure the U.S. is financially viable in the long run. We still must address entitlements and fiscal sustainability.”

Summers isn’t the only one concerned about unemployment. Wachovia’s senior economist Mark Vitner says the jobless rate will surge to 8 percent before the economy rebounds.

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Former Treasury Secretary Lawrence Summers says a fiscal stimulus program must be added to the $700 billion financial bailout to prevent the economy from sinking into a deep morass.“In the current circumstances, the case for fiscal stimulus — policy actions that increase...
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Tuesday, 07 Oct 2008 09:36 AM
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