Summers: Expand Stimulus to Avoid Lost Decade

“Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature,” Summers, now a professor at Harvard University, said in an article published in the London-based newspaper today. “Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees.”

President Barack Obama’s administration, which in January extended a 2 percentage-point reduction in worker contributions to the payroll tax during 2011, should also increase it to 3 percentage points, Summers said. The U.S. is “half way to a lost economic decade” and these measures would “raise the prospect of sizeable improvement in economic performance over the next few years,” he said.

The “near-term cost” of the steps will be about $200 billion, Summers wrote in an opinion article in The Washington Post dated yesterday.

“It is far too soon for financial policy to shift toward preventing future bubbles and possible inflation, and away from assuring adequate demand,” the former Treasury secretary wrote in the FT.

“The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth,” he said. “Discussions about medium-term austerity need to be coupled with a focus on near-term term growth.”