Sunday, April 19, 2009

Larry Summers on Whether Those Rays of Economic Daylight Are Real

Larry Summers on Whether Those Rays of Economic Daylight Are Real

No one in Washington is saying flat-out that the economy has turned a corner, but the Obama Administration is busily making the case that encouraging signs are starting to pop up. On Apr. 9, Larry Summers, director of the National Economic Council, pointed to positive indicators in a speech before the Economic Club of Washington, and five days later at Georgetown University, the President did the same. Is this more than a cheerleading exercise to boost public confidence? I talked with Summers after Obama's speech.


The President today talked about glimmers of hope in the economy, though he added that we are in for some tough news ahead when it comes to unemployment. Where has the growth been coming from most recently and where are the weak spots that remain?


Two months ago, you couldn't find anything positive. Every statistic was running negative, and you had a sense of an economy in free fall. I think today the picture is more mixed. There are obviously still problems in the financial market and weakness in housing. But production is now pretty clearly running below sales…which will be followed by an inventory cycle that can be a source of strength. You have a more mixed picture in terms of consumer spending, in part because the stimulus in the Recovery & Reinvestment Act is coming into people's paychecks. You have the fiscal policy coming online. You know, government almost never gets a positive surprise in how much things cost, but it's actually turning out that we're going to be able to do a lot of these infrastructure projects—and 2,000 have already been started—cheaper than we'd expected. That means more employment, more ability to do things.

The budget the President put forth suggests the economy will see 4% growth in 2011. Are you expecting that?
The President made the forecast several months ago in the context of the budget. It was pretty much a consensus forecast at the time. We will revisit the forecast, as governments always do, a couple times a year, and at that point, we'll be in a position to discuss a new forecast.

So if we were to see the economy not grow at 4%, would you be prepared to suggest that perhaps he should pull back his plans to raise taxes on the highest earners?
Let's just be clear here because what you said is not quite correct. The President isn't taking any action to raise taxes. Current law calls for [the Bush tax cuts for high-income earners] to expire [in 2011]. And the President does believe—and he is surely right in this conviction—that given the magnitude of the debt problems the country faces, we can no longer afford those tax cuts for a very small fraction of the population. If you look at the long-run fiscal burden imposed by those tax cuts, it's as great or greater than the entitlement programs that generate so much discussion, and the evidence suggests [the cuts have] very little stimulative benefit. So yes, we are prepared to let those tax cuts expire.

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