Why Larry Summers Is Wrong On Debt

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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If any other nation had gotten this close to failing to pay its debts its economy would have already collapsed as investors fled.
The New York Times

Lawrence Summers, former adviser to President Obama and Secretary of the Treasury during the waning days of the Clinton administration, published an Op-Ed in The Washington Post about why Washington is getting it wrong with its focus on debt instead of growth.

Mr Summers profusely cites the numbers by the Congressional Budget Office (CBO) to argue for a fiscal focus on growth or for additional public spending.

First, the CBO report he cites is a dire warning about the budget, deficit and debt situation in the United States. It forecasts a public debt of 100% of gross domestic product (GDP) by 2038 ceteris paribus. Taking into account intragovernmental obligations, US debt-to-GDP ratio exceeds 100% today making it far worse by 2038 than the CBO predicts.

Second, raising public investment requires incurring more debt, above CBO predicted levels, driving the United States to debt levels similar to Japan’s which incurred a debt of 200% of GDP because of higher public investment during its period of deflation.

Third, since 2007, as the Great Recession set in, the focus of Federal Reserve policy has been growth which, besides fiscal support in the form of tax incentives for real investment, requires a stable and healthy fiscal environment in the form of well managed budget, deficit and debt.

Washington, contrary to Mr Summers’ assertions, is on the right track. It only needs to keep in check its penchant for fiscal brinkmanship.

All the political posturing aside, US cannot pay all of its bills without borrowing: a fundamental cause of concern.


About Chandrashekar (Chandra) Tamirisa

This entry was posted in Economics, North America and Caribbean, Politics, Transformations LLC and tagged , . Bookmark the permalink.

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