Ex-Obama adviser Lawrence Summers: Don't race to cut deficit

Reuters News
Posted: Apr 14, 2011 4:47 PM

WASHINGTON (Reuters) - The United States should wait to tackle its bulging deficit until after economic growth is strong enough to warrant higher interest rates, former White House economic adviser Lawrence Summers said on Thursday.

Summers, speaking at an International Monetary Fund conference on fiscal risks, called his hosts to task for suggesting that the United States could and should reduce its deficit sharply by 2012.

"I have to report myself as somewhat surprised, not by the long-run imperative of deficit reduction stressed in the most recent IMF fiscal monitor, but by the short-run urgency that the IMF's most recent fiscal monitor attaches to achieving deficit reduction," Summers said.

If the United States were to slash its deficit next year, "the consequences for real economic activity would be most unfortunate," Summers said.

His comments go to the heart of one of the hottest debates in Washington: when and how to shrink a deficit that the IMF expects to approach 11 percent of total output this year.

President Barack Obama proposed cutting $4 trillion off the deficit over 12 years, while Republicans in Congress have pushed for even deeper cuts, starting with the current year's outlays.

The deficit is expected to be a big issues in the 2012 presidential election cycle. Although polls show Americans are concerned about the deficit, they are less clear about what voters would be willing to forgo in order to shrink it.

Summers, who stepped down as director of the National Economic Council at the end of last year, said research showing that cutting deficits can lead to strong economic growth would not apply in the current environment.

Normally, when fiscal policy tightens, monetary policy can be eased to compensate. But the Federal Reserve has already lowered its short-term interest rate to near zero and therefore cannot offset the contractionary impact of fiscal cutbacks.

That meant the United States should not embark on an aggressive deficit-cutting plan until the economy is strong enough for the Fed to normalize interest rates, he said.

"Until and unless monetary conditions are sufficiently normal that one can suppose that they will offset fiscal action in the normal way, caution about excessively rapid fiscal adjustment is in order," Summers said.

"It's my judgment that we're some distance from that point."

(Reporting by Emily Kaiser; Editing by Andrea Ricci)