How Spending Could Beat Cutting As A Deficit Fix

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The calls to cut government spending are growing louder. As President Obama's deficit reduction commission continues to propose ideas to reduce the red ink on the government's ledger, the national conversation about the economy has shifted from recovery to reduction.

That's the wrong way to go, says one of Obama's former economic advisers.

The focus needs to stay on recovery, Christina Romer tells Weekend All Things Considered host Guy Raz. What we really need to do, she says, is figure out how to avoid a deficit in the long term.

The real problem is the trajectory we're on right now, Romer says. The U.S. is currently projected to hit a deficit of 15 percent of the gross domestic product in 2035. Trying to solve the problem with short-term deficit reduction is bad economic policy, Romer says.

Spend More Now, Not Less

In an economy where the unemployment rate is 9.6 percent, immediate deficit reduction would be very hard for the economy to grow through, she says.

Like many mainstream economists, Romer thinks the long-term deficit is a terrible problem, but says a good plan for dealing with it in the short run should rely on fiscal expansion, not reduction.

"Do the fiscal contraction when the economy is healthier," she says.

Romer is the former chair of President Obama's Council of Economic Advisers. While in the White House, she was a supporter of aggressive fiscal stimulus. She says additional stimulus is needed to lift the still-lackluster economy.

"You can't look at where the economy is today and say that we're where we want to be," she says. "We are still in an economic crisis."

Not All Tax Cuts Are Equal

Romer agrees with Obama that tax cuts for everyone earning less than $250,000 should be extended. But with a newly elected — and divided — Congress, Obama may have to give up his plans to let tax cuts for high-income earners expire.

So what would she advise the president do?

"The way you might find a bipartisan agreement is to explain that those tax cuts from the very highest income earners don't do much at all in terms of short-run job creation," Romer says. But "they are potentially a disaster for our long-run budget deficit.

"Not every tax cut is equally effective," she explains. "The economic research is incredibly clear that tax cuts for very high income earners have about the least fiscal stimulus of tax cuts possible."

Instead, she recommends finding another kind of tax cut that would be more appropriate for the economy right now — one that shifts the stimulus of tax cuts to the middle class.

"Let the tax cut for the high-income earners go off, but do a payroll tax holiday of some sort. That would be pro-business, it would be pro-jobs, it would be a way of helping the small businesses."



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