How Spending Could Beat Cutting As A Deficit Fix The calls to cut government spending are growing louder. The national economic conversation has shifted from recovery to reduction, but a former Obama adviser says cutting spending for short-term gain is the wrong way to go.
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How Spending Could Beat Cutting As A Deficit Fix

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How Spending Could Beat Cutting As A Deficit Fix

How Spending Could Beat Cutting As A Deficit Fix

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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GUY RAZ, host:

And as Brian reported, high unemployment and slow growth is hitting rural parts of the country particularly hard. On this program for the past few months, we've been inviting top economists to offer up ideas for how to help dig us out.

The incoming Republican leadership in the House has argued that the road to full recovery and job growth runs through austerity: cutting the short-term deficit.

Now, as we heard earlier in the program, tackling the deficit in any meaningful way may only be possible by confronting the two largest entitlement programs: Medicare and Social Security. And other economists said that you can't cut the deficit a whole lot without also cutting defense spending.

Now, in past weeks, we've heard from deficit hawks and economists who want more stimulus. Today, it's Christina Romer's turn. She was the chair of President Obama's Council of Economic Advisers. She stepped down from the post earlier this year and is now back at U.C. Berkeley, where she teaches economics.

Professor CHRISTINA ROMER (Economist, University of California, Berkeley): Before I ever went to Washington and before we were in the middle of an economic crisis, I was probably as big a deficit hawk as anyone. And certainly, I am very worried about the long-term deficit.

And one of the things, I think, that frustrates me the most about members of Congress that want to cut spending by $100 billion next year, it's like that is bad for the economy now, and that's trivial. That doesn't solve the long-run problem.

That's just a symbolic gesture. And it's, in fact, distracting us from what we really need to do, which is figure out how do we have deficits that aren't 15 percent of GDP in 2035, which is the trajectory that we're on.

RAZ: Republicans really want to focus on short-term deficit reduction; they say they do. Should the president veto bills that would drastically cut the short-term deficit?

Prof. ROMER: It would be bad economic policy to try to cut the deficit tremendously in the short run. This is an economy where the unemployment rate is still 9.6 percent. An immediate deficit reduction would be very, very hard for the economy to grow through.

Now, I absolutely, like almost any mainstream economist, think the long-run deficit is a terrible problem. I'd be wildly in favor of passing a plan right now for dealing with that long-run deficit. But a good plan would almost surely have some fiscal expansion in the short run and then do the fiscal contraction when the economy is healthier.

RAZ: So let's put this in simple terms. I mean, you were vocal about your support for additional stimulus. You're saying there has to be some further stimulus.

Prof. ROMER: Yes. I think you can't look at where the economy is today and say that we're where we want to be. It is - we are still in an economic crisis. And, you know, even if all you care about is the budget deficit, taking actions now to get the unemployment rate down is good policy, because the thing I worry about is the longer this unemployment rate stays high, the bigger chance there is that some of it becomes permanent, and that's obviously a disaster for people, but it's a disaster for the long-run budget deficit.

RAZ: You have studied the year 1937. You've written about it. And you've warned against a repeat of what happened then when President Roosevelt's recovery program basically went back into recession. That was a year when he raised taxes, when the Fed tightened monetary policy. Wouldn't President Obama risk making some of the same mistakes by insisting on any tax increases at all at this point?

Prof. ROMER: It's incredible important to draw a distinction between not raising anybody's taxes and not raising net taxes. Not every tax cut is equally effective, and the economic research is incredibly clear that tax cuts for very high-income earners have about the least fiscal stimulus of tax cut possible.

So if you say I want to cut taxes by $50 billion, I'd say don't do it for the very high-income earners, but do it in the form of a payroll tax holiday, or continue the Making Work Pay tax cut that we had in the Recovery Act for another year and give that money to middle-class families. They're the ones that are likely to spend it.

This idea that somehow you can't raise any tax anywhere because we're in a recession, that's just bad policy.

RAZ: Christina Romer, you support more stimulus and a tax increase on the wealthiest Americans. Other economists would say, you know, let's focus on deficits and not raise taxes and not spend more. What makes your case more compelling? I mean, why do you think what you believe in and what other economists who agree with you believe in will necessary work?

I mean, you don't let's face it, I mean, you don't necessarily have facts on your side. The other side doesn't have facts on its side. We don't know the results of it, right? We just think we know what might happen.

Prof. ROMER: Well, I'm going to disagree that we don't have facts on our side because I think exactly what makes me very confident in the policy that I'm suggesting is the empirical evidence. So, for example, I'll cite, I think, a very important new study that came out of the International Monetary Fund that looked at fiscal consolidations, times when countries tried to get their budget deficit down in 15 countries over the last 25 years. And the conclusion of that is it hurts growth.

So this idea that getting your deficit down will somehow magically be good for growth, it will be painless, I think the empirical evidence is very strong that in the short run, that is something that will be painful. And I think that fact is what lies behind saying, of course, you legislate the deficit reduction, it's good policy even from a credibility, a confidence kind of perspective to get that plan in place, but don't be under the illusion that if you were able to cut the deficit a lot in 2011, that would somehow be good for the unemployment rate because it absolutely would not, and I think the evidence is very strong for that position.

RAZ: That's Christina Romer. She's the former chair of President Obama's Council of Economic Advisers. She's now back at U.C. Berkeley, where she teaches economics.

Christina Romer, thank you so much.

Prof. ROMER: Thank you.

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