In a passionate address, Harvard University economist and former U.S. Treasury Secretary Lawrence Summers told America’s top CEOs Tuesday that they had zeroed in on the wrong economic problems and strategy for the past several years.
Deficits and debts aren’t key to bringing the U.S. economy out of its current malaise of about 2 percent annual GDP growth, he said at the CEO Council meeting in Washington sponsored by the Wall Street Journal. Better to focus on economic growth instead, given limited political will and resources, said Summers.
“We’ve been obsessed with reducing the deficit,” said Summers, speaking of his 30 years' experience in Washington policy circles. “That’s been particularly true in the last few years.”
“We’ve had 10 bipartisan budget processes, but we’ve had zero bipartisan growth processes,” he continued. Summers questioned the accuracy of nonpartisan budget projections, arguing that margins of error are too high for projections further than a decade in the future.
“If we continue to be a country that doesn’t increase the fraction of adults that are working, that doesn’t catch up with its GDP potential … we can have all the entitlement summits in the world, and we are gradually going to accumulate debt,” continued Summers. “We just have gotten our focus to the wrong thing.”
Summers also warned of a long trend of “stagnation” in the U.S. economy, which blunted its competitiveness with major rivals like China.
In a later interview at Tuesday’s Wall Street Journal CEO Council, Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee and 2012 vice presidential candidate, dismissed Summers’ talk as based on the “sugar-high temporary” stimulus policy that has failed in the past.
“We have tried the Obama-Summers-Keynesian playbook for five years now, and look at the anemic growth we have,” said Ryan. “This sort of Keynesian demand-side spending stimulus has not worked.”
“It brings us higher deficits, which means more tax increases. It puts higher pressure on interest rates in the future. And it is all done at the expense of pro-growth policies, like lowering tax rates, regulatory reform, certainty,” he continued.
The U.S. budget deficit has narrowed in recent years, down from a record $1.42 trillion in 2009, according to Bloomberg. Many economists expect the deficit to continue to shrink, a priority President Barack Obama has also outlined.
But U.S. public debt is now about $17.1 trillion, or about 73 percent of GDP as of mid-September, according to MarketWatch. The U.S. economy grew 2.2 percent in 2012, according to the World Bank, but expanded by 2.8 percent in the latest quarter, beating analyst expectations.
Obama, meanwhile, told the meeting that welfare program tweaks or military spending were sideshows when it comes to reining in federal spending.
“When we talk about our deficit and debt problems, it is almost entirely health care costs,” he said on Tuesday, as he defended the problem-plagued rollout of his health care exchange.
Summers also suggested that a bitter class divide among the rich and the poor in the U.S. was the foremost political topic of the time, comparing it in importance to racial equality fought for in the 20th century.
Ryan also said that tax loopholes, known as tax expenditures in D.C. jargon, were needed to lower corporate tax rates to 25 percent and allow employers to create jobs.
The outcome of any budget deal in January remains a “key risk factor” for economic growth in 2014, according to economists at IHS Global Insight. If that’s resolved, though, economic growth should accelerate in 2014, led by a housing recovery, they wrote in a note late last week.