Economists Weigh in on Debt Deal

Former White House economist, Larry Summers, gives his take on the debt deal, concluding that it “solves the wrong problem.”  These seem to be the takeaway points:

Despite claims of spending reductions in the $1 trillion range, the actual agreements reached so far likely will have little impact on actual spending over the next decade.   The deal confirms the very low levels of spending already negotiated for 2011 and 2012, and caps 2013 spending about where most would have expected this Congress to end up.  Beyond that outcomes are anyone’s guess—the reality is that Congress votes discretionary spending  annually and the current Congress cannot effectively constrain future actions…

Remarkably for a matter so consequential the agreement that the Supercommittee will seek to reduce the deficit by $1.5 trillion comes without any agreement on what the baseline is from which the $1.5 trillion is to be subtracted.  Is the $1.5 trillion from a baseline that includes or excludes the Bush tax cuts? Includes or excludes tax extenders and the annual AMT fix?

Reuters also provides some space for alternate viewpoints, including those of Cafe Hayek bloggers Russ Roberts and Don Boudreaux.  Roberts doesn’t seem to buy Summers’ claim that spending is “low” this year:

Spending in 2011 is estimated to come in at $3.8 trillion or just over 25 percent of GDP. That’s the highest ratio since 1945 — in 2005, the ratio was under 20%. Calling $3.8 trillion dollars “very low” is very hard to understand, unless you see a crying need for an even larger number…

What does it matter? As regular readers probably know, Roberts is in Hayek’s corner in the Keynes v. Hayek dust up, with Summers in the Keynesian corner. Hence, there is some disagreement as to what’s likely to happen here:

And that brings us to the essence of Summers’ worldview… The key problem, says Summers, isn’t that we spend too much, it’s that we spend too little to reduce the unacceptably high level of unemployment. According to Summers, growth is driven by aggregate demand and aggregate demand is driven by government spending. What is the evidence that increases in government spending lead to growth? Very little, unfortunately…

We’ve plowed this ground before.

One thought on “Economists Weigh in on Debt Deal”

  1. Thats true, we spend very little on the right things and too much on the wrong things, its a matter of where to gov puts its money.

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