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Larry Summers: Fiscal Stimulus Can Pay For Itself

The Huffington Post  |  By Posted: 03/23/2012 3:15 pm Updated: 03/23/2012 3:15 pm

Larry Summers Fiscal Stimulus
Larry Summers argues in a paper released on Wednesday that fiscal stimulus spending pays for itself during a recession. He reportedly did not give President Obama the same level of full support to stimulus spending when he served as Obama's top economic adviser.

Larry Summers says the stimulus can take care of itself.

Summers, who served as President Obama's top economic adviser until last year, has co-authored a paper with Berkeley economics professor Brad DeLong arguing that stimulus spending finances itself during a recession.

Summers and DeLong argue that fiscal stimulus spending can self-finance because of increases in both consumer spending and investment, which, in turn, raises future incomes and tax payments, offsetting more government spending. But they made sure to emphasize that their analysis refers only to when economic growth is shrinking and not once the economy has recovered.

The paper stands in contrast to Summers' advice to the president in the wake of the worst financial crisis since the Great Depression. Summers, in fact, opposed those arguing for larger stimulus and emphasized the need to cut the deficit, in part because the stimulus would cost so much, according to The New Republic and The New Yorker, respectively.

Indeed, in real life, Summers was much more prone to consider the political consequences of such an act, writing to Obama in a December 2008 memo that Obama's stimulus proposal "could come as a considerable sticker shock to the American public and the American political system." He added that an overly ambitious stimulus could scare investors and cause borrowing costs to spike, according to The New Yorker.

“An excessive recovery package could spook markets or the public and be counterproductive,” Summers wrote at the time.

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