03/14/2012 09:45 pm ET Updated Jun 04, 2012

Larry Summers: Cuts Won't Fix Economy

WASHINGTON -- Larry Summers, a former top economic adviser to President Barack Obama, said on Wednesday that the U.S. government cannot cut its way to fiscal sustainability.

Summers said at The Atlantic's Economy Summit in Washington that the government needs to raise taxes and ensure robust economic and job growth in order to make the national debt sustainable.

"If our economy stagnates, as Japan's did after several false starts, as America's did in 1937, that is what will be the most serious threat to the nation's fiscal health -- and much else, frankly," said Summers, who served as Obama's director of the National Economic Council until September 2010. "It is terribly important to maintain the rate of growth." Summers, former president of Harvard University, is said to be a candidate to head the World Bank when the current bank president's term ends this year.

Summers said the government needs to "succeed in maintaining sustained economic growth, at a rate that puts a rising fraction of the population back to work," in order to be able to put the national debt in order.

"Maintaining a policy focus on assuring an adequate level of demand and growth in demand -- whether that means promoting exports, whether that means reforming and spending appropriately on infrastructure, whether that means appropriately designed tax reform -- is a critical issue," he said.

Summers said that slashing discretionary domestic spending (that is, U.S. spending not on Medicare, Medicaid, and Social Security) is "going to really bite and squeeze" and have an "adverse" effect on the economy. "I don't think we're going to get that much out of them," he said of discretionary spending cuts.

He said that it would not be a good idea to cut defense spending, since "surprises with respect to national defense are more likely to be unfavorable than favorable." He added that it is going to be a challenge just to slow the rate of growth of health care spending.

That leaves one viable option, Summers said: "We need more revenue, and we're going to need more progressivity." That is, raise taxes, and raise them more on the rich.

Since the richest one-percent has taken home so much more of the income gains than the rest of the country, simple math and fairness dictate that the wealthiest 1 percent should be paying more in taxes, Summers said.

"The relative tax burden on the top 1 percent shouldn't be going down," Summers said. "You can argue about whether, when you've got more income inequality, you should have a lot more income redistribution or not. It’s a reasonable argument. ... But it's very hard for me to understand why we should have less" taxes on the rich.

Summers answered questions from attendees. Following his presentation, he answered a rant from a business executive complaining that high taxes prevent him from hiring, but declined to answer a question from The Huffington Post on whether he has any regrets about his stimulus proposal in 2009. "I'm not going to get into that debate right now," he said.

Summers had recommended to Obama far smaller stimulus options than fellow economic adviser Christina Romer said were necessary to fill the economy's output gap, according to The New Republic. The implication: Summers, as Obama's chief economic adviser, did not make the president fully aware of the amount of government help that the economy truly needed.