the great likelihood is that over the next 15 years debts will rise relative to incomes in an unsustainable way if no actions are taken beyond those in the 2011 budget deal and the recent “fiscal cliff” agreement. So even without the risk of self-inflicted catastrophes — the possibility of default or a potential government shutdown this spring — it is appropriate for policy to focus on reducing prospective deficits. Those who argue against a further focus on prospective deficits on the grounds that the ratio of debt to gross domestic product may stabilize for a decade contingent on a forecast that assumes no recessions counsel irresponsibly. Given all the uncertainties and current U.S. debt levels, we should be planning to reduce debt ratios if the next decade goes well economically.
Larry Summers then says:
Reducing prospective deficits should be a key priority but should not take over economic policy.
But I don't get the very next sentence at all. How does a tax cut reduce the deficit?
Such an obsession risks the enactment of measures like pseudo-temporary tax cuts that produce cosmetic improvements in deficits at the cost of extra uncertainty and long-run fiscal burdens.
It's late, and it's been a long day -- I must be missing something. Anyway, I agree with this:
Surely even leaving aside any possible stimulus benefits, current economic conditions make this the ideal time for renewing the nation’s infrastructure. Such investments, borrowed at near-zero interest rates, need not increase debt ratios if their contribution to economic growth raises tax collections.
Infrastructure represents only the most salient of the deficits facing the United States. Nearly six years after the onset of financial crisis, we clearly are living with substantial deficits in jobs and growth. Consider that if an increase of just 0.15 percent in the economy’s growth rate were maintained over the next 10 years, the debt-to-GDP-ratio in 2023 would be reduced by about 2.5 percentage points. That’s an amount equal to the much debated year-end fiscal compromise that raised taxes. Increasing growth also creates jobs and raises incomes.
By all means, let’s address the budget deficit. But let’s not obsess over it in ways that are counterproductive, nor should we lose sight of the jobs and growth deficits that ultimately will have the greatest impact on how this generation of Americans lives and what they bequeath to the next generation
The obsession with the deficit in Washington is not going to end, and the deficit has received far too much attention relative to other issues like unemployment (which really ought to take precedence in the short-run). There is no need, at all, to remind policymakers of that the deficit needs attention.
The intent is different, but my fear is that phrases such as "the great likelihood is that over the next 15 years debts will rise relative to incomes in an unsustainable way if no actions are taken" and "it is appropriate for policy to focus on reducing prospective deficits" is the only message that Republicans and centrist Democrats will hear in this column.
Update: Paul Krugman comments.