Obama's Economic Advisor Lawrence Summers Argues for a Second Stimulus

Lawrence Summers
Lawrence Summers

DailyFinance is the media partner for Lawrence Summers' talk on the state of the American economy at the National Constitution Center on Thursday, May 27. DailyFinance readers can suggest questions for Mr. Summers before the talk in the comments section below, and see the event by live streamat 6:30 pm on Thursday.

Lawrence Summers, Director of the White House's National Economic Council, will bring his case for the "son of the stimulus" to the National Constitution Center in Philadelphia Thursday evening. The question is whether members of Congress worried about the critical midterm Congressional elections will have to stomach for the $200 billion spending plan Summers advocates.

Some economists argue that a new stimulus is needed because the impact of last year's $787 billion spending plan is starting to wear off. Unemployment remains near 10% though there are signs that the job market is starting to come around. Summers, a former Treasury Secretary, argues that the U.S. remains about 8 million jobs short of normal employment and that the gains recently seen in the economy may be undermined by weakness in Europe. He also remains concerned about cumulative federal deficits that are expected to average about $10 trillion over the next decade.

Old Debate, New Problems

Summers is advocating old-school Keynesian interventions, arguing that increases in short-term spending are necessary for long-term growth.The Atlantic put it this way: "deficits are good, for now, because heavy public spending in downturns is still required to juice long-term growth." Such sentiments are bound to make fiscal conservatives recoil in horror. The Heritage Foundation, for one, says the government needs to cut spending, not increase it, noting that deficits are surging at a rate not seen since World War II. In 2009, Washington spent about $33,932 per household, $8,000 more than 2008. A recent study by Harvard researchers cited by Heritage claims that more government spending leads to fewer jobs.

"A great follow up to this Harvard study would be to see if those businesses that cut investment and employment in their home state's productive economy, then reinvested those resources in Washington D.C.'s lawyers and lobbyists economy," the think tank notes, only half kidding.

The economy continues to face its share of challenges. According to the Tax Foundation, 45 states collected less in taxes in 2009 than 2008 even though many raised tax rates. Though economists say that the economy is recovering, experts continue to worry about a possible double-dip recession. And many believe that the Federal Reserve will have to raise interest rates at some point though it is not clear when that should happen.

President Obama, who in February created the National Commission on Fiscal Responsibility and Reform to come up with ways to reduce the deficit, is not letting Republicans keep the fiscal conservative claim for themselves. The president is pressing Congress for broad powers to trim pork from Congressional spending bills through the bluntly named "Reduce Unnecessary Spending Act of 2010." Though President George W. Bush sought similar power, some members of Congress such as Sen. Daniel Inouye (D-HI) and Senate Republican Leader Mitch McConnell (R-KY) do not appear to be too keen on the idea, as Reuters notes.

Summers will have to explain why the current administration thinks the U.S. can increase spending, cut government waste and grow the economy at the same time. It seems as though the government figures it can keep many plates spinning at once. Unfortunately, investors are not sure if one or all of them will come crashing down to the ground.