Committee for a Responsible Federal Budget

Larry Summers Joins the Announcement Effect Club

Jun 15, 2010 | Economics

Larry Summers, top economic advisor to President Obama, joined the Announcement Effect Club after remarks on a few occasions. First, in a speech at the John Hopkins School of Advanced International Studies:

On the other hand, those who recognize the fiscal and growth benefits of strong expansionary policies must also recognize that it is simultaneously desirable to provide confidence that deficits will come down to sustainable levels as recovery is achieved.  Such confidence both spurs recovery by reducing capital costs and reduces the risk of financial accidents.

Perfect. Then, yesterday in a Washington Post column by E.J. Dionne Jr.:

But for a policy centered around economic growth to be credible in the short term we must show a commitment on returning to a fiscal sustainable path over the medium- and long-term. That's why the president has taken important steps to bring responsibility back to the federal budget through health care reform and in creating a bipartisan fiscal commission.

Lately, the Announcement Effect Club's argument is becoming more important as the prospects of further stimulus is being discussed. There is a perception that either we have to put out unpaid-for stimulus or we have to stop all stimulus and start consolidating now. The Club is a middle ground that some people seem to be overlooking. Short-term stimulus accompanied by medium-term plans for fiscal consolidation can be more effective than stimulus alone. The demonstrated commitment to fiscal responsibility would assure markets and, consequently, would help keep interest rates down. Stimulus and fiscal responsibility are not mutually exclusive; Economist Mom Diane Rogers refers to this as "walking and chewing gum at the same time." If we do both, we can strengthen the economy in the short-term and provide more sustainable growth over the long haul.