Former Treasury Secretary Larry Summers took to Twitter on Tuesday to express his worst fears concerning the economy. He lamented the bloating fiscal deficit.
What Happened: “For all of the post-financial crisis/pre-pandemic period, I feared secular stagnation and opposed fiscal alarmism,” Summers tweeted. “But now I am alarmed because we are in new and dangerous territory,” he said.
The former Treasury official noted that Congressional Budget Office’s medium-term projections were twice as large as those when the Simpson-Bowles process was initiated in 2011.
The Simpson-Bowles deficit reduction plan is a 2010 bipartisan report that delved into the six ways to lower the budget deficit to 2.3% of the GDP by 2015.
To make matters worse, Summers said he thinks the CBO projection is “way over-optimistic.” He expects the deficit to exceed 10% of GDP, which would be by far the worst long-run fiscal outlook in the history of America.
Further Bloating Likely: Summers expects the short-term Treasury yields to run well over CBO’s 2.3% deficit to GDP assumption over the next decade, especially due to the high deficits. “1% higher rates add about 1.2% to the deficit, given current levels,” he said.
Trump tax cuts are unlikely to phase out in 2025, adding more than half a percent of GDP deficits, the economist said.
Summers also did not buy into the CBO’s estimate of defense spending as a share of GDP falling by 20%, given the ongoing tensions with Russia, China, Iran and North Korea.
Adjustments Needed: Since a 10% deficit-to-GDP ratio is unacceptable, significant adjustment will likely be needed, Summers said.
There is no choice as far as rising defense and interest costs are concerned, the economist said. He also noted that the size of the dependent aged population is rising and prices of services the government buys like health, education, and law enforcement tend to rise.
“All of this suggests that returning government spending to traditional levels will not be easy,” Summers said.
The economist favored the path to higher income. “We are an undertaxed nation,” he said.
“Raising revenue needs to start with those most able to pay — the top 1 % — but quite likely it cannot end there,” he added. The view is in line with President Joe Biden’s 25% billionaires tax.
The Biden proposal would require that the richest 0.01% of Americans pay at least a 25% tax rate. It would also increase the top tax rate for Americans making $400,000 to 39.6% from 37%, reversing one of Trump’s tax cuts — though tax rates for those making below that amount would remain untouched.
Produced in association with Benzinga
Edited by Jessi Rexroad Shull and Kyana Jeanin Rubinfeld
