Feds are underpaid, former Obama economic adviser says

An underpaid federal workforce is one of many short-sighted legacies the nation risks passing to the next generation if it fails to spur the economy through long-term investments in infrastructure, economist Larry Summers said Thursday.

“If the federal work force is underpaid, that will compromise our children as well,” the former Obama economic adviser and Clinton administration Treasury secretary said in a talk titled “Beyond the Fiscal Cliff” at the Center for American Progress.

Unwillingness to actively spend to avoid economic stagnation “is like a company making a commitment only to quarterly or annual earnings,” Summers said.

Though careful not to minimize the importance of a short-term resolution to the so-called fiscal cliff that Washington faces at the end of this year, Summers offered a five-part plan to tackle what he sees as the higher priority of stimulating growth and creating jobs while paying for it later. He also took a shot at the “arithmetic” underlying Republican presidential candidate Mitt Romney’s much debated tax proposal.

“The past two years have brought decelerating growth due to the withdrawal of fiscal activism needed to support demand,” said Summers, who served in the Obama White House during the financial crisis and is now a professor at Harvard University. Unlike the recovery of the early 1990s, which was responsive to deficit reduction and lower interest rates, the current U.S. and global economies are in uncharted territory. “You can’t fall very far out of the basement,” he said, adding the impact of fiscal policy on business demand is “speculative.”

Growth rates for the next decade are likely to remain in the 2 percent to 2.25 percent range, and there is a risk that “cyclical problems such as joblessness harden into structural problems,” Summers said. He warned that those unable to find work will withdraw from the labor force, companies will curb research and development, and recent graduates will be stunted by their inability to begin a career.

Hence he called for a “growth strategy to alleviate the middle-income squeeze by investing in the long term while letting the financing vary with the cycles. With an aging population and rising health care costs, we’re going to need a larger public sector, not a smaller one.”

Summers’ five-point plan would invest in transportation and schools, his key example being rebuilding New York City’s JFK airport.

Second, Summers would support businesses by continuing the current suspension of the payroll tax to inject $120 billion into the economy. That position is not shared by President Obama or many Republicans in Congress who recently stated they considered the suspension temporary.

Third, Summers favors an energy policy “not defined by or but by and,” meaning the nation should pursue renewable and fossil fuels on the principle that “it’s better to fail at trying too much rather than too little.”

Fourth, he would commit to bringing more tourists and students to this country and increasing exports, which creates more jobs for those with “relatively low skills.”

Finally, Summers would reform a tax code that “can’t be explained by any rational actor but only archaeologically.” He said the code distorts economic decisions by favoring debt over equity, finance over productivity, tax havens over domestic jobs, and the affluent over the many while “raising less revenue than any in 50 years.”

Asked about Romney’s plan to cut all tax rates by 20 percent and offset the revenue lost with unspecified closings of “loopholes” and deductions, Summers said his experience with nine election cycles shows that “challengers always make it look easy” and frequently employ “magic asterisks.” But he found while parsing the plans of past challengers involved ranges of error of billions or hundreds of billions of dollars, the Romney plan is the first to cite a range in the trillions and is the “daughter of voodoo economics.” He likened it to saying, “I plan to eat lots of hamburgers, French fries and milkshakes, and avoid painful exercise and lose 60 pounds.”

Despite the former Massachusetts governor’s denial, Summers said the Romney plan would involve $5 trillion in tax cuts, and he pooh-poohed the six studies the Republicans cite to argue for its affordability, saying “a Wall Street Journal editorial is not really a study.”

Asked about the White House promises that the 2009 Recovery Act would produce a “recovery summer” and lower unemployment numbers, Summers said the Obama administration’s “forecasts at the time were a consensus of macroeconomic forecasts.” But he said he had been concerned about “an unwillingness to recognize the very different character of the downturn aftermath of this financial crisis from the more conventional business cycle.” He added he had expected Congress at the time to be more willing to proceed with more stimulus.