Laura Tyson Argues for Deficit Reduction

Laura Tyson, a former chair of President Clinton’s Council of Economic Advisers, warned in a Bloomberg op-ed this morning that cutting back on fiscal stimulus too early might undermine the economic recovery, but that deficit reduction will be a necessity when the economy recovers. According to Tyson:

“Under [current economic] conditions, a robust self-sustaining recovery is far from a sure thing and cutting the deficit by curbing spending or boosting taxes too soon might tip the economy back into recession. Policy makers face an enormous and complicated challenge. They must lower future deficits and sustain economic growth with healthy job creation.”

This is something we've explained before, including in our Fiscal Roadmap paper  Good Deficit / Bad Deficit. To balance the delicate tradeoff between supporting the recovery and managing the deficit, Tyson made two recommendations:

“First, lawmakers should continue to provide significant fiscal support as long as the economy is operating far below its potential and private spending is constrained. Additional fiscal stimulus to encourage job creation in 2010 is advisable."

“Second, policy makers should develop a credible plan for fiscal tightening now to be implemented automatically once private demand recovers and the economy is operating close to its potential. Passage of such a plan would prevent increases in long-term interest rates triggered by investor concerns about projected future deficits even after the economy has recovered. In addition, such a plan would reduce the likelihood of another financial crisis, caused this time by a loss of confidence in the creditworthiness of the U.S. government and a flight from the dollar.”

CRFB could not agree more about the need for a credible fiscal consolidation plan. This is also exactly what the Peterson-Pew Commission has argued in its first report, Red Ink Rising. Such a commitment to stabilize the national debt would signal to creditors that we are serious about getting our fiscal house in order. The Commission also recommends that any fiscal consolidation plan should wait until 2012 to begin phasing in policy changes to ensure that the economy is on a well-established and robust recovery path.