What would Larry Summers do?

By Conor Clarke

There's been a worthwhile argument between Tyler Cowen, Matt Yglesias, Paul Krugman and Greg Mankiw over the standards we should apply to the debate over the stimulus package. It's a debate I'm going to do my best to avoid.

But a related question is whether or not the stimulus package meets the standards of its own architects. And it just so happens that prior to being tapped for the NEC Larry Summers was writing a monthly column for the Financial Times. A year ago, he wrote a column advocating the use of fiscal stimulus only under certain conditions:

First, to be effective, fiscal stimulus must be timely. To be worth undertaking, it must be [...] based on changes in taxes and benefits that can be implemented almost immediately.

Second, fiscal stimulus only works if it is spent so it must be targeted. Targeting should favour those with low incomes and those whose incomes have recently fallen for whom spending is most urgent.

Third, fiscal stimulus, to be maximally effective, must be clearly and credibly temporary - with no significant adverse impact on the deficit for more than a year or so after implementation. Otherwise it risks being counterproductive by raising the spectre of enlarged future deficits pushing up longer-term interest rates and undermining confidence and longer-term growth prospects.

Temporary, targeted and timely -- that was supposed to be the fiscal policy mantra of Rubin and Summers' Hamilton Project. I think those standards are worth keeping in mind as the debate proceeds, especially since there are certainly tradeoffs between them -- e.g., the more timely the bill, the harder it is to make it targetted. Will the current stimilus meet the standards? Obama wants the stimulus on his desk by February 16. Good luck.

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