Contemplating the Fiscal Cliff

Lawrence H. Summers urged for strong intervention to avoid sending the nation over the fiscal cliff by the end of the year, arguing that overcorrecting the economy is not a concern.

In the opening panel of the Washington Ideas Forum on Wednesday, Summers, former secretary of the Treasury, former director of National Economic Council and president emeritus of Harvard University, spoke with Al Hunt, executive editor of Bloomberg News, about the fiscal cliff and how to fix the American economy.

Refusing to speak on the hypothetical, that the U.S. may or may not go over the cliff, Summers said that a global recession has reduced demand for U.S. exports, and that not finding a solution would be a self-inflicted wound. 

"The idea is an odd one," he said. "It's a lot like putting daggers in steering wheels to encourage people to drive more safely."

Not reaching an agreement, Summers stressed, would make recession an overwhelming likelihood. Summers responded to critics who warned of overcorrecting the economy by comparing it to his own weight loss efforts. 

"When people asked my target, I told them I was in no danger of losing too much weight," he said. "There is no risk that we will have too much demand in the economy next year. There is no risk that we will overcorrect with sustainable finances in the long run."

It's impossible to fix the current economic issues without addressing changing demographic in the nation, including an aging population and how it will impact healthcare, Summers said. "There are a set of trends working against us," he said. "If we want to have the same society we have always had, we need to see upward shift in government." 

Looking forward, Summers said that to restore confidence in the markets and the economy at large, it's important not to put too much emphasis on forecasts. "For the long term, forecasts are uncertain but it's hard to escape the conclusion that you need to provide reasonable assurance that the nation's finances are on a sound basis," he said. "My best guess is, if anything, the projections people are working with will prove to be too optimistic."

Summers passed along a piece of advice that a former professional had shared in a different context.  "Things take longer to happen than you think they will," he said,  "and then they happen faster than you think they would."