Furman and Summers Argue Policymakers Should Focus on Investment, Not Debt

As the United States’ annual budget deficit approaches nearly $1 trillion this year, former Chair of the White House Council of Economic Advisers Jason Furman and former U.S. Treasury Secretary Lawrence H. Summers argue in a pre-released essay from the March/April issue of Foreign Affairs, that “It’s time for Washington to put away its debt obsession” and focus on “worthwhile investments in such areas as education, health care, and infrastructure.”

While “some commentators worry that rising deficits don’t just slowly eat away at economic growth, as the textbooks warn; they could lead to a fiscal meltdown,” Furman and Summers find that “there is precious little economic theory or historical evidence to justify this fear. Few, if any, fiscal crises have taken place in countries that borrow in their own currencies and print their own money.”

The authors, both Harvard professors, recommend an “approach that neither prioritizes cutting deficits nor dismisses them. Unlike in the past, budgeters need not make reducing projected deficits a priority. But they should ensure that, except during downturns, when fiscal stimulus is required, new spending and tax cuts do not add to the debt. This middle course would tolerate large and growing deficits without making a major effort to reduce them—at least for the foreseeable future.”

Furman and Summers explain: “There is a widely held misconception that the deficit has risen primarily because government programs have grown more generous. Not so. Deficits have ballooned because a series of tax cuts have dramatically reduced government revenue below past projections and historical levels.”

“More serious than leading to inadequate revenue is the way that tax cuts in the last 25 years have misallocated resources. They have wors­ened income inequality and, at best, have done very little for eco­nomic growth. The most recent tax cut, in 2017, will cost $1.9 trillion over ten years, but it boosted growth only slightly, if at all, while shift­ing the distribution of income toward the wealthy and reducing the number of people with health insurance.”

“A simple approach to fiscal policy that would prove understand­able, sustainable, and economically reasonable would be to focus on important investments but do no harm. In short, when you are in a hole, stop digging,” write the authors. “This approach would provide a ready way to prioritize: if some­thing is truly worth doing, it should be worth paying for.”

While recognizing “higher levels of debt do have downsides,” Furman and Summers conclude, “Policymakers will always know when the market is worried about the deficit. But no alarm bells ring when the government fails to rebuild decaying infrastructure, properly fund preschools, or provide access to health care. The results of that kind of neglect show up only later—but the human cost is often far larger.”

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