Ex-Treasury head Summers urges temporary tax cuts
WASHINGTON, Dec 19 (Reuters) - Temporary tax cuts, extending unemployment insurance and stepping up food stamp benefits may help protect the U.S. economy from a severe recession, former Treasury Secretary Lawrence Summers said on Wednesday.
In a speech at the Brookings Institution, Summers said it was more important for policy-makers to address the growing risk of a serious downturn than to worry about inflation, and interest rate cuts alone may not suffice.
"Fiscal policy can work more rapidly than monetary policy, which has a lag of a year between the change in the federal funds rate and its maximum impact," said Summers, who now teaches at Harvard University.
"It is reasonable to suggest that stimulus approaching $50 billion to $75 billion -- roughly in the range of 1/2 of 1 percent of GDP -- is likely to be appropriate," he said.
The bulk of that money should come in the form of tax cuts distributed equally among all taxpayers and recipients of tax refunds, he said. In addition, extending unemployment insurance and increasing food stamp benefits would quickly ease the strain on those most in need.
Summers warned last month that the risk of recession was rising as the housing downturn and tightening credit conditions threatened to derail economic growth, and policy responses needed to be strengthened.
"In this environment, the dominant risk is a downward spiral in which financial problems curtail credit and spending, thereby reducing economic activity, which in turn exacerbates the financial problems, creating a vicious spiral," he said on Wednesday.
"It is much more important to establish credibility that (monetary) policy is ahead of the credit crunch spiral than to reassure yet again that it is not behind the inflation curve."
He called the Bush Administration's plan to freeze mortgage interest rates for some subprime borrowers a "constructive step" but said more was needed to keep the housing mess from engulfing the economy.
Among his suggestions was writing down the value of mortgages to reflect current market prices, similar to the way Chapter 11 bankruptcy allows companies to restructure debt.
"The answer may lie in bankruptcy law reform, standard templates for mortgage restructuring, or other means," he said. (Reporting by Emily Kaiser; Editing by Tom Hals)
