Summers begins with a refreshing instance of honesty about the effect of the debt deal:
Despite claims of spending reductions in the $1 trillion range, the actual agreements reached so far likely will have little impact on actual spending over the next decade.
It is hard to reconcile this likely truth with the accusations coming from the left that Obama has caved and the Republicans are “terrorists” for “slashing government spending” but such is the nature of political life these days. Summers is also right about the importance of the baseline. When is a cut not a cut? When it’s a reduction from an artificially high baseline. There is very little austerity in the debt deal.
Summers next claim is harder to swallow:
The deal confirms the very low levels of spending already negotiated for 2011 and 2012, and caps 2013 spending about where most would have expected this Congress to end up.
Spending in 2011 is estimated to come in at $3.8 trillion or just over 25 percent of GDP. That’s the highest ratio since 1945 — in 2005, the ratio was under 20%. Calling $3.8 trillion dollars “very low” is very hard to understand, unless you see a crying need for an even larger number. And that brings us to the essence of Summers’ worldview, a view that is summarized in the title to his piece:A Debt Deal That Solves the Wrong Problem. The key problem, says Summers, isn’t that we spend too much, it’s that we spend too little to reduce the unacceptably high level of unemployment. According to Summers, growth is driven by aggregate demand and aggregate demand is driven by government spending.