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Summers calls for new boost to economy

Job seekers prepare for career fair to open at Rutgers University in New Brunswick, New Jersey
Job seekers prepare for career fair to open at Rutgers University in New Brunswick, New Jersey

By Jeff Mason and Caren Bohan

WASHINGTON (Reuters) - Former White House aide Larry Summers on Sunday urged expanded tax cuts on U.S. workers' wages, warning that America's economy was at risk of years of Japan-style stagnation without a further boost.

In an opinion piece published by Reuters on Sunday, Summers -- a Harvard professor and former Treasury secretary under President Bill Clinton -- argued that it would be "premature" to withdraw fiscal support for the economy at the end of 2011.

Summers' comments come as Republican and Democratic lawmakers debate ways to reduce the U.S. deficit and as his former colleagues in President Barack Obama's administration mull a temporary cut in payroll taxes for employers.

Summers said the United States might have faced a double-dip recession if Obama had not agreed to a deal last year with congressional Republicans to extend unemployment insurance benefits and payroll tax cuts for workers.

The deal was part of a wider package that included an extension of Bush-era tax cuts for the wealthiest Americans.

"Fiscal support should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees," Summers wrote.

"Raising the share of the payroll tax cut from 2 percent to 3 percent would be desirable as well."

He said the cost would be a little over $200 billion.

"These measures offer the prospect of significant improvement in economic performance over the next few years translating into significant increases in the tax base and reductions in necessary government outlays," he said.

In an interview, Summers offered more details of his idea, saying the $200 billion would cover both the expansion of the tax-cut and its extension through 2012.

He also said the economy would benefit from an extra $100 billion in infrastructure spending over the next several years and recommended additional aid to states and cities.

Summers, who headed the National Economic Council for the first two years of the Obama administration, said that the "greatest threat" to U.S. creditworthiness was a sustained period of slow growth.

"This means that essential discussions about medium-term measures to restrain spending and raise revenues need to be coupled with a focus on near-term growth," Summers wrote.

"Substantial withdrawal of fiscal support for demand at the end of 2011 would be premature."

WHITE HOUSE DEBATE

During much of 2010, Obama's economic advisers wrestled with a debate over whether to shift toward deficit reduction or pursue further fiscal stimulus.

Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan's "lost decade" of the 1990s.

Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus that was not coupled with deficit reduction in later years, as he warned of the danger of ballooning debt and deficits.

The payroll-tax cut was enacted late last year just before Summers returned to his teaching job at Harvard University.

He left the administration hopeful that the package would be enough to restore the economy to vigor. Solid payroll growth in the first few months of the year offered reasons for optimism.

In the interview, Summers listed several factors that contributed to the slowdown: the fallout on the global economy from Japan's earthquake, concerns in European debt markets, high oil prices and a deceleration in China's rate of growth.

But he also said the U.S. economy is in a "cycle that has some of the characteristics of what happened in Japan" following the bursting of its asset bubble and that's why it has struggled to regain its stride.

"The economy isn't as strong as I expected last winter," Summers. He said that in post-bubble recessions, such as Japan's in the 1990s and the Great Depression of the 1930s, there is a tendency to assume any pickup in growth means a return to normal growth but recoveries in those cases take much longer.

Separately, Jeff Immelt, chief executive of General Electric and head of Obama's jobs and competitiveness council, said Washington should streamline permitting for construction projects and make it easier for tourists to visit the United States to help boost hiring and spur the economy.

In an opinion piece co-written with American Express chief executive Ken Chenault, Immelt said his panel's "progress report" outlined ways to increase hiring in manufacturing, construction, healthcare, and tourism sectors.

The opinion piece was released by the White House on Sunday ahead of publication in the Wall Street Journal on Monday.

(Additional reporting by Caren Bohan; Editing by Paul Simao)

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