Extend Bush-era tax rates, says … Larry Summers?; Update: WSJ retracts

Yesterday, Bill Clinton got into hot water by making the radical suggestion that having a massive tax hike in a recessionary environment might not be such a great idea.  Clinton walked that back later in the day after other Democrats attacked him and questioned his motives for, er, making economic sense.  Those critics might be turning their guns on Barack Obama’s first Director of the National Economic Council and a key architect of Obama’s economic policies, who said the same thing earlier today on MSNBC’s Morning Joe [see update below]:

Lawrence Summers said Wednesday that Congress should temporarily extend Bush-era tax cuts, making him the second person with ties to the White House who is undercutting President Barack Obama’s position that the rates on upper-income Americans should rise at year’s end.

“The real risk to this economy is on the side of slow down…and that means we’ve got to make sure that we don’t take gasoline out of the tank at the end of this year,” he said on MSNBC’s “Morning Joe” program. “That’s gotta be the top priority.”

Mr. Summers’s comments echoed remarks made by his former boss, former President Bill Clinton. Mr. Clinton suggested Tuesday that Congress should temporarily extend the tax cuts, but later in the evening a spokesman for the former president walked back his comments.

Yesterday, Summers backed Obama on spending, arguing that low rates meant that government should borrow more rather than less:

In other words, from either political perspective, Summers is batting .500 this season.

The argument on tax rates will make it more difficult for Obama to cast his position as moderate, and for good reason.  Hiking taxes means necessarily pulling more capital out of the private sector, which is one reason why investors are currently sidelining capital until they see what changes will take place at the end of the year.  Some of the immediate problem is related to the ambiguity, but as the CBO has repeatedly warned about Taxmageddon, it’s also related to the seizure of capital that might have been put to work instead.

Resolving this issue now, even with another two-year pass, would encourage some of those investors to get back into the game now.  Summers — and Clinton — understand that Obama needs that kind of an outcome immediately, if he wants to salvage some of this summer and have some economic growth and momentum going into the election.  Republicans would probably come along just to ensure that a deal locking in the rates takes place at all.  That would soften Obama’s hyperpartisan edge built up since last September and make him look more effective as an executive, even if it means that Republicans get a temporary win on the policy.  Therefore, it’s both an economic and political win … and we can expect both Summers and Clinton to get pilloried for suggesting it by the same forces that are grimly marching their party over an electoral cliff.

Update: The WSJ now has retracted their report that Summers endorsed an extension of the Bush tax rates.  He said that the priority for economic policy should be to avoid Taxmageddon.

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