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Stimulus with Deficit Reduction Needed: Obama Advisor

The US can afford another stimulus package but needs to commit to long-term deficit reduction to help states handle pension liability, Laura D’Andrea Tyson, an economic adviser to Obama, told CNBC Monday.

"In order to create room for the stimulus, it has to be involved in long-term deficit reduction," said Tyson, an economist and a professor at the Haas School of Business at the University of California, Berkeley, who was also President Clinton’s chair of the US President's Council of Economic Advisers.

Tyson spoke with CNBC at the Economist's Buttonwood Gathering in New York City after appearing on a panel in which she spoke about a hypothetical situation of a government in fiscal trouble.

Tyson said the economic questions facing the states and federal government are huge.

"Why don't the states come up with a plan to handle their pension liabilities in 2030? Why doesn’t the US come up with a plan to handle the escalation of debt-to-GDP ratio that occurs inexorably once we’re through this recession?" said Tyson, who is also a board member at Morgan Stanley.

To boost the economy now, Tyson favors bringing tax rates for the top two tiers to the Clinton-era levels and pumping that revenue, about $40 billion she said, into a stimulus package.

“It could be a stimulus in terms of a temporary partial payroll tax holiday for companies,” she added. “That is a much more effective stimulus for the economy than keeping those tax rates at Bush levels.”

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