Larry Summers’ blog

Summers congratulates Ricardo Hausmann for 20 years at Harvard Kennedy School


Ricardo, congratulations on 20 remarkable years at the Kennedy School.

You know, I suppose when I was President of the University and you were a Professor at Harvard it could be said that I was your boss and I did have the privilege of appointing you as the head of the Center for International Development. But perhaps less well known is that in a certain sense, you were once my boss because long before you were at the Kennedy School, you, in your capacity in the Venezuelan government, was the chairman of the Development Committee of the World Bank, and I was the chief economist of the World Bank. And so you were at that time, my boss. I learned a lot from you then, and I’ve learned a lot from you ever since.

There are many brilliant people, there are many creative people, there are many action-oriented people at Harvard, but there’s no one who has been more consistently a source of bold new ideas and at the same time centrally involved in bringing them to fruition, as you have. Whether it was the concept of economic complexity and adjoining industries as a crucial way of thinking about the process of development. Whether it was your idea of growth diagnostics hatched with others, that changes, the way one thinks about confronting a country with important challenges. Whether it was your having done something that people have talked about for a long time, but no one else has ever done with the Growth Lab.

People have talked about medical education and how splendid medical education is because people don’t just work in classrooms, they actually practice medicine carefully supervised, and they learn in the process of practicing medicine and working with other more senior physicians. And you have brought that model to public policy with what the Growth Lab has done. And it’s been a great institutional innovation both for the Kennedy School and for the economics profession.

Whether it has been the conversations we’ve had intermittently about the tragedies in your native land of Venezuela and the possibilities of what could be done if reasonable governance can ever be restored in Venezuela, whether it is your ideas about transforming public policy education. Whether it is your very bold concepts for thinking differently about the US current account deficit as dark matter. Whether it was your ideas about what was necessary to provide confidence in terms of financial crises and how conditionality could be inimical to confidence rather than supportive. I don’t think you’ve always been right. But I do think you’ve always said what you thought was right. You’ve always been interesting. You’ve never been conventional. And your contributions to thought and action have always worked towards making the world a better place.

Your legacy is completely secure after 20 years, but Ricardo, this is an anniversary event, not a retirement event, and I, for one, am looking forward to 20 more years of substantial contribution.

Many companies pay nothing in taxes. The public has a right to know how they pull it off.


By Lawrence Summers and Natasha Sarin

Oct. 22, 2020

Corporations are increasingly recognizing the importance of being responsive not just to their shareholders but also to the interests of stakeholders, such as customers, employees and their communities. The corporate leaders of the Business Roundtable issued an announcement to that effect last year.
Supreme Court jurisprudence over the past two centuries, including with Citizens United in 2010, has affirmed the doctrine of “corporate personhood” — the notion that corporations enjoy many of the protections afforded to individual Americans by the Constitution.

If corporations are, in effect, U.S. citizens, surely their country is a stakeholder to whom they owe an obligation.

Yet it is striking how little U.S. corporations pay in taxes: Based on public reporting, we calculate that in 2019, nearly 20 percent of large corporations that reported profits to shareholders of $100 million (or more) paid zero (or even negative) federal income taxes. Some nonpayment of taxes reflects corporations that make extensive use of tax benefits directed at spurring investment or research and development. But there are valid concerns about companies’ tactics to avoid bearing their fair tax burden, including domestic tax-sheltering, international profit-shifting and deceptive accounting around activities such as leasing and debt forgiveness.

Transparency is the route to accountability; that is why charities’ tax returns are public and why corporations disclose their financial conditions to investors. Yet there is no requirement for corporations to make public their taxable profits, or the ways in which they are avoided. All that companies report is the total taxes they pay. This despite the fact that the IRS, in its own efforts to increase corporate accountability, has since 2004 required the annual filing of Schedule M-3, which reconciles the differences between income reported to shareholders and income taxed by the IRS. The M-3 has been celebrated as a “Rosetta Stone,” providing clarity about exactly how large profits avoid the IRS’s reach and helping to focus limited enforcement resources on the most egregious avoiders. But this road map is available to the IRS alone, not to the public, who can hold companies accountable, nor to policymakers with the power to foreclose the gaming opportunities they exploit.

For individual taxpayers, there are many reasons their returns should be private. There may well be reasons the entirety of the corporate tax return should be private, to preserve competitive secrets and limit confusion, since large corporations’ returns are tens of thousands of pages long. But corporations should be required to publicly account for the gap between the income they report to the IRS and the income that they report to their shareholders.

Yes, there are reasons the gap exists, given that “book” income and taxable income follow different accounting standards, with different objectives. But firms should be required to publicly reconcile this discrepancy. Today, companies are incentivized to exaggerate their income reported to shareholders and to understate their income for tax purposes. Being forced into a transparent reconciliation would push more honesty in both directions. And since the M-3 is a concise, three-page report, it would deliver clarity, not confusion.

Two solutions present themselves. One, long advocated by tax experts, including Ed Kleinbard, former chief of staff of the congressional Joint Committee on Taxation, is for the IRS to release the M-3 directly. But that would require new legislation, since the 1976 Tax Reform Act creates a default of privacy for taxpayer information (the Tax and Trade Relief Extension Act of 1998 reversed this default for nonprofits only). The idea has substantial merit — it ought to be included in the next significant piece of tax legislation.

An alternative way of reaching the same objective, absent congressional action, would be for the Securities and Exchange Commission to compel disclosure. The agency has, in recent years, particularly under Democratic administrations, used reporting requirements as a tool to promote corporate accountability in areas such as diversity in leadership selection and cybersecurity threats. Clearly, if reporting requirements hold firms accountable for their exposure to climate risk, they should also be held to account about the extent to which they engage in potentially dubious tax avoidance.

It would be inappropriate for the SEC to mandate disclosure of tax-return documents, but it would be entirely reasonable for the SEC to require that a reconciliation of book and taxable income be included in regular financial reporting. This would be a low-cost rule for firms, since the information is already produced for tax purposes. And it would be beneficial to investors.

What would be the ultimate effect of publicizing this information? We cannot know precisely, since there is no way to know what drives the wedge between book and taxable income today. Instead, the public hears competing claims that a firm’s low tax payments are either a consequence of following the rules and nurturing growth through investment, or of simply exploiting badly drafted tax laws to shelter income. What we do know: In this area, as in so many, tax transparency will lead to accountability and ultimately wiser policy.

A tribute to Marty Feldstein


It is hard for me to think about carrying on my career as an economist without Marty Feldstein.

I first met Marty in 1973, 46 years ago, when he hired me as part of his flotilla of a dozen or so research assistants. continue

The Economist Who Helped Me Find My Calling


Martin S. Feldstein was a great economist who changed the world through research, teaching, public service, hundreds of op-eds in these pages over 40 years, and leadership of the National Bureau of Economic Research.

Marty, who died Tuesday, June 11, at 79, didn’t lack for recognition. He earned the American Economic Association’s John Bates Clark medal and then its presidency, chairmanship of President Reagan’s Council of Economic Advisers, numerous honorary degrees, and memberships in prestigious scholarly and policy groups.

It was all well-deserved and has been well-chronicled in his obituaries. For me, though, Marty’s death isn’t merely the loss of an economics superstar; it is the loss of a mentor and friend who, through his teaching, generosity of spirit and example, made possible everything I have been able to achieve professionally. Countless others can say the same about him, in their own ways.

I met Marty in the summer of 1973 when he decided to take a chance on hiring a disheveled college sophomore as his research assistant. Marty was infinitely patient with my many questions about his research and remarkably tolerant of my inability to keep straight his data on international social-security comparisons.

Working for him, I saw what I had not seen in the classroom: that rigorous and close statistical analysis of data can provide better answers to economic questions, and possibly better lives for millions of people. A doctor can treat a patient. An economist, through research or policy advice, can improve life for a population.

Marty was appointed president of the NBER in 1977—a position he held for more than 30 years. The NBER became my professional home and occasionally my literal home as I slept near its computer terminals. In Marty’s work and what he created at the NBER, I can recognize many things that seem commonplace today but were new at the time. A network of hundreds of economists collaborating, debating and sharing data made far more progress than even geniuses working alone. More important, Marty’s research showed how data about individuals from the census, tax records or hospitals—information then rarely used by economists—could provide sharp answers to questions about policy.

At the time Marty was publishing more papers in top scholarly journals every year than most economists produce in a lifetime. I read them avidly and saw new frontiers open up for my generation of economists to study. Before Marty, public-finance economists had focused on who paid tax checks and who received government benefits, and on mathematically elegant abstract models of taxation. Marty persistently argued that it was also crucial to consider the incentive effects of tax and benefit programs. In the process he set the agenda for decades of research and contemporary debates on dynamic scoring and tax and social-insurance reform.

During his career Marty taught introductory economics to more than 10,000 undergraduates. The best economics course I ever took was taught by Marty. I learned from him what good and generous teaching is all about. I was one of dozens of graduate students whom he allowed to be listed as co-authors on studies of his design. On hundreds of occasions over the years, I was privileged to be a guest at the Feldstein home, where Marty and his wife, Kate, entertained students and junior colleagues.

Marty was a magnet for talent. I had the privilege of serving on his staff when he chaired the CEA. Marty didn’t care that I was a Democrat or that Paul Krugman was as well. That staff also included Greg Mankiw and Larry Lindsey, who went on to senior positions in Republican administrations. Marty cared about people’s economic analysis, not their political affiliation. That is why he mentored stars like Jeffrey Sachs and Raj Chetty, who disagreed with him on many questions, and why I so enjoyed working with him as he made valuable contributions to President Obama’s Economic Recovery Advisory Board.

I learned an important lesson about integrity in government from Marty’s service at the CEA. He was a powerful advocate for the Reagan administration’s agenda of lowering marginal tax rates and cutting government spending. But he wasn’t a deficit apologist and introduced into the public discourse ideas like “twin” budget and trade deficits and the adverse effects of anticipated future deficits.

For Marty, economics was a calling, never an intellectual game or a political tool. He represented the best in our profession and brought out the best in all those whose lives he touched. It has been the privilege of my professional life to follow in Marty Feldstein’s wake. Rest in peace, my mentor.

What Marco Rubio gets right — and wrong — about the decline of American investment


By Anna Stansbury and Lawrence H. Summers
The Washington Post
May 31, 2019

Sen. Marco Rubio (R-Fla.) recently released a thoughtful report highlighting a substantial issue in the American economy: the steady decline of American private investment.

The trend, Rubio contends, is the result of shareholder capitalism and corporate short-termism. In other words, business decision making has shifted toward “delivering returns quickly and predictably to investors, rather than building long-term capabilities through investment and production,” as he writes in his analysis. continue

Further Thinking on the Costs and Benefits of Deficits

By Jason Furman and Lawrence H. Summers
Peterson Institute of International Economics

Alan Krueger helped make life better for millions who will never know his name


I have had no student of whom I have been prouder than Alan Krueger. It has taken me a few days since the shock of learning of his death to think of how I wanted to pay tribute to him.

Alan was the kind of student who is the most satisfying to teach. He was not the kind of genius who grasps everything instantly, making his instructor feel unnecessary or irrelevant. Instead, he was someone with an extraordinary gift that could be unlocked through the diligent work of mastering the basic techniques of the economics field.

What made Alan perhaps the most interesting and influential labor economist of the past four decades? Although many say economics is too much applied math, it was not preternatural mathematical statistical talent. Nor was it an ability to think through hard problems at high speed.

Alan’s gift was something different — something that cannot really be taught. He had the knack of identifying important questions that he could convincingly answer with the data and data-analysis tools at his disposal. Again and again, sometimes on his own and sometimes with a range of co-authors, he shed light on the most important issues regarding labor markets. Our understanding of the economy and, equally important, how best to do economics was forever changed.

Take his celebrated work with David Card on the minimum wage. They looked at how relative hiring patterns changed when one state raised its minimum wage and one right on its border did not. Not much except the minimum wage differed between the two situations, so it was about as close to a controlled experiment as economists will ever get. Alan was a pioneer in the exploitation of such natural experiments. After Alan showed what kind of evidence can be marshaled to study a labor-market intervention, economists have raised their standard of what constitutes convincing evidence. What followed has been called a “credibility revolution” in empirical economics.

Alan’s knack seemed to include not just finding answerable important questions but sensing when the answers were likely to be new, surprising and overturning of conventional wisdom. The finding that raising the minimum wage did not reduce employment is only the most famous example. His research also has demonstrated convincingly that poverty is not a cause of terrorism, that past a certain point economic growth is good for the environment, and that even marginal increases in schooling meaningfully increase workers’ market value.

All these accomplishments could have been enough. But Alan wanted to serve more directly. And he did that with three major stints in government at the Labor Department, the Treasury Department and the White House Council of Economic Advisers. His heart and temperament were those of a professor of economics, not a political operative, but he turned that into an asset. Others in government meetings had their opinions or their agency’s position or their talking points. Alan always had a survey of the academic literature at hand, and sometimes, as in the Obama administration’s internal debate on wage subsidies, had his own specially commissioned survey to report.

It mattered. Whether in the Clinton administration’s push for higher minimum wages, the Obama administration’s emphasis on spurring hiring after the financial crash or in its focus on the problem of jobless middle-aged men, Alan was one of the rare academics in government who had a real impact on policy.

Many distinguished economists have worked in government over the years — most but not all at the Council of Economic Advisers. Alan stands out in a final respect. After he returned to academe, he did not rest on his laurels or become a commentator and consultant on all matter of economic issues. Rather, he returned to great effect to doing serious academic research on opiates, on the determinants of happiness and even on the economics of rock music. His commitment to research was an inspiration to me and many others.

Always, from the day he walked in to my office at Harvard as a first-year graduate student, Alan seemed a happy man, excited about what he was learning and teaching, intensely connected to his family, looking to his next tennis game and his next trip. He certainly enriched the lives of all those honored to count him as a friend and helped make life better for millions of people who will never know his name. Alan’s life was short, but his legacy will be long. Rest in peace, my friend.


Responding to some of the critiques of our paper on secular stagnation and fiscal policy


My paper with Lukasz Rachel on secular stagnation and fiscal policy summarized here has attracted a number of interesting responses including from Martin Wolf, David Leonhardt, Martin Sandbu and Brad DeLong and also many participants at the Brookings conference.

I’m gratified that there seems to be general acceptance of the core secular stagnation argument. “Normal” policy settings of real interest rates in the 2 percent range, balanced primary budgets and stable financial markets are a prescription for stagnation and underemployment. Such economic success as the industrial world has enjoyed in recent decades has reflected a combination of very low real rates, big budget deficits, private leveraging up and asset bubbles.

No one from whom I have heard doubts the key conclusion that a combination of meaningfully positive real interest rates and balanced budgets would likely be a prescription for sustained recession if not depression in the industrial world.

Notice that this is a much more fundamental argument than the suggestion that the some effective lower bound on interest rates may impede stabilizing the economy. The argument is that because of chronic private sector tendency towards oversaving, economies may be prone to underemployment and financial stability absent policy responses which are themselves problematic.

This is an argument much more in the spirit of Keynes, the early Keynesians, and today’s Post-Keynesians than the New Keynesians who have set the terms for much of contemporary macroeconomic discourse both in academia and in the world’s central banks.

The central feature of New Keynesian models is an idea that economies have an equilibrium to which they naturally revert independent of policies pursued. Good central bank policy achieves a desired inflation target (assumed to be feasible) while minimizing the amplitude of fluctuations around that equilibrium.

In contrast contemporary experience, where inflation has been below target almost throughout the industrial world for a decade and is expected by markets to remain below target for decades, and where output is sustained only by large budget deficits or extraordinary monetary policies, suggest that central banks acting alone cannot necessarily attain inflation targets and that misguided policy could easily not just raise the volatility of output but also reduce its average level.

While there seems to be little doubt that real interest rates–short and long, ex ante and ex post — have declined very substantially even as (other things equal) budget deficits and expanded social security programs should have increased them, there remains debate about how to analyze these trends. Lukasz and I argue that adjustment to balance saving and investment is the best way understand declining real rates. DeLong wonders about changing risk premiums and Wolf cites BIS work arguing that low rates reflect the monetary policy regime. There is no reason why there needs to be only one cause of low real rates so these factors may enter. But as I expect we will illustrate in the revised version of the paper, the largest part of the low frequency variation in ex ante real returns is accounted for by a downward trending factor common to all asset prices. This is illustrated for the US in the figure below. So risk premiums or factors specific to Treasuries are likely not high order.

Figure: Decline in US real asset returns









Granting that secular stagnation is a problem, there is the question of policy response. The right policy response will be the one that assures that full employment is maintained with a minimum of collateral problems. Sandbu argues against the notion of secular stagnation in part because he thinks it may lead in unconstructive directions like protectionism and because he believes that stagnation issues can be feasibly and relatively easily addressed by lowering rates. Wolf, relying on the BIS, is alarmed by the toxic effects of very low rates on financial stability in the short run and economic performance in the long run, and prefers fiscal stimulus. Leonhardt prefers a broad menu of measures to absorb saving and promote investment.

I am not certain of the right approach and I wish there was more evidence to bring to bear on the question. I can certain see the logic of the “zero is just another number” view, that holds that the current environment poses no new fundamental issues but just may require technical changes to make more negative interest rates possible. I am skeptical because (i) I am not sure how large the stimulus effect of rates going more negative is because of damage to banks, reduced interest income for consumers, and because capital cost is already not the barrier to investment; (ii) I wonder about the quality of any investment that was not made at a zero rate but was made at a negative rate; and (iii) I suspect that a world of significantly negative nominal rates if sustained will be a world of leveraging, risk seeking and bubbles. I have trouble thinking about behavior in situations where people and firms are paid to borrow!

I am inclined to prefer more reliance on reasonably managed fiscal policies as a response to secular stagnation: government borrowing at negative real rates and investing seems very attractive in a world where there are many projects with high social returns. Moreover, we are accustomed to thinking in terms of debt levels but it may be more appropriate to think in terms of sustained debt service levels. With near zero rates these are below average in most industrial countries. The content of fiscal policies is crucial. Measures which run up government debt without stimulating demand like large parts of the Trump tax cut are ill advised. In contrast measures which promote investment and raise the tax base down the road are much more attractive.

There are of course other measures beyond stabilization policies like fighting monopolies, promoting a more equal income distribution, and strengthening retirement security for which the desire to maintain macroeconomic stability provides an additional rationale.

Who’s Afraid of Budget Deficits?


How Washington Should End Its Debt Obsession

By Jason Furman and Lawrence H. Summers

The United States’ annual budget deficit is set to reach nearly $1 trillion this year, more than four percent of GDP and up from $585 billion in 2016. As a result of the continuing shortfall, over the next decade, the national debt—the total amount owed by the U.S. government—is projected to balloon from its current level of 78 percent of GDP to 105 percent of GDP. Such huge amounts of debt are unprecedented for the United States during a time of economic prosperity. continue

Has economics failed us? Hardly


My friend Fareed Zakaria has celebrated his well-deserved recognition by Foreign Policy Magazine as one of the 10 most important foreign policy thinkers of the last decade by writing an essay entitled “The End of Economics,” doubting the relevance and utility of economics and economists.  Because Fareed is so thoughtful, and echoes arguments that are frequently made, he deserves a considered response. continue

Bringing accountability to powerful, unelected officials


It is often said that the chair of the Federal Reserve is the second most important person in Washington. I’m not sure the statement is exactly right, but that it is plausible is, in a sense, remarkable. Why should the second most important person in Washington not be elected by the people, or at least directly accountable to and subject to dismissal by elected officials? The president cannot fire members of the Federal Reserve Board of Governors, and for the past quarter-century it has been taboo for the president or his economic team to so much as comment on the Fed’s activities. continue

The financial crisis and the foundations for macroeconomics


A, if not the, preoccupation of macroeconomists for the last generation has been providing macroeconomics with a microeconomic foundation. At one level this totally makes sense. How can one be against establishing foundations? And it makes sense to think that macroeconomic theories of fluctuations in investment, for example, should be rooted in theories of how individual businesses makes investment decisions. continue

Setting the Record Straight on Secular Stagnation


Joseph Stiglitz recently dismissed the relevance of secular stagnation to the American economy, and in the process attacked (without naming me) my work in the administrations of Presidents Bill Clinton and Barack Obama. I am not a disinterested observer, but this is not the first time that I find Stiglitz’s policy commentary as weak as his academic theoretical work is strong.

Stiglitz echoes conservatives like John Taylor in suggesting that secular stagnation was a fatalistic doctrine invented to provide an excuse for poor economic performance during the Obama years. This is simply not right. The theory of secular stagnation, as advanced by Alvin Hansen and echoed by me, holds that, left to its own devices, the private economy may not find its way back to full employment following a sharp contraction, which makes public policy essential. I think this is what Stiglitz also believes, so I don’t understand his attacks.

In all of my accounts of secular stagnation, I stressed that it was an argument not for any type of fatalism, but rather for policies to promote demand, especially through fiscal expansion. In 2012, Brad Delong and I argued that fiscal expansion would likely pay for itself. I also highlighted the role of rising inequality in increasing saving and the role of structural changes toward the demassification of the economy in reducing demand.

What about the policy record? Stiglitz condemns the Obama administration’s failure to implement a larger fiscal stimulus policy and suggests that this reflects a failure of economic understanding. He was a signatory to a November 19, 2008 letter also signed by noted progressives James K. Galbraith, Dean Baker, and Larry Mishel calling for a stimulus of $300-$400 billion – less than half of what the Obama administration proposed. So matters were less clear in prospect than in retrospect.

We on the Obama economic team believed that a stimulus of at least $800 billion – and likely more – was desirable, given the gravity of the economic situation. We were told by those on the new president’s political team to generate as much validation as possible for a large stimulus because big numbers approaching $1 trillion would generate “sticker shock” in the political system. So we worked to encourage a variety of economists, including Stiglitz, to offer larger estimates of what was appropriate, as reflected in the briefing memo I prepared for Obama.

Despite the incoming president’s popularity and an all-out political effort, the Recovery Act passed in Congress by the thinnest of margins, with doubts about its ultimate passage linger until the last moment. I cannot see the basis for the argument that a substantially larger fiscal stimulus was feasible. And the effort to seek a much larger one certainly would have meant more delay at a time when the economy was collapsing – and could have led to the defeat of fiscal expansion.

While I wish the political climate had been different, I think Obama made the right choices in approaching fiscal stimulus. It is of course also regrettable that after the initial Recovery Act, Congress refused to support a variety of Obama’s proposals for infrastructure and targeted tax credits.

Unrelated to the topic of secular stagnation, Stiglitz takes a swipe at me by saying that Obama turned to “the same individuals bearing culpability for the under-regulation of the economy in its pre-crisis days” and expected them “to fix what they had helped break.” I find this a bit rich. Under the auspices of the government-sponsored enterprise (GSE) Fannie Mae, Stiglitz published a paper in 2002 arguing that the chance that the mortgage lender’s capital would be depleted was less than one in 500,000, and in 2009 he called for nationalization of the US banking system. So I would expect Stiglitz to be well aware that hindsight is clearer than foresight.

What about the Clinton administration record on financial regulation? With hindsight, it clearly would have been better if we had foreseen the need for legislation like the 2010 Dodd-Frank reforms and had a way to enact it with a Republican-controlled Congress. Certainly we did not foresee the financial crisis that came eight years after we left office. Nor did we anticipate the ways in which credit default swaps would mushroom after 2000. We did, however, advocate for GSE reform and for measures to rein in predatory lending, which, if enacted by Congress, would have done much to forestall the accumulation of risks before 2008.

I have not seen a convincing causal argument linking the repeal of the Glass-Steagall Act and the financial crisis. The observation that most of the institutions involved – Bear Stearns, Lehman Brothers, Fannie Mae, the GSE Freddie Mac, AIG, WaMu, and Wachovia – were not covered by Glass-Steagall calls into question its centrality.

Yes, Citi and Bank of America were centrally involved, but the activities that generated major losses were fully permissible under Glass-Steagall. And, in important respects, the repeal of Glass-Steagall actually enabled the resolution of the crisis, by permitting the merger of Bear and Merrill Lynch and by allowing the US Federal Reserve to open its discount window for Morgan Stanley and Goldman when they otherwise could have been sources of systemic risk.

The other principal attack on the Clinton administration’s record targets the deregulation of derivatives in 2000. With the benefit of hindsight, I wish we had not supported this legislation. But, given the extreme deregulatory approach of President George W. Bush’s administration, it defies belief to suggest that it would have created major new rules regarding derivatives but for the 2000 act; so I am not sure how consequential our decisions were. It is also important to recall that we pursued the 2000 legislation not because we wanted to deregulate for its own sake, but rather to remove what the career lawyers at the US Treasury, the Fed, and the Securities and Exchange Commission saw as systemic risk arising from legal uncertainty surrounding derivatives contracts.

More important than litigating the past is thinking about the future. Even if we disagree about past political judgements and about the use of the term “secular stagnation,” I am glad that an eminent theorist like Stiglitz agrees with what I intended to emphasize in resurrecting that theory: We cannot rely on interest-rate policies to ensure full employment. We must think hard about fiscal policies and structural measures to support sustained and adequate aggregate demand.

In Memoriam Dick Spangler


My friend Dick Spangler died this week. He was a great supporter of Harvard and a very good friend to me. I feel his loss in a profound way.

I met Dick when he was a member of Harvard’s Board of Overseers and I became President. In a group of distinguished people, Dick was a towering figure. He contributed more to Harvard than anyone else;  he had more experience as a higher education leader than anyone else; he worked harder than anyone else reaching out often to people a third of his age. He was wise, pithy and clear in all his statements.

Dick was a very good friend to me. During my time as Harvard president he taught me much about treating people right, about fundraising, about setting priorities and about leadership. I’d have been better off if I had followed more of his advice.

Knowing Dick, I was not surprised to learn from his obituary that he had been a hero for civil rights, civility and public schooling in North Carolina. He was a business leader who understood (as many do not) business’ dependence on the broader society.

In the last long decade I saw Dick only every couple of years. He would drop by my office when he was visiting Harvard. He would always insist on waiting while I finished up a conversation with a stray sophomore. Then we would talk about Harvard, politics and family. As I became more involved in the business world, he gave me some of the best advice I have ever received.

Dick Spangler may be gone but his influence will endure through the many people he made better. I am proud to have been his friend.

How to actually help Puerto Rico


Desmond Lachman, Brad Setser and Antonio Weiss have written a strong analysis of the Puerto Rico situation. If ever there was a disconnect between underlying reality and what is happening in financial markets, it is the boom in Puerto Rican debt which has nearly doubled the value of some of its debt securities over the last few months. continue

No, “Obamasclerosis” wasnt a real problem for the economy


The Wall Street Journal’s Greg Ip, reviewing the Trump administration’s first Council of Economic Advisers report, finds credible its claims that President Barack Obama’s policies, particularly in his second term, materially slowed economic growth, even though Ip acknowledges that the CEA’s assertions regarding magnitudes are likely exaggerated.

The CEA’s thesis is that a wave of tax and regulatory policies reduced both workers’ incentives to work and businesses’ incentives to invest, leading to slower economic growth than would otherwise have been achievable.

I am sympathetic to arguments of this type, having often observed that “business confidence is the cheapest form of stimulus.” And I would be the last to argue that every regulatory intervention of the late Obama years was salutary. I would also note that much of what the Obama administration proposed (for example, more infrastructure spending and responsible tax reform) would have triggered even greater economic growth but never came to pass, largely due to congressional roadblocks. There was certainly more that could have been done.

But at least three broad features of the economic landscape make the CEA’s view an unlikely explanation for disappointing economic growth.

First, the dominant reason for slow growth has been what economists label slow “total factor productivity” (TFP) growth. That is, the problem has not primarily been a shortage of capital and labor inputs into production, but rather slow growth in output, given inputs. After growing at about 1 ¾ percent per year between 1996 and 2004, the TFP growth rate has dropped by half since 2005.

While TFP has fallen off rapidly, there is no basis for supposing that levels of labor input or capital are less than one would expect given the magnitude of the Great Financial Crisis. In fact, labor force participation rates in 2016 lined up closely with Federal Reserve researchers’ 2006 predictions. This suggests the lack of importance of the various factors adduced by the CEA’s report.

Second, perhaps the biggest surprise of the last few years has been the remarkably low rate of inflation even as the unemployment rate has reached 4 percent. Year after year, consensus and Federal Reserve Board forecasts of inflation have fallen short of predictions. If, as the CEA believes, our slow economic growth is a result of too little supply of labor and capital, one would expect surprisingly high, rather than surprisingly low, inflation as demand growth collided with constricted supply. This is the opposite of what we observe. On the other hand, the secular stagnation hypothesis that emphasizes issues on the demand side would predict exactly the combination of sluggish growth, low inflation and low capital costs that we observe.

Third, the essential idea behind the CEA’s thesis is that capital has been greatly burdened in recent years by onerous regulation, high taxes and a lack of availability of labor. This idea is belied by the behavior of the stock market and of corporate profits. Over the course of Obama’s second term, corporate profits increased by nearly 20 percent, and the S&P 500 grew by more than 50 percent. This hardly suggests a period of excessively increasing burdens on capital.

The observation that share buybacks appear to be the largest use of the proceeds from the Trump tax cuts points in the same direction. Costs of capital have not been responsible for holding back investment in the United States in recent years.

If the “Obamasclerosis” theory does not fit the facts of slow growth in recent years, what are its likely causes? This will remain a matter for active research. But my guess is that key elements include hysteresis effects from the financial crisis and associated recession, reduced application of innovation in the economy in recent years, and possibly the adverse effects of rising monopoly power and diminishing competition in a range of markets.

In memoriam Bill McDonough


William “Bill” McDonough was my friend. We met in January 1993 when I took up my new position leading international affairs at the Treasury Department, and Bill was preparing to become president of the New York Federal Reserve Bank. For the next eight years we probably spoke twice a week and much more frequently in times of crisis. I learned more from Bill than I was ever able to express to him.

In some ways, Bill was from central casting’s traditional idea of a central banker, and he acted the part. I never saw him in public and in doubt. In other ways, he was a very different from the typical central banker.

  • Most prefer to read a data table than a face. Not Bill. He knew how important relationships were when the chips were down and invested in them every day.
  • Most see the world in terms of global generalities. Bill cared about national particularities from native languages, to local rules, to culture. It made him a uniquely trusted figure, especially in Latin America but also around the world.
  • Most are stern and serious. I always picture Bill with a smile on his face as he explained to me what you had to grab to get hearts and minds to follow. He took what he did plenty seriously but he never took himself too seriously.
  • Most are pragmatists. Bill was too, but he was also a moralist. He knew that he lived a lucky life and he never forgot his good fortune. And he never let his friends forget that they too were, for the most part, highly fortunate and had obligations to those whose luck had been less good.

History alters perspectives. Some of Bill’s most important policy thrusts look more clearly right today than they did at the time. Bill was on to what we delicately call agency issues in finance before it was fashionable, as he warned about compensation practices. He was prescient on issues of systemic risk and capital adequacy. And his handling of Long-Term Capital Management, a hedge fund, presaged contemporary discussions of orderly workouts in important respects.

Gerry Corrigan had a worthy successor and Tim Geithner had a worthy predecessor in William McDonough.

I treasured Bill’s humor, wisdom and loyalty in equal measure. In those years of the Mexican financial crisis, the Asian financial crisis, a struggling Japan, and an ultimately defaulting Russia, Bill’s earthy, forceful warmth was a wonderful counterpart to the more abstract and analytical Greenspan in the conduct of financial diplomacy. Millions who never knew his name lived better more secure lives because of what he did.

May he rest in peace.


Why Treasury Secretaries should stick with the strong dollar mantra


Yesterday in Davos, Secretary Mnuchin left the impression that he might be reversing 25 years of US Treasury strong dollar policy by asserting that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.”  The dollar then had its biggest one day decline in nearly a year and bond yields rose.  Commerce Secretary Ross later joined the fray claiming that the US strong dollar policy was unchanged but this did not affect markets. continue

If we want to improve global health, we need to start taxing the things that are killing us


The world is going through a huge health transition, where the problems of the six billion people who live in emerging markets are increasingly the problems of the one billion people who live in rich countries. For the first time in history, more people suffer from eating too many calories than too few. Improving global health is no longer primarily about combating infectious diseases. continue

We are even more convinced that thousands will die prematurely if the ACA is repealed


On Monday, The Washington Post published an article by Casey Mulligan and Tomas Philipson attacking Lawrence Summers’s statement that “thousands” of individuals would die if the Republican tax bill became law. Summers reached his estimate after carefully reviewing the literature and consulting with health economists Jonathan Gruber and Mulligan and Philipson’s University of Chicago colleague Dean Kate Baicker, who has published a number of influential studies on the effect of health insurance on health. continue