Wall Street Journal CEO Council

November 25th, 2013

November 19, 2013


Ladies and gentlemen, please welcome to the stage the former Treasury Secretary Lawrence Summers, and the Economics Editor of The Wall Street Journal, David Wessel.


So y’all made it through the magnetometer.  Is anybody still up there waiting to go through?  It’s my great honor and privilege to be here with Larry Summers.  When Larry Summers was two years old, his parents took him to his pediatrician, who happened to be my father.  And, according to Larry’s father, a story he told at my father’s retirement party, Larry’s parents expressed concern that Larry wasn’t talking very much at two years old.  And supposedly my father’s response was, “I wouldn’t worry about it.  Once he starts, he’ll never stop.”  So with that—


Moving right along.


If we had been able to post questions, I would have asked you this question on the screen.  But I’m going to ask for a show of hands, because it’s relevant to what I want to talk to Larry about.  If you had to pick the top priority, the single top economic priority, for the U.S. government right now, and I gave you a choice between reducing the long-term deficit and doing something to spur growth in the short term and the long term – deficit or growth, you only get one vote.  How many people would choose the deficit over growth?  And how many people would choose growth over the deficit?  Larry, I have been here in Washington for 30 years.  And for much of that time, we have been obsessed with reducing the deficit.  And that has been particularly true in the last few years.  You think that’s a dumb idea, and so do a lot of people here.  Why?


You guys are right.  They’re wrong. You guys are not getting your way.  We’ve had ten bipartisan budget processes.  We’ve had zero bipartisan growth processes.  We’ve had budget summits up the ying yang.  We’ve had no growth summits.  Somehow – and frankly the business community is complicit in it, because they have been substantial financial supporters and encouragers of it – we have gotten the idea that addressing the deficit is the defining challenge facing the country.

There are three relevant realities.  First, on the current forecast, the debt-to-GDP ratio will improve over the next decade.  The debt forecasts look just about right on line with the way they looked in terms of decline after the 1993 budget deal.  For ten years, this problem is in hand.

Second, basing policy on forecasts longer than that is kind of a crazy thing to do.  If you take the confidence interval around the deficit forecast, not 20 years out, not a 95% confidence interval, but five years out, a 90% confidence interval.  That confidence interval is 10% of GDP-wide.  It is plus or minus 5%.  If, with global climate change, people were telling us temperature change would be between -3° to + 6°, we wouldn’t be acting on the problem. And so, we do not know what the long-run deficit is going to be.

And the third thing, and the most important thing, I think, is that if you take the longest-run deficit, and you take the official forecasts of it, if we increase the growth rate by two-tenths of 1%, just two-tenths of 1%, you solve the entire identified fiscal gap problem.

And I’m here to say that in a country that is stifling entrepreneurship in a variety of ways, in a country that is starved for public investment, that lets Kennedy Airport languish in the way we do, in a country that’s missing a huge opportunity on immigration reform, in a country that’s maintaining a regulatory and tax environment that surely doesn’t recognize that confidence is the cheapest form of stimulus, increasing the growth rate by more than two-tenths of a percent is easily attainable.

The truth is that if we get past our current perhaps protracted bout of secular stagnation and get the growth rate up, the debt problem will stay in control.  And if we continue to be a country that doesn’t increase the fraction of adults that are working, that doesn’t catch up with its GDP potential, that grows at 2% or less, we can have all the entitlement summits in the world, and we’re gradually going to accumulate debt and have a serious debt problem.

And so, we just have gotten our focus to the wrong thing.  We should be focusing on growth: because growth creates a virtuous circle, which creates more growth.  In a growing economy, employers work harder to train the next generation of workers.  In a growing economy, there are more ladders for kids to get on, which puts them in a better position to lead ten years down the road.

In a growing economy, there are more profits that can be reinvested in R&D and long-term capacity.  In a growing U.S. economy, there’s a stronger world economy, which is more likely to be a successful world economy.  That is where our priority should be.  And in my view, we have just, I’m sad to say, lost track of it as a country.


Why is it wrong to say that, “we know we have an aging society, we know we have some benefit promises that are going to be expensive to keep, and wouldn’t it be prudent to do something about growth and package that with things that we know take a long time to save money for, and do it now rather than bequeathing the problem?”


There were some real problems in the kitchen of the Titanic.  There were.  They just were the wrong problems to be working on given the challenges that the Titanic faced and given that management had only so many issues that it could devote itself to.  And it’s the same thing.  It would be better to be thinking about a range of long-term adjustments about 2035.  It would be.

But we really can’t do very much.  We have a lot of difficulty passing any legislation.  And so, in that context, the right focus is on what is most important.  And what is most important is things that contribute to growth.  And what is surely necessary is things that contribute to growth.  I think that the odds are that we’re going to need to make entitlement adjustments, but given the uncertainties in the forecasts, these forecasts are wrong by 5% of GDP all the time.

They were wrong by 5% of GDP on the high side – the forecasts were too pessimistic in the ’90s.  They were wrong by 5% of GDP on the low side – they were too optimistic in this period.  They’re wrong by 5% of GDP all the time.  And when people are talking about entitlement reform, they’re talking the big numbers.  They’re talking about 1% of GDP. They’re talking about 1.5% of GDP.  So yeah, it’s the right thing to be thinking about.  But it’s not nearly as important as spurring growth.

And one other thing that a group like this should remember.  Again, it’s the right thing to be doing.  But, you know, if you contribute the absolute maximum you’re legally allowed to every year from the time you’re 19 till the time you’re 65, your Social Security benefit is less than $40,000.  And so, yeah, there may be a case that we need to adjust the formula in various ways.

But just how excited can you really be about the central national project being cutting those benefits for the best of the Social Security recipients from $38,000 to $36,000, rather than figuring out a way to grow the economy faster so there can be more benefits for everybody.  The right debate to be having is not a debate about what the best way to contain the budget deficit is.  The debate to be having is about how best to spur growth.


You used a rather frightening phrase in your answer about secular stagnation.  Do you mean that we are at substantial risk of having an economy that perks along at 2% growth and has one in six men between 25-54 on the sidelines of the labor market for years to come?


I’m not predicting it.  But I don’t see how you can look at the data and not say that that is a substantial risk.  Here are just two points.  Four years ago, financial repair had happened.  The TARP money had been repaired.  Credit spreads had largely normalized.  There was no panic in the air with respect to banking institutions.

It has been four years.  We have not grown the share of adults who are working in the United States at all since that time.  We have not gained at all on the potential of the economy.  We have predicted a growth machine – the forecasters have been consistent, been absolutely consistent – a return to accelerated rates of growth nine months from now. That has been the forecast for the last four years.  And it has always been wrong.  And it might be right this time.  It really might be.  There are reasons to think it could be right.  But I don’t see how you can be certain that it’s right.  And if you look back, there’s a troubling feature, it seems to me, of the experience before this crisis.  And that’s what’s causes me to become more alarmed.

Think about the 2004-2007 years.  We had what consensus opinion now thinks were excessive budget deficits.  We had what consensus opinion now thinks were substantial excessively easy monetary policies.  We had what universally is regarded as having been a massive, imprudent, and excessive set of credit expansion.  We had what is universally regarded as having been an inordinate credit housing bubble, which created a false impression of wealth and created vast and excessive construction.

You might think that with all of those things going, we’d also have had an economy that would be overheating.  But if you look at the unemployment statistics, if you look at the inflation statistics, if you look at the growth statistics, the economy was bubbling.  There were bubbles all right.  But the underlying real economy, with a huge support to demand from all of that, was not overheating by any stretch of the imagination.

And so, it has now been a decade since we have grown at a rapid rate in a remotely healthy and sustainable way.  And it seems to me that has to be the deep concern as you look to the next decade.  Things happen.  I mean, when I came into the Clinton Administration in 1993, we did a comprehensive exercise.  And Treasury was part of it.  The Fed was part of it.  The IMF was part of it.  We asked all the outside forecasters.

Looking to the long run, there was a debate.  There were pessimists who thought Japan would grow by 3% a year over the succeeding 20 years.  And there were optimists who thought it would grow by 4% a year over the succeeding 20 years.  It has in fact grown by about .6% a year over the succeeding 23 years.  And so GDP is only slightly more than half today of what we universally believed then.  Because permanent stagnation was kind of inconceivable.

Now, in Japan, what happened was growth was very, very slow and continued to be very, very slow.  And then after awhile, everybody got used to it.  And they stopped calling it a demand gap.  And they started saying it was all that could be done.  And, to some extent, that became true.  Because after all those years, the companies didn’t reinvest, the companies lost their mojo.  They weren’t in a position to compete.

And so, at a certain point, supply came down to demand.  And you just got used to the idea that Japan was a different kind of growing country.  So, I’m not saying we’re going to have a 30% of GDP gap.  But we are already defining our aspirations as measured by potential GDP way down.  So if you ask, “is there a risk of this?”  Absolutely.  Does the risk, does the prospect of this seem as likely or more likely than the high optimism scenario, where we go back to an era of 4% growth?

Yeah, I have to say that as between the pessimistic scenario and the hyper-optimistic scenario, I would choose the pessimistic scenario.  You know, I think things have a way of working out.  And my guess is that it will be better than that.  But the thing that policymakers should be obsessing about is the risk of this secular stagnation.

That’s a much more urgent threat to every American interest than anything about Social Security benefits in 2035.  That is a much greater risk to American interests than anything about the emergence of hyper-inflation coming from monetary policies.  That is where the concern ought to be.


The gap between winners and losers in our society is wide by historical measures and has been widening.  A) Should we worry about that?  And B) If so, what should we do about it?


We surely should be worrying about it.  If the only thing that was happening was that, I would argue that we should be worrying about it.  But, I would understand why other people would feel, “well, that’s what the market was doing, and you shouldn’t make that be a preoccupation.”  But here’s what’s really scary.  For 240 years since George Washington, it’s always been true that we became a country with more equal opportunity every generation.

That is no longer true in the United States.  The gap in life prospects between the children of the rich and the children of the poor has widened over the last 40 years.  The gap in the college attendance rates between the children of the rich and the children of the poor has widened over the last 40 years.  It’s not that we don’t know how to make progress.

If you look at the achievement gap between black and white students, that achievement gap in 1970 was twice as large as the gap between the children of the rich and the children of the poor.  If you look today, the achievement gap between the children of the rich and the children of the poor is twice the gap between blacks and whites.  So, we know how to make problems.  With 40 years of effort, we have a long way to go.  But, with 40 years of effort, we have made enormous progress with respect to civil rights.  Still, if s is said the problem with 20th century was the color line, the problem of the 21st century is the class divide and what it means for opportunity.

And so a widening income distribution combined with more and more ways in which the fortunate can advantage their children I think is profoundly corrosive.  What is it that should be done?  We need to find ways to ensure that the educational opportunities open to every kid are like the educational opportunities open to the kids of the people in this room.  And we are not close to that as a country.

We need to make sure that where there are slots to be given, whether it’s the government giving rights to spectrum, or mining right, or whatever it is; that those processes are open and inclusive and are not processes that reward the fortunate.  I have written a lot of papers about the important incentive effects of taxation.  And I believe that.  And we cannot punitively tax; we cannot go back to the kind of tax rates that the country had in the ’50s and ’60s and the ’70s.

But I am here to tell you that there are a substantial set of loopholes, special interest privileges, and the like that distort the allocation of resources, make the economy function less well, and also act to reify and to reinforce inequality, and that serious tax reform that goes after those inequities could both make a fairer economy and make an economy that was more efficient.


Well, let me pick up on that last point a minute.  So corporate taxes, obviously something people here care about.  What would you do if you could write the corporate tax rules?  How would you handle the question of overseas earnings?  What’s the right way to do this for the economy and for the social good?


Indulge me for a minute, if you will, in an analogy.  Suppose you had a library and the library’s got a lot of overdue books.  One thing you could do is you could have an amnesty where people got to bring back their books and they didn’t have to pay a fine.  That would make sense.  Another thing you could do is you could is say, “We’re never going to have an amnesty.  You better bring back your books, because no matter how long you keep your books, you’re not going to get an amnesty.”

That would be kind of harsher.  But that would make sense, too.  A really idiotic thing to do would be to put a sign on the door of the library saying, “No amnesty, but stay tuned, there might be one next month.”  That would be the dumbest imaginable thing to do.  What has been the U.S. corporate tax debate for the last five years?  It’s been exactly that.  No break on repatriation now.  But, the constant hope that there may be a break on repatriation in the not too distant future.

And so, why would anyone bring back their money in the face of that?  What should we do?  I think the principle’s clear.  You can call it territorial with a minimum.  There are a lot of different things you can call it.  We should eliminate the distinction between repatriated profits and non-repatriated profits.  And we should establish, in a balanced budget way, a minimum tax on global income.

And so, whether the rate would be in the neighborhood of 15%, you’d pay that if you brought your money back.  You’d pay that if you left your money in Ireland.  And there would no longer be an incentive to keep money offshore.  And if you did it right, there would not be any revenue loss to the government.

But look, there are things we need to fix to stimulate investment in the country.  But, I don’t know that much about multinational business.  But, here’s something I think I do know.  If you measured it right, the places abroad where the American companies make the most profits would be places like China and Japan and Germany and France – places that have big economies.

But, if you look at their tax returns, the places that show up having the highest profits are places like the Netherlands and Ireland and, in case you’re not getting it, the Cayman Islands.  And that really shouldn’t be that way.  It really doesn’t need to be that way.  And it’s not really making the country more competitive or creating jobs to have it be that way.  So the principle is: don’t try to raise more money, but try to raise money in a much better way.  And certainly don’t keep up a set of uncertainties that all but forces everybody to leave their money abroad.


I can keep going, but if you have a question?  Okay, I don’t see anything.  Healthcare.gov is a disaster.  How much damage has that done to the trust that Americans have in the ability of the government to do anything?


We’ll see.  It can’t be good.  Look, this is an unhappy tale.  Many of you know from your own experiences that the right general rule on large I.T. projects is take the estimated time to completion, double it, and then move to the next higher unit of time.  So, days become weeks and weeks become months and I could continue the sequence.

And that’s true when it’s done in the private sector.  And there’s no organized constituency for failure.  And when it was done in the public sector, there was a massive organized constituency for failure that organized as best it could to bring about failure by starving the funds and by objecting to the procedures and so forth.

So, it was an extraordinarily difficult task whose difficulty was massively underestimated.  And I don’t think there’s any legitimate excuse for how badly it was underestimated.  And I think you have to say that if you look at the capacity of government to do things, you have to be less optimistic about that than you were before.  And I think it’s a huge imperative to do something that will renew confidence.

And, as I wrote a few days ago, the great danger at a moment like this – the great danger for a football team that’s down by two touchdowns early in the 4th quarter is that they will abandon their playbook and start throwing Hail Marys in every direction.  And usually, that’s a good way to end up down by three touchdowns.  And the great danger at a moment like this is that you’ll promise days when you’ll have results.  You’ll make confident claims about what’s going to happen next.  You’ll try to jerry-rig something rather than recognizing that given the depth of the hole you’re in, it’s going to be very difficult.

So, I think this it is going to take, as difficult as it was to do this right in the first place, it is going to be more difficult to fix.  But I think it is hugely important that it be fixed.  At the same time, I do think that we do need a kind of compact in this country, where we debate things and we debate things and we debate things; and then, when we come to a conclusion, for a while everybody tries to make them work.

And if they don’t work, then at a certain point, we draw the lessons from that.  But those who try to bring about failure and then say, “Look, we saw failure; therefore, we can’t rely on government,” I don’t think they are performing in a way that they should be proud of either.  So, I don’t think there’s anybody in Washington who is emerging as a winner from how this appears.

And I do, if I may say so, think that those of you who (which I suspect is a majority of people in this room) are of a more conservative bend than I, do need to recognize that of the several strategies that could have been pursued that would have resulted in universal health care, the one that was in fact pursued was the one that was most-respecting of the traditional market, was the one that went the most with the grain of the current system, was the one that was closest to what had been proposed by Republican think tanks like The Heritage Foundation and implemented by conservative state administrations.

And so, if this kind of combination of government operating at the edge rather than taking over the whole system is too difficult to make work, there are conclusions from that that could be drawn in both directions.  But, my hope and my expectation would be that this will over time be fixed and be made right.  And I think it is worth remembering, just as a general matter, having now kind of lived around Washington things for quite some time, you know.  It was only two months ago, less than two months ago, that the budget deal and the failures around the budget and the fact that the Republicans were face down on debt issues meant that they could have been seen as being in deep and terminal difficulties.

And that now is completely out of everyone’s mind.  And no one remembers that as an important event all of six weeks later.  And so it’s a great mistake to think that whatever the mood is right now that that’s what the mood will be three months from now, let alone three years from now.  There’s a large universe of possibility.


So Larry, you mentioned Japan, slow growth over more than a decade now, two decades.  Abe comes in, a new economic approach is three arrows – monetary, fiscal, and restructuring.  We’ve seen one of the arrows fired.  Maybe the second one is kind of in the quiver.  The third really isn’t that of the talking shop yet.  Wonder what your evaluation of that economic policy is and the likelihood of success.


You know, it’s a little bit like pulling your goalie in a hockey game.  It’s not that when you got a minute and a half to play, pulling your goalie out is that great a strategy.  It’s just that if you don’t pull your goalie out and the clock runs out, then you lose for sure.  And so you have to try something new.  So, I think the basic thrust of a substantial commitment to expansion was the right one.

I think there have been some encouraging signs so far in the increasing growth expectations, in the reduction in deflation expectations.  And so I think the prospects for Japan look considerably better than they did a year ago.  And that is a tribute to the policies.  But I don’t think we’ll know until nine months from now.  I think nine months from now they will put the value added tax in.  And either the economy will have weathered that and continue to be growing in a reasonable way or, as has happened in the past, there will be a run-up of growth until they do that.  And then, there’ll be an air pocket in spending afterwards and they’ll be back in the soup.  And I can’t confidently predict between those two possibilities.  Both, I think are real possibilities.


Question from one of the CEOs here.  Can you raise your hand?


Rich Schlecter.  You talked about the secular challenges to long-term growth.  Could you talk about the role of labor in society?  It feels like the combination of globalization, automation – we heard a wonderful discussion at lunch, which says even at the university level, there’ll be increasing pressures on traditional jobs.  Not maybe at the very top universities, but at many, many others.

And it just seems that, if you’re at the very top, today’s world offers more opportunity than ever to contribute globally.  And if you’re not at the very top, the pressures for middle-class jobs and other things are just enormous.  Do you see an underlying trend here?  And what do you think it means in terms of long-term growth and the inequities in society that you described?


If the issues that I called “secular stagnation” around lack of demand and all of that are the issue for the next decade, the issue for the next half-century is the issue that you raised.  You know, there were some guys who wrote, very distinguished economists who wrote a book nine years ago about technology and its impact on employment.

And one of the most striking passages was they said, you know, computers can do some things.  But computers really aren’t going to be able to do other things.  And their example of something that computers were not going to be able to do was make a left turn against ongoing traffic.  Well, Google nailed that one within less than a decade.

And one of the things I’ve done since leaving government is spend a bunch of time out in Silicon Valley.  And the set of things for which they are developing capacities to do is mind-boggling.  Now, it’s always been true before that jobs were eliminated in one sector by productivity increase and they went to somewhere else.  And that people thought it couldn’t happen.  That’s true with respect to agriculture.  That’s true with respect to the Luddites in England.  It’s always been true before.  It was always true before that, you know, house prices in America went up.  And so “it’s always been true before” is not a conclusive argument.  I think our chances are maximized if our education system is preparing as many people as possible to be as creative and flexible as possible.

I think we’re going to have to recognize that in a world where the potential rewards and leverage to the most creative are larger, that we’re going to have to find ways of having some redistribution from the most creative to everyone else.  You know, the example I like to give is George Eastman had some fantastic ideas about photography.  And he was very successful.  And along with his success, the City of Rochester supported a thriving middle-class for two generations.

Steve Jobs equally fundamental innovations or more fundamental innovations produced even greater success for him and for his shareholders.  But there was no comparable large-scale middle-class job creation.  And that’s what we’re going to have to work through.  It’s going to require us to be much more imaginative in thinking about various kinds of service work and thinking about the quality of jobs and the dignity of jobs associated with the service sector.

I’m all for doing everything we can.  And there’s a lot that we can do that is still undone to bring about a renaissance of American manufacturing.  But, China has gained competitiveness, gained share, innovated and raised its efficiency, as much as any country ever will.  And there are fewer workers in Chinese manufacturing today than there were 20 years ago.  Let me say that again.  There are fewer workers in Chinese manufacturing today than there were 20 years ago.  And so success, if and when it comes, is going to come from various kinds of service work, various kinds of greater customization.

Look, it’s a tragedy that on the one hand you’re saying (and you’re right and I understand why you’re saying it), that there may not be enough work to do.  On the other hand, there are several million kids in this country who profoundly need individual attention and mentoring of a kind they are not close to getting.  And we don’t have a way of bringing the people who want to work together with those kids.  And I don’t think it’s traditional government that’s going to do it.  But I also don’t think it’s going to be turning the country into some kind of Libertarian paradise.


With that, join me in thanking Larry Summers.


It seems that my father was right.


[1] Lightly edited for grammar and clarity of presentation.