Summers talked with Joe Kernen from CNBC’s Squawk Box on Thursday, April 9, 2015 saying, “Pre-emptive wars don’t work and pre-emptive wars on inflation would be a big mistake.” Summers also told Kernen, “We need to be all over the inflation data.” Read more
April 5, 2015
This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the US before, and times when American behaviour was hardly multilateralist, such as the 1971 Nixon shock, ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.
This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the US approach to global economics. With China’s economic size rivalling America’s and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the US have rendered it increasingly dysfunctional.
Largely because of resistance from the right, the US stands alone in the world in failing to approve the International Monetary Fund governance reforms that Washington itself pushed for in 2009. By supplementing IMF resources, this change would have bolstered confidence in the global economy. More important, it would come closer to giving countries such as China and India a share of IMF votes commensurate with their new economic heft.
Meanwhile, pressures from the left have led to pervasive restrictions on infrastructure projects financed through existing development banks, which consequently have receded as funders, even as many developing countries now see infrastructure finance as their principle external funding need.
With US commitments unhonoured and US-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank. There is room for argument about the tactical approach that should have been taken once the initiative was put forward. But the larger question now is one of strategy. Here are three precepts that US leaders should keep in mind.
First, American leadership must have a bipartisan foundation at home, be free from gross hypocrisy and be restrained in the pursuit of self-interest. As long as one of our major parties is opposed to essentially all trade agreements, and the other is resistant to funding international organisations, the US will not be in a position to shape the global economic system.
Other countries are legitimately frustrated when US officials ask them to adjust their policies — then insist that American state regulators, independent agencies and far-reaching judicial actions are beyond their control. This is especially true when many foreign businesses assert that US actions raise real rule of law problems.
The legitimacy of US leadership depends on our resisting the temptation to abuse it in pursuit of parochial interest, even when that interest appears compelling. We cannot expect to maintain the dollar’s primary role in the international system if we are too aggressive about limiting its use in pursuit of particular security objectives.
Second, in global as well as domestic politics, the middle class counts the most. It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonisation with moral concerns about global poverty and posterity, while offering little to those in the middle. Approaches that do not serve the working class in industrial countries (and rising urban populations in developing ones) are unlikely to work out well in the long run.
Third, we may be headed into a world where capital is abundant and deflationary pressures are substantial. Demand could be in short supply for some time. In no big industrialised country do markets expect real interest rates to be much above zero in 2020 or inflation targets to be achieved. In the future, the priority must be promoting investment, not imposing austerity. The present system places the onus of adjustment on “borrowing” countries. The world now requires a symmetric system, with pressure also placed on “surplus” countries.
These precepts are just a beginning, and many questions remain. There are questions about global public goods, about acting with the speed and clarity that the current era requires, about co-operation between governmental and non-governmental actors, and much more. What is crucial is that the events of the past month will be seen by future historians not as the end of an era, but as a salutary wake up call.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
In an exclusive interview with Prof. Summers and Prof. Edmund Phelps, Thought Economics looks at the story of modern capitalism, the benefits it has brought, and the challenges it has created. The series explores the ‘post crisis’ economy, the role of government in society, the relationship between capitalism, conflict and inequality and looks at what needs to be done to ‘fix’ our global economy, and the science of economics itself. Read more
March 8, 2015
Over the next few months, the question of U.S. participation in the Trans-Pacific Partnership trade deal is likely to be resolved one way or the other. It is, to put it mildly, a highly controversial issue. Proponents believe a deal is essential to both our economic and geopolitical interests; opponents fear that it will primarily benefit corporations and the wealthy at the expense of middle-class living standards.
Definitive judgement is not possible because the parties are still negotiating and we have not yet seen a final agreement. Our negotiators should never forget that those who “need” agreements get less-good ones than those who do not. The U.S. economy is certainly capable of prospering without a deal. And lack of global profit opportunities for corporations headquartered in the United States is not one of our economy’s most pressing problems. Nonetheless, I believe that the right TPP deal is very much in the U.S. national interest.
First, in considering what is most fundamental — the interests of American workers — it is essential to distinguish between the effects of trade and the effects of trade agreements. The combination of changing patterns of trade, in which more activity takes place with low-wage economies, and new research has altered economic thinking on trade. The consensus view now is that trade and globalization have meaningfully increased inequality in the United States by allowing more earning opportunities for those at the top and exposing ordinary workers to more competition, especially in manufacturing.
But increases in the extent of U.S. trade are driven largely by technology and by the increased sophistication of developing economies, not by trade agreements. The United States, for example, has had no new trade agreements or arrangements with India for 20 years. Yet the dollar volume of trade between the two countries has increased ninefold.
Arrangements such as the TPP have the potential to tilt the gains from trade toward the American middle class. This is due to the fact that the United States has been a very open market for a long time. This means that properly negotiated trade agreements bring down foreign barriers and promote exports to a much greater extent than they reduce U.S. barriers and benefit imports. They also reduce pressure for outsourcing because when barriers fall the incentive to invest abroad in order to avoid paying tariffs is attenuated.
Crucially, the TPP is necessary to allow U.S. producers to compete on a level playing field, given the proliferation of arrangements that do not include the United States. Currently, for example, Japanese and Southeast Asian producers get better terms in each other’s markets than does the United States. Only through the TPP do we have the chance to manage international competition in ways that can benefit U.S. workers through binding arrangements in areas such as labor and environmental standards.
So the TPP should be judged not against the hypothetical past in which U.S. workers did not face foreign competition but in the context of a world in which trade integration in Asia is already happening — with or without the United States. Its merit will depend on U.S. negotiating priorities.
Some matters pushed by the business community have little or nothing to do with the interests of the vast majority of U.S. workers and should not be emphasized. These include pressuring other countries to change health and safety regulations, extend and strengthen patent protections and deregulate financial services. In these areas, on grounds of fairness, it is reasonable for us to strive for the principle of national treatment — no discrimination against foreign firms — but not to use inherently scarce negotiating power to alter other countries’ basic choices.
Conversely, it is appropriate in the TPP talks, and our international economic diplomacy more generally, for us to use the substantial leverage we possess in areas that do bear directly on middle-class living standards. These include the prevention of inappropriate producer subsidies — including through manipulated exchange rates or distorted state enterprise accounting — and, more generally, cooperation to ensure that a world in which the greater mobility of capital and companies does not become one in which governments lose the ability to protect their citizens. If global integration means local disintegration, it will be a failure.
Any international agreement must be judged not just against our aspirations, but also against our alternatives. No plausible TPP deal will achieve all that we want. But it should be possible to negotiate an agreement that is much better than the alternative of growing trade shaped only by agreements that exclude the United States. I hope and expect that when it is presented for approval, the TPP will meet this test.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
In an March 3, 2015 article in The Washington Post’s Wonkblog Summers talked about technology, inequality and education. Summers reaffirmed the idea that more education won’t solve the inequality problem and called technological change an important fuel for the rising economic share captured by the top 1 percent of American earners.
Read more
Summers’ “Asiaphoria Meets Regression to the Mean” NBER Working Paper co-authored with Lant Pritchett, was featured in NBER’s March Digest. The paper demonstrates that typical degrees of regression to the mean imply substantial slowdowns in China and India relative even to currently cautious forecasts. Read more
On February 16, 2015, in her column for USA TODAY, Maria Bartiromo talks with Summers about Europe, Russia, Ukraine and and the implications for the global economy. Summers also discusses the U.S. economy, oil prices, the Fed and what Summers is learning from his students. Read more
Summers appeared on CNBC’s Squawk on the Street on February 12, 2015 to discuss why extraordinary economic conditions require extraordinary measures, and now is not the right time to raise interest rates. Read more
In an interview with the Harvard Business Review on February 9, 2015, Summers discusses the work of the Commission on Inclusive Prosperity and why executives and business owners should care about it. Summers answers questions like, How does corporate governance need to change in your view? Can the private sector create a more inclusive economy or is it up to policymakers to solve the problem? Read more
On January 30, 2015, Summers talked with Maria Bartiromo on FOX’s Opening Bell about the global economy, oil prices and innovation among students.
Read more
In an interview on the Charlie Rose Show on January 29, 2015, Summers discussed the growing concerns about the sense of stagnation. Summers told Rose, “we are in unchartered territory in regards to the global economy, with problems with lack of demand, deflation that’s too low, central banks that have trouble being activists and too much savings.” Read more
Summers discusses the challenges before the European Central Bank and explains why he sees Europe on its way to being the next Japan. He spoke to Bloomberg TV from the World Economic Forum in Davos, Switzerland on January 21, 2015. Read more
Summers talked with FT editor, Lionel Barber, on January 19, 2015 about the Inclusive Prosperity report, why economic growth has been hampered and whether ECB action can lift middle-class incomes.
Listen to the podcast here
January 18, 2015
The most challenging economic issue ahead of us involves a group that will barely be represented at this week’s annual Davos summit: the middle classes of the world’s industrial countries. As the Center for American Progress’s Inclusive Prosperity Commission, which I co-chaired with Ed Balls, the top economic official in Britain’s Labor Party, concludes in a new report, nothing is more important to the success of industrial democracies than sustained increases in wages and living standards for working families.
Amid the focus on global finance, geopolitics and the moral imperative to help the world’s poor, no one should lose sight of the fact that without substantial changes in policy, the prospects for the middle class globally are at best highly problematic.
First, the economic growth that is a necessary condition for rising incomes is threatened by the specter of secular stagnation and deflation. In the United States, 2014 was expected to be one of rising interest rates along with acceleration of growth, the end of quantitative easing and the approach of tightened monetary policy. In Japan, prices were to start rising again. In Europe, the year was to bring continued economic reform and normalization.
In fact, 10-year Treasury rates have fallen by more than 1 percentage point in the United States and are only half as high in Germany and Japan as they were a year ago. In a number of major countries, including Germany, France and Japan, short-term interest rates are now negative, with lenders to governments forced to pay for the privilege. Such low interest rates suggest a chronic excess of saving over investment and the likely persistence of conditions that make monetary policy ineffective in Europe and Japan, along with their possible reemergence in the United States. Market indicators almost everywhere suggest that inflation is expected to be well below the target rate for a decade.
The world has largely exhausted the scope for central bank improvisation as a growth strategy. Excess demand, inflation, excessive credit and the need for monetary tightening are the least of our concerns. Central banks still have to do their part, but it is time for concerted and substantial measures to raise both public and private investment.
Second, the capacity of our economies to sustain increasing growth and provide for rising living standards is not assured on the current policy path. The United States is often held out as a model, and indeed its performance has been strong by global standards. The United States has enjoyed growth of about 11 percent over the past five years. Of this, standard economic calculations suggest that about 8 percent can be regarded as cyclical, resulting from the decline in the unemployment rate. That leaves just 3 percent over five years as attributable to growth in the economy’s capacity. Even after our recovery, the share of American men age 25 to 54 who are out of work exceeds that in Japan, France, Germany and Britain.
Demand issues aside, growth prospects are worse in Europe and Japan, where adult populations are shrinking and ageing and economic dynamism is subsiding. A significant part of the sharp downward revisions in the estimated potential of industrial economies is a consequence of the recession conditions of recent years. In many ways, strong growth is itself the best structural policy for promoting growth as investment rises, workers gain experience and so forth. But more must be done.
Third, if it is to benefit the middle class, prosperity must be inclusive, and in the current environment this is far from assured. If the United States had the same income distribution it had in 1979, the bottom 80 percent of the population would have $1 trillion — or $11,000 per family — more. The top 1 percent would have $1 trillion — or $750,000 — less. There is little prospect for maintaining international integration and cooperation if it continues to be seen as leading to local disintegration while benefiting a mobile global elite.
The focus of international cooperative efforts in the economic sphere must shift. Considerable progress has been made in trade and investment. Less has been made in preventing races to the bottom in areas such as taxation and regulation. Only with enhanced international cooperation will the maintenance of progressive taxation and adequate regulatory protection be possible. And only if ordinary citizens see benefit in an ever more open global economy will it come about.
These three concerns — secular stagnation and deflation, slow underlying economic growth and rising inequality — are real. But they are not grounds for fatalism. The experience of many countries, including Canada and Australia in this century, and many eras shows that sustained growth in middle-class living standards is attainable. But it requires elites to recognize its importance and commit themselves to its achievement. That must be the focus of this year’s Davos.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
The Upshot
By DAVID LEONHARDT
JANUARY 15, 2015
After almost 15 years of a disappointing economy, it’s easy to get pessimistic. Incomes for the middle class and poor have now been stagnating over a two-term Republican presidency and well into a two-term Democratic one. The great wage slowdown of the 21st century has frustrated Americans, polls show, and raised serious questions about what kind of policies, if any, might change the situation.
Yet if you look around the world, you can find reasons for hope.
While wages and incomes have stagnated in the United States (as well as in Japan and large parts of Europe), they have not done so everywhere. In Canada, a broad measure of incomes has risen about 10 percent since 2000, even as it’s fallen here. In Australia, it’s up 30 percent.
These aren’t just any countries, either. They’re among those most similar to the United States: far-flung, once ruled by Britain, with a frontier culture and a commitment to capitalism. Though Australia and Canada obviously are not identical to the United States, it certainly seems worth asking what they’re doing differently.
Read the full article here.
Marc Andreessen’s thoughtful “Tweetstorm” on secular stagnation raises a number of important questions. We are in agreement that the essence of the secular stagnation issue is not whether technology has stopped advancing; but rather whether there is a mismatch between desired saving and investment opportunities that results in low equilibrium real interest rates, precipitates financial instability, and may inhibit economic growth. Here I respond to his specific questions and criticisms regarding the secular stagnation hypothesis: Read more
In an interview on January 9, 2015 with CNBC’s Squawk Box, Summers said while American economic growth is getting better and leads the rest of the world, investments need to be made to get the economy stronger. “Confidence is the cheapest form of stimulus,” he said. Read more
January 4, 2015
The fall in oil prices and declines in other energy prices make the case for a tax overwhelming
The case for carbon taxes has long been compelling. With the recent steep fall in oil prices and associated declines in other energy prices it is overwhelming. There is room for debate about the size of the tax and about how the proceeds should be deployed. But there should be no doubt that starting from the current zero tax rate on carbon, increased taxation would be desirable.
The core of the case for taxation is the recognition that those who use carbon-based fuels or products do not bear all the costs of their actions. Carbon emissions exacerbate the global climate change problem. In many cases they contribute to local pollution problems which immediately harm human health. Removing fossil fuels from the ground involves both accident risks and environmental challenges. And even with the substantial increases in US oil production we remain a net importer, so increases in consumption raise our dependence on Middle East producers.
When we drive our cars, heat our homes or use fossil fuels in more indirect ways, all of us create these costs without paying for them. It follows that we overuse these fuels. This is not some kind of government planning argument — it is the logic of the market: that which is not paid for is overused. Even if the government had no need or use for revenue, it could make the economy function better by levying carbon taxes and rebating the revenues to society.
While the recent decline in energy prices is a good thing in that it has on balance raised the incomes of Americans, it does exacerbate the problem of energy overuse. The benefit of imposing carbon taxes is therefore enhanced.
On the other side of the ledger, there has always been the concern that raising carbon taxes would place an unfair burden on some middle- and low-income consumers. Those who drive long distances to work, say, or who have homes that are expensive to heat would be disproportionately burdened. Now these groups have received a windfall from the drop in energy prices so it would be possible to impose substantial carbon taxes without them being burdened relative to where prices stood six months ago. As an example, the price of petrol has fallen by over $1 per gallon. A $25 a ton tax on carbon that would raise over $1tn during the next decade would lift petrol prices by only about 25 cents.
Some worry that taxing fossil fuels will hurt the competitiveness of US industry and encourage offshoring. In fact a well designed tax would be levied on the carbon content of all imports coming from countries that did not impose their own carbon levies. The US should insist that its tax is compatible with World Trade Organisation rules. It would have the virtue of encouraging countries who wished to avoid the US tax to impose carbon taxes of their own, thereby further supporting efforts to reduce global climate change.
A US carbon tax would contribute to efforts to combat climate change in other ways. It would be a hugely important symbolic step ahead of the global climate summit in Paris late this year. It would shift the debate towards harmonised measures to raise the price of carbon use and away from the complex cap-and-trade type systems that in the EU and elsewhere have proven more difficult to operate than expected.
What size levy is appropriate? Here there is more danger of doing too little than too much. Once the principle of taxation is accepted its level can be adjusted. A tax of $25 a ton would raise well over $100bn each year and seems a reasonable starting point.
How should the proceeds be used? Here too it seems more important to reach consensus on the principle of taxation. My preference would be for the proceeds to be split between investments in infrastructure and pro-work tax credits. An additional $50bn a year in infrastructure spending would be a significant contribution to closing America’s investment gap in that area. The same sum devoted to pro-work tax credits could finance a huge increase in the earned income tax credit, a meaningful reduction in the payroll tax or some combination of the two.
Progressives who are concerned about climate change should rally to a carbon tax as the most important step for mobilising against it. Conservatives who believe in the power of markets should favour carbon taxes on market principles. And Americans who want to see their country lead on the energy and climate issues that are crucial to the world this century should want to be in the vanguard on carbon taxes. Now is the time.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
In an NBER working paper, published with Lant Pritchett in October 2014, Summers writes, “consensus forecasts for the global economy over the medium and long term predict the world’s economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Read more
