Look beyond interest rates to get out of the gloom

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June 3, 2012

With the past week’s dismal US jobs data, signs of increasing financial strain in Europe and discouraging news from China, the proposition that the global economy is returning to a path of healthy growth looks highly implausible.

It is more likely that a pessimistic view is again taking over as falling incomes lead to falling confidence that leads to reduced spending and yet further declines in income. Financial strains hurt the real economy, especially in Europe, and reinforce existing strains. And export-dependent emerging markets suffer as the economies of the industrialised world weaken.

The question is not whether the current policy path is acceptable. The question is what should be done? To come up with a viable solution, consider the remarkable level of interest rates in much of the industrialised economies. The US government can borrow in nominal terms at about 0.5 per cent for five years, 1.5 per cent for 10 years and 2.5 per cent for 30 years. Rates are considerably lower in Germany and still lower in Japan.

Even more remarkable are the interest rates on inflation-protected bonds. In real terms, the world is prepared to pay the US more than 100 basis points to store its money for five years and more than 50 basis points for 10 years. Maturities would have to reach more than 20 years before the interest rates on indexed bonds become positive. Again, real rates are even lower in Germany and Japan. Remarkably, the UK borrowed money last week for 50 years at a real rate of 4 basis points.

These low rates even on long maturities mean that markets are offering the opportunity to lock in low long-term borrowing costs. In the US, for example, the government could commit to borrowing five-year money in five years at a nominal cost of about 2.5 per cent and at a real cost very close to zero.

What does all this say about macroeconomic policy? Many in both the US and Europe are arguing for further quantitative easing to bring down longer-term interest rates. This may be appropriate given that there is a much greater danger from policy underreacting to current economic weakness than from it overreacting.

However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate. There is also the question of whether extremely low safe real interest rates promote bubbles of various kinds.

There is also an oddity in this renewed emphasis on quantitative easing. The essential aim of such policies is to shorten the debt held by the public or issued by the consolidated public sector comprising both the government and central bank. Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates – exactly the opposite of what central banks are doing. In the US Treasury, for example, discussions of debt management policy have had exactly this emphasis. But the Treasury alone does not control the maturity of debt when the central bank is active in all debt markets.

So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less. They can also invest in improving their future fiscal position, even assuming that no positive demand stimulus effects are likely to materialise. At a time of negative real rates, accelerating any necessary maintenance project and issuing debt leave the state richer not poorer; this assumes that maintenance costs rise at or above the general inflation rate.
As my fellow Harvard economist Martin Feldstein has pointed out, this principle applies to accelerating replacement cycles for military supplies. Similarly, government decisions to issue debt and then buy space that is currently being leased will improve the government’s financial position. That is, as long as the interest rate on debt is less than the ratio of rents to building values, a condition almost certain to be met in a world of government borrowing rates of less than 2 per cent.

These examples are the place to begin because they involve what is in effect an arbitrage, whereby the government uses its credit to deliver essentially the same bundle of services at a lower cost. It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero. Consider a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate. Depending on where it was undertaken, this project would yield at least 1 cent a year in government revenue. At any real interest rate below 1 per cent, the project pays for itself even before taking into account any Keynesian effects.

This logic suggests that countries regarded as havens that can borrow long-term at a very low cost should be rushing to take advantage of the opportunity. This is a view that should be shared by those most alarmed about looming debt crises because the greater your concern about the ability to borrow in the future, the stronger the case for borrowing for the long term today.

There is, of course, still the question of whether more borrowing will increase anxiety about a government’s creditworthiness. It should not, as long as the proceeds of borrowing are used either to reduce future spending or raise future incomes.

Any rational business leader would use a moment like this to term out its debt. Governments in the industrialised world should too.

The writer is the Charles W. Eliot university professor at Harvard University and a former US Treasury secretary.

Copyright The Financial Times Limited 2012.

Time to act: euro collapse would define our era

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June 18, 2012

Once again good news has had a half-life in the markets of less than 24 hours. Just as news of Spain’s bank bailout rallied markets and sentiment for only a few hours, a Greek election outcome as good as could have been hoped did not buoy markets for even a day. There could be no clearer evidence that the strategy of vowing that the European system will hold together, doing the minimum to address each crisis as it comes and promising to build a system that is sound in the long run has run its course.

Nor is the Group of 20 leading economies, whose leaders conclude their meeting today, likely to change anything soon. Europe’s troubled economies will demand more emphasis on growth, lower interest rates on their official debts and more transfers. The Germans will show sympathy with the aim of reform but will insist that financial integration coincide with political integration. The rest of the world will express exasperation with Europe’s failures and demand more be done. Officials blessed with more diplomatic than economic insight or courage will produce a communiqué expressing a measure of satisfaction with the steps under way, recognising the need to do more and looking forward to continued dialogue. The only good thing is that expectations are so low this will barely disappoint markets.

The truth is that Europe’s debtors and creditors are both right. The borrowers are right that austerity and internal devaluation have never been a successful growth strategy, certainly not when major trading partners are stagnating. In the few cases where fiscal consolidations have preceded growth, they have either involved stagnation relative to previous levels of income (as in Ireland and the Baltics) or buoyant demand associated with surging exports, increasing competitiveness and low borrowing costs (many euro members in the early years). The borrowers are also right to claim that even a previously healthy economy will quickly become very sick if forced to operate for several years with interest rates far above growth rates, as is the case across southern Europe. And experience clearly shows that structural reform is always harder when an economy is contracting and there is no sector to absorb those displaced by reform.

Those wary of institutionalising financial integration without serious political integration are right as well. In a sound system, those with deep pockets who act either as borrowers or as guarantors must have control over borrowing decisions. A system where I borrow and you repay is a prescription for profligacy. This is why there is now so much discussion of eurozone bonds and Europe-wide deposit insurance being linked with much deeper political integration.

But there are two problems lying behind the soft references to greater integration. The first is the question of who really has control. If decisions are genuinely to be made at eurozone level, it is far from clear that there is any majority or even plurality support for responsible policies. If the idea is that the eurozone will be modelled on the European Central Bank – a European facade behind which Teutonic policies are pushed – it is far from clear that this will or should be acceptable across the continent.

The second problem is the scale of the transfers that could be involved. A good guess would be that during the US savings and loans crisis, the American south-west received a transfer from the rest of the country equal to at least 20 per cent of its gross domestic product. Is there a real will to commit to potential transfers of this scale in Europe? Maybe all of this can be resolved but it will surely not happen quickly.

Not all problems can be solved. It is not certain that the full repayment of all currently contracted sovereign debts, sustainable growth for all, and the eurozone retaining all its current members will prove feasible. The private sector is making clear that it recognises this painful reality. Official sector planning needs to recognise it as well. Outside Europe, even as leaders hope for the best they need to plan for the worst, ensuring adequate liquidity and demand in their economies even if Europe’s situation deteriorates rapidly. The fortification of the International Monetary Fund is a start but policy makers need also to consider national policies, trade, finance and social safety nets.

But a eurozone collapse would be a disaster that might define our era. Its prospect must focus the minds of all at the G20 summit on action. Non-Europeans must persuade Europeans that the rules change when the stakes rise. The ECB’s credibility will mean little if there is no longer a common currency.

Setting the right precedent seemed far more important 24 hours before Lehman’s collapse than 24 hours after it. Now is the time for radical cuts in the rates charged by official creditors to European sovereigns; for a willingness to subordinate official debts; and for expansionary monetary policies in Europe that prevent deflation and encourage the growth that can create jobs and reduce debts. Only if the system is preserved can its future be debated.

The writer is a former US Treasury secretary and Charles W. Eliot university professor at Harvard.

Copyright The Financial Times Limited 2012.

Land of Opportunity Can Fight Inequality

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July 15, 2012

Even if the process proves protracted, the American economy will eventually recover. Yet even as cyclical issues cease to dominate the economic conversation, it is likely that inequality will move to the forefront.

There is no question that income is distributed substantially more unequally than it was a generation ago, with those at the very top gaining a greater share as even the upper middle class loses ground in relative terms. Those with less skill – especially men who in an earlier era would have worked with their hands – are losing ground not just in relative but also in absolute terms.

These issues frame an important part of the economic debate in this election year. Progressives argue that widening inequality jeopardises the legitimacy of our political and economic system. They argue that a time when the market is generating more inequality is no time to shift tax burdens from those with the highest incomes to the middle class, as has taken place in the past dozen years. And while recognising that innovators such as Apple co-founder Steve Jobs earned their billions providing great value to consumers and making substantial contributions to the US and global economies, they assert that the social value associated with the activities behind many other fortunes, especially in finance, is less apparent.

Conservatives argue that, in a world where everything is increasingly mobile, high tax rates run more risk than they once did of driving businesses and jobs overseas. They highlight the central role of entrepreneurship in advancing economic growth and note that, since most new ventures fail, the returns on successful ones have to be very large if entrepreneurship is going to flourish. They take umbrage at the suggestion there is something wrong with success on a grand scale. And they worry that policy measures taken to combat inequality directly will have perverse side effects.

Unfortunately, the points on both sides of the argument have considerable force. While I support moves to make the tax system more progressive, the reality is that inequality is likely to remain high and continue to rise, even in the face of all that can responsibly be done to increase the burden on those with high income and redistribute the proceeds. Measures such as allowing unions to organise without undue reprisals and enhancing shareholders’ role in executive pay-setting are desirable. But they are unlikely even to hold at bay the trend towards increasing inequality.

Where does this leave the public policy agenda? The global record of populist policies motivated by inequality concerns is hardly encouraging. Equally, passivity in the face of dramatic economic change is unlikely to be viable. Perhaps the focus needs to shift from inequality in outcomes, where attitudes divide sharply and there are limits to what can be done, to inequalities in opportunity. It is hard to see who could disagree with the aspiration to equalise opportunity or fail to recognise the manifest inequalities in opportunity today.

By definition, the number of children not born in to the top 1 per cent who move into the top 1 per cent must equal the number of those born into the top 1 per cent who move out of it over their lifetimes. So a serious programme to promote equal opportunity must both seek to enhance opportunity for those not in wealthy families, and to address some of the advantages enjoyed by the children of the fortunate.

The most important step that can be taken to enhance opportunity is to strengthen public education. For the past decade we have focused on ensuring no child is left behind, and this must continue. But if we are to ensure everyone has a real chance of great success, we must also ensure every child in the public system can learn as much and go as far as their talent permits. This means judging schools on measures beyond the fraction of students who exceed some minimum. The leading universities have in the past 40 years, with the encouragement and support of the federal government, made a significant effort to recruit and support students from ethnic minorities. This should continue.

But as things stand a student from a minority group who has strong admission text scores is considerably more likely to apply, and be admitted, to a leading university than a low-income student. It is time the best institutions undertook the kind of commitment to economic diversity that they have long mounted towards racial diversity. It is not realistic to expect that schools and universities dependent on charitable contributions will not be attentive to offspring of their supporters. Perhaps, though, the custom could be established that, for each “legacy slot”, room would be made for one “opportunity slot”.

What about the perpetuation of privilege? Parents always seek to help their children, and it is not realistic to think privileged parents will do any differently. But there is no reason why the estate tax should decrease relative to the economy at a time when great fortunes are increasingly dominant. Nor should tax-planning techniques that are de facto tax cuts only for those with millions of dollars of income and tens of millions in wealth continue to be legal.

These are some ideas for advancing equality of opportunity. There are many more. It is an aspiration those of every political stripe should share.

The writer is Charles W. Eliot university professor at Harvard.

Copyright The Financial Times Limited 2012.

America’s state will expand whoever wins

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August 19, 2012

With the selection of Paul Ryan as the Republican vice-presidential candidate, it is clear both political parties agree that the central issue in the presidential election will be the scale and scope of government involvement in the US economy. There will be disagreement over what constituted “normal” levels of spending in the past and indeed over what constitutes “spending”. But there is a widespread view in both parties that it is feasible and desirable that in the future the federal government will be no larger as a share of the overall economy than it has been historically.

Unfortunately, this aspiration is unlikely to be achieved. Even preserving the amount of government functions the US had before the financial crisis will require substantial increases in the share of the economy devoted to the public sector. This is the case for several structural reasons.

First, demographic change will greatly expand federal outlays unless politicians decide to degrade the level of protection traditionally provided to the elderly. Between Social Security, Medicare and Medicaid and other smaller programmes, about 32 per cent of the US federal budget, or about 7.7 per cent of gross domestic product, is devoted to supporting those aged over 65. The ratio of this age group to those of working age will increase from 1:4.6 to 1:2.7 over the next generation, implying a rise in federal spending of 5.6 percentage points of GDP, if no other adjustments are made. True, as Americans’ health and life expectancy improve, it may be appropriate to revise upward the assumed retirement age. However, it will be unlikely to counteract the expected 34 per cent increase over the next generation in the share of the population who will be within 15 years of estimated life expectancy.

Second, the accumulation of more debt and a return to normal interest rates will raise the share of federal spending devoted to interest payments. In 2007, before the financial crisis, federal debt held by the public was equivalent to 36.3 per cent of GDP. On a very optimistic view, where recommendations such as those of the National Commission on Fiscal Responsibility and Reform (the Bowles-Simpson commission) are implemented, net debt held by the public will nearly double to 65 per cent of GDP by 2020. This implies that the federal government’s outlays to service its debt will rise from 1.7 per cent of GDP in 2007 to 3.2 per cent of GDP in 2020.

Third, increases in the price of what the federal government buys relative to what the private sector buys will inevitably increase the cost of state involvement in the economy. Since the early 1980s the price of hospital care and higher education has risen fivefold relative to the price of cars and clothing and more than 100-fold relative to the price of televisions. Similarly, the complexity and hence the cost of everything from cutting-edge scientific research to regulating banks rises faster than overall inflation. These trends reflect long-running trends in globalisation and technology. They imply that if government is to continue providing the same level of these services, government spending as a share of the economy has to rise, by at least 3 per cent of GDP.

Fourth, several methods that have been used to repress the deficit will soon be found to be unsustainable. Federal pension liabilities and the deferred maintenance of federal infrastructure are two examples.

Meanwhile, there is a steady decline in the fraction of tax returns that are audited and there is evidence of growing tax non-compliance. Both are a reflection of unsustainable cuts in spending. And on almost any reasonable view of the state’s responsibility, large increases in inequality such as those we have observed in recent years should call forth increased government activity. All of these factors suggest the likelihood of increased pressure on federal budgets over the years ahead.

There are ways in which federal spending can be reduced. Defence spending, which now represents 4.7 per cent of GDP (its average level over the past 40 years) could be reduced significantly. On the other hand, the fact that in a dangerous world our military is badly stretched by sustained deployments that are far smaller than even the first Iraq war suggests there is little ground for confidence that the Pentagon budget will be cut dramatically.

In some areas technology could greatly reduce government costs but it is important to recognise that by far the largest parts of the federal budget involve cash or in-kind transfers. These parts are far less susceptible to productivity-enhancing technologies than areas that involve the production of goods or services. There is scope for the elimination of outdated or duplicate programmes but efforts to identify waste, fraud and abuse invariably come up with only negligible savings.

For the next three months the US will debate the merits of growing versus shrinking government. But for the next three decades it will confront the reality that major structural changes in the economy will compel an increase in the public sector’s fraction of the total economy unless there is a substantial scaling down in the functions that the federal government has long performed. How government can best prepare for the pressures that will come, and how greater revenues can be mobilised without damaging the economy, are the great economic questions for the next generation.

The writer is Charles W. Eliot university professor at Harvard.

Copyright The Financial Times Limited 2012.

Britain risks a lost decade unless it changes course

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https://larrysummers.com/wp-content/uploads/2012/10/financial_times_logo1.jpgSeptember 16, 2012

It is the mark of science and perhaps rational thought to operate with a falsifiable understanding of how the world works. So it is fair to ask economists a fundamental question: what could happen that would cause you to revise your views of how the economy operates and acknowledge that the model you had been using was flawed? As a vigorous advocate of fiscal expansion as an appropriate response to a major economic slump in an economy with zero or near-zero interest rates, I have for the past several years suggested that if the British economy – with its major attempts at fiscal consolidation – were to enjoy a rapid recovery, it would force me to substantially revise my views about fiscal policy and the macroeconomy.

Unfortunately for the British economy, nothing in the past several years compels me revise my views. British economic growth post-crisis has lagged substantially behind the US and the gap is growing. British gross domestic product has not yet returned to its pre-crisis level and is more than 10 per cent below what would have been forecast from the pre-crisis trend. The cumulative output loss from this British downturn in its first five years exceeds even that experienced during the 1930s. Forecasts continue to be revised downwards, with a decade or more of Japan-style stagnation emerging as a real risk.

Whenever policy is failing to achieve its objectives, as in Britain today, there is a debate as to whether the right response is doubling down – perseverance and intensification of the existing path – or recognition of error or changed circumstances and a change in course. In Britain today such a debate rages on the aggressive fiscal consolidation that the government has made its economic centrepiece. Until and unless there is a substantial reversal on near-term fiscal consolidation, Britain’s short and long-run economic performance is likely to deteriorate.

An effective policy approach to Britain’s economic problems must start with the recognition that the principal factor holding back the British economy over both the short and medium term is the lack of demand. It is true that Britain also faces important structural issues ranging from difficulties in promoting innovation to deficiencies in the system of worker training. Still, it is apparent from the relatively low level of vacancies, the reluctance of workers to leave jobs and the pervasiveness across industries of increased unemployment that it is lack of demand that is holding the economy back. Testimony from companies on their investment plans also supports this view.

During the depression, John Maynard Keynes compared Britain’s economic woes to a “magneto” problem, referring to the fact that a car might have many infirmities but if its electrical system did not work the car would not go. If that was fixed, the car would run, even with other problems. So it is today. Moreover, to a greatly under-appreciated extent in the policy debate, short-run increases in demand and output would have medium to long-term benefits as the economy reaps the rewards of what economists call hysteresis effects. A stronger economy means more capital investment and fewer cuts to corporate research and development. It means fewer people lose their connection to good jobs and become addicted to living without work. It means that more young people get first jobs and it means more businesses choose leaders oriented to expansion rather than cost-cutting. The most important structural programme for raising Britain’s potential output in the future is raising its output today.

The objection to this view comes in many forms but it is in essence that reversing course on fiscal expansion now would undermine credibility, backfire with respect to growth by risking a spike in capital costs and risk catastrophe down the road as debts became unsustainable. This line of argument is profoundly flawed. First, the behaviour of financial markets suggests that economic weakness rather than profligacy is the main source of concern about future credit problems. Why else would the tendency be for the costs of buying credit insurance on the UK to rise when overall interest rates fall? In a similar vein, a tendency has emerged in both the UK and US for interest rates to rise and fall with stock prices, implying that it is evolving optimism and pessimism about the future, not changing views about fiscal policy driving markets. Second, the reality is that the primary determinant of fiscal health in both the US and UK over the medium term will be the rate of growth. An extra percentage point of growth maintained for five years would reduce Britain’s debt-to-GDP ratio by close to 10 percentage points whereas austerity policies that slowed growth could even backfire in the narrow sense of raising debt-to-GDP ratios and turning debt unsustainability into a self-fulfilling prophecy.

Britain must change the pace of fiscal consolidation to stand a chance of avoiding a lost decade. Rather than starving public investment, now is the time to add to confidence by making plans for structural reforms to contain the growth of public consumption spending over time. It is also time to take overdue measures to promote exports and, after years of appropriately low investment, to restart housing investment. But when demand is needed for growth and the private sector is hanging back, the first priority must be for the public sector to stop exacerbating the contraction.

The writer is Charles W. Eliot university professor at Harvard.

Copyright The Financial Times Limited 2012.

Global Leadership and Public Policy for the 21st Century

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 Lawrence H. Summers Remarks, March 30, 2011

I thought what I would do, actually, is something a little different than maybe some of your speakers have done. I’m going to be very brief, and I’m happy to talk about any economic or public policy question, or question about higher education that interests anybody here. But what I thought I would do is just offer a few observations on things I have learned since the time when I was a young global leader in this program about 20 years ago, things I’ve learned from things I’ve done right, and things I’ve learned from things I’ve done wrong.

Observation one. Only a very few things will matter. One of the features of aggressive, ambitious personalities – and that’s probably what makes most of you part of this group – is that you want to touch as many things as you can. You want to have as broad an influence as you can, and you want to stick your finger in many, many different pies. In fact, it ends up being that very few things matter importantly. I served as the international affairs person for the Treasury throughout President Clinton’s first term. The only thing that really, in the end, was hugely important was that we bailed out Mexico on a large scale, at a moment when that was a historically implausible thing to do, got the money back, and rescued Mexico, so it was a substantial success.1

But all of the important decisions were taken in a six-week period. But that six week period was defining of my multi-year experience. That doesn’t mean that I could have afforded to have done nothing during the other time, but it does mean that, at that moment, all my mental energy was usefully devoted to that problem, that that needed to be a priority, that completing that task successfully was one that is of enormous importance.

It’s an observation that scholars of marketing have made about people who shop, that people will work just as hard to save 10% when they’re purchasing a tennis racket as they will to save 5% when they’re purchasing a car, even though 5% of a car is infinitely more important than 10% of a tennis racket, in financial terms.2 Figuring out what is really important, and what is ephemeral, is one of the most important things that one can do to try to succeed.

And a very good test in life to use towards that objective is to project yourself forward into the future, and to ask, will I care about this a year from now? Will I care about this three years from now? Will I care about this five years from now? And it provides a very useful perspective. Most of the time, it causes you to think that whatever you’re aggravated about at the moment isn’t very important. Every once in a while, when there’s a once-in-a-lifetime position that’s come up, that you thought you had a chance of getting and you don’t get, this type of perspective can make you feel worse rather than better. But it’s a step towards thinking more clearly, and I think it’s something that is very, very important.

The second observation that I’d make is that a pretty substantial fraction of the time, the most important decisions that you make will be the negative decisions that you make. There were several moments during the Clinton administration, when I had been there for awhile in a sub-cabinet position, when I had been through the Mexican thing, which was enormously important and exciting, or it felt so to me, when nothing of comparable importance and excitement was under way, when I was offered very attractive positions, and was sorely tempted to take them. But on balance, I felt that while I couldn’t see exactly what was going to happen, the opportunities that were likely to come with senior government service that were not likely to come again – was, on balance, the better thing.

I would not have had the opportunities I’ve had to be Secretary of the Treasury, to serve as Harvard’s President, serve as the President’s Chief Economic Advisor, if I had accepted the positions for which I was sorely tempted to take at those points during the Clinton administration. Most of the people in this room will have a lot of opportunities to do a lot of different things. It is easy to have opportunities, be excited, and say yes. It is actually harder to say no to tempting opportunities, and it is a very important part of having succeeded.

One of the things you will be struck by, if you actually study the lifetime careers of successful people, is that while they are summarized in little descriptions, if you actually look hard at their careers, there are years and years when nothing actually hugely important and consequential, that somebody would mention in an introduction or an obituary, came up. And yet, those were part of the career, and those were part of preparing for the career. And so, particularly as you go from being a young global leader to being a global leader, you have to get used to the fact that not every year’s going to be the most exciting year of your career. It can’t be that way, and not every year is going to be more exciting than the last year. And sometimes what you have to do is ride along with where you are, and it’s something that people often have difficulty doing. But it is actually integral to success.

I would say a third thing that I think is enormously important is – and is also part of the transition from being a young global leader to being a global leader – is paying attention to those who are more junior to you. You are at the stage in your career where the most important relationships you have had have been with those who are either parallel to you or those who are senior to you. Over time, that situation will change and evolve. I think of all the influence that I’ve been able to have, not an insubstantial portion of it has been through people who I was able to work with and mentor who were younger than me, people like Tim Geithner, the current Treasury Secretary, people like Sheryl Sandberg, who I think is one of your number, who is running Facebook, and others.

You are missing a chance to have important influence on the world, and you are missing a chance to secure the kinds of legacy for yourself that you want, if you are not substantially investing in the careers of people who are following behind you, as well as trying to do a very good job for those who are older and more senior than yourself.

Fourth is the last one. Know what you think, and know what you want to do, but have a clear-eyed view of it. My observation in life is that people who maximize their potential, and maximize what they’re able to contribute, are able to have a clear idea of what they want to do. They know what they think about whatever issue they’re working on, they know what the vision is for whatever product they want to create, they know what policy they want to advocate. That’s one part of it. And the other part of it is if you ask them, what are the three biggest problems with the product they’re trying to create, or what are the three biggest problems with the policy that you’re trying to advocate, they’re able to give you a strong and persuasive answer to the question. And I have learned over time that whenever anybody advises me to do X, and I say, what are the best arguments against doing X? And they say, there aren’t any good ones, it’s obvious that you should do X, then that is advice I should entirely dismiss.

And I’ve also learned over time that I am unlikely to be well helped by those who, when I say, well, what should I do now? Say, well, if I were you, what you need to do is think about X. There are a lot of things I’ve got to think about. Well, I’d consider Y. Well, you really need to take account of Z. Yeah, I got all that. But could you please tell me – here’s my telephone, here’s my computer, here’s my network of people, here’s the position I hold. What would you advise me to do? The ability to answer that question in a concrete and direct way turns out to be enormously important. And so cultivating the skill of having a view, a clear answer to the question, what is to be done, but at the same time a recognition that you can’t be certain that your answer is right, that conditions may change and they may cause your answer to be wrong, and an awareness of the uncertainties, is a very crucial part of succeeding.

I think if you look at people who are able to know what they want to do, but able to see it in an objective fashion, who are able to develop and work with a network of people who they’re able to teach to share their vision, who are able to persevere in the face of temptation, and who are able to set and maintain a priority and a focus, rather than being tempted by all the important and exciting people, those are the people who ultimately have the largest and greatest influence on the world. And so those would be my bits of advice to you.

Just to be provocative, I will in conclusion share these views. The U.S. recovery is likely to persist, not at an especially rapid rate, but it is clearly likely to persist. The European financial situation is seen as bad, and is in fact worse that it is seen as being. The Japanese earthquake will be a substantial event, but will be a less substantial event when viewed historically 10 years from now than it is viewed today. The defining story, when the history of our time is written 150 years from now, will be the rise of Asia, and how that rise plays out with the prospects for very great opportunity or for very, very great risk. That the developments that will be enormously important also will be the changes in technology. That when it has not yet been the case, but that when somebody looks back 75 years from now, changes in life science technology, in medical, in health, in medical things, in the capacity to augment human capacities, will have been as significant or more significant than changes in information technology for the way in which society functions. And that the struggle is going to be to maintain the broad legitimacy of institutions in a world where there are so many forces pulling in so many directions. Let me stop there. I’m happy to respond to anybody on anything.

M: Dr. Summers, thank you for addressing us, and for your time.

My question is about mentorship. You mentioned –

SUMMERS: You were going to introduce yourself.

M: Oh, I’m the other Sanjay Gupta. (laughter) You talked about mentorship, and this is something important even my life, and I was wondering if you could expand more on your thoughts about it, thoughts on what the proper role of a mentor is, who are some of the key mentors you’ve had in your life and how they shaped your career?

SUMMERS: The two people who had the greatest influence on my career were Marty Feldstein, a professor here who was my thesis advisor and teacher in graduate school, and showed me the how, and sort of inspired me in the broad concept that one could apply the scientific method of mathematical and analytical techniques to economic questions and policy questions in a way that was relevant for policy debate, and who showed me how one could do that by carrying on research in a way that was rigorous, but at the same time was very relevant to policy concerns.

And Bob Rubin, who I was privileged to get to know relatively early in life, but to work with closely at the Treasury Department for a number of years, from whom I learned a great deal about leadership and management. Leadership and management came sort of naturally to Bob. It didn’t come equally naturally to me. More analytic things came more naturally to me. But I wanted to learn, and so by watching what he did, trying to understand consciously things he did unconsciously, I found I was able to learn a great deal about leadership. Both liked what they did, or cared about what they did, and were generous of spirit towards others. And so being probably the most important two attributes in a mentor are a willingness to be a little bit self-conscious about what you do and what you do well, and to think about why you do the things you did, how you do the things you did, and what the reasons are for the choices that you make. And I have found in life often the need to explain something to somebody else causes me to understand better why I’m making the decisions that I’m making. So a willingness to reflect on how you’re functioning, and being of generous spirit, and not feeling competitive with those that you work with are all important.

Bob always had the view, when he was Secretary of the Treasury, that anything he didn’t need to do, he needed not to do. And so if there was a speech that needed to be given, if there was a reporter that needed to be talked to, something that somebody else could do and it would be equally effective for the department, that was better, not worse. I think many of us have a more natural tendency to suppose that we really like doing what we do, and we’re good at what we do, so we’ll do as much as we possibly can. And that’s often good in the short run, but it’s usually less healthy for an organization.

M: I’ve been with the World Bank for the past 12 years. We met in Davos. I’m Originally from China. You mentioned in the last part of your opening speech, about the rise of Asia as one of the central themes, but I actually have a question about the U.S. I think the perception out there in the international stage about the U.S. is that, in addition to a lot of very specific problems, in terms of economic problems, political problems, I think the central problem is a lack of direction. I was talking to Chairman Lou Jiwei from CIC a few months ago. He said his largest
frustration is whenever he meets with policymakers in Washington, they gave him a different story about how this country’s going to go forward. And it’s very
different from China, right?

So look at the Chinese case, a lot of problems, but there is a general consensus about where the economy is moving, in terms of domestic consumption needs to go up, in terms of coastal area economy moving inland, in terms of urbanization. There is consensus about where the country is going. The difference is how do you get – the U.S. is like, there’s no agreement. That’s really an issue, is it not? Is there – I just don’t know what’s your view. Do you think that that sort of a status quo lack of direction is going to persist because of the nature of the political system, or do you think at some point, people will rally behind some general direction? Thank you.

SUMMERS: I think it’s a thoughtful and a very deep question. I’m not sure I fully accept its premise. Its premise is that having a direction is good, and I guess if you made a list of positive adjectives and negative adjectives, aimless isn’t usually an example of a positive adjective. And that sort of makes your point.

On the other hand, having a direction, having a clearly set direction and being relatively true to your direction, is really terrific if it’s the right direction. It’s really not actually terrific if it’s the wrong direction. There are probably people here who know more about the history of entrepreneurial successes, but what is striking about the history of entrepreneurial successes is how often the companies morphed in very large ways from what was their initial concept of their mission, and I think it is one of the great strengths of the United States that it has a kind of resilience. And that resilience is related to just what Lou Jiwei was condemning – the fact that it was less of a top-down society, the fact that there’s less coherence and cohesiveness on a single direction.

John Kennedy died believing that Russia would surpass the United States economically by 1985.3 And the reason he thought that was Russia had a higher investment rate, Russia had more engineers, Russia had fewer lawyers. Russia had more of a clear national purpose and a national strategy that was tied around technology. Russia was less focused on consumer frippery, automobile model changes and the like, and was a more disciplined society with a more disciplined educational system. For those reasons, it historically had faster growth. It had a clearer sense of national direction, and it would surpass the United States.4 That was widely believed in the United States in the early 1960s.

It was – if the young global leaders had come to the Kennedy School in 1990 and they had spent 10 days here, I promise you that at least eight people would have told them that the Cold War was over and Japan and Germany had won, and the United States had lost, because those were economies committed to investment, determined to succeed, with national strategies focused on developing the industries of the future.5 And yet, the more entrepreneurial United States, where guys with sweatshirts were starting companies and stuff like that, turned out to be more effective, and the United States boomed in the ’90s and actually pulled away from those countries.6

And I think something like that is probably relevant today. That doesn’t mean that the concerns are unwarranted. It doesn’t mean that there aren’t important respects in which the United States needs to pull up its socks. But I think the desire for national direction is a somewhat problematic concept in the modern world, because it raises questions about resilience, adaptiveness, and ability to do that. In the information technology space, the French had a terrific national direction in termsof Minitel.7 Didn’t actually work out that great relative to the Internet. There was a huge movement that felt that, 20 years ago, the United States needed to be in high- definition TV, that that was really the source of direction. Didn’t really work out that great for those who pursued those investments.8

So I would be very mindful of our flaws, but I wonder whether, when somebody looks back 25 years from now, is the problem going to be that the United States did not have enough direction in 2010, or is the problem going to be that China was insufficiently adaptive to the challenges created by its own growth and by a changing world.

DRUMMOND: Jamie Drummond of the advocacy group ONE. And from the point of view of being the seniormost policymaker in your field globally, what are the characteristics – what were characteristics of most good advocacy versus bad advocacy, and are there things that you wish there were people focusing on and advocating for that you do not see, and you wish there were people stepping up and focusing on, that you think groups like us should be focusing on that we may not be?

SUMMERS: I’ll give you my answer, but I may be an unusual customer for advocacy, so I wouldn’t necessarily, if I were you, give too much weight to my opinion– so the answer I’m going to give you is entirely faithful to what I think, but I’m not 100% certain I’d follow the advice if I were you.

It’s an observation in financial markets that anything that everybody knows is already reflected in the price.9 And the only thing that moves the financial market is something that’s unexpected. Well, and the same thing is, roughly speaking, true of the recipients of advocacy. So I’m the Secretary of the Treasury, I’m the President’s economic advisor, I’m sitting in my office, and somebody comes to see me. I’ve done this for a while, and most people who are doing it have done this for a while. So the steel industry comes and explains that the steel industry is important, and favors more support for the steel industry. This is really unlikely to change anybody’s mind. It was kind of expected. Anti-poverty group comes, says there’s a lot of poverty in the world, urges more efforts to combat global poverty, says that global poverty is a big problem, and even in difficult budget environments, is so big a problem that funds ought to be found for it, but doesn’t know how to find the funds. This is not news.

And so I would say the number one attribute of effective advocacy is something that is communicated to the person being advocated to that the person being advocated to would not have expected, would not have already known, and would not have expected to learn in the 20-minute meeting. And most of the time – I was always surprised by the fraction of the people who would come to my office and wouldn’t know this rule. And I would often try – mostly it served to irritate them – but I would often try to get there. I would say, let me stipulate that. And I would do, for whatever their sphere was, the equivalent of the thing they said. I would do it in three minutes. And then I would say, so let’s stipulate all those things, and I believe very much all those things. What else can you tell me? Or what do you think we should do? Or why do you think, given the force of your argument, this isn’t already happening? And I found most people would only go back to their thing. So with respect to advocacy, if you ever want to advocate something, tell the person you’re advocating to something they didn’t know before- this is the way to be effective.

I would say that the other part of being an effective advocate is it’s about them, not about you. Good advocates come and tell the President of Harvard why it would be good for Harvard to do X, not why X is good, and therefore Harvard should be part of it. And so advocacy that is attached to the person that is being advocated for is, I think, very important. If I look at the world, I think the things that are under- advocated are the things that don’t have natural constituencies. So producers have natural constituencies, consumers don’t have natural constituencies, so there’s too little advocacy for free trade, because the beneficiaries of protection know who they are, the beneficiaries of non-protection don’t know who they are. The beneficiaries of subsidies for a particular production know who they are.

The beneficiaries of more rapid progress in basic science don’t know who they are. So I would say the category of the unadvocated are those with desirable ideas but with a diffused constituency. Precisely because it’s difficult to mobilize funds for people who don’t know who they are, it’s difficult to mobilize excitement for people who don’t know who they are. So I would think of the task of finding subjects to advocate heavily around things that don’t have a natural constituency.

F: I see four more people, is that correct? These are going to have to be our four last questions. Thank you.

LISA: I’m curious about your thoughts about radical thinking. A lot of the approach to solving problems hinges on incremental change. Yet, do you think that the world is doing – and when I say radical, I don’t mean like violently radical, I just mean taking problems and flipping them upside down- is there enough radical thinking going on in government? Is there enough radical thinking going on in business and in nonprofits? Are we sort of sticking into the buckets that we know, and if we are, what are we missing?

SUMMERS: I’m not sure I know how to answer that question, but it’s a very good question, and I’m not sure I know, Lisa, how to answer it in the abstract. I think my basic view would be that the world probably does too few experiments, and probably – but probably doesn’t do too few lurches. So what I mean by that is this- take an idea that – I don’t know how it’s actually playing out, but there’s a professor here who is interested in the idea of basically, you’re a nine-year-old, you read a book, we’ll give you $2. So basically paying people to read. You know, the idea was, paying kids $100 a year to get them to read 50 books- it seems awfully economic in a world where school budgets are $17,000, and if you can make it work, it’s really a tremendous thing. There are a million other people who thought it was offensive, undermining values of loving to learn, and so forth.

My reaction to an idea like that was, you shouldn’t decide whether it’s a good idea or a bad idea. You should do an experiment somewhere, and see whether it works or not. I personally am no fan of school vouchers. I was appalled by the Clinton administration policy of violently opposing the experiment with school vouchers in Washington DC, not because I thought school vouchers were a good idea, but I thought one should see whether radical ideas were good ones. And that since there’s disposal of bad ideas, more ideas are good, and if you do a bunch of experiments that have a one in 60 chance of working, occasionally they’ll work, and the ones that work can be spread. So I think finding ways to do more experiments with apparently flaky ideas is something we as a society should work to encourage.

Conversely, I think that things have unintended consequences, and so radical policies that people propose to implement nationwide are almost certainly bad ideas. So whenever somebody comes and says, we did one pilot in one place with 62 people, and we should extrapolate the study to have a new national jobs program, my reaction is, well, let’s try it in more cities and see what happens. So more experimentation with radical ideas, but slowness in the world moving to adopt radical ideas on a large scale, would be the kind of vision that I would favor. So it’s a more mixed story.

JAY: Hi, my name’s Jay. I’m interested in your reflections on the financial crisis, and many people believe that the banks were good at privatizing their profits and socializing their losses. And obviously, you have to stop the economy from going over the edge, but looking back, is there any way that you think the U.S. administration could have privatized a bit more of the losses somehow?

SUMMERS: Battlefield medicine’s never perfect, and there’s unintended victims in war, and there are unintended beneficiaries in bailouts. I think, in the fullness of it all, the response to the crisis was pretty well managed, which doesn’t mean there aren’t some respects in which it could be improved.

One of the systematic errors that I believe people make, and that is very frequently made in looking at governments and in looking at other large organizations, is to confuse malevolence and incompetence. I know something about the management histories of a number of the major financial institutions. If you want to accuse some of the CEOs, some of those fairly senior positions, of fairly extreme stupidity, I would not attempt to make a defense. If you want to express surprise that they could have been as oblivious to risks that their organizations were running, I wouldn’t fight you. If you expressed puzzlement that they were as telescopic in their vision, without using a wide-angle lens in a complicated world, that would not be a proposition that I would fight.

But if you think that the guys who ran Lehman Brothers, who had 90% of their stock in Lehman Brothers, somehow were taking risk because they figured that the government would bail them out, and that it would sort of be OK if they failed, I don’t believe that for a minute.10 I don’t believe it for a minute. And yeah, you can say that, were they allowed to take more risk – a better argument would be that they were allowed to take more risk than they otherwise would have because the people who lent them money lent them money to a higher leverage rate, because they thought they would be bailed out. Maybe to some limited extent.

But do I believe that the guys who built the nuclear power plant in Japan were thinking, well, there is going to be government bailouts and the government’ll take care of it if the earthquake hits? That’s a way to understand that problem, that they were just – had their incentives to be cautious dulled by the fact that the government would help take care of it after the earthquake? Or is the right way to think about it that they sort of felt impervious, and there hadn’t been an earthquake for a long time, and there probably wouldn’t be an earthquake? I think it’s much more the second.

So I personally think that it is very easy to overdo the risks, overdo the moral hazard aspects in thinking about this relative to underrating the incompetence. If you own Citigroup stock today, you could make some set of arguments that it would have been better if Citigroup shareholders had lost 100% of their money, but they did lose 96% of their money, and maybe it was an important difference between 96 and 100, but I suspect that nobody’s thinking, well, it’ll be kind of OK to kind of have another financial disaster, because the government’ll come in and bail it out.11

So I don’t think that the failure to privatize losses sufficiently is an important part of the cause of excessive risk-taking. I think there’s been enough pain and suffering that nobody’s going to knowingly take big risks for the next 25 years, and I think whatever we do now, nobody’s going to remember it 40 years from now, so we don’t have a big opportunity to address that.

Would it have been better ex post to have inflicted some more pain around the financial sector? You can make that argument. It certainly would have been fairer. It certainly would have been more just. But I guess my reaction to that is, it’s a little bit like when my wife and I bought our house. We bought our house – my wife loved the house, just loved the house “we’ve got to buy this house, Larry, there’s no question, we’ve got to buy this house.” There’s a bidding process, we’re negotiating with the seller. We bid X, the seller says yes, we get the house, and we turned to each other and said, damn it, we probably could have gotten it 5% cheaper if we had just held on longer.

It is very easy to say right now that we could have inflicted more pain and still had a successful restoration of confidence and all of that, but you really wouldn’t have wanted to take the chance of being wrong. I would rather put more emphasis on raising capital and reducing leverage to reduce the brittleness of the financial system than to put the primary emphasis on a change in the terms of bailouts.

I think that the problem with the simple intuition versus the actual reality of financial crisis is, the story is always about an individual institution that takes risks, and gets itself in trouble, and the incentives for risk-taking by an individual institution. But in fact, if you look at all the failures, none of the failures take that form. None of the failures are ever because an institution is sitting in the midst of a tranquil sea taking too much risks. It’s either because they screw up with internal controls like Drexel Burnham, and do illegal things or something like that, or it’s because the whole system has a crisis at once.12 And neither of those problems is hugely well addressed with a lot of this privatizing the losses stuff. That’s why I’m for it, but I wouldn’t put my primary emphasis on it.

M: I’m from South Africa. On the way over here I watched the movie The Social Network. I assume you’ve seen it. My question is, was its portrayal of you accurate? (laughter)

SUMMERS: I had a feeling that one might come up. (laughter) How many people have seen the movie? I’m told that the Winklevii were quoted as saying that the movie was fairly accurate, except Larry Summers was not as nice to us in person.(laughter) On the one hand, I certainly did not tell anybody to punch me in the face, and the exact dialogue is wrong. On the other hand, the Winklevii did come swaggering in with singular arrogance, and I’ve read a few times that I can be arrogant, and (laughter) if that’s true, I surely was on that occasion. (applause) (laughter) I think there was nothing it portrayed, however, that was not something that actually happened at Harvard, but I think it was rather selective in its portrayal of Harvard. And I might also say, as somebody who knows Mark Zuckerberg pretty well, he is a significantly sunnier and more pleasant figure than is suggested by that movie.

M: I have two questions. The first question is, as much as everybody’s talking around the world about the rise of Asia, and China and India, I do believe the rise of Asia could be predicated on the success of the United States. What I do worry about, in the United States, is the fact that, given the shift in manufacturing to China and India, given the shift in innovation that’s happening, and given the unemployment rates in the United States- can the United States rise again?

The second question I have is that from the success the last few years in India, there’s also a dark side to it that’s coming out right now in terms of scams and corruption, etc. I’d like to get your perspective on what you feel a country that’s in that kind of environment right now- on the one hand we’re doing very well, on the other hand, there is a bit of a dark side- what should we be doing about it?

SUMMERS: These are very good questions, and you guys are giving me a lot to think about. I’m trying to think about – here’s my guess. My guess is that if you study all countries, and you study their rise, you will discover that they sort of go through three stages. They were invisibly corrupt, but you didn’t see the corruption, it didn’t get reported in the papers, people weren’t real angry about the corruption, and it was just part of life. Then there’s a second stage, which is everybody’s really angry and upset about corruption, which is when the corruption becomes visible
and observed, and that’s when anger at corruption is at a maximum. But actually, by the time you reach that point, the peak of corruption has actually already passed by some significant margin. And then there’s a third stage, which is, there’s a relatively vigilant press, and a general relaxation of controls, and corruption goes down.

One of the things that people never talk about when they talk about corruption is, if you have a price control, then there’s a black market, and there’s a white market, and there are two different prices.13 And stuff can be moved between them, and therefore, there’s corruption. If you have capital controls, then there’s underinvoicing to move money out of the country – or overinvoicing – to move money out of the country, and then there’s corruption.14 If you don’t have price controls, and you don’t have capital controls, then you can’t have the corruption.

So I think, if you look at the development of most societies, you’ll find that there are three stages, and you’ll find that there’s the highest degree of agitation over the issue when you’re in the second stage, even though the worst of the issue was when you were in the first stage. So if I looked at how the Congress Party won elections in Nehru’s time, or in Indira Gandhi’s time, how licenses were awarded in the License Raj, what the capacity of civil servants to get privileged access to education for their kids, who had particular aspect – particular abilities to get their kids into the right schools, who was able to take money out in order to travel in India- it would take a lot of work to convince me that, in any meaningful sense, there was more corruption in India today than there was 25 years ago.

What is the answer? The answer, I think, is outrage, transparency, and removal of opportunity. And I think things are, in general, moving in that kind of direction. An important aspect of this that I don’t really fully understand, and don’t really know how much it’s moving, but where I’ve heard – less relevant to India, but is more relevant to corruption in some other context – is I think that it is considerably more difficult to be a deposed leader with a billion dollars abroad, and keep the billion dollars abroad, in 2011 than it was in 2002.15 And if that’s right, that’s not a small thing, in terms of how the world will evolve. It’s not, by the way, a completely uncomplicated thing, because if you actually want to depose bad-guy leaders, you probably do need to give them landings that are acceptable if you don’t want them to hold on absolutely until the last gasp. But that is an area where there has really been some quite important change. Again, I don’t think that’s as relevant in India as it is in some other countries.

Your other question was about the United States. Sort of for the reasons that I said in answer to somebody else’s – to your question, I think I’m more optimistic about the American future than many other people who follow it. I am less certain that wealth in the 21st century is going to reside in manufacturing prowess than many other people are. If you look in the United States right now, about 5% of the jobs are production work and manufacturing.16 The statistic that’s widely quoted is double that, but that includes all the secretaries, that includes all the people who handle advertising and finance. If you look at the number of people who are actually on factory floors producing things, you’re in the range of the fraction of people who were farmers a generation ago.17

And so – and I suspect that what’s going to happen over the next 20 years is you’re going to see some return of manufacturing to the United States, and the reason you’re going to see some return of manufacturing to the United States is that, if it’s all done by robots anyway, it doesn’t really matter whether wage rates are lower in China or India than they are in the United States. So the strategy that is based on industrialization for job creation, I don’t believe, is real. Industrialization may happen, but I’m not sure how much wealth creation is going to happen out of the industrialization that can happen.

I think that the wealth creation is going to come more from acts of creation and innovation. And I think the question is going to be how do you cause the wealth creation that comes from acts of creation to be sufficiently widely distributed, since acts of creation are likely to be – have a high fraction of them done by a relatively limited share of individuals.

F: Thank you so much, Larry. (applause)

1 David E. Sanger, “Mexico Repays Bailout by U.S. Ahead of Time,” New York Times, January 16, 1997.

2 Matt Richtel, “Even at Megastores, Hagglers Find That No Price Is Set in Stone,” New York Times, March 23, 2008.

3 Steve Forbes, “Copernican Revolution Coming to Economics,” Forbes Magazine, January 17, 2011.

4 Martin Walker, The Cold War: A History, Henry Holt & Company, Inc., 1993.

5 Harvard Business Review, January-December 1991, available at http://hbr.org/archive- toc/3911.

6 Michael Lewis, “In Defense of the Boom,” New York Times, October 27, 2002.

7 Barry James, “Beyond Minitel: France on the Internet,” New York Times, January 8, 1996.

8 Kathryn Jones, “The Media Business: Zenith Wins Competition for HDTV,” New York Times, February 17, 1994.

9 Jeremy J. Siegel, “Efficient Market Theory and the Crisis,” Wall Street Journal, October 27, 2009.

10 Heidi N. Moore, “Congress Grills Lehman Brothers’s Dick Fuld: Highlights of the Hearing,” Wall Street Journal, October 6, 2008, available at http://blogs.wsj.com/deals/2008/10/06/dick- fulds-grilling-highlights-of-the-house-committee-hearing/.

11 Julie Satow, “Citigroup Stock Sinks to An All-Time Low of 97 Cents,” Huffington Post, March 5, 2009, available at http://www.huffingtonpost.com/2009/03/05/citigroup-stock-sinks- to_n_172167.html.

12 “Predator’s Fall: Drexel Burnham Lambert,” Time, February 26, 1990.

13 Simon Romero, “Chavez Threatens to Jail Price Control Violators,” New York Times, February 17, 2007.

14 Stephen Fidler and Jon Hilsenrath, “Countries’ Rising Use of Capital Controls Stirs Debate,” Wall Street Journal, January 29, 2011.

15 Deborah Ball, “Mubarak’s Swiss Assets Frozen,” Wall Street Journal, February 11, 2011.

16 Bureau of Labor Statistics, “Occupational Employment and Wages,” May 14, 2010.

17 United States Department of Agriculture, “The 20th Century Transformation of U.S. Agriculture and Farm Policy,” June 2005, available at http://www.ers.usda.gov/publications/eib3/eib3.htm.