The Fed on Wednesday backed off its plan to continue increasing rates this year in order to maintain U.S. economic growth.
Here & Now‘s Jeremy Hobson talks with Larry Summers, former secretary of the Treasury and president emeritus of Harvard University, about interest rates, tax rates and other economic issues.
In an interview on CNBC at the Asian Development Bank, Summers discussed the implications of steel tariffs for the US economy. The steel tariffs will do damage to the American economy “even before China retaliates” says Summers.
In an interview with Bloomberg News on March 26, 2018 at the Asian Development Bank, Summers discussed the psychological impact of trade sanctions with China.
Is there any other way besides tariffs — and potentially a trade war — to get China to play fair on trade? David Greene interviews Summers for his insight on NPR’s Morning Edition.
America’s regional disparities are large and regional convergence has declined if not disappeared. This wildly uneven economic landscape calls for a new look at spatially targeted policies. There are three plausible justifications for place-based policies–agglomeration economies, spatial equity and larger marginal returns to targeting social distress in high distress areas. The second justification is stronger than the first and the third justification is stronger than the second. The enormous social costs of non-employment suggests that fighting long-term joblessness is more important than fighting income inequality. Stronger tools, such as spatially targeted employment credits, may be needed in West Virginia than in San Francisco. Read the full paper here.
Brookings Papers on Economic Activity, Spring 2018
Benjamin Austin, Edward Glaeser, and Lawrence Summers
“Newt has the right elements of the answer- people are really angry, they’re disillusioned, they’re uncomfortable, they’re scared, they’re looking for something very different,” said Summers.
“He had a gut visceral connection that the Democrats lacked.”
“We had statisticians doing computer models around voter targeting, he had gut instincts around Twitter, rallies and Facebook- those three things, gut instincts, Trump’s analysis that people are very angry and disillusioned and his tremendous energy.”
“That’s why I think what happened in Alabama is a big deal.”
Read on Chicago Now.
Listen on Soundcloud.
Listen to Conversation with Tyler Cowen: Macroeconomics, Mentorship and Avoiding Complacency where we discuss a wide range of ideas including: innovation in higher education, Herman Melville, the Fed, Mexico, Russia, China, philanthropy and my table tennis adventure in the summer Jewish Olympics.
My interview with David Beckwirth of Macro Musings podcast where we discuss macro policy making, QE, nominal GDP targeting and more. Listen to the podcast here.
The New York Times
David Leonhardt
September 7th, 2017
A 19th-century economist named Adolph Wagner made a prediction that came to be known as Wagner’s Law: As societies became wealthier, their taxes would rise. They would rise because people would want more of the services that government tended to provide better than the private market, like national security, education, medical care and a guaranteed retirement.
Wagner’s Law has proven truer than not, but there are still many people who would like to pretend otherwise. Specifically, they wish we could summon a country with a strong military, good schools, health care and comfortable retirements — but falling taxes. It’s a nice fantasy.
Yesterday, Larry Summers, the economist and former Treasury secretary, gave a lunchtime presentation in Washington laying out the statistics that debunk the falling-taxes fantasy. He effectively updated Wagner’s Law for the United States in 2017.
“With the same values and preferences, and the same basic attitude about government activity versus private activity,” Summers said, “you should expect government to be larger in the future than it has been in the past.”
There are four main reasons, he argued:
• One, society is aging, which calls for greater spending on retirees. The ratio of elderly Americans — those expected to be in the last 15 years of their lives — to all other Americans will rise about 50 percent from 2010 to 2030.
• Two, inequality has soared, with living standards stagnating for the middle class and poor. Taxes push back against inequality.
• Three, labor-intensive services, like education and medical care, have become more expensive, and they also tend to be the areas where the government spends money.
• Four, American military spending has not kept up recently with the spending by our main rivals, including China, Iran and Russia. This trend shouldn’t continue forever, Summers said.
I find his case compelling. Even if you disagree in one particular area — say, you favor more private-sector education, or a weaker military — the combined costs are so large that the argument holds up. That’s part of the reason that taxes on the wealthy should rise, and big tax breaks — like those for home ownership and employer health insurance — should be reduced.
I don’t mean to suggest that taxes should always be rising and that government will eventually take over the economy. Capitalism clearly has worked much better than any alternative. And there are times — for example, after a war or when a population is becoming younger — that taxes should fall. It’s also important to cut government where it’s wasteful.
But believing in capitalism is different from believing that government cannot grow. Modern capitalism depends on a well-functioning government. Capitalism has already grown a lot over the last century, across this country and much of the world, and the world is a vastly richer place than a century ago.
“If we want to maintain traditional American values,” as Summers said, “government will need to be significantly larger.”
For more details on the numbers, I recommend a new paper by Paul van de Water of the Center on Budget and Policy Priorities, which hosted Summers’s presentation. I first learned of Wagner’s Law from the writer Matt Miller.
In North Dakota yesterday, President Trump tried his best to summon a magical world in which life keeps getting better and taxes keep falling. His pitch “is divorced from reality,” Katrina vanden Heuvel says in The Washington Post. Richard Rubin of The Wall Street Journal called the speech a big step away from tax reform and toward a simple tax cut.
Remember: If Trump succeeds in cutting taxes for the wealthy, taxes for everyone else will eventually need to rise even more.
https://www.nytimes.com/2017/09/07/opinion/trump-tax-increase.html?_r=0
Bloomberg
Why the U.S. Government Can’t Be Downsized
Albert Hunt
September 7th, 2017
https://www.bloomberg.com/view/articles/2017-09-07/why-the-u-s-government-can-t-be-downsized
The Republican vow to significantly reduce the size of government is a foolish pipe dream, Larry Summers says, not because of liberal policy aspirations but because of structural economic realities.
At a lunch on Wednesday, Summers, a former Treasury secretary and a leading Democratic economic-policy thinker, explained the substantive as well as political impracticalities of cutting entitlements and defense spending in the years ahead.
“If we want to maintain traditional American values, government will need to be significantly larger,” Summers declared at the event, hosted by the liberal Center on Budget and Policy Priorities.
What’s needed now, he said, is tax reform modeled on the law enacted in 1986 that improves the tax code and doesn’t lose money. What we can’t afford, the economist declared, is a tax cut like the one in 1981 that drained billions of dollars from the Treasury. As the plans of the Trump administration and congressional Republicans unfold, it becomes clearer that they are closer to the 1981 approach.
Summers, who was director of the National Economic Council under President Barack Obama, denigrated those efforts and summarized four economic realities that undercut the possibility of downsizing government:
He criticized the emerging Republican tax plans as counterproductive for the economy and for long-term government revenues. Most Republicans, although giving lip service to major reforms, are focused on a huge tax cut for corporations and higher-income individuals. Noting the relatively low cost of capital, with low interest rates, and the need to bolster revenues in the years ahead, he said: “This is not the moment for net tax cuts.”
Summers argued that a real tax reform, like the 1986 plan worked out between Republican President Ronald Reagan and a politically divided Congress, would be beneficial. Rates could be cut by slashing tax preferences like the carried interest enjoyed by some private-equity and hedge-fund executives and the huge real-estate tax breaks, among others, and by devoting more resources to tax compliance and enforcement.
The economist didn’t seem averse to a modest cut in the corporate tax rate but was appalled by Republican arguments to cut this top rate from 35 percent to as low as 15 percent.
“That might be a good thing for my finances, but it would be outrageous public policy,” said Summers, who is in demand as a speaker and consultant.
He ridiculed the populist-sounding arguments of Trump adviser Gary Cohn and Treasury Secretary Steven Mnuchin, who say, for example, that tax cuts would help firemen since a resulting surge in stocks would help their retirement plans. Most firemen have defined-benefit pension plans that wouldn’t be affected, Summers noted.
At the lunch, the Center on Budget and Policy Priorities released its own projections for federal spending and revenues. By 2035, with reasonably modest assumptions, spending would increase to 23.5 percent of the gross domestic product from 20.9 percent. Thus, the center contends, it will be necessary for revenue growth to keep pace — or the result would be a massive increase in deficits and debt.
The New York Times’ Upshot
September 3, 2017
Eastman Kodak was one of the technological giants of the 20th century, a dominant seller of film, cameras and other products. It made its founders unfathomably wealthy and created thousands of high-income jobs for executives, engineers and other white-collar professionals. The same is true of Apple today.
But Kodak also created enough working-class jobs to help create two generations of middle-class wealth in Rochester. The Harvard economist Larry Summers has often pointed at this difference, arguing that it helps explain rising inequality and declining social mobility.
“Think about the contrast between George Eastman, who pioneered fundamental innovations in photography, and Steve Jobs,” Mr. Summers wrote in 2014. “While Eastman’s innovations and their dissemination through the Eastman Kodak Co. provided a foundation for a prosperous middle class in Rochester for generations, no comparable impact has been created by Jobs’s innovations” at Apple. Click here to read the full article.
June 22, 2017
Published by Nathan Gardels, The WorldPost
What are the key policies of a centrist politics that is pro-globalization? In the wake of Brexit and Trump’s election, you have called for a “responsible nationalism” that responds to the needs of those voters. What does that mean in practice?
First of all, some of this is about policies. But some is about the extent to which we are projecting a global attitude that sees everyone in the world as a fellow human being and the extent to which you are projecting a concern for certain people because they are American.
As a global leader, we have not necessarily displayed the uppermost concern for Americans in our policies. So, some of it is a matter of what is projected.
I would say these are the most important policies:
1. A policy of investment in infrastructure; building things that everyone shares and can be proud of. This has the virtue of employing people who are having a tough time in the current economy. It is the best way to provide a general economic stimulus. A trillion-dollar commitment over the next 10 years would be a great step ― paid for by carbon taxes or other measures that are pro-environment.
2. A commitment to monetary policies that create an economy in which we’d face a shortage of workers rather than a shortage of jobs. That creates a more equal leverage between employers and employees, which is the condition for real wage growth for ordinary workers. We don’t even have a central bank that takes a 2 percent inflation target seriously. We’ve gone eight years with inflation nowhere near that. We need to target 2 percent, not just be comfortable with the forecasts of inflation inching minimally up.
3. We need a much greater level of investment in young people and their transition to work. Some of that has to do with the debt burden of a college education. But more importantly, we don’t do anything for people who don’t go to college. They are left to either sink or swim, and mostly they sink. I’m thinking here of the kind of vocational apprentice arrangements that Germany has implemented successfully.
4. We need to reorient our international economic policy toward what benefits people, instead of benefiting the rich and focusing on the priorities of corporations. Why is it that corporate tax loopholes, which mean that ordinary Americans need to pay more taxes, is not a priority? Instead, intellectual property protection for pharmaceutical companies are at the top of the international agenda. U.S. Commerce Secretary Wilbur Ross was recently very proud about getting credit rating agencies into China. Who cares? The shareholders come from all over the world ― and the jobs will be created for Chinese people in China. Why not tackle tax competition, jurisdiction arbitrage and tax shifting instead, all of which allow corporations to avoid their tax obligations. Tax avoidance and tax havens are the clearest example of bad international policy. And international agreement should aim as well at stopping races to the bottom on labor and environmental standards.
This should be the orientation – protecting regular people rather than protecting the interests of the people who know a lot about the international system and how to game it.
Right now, when we discuss the global economy, we mainly talk about things that improve “competitiveness” and are painful to the regular worker ― things that are aimed at promoting the interest of companies headquartered in the United States with global scope.
No wonder people don’t like globalism.
Is the greatest threat to jobs displacement and inequality from rapid technological advance or globalization?
It is pretty clearly it is from technology. Manufacturing employment as a share of GDP is substantially less in both Germany and China ― the big surplus export states ― than it was in 1990. So, I don’t see how you can avoid the conclusion that technology is the larger and more fundamental issue. And wealth is concentrating in the big tech companies. We are going to need to find ways of more progressive taxation if there is to be acceptance of the market system as a model. We should be moving toward more progressive taxation.
Also, in terms of inequality, I think the idea of wage subsidies should be seriously considered. There is an important distinction between an “earning subsidy” and a “wage subsidy.” In an earned income tax credit, if I earn $20,000, the state gives me $10,000. If I am earning $30,000, the state gives me $5,000. If I earn $50,000, the state doesn’t give me anything and I pay taxes.
A wage subsidy works like this: I earn $8 an hour and the government pays an extra $4 for every hour I work. If I earn $10 an hour, the government gives me $3 dollars. In other words, because it is based on my wage rate, it doesn’t distort my level of effort. It is more complicated to enforce, but more attractive. It is a better alternative to universal basic income where no level of effort is required. I think people want to work.
There are all kinds of important work in our society to do ― such as elderly care, child care, practicing preventive medicine ― for which there is not a readily apparent business model. If we are going to employ everybody, we’re going to have to find ways of making sure that that work can get done.
Another important thing to understand about wages and costs in this context is how the world has changed. If we assume consumer prices at 100 in 1983, the consumer price for a TV in 2017 is much, much less because the technology has improved and made it much cheaper. But the cost of a year of college has skyrocketed ― it is 600 today to compared to 100 in 1983. So, there has been a huge change in relative prices of those two goods.
It is hard to believe in that context that we shouldn’t have more spending by the government to help pay for one ― college costs ― and not the other.
Some have argued that the centrist “third way” politics practiced by you, former U.S. President Bill Clinton and former British Prime Minister Tony Blair failed because of its blind spot on financial deregulation. In retrospect do you think so?
We’ve done a lot with Dodd-Frank in the U.S. and with the various global versions of financial regulatory reform.
There are still problem areas ― shadow banking probably the largest among them. Surely finance was under-regulated before 2008. But I don’t think more regulation of finance is the foremost issue today. The place that had the biggest bubble and biggest crash was Japan ― yet it was and is a highly regulated financial system. They didn’t have derivatives or financial innovation. Continental Europe has a far less financial culture than U.S. or Great Britain, and they have performed worse over recent years.
Before 2008, yes, we should have had more regulation. Is there a fundamental principle around redefining the financial sector as a public utility? I don’t think so.
The Chinese see the center of gravity moving to the developing world and are describing a new phase of globalization in which their “Belt and Road” investment in infrastructure initiative boosts that growth to the benefit of the entire global economy. Do you agree with them?
There is no question that center of global economic gravity is moving to the South and East. There is no question that the dislocations associated with trade are greater when the wage rates in the developed world are five to eight times greater than in the developing world. It is a dislocation that wouldn’t take place if you were talking about economies with similar levels of development and wages. We’ve never seen anything quite like China that has a total economy of immense scale and huge financial power ― $3 trillion in reserves ― but has average income levels that are 20 percent of what America has.
We just haven’t seen history put together that kind of combination before. It is hard to guess how it will play out. There is no question that economies that are large by virtue of population rather than being at the cutting edge of productivity are going to be much more defining of the global system in the future than they have been in the past.
China’s “Belt and Road” initiative is constructive – connectivity and infrastructure is constructive. It is constructive to help countries develop. The question will be if it is done in the spirit of altruism that ultimately also benefits the altruist, or a more narrow, mercantile interest on the part of China. I don’t think the path is entirely clear
Should the U.S. join up with one of the central institutions of that effort, the China-led Asian Infrastructure Investment Bank?
Yes. It was a mistake for the U.S. to not join the AIIB during the Obama years. We would be well advised to join it now.
Despite our not having joined it, there are Westerners such as Germany and France in prominent roles. It is open to American companies for procurement contracts. Projects so far have been co-financed with the traditional development banks so they have the kind of environmental and transparency standards that we advocate. Is that true of all the various institutions and practices involved in the Belt and Road initiative? I’m not so sure.
Economists such as Laura Tyson and Branko Milanovic are stressing the notion of “pre-distribution” policies to tackles inequality. That means investing in public higher education and finding ways to share the wealth before taxation instead of relying solely on redistribution of wealth after it is created. Do you share that view?
Yes, if it means bolstering the educational system, investing in human capital. That is central. No, if the emphasis is on giving away capital. Yes, if it means supporting universal health care and affordable housing. No, if it means regulating wages in economies beyond the minimum wage or governments getting involved in capping compensation. Here I’m more skeptical about the degree of disruption that will result. Yes, if it means leveling the playing field of opportunity.
Countries like Singapore share the wealth with all their citizens through a mandatory national savings and investment scheme ― the Central Provident Fund ― in which all share in the returns on profitable investment. Wouldn’t a scheme like that help spread the wealth and reduce inequality in the U.S.?
There is a case for a more aggressive investment of Social Security trust funds in diversified pools of equities. Yes. These proposals deserve serious attention. On balance, it would give more people more stake in the profitability of the entire country’s economy.
In the U.S. context, though, I’m skeptical of the merits of establishing a fund so the government can allocate capital. In a small export-oriented economy like Singapore where you are looking across a whole range of global opportunities for returns, that works. But the way you establish funds like that is to build chronic budget surpluses – not something the U.S. is likely to see for a long while.
This interview has been edited and condensed for clarity.
June 20, 2017
Lawrence Summers, Harvard University Charles W. Eliot Professor and Former U.S. Treasury Secretary, discusses the Trump Administration’s trade policy ahead of the G-20 meeting. He speaks with Bloomberg’s Chad Thomas on “Bloomberg Daybreak: Americas.” (Source: Bloomberg)
June 20, 2017
Lawrence Summers, Harvard University Charles W. Eliot Professor and Former U.S. Treasury Secretary, discusses carbon dividends, a border adjustment tax, and U.S. trade agreements. He speaks with Bloomberg’s David Westin on “Bloomberg Daybreak: Americas.” (Source: Bloomberg)
June 20, 2017
Lawrence Summers, Harvard University Charles W. Eliot Professor and Former U.S. Treasury Secretary, discusses the benefits of a border adjustment tax. He speaks with Bloomberg’s David Westin on “Bloomberg Daybreak: Americas.” (Source: Bloomberg)
June 20, 2017
Lawrence Summers, Harvard University Charles W. Eliot Professor and Former U.S. Treasury Secretary, explains the process of addressing climate change using carbon dividends. He speaks with Bloomberg’s David Westin on “Bloomberg Daybreak: Americas.” (Source: Bloomberg)
Summers points out the math error in Trump’s budget on The Late Show with Stephen Colbert.
May 25, 2017
Published by the New York Times
June 7, 2017
Some of the nation’s most influential leaders in higher education met last week at the Higher Ed Leaders Forum hosted by The New York Times. They discussed an array of issues facing colleges and universities today, including high costs, free speech, addressing the skills gap, using big data and leading in a time of crisis. The excerpts below have been edited. Videos of the full sessions can be found online at www.nythigheredleaders.com.
Gina Raimondo, governor of Rhode Island, on reducing college costs
“Ninety-nine percent of good jobs that are being created in this country since the recession require a degree past high school. And so how can you say in order to get a good job you need a degree past high school, but oh, by the way, it’s unaffordable.”
“Too many students are being denied an opportunity to get a good job because they can’t afford college. It’s a crisis in this country; it’s locking people out of economic opportunity, and we have to take action.”
Ryan Craig, co-founder and managing director of University Ventures, on the need to bridge the skills gap
“We have, over the last decade, record levels of underemployment for college graduates, and the well-documented failure to launch — which, coupled with record student loan debt, has had spillover effects in terms of areas like home buying, in terms of new business creation.”
“A decade ago if you’d surveyed matriculating students as to why they were pursuing a degree, you’d get lots of different answers. About half of them would say it was related to job or income or career. Today it’s 92 percent.”
“Virtually all job descriptions are now online. Each posted job generates 150 to 250 applications. That’s too many for any single hiring manager to review. So most employers now have resorted to using applicant tracking systems as filters, and those are based on keyword filters. If applicants literally do not have in their résumés or CVs the keywords that are in those job descriptions, they will be invisible to human hiring managers.”
Lawrence H. Summers, Charles W. Eliot university professor and emeritus president of Harvard University, on free speech on campuses
“I think President [Robert] Zimmer at the University of Chicago got it about right. There’s a safe space with respect to hearing ideas you don’t like. It’s your parents’ house. It is not any place on a college campus. It should not be. Demands that speakers be disinvited should be rejected. The obligation to maintain order and give every speaker a chance to be heard should be respected. And when those norms of civility are violated, there should be consequences for those who violate them.”
Sheila Bair, president of Washington College and former chairwoman of the Federal Deposit Insurance Corporation, on college costs
“It’s important to understand that when you hear about these high sticker prices of tuition, that generally is not the price that a student pays. Scholarships are typically provided by my college and others. But nonetheless, it’s still really expensive. And why is that? Part of it, it was just too easy to raise tuition for a while. The demographics, the high school populations, were increasing for a while, and then when the federal government went to direct lending, it really opened up the spigot.”
Jonathan Haidt, social psychologist at New York University’s Stern School of Business, on free speech on campus
“There are so many things going on. But one of the most dangerous is this new culture of safety-ism. The most important psychological truth I think we all need to know for raising kids or educating students is anti-fragility. Nassim Taleb’s book “Antifragile” says that human beings, like many systems in the world, only become strong by being repeatedly exposed to shocks, challenges, unpleasant events. We overcome them, we’re stronger.”
Published by Business Insider
June 5, 2017
Former US Treasury Secretary Lawrence Summers has some harsh words for JPMorgan CEO Jamie Dimon: Stop giving cover to Donald Trump’s outrageous policies on immigration, climate and the economy.
Summers called Dimon out for not leaving the president’s Council of CEOs, which the Harvard economist said lends credence to what he sees as the president’s deeply misguided agenda.
Dimon previously defended his supportive stance on Bloomberg TV: “I am a American patriot, and I want to help the president of the United States. When someone is piloting the airplane I want to root for the pilot so I want to help him as best I can.”
Donald Trump set off the ire of leaders around the world last week by officially announcing he was pulling out of the Paris Agreement on climate. Dimon was being asked about that issue specifically.
“It is very hard if you say I’m going to go off an advisory group or not do ‘a, b, c’ because you disagree on one issue. Honestly, no one is going to agree with every president or prime minister on every issue. So I don’t want to overreact to it,” Dimon said.
Summers did not mince words in his response, also delivered on Bloomberg TV. He framed what he saw as a necessary opposition to Trump in much broader terms, saying Dimon’s argument that this was a single issue gone awry simply did not pass muster given the administration’s harsh stance on issues like immigration and international isolation on trade and security.
“Three points,” began Summers:
“1. Jamie referred to this as one issue. There’s an immigration ban, there’s arithmetic that doesn’t add up, there’s climate change, there’s crony capitalism and selective deals — this is hardly the first and only minor issue. This is the central part or philosophy — does the United States believe in a community of nations.
“2. Jamie should be prepared, and I would be prepared, and I hope any business leader would be prepared to offer advice to the president. That is a very different thing to lending your prestige and that of your company to joining an advisory board of his creation. That is accepting a presidential appointment.
“3. Where does this principle stop? Jamie says it’s one issue. What would cause him to back off? Look, our president is very different and I think the rhetoric on the left that compares him to leaders in Europe in the 1930s is frankly overdone.’
Summers went on:
“That said, at what point as a patriot is your allegiance to your country rather to your president? I’ve always thought of my allegiance as a patriot as being to my country. That’s why if I had been asked to support the kind of policies that are being advocated by this administration while in government I surely would have resigned. And make no mistake, the decisions business leaders make send a very powerful signal both to the rest of the world and the president. If Jamie and his colleagues on this advisory board resigned, not over the details of the Paris Agreement but over the philosophy that the United States no longer believes in cooperation with other nations in a community of nations, that would send a very powerful signal to the rest of the world and it would send a very powerful signal to the president and to the people at home.”
In an interview on Bloomberg Daybreak: Americas, Harvard University Charles W. Eliot Professor Lawrence Summers talks about his support for big reforms in U.S. air traffic control and looks at the prospect of infrastructure spending. He speaks with Bloomberg’s David Westin on “Bloomberg Daybreak: Americas.” (Source: Bloomberg)
