I am very sorry that a recently arising family commitment makes it impossible for me to be with you in person. Becoming independent for a central bank is I suppose like going off to college for a young person—a moment of validation, maturation and new adventure. The Bank of England’s performance since becoming independent 20 years ago has in many, if not all ways, borne out the hope of those like me who strongly supported independence. There is much to celebrate.
There is an opportunity for 1 or 2 Republican Senators to be 21st century Profiles in Courage. A Senator who stands up to his or her party and casts the decisive vote against the Cassidy Graham health legislation will be seen by history as a hero.
Cassidy Graham is the cruelest and most misguided piece of consequential legislation proposed so far in the 21st century. It is far worse than the “repeal and replace” bills that Congress has so far voted down. Cassidy Graham is much more dangerous than previous bills both because it goes further in eliminating critical parts of the ACA and because it savages the pre-ACA Medicaid safety net.
Speaking at an event organized by Robert Greenstein, the President of the Center for Budget and Policy Priorities, I argued last week that unless our values have changed profoundly in an antigovernment direction, the balance of pressures from economic change will lead to an expansion of the federal budget relative to GDP. This was also the conclusion of a paper released by Paul Van de Water of the Center. Excellent summaries were provided by Al Hunt and David Leonhardt.
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.
Stan Fischer announced yesterday that he is leaving his position as Vice Chair of the Fed. The Fed and the international monetary system will be weaker for his departure from official responsibility. It is the end of an era.
Stan’s has been a singular career. As an MIT professor he coauthored, with his close friend Rudi Dornbusch, the macro textbook that defined the basics of the field for a generation. With Olivier Blanchard, he wrote the treatise that defined the state of the art for graduate students. His lectures were models of lucid exposition and balanced judgement. My view of monetary economics was shaped by my experience auditing his class in the Fall of 1978. Legions of central banking greats, starting with Ben Bernanke and Mario Draghi, were not just his students but his disciples. Read more
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.
Given recent controversies, I was interested to read NEC chair Gary Cohn’s answer to a “why are you staying?” question put by Stuart Varney of Fox Business Network last week. To his credit Cohn did not back away from his reservations about the President’s response to Charlottesville. He said “Look, tax cuts are really important to me. I think it’s a once-in-a-lifetime opportunity. We haven’t done tax cuts in 31 years. So, to be a part of an Administration that gets something done that hasn’t been done for 31 years is enormously challenging, enormously interesting to me.”
The problem with this statement is how utterly wrong it is. Taxes were not cut 31 years ago. A central point of the 1986 Tax Reform Act was that it was revenue neutral. And since that time, taxes were cut in 1997, 2001, 2003, 2009 and 2015. Read more
September 4, 2017
The central issue in American politics is the economic security of the middle class and their sense of opportunity for their children. A pervasive sense of vulnerability and missing opportunity leads to dissatisfaction, reduces faith in government and institutions, diminishes willingness to support the least fortunate, increases resentment towards members of other ethnic groups and fuels truculence towards other nations.
As long as a substantial majority of American adults believe that their children will not live as well as they did our politics will remain bitter and divisive. Middle class anxiety is surely also fed by the slow growth of wages even in the ninth year of economic recovery with unemployment at historic low levels. The Phillips curve – the view that tighter labour markets spur an acceleration of wage growth – appears to have broken down. The Bureau of Labor Statistics just reported that average hourly earnings last month rose by all of 3 cents or little more than 0.1 per cent. For the last year, they rose by only 2.5 per cent. In contrast profits of the S&P 500 are rising at a 16 per cent annual rate.
What is going on? Economists do not have complete answers. In part there are inevitable fluctuations. Profits have declined in recent years. The wages that are reflected by the BLS are earned in the US, whereas a little less than half of profits are earned abroad and have become more valuable as the dollar has declined. In part, wages have not risen more because a strengthening labour market has drawn more people into the workforce.
But I suspect the most important factor explaining what is happening is that the bargaining power of employers has increased and that of workers has decreased. Bargaining power depends on alternative options. Technology has given employers more scope for replacing Americans with foreign workers, or with technology, or by drawing on the gig economy. So their leverage to hold down wages has increased.
On this Labor Day we would do well to remember that unions have long played a crucial role in the American economy in evening out the bargaining power between employers and employees. They win higher wages, better working conditions and more protection from unjust employer treatment for their members. More broadly they provide crucial support in the political process for broad measures such as Social Security and Medicare, which benefit members and non-members alike. Both were at their inception passionately opposed by major corporations.
What can be done? This is surely not the moment for policy to tilt further to strengthening the hand of large employers. Sooner or later labour law reform that gives organisers a chance by seriously punishing employers who engage in illegal reprisals should be back on the agenda. Union efforts to organise non-traditional groups in non-traditional ways need to be encouraged. And policy support needs to be given to institutions where workers have a chance to share in profits and in corporate governance.
In an era when the most valuable companies are the Apples and the Amazons rather than the General Motors and the General Electrics, the role of unions cannot go back to being what it was. But on this Labor Day any leader concerned with the American middle class needs to consider that the basic function of unions – balancing the power of employers and employees – is as important to our economy as it has ever been.
I will not be attending Jackson Hole this year but I will be thinking about some of the issues under discussion. As I have written recently, I think the period going forward will be more challenging for central banks than the preceding few years. I will sleep best at night if Janet Yellen is reappointed.
Even though the Fed has raised rates more than I would have preferred and done far more signaling of future rate hikes than has seemed reasonable to me or for that matter to markets, it could have been much worse. I do not see a case for a further rate increase on current facts and remain very concerned that macroeconomic policy has inadequately internalized all the aspects of large declines in the neutral real rate and secular stagnation risks. Read more
President Trump, recognizing the inevitable, has disbanded his Business Advisory Councils in order to preempt the tidal wave of resignations that was in the offing. Given my long standing views about CEOs lending legitimacy to the Trump administration, I was delighted that a group of CEOs forced this step.
It is a stunning development with more to come. Who could have imagined that the CEO world would be actively stepping away from a Republican President whose economic program is centered on business tax cuts and regulatory relief? Or that an incoming President could take his popularity down to 34 percent within 7 months. Considering polling data, legislative relations and connections or lack thereof to elites, I think it is safe to say that President Trump is more bereft of support than any President since Nixon in the months before his resignation. Read more
I have since Inauguration Day been troubled by abdication of moral responsibility on the part of business who have lent their reputations to President Trump. So congratulations to Merck CEO Ken Frazier on his resignation from Trump’s American Manufacturing Council over the President’s manifestly inadequate response to Charlottesville. Interestingly, the President lashed out by tweet at Frazier, who is African American, for resigning. He did not lash out at Disney CEO Robert Iger or Tesla CEO Elon Musk, who are white, when they resigned from his Strategic and Policy Forum because of the President’s decision to pull out of the Paris climate accord.
Andrew Ross Sorkin gets it absolutely right when he asks why there have not been more resignations from Trump’s various Advisory Councils. As I’ve discussed before, the President has again and again traduced American values of international cooperation, of integrity in government, and of human decency. No advisor committed to the bipartisan American traditions of government can possibly believe he or she is being effective at this point. And all should feel ashamed for complicity in Trump’s words and deeds. I sometimes wonder how they face their children. Read more
With the term of Janet Yellen as Federal Reserve chair ending next February, the president will have to nominate and the Senate will have to confirm a new head of the central bank in coming months. There is much discussion of the merits and implications of possible candidates for the job. For Donald Trump and the Senate it will be important to begin by considering the challenges that will face Ms Yellen’s successor.
I would have preferred a slower pace in raising rates at a number of junctures. I also think that in its statements the Fed has consistently over-assessed future inflation, growth and monetary tightening at some cost to its credibility. Overall though, it has done very well in recent years. We have not enjoyed so favourable a combination of unemployment and inflation in decades. Markets and finance have been remarkably stable, perhaps too much so, for years now. And by the standards of other institutions in Washington and central banks the Fed is highly respected. This is all a tribute to its leadership but also to fortunate circumstances.
I suspect the Fed’s job will be much more difficult over the next few years. Economics, finance and politics will all throw up new challenges that will probably demand creative and unorthodox responses.
If history is any guide, it is more likely than not that the economy will go into recession during the next Fed chair’s four-year term. Recovery is now in its ninth year with relatively slow underlying growth for demographic and technological reasons, very low unemployment and high asset prices. Even without these factors, experience teaches that recessions are almost never forecast or even rapidly recognised by the Fed or the professional consensus forecast, but there is at least a 20 per cent or so chance that if the economy is not in recession, it will be so within a year. So the likelihood that the next Fed chair will have to address a recession is probably about two-thirds.
Historically, the Fed has responded to recession by cutting rates substantially, with the benchmark funds rate falling by 400 basis points or more in the context of downturns over the past two generations. However, it is very unlikely that there will be room for this kind of rate cutting when the next recession comes given market forecasts. So the central bank will have to improvise with a combination of rhetoric and direct market intervention to influence longer-term rates. That will be tricky given that 10-year Treasuries currently yield below 2.20 per cent and this would decline precipitously with a recession and any move to cut Fed funds.
As a result, the economy is probably quite brittle within the current inflation targeting framework. This is under-appreciated. Responsible new leadership at the Fed will have to give serious thought to shifting the monetary policy framework, perhaps by putting more emphasis on nominal gross domestic product growth, focusing on the price level rather than inflation (so periods of low inflation are followed by periods of high inflation) or raising the inflation target. None of these steps would be easy in current circumstances, but once recession has come effectiveness will diminish.
There has not been a major bout of financial instability or a foreign financial crisis in the past four years. Such good fortune is unlikely to continue. There are real risks – from China to signs of overvaluation in parts of US equity markets, from build-ups in leverage after a long period of low rates and tranquil markets to a highly disordered geopolitical situation in which US credibility has fallen off sharply.
In reporting on the last round of bank stress tests the Fed has asserted that even if the stock market loses half its value, the unemployment rate reaches 10 per cent and house and real estate prices fall only as much as they did in the last crisis, the big institutions will all be fine without capital increases. Market evidence suggests otherwise, based on past patterns their equity values would collapse.
The challenge with respect to financial crisis risk will be maintaining the crucial components of Dodd-Frank regulation, such as the requirement to hold higher capital, as well as recognising incipient problems much more quickly than in 2008, when even after Bear Stearns shaky institutions were permitted to make huge dividend payments. If crisis comes the Fed must find ways in a difficult legal and political environment to avoid the kind of unravelling that followed Lehman’s failure.
Perhaps the most profound challenges ahead will be political. There must be more risk now of presidential interference with the Fed than at any time since Richard Nixon. In dealing with international matters, the Fed is partnered with an understaffed and amateurish Treasury and a president who is dissipating US credibility. Most fundamentally, the temper of the times has turned against technical expertise in favour of populist passion and the Fed is the quintessential enduring apolitical institution.
Tel Aviv, Jerusalem
July 5, 2017
I should say that there are many things I wish for in life. One of them is that I had the capacity for abstraction to follow the typical lecture at this remarkable seminar, which I know has done so much to shape so many careers and has meant so much to Kenneth. From discussions of gridlock in democratic countries, to issues of health insurance, to debates about how to discount the future benefits of environmental projects, to issues around derivatives markets, we see every day that albeit with long and variable lags, abstract economic theory moves the world.
I do not need to tell this group of Kenneth’s genius. You’ve all heard the stories of him, apparently asleep, waking up to ask exactly the right question in the middle of a seminar. You’ve all heard the story of the group of assistant professors that were tired of him knowing everything, and, so found an obscure issue of National Geographic on the sounds that dolphins make to communicate with each other and drove the conversation to that topic, figuring this would be a topic that they knew more about than Kenneth. Kenneth proceeded to explain that National Geographic had described a superseded theory, and that the most recent work in the area explained that what the assistant professors were saying was wrong.
I witnessed one of these moments at our annual family Thanksgiving in Philadelphia. We took the kids to see Independence Hall–that’s a relatively standard site when visiting the city. On the ride back, Kenneth recited the entire Declaration of Independence from memory. Later on that same trip, my wife Lisa, who’s a Professor of American Poetry at Harvard, found herself in conversation with Kenneth. They were discussing Emily Dickinson, who Lisa was writing about at that stage. Kenneth asked Lisa which of the two then recent biographies of the poet she felt had captured her better and discussed at length their respective merits.
Those stories could be multiplied, but one wonders when one thinks about genius, what other human qualities go along with it? I thought my comparative advantage might be commenting on a few aspects of Kenneth’s life that I think were inseparable from, but not the same as, his genius.
First, Kenneth the child: I didn’t know Kenneth, obviously, as a child, but I’ve heard many stories from my mother and two features of those stories stand out. One, that for someone so brilliant, he was extraordinarily patient and gentle in teaching his younger siblings about anything they wanted to know. When his ten-year-old sister, four years younger than he, inquired of Kenneth, “What exactly does the phrase, ‘make love’ mean?,” Kenneth found an appropriate and judicious answer. As I’ve heard it described, roughly speaking, as a child Kenneth did nothing wrong. This was good because there was the problem of how you punish a child like Kenneth. How do you punish normal children? You send them to their room. Well, there was no activity Kenneth liked better than being in his room, reading. Far, far better than trying to play baseball, or sitting outside on a hot day. What could be better than sitting in his room and reading? And he read and he read.
Second, Kenneth the teacher. Many have already referred to Kenneth as a teacher. As best I can tell, the only athletic ability at which Kenneth excelled was tossing a piece of chalk in the air and catching it. I experienced, when David and Andy were young, playing various ball games with Kenneth. I can reliably report that he was not able to catch a ball thrown from a distance of more than six feet, but with chalk he was excellent. For the right students, Kenneth was as good a teacher as there has ever been. But Kenneth had a real problem as a teacher, which is that he didn’t really think like the rest of us. From his Olympian perspective, it was very difficult to understand what students did and did not understand.
A story is told—and I’m not sure it’s true, but it’s a good story–that in the year that I was in Kenneth’s microeconomic theory graduate course, nobody was in any doubt about the profundity of what we were being exposed to, but there was some group in the class that was having substantial difficulty discerning the main points. So, a group of students very politely and humbly approached Kenneth and said, perhaps, he could work at explaining definitions and explaining terms, and just being a little more clear so people could follow the lecture. At the next lecture, very sweetly and innocently, Kenneth wrote, f(x) on the board, and he explained what f(x) means: a function. A function is something that maps one variable into another.
Now, if I had done something like that, it would have been because I was being sarcastic. If others had done that, it likely would have been because they were making a point about students needing to keep up or their frustration about students’ slowness. Kenneth was utterly sincere and in good faith. From his perspective, the Slutsky equation and the meaning of a function were equally elementary concepts.
Not everything Kenneth did succeeded. There was a movement in the Harvard Economics Department in the early ‘70s (this is an experiment that has not been repeated as best I know in the last 45 years) to assure that faculty rather than graduate students would teach introductory economics to college freshmen. This was accomplished in two ways: one is assistant professors were required to teach introductory economics, and the other is that generous souls were prevailed on. Kenneth was a generous soul and he was prevailed on. So, for a full year Kenneth was the teaching fellow for 24 fortunate freshmen. He reported afterwards, and I fear data confirms this, that he had not been quite able to find their level, and of 24 teaching fellows that year, he had been ranked 13th. The experiment was not repeated.
Third, Kenneth’s insatiable intellectual curiosity: You don’t become a prodigious contributor to a discipline like Kenneth, with the kind of insights that Kenneth offered us, without a certain extraordinary intellectual intensity. I remember the fall night in 1972, after Kenneth was awarded the Nobel Prize. The other American Nobel Prize winner at that moment, Paul Samuelson, also my uncle, hosted a party for Kenneth and the Cambridge economics community. I was a sophomore economics major at MIT, so I was hardly appropriate company for such an august gathering, but I was a little unique in being related to both the host and the honoree, so I was invited and I participated as best I could in the conversation. I have only one enduring impression of that evening, which is that seven o’clock, became eight o’clock, became nine o’clock, and then approached ten o’clock. Almost everybody left, and Paul and Kenneth were discussing turnpike theorems. Kenneth was discussing aspects of the Pontryagin’s maximum principle. Paul was discussing how stupid Joan Robinson was. Those of you who are old enough will really get this. And they were discussing the turnpike theorem, and the maximum principle, and the Hamiltonian and whatever. My aunt Marion, Paul’s wife, went upstairs. The caterers finished cleaning and left. Selma had her very heavy winter coat and looked on impatiently. I was waiting for my ride back to Cambridge Kenneth and Paul were still discussing the theorems. Until they got it straight, that discussion was not going to end. It made an impression on me that I never forgot. There were two people in that room who wanted to discuss economics for the longest period of time, with the least regard for social exigencies. And those were the two people in that room who had won the Nobel Prize.
Fourth, Kenneth and public policy. Some of you probably don’t know this, but Kenneth was proud of having been integral to the first cost benefit analysis of the US SST (Super Sonic Transit) proposal during his time on the staff of President Kennedy’s Council of Economic Advisers. He had the right to be proud as his analysis was part of the reason that the United States did not join Britain and France in their costly SST error.
Kenneth followed many, many aspects of public policy, closely. The two Americans who, in my experience, were able to discuss Israel’s dozen or so political parties with the most nuance were Bill Clinton and Kenneth Arrow. He would, each year at Thanksgiving, review with Eytan Sheshinski the progress of each of Israel’s political parties. While it was enough for me to get a sense of how the good guys were doing, Kenneth was on top of every twist and turn.
I think there was only one moment in the 62 years of my being Kenneth’s nephew, when we were seriously annoyed with each other, and I don’t actually know now which of us was right. In the summer of 1996, when I was in charge of international financial policy for the Clinton Administration, Boris Yeltsin was running for reelection against Zyuganov who was the full-fledged revanchist, the “return to the old way” Communist. Privatizations had taken place and were continuing. As history has recorded, the privatizations were not entirely legitimate, to put it mildly, and had substantial elements of unjust enrichment. It bears emphasis that some of the enterprises being privatized were being stolen from their state managers, so there was a reasonable argument that at least having some owner, even an illegitimate one, would improve the way in which they were being managed. The United States government, while not supporting the details of the privatization, was working very hard to support Boris Yeltsin against the Communist, and to support the idea of economic reform in Russia.
Just before the election Kenneth signed a letter, along with a group of pre-perestroika, pre-glasnost Soviet economists condemning the economic policies of the Yeltsin administration. It got enormous play in Russia. I thought it was an irresponsible and politically naïve act to intervene in a way that would predictably favor the communist without checking with the US government. He thought that I was losing my proper focus on what the right economic policy should be, in order to serve the political objective of the government. My poor mother had to hear my view of Kenneth’s actions and Kenneth’s view of my views. Fortunately, there were months that passed before Thanksgiving.
Five years ago I was involved in forming a commission of various former officials and scholars on global health. Dean Jamison, who is a former student of Kenneth’s, and was my collaborator in this venture, asked whether we should have Kenneth join. I said, “No, he’s 89 years old. The commission’s going to meet in Oslo. The commission’s going to meet in Addis Ababa. Who knows where this commission is going to meet? This is surely not what he wants to be doing at this stage in life. I don’t think that really makes sense.” And Dean said, “Really??” I thought about it and I decided that consumer sovereignty was a good principle in which Kenneth believed, and so I worked very hard to figure out a way of asking him whether he’d be interested in doing it, that was designed to make “no” as easy an answer for him as possible. Kenneth said, “Yes, absolutely, I’d be happy to do it. And just one more thing, as I’m approaching my 90th birthday, I probably won’t be able to write a section of the report myself.” And I said, “That will be okay.” I can report in a style that I do not think has been passed onto the next generation of academics, Kenneth joined the commission before learning that it would be possible to fly business class to its meetings. He would have been wholly prepared to fly coach, if that is something that had been requested.
Fifth, Kenneth, the person: One of the things that has never stopped impressing me about Kenneth was that while he was obviously extraordinary and he was obviously treated by people, like the people in this room and so many others, as extraordinary, he never had a sense of himself as special. I remember many, many years ago, probably 35 or 40 years ago, the American Economic Association, for some reason, had its meeting in Atlantic City. Atlantic City is about an hour, maybe an hour-and-a-quarter from Philadelphia, and after the meeting Kenneth was coming to my parents’ home. There are many ways one could make the journey. Kenneth went to the Atlantic City bus terminal, got on the bus, rode the bus to Philadelphia, and wanted to be picked up at the bus terminal. My mother explained, “You know, you were given a fair amount of money, we read in the paper a few years ago, when you won the Nobel prize. There are taxis, there are limos, there are many Penn faculty who, undoubtedly, would have been delighted to give you a ride in order to spend an hour with you. Did you really need to take the bus?” He said, “Oh, really? I guess I could have done those things but I never really thought of anything else.”
This was something that ran very deep. Four or five years ago, Kenneth found himself in Stanford Hospital needing surgery, and there were different surgical options. For whatever reason, the process of finding the way to the right option was not happening in an especially effective and efficient way. My mother and I said to Kenneth, “Kenneth, you know, you are not just any patient at the hospital of Stanford University. You have devoted much of your life to Stanford University and you are, perhaps, the most distinguished person associated with Stanford University. They really should take care of you and they should see you quickly, not slowly.” Kenneth said, “Really? Well, what should we do?” And I said, “Well, just kind of make it clear.” And it was clear that he didn’t really quite know what I meant, or how to do it. I asked, “Would it be okay if I made a couple of phone calls?” And he said, “Yeah, I suppose, if you want to.” The appropriate things then started to happen.
A final example of this, just slightly ethereal quality: I remember being in a conversation, with Kenneth and Selma in their kitchen in Cambridge, many years ago. We were discussing annuities. We were having a highly-animated conversation about intemporally separable utility, the nature of the bequest motive, risk aversion, adverse selection and whether purchasing annuities was optimal. A group of economic theorists like those here can more or less imagine all the propositions. Selma didn’t really find the conversation very interesting, but said, “Well, wait a minute, annuities? , We’re approaching retirement. Do we have our plan?” And Kenneth said, “Oh, I don’t know. Whatever, it will work itself out. It will work itself out in some reasonable way.”
Finally, Kenneth as an uncle and as a great uncle: If there’s a lot of ruin in a nation, there’s a fair amount of ignorant assertion in a family of 17, with many young persons present. I have never heard Kenneth treat a comment other than utterly seriously. If a nine year old or a twelve year old was trying to figure out whether it was true, false, or sometimes that all equilateral triangles are isosceles, he was prepared to devote himself to that question with the same thoughtful seriousness that he was prepared to devote himself to questions of mechanism design or the limits of information. If an opinion was being expressed about gambling or football betting, he was prepared to devote himself to at least the quantitative aspects of the betting, if not the content of the sport, in the same way that he would devote himself to the Savage axioms of risk and utility theory. He was there for everyone, expecting nothing in return, and, therefore, for his family, as for all of us here, he made us feel like we were smarter, more noble, and better than we actually were.
I miss him today, and the world will miss him always. Rest in peace, gentle genius.
Confusing civility with comity is a grave mistake in human or international relations. Yes, the Group of 20 summit issued a common communique after the leaders’ meeting. Some see this as an indication that some normality is being restored in international relations between the United States and other countries. The truth is that at no previous G-20 did the possibility occur to anyone that a common statement might not be agreed to by all participants.
All of this is troubling enough. The elephant in the room, however, is the president’s character and likely behavior in the difficult times that come during any presidential term. Biographer Robert Caro has observed that power may or may not corrupt but it always reveals. Trump has yet to experience a period of economic difficulty or international economic crisis. He has not yet had to make a major military decision in a time of crisis. Yet his behavior has been, to put it mildly, erratic.
The president chose hours before meeting with Russian President Vladimir Putin to cast doubt on judgments of the U.S. intelligence community regarding Russia’s interference in the 2016 election. On the brink of the most important set of international meetings of his presidency so far, he put forward the absurd idea that a main G-20 discussion item involved Hillary Clinton’s campaign chairman John Podesta, in the process making demonstrably false assertions about Podesta’s role.
It is rare for heads of government to step away from the table during major summits. When this is necessary, their place is normally taken by foreign ministers or other very senior government officials. There is no precedent for a head of government’s adult child taking a seat, as was the case when Ivanka Trump took her father’s place at the G-20 on Saturday. There is no precedent for good reason. It was insulting to the others present and sent a signal of disempowerment regarding senior government officials.
A corporate chief executive whose public behavior was as erratic as Trump’s would already have been replaced. The standard for democratically elected officials is appropriately different. But one cannot look at the past months and rule out the possibility of even more aberrant behavior in the future. The president’s Cabinet and his political allies in Congress should never forget that the oaths they swore were not to the defense of the president but to the defense of the Constitution.
President Trump’s Poland speech articulating his foreign policy principles has generated much comment and would have generated more but for all the Russia scandal news. It’s an important window into the President’s gestalt as he views the world. As I wrote recently, I don’t care for the “West against the Rest” as a paradigm US foreign policy because it risks becoming a self-fulfilling prophecy, a point Martin Wolf makes powerfully in his column today.
Certainly, there is an argument for the President’s invocation of Western Civilization. Unlike many of my friends and colleagues in American universities, I sympathize with the concern that contemporary educational norms pass too lightly over the accomplishments of America and the West in favor of a fashionable multiculturalism. Indeed I have joked after reading multiple issues of its flagship journal that the American Studies Association should be renamed the anti-American Studies Association since it sees America largely through its sins towards minority groups.
In the run-up to the ongoing G20 meeting in Hamburg, I was interviewed by the G20 Research Group about its significance. I argued that the only really important issue was whether the United States would at last be induced to signal a commitment to the idea of a global community or would it double down on atavism.
As I write Saturday morning (US time), things seem to be running below my already low expectations. On the philosophical and policy questions regarding United States’ willingness to continue supporting a rules based international system, there is no progress to observe.
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)
