Why China won’t keep growing fast forever

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The Upshot, The New York Times
October 26, 2014

There has been plenty of discussion lately about signs that China’s economy is slowing down, focused on details of a possible housing bubble and vast sums of bad loans that the country will have to reckon with. But put aside the challenges China faces this quarter, or next year, and there is one view that is overwhelming: China is a long-term economic juggernaut that will stand astride the global economy in another generation’s time.

I know this because, for years now, major magazines and editorials and books have told me about the Chinese Century, in which we are apparently now living. Leading foreign policy journals have devoted copious ink to exploring what China’s rise will mean for global economics and politics, often taking as a given that China will be the dominant power of the coming century. (“Can the Liberal System Survive?” Foreign Affairs asked in 2008.)

Official forecasts — from international agencies like the Organization for Economic Cooperation and Development and the World Bank, and from United States intelligence circles — envision China continuing to grow rapidly over the next couple of decades, its economy eventually becoming much larger than that of the United States. Robert W. Fogel, a Nobel laureate in economics, forecast in 2010 that in 2040, Chinese economic output would be $123 trillion, about seven times the current size of the American economy (and three times his forecast for the United States in 2040).

But what if it’s all hogwash?

Many of the most bullish forecasts of China’s economic future are based, more or less, on extrapolation. For more than three decades, its economic output per person has been rising at an extraordinary annual rate of 6 to 10 percent, climbing rapidly toward levels in the richest nations. If that continues for a couple of decades, the bullish forecasts will prove accurate.

But if you look at the long arc of economic history, such performance would be a remarkable aberration. That’s the argument that the Harvard economists Lant Pritchett and Lawrence H. Summers make in a new working paper. In short, past performance does not predict future results. What tends to happen, rather, is “reversion to the mean”: Countries having long periods of abnormal growth tend to revert to something around 2 percent growth, closer to the long-term global average.

“China’s experience from 1977 to 2010 already holds the distinction of being the only instance, quite possibly in the history of mankind,” with sustained super-rapid growth for more than 32 years, they write. “Why will growth slow? Mainly, because that is what rapid growth does.”

There are plenty of other China pessimists out there, who note everything from aging demographics to years of politically driven investment that may offer poor returns, to an economy trying to make the perilous transition away from investment spending and toward consumers. Just last week, a Conference Board report argued that China’s economy would slow as a credit and investment bubble deflated.

But part of what makes the argument from Mr. Pritchett and Mr. Summers interesting is that they don’t trouble themselves with those gory details of why growth may slow; they say just that the historical evidence suggests it is likely. Maybe concerns about debt levels and bad investments in China will prove justified. Or maybe not. Regardless, we should think that a change is more likely than not.

“China is a huge economy and a profoundly different economy than it was a generation ago,” Mr. Summers, the former Treasury secretary, said in an interview. “But it would be ahistoric to extrapolate and assume with any high degree of confidence that China will enjoy such extraordinary growth rates over the long term. Economists, strategic analysts, business planners and nervous neighbors should all recognize that a very wide spectrum of economic outcomes is possible over the next generation and that the most likely outcomes involve a very substantial slowing of growth.”

The paper’s authors put it in baseball terms. “If a hitter has a hot streak with a batting average up 50 points over the past 20 at-bats, then we would forecast a return to the average batting average over the next 20 at-bats,” they write. “If pressed to say why the batting average would be lower, one could speculate about why it currently is so high and predict those factors will diminish or predict future events will causally explain the lowering, but mainly, this is just what happens.”

The strongest arguments that they may be wrong, by contrast, focus on details of why China (as well as India, which they also analyze) has the potential to keep growing rapidly for many years to come.

I asked Jim O’Neill, the former Goldman Sachs strategist who coined the term “BRIC” for the large emerging economies of Brazil, Russia, India and China, to critique the Pritchett-Summers paper.

“In the case of China and India, the core driver of why a more positive path is likely to continue is the simple process of urbanization,” Mr. O’Neill wrote in an email. “If and when each get close to 70 percent urbanized, I’d have more sympathy with their findings, but this is a long way off.” (Just more than half of Chinese and a third of Indians live in cities. When people move from rural areas to cities, their economic output tends to rise sharply).

In other words, a China bull can look at the details of the country’s situation — the great potential of its people to keep increasing their productivity, a political system that has proved resilient through the challenges of the last few decades — and see plenty of reasons for optimism. The reversion-to-the-mean view says simply, “We don’t know what will go wrong, but history suggests that something will.”

If the pessimistic view is right, there are enormous implications for the global economy’s future. If China’s per capita G.D.P. kept growing from now until 2033 at the same rate as it has in recent decades, the country’s annual economic output would rise by $51.1 trillion over current levels in present-day dollars. By contrast, if growth reverts to the mean, the size of the Chinese economy will have increased only $11.2 trillion by 2033, or a difference of about $40 trillion. To put that in context, the current gross domestic product of the United States is about $17 trillion.

For decades, economists have been building models to try to understand the mysteries of what drives growth. Is economic destiny shaped by culture? By government institutions? By patterns of industrialization?

But those debates have been inconclusive. Consider some of the economic success stories of the last generation — China, India, Mexico, Poland, South Korea and Turkey, to name a few. All have different cultures, government institutions and economic development strategies.

Years of work on growth theory suggest that there is no secret recipe for a developing nation to achieve prosperity. As it turns out, a simplistic reversion-to-the-mean approach explains economic growth about as well as some more complex approaches to predicting which countries’ economies are poised to boom or shrink.

This work also offers a reminder: If you just extrapolate from the recent past to predict the economic future, you are likely to be wrong. Analysts predicted that the Soviet economy would soon surpass the American economy in the 1960s, that Japan’s would do the same in the 1980s and that the United States had achieved a new era of perpetual speedy growth in the late 1990s. None of these have come to pass.

In other words, when it comes to predicting nations’ fates over the long haul, we know a lot less than we like to admit.

The Economist: Even dragons tire

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The announcement this week that China’s economy had grown by 7.3% in the third quarter year-on-year was widely seen as marking the country’s “new normal” of slower growth, according to an October 25, 2014 Economist article. It was well below the roughly 10% pace China had averaged from 1980 until two years ago. Yet according to a new working paper by Lant Pritchett and Larry Summers of Harvard University, it is still abnormal: Chinese growth is likely to be lower still in future. Read more

The Harvard Crimson, Professor Summers

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BY MATTHEW Q. CLARIDA, CRIMSON STAFF WRITER

Larry Summers is, by most accounts, a pretty hard guy to please.

Students in his courses on globalization and American economic policy quickly see that they’re not in for a dose of Harvard’s famous grade inflation. If they ask about their mark, Summers might well tell them they would’ve earned a higher one if he graded like most of his colleagues.

Soon after Summers was picked as Harvard’s next president in 2001, faculty members realized they were in for a similar wake-up call. In his inaugural address, the new president declared that Harvard needed to reexamine its undergraduate curriculum and that professors needed to interact more with students, putting the Faculty on notice in the most public of ways.

Summers’s allies say he has high standards, is fiercely loyal, and is always laser-focused on solving the problem at hand. His opponents say he has a limited understanding of empathy, holds his friends to a lower bar, and does not know how to admit mistakes.

What few deny is that Summers is a master teacher: Socratic, probing, intellectually hungry. For all of this, his students swear by him. Summers brought these same traits to the Harvard presidency, challenging professors about their research and teaching and sparring with the Faculty of Arts and Sciences. At a university built on tradition, it was a change of pace.

Reactions were mixed, to say the least: Summers lasted just five years, leaving the presidency in 2006 after being rejected, in no uncertain terms, by many in the Faculty. And yet today, after a year on sabbatical, two years at the White House, and months of speculation in 2013 that he would move to the top post at the Federal Reserve, he’s settled back into teaching, a role that has shaped his Harvard career more than any other.

 

******

Larry Summers, who turns 60 next month, has had a lot of careers. Today, he calls himself a teacher.

It’s an interesting label for someone who is Harvard’s president emeritus, who has worked as a managing director at a top New York City hedge fund, served as U.S. Treasury Secretary, and most recently spent two years as one of President Barack Obama’s top economic and domestic policy advisers. But Summers, in one-on-one interviews as well as public lectures, sticks to it.

It’s a label, and a way of thinking and working, that’s informed much of his life, from Economics 10 office hours in the late 1970s to the meetings of the Faculty of Arts and Sciences he chaired as president and the tremendous chasm in between. It’s a label that’s guided him, again and again, back to Harvard.

Nowadays, Summers holds court at the Kennedy School of Government in a second floor area that lacks the grandeur of his old corner office in Massachusetts Hall. The office is also entirely more accessible than his old digs, situated as it is just above the HKS dining hall and just off a major student walkway. Students who look should have no problem finding Summers, and that’s how he likes it.

Summers’s area—it’s actually two offices and a waiting room—is everything you might expect. The former Harvard president and U.S. Treasury Secretary—now he’s “Professor Summers”or, more often, just “Larry”—has a staff of three who cue up phone calls, keep his packed schedule, and usher students in and out, often at least 15 minutes behind schedule.

The most spacious room in the mini-compound is Summers’s office, decorated head-to-toe with Harvard paraphernalia and a touch of U.S. financial and political history. Not five feet away is a space for Summers’s budding protégés, a collection of desks in an adjacent room where these students set up shop. Whether he’s on the phone or in a meeting, the system allows Summers to keep many of his best friends, as his former students often become, close.

Natasha R. Sarin, a third-year Harvard graduate student pursuing a law degree and a Ph.D. in Economics, is one protégé who makes the trek to Summers’s office frequently. Last year, as a second-year graduate student, Sarin worked out of the office five days a week. This year she’s busier, but she still stops by at least twice a week.

“There are days when we spend like three hours together,” Sarin told me one day this September, her notebooks spread out on one of the office’s spare desks. “Larry’s a really busy guy, he’s meeting a lot of important people…but he makes time.”

On this particular Tuesday an economics midterm is atop the agenda. Sarin’s a top student: On a year off from Yale in 2011, she worked at the National Economic Council, where she met Summers, at the time the NEC’s director. Sarin soon came to Harvard and quickly began working with Summers again, both on research and as a teaching fellow in his globalization courses.

But today, Sarin isn’t sure she’s got a handle on this exam.

“I’m having some trouble with verbal problems,” she says, thumbing through a wrinkled packet of midterm review questions.

Summers—legs crossed, torso angled towards Sarin in a favorite pose—doesn’t miss a beat. “Give me a verbal problem,” he says, motioning for the review questions. “Let’s do a verbal problem.”

As Summers reads the first question on the page, his speech slows just a bit. By the time he’s finished the prompt he’s got the answer in his head, but instead of blurting it out—instead of signaling his renowned quickness—he pauses. It’s not long before he’s launched into his slow, deliberate way of teaching by asking. As the questions build—“what happens to the meat prices here, if carrot prices go up?”—Sarin starts to nod.

“Yeah,” she says after a few minutes of the asking drill. “Yeah, I’ve got it.”

Summers smiles, and it’s a real smile, not one of the contrived grins that the oft-photographed—Summers included—are occasionally guilty of. He’s made it apparent time and again that he likes being right, but he also clearly enjoys this mentorship role, showing somebody the answer rather than telling them.

 

Summers addresses students in the Adams House dining hall during his tenure as university president in 2004.

 

It’s a Socratic skill that Summers has been honing for years, ever since his first time at the blackboard as an Ec. 10 teaching fellow in 1976. Way back then, with his characteristic untucked shirt and collection of crumpled notes, Summers earned a reputation as a bit “scatterbrained,” but also as utterly brilliant and especially dedicated. After class, you could always find him in Lowell House, either in his tutor suite—a mess of papers and pizza boxes—or in the dining hall, where he sat for hours working with students.

Today, while Summers’s office is far cleaner, his teaching philosophy is much the same. Proudly included on a curriculum vitae that runs 4,500 words is a flashback: “Outstanding Teaching Fellow in Introductory Economics, Harvard University, 1977.”

“Obviously I don’t hang out in dining halls the same way that I did when I was a tutor in my early 20s,” Summers told me this fall. “But to this day I get a lot of satisfaction out of, at any moment, being able to mentor a certain number of students.”

*****

That 1976 Ec. 10 section has never strayed very far from Larry Summers’s mind. Even when he left Harvard in 1991—first for the World Bank and eventually for escalating posts at the Treasury Department—he tried to keep debates and conversations no more formal than they were in section, back when he didn’t wear a suit and was barely older than the students he taught.

“It was very much a Socratic process of people working with each other,” remembered Robert E. Rubin ’60, a close Summers friend and his predecessor as U.S. Treasury Secretary.

“It didn’t matter whether you were the most senior person in the room or the most junior person in the room, what you said mattered,” Rubin added, largely crediting Summers with encouraging an atmosphere where prerogative took a back seat.

If the atmosphere was collegial, it certainly wasn’t perfect. Missteps during Summers’s Washington tenure—most notably a poor-taste memo from his World Bank days—would eventually become fodder for his opponents at Harvard and elsewhere.

Still, Harvard came calling in 2001, looking for its next president and asking Summers to interview for the job.

“There was interest in talking to me, and I thought, ‘This would be a hugely exciting opportunity.’ That it would be something to pursue,” Summers told me last month, sparing both of us the “I never thought I would be selected” cliché that we both know isn’t quite true.

This isn’t to say, of course, that Summers was always the frontrunner. He wasn’t, at least in the ever-speculating eyes of the media, which coalesced in declaring then-University of Michigan President Lee C. Bollinger—now the president of Columbia University—as the obvious pick. But as the field narrowed from 400 to 40 to three, Summers made the cut each time. At a final interview, Harvard Corporation Senior Fellow Robert G. Stone ’45-’47 pulled Summers aside and draped his arm around him for one last chat.

Summers left the meeting feeling good about his chances, and a few days later he was told he had the job if he wanted it. Accepting the Harvard presidency meant moving from Maryland to the ceremonial Elmwood residence—a Harvard-owned house that sacrifices privacy for ceremony and can be revoked on short notice—and making a long-term commitment to Harvard.

Summers said yes. At a triumphant press conference in March of 2001, he let his excitement, and his expectations, shine through.

“It’s good to be home. I accept,” he told the gaggle gathered in Loeb House, with another real smile. “I expect to be here quite a while.”

*****

Back in his days as a graduate teaching fellow and then as a young associate professor, Larry Summers had a reputation for rushing into class—maybe a few minutes late—and rather abruptly starting his lecture.

The tardiness followed him to Mass. Hall, but so did the urgency. When he took office in the fall of 2001, Summers got started quickly, jumping in headfirst with a pointed inauguration speech. His primary focus was the undergraduate experience.

“First, we will need in the years ahead to ensure that teaching and learning are everything they can be here, especially at the very heart of the University—Harvard College,” the new president said. “What is most crucial is this: Whether in the classroom or the common room, the library or the laboratory, we will assure more of what lies at the heart of the educational experience—direct contact between teacher and student.”

 

The statements made sense. But from a new president on one of the University’s most historic days, they were also a very public challenge to the hundreds of faculty in attendance, particularly as they suggested a new central authority—Summers—at an institution which had for centuries thrived on decentralization. Nevertheless, many Harvard faculty—even those who would eventually clash with Summers—remember being inspired themselves by the speech.

The underlying premise, though, was that Harvard’s faculty members needed to change the way they were doing their jobs. This central Summers thesis—reduced in at least one subsequent speech to “The College in the center of the University. It is excellent. It can be better”—soon became a flashpoint between the new president and the University’s oldest de facto governing body: the Faculty of Arts and Sciences.

Summers’s style only accentuated this point of tension. Faculty members soon found out that Larry Summers didn’t run meetings the same way his predecessor Neil L. Rudenstine did. While Rudenstine was soft-spoken and respected decorum, Summers was loud, asked a lot of questions, and wasn’t afraid to call you or your idea “stupid.”

“He would take positions that he knew were wrong, just to have a debate,” remembered Benedict H. Gross ’71, who served as the dean of Harvard College under Summers. “Some people just didn’t go for that stuff.”

Summers’s inclination to be provocative was an extension of his work as a teacher and a researcher, a manifestation of the sort of mind that had won top economics prizes by challenging common assumptions and had pushed eager students to new heights. But this approach, some suggest, led Summers to treat his presidency more like an intellectual debate—where feelings ought to be checked at the door—than was appropriate.

Some appreciated the debate.

“He was always pushing hard for whatever it was he wanted to have happen,” University President Drew G. Faust, who served as dean of the Radcliffe Institute for Advanced Study under Summers, said in an interview this month. “And he had a drive and impatience that was motivating and grabbed your attention and mobilized people.”

Stephen J. Greenblatt, a University Professor—Harvard’s top teaching appointment, which comes with license to teach any course in any department—found Summers’s style jarring at first, but also appreciated the intellectual spirit of the challenges.

“He is not someone who is reluctant to question people,” Greenblatt said this fall. “He expressed questions and doubts that I found sort of bracing, [but] it wasn’t annoying, it felt…exciting…I found it actually attractive.”

Others, like Cornel R. West ’74, were not as receptive. West, also a University Professor and the chair of Harvard’s growing African and African American Studies Department, was summoned to Summers’s Mass. Hall office in Oct. 2001.

The meeting was a debacle. West afterward claimed that Summers gestured to West’s spoken word album, referred to it as a rap CD and an “embarassment” to Harvard, and challenged West about his teaching. University Professor Henry Louis Gates Jr., a close colleague of Westin the African and African American Studies department—a unit with which Summers clashed early on—remembers the meeting as a “disaster, with two people who were both very smart, equally smart, with humongous egos, talking past each other.”

Former University Professor Cornel R. West ’74 spoke at a teach-in the weekend he announced he would leave Harvard for Princeton in 2002.

 

Summers has declined to comment in detail on what he insists was a private conversation.

“In retrospect, I wish that I had insisted on being present at that meeting to mediate between them,” Gates said this month. “Cornel is a very brilliant and refined thinker and was most certainly not used to being spoken to in the way in which Larry spoke to him.”

Coming as early as it did in Summers’s tenure, the affair signaled that a new leadership strategy generated divided reactions: while some found it refreshing, some thought it downright disrespectful and accused Summers of inappropriately meddling with the work of tenured faculty. West was in the latter camp. Less than 24 hours after the meeting, according to Gates, West had accepted an offer from Princeton. He was gone by the fall of 2002.

Gates, who said he enjoyed “verbal jousting” with Summers and didn’t mind the challenges, nevertheless recalled a paradigm shift.

“The styles embodied by Neil Rudenstine and Larry Summers couldn’t have been more diametrically opposed. It was night and day,” Gates said. “Most people want the president to remember their name…and say ‘I like that book you just published.’ And if you don’t get that kind of positive reinforcement, it’s quite disconcerting to most people, even professors at Harvard.”

*****

Today, Summers likes to be perfectly, 100 percent clear about ground rules. Reporters, even familiar faces, are greeted at the start of every interview with a firm discussion about how the conversation will be treated. Summers, it turns out, knows the ethics better than many journalists; he knows he can’t go off the record unless the reporter agrees, and he certainly knows to be explicit that off the record really means off the record and that his statements won’t become newsroom gossip.

The diligence, to anyone who knows Summers’s story, makes a lot of sense.

In early 2005, Summers’s presidency was moving full steam ahead. Since the Cornel West affair he had largely continued his practice of challenging everyone from undergraduates in his freshman seminars to potential new hires to University professors on their thinking, teaching, and research. At the same time, Summers raised funds for the University at record levels, markedly increased financial aid across the University, and worked on a master plan for a new Allston campus.

He had also made progress on perhaps his biggest project: the Harvard College Curricular Review. Though he stepped back from leading the review before it concluded, the process eventually generated the Program in General Education and pushed back the concentration declaration deadline, among other changes.

Summers had sought to effect culture change at Harvard, and particularly at the College, to make life revolve more around teaching and learning. And in a 2005 speech to the Harvard Club of Washington, D.C., he proudly declared that progress had been made.

“You know, when I was recruited to be a professor at Harvard in 1983, no one to my knowledge asked me for a single bit of evidence on whether I had or had not been an effective teacher at MIT, where I was then,” Summers told the crowd. “Today, no one becomes a member of the senior faculty at Harvard without a careful review of their record as a teacher and as a mentor of students.”

Summers was on a roll, confidently ticking off many of his top priorities. But this momentum hit a roadblock in January, 2005, when he removed his presidential cap for a seminar at the National Bureau of Economic Research—an old haunt for Summers and many Harvard economists. The seminar was titled “Diversifying the Science and Engineering Workforce.”

Summers made it clear that he was attending the event as an economist and not as Harvard’s president or to discuss University efforts to promote diversity. The seminar was to be off the record, and the event organizer said that he had invited Summers “to come and be provocative.”

Provocative Summers was. Between statements like “I’ve given you my guesses…they may be all wrong” Summers posited that women may be underrepresented in the sciences due to family constraints—not a new hypothesis—but also because of “issues of intrinsic aptitude, and particularly of the variability of aptitude.”

Within 48 hours, an interpretation of the remarks had hit the national media.

Summers had walked in to what he thought would be a collegial, off-the-record, classroom-type atmosphere. It was supposed to be exactly the type of arena in which he thrived, bouncing ideas off the participants with his trademark dose of provocation. Instead, two days later, he saw himself branded a sexist by some.

The remarks awoke a sleeping giant in the Faculty of Arts and Sciences. As discontent brewed and boiled, the February meeting of the FAS came and went. Multiple pockets of opposition existed, according to faculty members, but none was yet organized enough to mount a formal challenge to the president.

The lapse was temporary. In preparation for the March FAS meeting, J. Lorand Matory ’82, a professor of African and African American Studies and a leader of the Summers opposition, docketed a vote on the following motion: “the Faculty lacks confidence in the leadership of Lawrence H. Summers.”

Matory saw the vote as a public voice of opposition more than anything else. He did not expect it to pass.

“I was certainly hoping [it would pass], but I did not assume that it would be so,” he said last week. “If 20 percent of the FAS approved the measure, as I hoped, I would see no reason for that to be a cause for his leaving office…I wanted things to be clear, and I wanted that opinion to be here.”

Once docketed, however, the motion inspired an upheaval of anti-Summers sentiment. At least 550 faculty members—roughly five times the usual turnout for meetings of the FAS—attended the March meeting. The event had to be moved from University Hall to the Loeb Drama Center, where Summers and other top administrators sat among scenery for a production of Christopher Marlowe’s “Dido, Queen of Carthage.”

The atmosphere was unprecedented. Summers, who as president usually ran the FAS meetings, asked FAS Dean William F. Kirby to take over.

Gross, then the dean of the College and now a close friend of Summers, remembered a chaotic evening.

“Dean Kirby was trying to run the meeting very civilly, and he was saying, ‘Now, before we vote, let’s make time to discuss this,’ and people were standing up and yelling, ‘I object! We have to vote now!’” he said.

The tempers were an ominous sign. The vote, conducted by secret ballot, went against Summers in a development that shocked many: 218 in favor of the motion, 185 against, 18 in abstention.

*****

The vote stung.

Summers, at first, took the news coolly. But then his hand covered his mouth and, as he realized the magnitude of the announcement, his expression dropped off.

Those who were in attendance remember a certain cruelty of the affair. There he was, the president of Harvard—a graduate of Harvard—being told in front of many of his friends, with the national media just outside, that he had gone about things all wrong.

As he left, Summers didn’t duck the media. He said he hoped to heal the wounds. He said he would learn from his mistakes. He tried to smile, but photos caught him looking low, dead straight ahead, clutching prepared remarks in one hand and making his way, under police escort, away from the Loeb.

Gross remembered a lack of civility.

“It was really high tempers,” he said. “I’ve never seen faculty meetings like that.”

Summers, his friends say, felt attacked by a Faculty that by the end was looking for any opportunity to express its discontent. Shortly after the no-confidence vote he stepped back from the review of the undergraduate curriculum under heavy pressure from the Faculty. The review had been one of his his closest pet projects.

After a summer and fall full of peacemaking efforts, Summers hit another roadblock in Feb. 2006, when he tried to distance himself from his close friend Andrei Shleifer ’82, the disgraced economist whose criminal activities led to Harvard’s paying a $26.5 million settlement in 2005. When asked to comment on the Shleifer Affair in a Feb. 2006 faculty meeting, Summers—who had recused himself from Harvard’s handling of the matter—said he didn’t know enough of the facts to give an informed response.

The answer didn’t satisfy many in the Faculty. Matory, making the case against Summers, called the response “nothing short of disgusting.”

For many, the Shleifer affair was the final straw. After the Harvard Corporation lost confidence in him, Summers resigned in Feb. 2006.

“Difficult marriages sometimes end and so it is with ours,” he told the Faculty at his last FAS meeting.

Summers doesn’t enjoy speaking about the end of his presidency. He’d much rather tackle a student’s problem set or break down three top trends in the American economy. But in an interview this fall, he looked back to his tenure.

“I was in a hurry because I saw much that was urgent,” he said. “I didn’t think a 30-year-old curriculum or the lack of personal contact between faculty and students at Harvard College or the quality of student experiences was acceptable for the world’s leading university. I saw incredible potential for Harvard to respond to the growing equality of opportunity challenge in the United States, to lead the world in the life sciences and their applications, and to contribute to solving so many global challenges. I am proud of the progress the University made in all these areas during my presidency.”

Summers continued, addressing the contention surrounding his exit and his rift with many in the Faculty.

“Would I prefer that it had happened in a way where people were more comfortable and there was less controversy? Of course. We’re all works in progress and I’ve learned from my mistakes,” he said with a pause. “I have always believed that complacency is the greatest danger for great institutions, so I don’t regret my core decision to challenge prerogatives and push for change even at the expense of comfort and tradition.

*****

When Summers left the presidency in June 2006, he could have gone just about anywhere.

He could have gone back to Washington, to a think tank or the like to lay in wait for what was likely to be an incoming Democratic administration. He could have gone to almost any university in the world.

And he did leave, if only for a time, packing up with his wife, English professor Elisa New, and spending the better part of a year with their children from previous marriages.

“We had a lot of kids, and we were actually very concerned at that point with beginning to blend these families and so it was kind of exciting, and when Larry decided to resign, I thought, ‘Okay good, we can live in Brookline,’” New remembered earlier this month during an interview at the couple’s Brookline home.

“There were a ton of positives,” Summers added. He was firm all along that the year off was a sabbatical, not an exit strategy. He even bragged to graduating seniors in 2006 that he, unlike them, would keep his library privileges.

And, soon enough, New and Summers came straight back to Harvard. New settled back into the English Department, where she had once been the director of undergraduate studies, and Summers picked an office at the Kennedy School as the newly minted Charles Eliot University Professor.

“We’re both teachers,” New said this month. “There wasn’t much question [about returning to Harvard.]”

For Summers, it was in many ways a return to the scene of many of his hardest moments. As he unpacked in his new office at HKS, incoming president Faust moved into his old one in Mass. Hall.

Faust kept much of the furniture in the office where it was, and though she didn’t mention her predecessor much by name, in her early remarks she highlighted many of his hardest-fought accomplishments.

“We are on the verge of a new College curriculum that has already deeply engaged the Faculty and that promises more coherence, more choice, and more excitement in undergraduate education,” she said shortly after she was selected, ticking off primary tenets of Summers’s curricular crusade. “We have just received a faculty report calling for renewed and enhanced dedication to teaching. A new advising system has been launched.”

And, at today’s Harvard, Summers has found a niche—a large one given that he, as a University Professor, can teach in any department and at any school.

“I like to be based in a university, and Harvard’s the university because of its breadth that has always seemed most appealing to me,” he said last week.

But it’s clear that the connection goes deeper. Though he graduated from MIT— “a small technical institute located down Massachusetts Avenue,” as he often called it—Summers blossomed while teaching Ec. 10, Ec. 1410 (public sector economics), and working with graduate students. In 1983, when he had a chance for tenure at MIT, he returned to Harvard instead. In 2011, when he had a choice of retaining an ongoing appointment as an adviser to President Obama or holding on to his tenure—a distinction which expires after two years of inactivity—Summers chose Harvard once again.

To be sure, it’s not as if Larry Summers has lost his national and international focus: Last year, he was nearly tapped by Obama to lead the Federal Reserve, a position he clearly intended to accept, before senators strongly cautioned against his nomination. Now, he writes a monthly column for the Financial Times where he explores everything from hardcore economic theory to the political movements he’s had to master as a domestic policy adviser. It is not atypical for him to visit, in the course of one week, airports Logan, LaGuardia, and Reagan.

The trips are frequent and the weeks are long—“I’m outta here,” Summers said, slightly exasperated, around 2:30 p.m. on a Friday this fall after a rare short day. Campus days are packed with writing, student visits, and course plans, which Summers saturates with tidbits from his travels and, always, a story or two from his Treasury and World Bank days.

“I like to think that my activities outside the University are helpful for students because it enables me to provide them with connections and advice for the vast majority who are looking to pursue non-academic careers,” Summers told me this month. He added that the lectures and office hours are often highlights on his schedule.

“The aspect of my job that I love most is that I feel that I am able to be very close both to world of public policy and to the world of thought,” he told me. “I have a chance each year to touch, in at least a small way, tens if not hundreds of young people, many of whom will someday have positions of major responsibility.”

By the looks of it, Larry Summers is here to stay. He’s home.

Crimson Editor Madeline R. Lear contributed to the reporting of this story.

—Staff writer Matthew Q. Clarida can be reached at matthew.clarida@thecrimson.com. Follow him on Twitter @MattClarida.

 

FOX: Europe in danger of following path of Japan

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In an interview with Maria Bartiromo on FOX News’ Sunday Morning Futures on October 19, 2014, Summers discussed the state of the global economy and said, “Europe is in danger of following the path of Japan from the 90s onward.” Read more

NPR: Worry about Deflation not Inflation

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In an interview on October 16, 2014 with NPR’s Here & Now, Summer told Jeremy Hobson, “We need to worry about deflation not inflation.” Read more

Why public investment really is a free lunch

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The IMF finds that a dollar of spending increases output by nearly $3

October 7, 2014

It has been joked that the letters IMF stand for “it’s mostly fiscal.” The International Monetary Fund has long been a stalwart advocate of austerity as the route out of financial crisis, and every year it chastises dozens of countries for their fiscal indiscipline. Fiscal consolidation – a euphemism for cuts to government spending – is a staple of the fund’s rescue programmes. A year ago the IMF was suggesting that the US had a fiscal gap of as much as 10 per cent of gross domestic product.

All of this makes the IMF’s recently published World Economic Outlook a remarkable and important document. In its flagship publication, the IMF advocates substantially increased public infrastructure investment, and not just in the US but much of the world. It asserts that when unemployment is high, as it is in much of the industrialised world, the stimulative impact will be greater if investment is paid for by borrowing, rather than cutting other spending or raising taxes. Most notably, the IMF asserts that properly designed infrastructure investment will reduce rather than increase government debt burdens. Public infrastructure investments can pay for themselves.

Why does the IMF reach these conclusions? Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counterfactually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income. Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialised world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment, as the IMF recognised. It neglects the tax revenue that comes from the stimulative benefit of putting people to work constructing infrastructure, as well as the possible long-run benefits that come from combating recession. It neglects the reality that deferring infrastructure renewal places a burden on future generations just as surely as does government borrowing.

It ignores the fact that by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt. Critically, it takes no account of the fact that in many cases government can catalyse a dollar of infrastructure investment at a cost of much less than a dollar by providing a tranche of equity financing, a tax subsidy or a loan guarantee.

When it takes these factors into account, the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.

While the case for investment applies almost everywhere – possibly excepting China, where infrastructure investment has been used a stimulus tool for some time – the appropriate strategy for doing more differs around the world.

The US needs long-term budgeting for infrastructure that recognises benefits as well as costs. Projects should be approved with reasonable speed. The government can contribute by supporting private investments in areas such as telecommunications and energy.

Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps. This may be possible through the expansion of the European Investment Bank or more use of capital budget concepts in implementing fiscal reviews.

Emerging markets need to make sure that projects are chosen in a reasonable way based on economic benefit.

What is crucial everywhere is the recognition that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. The IMF, a bastion of “tough love” austerity, has come to this important realisation. Countries with the wisdom to follow its lead will benefit.

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

Debt Management and Zero Lower Bound

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On September 30, 2014, Summers presented a co-authored paper titled, “Government Debt Management at the Zero Lower Bound,” at the Brookings Institute in Washington, DC.  Read more

Need comprehensive tax reform

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In an interview with Andrew Ross Sorkin of CNBC’s Squawk Box on September 26, 2014, Summers called for comprehensive tax reform.  Summers also discussed income inequality, asset bubbles and tax inversions with Sorkin. Read more

Push for Domestic Financing for Health

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Summers spoke to the United Nations General Assembly on Monday, September 22, 2014 and called for low and middle income countries to increase their spending on health.  Summers said, “Just 1 percent of their economic growth over the next two decades would fund the grand convergence.” Read more

US needs a comprehensive growth strategy

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In an interview with Maria Bartiromo on Fox News’ Sunday Morning Futures on September 21, 2014, Summers talked about the state of the economy, job creation, energy policy and Ukraine.  Summers told Bartiromo,”Our focus has got to be on increasing the rate of growth.” Read more

Scottish independence “grave mistake”

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In a interview with CNBC on September 12, 2014 at the YES Conference in Kiev, Summers said, “It would be a grave mistake for Scotland to leave.” Read more

Future of US Energy & Climate Security

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“I believe that the question of whether the United States should have a substantially more permissive policy with respect to the export of crude oil and with respect to the export of natural gas is easy,”  Summers told a Brookings Institute audience on September 9, 2014. “The answer is affirmative.” Read more

Bold reform is the only answer to secular stagnation

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September 8, 2014

There may be supply-side barriers that hold the economy back before constraints on demand bind

By Lawrence H. Summers

The economy continues to operate way below any estimate of its potential made before the onset of financial crisis in 2007, with a shortfall of gross domestic product relative to previous trend in excess of $1.5tn, or $20,000 per family of four. As disturbing, the average growth rate of the economy of less than 2 per cent since that time has caused output to fall further and further below previous estimates of its potential.

Almost a year ago I invoked the concept of secular stagnation in response to the observation that five years after financial haemorrhaging had been staunched, the business cycle was cycling back to what had been previously thought of as normal levels of output.

Secular stagnation in my version, like that of Alvin Hansen, the economist who coined the term in the 1930s, has emphasised the difficulty of maintaining sufficient demand to permit normal levels of output.

But with a high propensity to save, a low propensity to invest and low inflation, this has been impossible. Nominal interest rates cannot fall below zero, as they would have to for real interest rates to be low enough to enable saving and investment to be equated with the economy producing at its full potential. Furthermore, even if potential output can be attained, it would require interest rates so low that they risk financial instability.

Given the factors operating to reduce natural interest rates – rising inequality, lower capital costs, slowing population growth, foreign reserve accumulation, and greater costs of financial intermediation – it seems unlikely that the American economy is capable of demanding 10 per cent more output than it does now, at interest rates consistent with financial stability. So demand-side secular stagnation remains an important economic problem.

But, as the work of Robert J Gordon has shown, there may now be supply-side barriers that threaten to hold back the economy before constraints on the ability to create demand start to bind. Two ways of looking at the current situation point up the difficulty.
First, while I have emphasised that levels of GDP are far short of what pre-crisis trends would predict, the unemployment rate at 6.1 per cent (down from a 10 per cent peak) has reverted most of the way back to even relatively optimistic estimates of its normal level. In other words, even while economic growth performance has been very poor, it appears that demand has been advancing rapidly enough to substantially reduce slack in the labour market. Weak growth, along with substantial decreases in slack, suggests significant weakness in the growth of potential output.

To be fair, there is room to cavil about the unemployment rate as a measure of slack in the labour market. But the extent of apparent normalisation is even greater if one looks at measures of job openings and vacancies, new unemployment insurance claims, or the short-term unemployment rate.

Second, with Friday’s relatively weak employment statistics job growth has averaged 200,000 jobs a month over the past six months. If this continues, what would it imply for movements in the unemployment rate?

This depends on what happens to labour force participation, which has been trending downwards because of population ageing and long-term structural trends, even as the unemployment rate has declined sharply. Assume (optimistically, given recent trends) that the labour force participation rate for workers of a given age remains constant, and that the economy creates 200,000 jobs a month. The unemployment rate would then fall to about 4 per cent by the end of 2016.

While such a low unemployment rate is conceivable, it seems much more likely that employment growth would slow at some point, because of rising wage costs or policy actions, or because employers have difficulty finding workers. Then, the economy would be held back not by lack of demand but lack of supply potential.

Why has the economy’s supply potential declined so much relative to the pre-2007 trend? This will be debated in the years to come. Part of the answer lies in the damaging effect of past economic weakness on future potential. Part is the brutal demographics of an ageing population, the end of the trend towards increased women’s labour force participation, and the exhaustion of the gains from an increasingly educated workforce. And part is the apparent slowing of at least measured productivity.

To achieve growth of even 2 per cent over the next decade, active support for demand will be necessary but not sufficient. Structural reform is essential to increase the productivity of both workers and capital, and to increase growth in the number of people able and willing to work productively. Infrastructure investment, immigration reform, policies to promote family-friendly work, support for exploitation of energy resources, and business tax reform become ever more important policy imperatives.

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

NYTimes: Europe is at risk of secular stagnation

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In a front page, New York Times story on August 30, 2014, Summer’s says, “Europe is at risk of secular stagnation.”  He added, “There is little chance that reasonable and rapid growth is going to return to the Eurozone.”  The article concluded, “A greatly diminished Europe will mean that the US will increasingly lack its best partners.” Read more

Secular Stagnation: facts, causes and cures

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Summers contributed a chapter, “Reflections on the New Secular Stagnation Hypothesis,” to the new Vox eBook, “Secular Stagnation: facts, causes and cures.” Read more

Bibliophiles

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In the Sunday Boston Globe books section, Summers discusses his reading habits in a “Bibliophiles” piece.  He says, “My mother used to take us to the public library every week or two and that set the habit.” Read more

Ending presidents’ second-term curse

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August 10, 2014

Disillusionment with Washington has rarely run higher. Congress is unable to act even in areas where there is widespread agreement that measures are necessary, such as immigration, infrastructure spending and business tax reform. The Obama administration, rightly or wrongly, is increasingly condemned as ineffectual. What was once a flood of extraordinarily talented people eager to go into government has shrunk to a trickle, and many crucial positions remain unfilled for months or even years. Bipartisan compromise seems inconceivable on profoundly important long-term challenges such as climate change, national security strategy and the need to strengthen entitlement programs in a fiscally responsible way.

It is tempting and, surely to some limited extent, right to blame all this on a failure of leadership by top policymakers. And structural factors such as increased polarization of the electorate and the ever-growing role of money in politics surely contribute.

Yet it is worth putting current concerns in the context of a stunning American political regularity. Second presidential terms are almost without exception very difficult for the president and his team, for the government and for the country. Consider the history:

George W. Bush’s second term began with a futile effort to reform Social Security and was then defined by the debacle of Hurricane Katrina and the nation’s plunge into financial crisis. His most significant policy steps — large structural tax cuts, redefinition of the federal role in education, the introduction of prescription drug benefits to Medicare and reorientation of national security strategy toward the threat of terrorism — all took place during his first term.

Bill Clinton’s second term will be remembered for scandal and his impeachment by the House. His most important legislative accomplishments — such as major moves to balance the budget, reforming welfare to support work rather than dependency, expansion of health-insurance benefits — took place in his first term.

Ronald Reagan’s second term was marked by the Iran-Contra scandal and a sense of a president who had become remote from much of the work of his administration. While the Tax Reform Act of 1986 was important, his most significant legacies — big tax and spending cuts, deregulation and a major defense buildup — largely occurred during his first term.

Richard Nixon’s second term was not completed because of his resignation over Watergate. The most important policy measures of his administration — the opening to China, withdrawal from Vietnam, the establishment of a major federal role in environmental and other forms of regulation — took place in his first term.

Dwight Eisenhower’s second term involved the resignation of his chief of staff and, more important, a growing perception that the country was suffering from a stifling complacency. It is hard to point to anything to compare to first-term accomplishments such as the withdrawal from Korea and initiation of the interstate highway system.

Harry Truman’s second term was marked by the Korean War, scandal, gridlock and extraordinarily low public approval. His important legacies — the Marshall Plan, the containment strategy, the postwar focus on strengthening the economy with measures such as the G.I. Bill and federal housing support — were products of his first term.

Franklin Roosevelt’s second term was the least successful part of his presidency, as it saw the failure of his effort to pack the Supreme Court and a major economic relapse in 1938 and no accomplishment remotely comparable to the New Deal or his wartime leadership.

And second terms have what may well be a substantial added cost. A large part of what presidents do during their first terms, particularly in the latter half, is directed at securing reelection rather than any longer-term objective.

Would the U.S. government function better if presidents were limited to one term, perhaps of six years? The unfortunate, bipartisan experience with second terms suggests the issue is worthy of debate. The historical record helps makes the case for change.

Why the record is not dispositive, however, is suggested by the term “lame duck.” As the phrase suggests, leaders nearing the end of their time in office lose the ability to influence other actors by offering future rewards and punishments or by making deals in which they commit to future actions. If this is the main reason second terms are difficult, then removing the possibility of reelection could simply pull the problems forward into first terms.

This is why many scholars regard the current constitutional limit of two presidential terms as problematic. However, reviewing the fairly dismal experience of second terms, my guess is that problems caused by lame-duck effects are much smaller than those caused by a toxic combination of hubris and exhaustion after the extraordinary effort that a president and his team must exert to achieve reelection. But the issue requires much more study and debate.

The belief that this time will be different usually precedes trouble, and so it has been with second terms. On the night of their reelection, all reelected presidents expect to beat the second-term curse. At least since the Civil War, none has. And we have been governed by reelected presidents for close about 40 percent of the last century. National reflection on reform is overdue.

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

 

Secular Stagnation Q&A in The New Republic

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In a July 2014 interview with the New Republic, Summers discusses secular stagnation and says, the economy hasn’t grown rapidly “in a financially sustainable way” for a long time. Read more

Put American foreign policy back on the pitch

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July 6, 2014

A failure to engage with global economic issues is a failure to mount a strong defense

By Lawrence H. Summers

Sports coaches know that there is nothing more dangerous for a team than retreating into passivity for fear of making a mistake. Whether it is due to a desire to sit on a lead, or because of nerves following a setback, failing to advance aggressively is almost always a strategic error.

What is true in athletic competition is all too true in the life of nations. While imprudence is always unwise, excessive caution in the name of prudence or expediency can have grave consequences. A nation will never have more power or influence than it has ambition to shape the global system. A sense of fatalism can become a self-fulfilling prophecy as adversaries are emboldened and allies move either to appease adversaries or to provide for their own security.

At a time of high tension in Europe with Russian adventurism in Ukraine, pervasive conflict and instability in the Middle East, and rising tensions within Asia as China makes its presence ever more strongly and widely felt, the choices the US makes will have far reaching consequences. It is no exaggeration to say that there is more doubt about our willingness to stand behind our allies, resist aggression and support a stable global system than at any time in decades.

Effective engagement at flash points is essential but crisis response is never as good as crisis prevention. Somewhat lost as the world focuses on global hotspots is the danger that the US will abdicate from the responsibility it has undertaken for 70 years since the second world war for supporting a more integrated, increasingly rule based and faster growing global economy. It is the success of this project that explains why history played out so differently after the second world war than after the first, and it is this project that won the cold war by demonstrating that capitalism rather than communism was the best way forward for the world’s people.

At a time when authoritarian mercantilism has emerged as the principal alternative to democratic capitalism, the US Congress is flirting with eliminating the Export Import Bank that, at no cost to the government, enables US exporters to compete on a more level playing field with those of competitor nations, all of whom have similar vehicles. Only by maintaining a capacity to counter foreign subsidies can we hope to maintain a level global trading system and to avoid ceding ground to mercantilists. Eliminating the Export Import Bank without extracting any concessions from foreign governments would be the economic equivalent of unilateral disarmament.

No one with any sophistication supposes that the world has seen the last big financial crisis or that we can prosper in a world in crisis. Yet the US, having pushed successfully for big increases in IMF resources and for important reforms in its governance, is now the lone nation blocking these measures from going into effect as Congress is unwilling to pass the relevant authorizing legislation. The IMF enables us to do in the economic area what we are unable to do in the security area: place most of the burden for supporting a functioning global system on all global stakeholders.

The vital strategic thrust proclaimed in US foreign policy over the past five years has been the pivot or rebalance towards Asia. This is entirely appropriate given the shift in the global economic centre of gravity. The reality though is that little has changed. The most important potential beneficial change in the next several years would be the achievement of the Trans-Pacific Partnership. Yet the combined prospect that a deal will be negotiated and that it will receive Congressional approval seems much too low for comfort and there is little evidence that the issue commands urgency beyond the relatively narrow international trade community. The prospects for a trade agreement with Europe seem even more remote.

Then there is the economic assistance dimension. When Latin America faced a profound debt crisis in the 1980s, when the Berlin Wall fell and the nations of central Europe and the former Soviet Union needed to transform their economies, when financial crisis struck Asia in 1997, when debt burdens stunted Africa’s growth around the turn of the century, the US working with its allies and the international financial institutions crafted strong if imperfect responses to restore growth and hope. No comparably large and generous effort is visible today with respect to the Middle East or Ukraine, even as China is emerging as a larger presence in much of Africa and Latin America than the US.

A failure to engage effectively with global economic issues is a failure to mount a strong forward defense of American interests. The fact that we cannot do everything must not become a reason not to do anything. While elections may turn on domestic preoccupations, history’s judgment will turn on what the US does internationally. Passivity’s moment has passed.

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

Aspen Ideas Festival

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Professor Summers participated in two sessions during the Aspen Ideas Festival.  On Tuesday, July 1, 2014 he held a discussion titled, “What does the future hold for our economy.”  On Monday, June 30, 2014, he had a conversation with Drew Faust about the future of universities. Read more