At the Aspen Ideas Festival on June 30, 2014, Summers told CNBC’s Closing Bell, “There’s a prospect that the economy could accelerate quite substantially over the next couple of quarters.” He went on to say, “That would be an important and obviously positive development,” [there’s] no assurance that will be the case, but I think that could be a surprise.” Read more
Secular Stagnation, Hysteresis, and the Zero Lower Bound
In his February 24, 2014 remarks to the National Association of Business Economics, Summers said, “I want to take up these issues -secular stagnation, the idea that the economy re-equilibrates; hysteresis, the shadow cast forward on economic activity by adverse cyclical developments; and the significance of the zero lower bound for the relative efficacy of monetary and fiscal policies.” Read more
The differences between the rich and everyone else are about health and opportunity
By Lawrence H. Summers
June 8, 2014
With the popularity of Thomas Piketty’s book, Capital in the 21st Century, inequality has become central to the public debate over economic policy. Piketty, and much of this discussion, focuses on the sharp increases in the share of income and wealth going to the top 1 per cent, 0.1 per cent and 0.01 per cent of the population.
This is indeed a critical issue. Whatever the resolution of arguments over particular numbers, it is almost certain that the share of personal income going to the top 1 per cent of the population has risen by 10 percentage points over the past generation, and that the share of the bottom 90 per cent has fallen by a comparable amount.
The only groups that have seen faster income growth than the top 1 per cent are the top 0.1 per cent and top 0.01 per cent.
This discussion helps push policy in constructive directions. There is every reason to believe that taxes can be reformed to eliminate loopholes for the wealthy and become more progressive, while also promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. There is a compelling case for policy measures to reduce profits from such rent-seeking activities as a number of economists, notably Dean Baker and the late Mancur Olsen, have emphasised.
At the same time, unless one regards envy as a virtue, the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much.
So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor.
On any reasonable reading of the evidence starting where the US is today, more could be done to increase tax progressivity without doing any noticeable damage to the prospects for economic growth.
It is vital to remember, however, that important aspects of inequality are unlikely to be transformed just by limited income redistribution. Consider two fundamental components of life – health and the ability to provide opportunity for children.
Barry Bosworth and his colleagues at the Brookings Institution have examined changes in life expectancy starting at age 55 for the cohort of people born in 1920 and the cohort born in 1940. They found that the richest men gained roughly six years in life expectancy, middle-income earners gained roughly four years, and those in the lowest part of the distribution gained two years. To put this in perspective, the elimination or doubling of cancer mortality would mean less than a four-year change in life expectancy.
Why these differences? They more likely have to do with lifestyle and variations in diet and stress than the ability to afford medical care – especially since the figures refer to relatively aged people, all of whom, once they reach 65, fall under Medicare.
Over the past two generations, the gap in educational achievement between the children of the rich and the children of the poor has doubled. While the college enrolment rate for children from the lowest quarter of the income distribution has increased from 6 per cent to 8 per cent, the rate for children from the highest quarter has risen from 40 per cent to 73 per cent.
What has driven these trends? No doubt there are many factors. But a crucial one has to be that the average affluent child now receives 6,000 hours of extracurricular education, in the form of being read to, taken to a museum, coached in a sport, or any other kind of stimulus provided by an adult, more than the average poor child – and this gap has greatly increased since the 1970s.
A famous literary spat between 1920s novelists F Scott Fitzgerald and Ernest Hemingway has been boiled down over time to a succinct, if apocryphal, exchange. Fitzgerald: “The rich are different from you and me.” Hemingway’s retort: “Yes, they have more money.”
These observations on health and the ability to provide opportunity for children suggest that the differences between the rich and everyone else are not only about money but about things that are even more fundamental: health and opportunity.
If society is to become more just and inclusive it will be necessary to craft policies that address the rapidly increasing share of money income going to the rich. But it is crucial to recognise that measures to support the rest of the population are at least equally important.
It would be a tragedy if this new focus on inequality and on great fortunes diverted attention from the most fundamental tasks of any democratic society – supporting the health and education of all its citizens.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
Summers spoke at the Conference on Inclusive Capitalism in London, England. Summers speech, “Which type of capitalism works best to build economic and social value?” can be viewed here. Read more
June 1, 2014 marks the 5-year anniversary of General Motors filing for Chapter 11, which had been preceded by Chrysler Motors’ declaration of bankruptcy. On May 21, 2014 the Brookings Institute held an event titled, “Recovery Road? An Assessment of the Auto Bailout and the State of U.S. Manufacturing.” Read more
“Student debt is slowing the US housing recovery,” Wall Street Journal
New York is more dependent on financial services yet its GDP is above its previous peak
May 4, 2014
By Lawrence H. Summers
The British economy is the standout member of the Group of Seven rich nations. Over the last quarter the UK had economic growth at an annual rate of more than 3 per cent. In the same period the US barely grew, continental Europe remained in the doldrums and Japan struggled to maintain momentum. No surprise then that many have seized on Britain’s strong performance as vindication of the austerity strategy pursued by the UK government since 2010, and as evidence to refute the idea of secular stagnation – that lack of demand is a constraint on growth.
Interpreting the UK experience correctly is important. As well as the domestic political stakes and the question of the country’s future economic policy, Britain is of much wider importance as it bears on economic policy debates around the world. Unfortunately for those who feel vindicated given the strategy that has been pursued, properly interpreted the British experience refutes austerity advocates and confirms JM Keynes’ warning about the dangers of indiscriminate budget cutting in the middle of a downturn.
The US economy grew at an annual rate of 9 per cent for a number of years after the trough of the Depression in 1933. Such rapid growth in peacetime is unheard of in the US experience. Why did it happen? Only because of the depth of the Depression. No one has ever taken the pace of the US recovery from the Depression as evidence for the austerity policies that helped to induce it. Likewise, part of the story of British growth is simply one of catching up after a major crisis. Historically, deeper recessions are followed by stronger recoveries. Again New York’s metropolitan area offers a powerful example: after falling relative to the rest of the US in 2008, it had more rapid growth thereafter.
Two additional points about the UK’s growth experience require emphasis. First, the acceleration in growth has less to do with austerity spurring expansion than it does to a slowdown in the pace at which policy became more austere. Whether one looks at the deficit itself, or the various structural deficit measures prepared by national and international organisations, the pace of fiscal contraction has slowed over the past two years.
This means that the brake on growth caused by fiscal policy is becoming more attenuated. So the turnround in growth over the past 18 months is as much evidence against austerity as it is pro-austerity.
Second, faced with the potential damage caused by the deficit reduction to demand and economic growth, the UK government has been forced to introduce a number of extraordinary measures to support lending. Most significant is the so-called Help to Buy programme to support property purchases. There are also programmes to reward banks for lending to small businesses and to get the central bank involved in export finance.
Especially in the case of Help to Buy, which manages to recapitulate most of the sins of the US government-sponsored enterprises, these programmes are highly problematic. The stated goal of the austerity drive was to improve confidence in Britain’s standing as a sovereign borrower. Yet there is the basic fact that guaranteeing mortgages en masse is creating a huge potential government liability, as do other loan guarantee programmes.
Moreover, subsidised credit for housing risks reigniting bubbles as house prices in London have risen much faster than GDP over the past year. And, of course, all programmes for the benefit of homeowners rather than renters have perverse distributional consequences.
Britain’s growth thus reflects a combination of the depth of the hole it found itself in, the moderation in the trend towards ever-deeper austerity and the effects of possibly bubble-inducing government loans. It may be better for the citizens of Britain than any alternative. It certainly should not, however, be seen as any kind of inspiration to other companies or countries.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
“Globalization will keep happening,” Export-Import Bank
“Need to do big things to address big challenges,“ CNN Money, April 2014
If now is not the moment to rebuild, when is?
By Lawrence H. Summers
The Boston Globe
April 11, 2014 — Are you proud of New York’s John F. Kennedy Airport? It’s a question I ask nearly every audience I speak to these days. JFK, after all, is the largest entry point for foreign visitors arriving in what sees itself as the greatest city on earth.
To a person, I’ve never heard anyone answer, “Yes.” Vice President Joe Biden took it one step further in a speech earlier this year, likening the airport down the road, New York’s LaGuardia, to being in “some third-world country.”
Yet the unemployment rate for construction workers in the United States is in the double digits. And the government can borrow — in the currency we print — at long-term rates of less than 3 percent. If now is not the moment to rebuild these airports, when will that moment ever come?
The American economy is not performing to the satisfaction of the American people. Total incomes are about $1.5 trillion less today — or $5,000 per person — than was anticipated in 2007 before the financial crisis began. The share of American adults working has increased only slightly since the recesssion’s trough, and more than 5 million fewer people are working than when employment was at peak levels in the mid-2000s. Median family incomes and hourly wages have remained essentially stagnant for more than a generation.
The single most important step the US government can take to reverse these discouraging trends is to mount a concerted, large-scale program directed at renewing our national infrastructure. At a time of unprecedented low interest rates and long-term unemployment, such a program is good economics but, more fundamentally, it is common sense.
Few Americans are impervious to the crumbling infrastructure in their everyday lives.
The country that brought the world the Internet and continues to lead the globe in information technology has an air traffic control system that relies on vacuum tubes and where sticky pieces of paper are moved around on bulletin boards to track flights. Even leaving aside the safety risks, the costs in extra fuel consumption and unneeded delays are measured well into the tens of billions of dollars. Can it possibly make sense to wait until every repair person capable of working with vacuum tubes has died off to complete the renovation of this antiquated system?
I travel constantly. Calls to my office on my iPhone are less likely to drop driving from Beijing to its airport or from Almaty in Kazakhstan to its airport than driving from the airport into Boston, New York, or Washington. I know I’m not alone in experiencing such problems. Surely, at a time when US companies are holding close to $2 trillion in cash, earning next to nothing for balance sheets, we should be investing in improving this frustrating deficiency.
As secretary of the Treasury during the Clinton administration, I used to visit a public school every time I went to a city outside Washington. I’ll never forget an occasion at an Oakland high school when I gave a speech extolling the importance of education. A young teacher came up to me and said, “Secretary Summers, that was a fine speech, and I agree with all of it. Just one thing — why should any of the students believe you when there is paint chipping off the walls of their classroom and when the first lunch period has to begin at 9:45 a.m. because this school is so overcrowded? There is no chipping paint at any bank. Maybe we think that is the most important thing.” She had a point I’ve never forgotten.
After 40 years of dangerous energy dependence, it is possible that within this decade the United States will become a major oil and natural gas exporter. Already, we produce more oil than Saudi Arabia. And there’s no denying that having America as the ultimate balancer in the world’s oil market will make it safer and more stable than the one we live in now. But that will not happen if we, as a nation, keep underinvesting in infrastructure to the point where trains and trucks — rather than pipelines — must play the primary role in moving energy resources around our country.
The terrible winter we’ve just suffered has no doubt left behind a legacy of potholes. The American Society of Civil Engineers estimates that driving on roads in need of repair costs the average Massachusetts motorist $313 annually. This is the equivalent of more than 50 cents a gallon. And yet gasoline taxes have not been raised in two decades, and as a country, we do not invest enough to maintain a transportation infrastructure, let alone to improve it.
There are many more examples. But beyond the power of examples, there is the reality that a substantial step-up in infrastructure investment would serve all of our major economic objectives. It is as close to a free lunch as economics will ever produce.
There is increasing concern that we may be in an era of secular stagnation in which there is insufficient investment demand to absorb all the financial savings done by households and corporations, even with interest rates so low as to risk financial bubbles. Raising demand through greater infrastructure investment is an antidote for such malaise as well as a source of better employment and economic growth.
Why? Investing in infrastructure offers the prospect of expanded economic capacity. With interest rates already near zero, incremental private outlays brought on by easier financial conditions are unlikely to have a very high return. On the other hand, the available evidence from the historical experience of the United States, in addition to cross-country comparisons and comparisons across US states, is that the social return to public infrastructure investment is very high.
We live in an ever more interdependent and competitive world. Savings can flow into any country. The fruits of research and development flow globally. Many iconic American companies now earn less than half their profits in the United States.
But one thing that is inherently immobile is our infrastructure. When we put money into strengthening our infrastructure, essentially all of what we spend stays in the United States. Once in place, all the benefits of the infrastructure go to Americans.
As an economic strategy, infrastructure investment also promotes fairness. The group in our society that has suffered most heavily from all of the structural change of the last generation is men with limited education. These men disproportionately work in construction, the core of infrastructure, and thus become the main beneficiaries of increased funding. Moreover, it is the majority of Americans, not the super-fortunate minority, who primarily benefit from improving public schools or airports or reducing potholes.
Finally, infrastructure investment is important for generational fairness. We live in a period when a — if not the — focus of economic policy has been on reducing government deficits and debts. These are important concerns, but they have been viewed too narrowly.
Infrastructure investments, even if not immediately paid for with new revenue sources, can easily contribute to reductions in long-term debt-to-income ratios because they spur economic growth, raise long-run capacity, and reduce the obligations of future generations. It is an accounting convention, not an economic reality, that borrowing money shows up as a debt, but deferring maintenance that will inevitably have to be done at some point does not. When maintenance or necessary investment is deferred, the bills climb much more quickly than the cost of federal borrowing at an average interest rate below 2 percent.
Where do we go from here? This should not be a partisan issue.
Democrats are correct that we need to commit more government money to measures like repairing highways and modernizing schools where there is no immediate cost recovery available. They are also right in their emphasis that a great nation cannot endure with its government operating on a shoestring. Even if we assume that entitlements are reformed, the rising share of the elderly in the population, health care costs that grow faster than the rest of the economy, and American international obligations mean that revenue increases are required if the United States is to invest adequately in its future.
Republicans are right that regulatory barriers hold back infrastructure investment. We need protections, but we need them to be administered more predictably and more rapidly. In 1903, it took Harvard less than 18 months to build Soldiers Field. Less than 18 months from when the stadium was conceived to when the first game was played — even without the benefit of modern construction equipment. It would take a decade today. In San Francisco, repairs to the Bay Bridge recently took nearly four times as long as building the original bridge in the 1930s.
And then there are the points that everyone should be able to agree on. Government needs to operate more efficiently. The Anderson Bridge connecting Cambridge and Boston has been under repair for nearly two years. I suspect that, with the right incentives, what was necessary could have been done in a matter of weeks rather than years. No doubt an important part of operating more efficiently will involve greater reliance on the private sector, but this must be done in a way that carefully protects taxpayer interests.
For all our problems, I would far prefer play the economic hand of the United States than that of any other major country. And while much more could be said with respect to tactics, I am confident that we as a nation will get them right if we can get behind the right basic principle: From the intercontinental railway to the interstate highway system to the Internet, American economic progress has depended on fundamental infrastructure investments. Our generation has not been doing its part. It is time for us to step up.
Lawrence H. Summers is a university professor and president emeritus at Harvard. He served as the secretary of the Treasury for President Clinton and the director of the National Economic Council for President Obama.
This article originally appeared in the Boston Globe.
“One on One with Larry Summers,” Business News Network, Toronto
“2014 Year of Anniversaries,” Globalist of Year Award, Canadian International Council, April 9, 2014. Read the speech here.
