Archive for category: Old Pages

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 

DEMOCRACY: A Journal of Ideas 

Issue #32, Spring 2014

Thomas Piketty’s tour de force analysis doesn’t get everything right, but it’s certainly gotten us pondering the right questions. Commentary on Summers’ review

Lawrence H. Summers

Capital in the Twenty-First Century by Thomas Piketty; Translated by Arthur Goldhammer • Belknap/Harvard University Press • 2014 • 696 pages • $39.95

Once in a great while, a heavy academic tome dominates for a time the policy debate and, despite bristling with footnotes, shows up on the best-seller list. Thomas Piketty’s Capital in the Twenty-First Century is such a volume. As with Paul Kennedy’s The Rise and Fall of the Great Powers, which came out at the end of the Reagan Administration and hit a nerve by arguing the case against imperial overreach through an extensive examination of European history, Piketty’s treatment of inequality is perfectly matched to its moment.

Like Kennedy a generation ago, Piketty has emerged as a rock star of the policy-intellectual world. His book was for a time Amazon’s bestseller. Every pundit has expressed a view on his argument, almost always wildly favorable if the pundit is progressive and harshly critical if the pundit is conservative. Piketty’s tome seems to be drawn on a dozen times for every time it is read.

This should not be surprising. At a moment when our politics seem to be defined by a surly middle class and the President has made inequality his central economic issue, how could a book documenting the pervasive and increasing concentration of wealth and income among the top 1, .1, and .01 percent of households not attract great attention? Especially when it exudes erudition from each of its nearly 700 pages, drips with literary references, and goes on to propose easily understood laws of capitalism that suggest that the trend toward greater concentration is inherent in the market system and will persist absent the adoption of radical new tax policies.

Piketty’s timing may be impeccable, and his easily understandable but slightly exotic accent perfectly suited to today’s media; but make no mistake, his work richly deserves all the attention it is receiving. This is not to say, however, that all of its conclusions will stand up to scholarly criticism from his fellow economists in the short run or to the test of history in the long run. Nor is it to suggest that his policy recommendations are either realistic or close to complete as a menu for addressing inequality.

Start with its strengths. In many respects, Capital in the Twenty-First Century embodies the virtues that we all would like to see but find too infrequently in the work of academic economists. It is deeply grounded in painstaking empirical research. Piketty, in collaboration with others, has spent more than a decade mining huge quantities of data spanning centuries and many countries to document, absolutely conclusively, that the share of income and wealth going to those at the very top—the top 1 percent, .1 percent, and .01 percent of the population—has risen sharply over the last generation, marking a return to a pattern that prevailed before World War I. There can now be no doubt that the phenomenon of inequality is not dominantly about the inadequacy of the skills of lagging workers. Even in terms of income ratios, the gaps that have opened up between, say, the top .1 percent and the remainder of the top 10 percent are far larger than those that have opened up between the top 10 percent and average income earners. Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution.

Piketty provides an elegant framework for making sense of a complex reality. His theorizing is bold and simple and hugely important if correct. In every area of thought, progress comes from simple abstract paradigms that guide later thinking, such as Darwin’s idea of evolution, Ricardo’s notion of comparative advantage, or Keynes’s conception of aggregate demand. Whether or not his idea ultimately proves out, Piketty makes a major contribution by putting forth a theory of natural economic evolution under capitalism. His argument is that capital or wealth grows at the rate of return to capital, a rate that normally exceeds the economic growth rate. Thus, economies will tend to have ever-increasing ratios of wealth to income, barring huge disturbances like wars and depressions. Since wealth is highly concentrated, it follows that inequality will tend to increase without bound until a policy change is introduced or some kind of catastrophe interferes with wealth accumulation.

Piketty writes in the epic philosophical mode of Keynes, Marx, or Adam Smith rather than in the dry, technocratic prose of most contemporary academic economists. His pages are littered with asides referencing Jane Austen, the works of Balzac, and many other literary figures. For those who don’t like or trust economics and economists, Piketty’s humane and urbane learning makes his analysis that much more compelling. As well it should: The issues of fairness of market outcomes that he deals with are best thought of as part of a broad contemplation of our society rather than in narrow numerical terms.

All of this is more than enough to justify the rapturous reception accorded Piketty in many quarters. But recall that Kennedy seemed to hit the zeitgeist perfectly but turned out later to have missed his mark as the Berlin Wall fell and the United States enjoyed an economic renaissance in the decade after he wrote; similarly, I have serious reservations about Piketty’s theorizing as a guide to understanding the evolution of American inequality. And, as even Piketty himself recognizes, his policy recommendations are unworldly—which could stand in the way of more feasible steps that could make a material difference for the middle class.

Piketty’s argument is straightforward, relying, as he says in his conclusion, on a simple inequality: r>g, in which the rate of return on capital exceeds the growth rate. Its essence is most easily grasped by thinking about population growth. Think first of a world where couples have four children. In that case, an accumulated fortune will dissipate, as the third generation of descendants has 64 members and the fourth has 256 members. On the other hand, if couples have only two children, a fortune has to be split only 16 ways even after four generations. So slow growth is especially conducive to rising levels of wealth inequality, as is a high rate of return on capital that accelerates wealth accumulation. Piketty argues that as long as the return to wealth exceeds an economy’s growth rate, wealth-to-income ratios will tend to rise, leading to increased inequality. According to Piketty, this is the normal state of capitalism. The middle of the twentieth century, a period of unprecedented equality, was also marked by wrenching changes associated with the Great Depression, World War II, and the rise of government, making the period from 1914 to 1970 highly atypical.

This rather fatalistic and certainly dismal view of capitalism can be challenged on two levels. It presumes, first, that the return to capital diminishes slowly, if at all, as wealth is accumulated and, second, that the returns to wealth are all reinvested. Whatever may have been the case historically, neither of these premises is likely correct as a guide to thinking about the American economy today.

Economists universally believe in the law of diminishing returns. As capital accumulates, the incremental return on an additional unit of capital declines. The crucial question goes to what is technically referred to as the elasticity of substitution. With 1 percent more capital and the same amount of everything else, does the return to a unit of capital relative to a unit of labor decline by more or less than 1 percent? If, as Piketty assumes, it declines by less than 1 percent, the share of income going to capital rises. If, on the other hand, it declines by more than 1 percent, the share of capital falls.

Economists have tried forever to estimate elasticities of substitution with many types of data, but there are many statistical problems. Piketty argues that the economic literature supports his assumption that returns diminish slowly (in technical parlance, that the elasticity of substitution is greater than 1), and so capital’s share rises with capital accumulation. But I think he misreads the literature by conflating gross and net returns to capital. It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.

There are other fragmentary bits of evidence supporting this conclusion that come from looking at particular types of capital. Consider the case of land. In countries where land is scarce, like Japan or the United Kingdom, land rents represent a larger share of income than in countries like the United States or Canada, where it is abundant. Or consider the case of housing. Economists are quite confident that the demand for housing is inelastic, so that as more housing is created, prices fall more than proportionally—a proposition painfully illustrated in 2007 and 2008.

Does not the rising share of profits in national income in most industrial countries over the last several decades prove out Piketty’s argument? Only if one assumes that the only factors at work are the ones he emphasizes. Rather than attributing the rising share of profits to the inexorable process of wealth accumulation, most economists would attribute both it and rising inequality to the working out of various forces associated with globalization and technological change. For example, mechanization of what was previously manual work quite obviously will raise the share of income that comes in the form of profits. So does the greater ability to draw on low-cost foreign labor.

There is also the question of whether the returns to wealth are largely reinvested. A central claim by Piketty is that a country’s wealth-income ratio tends toward s/g, the ratio of its savings rate to its growth rate. Hence, as he argues, a declining growth rate leads to a higher wealth ratio. But this presumes a constant or rising saving ratio. Since he imagines returns to capital as largely reinvested, he finds this a plausible assumption.

I am much less sure. At the simplest level, consider a family with current income of 100 and wealth of 100 as opposed to a family with current income of 100 and wealth of 500. One would expect the former family to have a considerably higher saving ratio. In other words, there is a self-correcting tendency Piketty abstracts from whereby rising wealth leads to declining saving.

The largest single component of capital in the United States is owner-occupied housing. Its return comes in the form of the services enjoyed by the owners—what economists call “imputed rent”—which are all consumed rather than reinvested since they do not take a financial form. The phenomenon is broader. The determinants of levels of consumer spending have been much studied by macroeconomists. The general conclusion of the research is that an increase of $1 in wealth leads to an additional $.05 in spending. This is just enough to offset the accumulation of returns that is central to Piketty’s analysis.

A brief look at the Forbes 400 list also provides only limited support for Piketty’s ideas that fortunes are patiently accumulated through reinvestment. When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.

But if it is not at all clear that there is any kind of iron law of capitalism that leads to rising wealth and income inequality, the question of how to account for rising inequality remains. After Piketty and his colleagues’ work, there can never again be a question about the phenomenon or its pervasiveness. The share of the top 1 percent of American income recipients has risen from below 10 percent to above 20 percent in some recent years. More than half of the income gains enjoyed by Americans in the twenty-first century have gone to the top 1 percent. The only groups that have outpaced the top 1 percent have been the top .1 and .01 percent.

Piketty, being a meticulous scholar, recognizes that at this point the gains in income of the top 1 percent substantially represent labor rather than capital income, so they are really a separate issue from processes of wealth accumulation. The official data probably underestimate this aspect—for example, some large part of Bill Gates’s reported capital income is really best thought of as a return to his entrepreneurial labor.

So why has the labor income of the top 1 percent risen so sharply relative to the income of everyone else? No one really knows. Certainly there have been changes in prevailing mores regarding executive compensation, particularly in the English-speaking world. It is conceivable, as Piketty argues, that as tax rates have fallen, executives have gone to more trouble to bargain for super high salaries, effort that would not have been worthwhile when tax rates were high (though I think it is equally plausible that higher tax rates would pressure executives to extract more, so as to maintain their post-tax income levels).

There is plenty to criticize in existing corporate-governance arrangements and their lack of resistance to executive self-dealing. There are certainly abuses. I think, however, that those like Piketty who dismiss the idea that productivity has anything to do with compensation should be given a little pause by the choices made in firms where a single hard-nosed owner is in control. The executives who make the most money are not for most part the ones running public companies who can pack their boards with friends. Rather, they are the executives chosen by private equity firms to run the companies they control. This is not in any way to ethically justify inordinate compensation—only to raise a question about the economic forces that generate it.

The rise of incomes of the top 1 percent also reflects the extraordinary levels of compensation in the financial sector. While anyone looking at the substantial resources invested in trading faster by nanoseconds has to worry about the over-financialization of the economy, much of the income earned in finance does reflect some form of pay for performance; investment managers are, for example, compensated with a share of the returns they generate.

And there is the basic truth that technology and globalization give greater scope to those with extraordinary entrepreneurial ability, luck, or managerial skill. Think about the contrast between George Eastman, who pioneered fundamental innovations in photography, and Steve Jobs. Jobs had an immediate global market, and the immediate capacity to implement his innovations at very low cost, so he was able to capture a far larger share of their value than Eastman. Correspondingly, 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.

This type of scenario is pervasive. Most obviously, the best athletes and entertainers benefit from a worldwide market for their celebrity. But something similar is true for those with extraordinary gifts of any kind. For example, I suspect we will soon see the rise of educator superstars who command audiences of hundreds of thousands for their Internet courses and earn sums way above the traditional dreams of academics.

Even where capital accumulation is concerned, I am not sure that Piketty’s theory emphasizes the right aspects. Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes. It will be the devastating consequences of robots, 3-D printing, artificial intelligence, and the like for those who perform routine tasks. Already there are more American men on disability insurance than doing production work in manufacturing. And the trends are all in the wrong direction, particularly for the less skilled, as the capacity of capital embodying artificial intelligence to replace white-collar as well as blue-collar work will increase rapidly in the years ahead.

Where does this leave policy?

Piketty’s argument is that a tendency toward wealth accumulation and concentration is an inevitable byproduct of the workings of the capitalist system. From his perspective, differences between capitalism as practiced in the English-speaking world and in continental Europe are of second order relative to the underlying forces at work. So he is led to far-reaching policy proposals as the principal redress for rising inequality.

In particular, Piketty argues for an internationally enforced progressive wealth tax, where the rate of tax rises with the level of wealth. This idea has many problems, starting with the fact that it is unimaginable that it will be implemented any time soon. Even with political will, there are many problems of enforcement. How does one value a closely held business? Even if a closely held business could be accurately valued, will its owners be able to generate the liquidity necessary to pay the tax? Won’t each jurisdiction have a tendency to undervalue assets within it as a way of attracting investment? Will a wealth tax encourage unseemly consumption by the wealthy?

Perhaps the best way of thinking about Piketty’s wealth tax is less as a serious proposal than as a device for pointing up two truths. First, success in combating inequality will require addressing the myriad devices that enable those with great wealth to avoid paying income and estate taxes. It is sobering to contemplate that in the United States, annual estate and gift tax revenues come to less than 1 percent of the wealth of just the 400 wealthiest Americans. With respect to taxation, as so much else in life, the real scandal is not the illegal things people do—it is the things that are legal. And second, such efforts are likely to require international cooperation if they are to be effective in a world where capital is ever more mobile. The G-20 nations working through the OECD have begun to address these issues, but there is much more that can be done. Whatever one’s views on capital mobility generally, there should be a consensus on much more vigorous cooperative efforts to go after its dark side—tax havens, bank secrecy, money laundering, and regulatory arbitrage.

Beyond taxation, however, there is, one would hope, more than Piketty acknowledges that can be done to make it easier to raise middle-class incomes and to make it more difficult to accumulate great fortunes without requiring great social contributions in return. Examples include more vigorous enforcement of antimonopoly laws, reductions in excessive protection for intellectual property in cases where incentive effects are small and monopoly rents are high, greater encouragement of profit-sharing schemes that benefit workers and give them a stake in wealth accumulation, increased investment of government pension resources in riskier high-return assets, strengthening of collective bargaining arrangements, and improvements in corporate governance. Probably the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity, and an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value.

Hanging over this subject is a last issue. Why is inequality so great a concern? Is it because of the adverse consequences of great fortunes or because of the hope that middle-class incomes could grow again? If, as I believe, envy is a much less important reason for concern than lost opportunity, great emphasis should shift to policies that promote bottom-up growth. At a moment when secular stagnation is a real risk, such policies may include substantially increased public investment and better training for young people and retraining for displaced workers, as well as measures to reduce barriers to private investment in spheres like energy production, where substantial job creation is possible.

Look at Kennedy airport. It is an embarrassment as an entry point to the leading city in the leading country in the world. The wealthiest, by flying privately, largely escape its depredations. Fixing it would employ substantial numbers of people who work with their hands and provide a significant stimulus to employment and growth. As I’ve written previously, if a moment when the United States can borrow at lower than 3 percent in a currency we print ourselves, and when the unemployment rate for construction workers hovers above 10 percent, is not the right moment to do it, when will that moment come?

Books that represent the last word on a topic are important. Books that represent one of the first words are even more important. By focusing attention on what has happened to a fortunate few among us, and by opening up for debate issues around the long-run functioning of our market system, Capital in the Twenty-First Century has made a profoundly important contribution.

http://www.democracyjournal.org/32/the-inequality-puzzle.php?page=1

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.

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.

March 6, 2014

Eric, thank you very much for those overly generous words. You remind me slightly of what Lyndon Johnson used to say when he was introduced too generously – I wish my parents had been here for that. My father would have appreciated it, and my mother would have believed it. You know, there’s one thing in politics that we learn where you have utterly failed me, and that is the management of expectations.

I’d like to tell you why I accepted Eric’s invitation to be the chairman of the board of Citizen Schools and to make it an important focus of my philanthropic activities. It rests on three judgments. The first judgment is that equality of opportunity is the central challenge that will bear on the legitimacy of the American system going forward over the next generation. You know, we are not going to achieve full income equality. We do not really want to achieve full income equality. It is not a reasonable aspiration in a world where people’s abilities and capacities differ, where market demands shift. But it is, I would suggest, central to the legitimacy of our system, that everybody have a chance to succeed no matter where they start.

And on that standard, we are falling down as a nation. We think of ourselves as a topsy-turvy, turbulent, churning society, but there is less equality of opportunity in the United States than there is in every country in Western Europe. We think of ourselves as, generation after generation, perfecting the American dream. But for the first time since George Washington, in this generation, the gap in income between the children of the rich and the children of the poor will be wider than it was the previous generation. We think of equal opportunity as centrally related to education, but, amazingly, despite all the things that have been done to promote financial aid, to promote access, the gap in the college attendance rates between the children of the rich and the children of the poor, is today far greater than it was in the 1970s.

And we are seeing the roots of an expanding gap. By the time they turn 12, a child from an affluent family will, on average, have received 6,000 more hours of enrichment activity of some kind than a child from a less affluent family, and that gap has more than doubled since 1970. That is not good enough, and that is not the stuff of a system that is going to be sustainable. So the first judgment that brings me here is that, as a country, we have to do better on equal opportunity.

The second judgment that brings me here is the knowledge that this is a tractable problem. We have a problem to compare it to. It’s not a problem we have resolved in this country. It is a problem that is still with us. But, 45 years ago, white students were five to ten times more likely to go to college than black students. Today, that gap is more like 20%, like a factor of five. Forty to 50 years ago, the gap in achievement between white and black kids was twice as large as the gap in achievement between rich and poor kids. Today, it is half as large. Forty to 50 years ago, it was inconceivable that we would have an African-American president, and today, it is something that we take for granted.

That did not happen by accident. That did not just randomly happen. That did not happen just because Congress passed a law, although the Civil Rights Act made an enormous contribution. That happened because a society was broadly engaged in recognizing an injustice and then doing something about it, and a central part of doing something about it was what we did in education – what we did in higher education with affirmative action, what we did in the South with desegregation, what we have tried to do in urban school districts.

Now, I am under no illusion. We have a long way to go in correcting and addressing racial gaps. We are not there. But equally, I have seen what has happened in my lifetime, and that tells me what a committed society can do. I am convinced that, if Du Bois was right, the problem of the color line was the problem of the 20th century – that the problem of the class divide is the problem of the 21st century. I am convinced that it will not be solved except through a concerted attack on educational inequity, and that is an attack that will have many aspects. It will involve many different initiatives. But I am convinced that the approach focused on extended learning time and focused on the involvement of ordinary citizens, of Citizen Schools, is as or more promising than any other approach to addressing that class divide in education.

Let me tell you why. There are really three things that have convinced me. First, I am not really a very touchy-feely guy. I’m a guy who cares about this stuff, but I’m a guy who looks at numbers and challenges conclusions and argues and all of that, and what impressed me when I first talked with Eric was that he understood that it didn’t really matter if this stuff made the citizens who participated in the after-school programs feel good and if it was fun for the kids and there were stories that touched people’s hearts. That ultimately wasn’t that important if it didn’t actually change kids’ achievement. And he understood that we don’t let surgeons decide whether their new surgical procedure works based on their intuition. We don’t let drug companies decide whether their drug’s an effective drug based on their intuition. We insist on rigorous and objective evaluation, and Citizen Schools has rigorous and objective evaluation.

This is not as sweeping an intervention as taking a kid out of a regular school and sending the kid to a charter school. This is not as fundamental a change as say who a teacher is in a program like Teach for America. But the evidence is that it is as or more effective in terms of generating incremental educational achievement, and it is vastly more scalable. Whatever you think about the controversies that are going on in this city about charter schools – I suspect most of the people in this room think that the charter school movement deserves to be supported, rather than squashed – whatever you think about that, we’re not going to see the day in a relevant horizon when half the kids in any major city are going to a charter school. And so if we’re going to solve this problem, we’ve got to find some interventions that work alongside the public schools.

And so if rigorously proven efficacy is the first reason why I think this is so promising, the second is that this is an approach that cuts across the traditional divide. It is not at all government, let’s-just-change-the-way-public-school-operates, but it is not some libertarian paradise that does away with the public school, either. It is an approach that works with the grain of the system.

I saw it. I attended the other day, actually probably six weeks ago, the touch football games with the Boston school where my daughter works in the after-school program working with disadvantaged kids, and I talked to the guy who was the vice principal of that school and had been there for 30 years. He was kind enough to say some very generous things about my daughter, and I have to say that’s probably the part of the conversation I liked best. But a very close second was when he talked about, look, we can’t do all the things we want to do for the kids. Our day ends at 1:30. There’s no one for them to go home to at 1:30. They need help. They need to be occupied productively after 1:30, and we don’t do that, and that’s why it’s so wonderful to have this program in this school to help make it work for the kids.

Most of the teachers in that school are in a union, and maybe the union asks some unreasonable things, but the great majority of those teachers are good people who really need a lot of help, and what I find so attractive about this is that Citizen Schools is an approach to supporting education reform that is real reform, that is real change, but it is not fighting an unproductive war where children are caught in the crossfire. And so that’s the second reason why I think this is such a promising approach.

And the third is that it’s actually supported by overwhelming, broad logic. Malcolm Gladwell famously popularized the observation that many people can become superb at something with 10,000 hours of focused practice. If you think about it, that makes the 6,000-hour difference in enrichment activity between the more fortunate and less fortunate kids a pretty sobering thing. If we are going to succeed in addressing the injuries of class, it is not all going to happen by changing the six hours in a conventional school day on the conventional schedule. It’s going to occur by doing smarter things with kids before they go to school. It’s going to occur by doing smarter things with kids over the summer, when the evidence is that there’s so much regress for kids who are less fortunate. And it’s going to come after 1:30 in the afternoon. It stands to reason that this should work and that it does work.

So I have said for a long time that the Duke of Wellington famously observed that the Battle of Waterloo against Napoleon had been won on the playing fields of the great British private school – they called it public school – of that era. I’m convinced that the battle for America’s kids, and its legitimacy, will be won or lost in its public schools and that the approach being pioneered and driven by Citizen Schools is a remarkably effective approach and a remarkably scalable approach, an approach consistent with the broad value of American society that Americans are people who pitch in with a sense of community to solve problems.

So I look forward to the day when someone will look back and be able to say that just as America made progress towards equality with respect to race, and that is a continuing and ever-present task, so also, at the beginning of the 21st century, it began to make enormous progress with respect to providing ever more equal opportunity, and I’m convinced that Citizen Schools will be an important part of all that. Thank you very much.

Download the .pdf here.

SUMMERS:  Thank you very much, Michael, for those generous words and for your thoughtful observations about the long-run economic challenges that our country faces.  You do not, however, get to the long run except through the short run, and what happens in the short run has a profound impact on the long run.  To reverse Keynes a bit, if you die in the short run, there is no long run.  So my preoccupation this morning will be with a set of temporary, but I believe ultimately long-term concerns.

Before I turn to those concerns, however, let me just say how grateful I am to be back with the National Association of Business Economists.  It seems to me that the members of this organization make an enormous, ongoing contribution to evaluating, understanding, and responding to the flow of economic events.  I have been coming to these meetings on and off now for more than 30 years, and have always been struck by the sophistication and relevance of the analyses that are discussed herein.

Indeed, I think it is fair to say that some of the themes that are today central to discussions of academic macroeconomics, but had receded from the debate for many years, were always kept alive at the National Association of Business Economists.  I think, for example, of the importance of the financial sector and the flow of credit.  I also think of the issues surrounding confidence and uncertainty.  These have long been staples of the discussions here at the National Association of Business Economists.

Macroeconomics, just six or seven years ago, was a very different subject than it is today.  Leaving aside the set of concerns associated with long-run growth, I think it is fair to say that six years ago, macroeconomics was primarily about the use of monetary policy to reduce the already small amplitude of fluctuations about a given trend, while maintaining price stability.  That was the preoccupation.  It was supported by historical analysis emphasizing that we were in a great moderation.  It was supported by policy and theoretical analysis suggesting the importance of feedback rules.  And it was supported by a vast empirical program directed at optimizing those feedback rules.

Today, we wish for the problem of minimizing fluctuations around a satisfactory trend.  Indeed, I think it is fair to say that today, the amplitude of fluctuations appears large, not small.  As I shall discuss, there is room for doubt about whether the cycle actually cycles.  Today, it is increasingly clear that the trend in growth can be adversely affected over the longer term by what happens in the business cycle.  And today, there are real questions about the totality and sufficiency of the efficacy of monetary policy, given the zero lower bound on interest rates.

In my remarks today, 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.

I shall argue three propositions.  First, as US and industrial economies are currently configured, simultaneous achievement of adequate growth, capacity utilization, and financial stability appears increasingly difficult.  Second, this is likely related to a substantial decline in the equilibrium or natural real rate of interest.  Third, addressing these challenges requires different policy approaches than are represented by the current conventional wisdom.

Let me turn, then, to the first of these propositions.  It has now been nearly five years since the trough of the recession in the early summer of 2009.  It is no small achievement of policy that the economy has grown consistently since then, and that employment has increased on a sustained basis.  Yet, it must be acknowledged that essentially all of the convergence between the economy’s level of output and its potential has been achieved not through the economy’s growth, but through downward revisions in its potential.

In round numbers, the economy is now 10% below what in 2007 we thought its potential would be in 2014.  Of that 10% gap, 5% has already been accommodated into a reduction in the estimate of its potential, and 5% remains as an estimate of its GDP gap.  In other words, through this recovery, we have made no progress in restoring GDP to its potential.

Information on employment is similarly sobering.  This chart depicts the employment/population ratio in aggregate.  Using this relatively crude measure, one observes almost no progress.  It has been pointed out repeatedly and correctly that this chart is somewhat misleading, because it neglects the impact of a range of demographic changes on the employment ratio that would have been expected to carry on even in the absence of a cyclical downturn.

But that is not the largest part of the story.  Even if one looks at 25 to 54-year old men, a group where there is perhaps the least ambiguity because there is the greatest social expectation of work, one sees that the employment/population ratio  declined sharply during the downturn, and only a small portion of that decrease has been recovered since that time.

The recovery has not represented a return to potential, and, according to the best estimates we have, the downturn has cast a substantial shadow on the economy’s future potential.  Making the best calculations one can from the CBO’s estimates of potential (and I believe quite similar results would come from other estimates of potential), one sees that this is not about technological change.  Slower total factor productivity than we would have expected in 2007 accounts for the smallest part of the downward trend in potential.  The largest part is associated with reduced capital investment, followed closely by reduced labor input.  Let me emphasize this is not a calculation about why we have less output today.  It is a calculation about why it is estimated that the potential of the economy has declined by 5% as a consequence of the downturn that we have suffered.

The record of growth for the last five years is disturbing, but I think that is not the whole of what should concern us.  It is true that prior to the downturn in 2007, through the period from, say, 2002 until 2007, the economy grew at a satisfactory rate.  Mind you, there is no clear evidence of overheating.  Inflation did not accelerate in any substantial way.  But the economy did grow at a satisfactory rate, and did certainly achieve satisfactory levels of capacity utilization and employment.

Did it do so in a sustainable way?  I would suggest not.  It is now clear that an increase in house prices (that can retrospectively be convincingly labeled a bubble) was associated with an unsustainable upward movement in the share of GDP devoted to residential investment.  And this made possible a substantial increase in the debt-to-income ratio for households, which has been reversed only to a limited extent.

It is fair to say that critiques of macroeconomic policy during this period, almost without exception, suggest that prudential policy was insufficiently prudent, that fiscal policy was excessively expansive, and that monetary policy was excessively loose.  One is left to wonder how satisfactory would the recovery have been in terms of growth and in terms of achievement of the economy’s potential with a different policy environment, in the absence of a housing bubble, and with the maintenance of strong credit standards?

As a reminder, prior to this period, the economy suffered the relatively small, but somewhat prolonged, downturn of 2001.  Before that, there was very strong economic performance that in retrospect we now know was associated with the substantial stock market bubble of the late 1990s.  The question arises, then, in the last 15 years, can we identify any sustained stretch during which the economy grew satisfactorily with conditions that were financially sustainable?  Perhaps one can find some such period, but it is very much the minority, rather than the majority, of the historical experience.

What about the rest of the industrialized world?  I remember well when the Clinton administration came into office in 1993.  We carried out a careful review of the situation in the global economy.  We consulted with all the relevant forecasting agencies about the long-term view for the global economy.

At that time, there was some controversy as to whether a reasonable estimate of potential growth for Japan going forward was 3% or 4%.  Since then, Japanese growth has been barely 1%.  So, it is hard to make the case that over the last 20 years, Japan represents a substantial counterexample to the proposition that industrial countries are having difficulty achieving what we traditionally would have regarded as satisfactory growth with sustainable financial conditions.

What about Europe?  Certainly, for some years after the introduction of the Euro in 1999, Europe’s economic performance appeared substantially stronger than many on this side of the Atlantic expected.  Growth appeared satisfactory and impressive.  Fears that were expressed about the potential risks associated with a common currency without common governance appeared to have been overblown.

In retrospect, matters look different.  It is now clear that the strong performance of the Euro in the first decade of this century was unsustainable and reliant on financial flows to the European periphery that in retrospect appear to have had the character of a bubble.  For the last few years, and in prospect, European economic growth appears, if anything, less satisfactory than American economic growth.

In sum, I would suggest to you that the record of industrial countries over the last 15 years is profoundly discouraging as to the prospects of maintaining substantial growth with financial stability.  What does this have to do with?  I would suggest that in understanding this phenomenon, it is useful at the outset to consider the possibility that changes in the structure of the economy have led to a significant shift in the natural balance between savings and investment, causing a decline in the equilibrium or normal real rate of interest that is associated with full employment.

Let us imagine, as a hypothesis, that this has taken place.  What would one expect to see?  One would expect increasing difficulty, particularly in the down phase of the cycle, in achieving full employment and strong growth, because of the constraints associated with the zero lower bound on interest rates.  One would expect that, as a normal matter, real interest rates would be lower.  With very low real interest rates and with low inflation, this also means very low nominal interest rates, so one would expect increasing risk-seeking by investors.  As such, one would expect greater reliance on Ponzi finance and increased financial instability.

So, I think it is reasonable to suggest that if there had been a significant decline in equilibrium real interest rates, one might observe the kinds of disturbing signs that we have observed.  Is it reasonable to suggest that equilibrium real interest rates have declined?  I would suggest it is a reasonable hypothesis for at least six reasons, whose impact probably differs from moment to moment and probably is not readily amenable to precise quantification.

First, reductions in demand for debt-financed investment.  In part, this is a reflection of the legacy of a period of excessive leverage.  In part, it is a consequence of greater restriction on financial intermediation as a result of the experiences of recent years.  Yet, probably to a greater extent, it is a reflection of the changing character of productive economic activity.

Ponder that the leading technological companies of this age – I think, for example, of Apple and Google – find themselves swimming in cash and facing the challenge of what to do with a very large cash horde.  Ponder the fact that WhatsApp has a greater market value than Sony, with next to no capital investment required to achieve it.  Ponder the fact that it used to require tens of millions of dollars to start a significant new venture, and significant new ventures today are seeded with hundreds of thousands of dollars.  All of this means reduced demand for investment, with consequences for equilibrium levels of interest rates.

Second, it is a well known, going back to Alvin Hansen and way before, that a declining rate of population growth means a declining natural rate of interest.  The US labor force will grow at a substantially lower rate over the next two decades than it has over the last two decades, a point that is reinforced if one uses the quality-adjusted labor force for education as one’s measure.  There is the possibility, on which I take no stand, that the rate of technological progress has slowed as well, functioning in a similar direction.

Third, changes in the distribution of income, both between labor income and capital income and between those with more wealth and income and those with less, have operated to raise the propensity to save, as have increases in corporate-retained earnings.  An increase in inequality and the capital income share operate to increase the level of savings.  Reduced investment demand and increased propensity to save operate in the direction of a lower equilibrium real interest rate.

Related to the changes I described before, but I think separate, is a substantial change in the relative price of capital goods.  This graph shows the evolution of the relative price of business equipment.  Something similar, but less dramatic, is present in the data on consumer durables.  To take just one example, during a period in which median wages have been stagnant over the last 30 years, median wages in terms of automobiles have almost doubled according to BLS data.  Cheaper capital goods mean that investment goods can be achieved with less borrowing and spending, reducing the propensity for investment.

Fifth, and I will not dwell on this point, there is a reasonable argument to be made that what matters in the economy is after-tax, rather than pre-tax, real interest rates, and the consequence of disinflation is that for any given after-tax real interest rate, the pre-tax real interest rate now needs to be lower than it was before.

Finally, there have been substantial global moves to accumulate reserves, disproportionately in safe assets in general, and in US Treasuries in particular.  Each of these factors has operated to reduce natural or equilibrium real interest rates.

What has the consequence been?  Laubach and Williams from the Federal Reserve established a methodology in 2003 for estimating the natural rate of interest.  Essentially, they looked at the size of the output gap, and they looked at where the real interest rate was, and they calculated the real interest rate that went with no output gap over time.  Their methodology was established in 2003.  It has been extended to this point, and it shows a very substantial decline and continuing decline in the real rate of interest.

One looks at a graph of the 10-year TIP and sees the same picture.  Mervyn King, the former governor of the Bank of England, has recently constructed a time series on the long-term real interest rate on a global basis which shows a similar broad pattern of continuing decline.

I would argue first that there is a continuing challenge of how to achieve growth with financial stability.  Second, this might be what you would expect if there had been a substantial decline in natural real rates of interest.  And third, addressing these challenges requires thoughtful consideration about what policy approaches should be taken.

So, what is to be done if this view is accepted?  As a matter of logic, there are three possible responses.  The first is patience.  These things happen.  Policy has limited impact.  Perhaps one is confusing the long aftermath of an excessive debt buildup with a new era.  So there are limits to what can feasibly be done.

I would suggest that this is the strategy that Japan pursued for many years, and it has been the strategy that the US fiscal authorities have been pursuing for the last three or four years.  We are seeing very powerfully a kind of inverse Say’s Law.  Say’s Law was the proposition that supply creates its own demand.  Here, we are observing that lack of demand creates its own lack of supply.

To restate, the potential of the US economy has been revised downwards by 5%, largely due to reduced capital and labor inputs.  This is not, according to those who make these estimates, a temporary decline, but is a sustained, long-term decline.

A second response as a matter of logic is, if the natural real rate of interest has declined, then it is appropriate to reduce the actual real rate of interest, so as to permit adequate economic growth.  This is one interpretation of the Federal Reserve’s policy in the last three to four years.  Not in the immediate aftermath of the panic, when the policy was best thought of as responding to panic, but in recent years.

This is surely, in my judgment, better than no response.  It does, however, raise a number of questions.  Just how much extra economic activity can be stimulated by further actions once the federal funds rate is zero?  What are the risks when interest rates are at zero, promised to remain at zero for a substantial interval, and then further interventions are undertaken to reduce risk premia?  Is there a risk of creating financial bubbles?

At some point, growth in the balance sheet of the Federal Reserve raises profound questions of sustainability, and there are distributional concerns associated with policies that have their proximate impact on increasing the level of asset prices.  There’s also the concern pointed out by Japanese observers that in a period of zero interest rates or very low interest rates, it is very easy to roll over loans, and therefore there is very little pressure to restructure inefficient or even zombie enterprises.  So, the strategy of taking as a given lower equilibrium real rates and relying on monetary and financial policies to bring down rates is, as a broad strategy, preferable to doing nothing, but comes, I would suggest, with significant costs.

The preferable strategy, I would argue, is to raise the level of demand at any given rate of interest, so as to raise the level of output consistent with an increased level of equilibrium rates and mitigate the various risks associated with low interest rates that I have described.

How might that be done?  It seems to me there are a variety of plausible approaches, and economists will differ on their relative efficacy.  Anything that stimulates demand will operate in a positive direction from this perspective.  Austerity, from this perspective, is counterproductive unless it generates so much confidence that it is a net increaser of demand.

There is surely scope in today’s United States for regulatory and tax reforms that would promote private investment.  While it should be clear from what I am saying that I do not regard a prompt reduction in the federal budget deficit as a high order priority for the nation, I would be the first to agree with Michael Peterson and his colleagues that credible long-term commitments would be a contributor to confidence.

Second, policies that are successful in promoting exports, whether through trade agreements, relaxation of export controls, promotion of US exports, or resistance to the mercantilist practices of other nations when they are pursued, offer the prospect of increasing demand and are responses to the dilemmas that I have put forward.

Third, as I’ve emphasized in the past, public investments have a potentially substantial role to play.  The colloquial way to put the point is to ask if anyone is proud of Kennedy Airport, and then to ask how it is possible that a moment when the long-term interest rate in a currency we print is below 3% and the construction unemployment rate approaches double digits is not the right moment to increase public investment in general – and perhaps to repair Kennedy Airport in particular.

But there is a more analytic case to make, as well.  This will represent my final set of observations.  With the help of David Reifschneider, who bears responsibility for anything good you like in what I am about to say, but nothing that you do not like in what I am about to say, we performed several simulations of the standard Federal Reserve macroeconometric model –including the version that he, Wascher, and Wilcox have studied – to address issues associated with hysteresis coming from the labor market.  To be clear, this is the Federal Reserve model as it stands, not modified in any way to reflect any views that I have.

The simulations performed addressed a 1% increase in the budget deficit directed at government spending maintained for five years, tracking carefully the adverse effects on the impacts on investment and labor force withdrawal which in turn affect the economy’s subsequent potential.  The simulations also recognize that until the economy approaches full employment, it is reasonable to expect that the zero interest rate will be maintained, and the standard Fed reaction function is used after that point.

Simulations show what you might expect them to show, that while the fiscal stimulus is in place, there is a substantial response, a greater response when allowance is made for labor force withdrawal effects than when no such allowance is made.  What is perhaps more interesting is that you see some long-run impact of the stimulus on GDP after it has been withdrawn.  That is why the potential multiplier can be quite large.

And my final point – this shows the impact of this fiscal stimulus on the debt-to-GDP ratio.  You will note that with or without taking into account labor force withdrawal, using this standard macroeconometric model, a temporary increase in fiscal stimulus reduces, rather than increases, the long-run debt-to-GDP ratio.

Now, there are plenty of political economy issues, of whether it is possible to achieve a temporary increase in government spending, and so forth.  But I believe that the demonstration that with a standard model, increases in demand actually reduce the long-run debt-to-GDP ratio should contribute to reassessment of the policy issues facing the United States and push us towards placing substantial emphasis on increasing demand for adequate economic growth. This should serve as a prelude to the day when we can return to the concerns that I think almost all of us would prefer to have as dominant: the achievement of adequate supply potential for the US economy.  Thank you very much.

November 19, 2013

ANNOUNCER[1]:

Ladies and gentlemen, please welcome to the stage the former Treasury Secretary Lawrence Summers, and the Economics Editor of The Wall Street Journal, David Wessel.

DAVID WESSEL:

So y’all made it through the magnetometer.  Is anybody still up there waiting to go through?  It’s my great honor and privilege to be here with Larry Summers.  When Larry Summers was two years old, his parents took him to his pediatrician, who happened to be my father.  And, according to Larry’s father, a story he told at my father’s retirement party, Larry’s parents expressed concern that Larry wasn’t talking very much at two years old.  And supposedly my father’s response was, “I wouldn’t worry about it.  Once he starts, he’ll never stop.”  So with that—

LAWRENCE SUMMERS:

Moving right along.

DAVID WESSEL:

If we had been able to post questions, I would have asked you this question on the screen.  But I’m going to ask for a show of hands, because it’s relevant to what I want to talk to Larry about.  If you had to pick the top priority, the single top economic priority, for the U.S. government right now, and I gave you a choice between reducing the long-term deficit and doing something to spur growth in the short term and the long term – deficit or growth, you only get one vote.  How many people would choose the deficit over growth?  And how many people would choose growth over the deficit?  Larry, I have been here in Washington for 30 years.  And for much of that time, we have been obsessed with reducing the deficit.  And that has been particularly true in the last few years.  You think that’s a dumb idea, and so do a lot of people here.  Why?

LAWRENCE SUMMERS:

You guys are right.  They’re wrong. You guys are not getting your way.  We’ve had ten bipartisan budget processes.  We’ve had zero bipartisan growth processes.  We’ve had budget summits up the ying yang.  We’ve had no growth summits.  Somehow – and frankly the business community is complicit in it, because they have been substantial financial supporters and encouragers of it – we have gotten the idea that addressing the deficit is the defining challenge facing the country.

There are three relevant realities.  First, on the current forecast, the debt-to-GDP ratio will improve over the next decade.  The debt forecasts look just about right on line with the way they looked in terms of decline after the 1993 budget deal.  For ten years, this problem is in hand.

Second, basing policy on forecasts longer than that is kind of a crazy thing to do.  If you take the confidence interval around the deficit forecast, not 20 years out, not a 95% confidence interval, but five years out, a 90% confidence interval.  That confidence interval is 10% of GDP-wide.  It is plus or minus 5%.  If, with global climate change, people were telling us temperature change would be between -3° to + 6°, we wouldn’t be acting on the problem. And so, we do not know what the long-run deficit is going to be.

And the third thing, and the most important thing, I think, is that if you take the longest-run deficit, and you take the official forecasts of it, if we increase the growth rate by two-tenths of 1%, just two-tenths of 1%, you solve the entire identified fiscal gap problem.

And I’m here to say that in a country that is stifling entrepreneurship in a variety of ways, in a country that is starved for public investment, that lets Kennedy Airport languish in the way we do, in a country that’s missing a huge opportunity on immigration reform, in a country that’s maintaining a regulatory and tax environment that surely doesn’t recognize that confidence is the cheapest form of stimulus, increasing the growth rate by more than two-tenths of a percent is easily attainable.

The truth is that if we get past our current perhaps protracted bout of secular stagnation and get the growth rate up, the debt problem will stay in control.  And if we continue to be a country that doesn’t increase the fraction of adults that are working, that doesn’t catch up with its GDP potential, that grows at 2% or less, we can have all the entitlement summits in the world, and we’re gradually going to accumulate debt and have a serious debt problem.

And so, we just have gotten our focus to the wrong thing.  We should be focusing on growth: because growth creates a virtuous circle, which creates more growth.  In a growing economy, employers work harder to train the next generation of workers.  In a growing economy, there are more ladders for kids to get on, which puts them in a better position to lead ten years down the road.

In a growing economy, there are more profits that can be reinvested in R&D and long-term capacity.  In a growing U.S. economy, there’s a stronger world economy, which is more likely to be a successful world economy.  That is where our priority should be.  And in my view, we have just, I’m sad to say, lost track of it as a country.

DAVID WESSEL:

Why is it wrong to say that, “we know we have an aging society, we know we have some benefit promises that are going to be expensive to keep, and wouldn’t it be prudent to do something about growth and package that with things that we know take a long time to save money for, and do it now rather than bequeathing the problem?”

LAWRENCE SUMMERS:

There were some real problems in the kitchen of the Titanic.  There were.  They just were the wrong problems to be working on given the challenges that the Titanic faced and given that management had only so many issues that it could devote itself to.  And it’s the same thing.  It would be better to be thinking about a range of long-term adjustments about 2035.  It would be.

But we really can’t do very much.  We have a lot of difficulty passing any legislation.  And so, in that context, the right focus is on what is most important.  And what is most important is things that contribute to growth.  And what is surely necessary is things that contribute to growth.  I think that the odds are that we’re going to need to make entitlement adjustments, but given the uncertainties in the forecasts, these forecasts are wrong by 5% of GDP all the time.

They were wrong by 5% of GDP on the high side – the forecasts were too pessimistic in the ’90s.  They were wrong by 5% of GDP on the low side – they were too optimistic in this period.  They’re wrong by 5% of GDP all the time.  And when people are talking about entitlement reform, they’re talking the big numbers.  They’re talking about 1% of GDP. They’re talking about 1.5% of GDP.  So yeah, it’s the right thing to be thinking about.  But it’s not nearly as important as spurring growth.

And one other thing that a group like this should remember.  Again, it’s the right thing to be doing.  But, you know, if you contribute the absolute maximum you’re legally allowed to every year from the time you’re 19 till the time you’re 65, your Social Security benefit is less than $40,000.  And so, yeah, there may be a case that we need to adjust the formula in various ways.

But just how excited can you really be about the central national project being cutting those benefits for the best of the Social Security recipients from $38,000 to $36,000, rather than figuring out a way to grow the economy faster so there can be more benefits for everybody.  The right debate to be having is not a debate about what the best way to contain the budget deficit is.  The debate to be having is about how best to spur growth.

DAVID WESSEL:

You used a rather frightening phrase in your answer about secular stagnation.  Do you mean that we are at substantial risk of having an economy that perks along at 2% growth and has one in six men between 25-54 on the sidelines of the labor market for years to come?

LAWRENCE SUMMERS:

I’m not predicting it.  But I don’t see how you can look at the data and not say that that is a substantial risk.  Here are just two points.  Four years ago, financial repair had happened.  The TARP money had been repaired.  Credit spreads had largely normalized.  There was no panic in the air with respect to banking institutions.

It has been four years.  We have not grown the share of adults who are working in the United States at all since that time.  We have not gained at all on the potential of the economy.  We have predicted a growth machine – the forecasters have been consistent, been absolutely consistent – a return to accelerated rates of growth nine months from now. That has been the forecast for the last four years.  And it has always been wrong.  And it might be right this time.  It really might be.  There are reasons to think it could be right.  But I don’t see how you can be certain that it’s right.  And if you look back, there’s a troubling feature, it seems to me, of the experience before this crisis.  And that’s what’s causes me to become more alarmed.

Think about the 2004-2007 years.  We had what consensus opinion now thinks were excessive budget deficits.  We had what consensus opinion now thinks were substantial excessively easy monetary policies.  We had what universally is regarded as having been a massive, imprudent, and excessive set of credit expansion.  We had what is universally regarded as having been an inordinate credit housing bubble, which created a false impression of wealth and created vast and excessive construction.

You might think that with all of those things going, we’d also have had an economy that would be overheating.  But if you look at the unemployment statistics, if you look at the inflation statistics, if you look at the growth statistics, the economy was bubbling.  There were bubbles all right.  But the underlying real economy, with a huge support to demand from all of that, was not overheating by any stretch of the imagination.

And so, it has now been a decade since we have grown at a rapid rate in a remotely healthy and sustainable way.  And it seems to me that has to be the deep concern as you look to the next decade.  Things happen.  I mean, when I came into the Clinton Administration in 1993, we did a comprehensive exercise.  And Treasury was part of it.  The Fed was part of it.  The IMF was part of it.  We asked all the outside forecasters.

Looking to the long run, there was a debate.  There were pessimists who thought Japan would grow by 3% a year over the succeeding 20 years.  And there were optimists who thought it would grow by 4% a year over the succeeding 20 years.  It has in fact grown by about .6% a year over the succeeding 23 years.  And so GDP is only slightly more than half today of what we universally believed then.  Because permanent stagnation was kind of inconceivable.

Now, in Japan, what happened was growth was very, very slow and continued to be very, very slow.  And then after awhile, everybody got used to it.  And they stopped calling it a demand gap.  And they started saying it was all that could be done.  And, to some extent, that became true.  Because after all those years, the companies didn’t reinvest, the companies lost their mojo.  They weren’t in a position to compete.

And so, at a certain point, supply came down to demand.  And you just got used to the idea that Japan was a different kind of growing country.  So, I’m not saying we’re going to have a 30% of GDP gap.  But we are already defining our aspirations as measured by potential GDP way down.  So if you ask, “is there a risk of this?”  Absolutely.  Does the risk, does the prospect of this seem as likely or more likely than the high optimism scenario, where we go back to an era of 4% growth?

Yeah, I have to say that as between the pessimistic scenario and the hyper-optimistic scenario, I would choose the pessimistic scenario.  You know, I think things have a way of working out.  And my guess is that it will be better than that.  But the thing that policymakers should be obsessing about is the risk of this secular stagnation.

That’s a much more urgent threat to every American interest than anything about Social Security benefits in 2035.  That is a much greater risk to American interests than anything about the emergence of hyper-inflation coming from monetary policies.  That is where the concern ought to be.

DAVID WESSEL:

The gap between winners and losers in our society is wide by historical measures and has been widening.  A) Should we worry about that?  And B) If so, what should we do about it?

LAWRENCE SUMMERS:

We surely should be worrying about it.  If the only thing that was happening was that, I would argue that we should be worrying about it.  But, I would understand why other people would feel, “well, that’s what the market was doing, and you shouldn’t make that be a preoccupation.”  But here’s what’s really scary.  For 240 years since George Washington, it’s always been true that we became a country with more equal opportunity every generation.

That is no longer true in the United States.  The gap in life prospects between the children of the rich and the children of the poor has widened over the last 40 years.  The gap in the college attendance rates between the children of the rich and the children of the poor has widened over the last 40 years.  It’s not that we don’t know how to make progress.

If you look at the achievement gap between black and white students, that achievement gap in 1970 was twice as large as the gap between the children of the rich and the children of the poor.  If you look today, the achievement gap between the children of the rich and the children of the poor is twice the gap between blacks and whites.  So, we know how to make problems.  With 40 years of effort, we have a long way to go.  But, with 40 years of effort, we have made enormous progress with respect to civil rights.  Still, if s is said the problem with 20th century was the color line, the problem of the 21st century is the class divide and what it means for opportunity.

And so a widening income distribution combined with more and more ways in which the fortunate can advantage their children I think is profoundly corrosive.  What is it that should be done?  We need to find ways to ensure that the educational opportunities open to every kid are like the educational opportunities open to the kids of the people in this room.  And we are not close to that as a country.

We need to make sure that where there are slots to be given, whether it’s the government giving rights to spectrum, or mining right, or whatever it is; that those processes are open and inclusive and are not processes that reward the fortunate.  I have written a lot of papers about the important incentive effects of taxation.  And I believe that.  And we cannot punitively tax; we cannot go back to the kind of tax rates that the country had in the ’50s and ’60s and the ’70s.

But I am here to tell you that there are a substantial set of loopholes, special interest privileges, and the like that distort the allocation of resources, make the economy function less well, and also act to reify and to reinforce inequality, and that serious tax reform that goes after those inequities could both make a fairer economy and make an economy that was more efficient.

DAVID WESSEL:

Well, let me pick up on that last point a minute.  So corporate taxes, obviously something people here care about.  What would you do if you could write the corporate tax rules?  How would you handle the question of overseas earnings?  What’s the right way to do this for the economy and for the social good?

LAWRENCE SUMMERS:

Indulge me for a minute, if you will, in an analogy.  Suppose you had a library and the library’s got a lot of overdue books.  One thing you could do is you could have an amnesty where people got to bring back their books and they didn’t have to pay a fine.  That would make sense.  Another thing you could do is you could is say, “We’re never going to have an amnesty.  You better bring back your books, because no matter how long you keep your books, you’re not going to get an amnesty.”

That would be kind of harsher.  But that would make sense, too.  A really idiotic thing to do would be to put a sign on the door of the library saying, “No amnesty, but stay tuned, there might be one next month.”  That would be the dumbest imaginable thing to do.  What has been the U.S. corporate tax debate for the last five years?  It’s been exactly that.  No break on repatriation now.  But, the constant hope that there may be a break on repatriation in the not too distant future.

And so, why would anyone bring back their money in the face of that?  What should we do?  I think the principle’s clear.  You can call it territorial with a minimum.  There are a lot of different things you can call it.  We should eliminate the distinction between repatriated profits and non-repatriated profits.  And we should establish, in a balanced budget way, a minimum tax on global income.

And so, whether the rate would be in the neighborhood of 15%, you’d pay that if you brought your money back.  You’d pay that if you left your money in Ireland.  And there would no longer be an incentive to keep money offshore.  And if you did it right, there would not be any revenue loss to the government.

But look, there are things we need to fix to stimulate investment in the country.  But, I don’t know that much about multinational business.  But, here’s something I think I do know.  If you measured it right, the places abroad where the American companies make the most profits would be places like China and Japan and Germany and France – places that have big economies.

But, if you look at their tax returns, the places that show up having the highest profits are places like the Netherlands and Ireland and, in case you’re not getting it, the Cayman Islands.  And that really shouldn’t be that way.  It really doesn’t need to be that way.  And it’s not really making the country more competitive or creating jobs to have it be that way.  So the principle is: don’t try to raise more money, but try to raise money in a much better way.  And certainly don’t keep up a set of uncertainties that all but forces everybody to leave their money abroad.

DAVID WESSEL:

I can keep going, but if you have a question?  Okay, I don’t see anything.  Healthcare.gov is a disaster.  How much damage has that done to the trust that Americans have in the ability of the government to do anything?

LAWRENCE SUMMERS:

We’ll see.  It can’t be good.  Look, this is an unhappy tale.  Many of you know from your own experiences that the right general rule on large I.T. projects is take the estimated time to completion, double it, and then move to the next higher unit of time.  So, days become weeks and weeks become months and I could continue the sequence.

And that’s true when it’s done in the private sector.  And there’s no organized constituency for failure.  And when it was done in the public sector, there was a massive organized constituency for failure that organized as best it could to bring about failure by starving the funds and by objecting to the procedures and so forth.

So, it was an extraordinarily difficult task whose difficulty was massively underestimated.  And I don’t think there’s any legitimate excuse for how badly it was underestimated.  And I think you have to say that if you look at the capacity of government to do things, you have to be less optimistic about that than you were before.  And I think it’s a huge imperative to do something that will renew confidence.

And, as I wrote a few days ago, the great danger at a moment like this – the great danger for a football team that’s down by two touchdowns early in the 4th quarter is that they will abandon their playbook and start throwing Hail Marys in every direction.  And usually, that’s a good way to end up down by three touchdowns.  And the great danger at a moment like this is that you’ll promise days when you’ll have results.  You’ll make confident claims about what’s going to happen next.  You’ll try to jerry-rig something rather than recognizing that given the depth of the hole you’re in, it’s going to be very difficult.

So, I think this it is going to take, as difficult as it was to do this right in the first place, it is going to be more difficult to fix.  But I think it is hugely important that it be fixed.  At the same time, I do think that we do need a kind of compact in this country, where we debate things and we debate things and we debate things; and then, when we come to a conclusion, for a while everybody tries to make them work.

And if they don’t work, then at a certain point, we draw the lessons from that.  But those who try to bring about failure and then say, “Look, we saw failure; therefore, we can’t rely on government,” I don’t think they are performing in a way that they should be proud of either.  So, I don’t think there’s anybody in Washington who is emerging as a winner from how this appears.

And I do, if I may say so, think that those of you who (which I suspect is a majority of people in this room) are of a more conservative bend than I, do need to recognize that of the several strategies that could have been pursued that would have resulted in universal health care, the one that was in fact pursued was the one that was most-respecting of the traditional market, was the one that went the most with the grain of the current system, was the one that was closest to what had been proposed by Republican think tanks like The Heritage Foundation and implemented by conservative state administrations.

And so, if this kind of combination of government operating at the edge rather than taking over the whole system is too difficult to make work, there are conclusions from that that could be drawn in both directions.  But, my hope and my expectation would be that this will over time be fixed and be made right.  And I think it is worth remembering, just as a general matter, having now kind of lived around Washington things for quite some time, you know.  It was only two months ago, less than two months ago, that the budget deal and the failures around the budget and the fact that the Republicans were face down on debt issues meant that they could have been seen as being in deep and terminal difficulties.

And that now is completely out of everyone’s mind.  And no one remembers that as an important event all of six weeks later.  And so it’s a great mistake to think that whatever the mood is right now that that’s what the mood will be three months from now, let alone three years from now.  There’s a large universe of possibility.

DAVID WESSEL:

So Larry, you mentioned Japan, slow growth over more than a decade now, two decades.  Abe comes in, a new economic approach is three arrows – monetary, fiscal, and restructuring.  We’ve seen one of the arrows fired.  Maybe the second one is kind of in the quiver.  The third really isn’t that of the talking shop yet.  Wonder what your evaluation of that economic policy is and the likelihood of success.

LAWRENCE SUMMERS:

You know, it’s a little bit like pulling your goalie in a hockey game.  It’s not that when you got a minute and a half to play, pulling your goalie out is that great a strategy.  It’s just that if you don’t pull your goalie out and the clock runs out, then you lose for sure.  And so you have to try something new.  So, I think the basic thrust of a substantial commitment to expansion was the right one.

I think there have been some encouraging signs so far in the increasing growth expectations, in the reduction in deflation expectations.  And so I think the prospects for Japan look considerably better than they did a year ago.  And that is a tribute to the policies.  But I don’t think we’ll know until nine months from now.  I think nine months from now they will put the value added tax in.  And either the economy will have weathered that and continue to be growing in a reasonable way or, as has happened in the past, there will be a run-up of growth until they do that.  And then, there’ll be an air pocket in spending afterwards and they’ll be back in the soup.  And I can’t confidently predict between those two possibilities.  Both, I think are real possibilities.

DAVID WESSEL:

Question from one of the CEOs here.  Can you raise your hand?

RICH SCHLECTER:

Rich Schlecter.  You talked about the secular challenges to long-term growth.  Could you talk about the role of labor in society?  It feels like the combination of globalization, automation – we heard a wonderful discussion at lunch, which says even at the university level, there’ll be increasing pressures on traditional jobs.  Not maybe at the very top universities, but at many, many others.

And it just seems that, if you’re at the very top, today’s world offers more opportunity than ever to contribute globally.  And if you’re not at the very top, the pressures for middle-class jobs and other things are just enormous.  Do you see an underlying trend here?  And what do you think it means in terms of long-term growth and the inequities in society that you described?

LAWRENCE SUMMERS:

If the issues that I called “secular stagnation” around lack of demand and all of that are the issue for the next decade, the issue for the next half-century is the issue that you raised.  You know, there were some guys who wrote, very distinguished economists who wrote a book nine years ago about technology and its impact on employment.

And one of the most striking passages was they said, you know, computers can do some things.  But computers really aren’t going to be able to do other things.  And their example of something that computers were not going to be able to do was make a left turn against ongoing traffic.  Well, Google nailed that one within less than a decade.

And one of the things I’ve done since leaving government is spend a bunch of time out in Silicon Valley.  And the set of things for which they are developing capacities to do is mind-boggling.  Now, it’s always been true before that jobs were eliminated in one sector by productivity increase and they went to somewhere else.  And that people thought it couldn’t happen.  That’s true with respect to agriculture.  That’s true with respect to the Luddites in England.  It’s always been true before.  It was always true before that, you know, house prices in America went up.  And so “it’s always been true before” is not a conclusive argument.  I think our chances are maximized if our education system is preparing as many people as possible to be as creative and flexible as possible.

I think we’re going to have to recognize that in a world where the potential rewards and leverage to the most creative are larger, that we’re going to have to find ways of having some redistribution from the most creative to everyone else.  You know, the example I like to give is George Eastman had some fantastic ideas about photography.  And he was very successful.  And along with his success, the City of Rochester supported a thriving middle-class for two generations.

Steve Jobs equally fundamental innovations or more fundamental innovations produced even greater success for him and for his shareholders.  But there was no comparable large-scale middle-class job creation.  And that’s what we’re going to have to work through.  It’s going to require us to be much more imaginative in thinking about various kinds of service work and thinking about the quality of jobs and the dignity of jobs associated with the service sector.

I’m all for doing everything we can.  And there’s a lot that we can do that is still undone to bring about a renaissance of American manufacturing.  But, China has gained competitiveness, gained share, innovated and raised its efficiency, as much as any country ever will.  And there are fewer workers in Chinese manufacturing today than there were 20 years ago.  Let me say that again.  There are fewer workers in Chinese manufacturing today than there were 20 years ago.  And so success, if and when it comes, is going to come from various kinds of service work, various kinds of greater customization.

Look, it’s a tragedy that on the one hand you’re saying (and you’re right and I understand why you’re saying it), that there may not be enough work to do.  On the other hand, there are several million kids in this country who profoundly need individual attention and mentoring of a kind they are not close to getting.  And we don’t have a way of bringing the people who want to work together with those kids.  And I don’t think it’s traditional government that’s going to do it.  But I also don’t think it’s going to be turning the country into some kind of Libertarian paradise.

DAVID WESSEL:

With that, join me in thanking Larry Summers.

LAWRENCE SUMMERS:

It seems that my father was right.

___________________________________

CITIZEN SCHOOLS CONTACT: Holly Trippett, 301-452-3904, 617-695-2300 ext. 1161, hollytrippett@citizenschools.org

 LAWRENCE H. SUMMERS CONTACT:  Kelly Friendly, (650) 387-0042, kelly.friendly@ls.academicwebpages.com

FOR IMMEDIATE RELEASE

November 19, 2013 – Boston, MA – Citizen Schools today announces Lawrence H. Summers as the Chair-elect of its national Board of Directors. Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University and former Treasury Secretary of the United States. Andrew Balson, current Chair of the national Board of Directors, will announce Summers’ new role during a breakfast organized by Citizen Schools, “Education and the Economy: A Conversation with Lawrence H. Summers,” today from 8-9:30 AM at the law offices of Edwards Wildman.

 Founded in Boston, Citizen Schools partners with public middle schools in low-income communities nationwide to expand the learning day through academic mentoring and skill-building apprenticeships. The nonprofit is a leader in expanded learning time (ELT) since opening its first ELT program at the Edwards Middle School in Charlestown, MA in 2006. An expanded day partner at 24 schools in seven states, Citizen Schools external evaluations indicate that its students achieve gains in learning that are as large or larger than top charter schools and exceed the U.S. Department of Education’s guidelines for successful school turnaround.

“Citizen Schools is developing a new model for a longer, more engaging, and more effective school day,” said Eric Schwarz, Co-Founder and CEO of Citizen Schools. “I am excited Larry Summers has agreed to Chair our Board of Directors. He brings a deep understanding of education and its connection to economic growth and fairness.  With his leadership, Citizen Schools is positioned to build on its track record of innovation and growth.”

 “I am honored to be named Chair of Citizen Schools’ national Board of Directors,” said Summers. “Citizen Schools’ proven model offers an innovative and scalable solution to re-imagining what the school day of the 21st Century should look like.”

 Summers will succeed Balson, who will remain on the board.

“On behalf of the board, I am excited to welcome Larry as the new Chair of the Board and work closely with him to deepen and expand Citizen Schools’ already considerable impact on education,” said Balson.

Summers will join the Board of Directors immediately and will become the Chair in early 2014. In the last two decades, Summers was the Director of the National Economic Council for President Obama and served as the 71^st Secretary of the Treasury for President Clinton. In addition to his work in academia, government, and the private sector, Summers has long held a deep interest in education. Among other involvements, he serves on the executive committee of the Teach For America national board.

About Citizen Schools

Citizen Schools is a national nonprofit organization that partners with middle schools to expand the learning day for children in low-income communities. Citizen Schools mobilizes a team of AmeriCorps educators and volunteer “Citizen Teachers” to teach real-world learning projects and provide academic support, in order to help all students discover and achieve their dreams. For more information, please visit http://www.citizenschools.org/.

 ###

 The Wall Street Journal 

Seib & Wessel Breakfast

with

Lawrence Summers

Location:  St. Regis Hotel (Magnolia Room),

Washington, D.C.

Time:  8:30 a.m. EDT

Date:  Tuesday, June 4, 2013 

Transcript by

Federal News Service

Washington, D.C.

JERRY SEIB:  OK.  So let’s get started.  Thanks for coming.  Let me do a few housekeeping details as usual.  The usual ones were on the record.  We’ll go for one hour.  We’ll end right around 9:30.  But no tweeting, texting, Facebooking, calling your – calling your brother-in-law until 9:30 when we’re done so everybody’s on an equal footing.  There will be a transcript, which we’ll email around to you all later today – you know, usually early afternoon – (inaudible).

MR.     :  All right, so why don’t we say five minutes after we end

MR. SEIB:  Five minutes after we end.

MR.     :  Embargoed for five minutes.

MR. SEIB:  OK.

You all know Larry Summers.  I won’t spend a lot of time introducing you to the former Treasury secretary, former Harvard University president, former head of the National Economic Council and all that.  But you can all introduce yourselves to Larry, because I think he knows everybody, but just to get started – Jon, why don’t we start with you.  And we’ll go around, and then we’ll launch into it.

JON HILSENRATH:  Jon Hilsenrath, chief economics correspondent, Wall Street Journal.

ERIC PIANIN:  Eric Pianin, Fiscal Times.

CLIVE CROOK:  Clive Crook, Bloomberg View.

NEIL IRWIN:  Neil Irwin, Washington Post.

DAMIAN PALETTA:  Damian Paletta, Wall Street Journal.

RICH MILLER:  Rich Miller, Bloomberg.

JOE MINARIK:  Joe Minarik, Committee for Economic Development.

MR.     :  (Off mic.)

MS.     :  (Off mic.)

MS.     :  (Off mic.)

EZRA KLEIN:  Ezra Klein, The Washington Post.

MS.     :  (Off mic.)

MR.     :  (Off mic.)

MICHAEL DUFFY:  Mike Duffy, Time.

MR.     :  (Off mic.)

GREG IP:  Greg Ip, The Economist.

ROBERT GUEST:  Robert Guest, The Economist.

RICHARD MCGREGOR:  Richard McGregor, Financial Times.

ANDREW TAYLOR:  Andrew Taylor with AP.

MR. SEIB:  All right.  Well, thanks for coming.

Larry, you know, you’re here – aside from the fact you wanted to have breakfast with us, you are here to talk about – to talk in Congress I guess later today about the great austerity versus no austerity debate.  So maybe we can start in that neighborhood, if you don’t mind.

So let’s see.  Unemployment’s down.  The deficit is dropping.  Health care costs are slowing.  Things seem to be pretty good.  Should we just forget about reducing the deficit in the short term given that all those things are happening?

LAWRENCE SUMMERS:  In short term, we brought the deficit down faster than would have been optimal, and as a consequence, we’ve suffered slower growth than we needed to suffer.  And the acceleration of recovery has been postponed more than it needed to be postponed.

In the medium term, a reasonable judgment is that a significant – medium and long term – significant, perhaps a substantial fiscal challenge remains.

If one operates with a forecast that assumes no major shock or disruption to economic activity looking out over 10 years, then in such a period, the aspiration should be to reduce the debt-to-GDP ratio, conditional on it being good times for 10 years, and so one should not be satisfied with rough stasis.  And on the current forecast, out beyond 10 years, the likelihood is of a gap between expenditures, forecast expenditures and forecast revenues.

So the deficit challenge remains a challenge for the country.  But addressing it too rapidly is not wise.  There is the possibility that the adverse consequences on the economy, as they feed back through revenues, as they lower the level of GDP, which, of course, is the denominator of the debt-to-GDP ratio, may actually be counterproductive in the sense that the debt-to-GDP ratio goes up rather than down.

That – whether that is literally the case or not, in the short run, while the economy is still depressed, while monetary policy is still constrained by zero bound and multiplier effects are likely to be large, seems to me that any reasonable cost-benefit judgment suggests that further steps into austerity have growth costs that very substantially exceed any debt reduction benefits, a consideration that would be reinforced by hysteresis effects, through which slower growth means lower GDP – slower growth today means lower potential tomorrow.  So the right path – and this, it seems to me, has been the right view for several years – has been that relative to the path we’re on, we need more action with respect to the medium and long term, and less action with respect to the immediate horizon than has been pursued.  And it seems to me – and this is one of the points I stress in my testimony – that if you accept that diagnosis, the ideal fiscal policies are measures which pull subsequent expenditures forward.

The example I always like to use is Kennedy Airport is going to be repaired.  It is going to be repaired at some point.  Potholes in roads are going to be filled. The question is whether we’re going to fill them now, when we can borrow to fill them at zero in real terms, and when construction unemployment is near double digits, or whether we’re going to do that years from now, when there will no longer be any multiplier benefits to those expenditures and when the deficit problem will be a more serious problem.

So it seems to me that we need to recognize that burdening future generations is a crucial issue, but that you burden future generations when you accumulate debt; you also burden future generations when you defer maintenance; you also burden future generations when you underfund pensions or you undercompensate the civil service or you underinvest in research and development and education or public institutions.

Now, the challenge, of course, in this view is that it has a St. Augustine character.  You’re urging the more pleasant steps today and deferring the more painful steps.  But the track record going back to the Greenspan Commission of commitments made at one point that kick in some years hence is that when those commitments are made – not always, but with very substantial probability, they in fact are kept when the time comes.  And the observation that the retirement age increases in Social Security have been implemented for some time now without substantial political disruption suggests to me that appropriate measures focused, in my view, on containing health care costs through improved reimbursement procedures is a critical priority; and on mobilizing revenues with appropriate phase-ins, I think we’d make an important fiscal contribution.

MR. SEIB:  Just one quick follow-up.  I guess it follows from what you just said that you would argue the sequester has done more harm than good, not only in growth, but on the deficit itself?

MR. SUMMERS:  If you take the CBO calculation of the impact of the sequester and you ask how the debt-to-GDP ratio compares at the end of this year with and without the sequester, it’s just about a wash.  On the one hand, less debt was accumulated.  On the other hand, the economy grew more slowly, which meant less revenue collection; and less GDP growth means a lower GDP, which makes the debt-to-GDP ratio higher than it would otherwise be.  So if you take the CBO’s calculation, you make no allowance for any subsequent hysteresis effect and you just do the calculation at the end of this year, it comes out a bit of a wash.

I wouldn’t want to push the claim that it was literally counterproductive in – with respect to the debt-to-GDP ratio it might be that it turned out to be constructive by some margin.  But it seems to me on some overall cost-benefit test, we would have been much better off with a kind of expenditure reduction that was back-loaded rather than front-loaded.

MR. SEIB:  Larry, you use the phrase mobilizing revenues, which is a new euphemism.  One of the focuses recently has been on the behavior of big, multinational corporations.  Apple has become the poster child for companies that find very creative ways to avoid paying U.S. taxes, and in some cases any taxes.  Are these companies doing something wrong?  And how would you redo the corporate tax system, if at all?

MR. SUMMERS:  I haven’t studied or audited the corporate tax returns – I don’t have access to them or the capacity to do it effectively – of major corporate – of major corporations.  The last thing I would want to do is accuse any particular company of legal wrongdoing.  If you look at the share of U.S. corporate profits earned abroad, they’re earned in jurisdictions like Ireland, the Cayman Islands and the Netherlands, that are conspicuous for their low tax rates.  It obviously bears no relation to any real sense of economic activity.

And that seems to me to be something that is quite problematic, whether – it may well be, mostly likely it is something that reflects mostly unfortunate aspects of the law.  It probably also reflects the failure to effectively enforce rules on transfer pricing and the allocation of income that are hideously complex.  There’s no question that there is a huge quantity of cash that is sitting abroad, held by U.S. corporations.  And in a sense, right now public policy is in the worst possible place with respect to that cash.

Let me give an analogy.  If you’re a library and you have a lot of overdue books out, there’s an argument that you should have an amnesty, there’s an argument that you should make clear that you’re never going to have an amnesty.  But the single worst policy is to have everybody think there’s a reasonable chance of an amnesty next month and have the amnesty never come because then no one will ever return any books.  And that is essentially where our corporate tax debate has been for some time.  So this is a case where lack of clarity is clearly inimical to bringing the cash home.  Clarity in either direction would magnify the incentive for the cash to come home.

I am inclined to think that reforms are available that would make the treasury better off and make multinational corporations, as a whole, better off as well, which would take the form of an adjustment of tax rules to place a tax on global income, including global income earned in the past and not yet repatriated, at a rate that is considerably lower than the existing corporate rate but considerably higher than the rate that’s now being not paid because of deferral.  The corporations that really want to bring the money home are being burdened by the current system.  And they’re being burdened by the current system, and they’re being burdened in a way that doesn’t show up as revenue collections for the government, to state that premise in a slightly clearer way.

In general, in tax policy, when you see a tax provision that is, on the one hand, experienced as a substantial burden by taxpayers, and on the other hand, not generating revenue for the Treasury, it is natural to ask whether there’s a way of adjusting that provision so that more revenue is received by the Treasury and taxpayers feel better off.  I believe that the very heavy tax on repatriated profits is such a provision.

To be crystal clear, I am not advocating the repatriation holiday proposals that many advocate.  Those would represent a loss in revenue to the Treasury without commensurate economic gain.  I am certainly not advocating a move to a pure territorial system that would also represent a loss to the Treasury as well as an increased incentive to locate economic activity abroad.  Rather, I am advocating clarity with the clarity taking the form of a tax rate earned – tax rate levied on income earned abroad that does not – critically, that does not discriminate based on whether that income earned abroad has been repatriated or has not been repatriated.  Ideas of that kind are implicit in – although not framed in quite that way – in some of the proposals that have been discussed by the administration and in some of the proposals that have been discussed by Congressman Camp.

I think there is also a case – probably a fairly strong case for reform of provisions that have allowed erosion of the corporate tax base as companies have moved out of – business activity has moved out of corporate form.  I think there is a non-neutrality there that is quite substantial.  And there are a range of special interest provisions that almost certainly should be addressed as part of a reform.

Unfortunately, the really outrageous ones – certain kinds of chandeliers in particular – the rifle-shot ones that are most easy to muster indignation about are not, in aggregate, large amounts of revenue, and so the task is more difficult than it is sometimes made to seem.  But yes, I think there are corporate tax reforms, particularly with respect to global companies, that would be constructive and would improve matters for both – have the potential to improve matters both from the perspective of taxpayers, economic performance and the Treasury.

MR. SEIB:  We can open this up to questions from you all if somebody wants to jump in.  Eric.

Q:  What is your general economic forecast for the rest of the year, and do you expect any economic headwinds this fall when the debt ceiling renewal comes up again?

MR. SUMMERS:  I’m better at economic prognostication than political prognostication, so I’ll leave you guys to make the judgment as to how much drama is going to surround the debt ceiling this fall.  I think there are big headwinds from the sequester and the payroll tax increase are likely to constrain growth over the next several quarters, juxtaposed with substantial growth benefits from the (churn ?) in housing and from the increased investment in energy and the wealth effects of a stronger stock market and, you know, generally, the repair of consumer balance sheets.

So I think they are going to struggle with each other, and growth for the next couple of quarters is likely to remain in the general range that it has been.  I would expect that after that, as we get towards the end of the year, you will see a significant acceleration in growth, towards or perhaps beyond going into next year – 3 percent, as the economy is no longer absorbing substantial further blows from fiscal policy and the growth benefits accelerate from the factors that – the factors that I cited.

Obviously, there are risks to that forecast from what happens with respect to the rest of the world, geopolitical shocks, confidence (ephemeral ?), but that would be my best guess.  And I think we are now in a period, which has not been my dominant view in – over the last years, when there really is two-sided risk.  One can certainly conceive of risks to a forecast to the downside, but one can also conceive of risks to a forecast to the upside as well.

Q:  What about Europe?  How would you describe the outlook for Europe and the quality of their economic policy?

MR. SUMMERS:  In that order.  (Laughter.)

Q:  Or reverse order.  (Laughter.)

MR.     :  Without even looking at her, I can see that Kelly is giving me that “don’t be too political” look.

DAVID WESSEL:  Kelly, I think you have a phone call outside.  (Laughter.)

MR.     :  Somebody stand in front of her.

MR. SUMMERS:  I think it’s a very – I think it’s a very, very long road for Europe.  Even assuming the avoidance of financial accident, the euro system imposes a brittleness that increases the risk of – increases the risks of slow growth, and it is very difficult to see where the major impetus for increased growth is going to come from.

I think there has been a – some failure in at least some European circles to recognize what economists call the fallacy of composition.  If one person stands up in a theater, they can see better.  If everybody stands up in a theater, nobody can see better.  Any one country can improve its economic performance by saving more, suppressing its wages and becoming more export-competitive.  But that can’t happen across the planet because the one thing that all economists can agree on is that the total level of exports is equal to the total level of imports.  And so the – though it’s not – (inaudible) – (laughter) – official statistics, the measures do not support – do not – do not support that view.

So it seems to me the idea that going through the kind of difficult adjustments that Germany went through five to 10 years ago is a universal salvation for Europe is quite misguided.  Those kinds of structural adjustments are very important, but they need to be coupled with measures that would promote demand.  And it seems to me that more effort to provide common support and common approaches to the recapitalization of the European banking system, more mobilization of Europe’s overall fiscal capacity in support of growth, further intensified structural reform and a clear bias of monetary policy towards supporting growth are all important elements in the European situation.  And while the last few numbers have been a bit more favorable than had been supposed, I think that Europe remains the major worry area in the global economy.

MR.     :  Greg (sp).

Q:  Larry, in your paper with Brad DeLong, you said that one of the downsides to a scenario that –

MR.     :  Can you grab the mic?  It’s in front of Rob (sp).

Q:  In your paper with Brad DeLong, you said that one of the downsides of austerity in a depressed economy is that it puts more of the burden on unconventional monetary policy to support demand, and that one of the risks of unconventional monetary policy is the asset bubbles and financial instability, more generally.  Do you see that risk right now?  Do you think that’s happening right now?  And more broadly, do you think the benefits of quantitative easing right now exceed the costs?

MR. SUMMERS:  Old treasury – old treasury secretary habits die hard, so I’m going to respect the independence of the Federal Reserve system and not make a – not make a statement about the posture of policy right now.

I do think that the argument – the argument Brad and I made has to be – almost has to be directionally valid, that if you rely more on monetary policy you’re going to have more liquidity and lower rates and pressures that are going to drive risk premium down, and that that’s going to be an environment that’s going to increase the risk of – going to increase the risk of bubbles, as well as having the benefit of increasing confidence and stimulating investment.  And I don’t think there’s any question that if you look at fixed income markets, risk premiums have come down substantially in recent – in recent months.  Some credit spreads are at or below historic lows.  Those patterns are present with respect to corporate borrowing, are present with respect to sovereign borrowing.  And there’s certainly anecdotal evidence of yield chasing by investors who are seeking to earn greater than completely safe rates of return.  To what extent that reflects desirable increases in confluence and to what extent that reflects movements towards bubbles is a judgment that the investors individually will have to make and that monetary policy authorities will have to make over time.  But those tradeoffs would, in my judgment, have been eased if in greater part of the burden of supporting demand had been placed on fiscal rather than monetary policy.  And I further believe, just to emphasize the link that I made earlier, that if the greater fiscal policy came in the form of frontloading surely necessary expenditures, it would be possible to increase fiscal policy impacts without any impact on long-run debt accumulation.

MR. SEIB:  Ezra, then Michael.

Q:  My question’s actually related to Greg’s.  There’s been a discussion lately about whether or not the reliance on monetary policy with the absence of fiscal policy has led to a worsening of inequality through boosting asset classes that are largely held by more affluent folks and by taking away (things like ?) payroll tax cut that are more progressive.  Do you have any thoughts on that, and if so, what the magnitude of it might be?

MR. SUMMERS:  I think it’s important – I’ve not yet seen a careful, full evaluation of that hypothesis.  There’s certainly the effect you described, that asset prices have gone up and assets are held by wealthy – assets are disproportionately held by the wealthy.  There are two other aspects, I think, to thinking about the question fully that need also to be recognized.  And where the balance would come out, I don’t know, Ezra.  One is that some of the wealth increase reflects a – reflects the economist’s way of saying it would be a change in the price of future consumption.  Maybe the point – maybe the way to make the point is this.  Imagine that you are an individual who is going to live forever, and you own a 5 percent perpetuity.  You are 5 percent perpetuity, so you own a bond that pays a coupon of five dollars a day – five dollars a year.  Your perpetuity would then be worth $200, and so in a sense, you would be twice as wealthy; its asset price would have gone up.  But if you actually thought about your consumption stream, you would continue to be able to finance a consumption stream of $5 a year forever, the same consumption stream you were able to finance before.

And so the wealth effect that is generated by the mirror effect of a lower required rate of return is actually quite different in terms of what it means for well-being than a wealth effect that was generated by that coupon going from $5 to $10.  So that operates in the – that consideration operates in the other direction.

Second consideration that operates in the other direction is that on average, creditors are more affluent than debtors and higher interest rates are paid from debtors to creditors.  So what the on-balance effect is, I think, is not easy to fully calculate.  I think it’s very likely that proper fiscal policies, having maintained somewhat longer the payroll tax cut, support for infrastructure investment, would be quite egalitarian in their impact.  And there wouldn’t be much scope for debate that they were operating to favor the wealthy.

And in that sense, I think the conclusion that you’re likely to be operating more fairly with most forms of fiscal action than with reliance on monetary action is valid.  But I think the full distributional impact of monetary policy is actually a really quite complicated subject to fully trace through.

MR. SEIB:  Michael, then John and then Joe.

Q:  Larry, if you can talk about energy – go back and talk about energy a little bit and isolate for us, if you can, the role it plays specifically in the prognosis you did for Eric (sp) a minute ago?

MR. SUMMERS:  My guess is that when history is written 15, 20 years from now, the huge change in the fossil fuel environment, in fossil fuel potential in the U.S. economy will be judged to have been somewhat more economically significant, though perhaps slightly less geopolitically significant, than the current conventional wisdom has it.  I say more economically significant because it looks to me like this is going to attract very substantial volumes of direct investment, perhaps approaching half to two-thirds of a percent of GDP a year, investment that’s going to tend to take plane in areas like western Pennsylvania with relatively high unemployment and that’s going to create types of jobs that are going to involve people using physical strength and working with their hands that have been in particularly short supply in the United States, and that those investments are likely to continue for some quite substantial and sustained period of time.

Then in addition to that, even – almost regardless of what policies are pursued, the very low price of natural gas in the United States relative to the rest of the world is a gap that will not be closed within a – or close to closed within a decade, and therefore, will operate to support a variety of energy-intensive activities in the United States, which will operate to stimulate further investment in manufacturing.  So I think the cumulative impact is likely to be quite important.

The reason I say it’s a little bit less geopolitically important than is often supposed is because it seems to me that some of the discussion makes an error in conflating the United States achieving net fossil fuel in – United States and North America – achieving net fossil fuel export status, which is likely to take place by the end of this decade, with an absence of dependence on the Middle East, which I think is not likely over any horizon.  It’s extremely unlikely the situation will ever obtain where the price of oil differs by tens of dollars between the United States, Europe and Japan.  And as long as they are substantially dependent on the Middle East, and as long as, broadly speaking, obviously, with adjustments for grade and transport costs, there’s one world price of oil, the day when we achieve so-called energy independence is not a day when we will achieve insulation from the world oil market, which will still fluctuate and will still be very sensitive to supply developments outside of the United States.

So I think the economic impact is somewhat greater and the geopolitical impact is somewhat less than is often suggested.

MR. SEIB:  Jon.

Q:  I wanted to ask follow-up questions, two follow-up questions, one to Eric’s and one to Greg’s.  You see the prospect for acceleration in growth by year end.  It seems like throughout this recovery, economists and policymakers have been talking about an acceleration of growth just around the corner, and it hasn’t happened.  So I wanted to hear first your explanation for why growth keeps disappointing and why this next corner should be different than the last few corners we’ve turned around.  That’s the follow to Eric’s questions.

To Greg, I want to hear from Larry Summers the economist, not Larry Summers the former Treasury secretary, about your assessment of quantitative easing as a policy tool and the costs and benefits.  What have you learned as an economist about how effective that tool is and what the potential drawbacks are?

MR. SUMMERS:  On the second, I think that we will know so much more after this cycle has been completed and after the experience of different countries has been observed, that it would be premature to try to reach a judgment on the basis of what has been – on the basis of what has been observed so far.  But it’s a good attempt.  (Laughter.)

I have learned – I have learned, painfully – and you just made the mistake of giving me the cue, because I have learned painfully in life that whenever a question is asked in the form I would like to know what Larry Summers the economist – (laughter) – as opposed to Larry Summers the whatever, thinks, I’m being invited to say something that I will regret.  (Laughter.)

Have this – having said –

MR. SEIB:  But that hasn’t always stopped you, as – (laughter) – I’m just noting –

MR. SUMMERS:  Yes, not always stopped me – (laughs) –

MR. SEIB:  – just – I’m just noting here.

MR. SUMMERS:  – but we always can get wiser with age, and perhaps the old – perhaps someone will find a way to ask a question again – (laughter) – and elicit – and elicit more.

On growth – on growth, look, these estimates, first of all, I would be the first – I’d be the first to recognize that all these forecasts have uncertainty.  I don’t think I have been as robustly optimistic the last several years as many others in predicting that the acceleration is around the corner.  So this is not a(n) entirely recurrent cycle for – cycle for me.

I have in the past felt that yes, there were processes of private sector repair, but they were slow, and that there were going to be continuing substantial fiscal obstacles interposed.  It does not appear to me likely that between 2013 and 2014 there will be anything like the degree of fiscal contraction that has been observed yearly for the past several years as the stimulus program phased out and as various other budget measures were implemented.  So the combination of the private sector recovery gaining momentum and the public sector headwind losing momentum – both, it seems to me, at faster rates than was the case in the past – leads me to think a growth – a significant growth acceleration is more likely now than it was in the past.

MR. SEIB:  Joe.

Q:  Nice tap-dance, Larry – (laughter) – on quantitative easing.  Could I take you back to the infrastructure solution for a moment?  Two premises.  Number one, we’ve got lots of unemployed construction workers out there.  And number two, we can borrow at near zero rates.

Premise number one, as I see the employment statistics, within the category of construction, employment has declined by orders of magnitude more in residential construction than it has in heavy construction.  And it may be that the guys who hang drywall and string electrical cable are good candidates to run earth-movers and pour concrete, but that’s not necessarily the case.

We can borrow money at zero rates, premise two.  The Treasury can borrow money at zero rates for 90 days.  The Treasury cannot do 100 percent of its incremental borrowing from a substantial infrastructure program all in 30s and 10s.  Some of that money is going to be in bills.  So the opportunity to in fact borrow at zero rates is finite.  As I look back at the stimulus program, I think there are a lot of questions as to whether the emphasis on construction was in fact constructive – pardon the pun – in terms of getting economic activity moving quickly.  I just wonder, if you put all those things together, whether infrastructure is really the ticket to accelerating economic growth in the near term.

MR. SUMMERS:  So you’ve got – you made three – there are three points in what you just said, Joe (sp).  First, on interest rates, I may have – I may have slipped and failed to use the word “real.”  If you think about real interest rates, real interest rates are, as measured by TIPS, literally negative out at any horizon short of 15 years and are negligible even out to 30 years.  And from the point of view of doing an analysis like this, it’s the real interest rate that’s appropriate, and the consequent – again, I’m talking about pulling forward infrastructure investment and maintenance, and it seems to me that while we could debate just what the debt capacity is, the debt capacity is pretty large relative to feasible increases in infrastructure commitments over the next five years.

So the place where I’m most confident is on the fact that this is a moment when borrowing costs are relatively low and you could conceive in a variety of different views about duration and the – of course, in thinking about the duration of the public sector’s debt, quantitative easing would come into that calculation, since the Fed is in effect transforming the duration structure of the Treasury’s borrowing.  But I don’t think you’re going to get away from the conclusion that debt costs are low.

Second question you raise is about categories of employment, and you’re of course – you’re of course right that if you look narrowly enough, you will find that it is not precisely the occupation titles that are involved in – that are involved in infrastructure that were involved in residential construction.  On the other hand, if you look broadly at the characteristics of the workers involved, the truth is that the vast majority of categories of labor in the United States are experiencing relatively high unemployment and relatively high vacancies, and the categories of labor that are disproportionately employed in infrastructure, men with relatively – with less rather than more education, are experiencing even more of that phenomenon.  It is as good a time labor marketwise to be making infrastructure investments as we can reasonably expect we will see again in the next 10 to 20 years.

I do think there is – there are important issues around timing.  I think we have made a – I think we have a bit of a problem as a country that we tend to want to do infrastructure quickly as stimulus.  It tends to be hard and especially hard to do well when it is being done quickly.

So I think the optimal formulas, though they’re not politically easy, involve long-term commitments to infrastructure payment – infrastructure investment with financing allowed to fluctuate on cyclical grounds with financing triggered in at moments of cyclical strength and triggered out at moments of cyclical weakness.  But I think the difficulty is that if we always reason that we need stimulus now and it takes time to gear up infrastructure, then we’ll never do infrastructure.  And that can’t be the right – that can’t be the right approach for us to take.

I also think that it’s important to distinguish as between fundamental visionary infrastructure investment and maintenance.  The former is much more glamorous.  It also takes much longer and is much more complex.  The latter probably has a higher rate of – social rate of return, as best one can judge these things, and can be geared up much more rapidly.  And there are very substantial maintenance investments that could be geared up in the country quite quickly.

And that requires more emphasis than I think it has received.  It doesn’t have the same salience.  You can’t really name a filled-in pothole.  But you can’t name an uncollapsed bridge that has been reinforced.  And so the – it’s hard – it is hard for a non-decaying school to be somebody’s legacy because of a repair job.  And so around the world, one finds within infrastructure investment, a tendency toward overinvestment in the new and undermaintenance of the existing.  And that’s been important for us to address as well.

MR. SEIB:  Well, if you share some – if you share some of your wealth in filling in a pothole, we will declare it the Larry Summers filled-in pothole.  And we’ll put – we’ll collectively pay for a little plaque.  (Laughter.)

McGregor (sp).

Q:  Thanks.  There’s a – (inaudible) – U.S. summit on in California on the weekend.  Somebody who used to, I guess as Treasury secretary chair the CFIUS process, I want to ask a question about Chinese investment.  In theory, there’s a – you know, a large amount of Chinese money ready to come into, not just the U.S., but around the world.

What kind of reasonably boundaries can and should the U.S. set for Chinese investment coming into the U.S. on national security grounds, particularly at a time when there’s a wave of accusations from the White House down about theft of IPR by cyberhacking – in other words, a great display of bad faith on the side of the Chinese?  You would be in favor of investment, but what boundaries would you set for it?

MR. SUMMERS:  I’m not sure I know how – I’m not sure I know how – it’s a little bit like Justice White on pornography.  Confronted with particular fact situations I tend to have instincts, but I’m not sure I can articulate rules that will – rules that would guide me – would guide me through.  Is it Justice White or Justice Stewart on pornography?  I’m not sure.

I think the answer is that where – I don’t know how to say it much more than to repeat back to you.  So let me just say, in asking – in answering your – in answering your question – where the industry involved has substantial national security sensitivity in the form of possessing technological knowledge of a kind that is not otherwise available, and it could be used in ways that are adverse to our national security, where the industry involved in sufficiently sensitive – is sufficiently central to networks that a decision by those who control it could have substantial adverse impacts on the U.S. economy or – well, those two – in those two cases, I think it’s appropriate for the very serious scrutiny and protection of national security interests.

I think we have to be very careful in making sure that we are realistic about when technology is otherwise available and when it isn’t, and there’s some tendency to restrict access to investment on technological grounds when the technology and technologies involved, in fact, are not hard to learn about from open sources.  That makes one cautious about protection, and I think we have to be cautious about tit-for-tat strategies where we don’t really have an objection to the investment in question or see danger from the investment in question, but there are other aspects of Chinese policy, including the policy towards U.S. investment, that we don’t like, and the proposal is to retaliate.  And I think we just need to be very careful in the way in which we execute those kinds of – those kinds of strategies.

MR. WESSEL:  OK.  So we’re limited for time, so I’m going to suggest that the remaining people who have remaining questions ask them as briefly as possible, and then, if Larry wants to filibuster, he’ll just say, I’m filibustering that one, and answer the ones you want to answer, OK?  Alan (sp), Rich, and Don.

Q:  Just for a quick follow-up – if you were writing the agenda for the – for the summit – you know, it’s the most consequential relationship in the world.  What would you say needs to be grappled with?

MR. WESSEL:  OK.  Rich?

Q:  Abenomics.

MR. SEIB:  OK.  And Don?

Q:  (Off mic) – corporation – (off mic) –

MR. WESSEL:  OK.  You’re not allowed to filibuster any of those; those are all safe.

MR.     :  Lightning round.

MR. SUMMERS:  I’m not an expert on immigration reform, but my reading is that there’s a large space of possible immigration reforms that would be significantly economically beneficial – significantly economically beneficial because of the entrepreneurial talent that would come into the country, significantly beneficial because of the technological talent that would come into the country, significantly beneficial because of the demographic uplift that would come from an age structure that was more felicitous to the federal budget at a time when the – at a time when the population was aging.  And so I think that from an economic point of view, either measured in terms of the country’s aggregate economic performance or measured in terms of the future well-being of the U.S. citizens who are here today, there’s almost every reason to think that some form of immigration reform would make things – would make things better off.

Abenomics – look, I’ve been saying for some time that I think that while it’s unfortunate that the experiment is being carried out, in a sense, in both countries, the contrast between Japanese economic performance and British economic performance when viewed three years from now would be an important object lesson for macroeconomists, because a very different policy philosophy is being pursued in the two countries, and we’ll see how the result – we’ll see how the results play out.  We certainly are in – particularly as regards the monetary policy side, in uncharted territory in Japan, so while my answer to Professor Hilsenrath was, in part, an evasion, it was also expressing a truth, which is that we’re in early stages, and it’s, I think, premature to make an evaluation.

I don’t think that any question that the – that there have to date been salutary benefits for Japanese economic performance from the substantial change in Japanese policy, but even if one had the concerns that one might have about such a large change and such a strong commitment towards expansion, one would probably expect that in the short run, it would work out well.  Experiments of this kind that ended badly in Latin America often had six months of very favorable performance, so I think it really is too early for a definitive – for any kind of definitive conclusion.

I think the movements in yields in Japan are a proper object of concern, but on balance, the move towards a focus on expansion seems to me to have been an appropriate change in Japanese – in Japanese policy.

I think the – I think there are probably three major issues on the economic side that seem to be important in looking at the U.S.-China relationship going forward.  One is the avoidance of a – of a rewidening of imbalances on a large scale as the two – as the two economies evolve, which I think would be quite unfortunate for both U.S. economic performance and the – and the global trading system.

Second, a range of Chinese business practices that are unacceptable at – in terms of what they mean for the competitive position of foreign firms and how that’s going to be addressed – how that’s going to be addressed going forward, and third, the question of American and Chinese cooperation with respect to the global – the global financial architecture, the future role of the IMF, are there going to be – is there going to be a global system?  What is the future of the development banks at a time when China now is lending money larger – in larger quantities?  They added new development banks at a time when the – so many countries have such substantial reserves that the whole question of the role of development banks looms as an important one.  So international financial architecture, business practices, future surpluses would be probably three areas that I would regard as especially central in the economic area.

I do – I do think that no one can – no one can forecast with confidence the future of the Chinese economy.  In retrospect, U.S. alarmism about Japanese growth peaked at just about the same point that the Japanese competitive threat to the American economy peaked.  And not very long after those concerns, Japanese economic weakness became more of a concern for the United States than Japanese economic strength.  And I think that U.S. policymakers would do well to recognize that there’s an enormous range of uncertainty about possible Chinese outcomes and that sustained, rapid growth and greater competitive threat is one of the possibilities, but it is by no means the only possibility.

MR. SEIB:  Larry, thank you very much.  The lightning round worked out well.  And you can email us later today and let us know whether the questions here – how they stacked up in relation to the ones you’ll hear up on the Hill later today.  I’m confident that our group will stand up well in that comparison.

MR. SUMMERS:  I enjoyed being with all of you.

MR. SEIB:  Thanks, appreciate it very much.

(END)