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Tuesday, February 11, 2014

Larry Summers: U.S. ‘Obsession’ With Paper Debt Is Misguided

Former U.S. Treasury Secretary Larry Summers addresses the Wall Street Journal CEO Council on November 19, 2013 in Washington, D.C.  (Nicholas Kamm/AFP/Getty Images)

Former U.S. Treasury Secretary Larry Summers addresses the Wall Street Journal CEO Council on November 19, 2013 in Washington, D.C. (Nicholas Kamm/AFP/Getty Images)

Lawrence Summers, who served as economic adviser to Presidents Obama and Clinton, says that more than any paper debt, he’s worried about leaving future generations with costs of work that should be done now.

Summers tells Here & Now’s Jeremy Hobson that with interest rates so low, taking on debt is a better option than deferring infrastructure maintenance or cutting investment in education, science and innovation. He’s calling for significant infrastructure investment to help the economy.

Interview Highlights: Larry Summers

On volatility in the stock market

“If you look at history in the vast majority of years, markets go down by a few percent several times. And so except by the standard of the remarkable performance of the last year or two, a fluctuation of this kind in historical terms is more like a four-inch snowfall in Boston than it is like a one-foot snowfall in Boston.”

“I think that there is going to be pressure on a number of major emerging markets. I don’t think that’s going to be an immense story in terms of its direct impacts on the United States, but I do think a number of countries — Turkey, South Africa for example — have gotten themselves in very difficult situations because they’ve come to rely on easy money as an alternative to strong policy. And as the world economy grows and as financial conditions change, they’re going to be challenged.”

On where the U.S. is now in the recovery

“The good news is that the fall of 2008 was worse than the fall of 1929. The winter of 2009 was worse than the winter of 1930. And what’s followed bears no resemblance to the depression, to what happened between 1930 and 1933. And that’s a tribute to the strong polices that President Obama put into place. I think there are deep concerns about the capacity of our economy to grow rapidly with financial stability. As you point out, growth has been positive. We’ve been growing — that’s a real achievement. But it hasn’t been at a rate that’s sufficient to re-employee people substantially. It hasn’t been at a rate that enables us to close the gap between the economy’s capacity and its potential.”

On the need to improve infrastructure in the U.S.

“We have been obsessed in recent years by the paper debt we might leave our children — but debt that carries a 3 percent interest rate. When I think of the burdens that my generation’s going to leave to my children’s generation, it’s not the paper debt that I’m worried about. It’s deferred maintenance on a nation’s infrastructure that in too many respects is collapsing. It’s an education deficit of people who used to receive the best educations in the world and now aren’t in the top 20. It’s the debt represented by the fact that we have dipped into all the funds for science and innovation and aren’t maintaining them at the rate we used to at a time when the rest of the world is investing ever more in science and technology. Those are the debts — and those are debts that incur interest rates and costs much more than the 0 or 3 percent on treasuries. Those are the debts I worry about most.”

On income inequality in the U.S.

“There is no question that inequality is an absolutely central issue. Inequality limits demand in our economy, which holds back economic growth. Inequality distorts the composition of political power and influence. What’s particularly tragic about American inequality is that it is increasingly translating into inequality of opportunity. Since George Washington, the vast majority of Americans have lived better than their parents. America has been a country where there’s been more and more equal opportunity in every generation. And that process has stopped in recent years, and that, I would suggest to you, is unacceptable. We’re never going to completely eliminate inequality — we shouldn’t want to. Some people work harder, some people are more productive than others. But it is not acceptable that every child in the United States does not have a chance.”

Guest

Transcript

JEREMY HOBSON, HOST:

Well, now to Washington, where it appears there will not be a big fight over raising the debt ceiling this time. The U.S. is on course to default on its obligations this month, unless Congress raises the borrowing authority. And today, House Speaker John Boehner told fellow Republicans that he plans to bring a vote to the floor as soon as tomorrow to raise the debt limit without strings attached.

Boehner will be relying on Democrats to help pass the increase, which would extend the Treasury Department's borrowing authority for another year. Before Speaker Boehner made that announcement, I sat down with former Treasury Secretary Larry Summers at his home outside Boston and started our interview by asking him if there's any way to avoid these reoccurring showdowns over the debt ceiling.

LARRY SUMMERS: We come to our senses. We don't have a realistic option, ever, of defaulting on the debt. It hasn't been a realistic option. It will not be a realistic option. People shouldn't use it as a tool of extortion. Every time it's been tried, it's embarrassed and worked to the detriment of the people who threatened it. And sooner or later, I suspect they'll come to their senses. And sooner or later I suspect we will come to the view that Congress does have the power to appropriate money. It doesn't have to appropriate money, if it wishes. But once we've made a spending commitment, we don't really have a choice.

HOBSON: But are global markets going to put up with this again and again? Because it does seem like it's becoming an annual tradition in Washington now.

SUMMERS: I think global markets will put up with it, because I think global markets don't take it seriously. I think global markets think it's a bit of slightly preposterous theater. But they recognize that, in the end, the country's not going to be allowed to default. And I think there's a very delicate balance, which is if nobody thinks it's going to be a problem, then it's costless to indulge in this theater. And until it starts to have real consequences, people may continue to indulge in the theater, but it really is just theater.

HOBSON: There has been a lot of volatility in the markets since the beginning of the year, a lot of people pointing to trouble in emerging markets like Venezuela and Argentina, weak corporate earnings. What do you think is causing all of this trouble right now?

SUMMERS: Markets fluctuate, and particularly after a period when they've gone after straight up, people get very surprised and alarmed when they decline by even a few percent. But, in fact, if you look at history, in the vast majority of years, markets go down by a few percent several times.

And so, except by the standard of the remarkable performance of the last year or two, a fluctuation of this kind in historical terms is more like a four-inch snowfall in Boston than it is like a one-foot snowfall in Boston.

HOBSON: So you don't think that fears about the emerging world slowing down and not seeing the kind of growth that they've seen over the last several years are justified?

SUMMERS: No. I think that there is going to be pressure on a number of major emerging markets. I don't think that's going to be an immense story in terms of its direct impacts on the United States. But I do think a number of countries - Turkey, South Africa, for example - have gotten themselves in very difficult situations because they've come to rely on easy money as an alternative to strong policy.

And as the world economy grows and as financial conditions change, they're going to be challenged. So I think it is in a number of emerging markets - Brazil, Turkey, South Africa - it's likely to be a difficult several years. But I think the most important determinative of what happens to the American economy is the policies that are pursued in America.

HOBSON: Well, let's talk about the American economy. How would you describe the place that we are in the recovery right now? Because this is almost six years after the financial crisis, and I don't think anybody would say that we're totally out of the mess yet.

SUMMERS: You know, I think that's right, Jeremy. Look, the good news is that the fall of 2008 was worse than the fall of 1929. The winter of 2009 was worse than the winter of 1930. And what's followed bears no resemblance to the Depression, to what happened between 1930 and 1933. And that's a tribute to the strong policies that President Obama put into place.

I think there are deep concerns about the capacity of our economy to grow rapidly with financial stability. As you point out, growth has been positive. We've been growing .That's a real achievement, but it hasn't been at a rate that's sufficient to re-employ people substantially. It hasn't been at a rate that enables us to close the gap between the economy's capacity and its potential. And that is a real cause for concern.

And if you look back, growth was adequate between 2004 and 2007. But in order to get to adequate, it was sustained by the mother of all credit bubbles, a huge upsurge in housing prices and a great deal of imprudent lending.

HOBSON: Well, and any growth that we're seeing now, you have to say, is based in part on the fact that interest rates are at zero percent, and that there's extraordinarily stimulus continuing from the Federal Reserve.

SUMMERS: Well, there has been very low interest rates, as you correctly point out. But there has also been, for the last several years, inappropriate and unfortunate fiscal contraction. The government has reduced its spending, has reduced levels of public investment, taken money and demand out of the economy, and I think that's been quite unfortunate.

The good news is that after three years of withdrawing fiscal stimulus, that's not going to happen this year. That's one of the reasons why many of us expect somewhat more favorable economic performance in 2014 than in 2013.

HOBSON: We're speaking with former Treasury Secretary Larry Summers, who was the top economist for President Obama. He's now an economist at Harvard University. And you're listening to HERE AND NOW.

(SOUNDBITE OF MUSIC)

HOBSON: It's HERE AND NOW, and let's get back to our conversation with former Treasury secretary Larry Summers. We were talking before the break about the Federal Reserve. Summers, as we know, withdrew his name from consideration to replace Ben Bernanke as chairman of the Fed after strong opposition from the left. That opened the door for Janet Yellen's nomination and confirmation as the new Fed chair.

Well, today she testified before Congress in that role for the first time, saying the country should expect continuity in Fed policy under her leadership.

JANET YELLEN: If incoming information broadly supports the committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps at future meetings.

HOBSON: Which in English means the Fed will continue to cut back on its stimulus unless there is a change in what she just called incoming information. Well, I asked Larry Summers if that's what he would be doing if he were Fed chair.

SUMMERS: Look, old Treasury secretary habits die hard, and I neither predict nor prescribe what the Fed is going to do. I think the broad orientation of Federal Reserve policy towards expansion, towards recognition that the greatest risk we face is inadequate recovery, an economy that's too short of demand rather than some kind of sudden emergence of inflation, I think that's the right broad judgment.

The precise tactics are something that I'd leave to those who sit with all the data that the Federal Reserve sits with. But it seems to me the Federal Reserve deserves a great deal of credit in the efforts over the last few years to prevent the emergence of depression and to preserve financial stability.

HOBSON: But as you just said, the focus should also be on fiscal policy in this country. You've talked about the need for more infrastructure, which is a call that has been made over the last many years many times, and it never seems to really happen.

SUMMERS: Look, Jeremy, I think this is about as easy as questions in public policy gets. Look at Kennedy Airport. No American can be proud of Kennedy Airport as the gateway to our country. Look at Kennedy Airport in comparison to any of the places abroad that you might travel to from Kennedy Airport. And then ask yourself this question: If we're not repairing Kennedy Airport at a moment when the interest rate is well under 3 percent, in a currency we print ourselves, and the construction unemployment rate is close to double digits, when will the right moment to fix Kennedy Airport ever come?

Look, we have been obsessed in recent years by the paper debt we might leave our children. But debt that carries a 3 percent interest rate, when I think of the burdens that my generation's going to leave to my children's generation, it's not the paper debt that I'm worried about. It's deferred maintenance on a nation's infrastructure that in too many respects is collapsing.

It's an education deficit of people who used to receive the best educations in the world and now aren't in the top 20. It's the debt represented by the fact that we have dipped into all the funds for science and innovation and aren't maintaining them at the rate we used to at a time when the rest of the world is investing ever more in science and technology.

Those are the debts, and those are debts that incur interest rates and costs much more than the zero or 3 percent on treasuries. Those are the debts I worry about most. And in the name of deficit reduction, we have increased the magnitude of those debts. Look, we are going to have to fix Kennedy Airport sometime.

HOBSON: We're speaking with Larry Summers, former Treasury secretary and current Harvard economist, and you're listening to HERE AND NOW. And I want to get your thoughts, Larry Summers, on two more things. One is what President Obama has called the defining issue of our time, and that is income inequality. You have said that attacking the rich is not the way to get there.

SUMMERS: Look, there is no question that inequality is an absolutely central issue. Inequality limits demand in our economy, which holds back economic growth. Inequality distorts the composition of political power and influence. What's particularly tragic about American inequality is that it is increasingly translating into inequality of opportunity.

Since George Washington, the vast majority of Americans have lived better than their parents. America has been a country where there's been more and more equal opportunity in every generation. And that process has stopped in recent years, and that, I would suggest to you, is unacceptable.

We're never going to completely eliminate inequality; we shouldn't want to. Some people work harder; some people are more productive than others. But it is not acceptable that every child in the United States does not have a chance. And if you look, the gap in college attendance rates between children of the rich and children of the poor has gone up over the last 40 years. If you look, the gap between the quality of the schooling of the children of the rich and the children of the poor has gone up in the last 40 years, and that I would suggest to you shouldn't be acceptable to any of us as Americans.

So no, I don't think the most productive agenda is to simply focus on tearing down the rich. But no one should be satisfied with the state of fairness and equality in America today. And the right approaches will center on assuring equality opportunity. They'll also assure that we increasingly base our tax system on something that used to be more relevant than it is today, and that is the ability to pay.

There are too many tax shelters and too many loopholes that cause those who are most fortunate to pay a smaller fraction of their income or their wealth than those who are much less fortunate.

HOBSON: Do you think it's time to raise the minimum wage again so that somebody who works fulltime doesn't make just $15,000 a year?

SUMMERS: You know, today's minimum wage is substantially lower than when that fiery liberal Ronald Reagan was president. Today's minimum wage is substantially lower when that great friend of the working man, Richard Nixon, was president. So I think it's impossible to believe that a minimum wage that with the economy and productivity of 25 years ago worked fine for Ronald Reagan, that a minimum wage that with the economy and productivity of 40 years ago worked fine for Richard Nixon, wouldn't work in today's America.

So yes, I absolutely am for an increase in the minimum wage.

HOBSON: Larry Summers, former Treasury secretary, former top economist for President Obama and now an economist at Harvard, thanks so much as always.

SUMMERS: Glad to be with you, Jeremy.

HOBSON: And we'd love to hear your thoughts at hereandnow.org. This is HERE AND NOW.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.


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  • Whitesauce

    It amazes me that anyone still talks with Mr. Summers. He, along with Robert Rubin and Alan Greenspan, are responsible for policies that put us in the mess we’re in. He is unaccountable. “All the Devils Are Here” by Bethany McLean and Joe Nocera is a good read and highlights the problem with Mr. Summers.

    • EndangeredSpecies

      I agree. I just read an hour ago some pages in Arianna Huffington’s book “Pigs At the Trough” which highlights Summers’ large role he played in getting Congress to weaken laws regarding banking oversight/regulations. He has no credibility now as a supposed spokesperson for the nation; his new focus? Rallying taxpayers to invest in infrastructure. NPR needs to interview true OCCUPY heroes that are part of the 99%!!! Additionally, the interviews need to be live, not pre-recorded as is done with people such as Noam Chomsky.

      • loyal listener

        What happened to all those Occupy “heroes” anyway??? Are they all hiding out for the winter in some type of government housing, milking the unemployment while planning their next terrorist attack? Or did they all get hired to be Obamacare “navigators”?

    • jonathanpulliam

      There is simply no getting around the fact that the 3 trillion dollars the U.S. blew on our ill-considered Iraq/Afghan adventures dwarfs the 700 billion systemic stimulus “lump” summed with the ongoing monthly 80 billion spent to permit Fed Quantitative Easing bond purchases. The equities markets have run up on stimulus, not on any underlying macro-economic justification for optimism regarding real economic recovery. “Don’t Fight the Fed” is the primary aphorism which accounts for the latest bubble, bolstered by the nominally “dovish” Fed chair Janet Yellen, who recently asserted a need to continue on this “3% APR” trajectory Summers cites. The problem with Summers’ “logic” is that an inordinately massive debt at 3% is equally corrosive to domestic U.S. growth prospects as a smaller, appropriately sized debt, at a significantly higher rate. Moreover, the desperately needed U.S. policy reforms to the banking, mortgage, bond/equities trading and hedge fund “industries” have been consistently deferred under Obama’s feckless stewardship, rendering a basis for real growth domestic productivity optimism all but illusory.

  • loyal listener

    Another very biased interview promoting increasing the size and scope of the federal government, along with higher taxes and wreckless spending.

    When are you going to interview someone with an opposing viewpoint? Never?

  • Frog

    Mr. Summers policies can’t be looked at in a vacuum. Part of the crux of his argument is to reform the tax structure. Fixing incentives. Here is his opinion on reforming corporate taxes: “The US should eliminate the distinction between repatriated and unrepatriated foreign corporate profits for US companies and tax all foreign income (after allowance for taxes paid to other governments) at a fixed rate well below the current US corporate rate of 35 per cent, perhaps about 15 per cent. A similar tax should be imposed retrospectively on accumulated profits held abroad.”

    Lower corporate rate to 15%….repatriate 2 trillion in overseas profits.

    • Whitesauce

      So the gov’t should get what it can from companies that choose to not support things like infrastructure? Also, what guarantees would we have that these corporations wouldn’t continue to divert money overseas? Proposals like this put a lot of trust in organizations that have proven to be bad actors. We’d be better off placing a tariff or other fee on products sold by these companies, but, of course, no one would bring this up. I’m sure language in our free trade agreements would limit that sort of action.

      • Frog

        It would make no sense to divert money overseas because his plan would “eliminate the distinction between repatriated and unrepatriated foreign corporate profits”. Corporations would have ALL their profits taxed instead of just profits “earned” in the US…which can and is being “gamed” into low taxed countries like Ireland by high priced accountants and lawyers. Corporations, on the other hand, would get a very competitive tax rate and freedom to use their trapped retained earnings.

  • Paul Schornack

    Larry Summers comments about how we are sacrificing infrastructure, science, and technology, in order to keep our paper debt down, are golden. It is indeed a shame that we let all kinds of human resources languish in order to keep our financial state in “good” shape. He referred to unemployed construction workers in double digits and we should also consider the highly educated scientists and others that are not being utilized due infiltration of a wall street business like mentality into academic and other settings.

    • loyal listener

      If those things were so important, why couldn’t we “pay as we go” for them?

      Everybody wants to spend more money, as long as someone else pays for it (future generations, or “the rich”).

      • SirLee_V

        We would be very happy to “pay as we go”. However, in order to do that we will need to go back to the Eisenhower era tax levels, or cut out military spending to a level comparable to other nations of our size, or adopt Modern Monetary Theory methods of managing our spending. Any one of which the GOP/Tea Party will throw a massive fit over.

        • loyal listener

          Listen sweetheart, high income earners in liberal meccas like California are already paying upwards of 70% of their income in taxes, by the time you take into account federal, state, local, sales, property tax, etc, etc, etc. There is a limit to how much money you can steal from other people to redistribute to those who haven’t earned it and don’t deserve it. Like Margaret Thatcher said: “The problem with socialism is that eventually you run out of other people’s money to spend. “

          • SirLee_V

            First I am not your sweetheart. Do not use that condensing crap with me.

            Second, your 70% tax rate quote is total crap. California has a top tax rate of 13.3% the top Fed rate is 35%. Before deductions. And, as the high earners do not have taxable income, instead have capital gains that rate is 15%. California has grandfathered in property tax rates, so the effective rate for most is much lower than the stated rate. If your house was 35,000$ when you purchased it, you will pay property tax on that level till you sell it. California also has a below average property tax rate compared to other states. If you actually do the math, the total tax rate for those making 250,000$ a year (all of it from labor) then the effective tax rate is around 50%. If you have a good tax lawyer or a large part of your income is capital gains it is much lower.

            Third , you failed to address the other two methods I listed of paying as we go. Why? Are you not able to because that does not fit your narrative? Or, do you just fail to grasp the concept of what I stated?

            Fourth, anyone equating taxes to theft in a democratic society either fails to understand how society works and why those who benefit the most from society should pay the most. Or, is trolling and needs to head back to that dank dark corner of the Internet mises.org.

            If you hate paying your fair share that much. Feel free to move to any of the arcano-capitalist paradises. I hear Somalia is nice this time of year.

          • jonathanpulliam

            It’s “condescending”, not “condensing”. If California’s fiscal affairs were in order, then it stands to reason they wouldn’t have massive annual budget shortfalls, yet they do. As a result of their irresponsibility, they have a markedly declining overall quality of life, and a corresponding rapidly rising property crimes, etc.

          • SirLee_V

            You will be happy to know that California has recovered from their fiscal crisis and now has a budget in the black. They did this by getting rid of their gerrymandered GOP obstructionism. It seems that the only party capable of balancing a budget is the Democratic party.

            It is also worth noting that California has one of the lowest unemployment rates and highest standards of living in the US.

        • jonathanpulliam

          GOP/Tea Party is not monolithic in regards to interventionist U.S. policies. Tea Party supporters tend to oppose reflexive U.S. meddling in the internal affairs of other nations on our limited dime. Rand Paul/Ron Paul have long been articulate skeptics about the so-called “war on terror”, as well they should be.

      • Pablo Schornack

        @loyal, so we should also “pay as we go” with the highly specialized scientists out there? In a sense, that is what we are doing with all the PhD’s out there: the successful subset get’s the viable tenure track position where the may do research, teach or both, depending on the university setting. Some flavors of science lend themselves to industry jobs. Some don’t. The ‘pay as you go’ option for a scientist is where they teach on a course by course basis as an instructor. This is what is happening for alot of PhD scientists now and it is simply not viable & is not a road to a better descent existence that was alluded to as we spent our 20′s in grad school, & our late 20′s early 30′s as post-docs, with sub-standard wages.
        The “pay as you go” concept sounds nice on paper, but it would never have put a man on the moon nor lead to a majority of the medical breakthroughs we enjoy. These types of accomplishments need the concerted application of resources that only government can provide. Letting the “free market”, “pay as you go” dictate many of these things is not conducive to society. Things would fall apart quickly. A specific example of this is how we are letting the relatively small pool of exceptional scientific talent slip through the cracks. People that made themselves quite vulnerable for years becoming specialized and exceptional in the sciences, only to be left without viable career paths (ie, making a basic living). Most people have a hard time with science and just don’t get it; it is good to have those around that do.

  • Adventure49

    John F. Kennedy said, “And so, my fellow Americans: ask not what your country can do for you — ask what you can do for your country.” Fifty-three years later Americans are looking at investments that are for the common good of the country, and they are seeing more utility in serving their own individual interests.

  • jonathanpulliam

    The last two years of an 8-year Clinton term is certainly the shortest “era” ever, huh? Earlier Clinton over-reaching, that cost Democrats control of the House, proved an obstacle to “spending” proposals, and this should come as no surprise. That’s just one more reason passage of the the ACA was so misguided A, for it was later punished by the electorate, who blamed the over-reach on House Democrats, predictably resulting in yet another forfeiture of Democratic control in the U.S. House of Representatives. Good going, zealots,

    • Euphoriologist

      Yes, the era of fiscal surplus ended after Clinton served his maximum two terms and Bush was elected. You say this era of responsibility was too short. We both agree!

      If Obamacare was “over-reach”, why would the embodiment of it, President Obama, be overwhelmingly chosen by US citizens in a landslide election afterwards to serve his country again? You conveniently leave this little fact out.

      If Obamacare was so hated, why is Hilary Clinton, the embodiment of “Hilarycare” and future caretaker of Obamacare, be accruing ever-greater popularity over all other candidates?

      Finally, if the ACA = The Devil, why did Republicans, given a blank slate to create the exact opposite of Obamacare, instead choose…to create an Obamacare Lite bill that essentially recreates all the components of Obamacare, but this time with an (R) stamp of approval? With this vote, Republicans have cemented the fact that some version of Obamacare is guaranteed to be the law of the land in the US, no matter which party rules.

      If Obamacare is “over-reach”, it sure seems like “over-reach” is what both Democrat and Republican voters are hungry for and what both parties are offering to voters. It doesn’t get more popular than that. And no wonder; people want change.

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Robin Young and Jeremy Hobson host Here & Now, a live two-hour production of NPR and WBUR Boston.

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