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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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