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Transcript of Lawrence Summers
- 1. Lawrence Summers Lawrence Summers Jun 9, 2014 06:00 UTC With Thomas Piketty's book, Capital in the 21st Century, rising to number 1 on best-seller lists, inequality has become central to the public debate over economic policy. Piketty, and much of this discussion, focuses on the sharp increases in the share of income and wealth going to the top 1 percent, .1 percent and .01 percent of the population. This is indeed a critical issue. Whatever the resolution of particular numerical arguments, it is almost certain that the share of income going to the top 1 percent of the population has risen by 10 percentage points over the last generation, and that the share of the bottom 90 percent has fallen by a comparable amount. The only groups that have seen faster income growth than the top 1 percent are the top .1 percent and top .01 percent.
2. This discussion helps push policy in constructive directions. Taxes can be reformed to eliminate loopholes and become more progressive, while also promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. There is a clear case for policy measures to reduce profits from such rent- seeking activities, as a number of economists, notably Dean Baker and the late Mancur Olsen, have emphasized. Unless one regards envy as a virtue, the key reason for concern about inequality is that lower- and middle-income workers have too little -- not that the rich have too much. So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor. On any reasonable reading of the evidence starting where the United States is today, more could be done to increase tax progressivity without doing any noticeable damage to the prospects for economic growth. It is important to remember, however, that important aspects of inequality are unlikely to be transformed just by limited income redistribution. Consider two fundamental components of life: health and the ability to provide opportunity for children. Lawrence Summers May 5, 2014 13:53 UTC 3. The British economy has experienced the most rapid growth in the G7 over the last few months. It increased at an annual rate of more than 3 percent in the last quarter -- even as the U.S. economy barely grew, continental Europe remained in the doldrums and Japan struggled to maintain momentum in the face of a major new valued added tax increase. Many have seized on Britain's strong performance as vindication of the austerity policy that Britain has followed since 2010, and evidence against the secular stagnation idea that lack of demand is a medium-term constraint on growth in the industrial world. Interpreting the British strategy correctly is http://THEADSHOPTC.COM crucial because of the political stakes in Britain, the question of future British economic policy and, most important, because the British experience influences economic policy debates around the globe. Unfortunately, when properly interpreted, the British experience refutes the austerity advocates and confirms John Maynard Keynes's warning about the dangers of indiscriminate budget cutting during an economic downturn. Lawrence Summers Apr 7, 2014 12:57 UTC 4. The world's finance ministers and central bank governors will gather in Washington this week for the twice yearly meetings of the International Monetary Fund. Though there will not be the sense of alarm that dominated these meetings after the financial crisis, the unfortunate reality is that the global economy's medium-term prospects have not been so cloudy for a long time. The IMF in its current World Economic Outlook essentially endorses the secular stagnation hypothesis -- noting that the real interest rate necessary to bring about enough demand for full employment has declined significantly and is likely to remain depressed for a substantial period. This is evident because inflation is well below target throughout the industrial world and is likely to decline further this year. Without robust growth in industrial world markets, growth in emerging markets is likely to subside - - even without considering the political challenges facing countries as diverse as Brazil, China, South Africa, Russia and Turkey. Lawrence Summers Mar 10, 2014 15:25 UTC 5. The events in Ukraine have now made effective external support for successful economic and political reform there even more crucial. The world community is rising to the occasion, with concrete indications of aid coming not just from the International Monetary Fund and other international financial institutions but also the United States, the European Union and the G20. At one level, the Ukraine situation is unique -- particularly the geopolitical aspects associated with Russia's presence in Crimea and the issues raised by Ukraine's strategically sensitive location between Russia and Europe. At a broader level, the world community has seen many examples over the last generation where an illegitimate, or at least highly problematic, government was brought down and the world community sought to support economic reform and a new, presumably more democratic and legitimate one. Think of the transitions after the Berlin Wall fell or the Arab Spring. Lawrence Summers Feb 17, 2014 04:29 UTC 6. Inequality has emerged as a major economic issue in the United States and beyond. Sharp increases in the share of income going to the top 1 percent of earners, a rising share of income going to profits, stagnant real wages, and a rising gap between productivity growth and growth in median family income are all valid causes for concern. A generation ago, it could have been plausibly asserted that the economy's overall growth rate was the dominant determinant of growth in middle-class incomes and progress in reducing poverty. This is no longer plausible. The United States may well be on the way to becoming a Downton Abbey economy. So concern about inequality and its concomitants is warranted. Issues associated with an increasingly unequal distribution of economic rewards will likely be with us long after the cyclical conditions have normalized and budget deficits finally addressed. Lawrence Summers Jan 6, 2014 12:42 UTC Last month in this space I argued that we may be in a period of secular stagnation in which sluggish growth, output and employment at levels well below 7. potential, and problematically low real interest rates might coincide for quite some time to come. Since the beginning of this century U.S. GDP growth has averaged less than 1.8 percent per year. Right now the economy is operating at nearly 10 percent -- or more than $1.6 trillion -- below what was judged to be its potential path as recently as 2007. And all this is in the face of negative real interest rates out for more than 5 years and extraordinarily easy monetary policies. It is true that even some forecasters who have had the wisdom to remain pessimistic about growth prospects for the last few years are coming around to more optimistic views about growth in 2014, at least in the U.S. This is encouraging, but optimism should be qualified by the recognition that even optimistic forecasts show output and employment remaining well below previous trends for many years. More troubling even with the current high degree of slack in the economy and wage and price inflation slowing, there are increasing signs of eroding credit standards and inflated asset values. If we were to enjoy several years of healthy growth with anything like current credit conditions, there is every reason to expect a return to the kind of problems we saw in 2005-2007 long before output and employment returned to trend or inflation accelerated. The secular stagnation challenge then is not just to achieve reasonable growth, but to do so in a financially sustainable way. What then is to be done? Essentially three approaches compete for policymakers' attention. The first emphasizes what is seen as the economy's deep supply side fundamentals -- the skills of the workforce, companies' capacity for innovation, structural tax reform, and assuring the long-run sustainability of entitlement programs. All of this is intuitively appealing, if politically difficult, and would indeed make a great contribution to the economy's health over the long run. But it is very unlikely to do much over the next 5 to 10 years. Apart from obvious lags like those with which education operates, there is the reality that our economy is constrained by lack of demand rather than lack of supply. Increasing our capacity to produce will not translate into increased output unless there is more demand for goods and services. Training programs or reform of social insurance, for instance, may affect which workers get jobs, but they will not affect how many get jobs. Indeed measures that raised supply could have the perverse effect of magnifying deflationary pressures. Lawrence Summers Dec 16, 2013 12:31 UTC Some time ago speaking at the IMF, I joined others who have invoked the old idea of secular stagnation and raised the possibility that the American and global economies could not rely on 8. normal market mechanisms to assure full employment and strong growth without sustained unconventional policy support. My concern rested on a number of considerations. First, even though financial repair had largely taken place four years ago, recovery since that time has only kept up with population growth and normal productivity growth in the United States, and has been worse elsewhere in the industrial world. Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the last decade, along with very easy money, were sufficient to drive only moderate economic growth. Third, short-term interest rates are severely constrained by zero lower bound and there is very little scope for further reductions in either term premia or credit spreads, and so real interest rates may not be able to fall far enough to spur enough investment to lead to full employment. Fourth, in such a situation falling wages and prices or inflation at slower- than-expected rates is likely to worsen economic performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from higher spending debtors to lower spending creditors. The implication of these considerations is that the presumption that runs through most policy discussion -- that normal economic and policy conditions will return at some point -- cannot be maintained. The point is demonstrated by the Japanese experience, where gross domestic product today is less than two-thirds of what most observers predicted a generation ago, even as interest rates have been at zero for many years. It bears emphasis that Japanese GDP disappointed less in the five years after the bubbles burst at the end of the 1980s than the United States has since 2008. GDP today in the United States is more than 10 percent below what was predicted before the financial crisis. If secular stagnation concerns are relevant to our current economic situation, there are obviously profound policy implications that I will address in a subsequent column. Before turning to policy, though, there are two central issues regarding the secular stagnation thesis that have to be addressed. Lawrence Summers Nov 11, 2013 10:11 UTC As the president has recognized, the failure of his administration to deliver a functioning website that Americans can use to enroll in Obamacare represents an inexcusable error. Having succeeded after more than a century of failed efforts in achieving the progressive dream goal of legislating universal health insurance in America, it is tragic to be falling short on the mundane task of allowing Americans to actually enroll in the healthcare exchanges. Even if the goal of getting the health insurance exchanges working by November 30 is achieved, and this cannot be regarded by objective observers as a certainty, a shadow has been cast on the core competence of the federal government. What should be learned from this episode? It is too soon to know with confidence, but worth 9. reaching some preliminary judgments while the issue is front of mind. At a basic level the implications go to public management. The dismal track record of the implementation of large-scale information technology initiatives, even in rigorous and focused corporate environments, points up their difficulty. Unexpected obstacles always arise, deadlines are usually missed, and budgets are usually overrun. Maximizing the prospect of success requires providing for slack in the schedule and the budget, structuring projects with very clear accountabilities and frequent checkpoints, and assigning oversight responsibility to people with extensive IT experience, rather than general managers with programmatic commitments. Lawrence Summers Oct 14, 2013 11:48 UTC This month Washington is consumed by the impasse over reopening the government and raising the debt limit. It seems likely that this episode, like the 1995-96 government shutdowns and the 2011 debt limit scare, will be remembered mainly by the people directly involved. But there is a chance future historians will see today's crisis as the turning point where American democracy was shown to be dysfunctional -- an example to be avoided rather than emulated. The tragedy is compounded by the fact that most of the substance being debated in the current crisis is only tangentially relevant to the major challenges and opportunities facing the United States. This is the case with respect to the endless discussions about the precise timing of continuing resolutions and debt limit extensions, or the proposals to change Congressional staff healthcare packages or cut a medical device tax that represents only about .015 percent of GDP. More fundamental is this: current and future budget deficits are now a second order problem relative to other more pressing issues facing the American economy. Projections that there will be a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder in economic terms and more plausible in political terms than the long-run budget deals with which much of the policy community is obsessed. Lawrence Summers Jul 8, 2013 11:20 UTC 10. No one is satisfied with the U.S. corporate tax system. From one perspective the main problem is that at a time when corporate profits are extraordinarily high relative to GDP, tax collections are very low relative to GDP. And many very successful companies pay little or nothing in taxes at a time when the budget deficit is a major concern and when hundreds of thousands of defense workers are being furloughed and lotteries are being held to determine which children Head Start can no longer afford to help. From another perspective, the main problem is that the United States has a higher corporate tax rate than any other major country and, unlike other countries, it imposes severe taxes on income earned outside its borders. Many argue that this unfairly burdens companies engaged in international competition, discourages the repatriation of profits earned abroad, and-because of the patterns of investment that result-benefits foreign workers at the expense of their counterparts. These two perspectives on corporate taxes seem to point in opposite directions with respect to reform. The former perspective points towards the desirability of raising revenues by closing loopholes, whereas the latter perspective seems to call for a reduction in corporate tax burdens. Little wonder, then, that corporate tax reform debates are so divisive. Many can get behind the idea of "broadening the base and lowering the rate," but consensus tends to collapse when the issue becomes the means to broaden the base. Indeed a principal objective of many business-oriented reformers seems to be narrowing the corporate tax base by reducing the taxation of foreign earnings through movement to a territorial system. Where then should the debate go? Despite the tension between the critical perspectives on corporate tax reform, the current debate has landed us in so perverse a place that win-win reform is easy to achieve. The center of the issue is the taxation of global companies. Under current law U.S. companies are taxed on their foreign profits (with a credit for taxes paid to other governments) only when they repatriate these profits to the United States. Right now U.S. companies are holding nearly $2 trillion in cash abroad. The companies argue, with some validity, that current rules burden them by making it expensive to bring money home without raising much revenue for the government because it has no claim against foreign profits that are not repatriated. They hope for and call for relief arguing that it will help them bring money home at a minimum for the benefit of their shareholders and possibly to increase investment.