Among his accomplishments, Summers has held leadership positions at the World Bank, the U.S. Treasury, and the National Economic Council for the Obama administration. Here, during the Afternoon of Conversation, Summers discusses America's fiscal priorities and the question of patriotism, among other topics.
In Conversation with Lawrence H. Summers
MS. BOONE: To get the afternoon started I am very proud and pleased to introduce to you Gillian Tett and Lawrence Summers.
MS. TETT: Good afternoon everybody, and welcome to an entirely un-random act of economics. My name is
Gillian Tett, I'm the U.S. managing editor of the Financial Times. And with me today, as all of you know, is Larry Summers, a man of many impressive titles including U.S. Treasury secretary, president of Harvard University, advisor to the White House under the latest Obama administration, and now a Harvard professor of economics. And also, I should say, a Financial Times columnist. So thank you very much indeed for joining us on stage.
Now, you recently said in one of your columns that the breakup of the euro could potentially be the defining catastrophe of our generation. And we have once again had today's newspapers dominated by stories on the future of the euro it's all over the television as well. So as a man who has spent much of his career handling crises and catastrophes, and also handling numbers, I'd like to start by asking you the most basic question, which is that, what probability do you now give to the chance of that breakup occurring?
MR. SUMMERS: Harold Wilson famously told economists that they should name a date or name a number, but never name both. I'd say the chances of the euro staying together are in the same range as the chances of the Financial Times remaining independent Gillian. That's to allow both possibilities.
Look, I don't think there's anybody that represents nearly a critical mass that wants to see the euro collapse. So in some deep sense there's a lot of political will to keep it together. But I think there are two problems. One is that there are laws of economics, like laws of physics, and sometimes they say that certain things just won't work. And there's also the risk of accidents, and some kind of accident where there's a miscalculation.
And so I think one would have to say that at this point there were very real risks of what happens with respect to the euro that those risks probably cannot be completely eliminated no matter what policymakers do. But
if policymakers can get themselves ahead rather than continuing to lag behind the chances of a good outcome are increased.
of the problem, problem, the
MS. TETT: Well, we'll come on minute about the question of what policymakers are doing, but just in very broad ballpark terms, do you think there's more than a 50 percent chance that all the existing members of the euro zone will be there in a year's time?
MR. SUMMERS: Gillian, I'm a kind of numbers person, so I sort of get it if you go plus or minus 50 percent and then you go plus or minus 25 percent. You've pretty soon got the guy to give the probability that he refused -- that he --
MS. TETT: Well, I'm a journalist -- so there you go.
MR. SUMMERS: -- that he refused to give. I think I'd leave at -- that the risks are very real. I think they are obviously much greater that Greece will leave at some point, which is at least plausibly an event that can be managed and wouldn't represent a fundamental change in economic arrangements in Europe.
Then the much more serious question of, if Spain or Italy left? You'd then be looking at a very different monetary arrangement in Europe than the one we have today. And I think risks of Greece leaving would have to be quite substantial and that there would be significant risks beyond Greece.
MS. TETT: And one of the problems in covering the euro as a newspaper is it feels a bit like Groundhog Day, I mean we've had summit after summit after summit that's supposed to fix the problems, and nothing has actually really worked. Do you think the latest summit that we saw yesterday has actually fixed it?
MR. SUMMERS: I think it has bought time for the next summit. I don't think it has fixed the problem. Look, one of the things I read many, many years ago about public policy that has stayed with me was an essay that Dan Ellsberg wrote about the Vietnam War. And it was -- Dan Ellsberg was the guy who wrote much of the Pentagon Papers, and then was radicalized and leaked them.
And he wrote a very thoughtful essay about their lessons. It was called "The Stalemate Myth and The Quagmire Machine." And its argument was that at every important juncture in Vietnam, the structure was the same. Policymakers were told that if they did nothing the system would collapse into surrender. If they wanted to have a realistic prospect of winning the war, or establishing a reasonable peace they needed to do A, B, C, and D; though that would not guarantee success, it would give a good chance of success.
And then they were told that if they did E, they would avoid catastrophe for the next 6 months, but there was no realistic chance that E alone would put them on the path to victory. And at every juncture they chose option three, which was to kick the can. And that's a very natural decision-making process for public officials assigned responsibility for making very difficult choices. And the only thing that makes it more likely that you'll choose option three, is if there's no official with responsibility for the outcomes, but if decision making is by committee. And that's of course what happens in the 17-country euro. And so the structure is that they keep pushing and doing things that buy time, you know, they did some things that bought a few months, they reached kind of a new low 2 weeks ago when they did a Spanish bank bailout that held for 4 hours.
The summit on -- the announcements that came Thursday night, our time, clearly held all the way through the day on Friday. And my guess is that they will hold a while more, but I don't think that the most fundamental issues have really been addressed.
Look, suppose we -- here's a way to think about this -- and this oversimplifies it, but it captures some of it. Suppose we formed the Aspen dinner club, and the rules of the Aspen dinner club were that everybody in this room would go out to dinner together. Let's say there are 1,000 people in this room, we could each bring as many guests as we wanted, and we would each pay one/one- thousandth of the bill. What would happen?
Everybody would order steak and very good wine, everybody would actually invite all their friends, a few among us who are really kind of clever would charge people to come with us because we'd understand that it would only pay one/one-thousandth of the bill and we could collect more than that by charging people to come with us. And the logic of it would drive to a place where all of planet earth would be eating dinner through the Aspen dinner club, which would be moving towards bankruptcy.
Now, how do you solve that? There are only two ways to fix the Aspen dinner club. One way is to say there are 1,000 separate checks that the restaurant has to produce. And the other is to say that General McChrystal and General Musharraf will order for all of us and decide what we're going to have and how many guests there are.
Those two ways work, and no other way works. And that is the challenge in Europe; you either have to move towards much greater accountability at the local level or you need to have a much greater degree of central control.
Now, central control in Europe has profound challenges too. It's -- these are countries that are still proudly autonomous. And there's a deeper problem, which is, is central control or federated Europe code for German control -- that has some historical resonances that are unfortunate. Or is central control mean that it's sort of one-person-one-vote in Europe. And if you think about all the countries that aren't included in the euro zone it's not clear that majority rule is going to take you towards terribly responsible economic and financial policies.
So the kinds of political consolidation that are necessary are very, very difficult. The kinds of economic consolidation that are necessary are very, very difficult. How do we make this work? How does the American monetary union work? After all, just like there are shocks between Germany and Spain, there are shocks between Illinois and Texas. But the American monetary union has two things going for it that make it work. One is large numbers of people move back and forth between Illinois and Texas, and the other is that the federal government -- when Texas earns an extra dollar, the federal government takes 30 cents of that dollar in higher taxes and gives it to Illinois, which is struggling. Those are very large transfers relative to what's been discussed traditionally in Europe.
So the chances of success can be substantially increased but it will take measures that are very difficult in both the political and the economic sphere. And even then there is no guarantee of success.
MS. TETT: Well, there is of course a third option, which is that you could simply shutdown the Aspen dinner club altogether or actually put it into bankruptcy. But since you've refused to speculate on the probability of that happening in the euro zone, can I turn to the U.S. and ask, just how damaging is this lowish chance of success in the Europe for the U.S. economy?
Because we're now sitting here in Aspen for the third year, in which things have started out relatively well in the spring, newspapers have been full of clichés about green shoots, and then either because of the euro zone crisis or last year's tragic events in Japan, we get to summer and green shoots are shriveling up pretty fast. Do you think the U.S. is heading for recession in the autumn?
MR. SUMMERS: No, I think the good news is that recession in the United States is very much odds off, quite low probability. I think the bad news is that the most likely outcome is probably growth at a rate that is insufficient to keep pace with population growth and productivity growth. And so you're likely not looking at substantial reductions in unemployment, you're not looking at substantial increases in the fraction of the population that are working. And so it's not likely to feel, over the next 6 months, terribly dynamic.
I think there is risk. I thought, in the spring, that the Middle East had become a much greater threat to U.S. recovery than Europe. And a combination of the fact that there's been more oil produced and therefore a substantial falloff in the price of oil. And the fact that Europe has held itself together less effectively than I expected in the spring means that I was wrong. And Europe is now back as the principal external risk to the United States.
But look, this isn't that complicated in the -- at one level it's hugely complicated, but at another level it's not that complicated at all. We had a huge financial crisis. People were way overconfident. They built too much. They borrowed too much. Then they got shocked. And so now they don't want to spend, and they want to pay down their debts. And when everybody wants to pay down their debts the result is less spending, which means less income, which means a contraction. And what we need to do is find ways to engineer increased demand. Part of that is about what the government needs to do in the short-run. How can it make any sense at all that the United States has construction unemployment approaching 18 percent? The United States can borrow money for 30 years, in dollars, at 2.7 percent. If you adjust for inflation, it's more like three-tenths of 1 percent. We can borrow the money for 30-years.
Now, look at Kennedy Airport. How can it make sense that able to borrow at essentially nothing, with those kinds of unemployed resources, we are not fixing the Kennedy airports that exist across the country?
How can it make sense that we tell our kids that nothing is more important than their education, and in a number of states they only go to school for 4 days a week, and in tens of thousands of schools across the country the paint is chipping off the walls.
MS. TETT: And yet, people like Glenn Hubbard would say, and you've had a very lively exchange in the pages of the Financial Times, they would say that anymore spending at the moment is tantamount to fiscal irresponsibility. And that the kind of -- and I think he - - Glenn Hubbard accused you of acting as if you were on a Jeopardy game show recently, chucking around numbers that didn't add up properly. What would you say to that? Is there really room for the U.S. to borrow more, with the current fiscal burden?
MR. SUMMERS: Well, at least my economics isn't slapstick comedy. Sorry about that.
MS. TETT: But on a serious note, I mean you know, there are many people who would say, debt to GDP is already exploding, how can you possibly argue for more borrowing when we've not yet got a credible budget plan?
MR. SUMMERS: Look there's nothing more important -- there's no issue of patriotism, or of morality, or of economic prudence that's more important than what we leave to our children. What I cannot understand is why people think that what we have left to our children is measured only by the number of dollars there are in the national debt.
That it's not measured by whether their schools are decent and of quality. That it's not measured by whether we bequeath them an infrastructure that is repaired. It's not measured by whether we bequeath them a world in which American leadership has been perpetuated. But it is only measured in terms of the number of dollars of the deficit.
But even if you accept that premise, the truth is that if we increase the growth rate of our economy by 1 percent over the next 5 years, that's $3 trillion less in the national debt.
MS. TETT: Right.
MR. SUMMERS: If we are successful in stimulating our economy it's not even going to leave
behind a greater debt burden, because of the extra tax collections that are going to come, because of the reduced need for benefit payments. And every one of us knows that you don't just look -- if you think about a family, you don't just look at the size of the debt. You look at the size of the debt relative to the size of the income.
And so, yes, we're going to need to take actions, a set of very important actions, both in terms of entitlements and in terms of tax reform, down the road to bring spending and revenues into greater balance. But right now, the greatest economic threat to the United States, the greatest security threat to the United States, and the greatest moral threat to America's children is
continued stagnation policies directed at imperative.
MS. TETT: you've got me on the
of our economy. And that's why more economic expansion is so
Well -- on one level it's a pity platform rather than Glenn Hubbard, because you would have a really lively economic debate. But the fact that you and someone like Professor Hubbard are so divided in your opinions on the budget does reflect a much more profound split.
So having dodged your question about the euro zone, what probability would you give to the United States going off that fiscal cliff at the end of the year, or early next year?
MR. SUMMERS: Low. Not zero, but very low. Winston Churchill said wisely of our country, that the United States always does the right thing, but only after fully exhausting the alternatives.
And I think that captures an important bit of wisdom. Let me -- since you keep coming back to Glenn Hubbard. Let me give you kind of a -- I'm not going to make another wisecrack -- let me give you kind of a serious statement about where it seems to me people ought to be able to agree and where --
MS. TETT: And this more about the economy's debate, it's not about personality it's just simply because --
MR. SUMMERS: Yeah, understood.
MS. TETT: Anyone who wants to understand the difference they'll have two, you know, important mainstream economists disagreeing in this way is a very good way of capturing the issues.
MR. SUMMERS: Look, I think there are -- what should everybody be able to agree on? Everybody should be able to agree that when we look at projected budgets, when we look at the economic projections for the country they should be based on what the best technical experts think are the consequences of different actions. And you don't get credit for saying, I'm going to balance the budget but I'm not going to tell you, how I'm just going to cut expenditures.
Everybody ought to be able to agree on that. There are sins on both sides with respect to that. Frankly, on this one I think the president has very much the edge, maybe he has the edge because he's morally superior, but he has the edge because he's got the obligation -- whether he is or is not -- he's got the edge because he's got the obligation to put forth a budget, which his technocrats score and which the Congressional Budget Office scores. Whereas, when you're running for president you kind of have much more freedom of arithmetic because there's no water. I think we ought to be able to agree that we score things as accurately possible.
I think we ought to be able to agree that we need a dynamic private sector with businesses that are flourishing and succeeding if the country is going to work and the country is going to be prosperous and anyone who denies that in either party is making a great mistake.
I think we agree that there needs to be a strong government that assures that we defend ourselves as a nation, that assures that we are able to collect taxes, that assures that the least among us are assisted. We all ought to be able to agree on that. And then there is a disagreement, there is a disagreement about just what the right scale and scope of that government is. I believe it's imperative that in the United States like in every other industrialized country everyone have access to health insurance.
But that comes with costs and economic consequences, you can't have that without paying for it. And according to other people's values it may be better to just let people keep more of their money and have some people be without health insurance and that's a debate. And that's the kind of debate that this election will be framed -- will be framed around at the margin what's the right scale for government. And I look at the quality of the nation's sports stadiums and its office buildings. And then I -- and its malls -- and then I look at the quality of its airports and its schools and I think that there are things where we need to have the public sector do more. But that's why I'm on the political side that I'm on and that's a good debate.
MS. TETT: Okay, right. Well, unfortunately we're going to have also agree that we're out of time. But we can also all agree that it's been a very lively conversation. So thank you very much indeed.