Yves here. I encourage readers to have fun with this short interview in comments. One obvious observation is that this is another example of Democrats normalizing Republicans. IMHO, the last Republican president who deserves any praise for his economic policies is the American socialist, Richard Nixon, who said he was “now a Keynesian in economics.” He also proposed a negative income tax, stopped taxing two million people in poverty, and instituted revenue sharing, a program ended by Reagan.
By Lynn Parramore, a senior research analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
Lawrence Summers, Charles W. Eliot Professor and President Emeritus at Harvard, Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama, recently joined the Institute for New Economic Thinking for a discussion on secular stagnation— the idea that we may have slower economic growth in the future than we’ve come to expect. In the following conversation, he weighs in on inequality, how an aging population impacts our economic future, and why Reagan’s tax plan was actually better than Trump’s.
Lynn Parramore: You’ve been critical of President Trump’s approach to economic policy, most recently his tax plan which you’ve criticized on your blog. What do you think would work better to improve the economy and why?
Larry Summers: As I’ve written, I think something more in the tradition of 1986 [the bipartisan Tax Reform Act of 1986 under President Reagan] would have been a better approach. It would not be based on increasing the budget deficit, changing the distribution towards those at the top, or opening up new shelter opportunities for corporations.
LP: How do you assess the ongoing debate about the “New Normal,” also known as “secular stagnation,” i.e. the notion that future economic growth may fall short of what we’re accustomed to? Despite recent optimism about a strong economy, do you accept that the rate of growth has slowed? If so, what do you see as the causes?
LS: The basic demographic arithmetic is that the adult population is going to grow much more slowly than it has historically. Essentially, that makes it inevitable that there will be slower GDP growth, even if productivity growth continues at its normal rate—and recent evidence suggests that productivity growth is running somewhat slower than historical norm. In any event, there’s more risk of downturns being protracted than has been true historically because of the “zero lower bound” [policymakers tend to keep short-term interest rates from going below zero].
LP: You’ve recently written about the broken link between pay and worker productivity. What responses might help realign them?
LS: I think it’s important to understand that contrary to what some people believe, marginal changes in productivity actually do produce increases in wages. So the suggestion that it’s not worth focusing on productivity because it doesn’t have much impact wages is, I think, a misguided one. I think strengthening labor market institutions like unions is important. I think combating monopoly power is important. And I think a commitment to run a high-pressure economy where there are more issues of firms not finding workers than there are workers not finding jobs is also important. All of these things are important.
LP: Could low wages negatively impact productivity instead of just being the result of a slower-growing economy?
LS: I think there may be some effects of those kinds. There are “efficiency wage” types of effects: when wages are lower, workers are likely to be less motivated in a variety of respects and they may put forth less effort. They may also have more tendencies to turn over because there are also effects where when wages are higher, firms go to more efforts to mechanize and to find technologies to conserve on labor income. So I’m sure that levels of wages do have an impact on productivity.
LP: There’s currently a debate on how close we are to full employment, which has major implications for Federal Reserve policy. How close do you think we are? And since vast numbers of people have left the labor force, what do we do about them, like those caught up in the opioid epidemic?
LS: I think we’re obviously closer to full employment than we have been historically. There is some evidence that there’s room for participation to increase and that means there may be some scope for drawing more people into the labor market by increasing aggregate demand, and that is an important set of policy issues. I think we probably need a range of structural policies to reduce dependence on disability insurance and to help combat opioids.
LP: You have expressed concern that upward mobility is decreasing in the U.S. and that educational institutions are hindering mobility. What can they do to create opportunities for low-income students to succeed? Any role for tax policy?
LS: I think the kind of effort that has been made over time to increase racial diversity needs to be made to support economic diversity. We need to do much more to draw kids in whose parents didn’t go to college and to draw kids in from the lower parts of the income distribution. That’s not just a matter of providing financial aid, that’s a matter of creating a more welcoming environment. That’s a matter of adjusting admissions policies as well. There may be a role for tax credits, but I think of it as more something that needs to be done at the level of individual institutions.
Where to begin with this one..
FRED civilian employment ratio
Not even close to a historical high And if we were at full employment then his next two sentences would be unnecessary.
How does kicking people off disability get us to full employment again?? It would make the numbers look worse.
This list of questions looks like it was an email interview. There is no back and forth at all between them, not a conversation.
One question: how does larry summers have any credibility after fumbling Harvard’s endowment and face planting the response to the crash of 2008? Seriously?
Once you attain “great thinker/leader” status, there is almost nothing that can knock you off that perch. That is because you will say and do banal things that are very useful to elites that desire greater control over the economy and our political system. You know that institutions are there to whitewash the criminal behavior of our elites. And as for his fumbling of the Harvard Endowment, how could Larry Summers have anticipated such an historic “black swan” event, when none of our other “great thinkers” did either? Besides, that’s water under the bridge as the Harvard Endowment is more swollen than it’s ever been.
Yes, hedge funds – which is what Harvard is, with a higher education subsidiary, just as NYU is a real estate development company with a higher ed subsidiary – have their up years and their down years, but, all things being equal, Fed policy will always seek to fatten them
David Stockman estimates that front-loaded tax cuts will produce a federal deficit of about $1.3 trillion in fiscal year 2019. In effect, fiscal stimulus is being cranked from 3 to 6 percent of GDP.
Gunning the economy could help reduce R party losses in the 2018 midterm elections. But it’s very poor timing for the 2020 presidential election. By then, with rate hikes biting and stimulus easing, the economy is likely to take a tumble at the worst possible time for re-electing the incumbent.
But given the regal out-of-touchness of elitist Dems, coupled with their jaw-dropping incompetence, they should still be able to seize defeat from the jaws of victory.
Cuomo 2020! :-)
My biggest complaint with this argument is that it’s far from clear the tax bill is gunning the economy. It looks much more like looting, in terms of where the gains go.
Doubling the standard deduction might have a big effect on a number of cash-constrained households. It won’t do much for the 47%, and of course it expires. I don’t know how much effect it will have in aggregate though.
I agree with you on the looting. What I expect that the Republicans are counting on is:
1) The base (the people most immediately screwed by this) will still vote with them because of tribalism and a few symbolic bonuses from a grateful AT&T.
2) The middle-class will be carried through the mid-terms by the immediate cuts and some measure of gullibility.
3) The stock owners will enjoy the sugar high as buybacks kick off speculation, and thus be more predisposed to it.
4) The donor cash will cushion the blow of any real blowback and the Dems will fumble the fight over extending the “temporary” cuts so that the Repubs can look like middle class saviors.
5) Even if all that fails they get cushy jobs as consultants.
Disagree that it gins the economy because the distribution of the tax cuts looks more like a QE program than what tax cuts were when they cut taxes for working people.
The tax cuts go to those who hoard money and take it out of circulation – the rich and corporations. They aren’t going to spend more, they will save more or do stock buy backs.
Thus the velocity of money will decline further.
So where is the gin coming from because I’m not seeing it.
Tax cuts are one part of fiscal stimulus. But so is increased direct spending. Stockman elaborates:
If such radically ramped-up spending fails to gin the economy, then we will be obliged to question (as some do) whether fiscal stimulus actually works at all.
I was referring to the tax cut, but you are right about the spending side…and wrong too IMO.
Disagree that this “increase” in spending – which is party a decrease of a decrease – is even light years close to “radical” as you say.
The Defense spending is the least stimulate type of fiscal spending, Obamacare goes mostly to rich gigantic corporations, disaster relief is transitory, and the interest goes to investors.
So spending increases of a small very non radical nature that go largely to rich gigantic corporations.
Ok I’m seeing some gin. But I’m still not seeing much gin.
Never attribute behavior to incompetence when it can be attributed to greed.
Or class warfare…
I know I’m not answering the question but it pains me that this guy and not campus “progressives” is the one who has consistently talked about letting the 99% into elite universities and that said universities are hostile to people of ordinary means in the same way they are hostile to poc. Witness the fight at Harvard over secret societies.
Notice his corkscrew formulation: “I think that the kind of effort that has been made over time to increase racial diversity needs to be made to support economic diversity.” Yeah, look how successful that has been. He avoids mentioning making university attendance tuition free. No stipends. Just policy adjustment within institutions, a little more financial aid, “there may be a role for tax credits.” Wow, what a revolutionary! I can see diversity on the horizon!
You are absolutely right…but… you are comparing him to whom? Who has ever held a privately university presidentship and has mentioned the elephant in the room that they are country clubs?
AFAIK only this guy. And when do campus activists outside less prestigious state universities ever talk about access? I would love to be corrected.
I agree — you could call him the leading edge of a sea anchor demographic. Still, he can see what amounts to discrimination against groups that amount to a majority of the population, and what kind of policy options does this guy give us? The elephant in the room has given birth to a mouse! “By the little that satisfies Spirit, we can measure it’s loss.” This is all we’re going to get from these people, unless we twist arms.
Which Democratic President, since Nixon, has had praisable economic policies?
Too bad we don’t have Tricky Dick to kick around any more.
Well (as Ronnie would say), I’ve been waiting since 1986 to get trickled on. Still waiting.
Larry Summers says that “the basic demographic arithmetic is that the adult population is going to grow much more slowly than it has historically. Essentially, that makes it inevitable that there will be slower GDP growth.” I suspect that he has put the result before the cause here. If the US GDP is slowing, it is because between increasing taxes, unstable work conditions, on-call employment, criminally high medical expenses, etc have accumulated to the point that these parasitic activities are sucking the life blood out of the real economy. With most young people treading water at best economically, of course they will not feel secure enough to have children, hence a slowing birth rate. It should be also mentioned that they will be financially insecure enough to defer buying houses and cars which is already being seen. And Larry was at the heart of all these developments.
Actual wage growth died in the US back in the 1970s and has flat-lined ever since. As a mental experiment, it would be interesting to work out what the US would be like now if wages had maintained par instead and all those corporations starved of all that superfluous cash. You would not have a situation where Apple is sitting on $250 billion and not knowing what to do with it nor having all the major corporations having hundreds of billions of dollars overseas and not wanting to repatriate them as they would actually have to pay tax on them. You would have far less cash for billionaires to spend on their hobby horses such as buying elections, stock buybacks, etc. With all that cash in consumers pockets, you would have only had a much smaller credit explosion over the decades and the real economy would find itself hyper-charged. But then again, I am not an economist so what would I know?
1) True wealth for a society – ie, decent & improving living conditions- always requires science & engineering advances – energy, medicine, infrastructure, information technology.
2) Such an advance is currently underway with IT, we don’t realize how discrete it is because we’re in the middle of it.
3) So wages & jobs in the US are actually improving – but not much compared to the last 60 years.
4) Is what’s best for global capitalism/sp500 also what’s best for the average American? I honestly don’t know. A slim majority of Americans say ‘yes’ & voted for that candidate, but the checks/balances of our electoral system awarded the election to the candidate who said “Hell no!”. (Said vs does remains to be seen).
But it’s not “the 1%” distinguished from 99% as parallel economic realities. It’s the 20% (decent skilled job w real benefits & some security/ govt employee ) vs the 80%. If you’re reading this, you’re likely in the 20.
5) Saying “the rich will get richer” is nonsensical, the rich will always get richer, the alternative where they get poorer – Russian revolution, Khemer Rouge, Maoism, etc- is a disaster. The actual tax rate changes for individuals btw have not significantly changed; 0-1% for most, 2.5% for very wealthy incomes.
6) American social solidarity is not at the level of Canada, Norway, Japan, Germany, or even UK. I think we’re ahead of Russia – ?
7) Going from a corporate tax rate of 35% to 21% is going to free up an enormous amount of money that will far exceed executive bonuses and stock buy-backs. Much will have to be plowed back into the company.
As mentioned above, this is as robust a test of trickle-down as we will see.
8-10 years required for the real answer.