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Larry Summers Reflects


Lawrence H. Summers
Photograph by Jim Harrison

Lawrence H. Summers
Photograph by Jim Harrison

In the decade since Lawrence H. Summers departed Massachusetts Hall, the former Harvard president, now Eliot University Professor, took a sabbatical; resumed teaching; joined President Barack Obama’s administration to help secure recovery from the recession; and then re-engaged as a teacher, economics scholar, and participant in high-level policy discussions around the globe. Harvard Magazine visited Summers at his Kennedy School office for a reflective conversation about these activities and some of the ideas that interest him now. The transcript follows.


Harvard Magazine: Since your presidency, you had a sabbatical year, you consulted, you talked about economics around the world, you helped rescue the United States and the world’s economy. You resumed your academic duties. You’ve continued to consult and advise and be involved in economic discussions globally. You led that interesting report on inclusive prosperity, you redid the Lancet commission on investing in global health. Among those many engagements, what has been the most consequential, the most rewarding?


Larry Summers: I think the most ultimately consequential thing I’ve done since I was president was work with President Obama during his general election campaign and his transition to the presidency, and during the first two years of the presidency.

We were at a historic moment when the economic statistics were, by almost any measure, worse in the fall of 2008 and the winter of 2009 than they had been in the fall of 1929 and the winter of 1930. And we were able to produce an outcome that, while unsatisfactory in many respects, was infinitely better than the outcome that played out in the early 1930s—or the outcome that has played out in Europe and in Japan.

So I think the most consequential thing I’ve had a chance to be part of was the various elements of the United States response to the crisis. The American Recovery and Reinvestment Act, which was the largest peacetime fiscal expansion in the country’s history, by far—even if politics meant that it was not as large and sustained as would have been ideal. The policy approaches to supporting and rescuing the major parts of the financial system, and the decision to support the automobile industry, where I was most closely involved, through the bankruptcies of Chrysler and General Motors. The decisions to put in place a set of regulatory reforms to make financial crisis less likely and to greatly strengthen the International Monetary Fund and the international financial system.

So it was an enormous privilege to be given a central role in the recovery effort at what almost certainly was the most dangerous moment in U.S. economic history since the Second World War.

But I have also derived enormous satisfaction from the years I’ve spent as a professor. I greatly enjoy teaching undergraduates and do that in two large courses—on globalization and on economic policy. And I’ve had a chance to work with a substantial number of undergraduates and graduate students on a more individual basis, and I still find those interactions with the young people very, very gratifying.

I’ve tried also to be very active as an observer of economic events and economic policies, through my column in the Financial Times, through a range of other writings, and by participating in a variety of commissions and other groups that are concerned with public-policy issues. I’ve also tried to continue doing what was my first passion, economic research, albeit of a somewhat less technical nature than when I was younger. Unfortunately, I think I may be on to something with the idea of “secular stagnation” that I’ve been discussing and pushing for the last couple of years [see below]. 


Teaching and Higher Education

HM: About that teaching—the economic-policy course, your globalization course, and then the one on policymaking inside the federal government that you taught with [Walmsley University Professor] Cass Sunstein. What are your impressions about student expectations, aptitudes, and interests today?


Larry Summers: I am struck by how interested students are in economic issues and how many deeply thoughtful students there are.

Just today, I met with a student who was embarking on a long paper on derivative clearinghouses and the potential systemic risks that they pose. After class this morning, I spent time talking with a student who, drawing on his summer experience in a hedge fund, was interested in pursuing the idea of leverage cycles. I just hosted a brunch in my home for the top dozen students in my globalization class—several of them wrote memos in connection with the public-policy simulations we do in that class that were better than many memos I received when I was head of the National Economic Council. So it’s an enormous privilege to teach and work with the students who are here.


HM: Staying on education, but beyond the classroom and your teaching, you were on the advisory board of Minerva, which is looking into a wholesale reinvention of undergraduate education. Your household includes a teacher of a significant HarvardX course, who has obviously changed her teaching [Cabot professor of American literature Elisa New and Summers are married; she teaches a series of poetry modules online]. Your children have graduated from or are attending some interesting institutions, and you’re on many campuses around the world in the course of your travels. And you’ve advised a number of doctoral and master’s students in economics and public policy. What challenges, opportunities, and changes do you see in the academy?


Larry Summers: I still think what I thought throughout my time as Harvard president—that universities have never had a greater opportunity to transform the world, because the world is ever more driven by ideas. It’s ever more driven by personal connections that cross boundaries of nations, of class, and of ethnicity. And the older I get, the more I realize that the ways in which people think and act are products of the experiences they had when they were young. So I’m ever more convinced of the importance of universities.

At the same time, I hold to the conviction that I expressed in my inaugural speech as Harvard president and my valedictory speech that the greatest threat to universities in general—and to Harvard in particular—is complacency, and an excessive attachment to tradition. One of my wife’s colleagues put it very well when he said Harvard will have to choose in the years ahead between its commitment to preeminence and its commitment to doing things in its traditional ways. I’ve always been clearly on one side of that—respecting tradition, but focusing on the future.

I think Harvard has the potential to multiply its impact on the world threefold or fivefold or tenfold, through reaching the entire planet with the knowledge that is here and the capacity to teach and impart knowledge that is here, in a way that would have been unimaginable when I was a graduate student here in the 1970s or when I was on the faculty in the 1980s. Any student, anywhere, could have substantially the experience of taking Harvard’s great courses and increasingly benefiting from the interactions that make this such a great place.

HarvardX is a good start, in its focus on providing access to the Harvard experience to students around the globe. I am incredibly proud of what my wife has done in terms of creating a course experience that is more like documentary film than classroom lecture, and that takes account of the very great scope that video provides. The first idea when the movie was invented was that you would film a play on a stage. And soon it was realized that movies made possible an entirely different kind of experience and Lisa is providing something that is much more than a recorded class. I think that she is pushing the frontiers, but I think there is more that could be done. Indeed, I think the philosophy of HarvardX as it is designed—that it’s supposed to focus on strengthening the on-campus experience—is precisely the opposite of what Clay Christensen teaches about disruptive innovation [Clark professor of business administration Clayton Christensen, profiled in “Disruptive Genius,” July-August 2014, page 38]. The essence of Christensen’s idea is that for leading organizations to have a chance with respect to disruptive innovation, they have to insulate it from their traditional mission and pursue it on its own terms. Distance education and the use of the Internet are perhaps the most important things that are going to be disruptive in higher education.

Another way we can grow as educators is realizing that active learning is much more effective than passive learning—that the big-podium, small-chair model is actually quite inefficient for transferring knowledge. Each year in our globalization class, [Williams professor of international trade and investment] Robert Lawrence and I add more debates with visitors, role-playing exercises for students, illustrative film clips, and class debates and discussions—and I think much more of that would greatly strengthen what happens in our classrooms and our universities as a whole.

Perhaps the most important is that universities are places that are governed by the authority of ideas, rather than the idea of authority. I think that is under increasing threat with the growing focus on comfort and the growing concern with arguments and speech that make people uncomfortable. If my class does not make students quite uncomfortable with something they previously thought, or something they hear or read, then it has not been a full contributor to their liberal education. So I think it is terribly important that in the pursuit of comfort we not impose any kind of ethic of conformity. My views on most political questions are left of center, but I found Mike Bloomberg’s 2014 Harvard Commencement address worrying about political correctness to be compelling [read a report and excerpts here].

This is an area where American universities have traditionally been very strong by global standards, but we are falling back. I think it’s enormously important that American universities proselytize and even be evangelical about the virtues of intellectual freedom and debate, and the importance of the pursuit of knowledge. This year, I had a chance to speak to these values at a prominent Indian university and at Tsinghua University in China. The educations that American universities provide are now a major American export, and in a philosophical sense, the ideal of the American university at its best is as important as any other U.S. export.


Economic Stasis

HM: Exports is a good segue back to economic matters. You have been talking about an era of economic frustration—in technical terms, secular stagnation. You have outlined a paradigm shift in economic policy, from worrying about taming inflation and controlling the economic cycle to worrying about deflation and responding to inadequate demand. And you have raised concerns about making policy in a U.S. setting where one party reflexively doesn’t care about the international financial system, which is critical to buffering crises, and one party doesn’t understand trade. I am sure readers would be interested in your perspectives and recommendations in this context from, say, now to the end of the next U.S. president’s first term.


Larry Summers: Let me talk about three things: the macroeconomic and analytic research I’ve done on the idea of secular stagnation, that I think helps to understand our current economic challenge; the policies that I believe are important for the United States to pursue over the next five years; and the political distemper and malaise that the country seems to find itself in.

A striking fact about the world right now is that the United States has a 10-year bond rate of 1.8 percent—and that is very high by global standards—the rate is a quarter of a percent in Germany, and essentially zero in Japan. What that’s telling us is that markets don’t expect a return to 2 percent inflation even over a decade—and that they don’t expect real interest rates (adjusted for inflation) to be significantly greater than zero, on a global basis, over the next decade.

Something like this occurred during the 1930s and led Harvard economist Alvin Hansen to put forward the idea of “secular stagnation.” Essentially, Hansen’s idea was that an economy may find itself with a propensity to save that is very high, relative to its propensity to invest in new physical capital. Introductory economics would say that in such a situation the interest rate should decline, discouraging savings and encouraging investment, and bring about balance. But there are limits to how far interest rates can fall, since people can just hold cash, and since excessively low interest rates may create financial bubbles. So it may be that interest rates never get low enough to enable investment to absorb all the desired saving. The result is a tendency toward sluggish growth, low inflation, and very low interest rates—exactly what we’ve seen.

In my papers on this topic, I’ve explored some of the reasons for increased saving and diminished investment—factors like the “demassification” of the economy caused by Airbnb reducing the need for new hotels, e-commerce reducing the need for new malls, and so forth. I’ve also shown that real interest rates have been pretty steadily declining for the last 25 years.

 So I believe we have a real macroeconomic challenge that’s very different than the one that we have had traditionally: generating enough demand in a financially sustainable way to absorb all that the economy is capable of producing.


Policy Proposals

What should be done? There are a number of things that flow from this analysis.

First and most obviously, it makes a compelling case for expanded public investment in infrastructure. Money has never been cheaper, material costs have rarely been lower, and there are large numbers of construction workers who are still out of work. What better time to fix LaGuardia Airport, to address the 20,000 American schools with chipping paint, to fix the water system of Flint, Michigan, and many other cities, and to rebuild an air-traffic control system where controllers in some of our busiest cities still use paper strips to track flights? Our infrastructure investment rate is lower than at any time since the Second World War, and if you take depreciation out, it is essentially zero. Increased public investment would raise employment in the short run, would increase the economy’s capacity in the medium run, and, by avoiding deferred maintenance, would reduce the liabilities that our children’s generation will inherit.

Equally important is stimulating private investment. There’s no better time than the present to shift away from coal, which is the new tobacco, and to start producing power in more environmentally sustainable ways.

Our tax system, particularly as it affects businesses, is in desperate need of reform. Permit me an analogy. A library with overdue books might sensibly decide to offer an amnesty from library fines. Or, it might decide to announce that there would never be an amnesty, so people would save money by bringing in their books as soon as possible. But only a crazy librarian would put a sign up saying, “No amnesty now, but thinking of one next month.” And yet, that is exactly what we are doing with respect to the more than two trillion dollars of cash now being held overseas. Our political leaders hold out the prospect of a tax reform in which there would be tax benefits for bringing this money home, but they never in fact deliver. It is hard to imagine a policy more effective in keeping the money outside of our country.

There’s also, in my judgment, a compelling case for immigration reform that would keep more skilled workers and entrepreneurs in this country. During my time as Harvard president, I saw the damage done by misguided visa policies that, for example, caused a student doing cutting-edge science, who went back to China for his father’s funeral, to have to stay in China for nearly a year before he could get a return visa.

There’s also a clear case for the United States to pursue a strategy that I’ve called “export activism.” One part of that strategy is signing onto trade agreements when, as is the case with the Trans-Pacific Partnership, other countries are reducing their trade barriers by far more than the United States, which is so open already. We also foolishly maintain security controls on the export of goods that you can get at Best Buy. There’s much that United States embassies can do to help American producers gain market share in foreign countries. And certainly this is the time to be growing, rather than shrinking, the Export-Import Bank.

There’s more to do, for example with respect to housing. And critically, in the current economic context, where we’re short on spending, measures like increases in the minimum wage and support for fair treatment to union organizers, which promote economic equity, offer the prospect of increased spending, increased demand, and economic growth.

An agenda of this kind is, it seems to me, should be able to command broad support from government, business, and households—from progressives with respect to some of its elements like public investment, and from conservatives with respect to others like tax reform.


“A Moment of Political Distemper”

But we’re caught in a difficult moment of political distemper. I’m inherently an optimist (though Donald Trump challenges that optimism).

It seems to me that the lesson of American history is that we are prone to self-denying prophecy. The fears that we were the falling great power in 1988, that we had a crisis of the national spirit in 1979, that Russia would soon surpass us militarily and economically during the early 1960s—those examples come to mind. And I’m told that Patrick Henry warned in the early 1790s that the spirit of the Revolution had already been lost. That concern can and historically has been constructive.

What worries me is that we seem to be losing faith in our public institutions—and responding by making it harder and harder for them to succeed as their resources are cut and more and more requirements are imposed on them. Then there is a vicious cycle of poor performance, reduced support, and poorer performance.

The ultimate challenge for the next president is to reverse this cycle. Without confidence in their government, I think the American people will have trouble being confident in their future. And without an America that is confident in its future, other nations will become ever more insecure and fractious.

There are plenty of issues of process—campaign finance, gerrymandering, perhaps the filibuster. But ultimately the challenge is to define our future greatness in a way that can rally a broad public. If that can be done at a moment of immense opportunity in the world, immense capacity for technology, then I believe we can solve most of the specific problems.