Brunswick CEO Neal Wolin interviews his former boss Larry Summers at a Brunswick event in the New York office
NEAL WOLIN: Larry Summers needs no introduction. So I’ll be brief. In chronological order, Larry has, among the many things he’s done, been the Chief Economist of the World Bank. In the Clinton presidency, he was the Secretary of the Treasury. He was the President of Harvard. Came back to public service in the Obama Administration. Was the head of the National Economic Council at the White House in the midst of the financial crisis. He is now the Charles Eliot Professor at Harvard. And he is, it’s fair to say, a leading public intellectual on a ridiculously wide range of topics concerning economic policy, and public policy more generally. So thank you, Larry, for being here.
LARRY SUMMERS: I had the very good fortune when I was the Secretary of the Treasury to have Neal as my general counsel. In that capacity, Neal was crucial in the negotiation of a very complex standstill on $100 billion-plus of Korean debt. When for a brief moment it appeared that there would be some overall agreement between the government and the gun manufacturers, Neal was its architect. And Neal also had the unfortunate responsibility of having to enforce the Treasury’s ethics codes.
I well remember when I arrived at a United Airlines counter as the Secretary of the Treasury, with my secret service detail. And United Airlines reacted to my presence by offering an upgrade.My chief of staff called Neal to inquire whether I could accept the upgrade, and Neal inquired whether there were any spaces available in coach. Unfortunately, there were spaces available in coach. So Neal opined that I was not permitted to accept the upgrade. I did not take it well. (Laughter)
NEAL WOLIN: Obviously, that’s not a way to endear yourself to a Treasury Secretary. (Laughter) I want to start with what seems like the topic of the moment, which is tax reform, and its potential growth effects. Earlier in the week, 137 economists wrote an open letter saying there would be all kinds of growth effects. What is your judgment about the chance either in the short term or the long term that tax reform would actually lead to incremental economic growth?
LARRY SUMMERS: You can’t rule out the possibility that the tax cut will lead to a substantial acceleration in growth. But it’s not anybody’s sensible best guess. If you read that letter you just referenced, you’ll see that the conservative economists who wrote it quoted three studies. And the quotations are just badly wrong from two of them. And when I say badly wrong, I mean that if a Harvard student did what they did – citing only the high end of growth estimates in the sources being quoted – I would call it dishonest.
NEAL WOLIN: You’ve been a strong proponent of this idea of secular stagnation. We’ve got inflation that seems to be anchored substantially below 2 percent. What do you make of it? And what set of things that are politically achievable are likely to bring us out of this dynamic?
LARRY SUMMERS: It’s a bit of a mystery. You would have thought that when the unemployment rate was this low and there were this many people saying they had vacancies to fill, that there’d be more wage pressure. And if you had told me every other variable and you’d ask me to guess the inflation rate, I would’ve guessed higher than what’s played out. My guess is that people are more fundamentally scared by the combination of the recent recession experience, the possibility of their job being outsourced to India and the possibility a robot will start to do their job, that you just have very quiescent labor and with very quiescent labor you don’t get wage pressure. And without wage pressure, you don’t get inflation.
That said, what we all just need to get used to is that for the last 40 years, even 60 years, the labor force has grown reasonably fast. It’s grown reasonably fast because we’ve had significant immigration. Because people used to average having three kids. And because more and more women were entering the labor force. The adult labor force was growing at one and a half percent-ish a year. Going forward, the adult labor force is not going to grow. If the economy works as well as it used to, it is going to grow substantially slower than it used to. And that’s just life. It’s OK. It’s sort of more like GDP per person that we care about, than it is the total quantity of GDP. In that sense, slower growth is baked in demographically.
On top of that, there’s much less call for physical investment than there used to be, because people shop electronically rather than go to malls, because a law firm that used to need 1,400 square feet of space per lawyer now needs 700 square feet because it stores things in the cloud. Because of whatever it is that’s causing our leading tech companies like Google and Apple to be rolling in cash – without full uses for cash.
All those things combined with rising saving, because people are living longer, because more capital’s coming from abroad, because more of the income’s going to rich people, all that means, you got a lot of savings. You don’t have much investment. That means low interest rates. That means high asset prices, because the savings flow into the existing assets. That means limited demand pressure. Which means a tendency to sluggish growth. And it means a tendency to low inflation.
And it raises the question whether when you have good growth under these circumstances, is it financially sustainable?