The wisdom of Larry Summers
This is all good stuff:
I would suggest six misconceptions that purveyed a great deal of the current
economic debate.First, it is supposed that the idea of economic policy is to maximize the
creation of jobs rather than to maximize the availability of goods at low
cost to consumers and firms. Both the officials responsible for competition
policy and those responsible for international trade have explicitly rejected
economic efficiency as a central guide for economic policy. This, I would
suggest, is a costly and consequential error. . . .The second misconception is that these have not been good decades. For
the American economy in international perspective. I first got to know my
friend Ted Truman well when he was long into his career as the head of
the Federal Reserve’s International Economic Section. and I was a new
undersecretary of the Treasury for international Affairs. We were involved
in making various long term economic projections for the world.None of them would have believed that US GDP as a share of global GDP
would have remained robust for the entirety of the next generation. And if
we had been told how spectacularly China was going to do over the next
30 years, we would have been that much more pessimistic. We could not
have imagined that the share of US wealth reflected heavily in the stock
market would have been far higher a generation later than it was at that
time. . . .Third, the world has fared very well. Relative to the time when I was chief
economist of the World Bank at the beginning of the 1990s, child
mortality rates are less than half of what they were then. Literacy rates are
more than twice what they were then. Poverty rates, terms of extreme
poverty are less than 40% of what they were then.And in some ways most fundamental and important, this month, we
celebrate the 78th anniversary of a situation where there has been no direct
war between major powers. You cannot find a period of 78 years since
Christ was born when that was the case. So, the idea that we’ve been doing
it all wrong is, I would suggest, a substantial misconception.Fourth, the problems that we have are not due to trade liberalization. The
single most misleading idea that has moved from academic economic
research into the popular domain is the concept of the China shock
associated with China’s accession to the WTO. To start with, that
agreement did not change one iota of US policy permitting Chinese goods
to be sold in US markets.The principle that China would be the beneficiary of most favored nation
treatment and get the same benefits that other countries did had been well
established years before. It was ritually reaffirmed annually by the
Congress. Yes, China’s tremendous economic progress did lead to far
more sale of goods in the United States. But it is hard to imagine a less
credible approach to the problem. The adding up all the losers from the
imports without taking any account of the jobs created and the economic
impacts of the goods we sold to China.Of the lower cost inputs we received because of imports from China. Of
the enhanced real wages and associated with greater spending caused by
those lower prices. And the lower capital costs associated with the inflows
of capital that we received from China. When those calculations have been
done, as they’ve now been done by Rob Feenstra and several other teams
of economists, they show that, in fact, as with NAFTA, the net benefit to
the US economy has been substantial.The fifth misconception is that domestic industrialization and some kind
of renaissance of manufacturing is somehow the central issue for US
prosperity going forward. This is simply not a realistic idea. In 1970,
about 20% of US workers were engaged in production work in
manufacturing. Today, that number is about 6%.That number has trended downwards in countries like the United States
that have tended to run trade deficits. It has also trended downwards
rapidly in countries like Germany that have run manufacturing, export,
mercantilist oriented economic strategies and not at very different rates. It
is a consequence of the same set of phenomena that led to declining shares
of workers in agriculture over time.Rapid productivity growth, relatively inelastic demand, rapidly declining
relative prices created abundance without substantial and with declining
levels of employment. And there is nothing in the coming robotic
revolution to suggest that these trends are likely to do anything other than
accelerate going forward. I would note that the president of Ford has
judged that it requires about 40% less labor input in a Ford factory to
make an electric car as to make a traditional car. . . .Finally, I would suggest that substantial and accumulating deficits and
debts are a substantial threat to national security and national power
contrary to what is often believed in what sometimes seems like a post
budget constraint era of economic thinking. . . . [Our] budget prospects are vastly worse than they were at the time of the Clinton administration’s successful budget actions and substantially worse than they were at the time of the Simpson-Bowles efforts. The budget deficits a decade out comfortably in double digits now seems as a share of GDP now seem a reasonable projection with primary deficits quite likely in the 5% of GDP range.This is without the assumption of the need for vast mobilization for
meeting contingencies, military or non-military. And I think it is
reasonable to ask the question. How long can or will the world’s greatest
debtor be able to maintain its position as the world’s greatest power.
The Q&A has more good stuff. Here he discusses recent anti-China hysteria:
I think we need to proceed with very considerable care. I’m also very alarmed anytime you have a dynamic where on any issue, it’s only safe to be on half the spectrum of views for an individual. You are at risk of the outcome, moving a very, very long distance. The reason why the grade point average at Harvard University is now above 3.7. Think about it. . . .
No one with ambition wants to be in the dovish half of those talking about policy directed towards China. And that creates a potentially very, very dangerous dynamic. So, I don’t think we can ignore the national security issues posed by China at all, but roughly speaking, whenever somebody talks about jobs in Ohio, at the same time they’re talking about the national security threat from China, and as an important benefit of the national security policy, I get pretty nervous.
I don’t mind being on the dovish half on China.
And this is also excellent:
I’m inclined to think that if climate change is a central problem, we should
want climate change technologies produced as inexpensively as possible.
My view, which I’ve been expressing for some years, that has become
more fashionable in the last few months, at least in some part of it, is that
people, historians will look back on American views of the Soviet Union
in 1960, American views of Japan in 1990 and American views of China
in 2020 in quite similar ways as maximum alarm just at the moment of
maximum mean reversion for the economy in question.And I think we have to think very hard about, in the context of that
possibility, what the right strategies are and strategies that are about
maximum pressure can also be strategies that provoke maximally sharp
responses. Every time I hear somebody talk about Britain in the 1930 with
an emerging threat, I’m led to think about the antecedents to Pearl Harbor
in terms of Japanese perception.
Exactly.
HT: David Levey
Tags:
25. September 2023 at 13:39
I too am concerned about out of control deficits and debt, even in a time of peace and relative prosperity. But I can’t see how spending can be meaningfully cut without massive negative economic dislocations, nor do I think we can raise taxes substantially from where they are now.
Perhaps we have reached peak living standards? Do houses need to be smaller, medical care worse, education devalued? How does that happen in a basically free market economy?
25. September 2023 at 13:57
Perhaps we should refrain from giving checks for $2000 to people making $150,000.
25. September 2023 at 14:03
Summers: “Third, the world has fared very well. Relative to the time when I was chief economist of the World Bank at the beginning of the 1990s, child mortality rates are less than half of what they were then. Literacy rates are more than twice what they were then. Poverty rates, terms of extreme poverty are less than 40% of what they were then.”
What an insipid statement by Summers. If you know math, you’ll know over 33 years if things improve by 2.1%/yr you’ll have double the values (or equivalently half). So child mortality rates improving by 2x is nothing more than 2.1%/yr improvement a year. Same with literacy rates. Extreme poverty is roughly half as well. Nothing to do with macro-economics just incremental improvements over times.
@msgkings – “I too am concerned about…” (litany of old foggy woes) – yet you clamor to your congressman when you want a benefit? Also if growth > the increase in debt there’s nothing to worry about. Further, if you make Social Security and Medicare “means based” you’ll solve the deficit overnight. By the stroke of a pen, if people wanted to, the deficit would be halved instantly as SS/Medicare is 50% of federal expenses. Instead, you offer such nonsensical prescriptions as “houses need to be smaller, medicare care worse, education devalued”. I wonder how you made your money with such a puny intellect.
25. September 2023 at 14:09
@ssumner:
Sure, but that’s a sunk cost. How do we fix this?
Maybe the only way out is an AI fueled productivity boom?
25. September 2023 at 14:13
@Ray Lopez
I’m honored to be the target of your latest electronic diarrhea. Curious why you think growth in the US can be > than the increase in the debt without massive problematic adjustments. So yeah, either AI saves us or living standards have to eventually drop. Means testing LOL.
I do know I didn’t make my money by inheriting it like you did. Picking the right parents is arguably the smartest move.
25. September 2023 at 15:04
Your international policy proposals show a considerable lack of understanding, depth of thought, and shortsightedness.
Remaining “dovish” which in your mind means “saying nothing at all” is akin to those who refused to speak out against Nazi, Germany in the 1930’s.
Concerns over China’s organ harvesting program (falun gong), intellectual property theft, forcing companies to provide backdoors into their software for the purpose of censorship and citizen control (i.e., aiding and abetting a totalitarian regime) and imprisoning uighers, sterilizing them or forcing uigher women to bed with the ‘Han’ in some sick forced genocide scheme, is nothing to do with being “hawkish or dovish.”
It’s simply the truth.
Those who spoke out against Nazi, Germany in the 1930’s were not Hawkish, and those who questioned IBM”s assistance to the Nazi regime, pursuant to identifying all Jews, were not “hawkish.”
They simply pointed out the facts.
Those words, in the context you use them, are nonsensical.
And yes, one must question your judgment because you say a lot of things that are inaccurate. For example, you scream “false flag” over the Donbas secession, and yell “putin puppet” towards anyone who questions the war, but when asked to provide any piece of evidence you scream “what side are you on” like a madman with a personal vandetta against anything and everything Russian.
So yes, your judgment is not good.
But no, you are not senile. You are just not very bight.
25. September 2023 at 15:38
@Ray Lopez: but under what conditions do you consider 2.1% annual improvement on a consistent basis for 33 years to be the normal state of affairs?
@ssumner: 2 disparate thoughts:
1. On your “checks for $2000 to people making $150,000”, I’m really curious when the wealthy will have actually unwound pent up demand from Covid. Shutting down so much of the economy, especially the travel and leisure economy, led to so much deferred luxury spending. I wonder what impact that finally exhausting will have on inflation. (or even where we are on savings above trend)
2. re: Jim Farley’s claims about 40% lower labor, one thing a lot of people like to pretend is that EVs are some magic switch to flip on labor. Likely to help offset the optics of the significant investment cost. EVs are a powertrain swap, all the rest of the vehicle like the body, seats, HVAC, etc. is still there. The proportion of a vehicle’s labor in the engine and transmission alone is not >40%. There are savings, but nowhere near that much.
A larger factor is that, unlike in engines and transmissions (which are often fully in-house operations), the batteries, motors, and power electronics that run them are almost always farmed out commodities. We’ll see in the long run if the OEMs continue that strategy, or (as we’ve seen with Ford/SKI and GM/LG) if they’ll joint venture or even in-house production.
A small point, but one I see a lot that should be heavily tempered.
25. September 2023 at 16:06
I don’t know.
Japan has huge national debts. And yet it’s boosting outlays for national security and becoming more secure.
No one thinks Japan is going to default on its debts. But then, the Bank of Japan owns half of the national debt there.
Let Larry Summers live in globalized Detroit and then Japan. Perhaps Summers would also enjoy living in a concentration camp in China. Or, if he is lucky, spending 1/3 of his days studying the thoughts of Xi.
But you know what they say? In orthodox macroeconomics, what is true in theory is more important than what is true in fact.
25. September 2023 at 18:27
Hasn’t China’s leadership indicated that they would invade Taiwan for a long time conditional upon a reasonable chance of success? It seems to me that the US and Taiwan have a problem where the apparent balance of military power is shifting in the PRC’s favor, and that the best chance that US and Taiwan have of dissuading the PRC from starting a war is the so called porcupine strategy. The US electorate and the US governing elite are too apathetic to actually rise to the occasion without a panic. In my view panicking about China’s military (and military industrial) capacity and the US’s deficiencies in the same is the best way to prevent war with China. Even that may not be enough as Xi gets older, more paranoid, and likely more isolated from reality just like Putin has.
25. September 2023 at 23:02
msgkings, Isn’t there already talk of future rebates? I heard Trump wants to rebate the money from a 10% tariff. Let’s just stop doing those rebates.
Bluesilverwave, I don’t buy the “pent-up demand” theory. That might explain consumption, but it doesn’t explain aggregate demand. The problem has been easy money, not pent up demand.
I can’t comment on EVs–not my area.
Lizard, One way of avoiding war with China is to not attack China. I don’t expect them to attack us.
That’s how we avoided war with Russia after the Ukraine invasion last year.
26. September 2023 at 05:20
Xi very well may attack Taiwan, no matter the consequences to everyone else in China. Arguably it is even rational for him to do so, as it will let him even further enhance his power within China.
26. September 2023 at 08:09
Scott,
Thanks for linking to that interview. Summers has been a voice of reason now for awhile. However, I think its worth pushing back on his statement here:
“Every time I hear somebody talk about Britain in the 1930 with
an emerging threat, I’m led to think about the antecedents to Pearl Harbor in terms of Japanese perception.”
If I understand correctly, he is implying that the U.S. policy towards Japan prior to Pearl Harbor was (too?) harsh and drove Japan to attack the U.S. Implying that a softer approach might have avoided war and we should do the same with China now.
This is wrong. Yes, the oil embargo and the freezing of Japanese assets led the Japanese leadership to decide to go to war, but that doesn’t mean the U.S. was wrong to do it. Japan had invaded China (and not just invaded but committed a number of horrific war crimes on the population over and above what one would expect in a war) and seized Indochina. The U.S. response was justified, just as our responses to Russia’s Ukraine invasion are justified. Did our policies convince the Japanese elites to go to war with the U.S.? Yes, but that’s on them, not the U.S. They could have withdrawn from China and Indochina and given up their expansionist policies. If the price of peace between Japan and the U.S. was to let Japan run amok through Asia, then the price was simply too high.
I agree with Summers that U.S policy with China right now is too bellicose, but the analogy with U.S./Japan relations in the 30’s is way off base.
26. September 2023 at 08:32
Lizard, Yes, there’s a real risk of that occurring. Oddly, the Taiwanese themselves don’t seem that concerned. Not sure why they are spending so little on their military.
26. September 2023 at 08:57
@ssumner:
There might be ‘talk’ but nothing rising to the level of ‘this might happen’. And while I agree no need to do that again, and maybe shouldn’t have done it before, that doesn’t really answer the question about our debt and deficit problem.
Re Taiwan’s military spending, they are doing some free-riding knowing we’ve got their back. I agree war in Taiwan is unlikely but it’s not 0% chance.
26. September 2023 at 10:21
[…] The wisdom of Larry Summers, recommended. YouTube […]
26. September 2023 at 10:37
With respect to economic policy, where one might stand depends on where one sits. There is significant benefit to a large number of citizens from economic efficiency. At the same time, the cost of economic efficiency is largely borne by those at the lower end of the economic spectrum where the negative impact on jobs and wages outweighs the positive benefit of lower cost goods.
Economic policy cannot be divorced from social policy. If we are to favor economic efficiency based on Mr. Summers’ arguments, we also need to favor some compensatory social welfare payments or job creation for affected workers, in part through a significantly higher minimum wage.
26. September 2023 at 12:02
I agree with summers on everything except I’m not sure that the deficits will matter much because I saw some data that showed that affluent retirees do not spend down there assets but continue to accumulate assets until they die.
26. September 2023 at 14:38
If we believe that the Chinese leadership, both political and military, are rational, then they surely realize that actually invading Taiwan, like all speculative military adventures, have a high probability of going wrong in all sorts of ways. I can’t think of any other action the CCP could take that has a higher likelihood of resulting in regime change in China than a failed invasion of Taiwan. The Chinese military has had zero experience in high intensity conflict for over 4 decades and their last adventure in Vietnam didn’t go all that well.
26. September 2023 at 16:39
The maim thing Summers doesn’t mention or emphasize is that America’s greatest economic wound is self-inflicted, in the form of legal restrictions on housing construction (see e.g. https://www.aeaweb.org/articles?id=10.1257/mac.20170388). We could have a lot more prosperity, and a lot more blue-collar, factory-worker-substitute jobs, if we decided to legalize the construction of housing.
26. September 2023 at 17:52
@msgkings – (the Bay area hockey fan who lives cheap Chinese takeout) – see below. While it’s true growth in projected Fed deficits will exceed projected US GDP (3.3% > 2.1%) in the near term, it’s not a big deal (yet).
@BlueSilverWave – coming from a low base, a 2.1%/yr increase in good things like literacy is very doable, not a stretch, and as to my point nothing macroeconomics can take credit for.
Bing ChatGPT: In CBO’s projections, annual deficits average $1.2 trillion a year from 2022 to 2031 and exceed their 50-year average of 3.3 percent of GDP in each of those years. … The U.S. Bureau of Labor Statistics (BLS) projects the economy to grow by 2.1 percent each year, on average, from 2021 to 2031. As the chart shows, this would be slightly faster than the 2.0-percent growth averaged over the previous decade but slower than the growth rates in the 1980s and 1990s.
26. September 2023 at 20:45
I think it’s sensible to be both dovish and hawkish on China–they are vast and contain multitudes. Same goes for India, by the way.
However, the real enemy, the greatest threat to American freedom, is Amazon. In the course of less than 2 decades they have become the embodiment of corporate evil by creating a marketplace that sells just about everything. Their dominance has surely contributed to the collapse of venerable American institutions like Sears Roebuck. Their continued low prices and expansive offerings threaten local mom & pop retailers like Wal-Mart, Target, Borders, and Macy’s.
Thank goodness the FTC is coming to our rescue with an antitrust lawsuit. I hope they can find a way to force those greedmongers to reduce the cost of my annual Prime membership from $139 to something that is fair and reasonable.
26. September 2023 at 21:05
Philly Wino, In fact, low income people are some of the biggest beneficiaries of economic efficiency. Take Jseliger’s point about the need for more housing. If we deregulated housing the gains would overwhelmingly go to lower income people. Ditto for deregulating medicine, or school choice, or occupational licensing reform, or ending the war on drugs.
27. September 2023 at 05:43
@msgkings: You say there is no way to raise taxes, and then trash someone for being the beneficiary of inherited wealth. Have you forgotten that our system not only fails to effectively tax inherited wealth, but perversely subsidizes it, eg, with the step-up in basis?
@ssumner: Deregulating housing/zoning seems like a red herring and, we often forget, was already tried in the gilded age with some major drawbacks (eg a 50’ wall around the lot someone refused to sell). I don’t understand why every libertarian isn’t also by necessity a georgist. Property rights under libertarianism are completely incoherent unless ownership of a good is established by non-coercive transfers from the point at which it is created from labor and base or renewable materials. Of course this criterion can never be satisfied in the case of land.
27. September 2023 at 09:49
“(eg a 50’ wall around the lot someone refused to sell)”
LOL, and you accuse me of red herrings!
27. September 2023 at 11:55
@Jeff – the most efficient tax is a sales tax, and a heavy inverted U shape tax on the middle class, studies have shown. Tax the middle class and don’t tax the rich or poor at all. Gives incentive to the middle classes to either become poor or try to get rich. Further, not having death taxes gives incentive to people to leave something to their kids or loved ones rather than spend it all. As for Georgist land taxes, that’s not a bad idea, but already here in DC we pay about $12k a year in local property taxes, for our numerous rentals, and I say that’s enough. As for creating wealth, given that the Columbia U economist William Nordhaus estimates pioneer inventors only get 5% of the market value of their pioneer inventions, with “me-too”, “second-mover” imitators and society capturing the rest (btw 5%’s also the typical royalty rate in patents, actually a generous one at that), I suppose you would favor not taxing such inventors, or giving them a subsidy, or giving them a ex-post prize? If not, then you are a hypocrite.
27. September 2023 at 11:55
That is real! (I was slightly off—the wall was actually 40 feet) https://www.foundsf.org/index.php?title=Crocker%27s_Spite_Fence
27. September 2023 at 13:31
Jeff, You said: “Major drawbacks”. Yes, it happened. But please be serious.
28. September 2023 at 23:11
@Big Al
Re: irrationality of invading neighboring countries: I used to think the same about Russia, but was of course completely wrong about that.