“No thoughtful person can look at the U.S. economy today and believe that the principal constraint on expansion of output and employment is anything other than the lack of demand experienced by firms,” Summers said. That is, not enough consumers in the country have sufficient spending power; government programs employing more people would change that, he asserted at the event, hosted by MIT’s Undergraduate Economics Association.
“If the private sector is either unable or unwilling to borrow and spend on a sufficient scale, then there is a substantial role for government in doing that,” added Summers, who also served as Treasury secretary in the Clinton administration. “That’s the right macroeconomics. It’s also common sense.”
Lawmakers in Washington are currently proposing new budget cuts. By contrast, Summers recommended, “government should be embarked on a multiyear, substantial investment program in infrastructure.”
Summers claimed that monetary policy — essentially control of interest rates — would normally by itself spur growth, by making it easier for businesses to borrow and spend. But with Federal Reserve rates near zero, that option is now impossible. “When the zero interest rate binds, everything works differently,” Summers said.
And while economic growth often produces inflation, Summers was skeptical that such an effect would occur soon.
“It’s possible that they will overdo it on expansion, and it’s possible that I will overdo it on my diet and be too thin,” quipped the sturdily built Summers. “But that would not be where a sensible person would place their principal worries.”
Europe: Apocalypse now, or later?
Summers is currently the Charles W. Eliot University Professor at Harvard, where he served as university president from 2001 through 2006. In his most recent stint in Washington, Summers served as the director of the National Economic Council for the first two years of Barack Obama’s presidency.
Wednesday’s event, in front of an overflow crowd in Wong Auditorium, featured an interview format in which Summers answered questions from James Poterba, MIT’s Mitsui Professor of Economics, who has collaborated with Summers on research.
Asked by Poterba to discuss the economic crisis in Europe, Summers noted dryly that it was “hard to be enormously optimistic about the situation.” The crisis, he said, is a fiscal-policy version of the United States’ war in Vietnam, in which stopgap measures by Europe’s leaders have produced a quagmire.
“They have, at every stage, acted only when it was ‘apocalypse imminent,’” said Summers, referring to the bailout measures given to Greece and other debt-laden European countries.
When 44 equals 42
Asked about working in the White House, Summers was entirely complimentary of the two presidents he has served, Obama and Clinton. “They are each extraordinary in their way,” he said. “I think it’s an enormous privilege to have worked for both of them.”
Summers did draw laughs from the audience by detailing the contrast in the two presidents’ working styles.
“They’re very different people,” Summers said. “If you have a 2:00 meeting scheduled with Barack Obama, the meeting might begin at 10 of two … and it surely will have begun by 10 after two.” Summers added: “If you’ve sent him a 20-page memo before the meeting, he will have read the memo, and he will not appreciate your attempting to summarize the memo for him. … Your meeting will end with, ‘These are the three things I care about, if you want to do anything different than A, B or C, please come back to me.’ … Barack Obama [is] very impressive and sharp.”
With Clinton, Summers noted, “the chance that your meeting will have begun at 2:02 is zero. The chance that your meeting will have begun by 2:15 is about one in three. The chance that he will have read carefully your 20-page memo is about even … [but] in the five minutes you spend summarizing it for him, he will have absorbed virtually all the content. He will then have something to say. It might be, ‘I was in the White House library the other night and I happened to be reading the Journal of Finance, and this is what it says about dividend policy.’ Or, ‘I was at a conference at Brookings seven or eight years ago, and this is what they said about banking. … He will have some substantially incisive comments to make about things you wish you had thought of.”
World leaders: Reading NBER working papers
Summers also weighed in on economists’ performance in light of the largely unanticipated economic crisis. For the most part, Summers defended economists, arguing that the profession has made world leaders better informed in recent decades.
“I’ve had meetings with vice premiers, number-two people in China, who have asked me questions about NBER [National Bureau of Economic Research] working papers in macroeconomics,” Summers said. “That says the work has an enormously positive and important impact.”
However, Summers asserted, the dynamic stochastic general equilibrium models used by many economists, which often assume the economy will naturally return to a basic equilibrium with full employment, have been of little value in these complex times.
“In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought,” Summers said, adding: “I think the profession is not entirely innocent.”
Still, Summers said, the complaint that economists should have seen the crisis coming represents “a confusion” on the part of critics. Identifying financial bubbles and knowing when they will burst, he claimed, “is to ask more of the profession than it can reasonably expect to discover.”