Interview with Larry Summers: China, Debt, Pandemic, and More

Irwin Stelzer and Jeffrey Gedmin have a wide-ranging interview with Lawrence Summers in The American Interest (May 22, 2020, "How to Fix Globalization—for Detroit, Not Davos").

As always, Summers is his habitually and incorrigibly interesting and provocative self. Here re a few of many quotable remarks. 

China

In general, economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency. Going forward we will need more emphasis on “just in case” even at some cost in terms of “just in time.” More broadly our economic strategy will need to put less emphasis on short-term commercial advantage and pay more attention to long-run strategic advantage. ...

At the broadest level, we need to craft a relationship with China from the principles of mutual respect and strategic reassurance, with rather less of the feigned affection that there has been in the past. We are not partners. We are not really friends. We are entities that find ourselves on the same small lifeboat in turbulent waters a long way from shore. We need to be pulling in unison if things are to work for either of us. If we can respect each other’s roles, respect our very substantial differences, confine our spheres of negotiation to those areas that are most important for cooperation, and represent the most fundamental interests of our societies, we can have a more successful co-evolution that we have had in recent years. ...

Attitudes on Globalization

Someone put it to me this way: First, we said that you are going to lose your job, but it was okay because when you got your new one, you were going to have higher wages thanks to lower prices because of international trade. Then we said that your company was going to move your job overseas, but it was really necessary because if we didn’t do that, then your company was going to be less competitive. Now we’re saying that we have to cut the taxes on those companies and cut the calculus class from your kid’s high school, because otherwise we won’t be able to attract companies to the United States, and you have to pay higher taxes and live with fewer services. At a certain point, people say, “This whole global thing doesn’t work for me,” and they have a point.

So we need a global agenda that is about broad popular interests rather than about corporate freedom—that is, cooperation to assure that government purposes can be served and that global threats can be met. If we have an agenda like that, we can rebuild a constituency for global dialogue.

Government Debt

The deepest truth about debt is that you can’t evaluate borrowing without knowing what it’s going to be used for. Borrowing to invest in ways that earn a higher return than the cost of borrowing, and provide the wherewithal for debt service with an excess leftover, is generally a good and sustainable thing. Borrowing to finance consumption, leaving no return to cover debt service, is generally an unsustainable and problematic thing. ...

I think we need to be very careful, with respect to the expectation that we now seem to be setting of having government cover all the losses associated with the COVID period. For the life of me, I cannot understand why grants should have been made to airlines to enable them to continue to function, rather than allowing their share values to be further depressed, and allowing those who would earn substantial premiums by taking risk on airline bonds to do so, accepting the consequences of an investment gone wrong.

Looking towards an economy that is going to be very different than the one we had before COVID, we cannot aspire to maintain every job or every enterprise with a compensation program indefinitely. So as I look at the 30 percent of GDP deficit that we are running in Quarters Three and Four of Fiscal 2020, I don’t think that can be sustained over a multi-year period.

Enforcing Existing Tax Laws for Those With High Incomes

We could raise well over a trillion dollars over the next decade by simply enforcing the tax law that we have against people with high incomes. Natasha Sarin and I made this case and generated a revenue estimate some time ago. If we just restored the IRS to its previous size, judged relatively to the economy; if we moved past the massive injustice represented by the fact that you’re more likely to get audited if you receive the earned income tax credit (EITC) than if you earn $300,000 a year or more; if we made plausible use of information technology and the IRS got to where the credit card companies were 20 years ago, in terms of information technology-matching; and if we required of those who make shelter investments the kind of regular reporting that we require of cleaning women, we would raise, by my estimate, over a trillion dollars [over ten years]. Former IRS Commissioner Charles Rossotti, who knows more about it than I do, thinks the figure is closer to $2 trillion. That’s where we should start.

Coronavirus Priorities

The real crime is not that we miscalibrated on some economic versus public health trade-off. The real crime is that we have not succeeded in generating far greater quantities of testing, far greater mechanisms for those 40 million unemployed people to do contract tracing, far more availability of well-fitting, comfortable, and safe masks, and that we’re under-investing in the development of new therapeutics and vaccines.

When something costs $10 to $15 billion a day, you need to make decisions in new ways. We should not be waiting to see which of two tests works best. We should be producing both of them. We should not wait for vaccines to be proven before we start producing them. We should be producing all the plausible candidates. Remember, one week earlier in moving through this is worth a hundred billion dollars: two months’ worth of the annual defense budget.

A version of this article first appeared on Conversable Economist.