Strengthening the middle class is the central issue facing economic recovery in the U.S., said Lawrence Summers, former U.S. Treasury Secretary and now a professor at Harvard University.
“The middle class needs to see this economy get back to its potential,” said Summers in an interview with Trish Regan on Bloomberg Television’s “Street Smart.” “It needs to see a real substantial expansion; it needs to see more focus on economic growth.”
Rising inequality and income disparity is “pulling apart” American society and must be addressed as part of the country’s renewal process, said Summers.
“‘‘We’ve had a rising tide that’s helped the yacht, but hasn’t helped most of the smaller ships,” he said. “We’re seeing the correlation between the prospects of the children of the rich and the prospects of the children of the middle class actually widening for the first time in history.”
The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to estimates released by the U.S. Census Bureau. Earnings fell 1.7 percent for the 96 million households in the bottom 80 percent -- those that made less than $101,583.
Incomes in the U.S. rose 0.1 percent in August, the Commerce Department said on Sept. 28. Wages and salaries also increased 0.1 percent and the saving rate fell to 3.7 percent, the lowest since April. Disposable income, or the money left over after taxes, decreased 0.3 percent after adjusting for inflation, the weakest reading since November.
“The private sector is not going to invest that much,” said Summers. “There’s excess capacity, there’s problems in the financial system.”
Instead, Summers said investing in the public sector, renewing the country’s infrastructure, exploiting the natural gas industry and providing stronger incentives to small businesses are all essential components of an economic growth strategy.
“These are all - managed right - effective and substantial job creators. That’s where we need to start,” said Summers. “Surely this moment, when so many people are out of work, is the moment to put people to work.”
Last week the Department of Labor said the economy added 114,000 workers in September following a 142,000 gain in August. The jobless rate fell to 7.8 percent, the lowest level since January 2009, after hovering above 8 percent for 43 straight months. Private employment, which excludes government agencies, rose by 104,000 in September.
Summers also said the country cannot afford “massive, across the board, tax cuts” at this time and that there is no evidence the tax plan proposed by Republican presidential candidate Mitt Romney would contribute to economic growth.
“The evidence is the economy can grow very rapidly and what we need is adequate revenue to do the fundamental things that the public sector has to,” he said.
Romney has called for a tax plan that would reduce income tax rates by 20 percent, cap individuals’ tax deductions at $17,000 and eliminate the estate tax and the alternative minimum tax. An August analysis by Tax Policy Center, a nonpartisan organization in Washington, found that under Romney’s plan, in 2015, $86 billion of the tax burden would be shifted to the middle class to keep the plan from increasing the deficit.
Summers is President Emeritus of Harvard University in Cambridge, Massachusetts, and previously served in the Obama administration as the director of the National Economic Council. He served as U.S. Treasury Secretary from 1999 to 2001.