Larry Summers: Bullish About Practically Everything

The U.S. Treasury Secretary on China, Japan, the budget...

This has been a busy time for Treasury Secretary Lawrence H. Summers and the Clinton Administration. On Nov. 15, the Administration inked an agreement to bring China into the World Trade Organization -- long a goal of Summers and his President. And on Nov. 17, they sealed a deal on the overdue federal budget with the Republican-led Congress. In between calls to lawmakers trying to wrap up the budget, Summers spoke to Business Week Economics Correspondent Rich Miller about the latest developments, including rising interest rates. Here's an extended, online-only version of the interview that appears in the Nov. 29 issue of Business Week:

Q: Can China deliver on the promises it has made to get into the WTO?

A: I'm sure that there will be implementation issues, as there are in these agreements with many countries. But one of the strengths of the WTO arrangement is that it provides a stronger, more rapid capacity for responses to failures to comply. There's no question that the pace of market opening in China will be significantly faster and U.S. leverage to encourage market opportunity will be significantly greater with China in the WTO than without China in the WTO.

Q: Is there a risk that China will undercut the deal by devaluing its currency to make imports less attractive?

A: The Chinese have made quite clear their sustained commitment to currency stability. That was something that was emphasized both by [the Chinese] Premier and the central bank governor during my trip [there last month]. And they have very substantial means toward achieving that end with a very large supply of [foreign currency] reserves. If anything, [the WTO deal] probably acts to a limited extent as a factor that would strengthen the renminbi by increasing the attractiveness of investment in China.

Q: What's the impact of the WTO deal on the U.S. trade deficit with China?

A: Other things equal, this agreement will reduce the bilateral trade deficit. I don't think at this point we're in a position to quantify [by how much].

Q: How's the world economy faring?

A: We can take satisfaction from the trends of the last year. Our economy has continued to grow rapidly without excessive inflationary pressure. Europe and Japan will both do better this year than were forecast. But there is a great deal to worry about and to work on going forward -- avoiding complacency and overconfidence, ensuring that the pattern of world growth becomes more balanced and the U.S. ceases to be the single engine, assuring that the flow of capital to emerging markets picks up and making sure that even after the financial crisis, the hard work of structural reform continues.

Q: Is the world economy strong enough to take the recent rise in interest rates in the U.S. and elsewhere?

A: The changes in longer-term interest rates are a reflection of economic strength rather than a threat to it. Increasing long-term

interest rates have coincided with increasing asset prices and volumes of investment. That tends to suggest that [rates] have not put downward pressure on investment plans.

Q: Has Japan's economy turned around?

A: There have been increases in asset prices and an improvement in the tone of the economic statistics. But it's important not to prematurely declare an end to Japan's economic problems or the need [for it] to support strong domestic-demand-led growth.

Q: What's the outlook for Europe?

A: Europe's situation today bears some resemblance to that of the U.S. in the mid 1980s. There are real concerns about competitiveness and the need for substantial restructuring of many large corporations. And just as in the U.S., where financial markets drove substantial restructuring, value-maximizing shareholders are starting to make a big difference in Europe. What public policy will permit in terms of labor-market flexibility and deregulation will be crucial in the years ahead.

Q: Doesn't the pending U.S. budget deal signal a return to fiscal laxity because it busts caps on government spending?

A: This is a fiscally responsible deal because it pays down more debt than ever before. It will balance the budget, possibly with $100 billion to spare. [And] it avoids permanent commitments that would have dissipated a large part of projected budget surpluses.

Q: Won't the increased spending reduce future budget surpluses?

A: Over the last 10 months, we've run ahead of the schedule in the President's budget for the elimination of the national debt by 2015. And after this budget agreement, I am confident that the projected surpluses and debt pay downs will be measured comfortably in the trillions of dollars over the next 10 years.

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