Plain Talk From Larry Summers
Former Treasury Secretary Lawrence Summers, now the 27th president of Harvard University, became a tenured professor of economics there at age 28. He has since divided his career between academia and Washington. On Oct. 21, as part of the Captains of Industry series at New York's 92nd Street Y, Summers and BusinessWeek Editor-in-Chief Stephen B. Shepard had a wide-ranging discussion. Some excerpts:
What was so attractive about Washington that you spent so many years there?
The most difficult day of my professional life was the day in 1993 when I wrote a letter resigning my tenure at Harvard. But I really became caught up in what I was doing, first at the World Bank, and then in the Clinton Treasury. I don't think we got everything right, but I believe that because of decisions President Clinton made, that were unpopular when he made them -- to reduce the U.S. budget deficit substantially -- millions of workers earned higher incomes going forward.
You were there during one of the great booms, yet underneath we now know there were problems. Did you have any inkling of trouble during that period?
Sure we did. In almost every speech for about a year and a half, I would say: "The main thing we have to fear is the lack of fear itself." Optimism can be a self-denying prophecy if it leads to unsustainable spending plans or excessive expansion of credit or unrealistic growth in capacity. So yes, there was an awareness of where the risks were.
Do you share Greenspan's view that even if you think there is a bubble, there is really nothing you can do about it?
There is not much you can do. I think we tried to say cautionary things...with some frequency. I don't think it's responsible for public officials to make hubristic forecasts. And in terms of one of the important indicators, public policy has gotten less credit than it has deserved. The bank regulators at the Comptroller of the Currency, which was part of the Treasury, and the Federal Reserve, did warn the banks about the dangers of boom-time lending. And while the last four years in this country haven't been easy, what is striking is how little distress there has been in the banking system. One of the reasons for that is that public policy promoted a diverse system of finance with multiple sources.
Sure, people invested in vastly more fiber-optic cable than made any sense, but the government [shouldn't] make judgments about what the appropriate level of investments in different industries is.
We had an era when unemployment fell to 3.9%. We had very strong growth, no inflation, budget surpluses. Is this a replicable thing, or did we get lucky?
Vince Lombardi had it right when he said: "You make your breaks." Clearly, we were lucky in the 1990s [with] growth and productivity, in what high tech was able to accomplish. But one of the main reasons people were willing to take the long view was that there were low costs of capital, [partly because] the government was eliminating pressure on credit markets. We benefited enormously from information technology, but that was [partly because] the government for years had invested in the formation of networks.
Could it ever happen again?
The underlying rate of technical progress and productivity growth -- what economists call total factor productivity growth -- has accelerated in the last four years. So there is at least a prospect of rapid growth. I'm guardedly optimistic for the medium to long term in terms of the economy's potential. [But] the policies that have led to a resumption of substantial budget deficits, low national savings, and huge dependence on foreign capital mean we're going to be on fairly thin ice for the next several years.
Why are we having such a hard time creating jobs now, despite decent growth?
If you have more rapid productivity growth -- at 3% -- and the economy grows at 3%, you need the same number of people working as you did before. So it's a high-class problem to have. It means you get the same amount of output with less work, but it does mean you need to find ways of assuring the confidence in the future that will enable businesses and individuals to spend. That's why the magnitude of the future tax cuts that attenuate our flexibility to respond is unfortunate.
How serious a problem is outsourcing to India and China?
It's sort of like asking how serious a problem is the winter in New York. We can't place a variety of restrictions on where businesses choose to produce and not do enormous damage to the efficiency and effectiveness of our economy.
In a progressive economy, technology can do things people used to do, and people are going to lose jobs. That's a larger phenomenon and a larger issue than what happens with outsourcing. We have to think about the needs of those people. We can provide income support and a systematic way to retrain. I'm all for a dynamic global economy, but at the same time we have to look out for people here.
Have your views about globalization changed? Even your uncle, the economist Paul Samuelson, seems to have some reservations about the global system.
If you try to block progress and try to restrict the ability of businesses to locate where they want to, or try to restrict the flow of imports, you will make the vast majority of people poorer. I prefer recognizing that the rise of India and China is much like the rise of new technologies -- new productive opportunities for the U.S. economy. You have to work with those new opportunities and make sure people aren't left behind.
I live in Boston and New England. Boston is one of the most prosperous areas of the country, supported by institutions like mine at Harvard, by vibrant financial services. It has a terrific biotech and health-care industry and some other technology. Thirty years ago, New England was dependent on shoes and textiles, and those jobs moved away. Some thought the right strategy was to try to stop those jobs moving away. I have no doubt that people in New England today have better job opportunities because we allowed for changes in the economy.
Let's talk about Harvard. What do you want to change in undergraduate education, and how much progress are you making?
Two issues go to the content of what we teach undergraduates. Our country has never so misunderstood the world and has never been so misunderstood in the world. So we will create an expectation that all students will have an international experience in college.
You can say something similar about science. It's a crucial issue in the traditions of our universities. There is an idea that if a person doesn't know the name of five plays by Shakespeare, they would be embarrassed. But if you don't know the difference between a gene or a chromosome, well, that's a technical subject others can worry about. In a world where disease cures depend on stem cells, where computers are a pervasive part of life, I don't think that's good enough.
A third element is making sure there is the right kind and enough contact between students and faculty.
Do you have any other priorities?
I would highlight equal access in higher education. Inequality between those in the high-income groups and those in the low-income groups is widening. In the last two decades, for the first time probably in the country's history, the gap in life prospects...is growing. One of the reasons is that the gap in the college enrollment rate between [those groups] is growing.
We announced last year that any student with a family income under $40,000 can come to Harvard with no parental contribution at all. That has had a substantial influence on the flow of our applications and on our student body.
Need-blind financial aid shouldn't just be in a college. What if you want to come to the Harvard Graduate School of Education to be a teacher, or the Harvard Medical School to work in a clinic, or the Harvard Public Health School to work in Africa on AIDS? So we increase the financial aid and the loan forgiveness for people going into some form of service to society.
Talk about the Harvard endowment. There was a little controversy about the compensation of those who manage it.
They have a disciplined approach based on a substantial amount of diversification. So they are invested in timber, commodities, real estate, and less than a fifth in domestic U.S. stocks.
We've had some issues because we, unlike almost every other university, employ some of our own portfolio managers. Most universities hire hedge funds, [which] pay huge salaries to their best traders. We hire our own traders and therefore pay them huge salaries, and people sometimes get upset.
The easy thing would be to say we weren't going to do it anymore and hire external managers, like everybody else does. [But] we would then be spending $50 to $100 million a year more getting our endowment managed. It would be easier to do the inefficient thing and avoid bad publicity, but I don't think it would be the right thing to do.