Why Larry Summers Is the Economist Everyone Hates to Love (Ep. 303)
Our latest Freakonomics Radio episode is called “Why Larry Summers Is the Economist Everyone Hates to Love.” (You can subscribe to the podcast at Apple Podcasts or elsewhere, get the RSS feed, or listen via the media player above.)
He’s been U.S. Treasury Secretary, a chief economist for the Obama White House and the World Bank, and president of Harvard. He’s one of the most brilliant economists of his generation (and perhaps the most irascible). And he thinks the Trump Administration is wrong on just about everything.
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post.
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We’ll start today with a quiz. First: name a former president of Harvard. Now, name a Secretary of the Treasury under President Clinton. Now name a chief economist in the Obama White House. Now name a one-time chief economist for the World Bank. Now name a White House economic adviser under President Reagan. And now name one of the most outspoken policy critics of President Trump. How’d you do? What’s that — too easy? All right, let’s make it a little harder — name a former Harvard President, Clinton Treasury Secretary, Obama chief economist, World Bank chief economist, Reagan adviser, and Trump critic — who are all the same person.
Larry SUMMERS: Hello.
Stephen J. DUBNER: Hey, it’s Stephen Dubner. Is that Larry Summers?
SUMMERS: Hi, Stephen. How are you?
Larry Summers — or Lawrence H. Summers; that’s how he signed your money when he ran the Treasury — is considered one of the most brilliant, opinionated, and influential economists of his generation. Summers’s reputation is that he’s so smart that if you have a huge position open, you’d be an idiot to not consider him — but that he’s so irascible, so radically candid, such a non-sufferer of fools, that you may live to regret it. As Harvard learned, when Summers, after five years as its president, quit before he could be fired. But he’s back at Harvard now, as a professor. How does he spend his days?
SUMMERS: I teach classes. I advise students on research, on their future. I write a blog on various aspects of public policy. I write economics research papers on topics ranging from global health to the future of the banking system and the prospects of financial stability. I speak with government officials around the world. I advise a number of companies.
And he’s been publishing, in The Washington Post and The Financial Times, some of the most incendiary anti-Trump rhetoric around. But here’s the thing — he’s also been carrying on a multi-year campaign about the dangers of what economists call secular stagnation — a long-term period of slow growth. Summers calls it “the defining macroeconomic challenge of our times.” You can see a similar latitude in the institutions where he’s a board member or fellow or adviser. The Center for American Progress, for instance, which is essentially an offshoot of the Clinton wing of the Democratic Party. But also the much-less-doctrinaire Peterson Institute for International Economics, where he dispenses macroeconomic insights that are considered without peer. Today on Freakonomics Radio, Summers tells us what the White House felt like during the first days of the Great Recession:
SUMMERS: It was a very tense time… And there were many who thought we might be seeing a precursor to the Depression.
He talks about his policy successes — and failures.
SUMMERS: Perhaps, given what happened, you can say it was a mistake.
He lists his current economic priorities:
SUMMERS: We’ve completely mismanaged infrastructure investment in the United States.
He talks about policy decisions he would have made differently:
SUMMERS: Only an idiot would put a sign on the library door saying, “No amnesty now — thinking about one next month.”
And why he’s not a big fan of the current White House:
SUMMERS: It’s the disregard for ascertainable fact and disregard for analysis of the consequences of policy actions.
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Let’s say the year is 1954 and you are running some kind of experimental breeding lab for supernaturally talented economists. The most-prized product of your lab surely would have been young Lawrence Summers.
DUBNER: You come from a most distinguished economics lineage: your father and mother were both economists, as were two uncles who each won a Nobel Prize — Paul Samuelson and Kenneth Arrow. When you grow up with economics in your blood and in the air, how does that inform your worldview?
SUMMERS: I suppose I learned about supply and demand a little earlier than the average child did. Certainly, one of the first lessons I learned as a child was that the most important things in life had nothing to do with money. So I was always someone who took the statement that, “an economist is someone who knows the price of everything and the value of nothing,” not as a definition or description, but as a cautionary warning.
DUBNER: You’ve served many roles in government and institutions, but you’ve also spent a lot of your career in academia. Talk about the central difference between academia and government, especially when it comes to the relationship between empirical evidence and policy decisions.
SUMMERS: I always joked that — when I moved from Harvard to work in the U.S. Treasury — that the worst thing you could do as a Harvard professor was to sign your name to something you had not written yourself. On the other hand, as an undersecretary of the Treasury, it was a mark of effectiveness to do so as frequently as possible.
It’s an interesting joke for Summers to tell. In 1991, as chief economist at the World Bank, he did sign off on an internal memo that he reportedly didn’t write. It was about pollution in poor countries. “Just between you and me,” the memo read, “shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the L.D.C.’s [or Less Developed Countries]? … I think the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable. … under-populated countries in Africa are vastly UNDER-polluted.”
The memo was leaked — after which Brazil’s Secretary of the Environment wrote this to Summers: “Your reasoning is perfectly logical but totally insane,” and he called it “a concrete example of the unbelievable alienation, reductionist thinking, social ruthlessness and the arrogant ignorance of many conventional ‘economists’ concerning the nature of the world we live in.” Here’s how Summers ultimately responded to the so-called toxic memo: He said, “I think the best that can be said is, to quote La Guardia and say, ‘When I make a mistake, it’s a whopper.’” So that’s one difference between academia and politics.
SUMMERS: Of course, there was another difference, which is that as a scholar, if you work on a problem and you work on a problem and it’s just too hard and you can’t find a good solution, what you do is you move on to a different problem. As a policymaker, you don’t have that luxury. One huge difference between the needs of scholarship and the needs of policy-making is that, in scholarship, if you point up an important aspect of a problem that nobody’s really thought much about before, and you show that it’s important, and you explore it in its various aspects, you’ve made a very valuable contribution. It’s the essence of scholarship to abstract from many things in order to highlight a particular point. It’s the essence of policymaking to be able to see all the aspects of a given situation. If you’ve neglected any important aspect, you’re probably not doing your job very well because that can lead you to make a wrong decision.
In 1993, Summers won the John Bates Clark Medal, given to the best American economist under 40. He was still young but he was also an old hand — Harvard had awarded him a professorship back in 1983, when he was just 28. He’d taken a leave to work at the World Bank — then back to Harvard. But then it was back to D.C., as Undersecretary of the Treasury for International Affairs. He was at Treasury for six years before Bill Clinton named him Secretary, toward the end of Clinton’s final term. (By the way, Summers’s chief of staff at the time? Sheryl Sandberg, now of Facebook and Lean In fame.) Summers’s time as head of Treasury was marked by a push for modernizing the financial and regulatory systems.
SUMMERS in a speech: Let me welcome you all here today for the signing of this historic legislation. With this bill, the American financial system takes a major step forward towards the 21st century.
Along with the new Republican Administration, under George W. Bush, came a new Treasury Secretary, Paul O’Neill. But within seven months, Larry Summers went from being the 71st Secretary of the Treasury to the 27th President of Harvard.
Charlie ROSE in an interview: Tell me about this world’s richest university that you’re taking the helm of.
SUMMERS in an interview: Harvard is a very special institution and the challenge for the next decade is to maintain Harvard’s excellence.
His agenda for Harvard was ambitious: a physical expansion of the campus; a greater emphasis on science; more financial aid; and making sure students, especially undergraduates, had good access to faculty. He made some progress but, along the way, he also made enemies. Maybe it was his background in academic economics — where intellectual firepower counts for a lot more than manners. In any case, he infuriated some people, alienated even more.
What turned out to be the final straw was a talk Summers gave at a small economics conference in Cambridge. The theme was diversifying the workforce in science and engineering. Summers made it clear that he was speaking, “unofficially and not using this as an occasion to lay out the many things we’re doing at Harvard to promote the crucial objective of diversity.” In other words, he’d be speaking as an economist, not a bureaucrat.
The question he sought to address: why are women so underrepresented “in tenured positions in science and engineering at top universities and research institutions”? He made clear this was hardly a unique case. “To take a set of diverse examples,” his lecture read, “the data will, I am confident, reveal that Catholics are substantially underrepresented in investment banking, which is an enormously high-paying profession in our society; that white men are very substantially underrepresented in the National Basketball Association; and that Jews are very substantially underrepresented in farming and in agriculture.” When it came to the underrepresentation of women in science, Summers identified several possible factors: discrimination; gender differences in preferences and in socialization from an early age; but also, as he put it, “there are issues of intrinsic aptitude.”
He went on to say, “I would like nothing better than to be proved wrong, because I would like nothing better than for these problems to be addressable simply by everybody understanding what they are, and working very hard to address them.” But once Summers’s remarks became public, no amount of nuance or wishful thinking could save him. His goodwill account had run dangerously low, and, with the writing on the wall, he resigned. As you can imagine, Summers is not fond of talking about the end of his Harvard reign. I did want to ask him, however, about some interesting new research concerning women in science.
DUBNER: [I’ve] no idea if you’ve seen it or know anything about it. It’s by David Card and Abigail Payne. It argues that, for STEM students in college, it’s not so much a case that women are underrepresented as that men are overrepresented. The reason being that many more women enroll in college now generally than men and that men are typically much worse than women in non-STEM fields. Basically, the men who are good enough to go to college tend to be more appropriately suited to STEM. I don’t know if you know anything about this paper, but I’m really curious to know your thoughts on it since it obviously picks up on a topic that led to your demise as president at Harvard.
SUMMERS: Well, I’m going to stay away from that aspect of my time at Harvard, Stephen. I’m afraid I haven’t seen the Card and Payne paper. It is, I believe, a fact that if you look at men who have extremely high test scores in mathematics and women who have extremely high test scores in mathematics — that if you look at the test scores outside of mathematics, the women will on average have higher scores. That may have something to do with the respective choices, precisely because the women have the greater intellectual strength in the verbal areas. But I’m not going to say any more about this because, as I say, I have not had a chance to read the Card and Payne paper.
Summers’s comments at that conference would continue to dog him. When Barack Obama was elected in 2008 and installed Summers as head of the National Economic Council, there was a lot of pushback. “[T]his is a man who only listens to what he wants to hear,” said a female M.I.T. scientist. “Does Obama care that someone says 50 percent of the population is genetically inferior to the other 50 percent?” During his first White House Correspondents Association dinner, Obama tried to joke about Summers’s reputation — not very successfully …
Barack OBAMA at the White House Correspondents Dinner: We’ve also begun to change the culture in Washington. We’ve even made the White House a place where people can learn, and can grow. Just recently, Larry Summers asked if he could chair the White House Council on Women and Girls. [Weak laughter.]
Coming up on Freakonomics Radio. Summers on the Great Recession; Summers on Trump; and Summers on Summers:
DUBNER: You think you’ll serve in government again, Larry?
SUMMERS: You never know what’s going to happen.
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Here are a few headlines of the articles and blog posts Larry Summers has written lately: “Trump’s C.E.O.’s Resigned. His Staff Should Do the Same.” “What History Can Tell Us About Trump’s Budget Fantasy.” “Western Civilization and Presidential Hypocrisy.” In his denunciations of Trump, he has begun to out-Krugman Paul Krugman as the economist most likely start a bonfire. But there’s a difference. No matter how indignant Summers gets, his analysis isn’t received as mere ranting. His bona fides in government seem to have earned him the right. Now, why had Barack Obama been willing to install someone with Summers’s baggage as head of the National Economic Council? Because if you are a new, young President who’s just inherited the scariest recession in generations, you want experience and you want brilliance. And that is what Larry Summers had come to represent.
OBAMA: As one of the great economic minds of our time, Larry has earned a global reputation for being able to cut to the heart of the most complex and novel policy challenges. With respect to both our current financial crisis and other pressing economic issues of our time, his thinking, writing and speaking have set the terms of the debate. I’m glad he will be by my side playing the critical role of coordinating my administration’s economic policy in the White House and I will rely heavily on his advice as we navigate the uncharted waters of this economic crisis.
DUBNER: What was it like to be on the inside of the Obama Administration during the financial meltdown, especially those early weeks where the future of the economy was in question?
SUMMERS: It was a very tense time. We would meet with the President each morning and talk about what was happening, what had happened in the markets the previous day, what we’re hearing about the health of different financial institutions. But the President was very clear. He said, “This is why I was elected: to do the right thing, whatever the right thing is. Don’t tell me about the political problems. Tell me what the right thing to do is.” That’s what Tim Geithner and I tried to do.While battlefield medicine’s never perfect and the[re are] things you could look back on and ask questions about, I think you’d have to say that the fact that we had such a dramatic turn in the economy — in May, June of the president’s first year — means that, at least on some of the big, broad-picture aspects, that the approach we chose was effective. Certainly, it wasn’t a priori clear that it would be as effective as it was. There were many who thought we might be seeing a precursor to the Depression.
DUBNER: You were co-chair of the President’s Auto Task Force. One of the biggest and most difficult decisions was whether to bail out G.M. and Chrysler. You argued in favor of a bailout — and you won the argument, though not without a fight — the other side represented by Austan Goolsbee and others. Give us briefly your perspective on this chapter. Even though you won the argument and even though, from what I can tell, your argument turned out to be correct — in retrospect, I’m wondering if there’s anything you might have done differently.
SUMMERS: No. As it always is in providing emergency lending, on the one hand, the cost of keeping Chrysler alive was about the same as the cost of providing for unemployment benefits for all the workers and pension benefits for all those who the pension insurance company would be on the hook for if Chrysler went belly up. At one level you could say, there really wasn’t a net cost to keeping Chrysler going. The problem, of course, was that if you didn’t succeed in keeping Chrysler going, you’d pay twice. Once for your failed attempt to keep Chrysler going and then again, when it failed, you’d end up not having avoided the costs of failure.
One had to make a judgment, given the dynamics at that time about the prospects that, with support, Chrysler would be able to turn things around. You had to be able to make a judgment about how widespread the consequences would be for the rest of the economy if Chrysler were to go down. I believed that there were no certainties. But I thought there was a substantial chance that, given this support, Chrysler would be able to make it forward and G.M. would be able to make it forward and that you would avoid dealing with something traumatic at a moment when the economy was least in a position to deal with something traumatic. I think that judgment has been borne out by subsequent events.
Could there have been slightly different conditions? Could there have been a slightly different allocation between bondholders and workers of the costs? Could the shares that the government took have been put back on the market with different timing? These are all questions where reasonable people can argue with the benefit of hindsight, where there would be people who would have made different judgments than the ones we did at the time we made our judgments. But I think the broad strategic judgment has been overwhelmingly borne out by what’s happened.
DUBNER: Now there are some people who would argue that the financial crisis itself was a product, in some part, based on decisions that you and others had made in a previous Democratic administration — the Clinton Administration; specifically as part of the Financial Services Modernization Act, the repeal of Glass-Steagall, which freed up banks to be more aggressive. Also, you argued quite heavily against the regulation of derivatives, the financial instruments which, of course, turned out to be quite dangerous. Looking back, same question: what do you think you might have done differently if you knew then what you know.
SUMMERS: With the benefit of hindsight and if you wave away all the political problems that would have existed at that time, it surely would have been much better to have put in place all the kinds of safeguards that were contained in the Dodd-Frank legislation that was passed in 2010, to have anticipated all of those needs, and to have put them in place during the 1990s. I think that, in assessing the actions that were taken in the 1990s, there are a number of things that are useful to keep in mind.
With respect to Glass-Steagall, there’s nothing in the crisis that had to do with the combination of commercial banking and investment banking, which is what Glass-Steagall was all about. You think about the main institutions that were involved: Lehman Brothers had nothing to do with commercial banking, Bear Stearns had nothing to do with commercial banking, Fannie and Freddie had nothing to do with either, A.I.G. was an insurance company, and I could go on with the list. In fact, some of the key measures that resolved the crisis, such as J.P. Morgan’s taking over of Bear Stearns or Bank of America’s taking over of Merrill Lynch, involved the combination of commercial banking and investment banking. So I don’t find it plausible that Glass-Steagall reform had anything to do with causing the crisis. I think it’s a mistake that economists should be able to move beyond — to simply phrase these questions as “all regulation is good and all deregulation is bad.”
I think the question of derivatives is a much more complicated story. Our desire was not to keep derivatives deregulated. We ran into a problem, which was that statements that had been made by the C.F.T.C. called into question whether the enforcement of all the huge trillions of dollars of derivatives contracts out there would be possible. Because of the way they’d made the statements, they seem to be questioning the enforceability of those contracts. Under those circumstances, there was huge pressure from Congress to provide legal certainty. It was a Republican — very much a free-market — Congress and they insisted, as part of providing legal certainty, that there be some removal of certain regulatory issues with respect to derivatives.
Should we have gone along with that? Perhaps, given what happened, you can say it was a mistake. I worry that it may have been a mistake. On the other hand, there were issues that seemed pressing to the experienced attorneys at the S.E.C., the Treasury, and the Fed about legal certainty to which we were responding. If we had preserved authority, I don’t think very much would have happened because while we did sign legislation that reduced regulatory authority, the Bush administration, which was the administration in power from 2000 until the crisis hit, used only a small fraction of the regulatory authorities that it had. It, in fact, ran major photo-ops where they showed all the regulatory officials taking the saws you use to cut wood to books of regulations. It’s hard to believe that whatever authority had been preserved would have been used by the officials who were staging book burnings of regulatory books.
I’m not completely objective on it. Again, I would wish more than anything that we had had the foresight and the political strength to put in place — irrevocably — the kind of protections that were put in place in 2010 with Dodd-Frank. But I think that the narrative is, at least, much more complicated than that of many who simply say, “They were for deregulation and then we had a crisis, so it must have been a mistake.”
No matter how complicated it was; whether Summers made “mistakes” or not — the fact is that he accumulated plenty of critics, even on the Democratic side. In 2013, when the White House floated the idea of Summers as a possible replacement for Ben Bernanke, the outgoing Federal Reserve chairman, a chorus rose against him.
CNN Newsroom: Three Democrats on the Senate Banking Committee recently said they would not support Summers.
Jeffrey SACHS on Morning Joe: The prospect of his appointment had unified Washington against, both sides, both parties. People want a new page.
Joe SCARBOROUGH on Morning Joe: It seems like the president was the only person in Larry Summers’s corner. I just didn’t hear anybody in Washington or across the country come out in support of him.
The left flank of the Democratic Party had grown particularly frustrated with Summers. He had become the face of a discredited brand of economic centrism that was considered too friendly to the big banks. He did have his defenders — like former President Bill Clinton:
Bill CLINTON: He’s a friend of mine and I think that a lot of the criticism in which he’s been subject about — what he did in my administration — is not accurate. There’s this cartoon image that’s been developed that somehow Larry Summers was a one-note Johnny just trying to let big financial titans ravage the land, and it’s just ludicrous.
But it was clear which way the wind was blowing. Summers wrote a letter to President Obama, withdrawing his name from consideration for the Fed Chair post. Larry Summers may no longer be the political player he used to be, at least for now, but in the age of Trump, he’s more vocal than ever.
DUBNER: Give me a thumbnail assessment, if you can, of the two men who are serving in two roles that you’ve served under different administrations. Gary Cohn, Director of the N.E.C., National Economic Council. Steve Mnuchin, Treasury Secretary.
SUMMERS: One of the crucial functions of the Treasury Department is to be a bulwark of financial integrity for the federal government. I’ve been disturbed by the number of things that Secretary Mnuchin has said that were not actually true. His claim that the Trump tax cuts would not provide any relief to those with the highest incomes. His strong defense of the President’s behavior with respect to the tragedies in Charlottesville. A variety of his statements about the plausibility that the President’s policies would stimulate economic growth, seem to me to have put his credibility in considerable doubt. That’s not a personal thing. We don’t know when there’s going to be some crisis or serious economic problem. It will be necessary for the Treasury Secretary to provide reassurance. At the moment when it is necessary for him to provide reassurance, his credibility is going to be a crucial asset. If he has said that Donald Trump didn’t provide any aid and comfort to racism, if he has said that the tax cuts are not for rich people, then his credibility will be less there when the moment comes, when it is asked.
In the same way, I have been surprised by the number of statements that Gary Cohn has made that just are matters of fact and aren’t right. He asserted that Dodd-Frank had cost banks a few hundred billion dollars a year in compliance costs. I happen to support Dodd-Frank regulations. Reasonable people can agree or disagree as to whether they’re a good idea. But given that the total payroll of all the banks in the country is $400 billion, it seems unlikely that complying with Dodd-Frank is costing a few hundred billion dollars in compliance costs. Gary Cohn asserted that he was working on doing the first tax cuts in 31 years. Well, we had tax cuts in 1997, 1999, 2001, 2003, and a variety of other years. There are a variety of misstatements that are made. Now, you can say that everybody exaggerates in service of an argument. You can say that it’s all politics and it’s not a seminar room. On the other hand, I think, in the economic and financial arena, it’s very important for public officials to maintain their credibility.
I would add that on the evidence so far — and of course, things may change — the President talked about a variety of things in the economic area. He talked about what he regarded as the economic benefits of repealing Obamacare. That didn’t happen. He talked about the benefits of infrastructure investment. Nine months in, there’s not even a plan from the administration for infrastructure investment. He talked about how he would bring about dramatic changes in our trade relations, but he didn’t do what he’d said he was going to do with respect to China or with respect to NAFTA. So if you judge by, “Has the administration been successful in bringing into place the policies he’d campaigned on?” or if you asked the question, “Has the administration been successful in bringing into place significant policies that have the prospect of spurring economic growth?” one would have to say the answer to both those questions so far is no.
DUBNER: Just pretend for a minute that you are on the Republican team. Presumably, you could make an argument that it’s early days. Indeed, there is a tax-reform plan under discussion, at least, and that these things take time. Right?
SUMMERS: If you look at some past presidencies — I didn’t support them, but President Reagan’s signature policy, his tax cuts, were passed in July or August of 1981. President Clinton’s signature economic initiative, the Budget Deficit Reduction Act of 1993, was passed in July of 1993. President Obama’s signature economic policy, the Recovery Act from the recession, was passed in February of 2009. The economy had had its biggest turn from a negative quarter into a positive quarter in the post-Second World War period in the — between the second and third quarter of 2009.
I can go on with examples like the legislation that L.B.J. achieved in the summer of the year after his re-election in 1965, or in the summer after he took office in 1964 with the Civil Rights Act. I think the experience is actually very compelling that large deeds by presidents — in the economic area — tend to have been legislated by this phase in the presidency or at least tend to be very much in prospect. So I don’t think it’s unfair to apply the standards that history has applied in judging other presidents. You know, I left out what’s obviously the most important example, which is F.D.R.’s Hundred Days. We’re now well past 200 days.
DUBNER: Let’s say a Democrat like Hillary Clinton had won and let’s say Hillary Clinton brought Larry Summers back to D.C. in some to-be-determined policy position. If you’re making your to-do list, right now, 2017, for the American economy, and America as part of the global economy, what are your top three items? What do you most want to accomplish?
SUMMERS: I think we’ve completely mismanaged infrastructure investment in the United States. We have a way inadequate level of spending. It’s nuts that, when interest rates are lower than they’ve been any time in 50 years, that we’re also investing less, net of depreciation, than at almost any time in the last 50 years. It’s nuts that we have a regulatory apparatus that means that it took far longer to repair a single exit of the Oakland Bay Bridge than it did to build the entire Oakland Bay Bridge two generations ago. There’s a small bridge across the Charles River that I’m looking at outside my office. It’s about 300 feet long. It was under repair, with a lane of traffic closed, for five years. Julius Caesar built a bridge over a span of the Rhine that was nine times as long in nine days. Both on the quantity of expenditure and on the efficiency of the expenditure and the streamlining of the effort, there’s plenty of room for improvement. That’s not a partisan thing: Democrats tend to be bigger on spending; Republicans tend to be bigger on the streamlining.
DUBNER: All right, infrastructure [is] number one.
SUMMERS: Second, I think the President’s right on the principle, even if he’s wrong on the specifics, with respect to tax reform. Look, we have $2.5 trillion sitting abroad. Indulge me, if you will, Stephen, in an analogy. Suppose you ran a library. Suppose you had a lot of overdue books from your library. You might decide to give a library amnesty, so people would bring the books home. You might decide to say that there would never be an amnesty, and people better bring the books back because otherwise the fines are just going to mount. But only an idiot would put a sign on the library door saying, “No amnesty now — thinking about one next month.” Yet what have we done as a country? We’ve said to all the businesses with that $2.5 trillion abroad that, “If you bring it home right now, you’ll have to pay 35 percent tax. But we’re talking about and thinking about and planning and maybe we’ll have some tax reform where that will go down.”
Getting to [a] resolution, one way or another, on the corporate-tax regime is a very important issue. I’d like to see us tax global income more heavily than we do now, even if it’s not repatriated and brought back into the United States. Then I’d like to see some more favorable rate if it is brought back into the United States, so that we greatly narrow the gap that provides an incentive to keep capital outside the country right now.
DUBNER: Do you get rid of carried-interest loophole or you keep it?
SUMMERS: I think that we have a variety of tax breaks for financial engineering like carried interest, various breaks that let the wealthy engage in complicated loan transactions with their children, that facilitate the avoidance of tax. All of these things, if they were repaired, would help us have a more dynamic and a more efficient economy. The third thing is adapting to the knowledge economy. The truth is that value used to reside heavily in how heavy a thing was and now it resides heavily in how knowledgeable it is. That means a whole set of things, starting with strengthening an education system. In many ways, one of the triumphs in this country is that we have — over the last generation — largely conquered price inflation. Inflation rates have been very low. But we certainly haven’t conquered grade inflation. When the most common grade in our leading universities is ‘A,’ I don’t think it can be very surprising when there’s various kinds of misrepresentation and exaggeration of profits by the graduates of those universities down the line when they’re in positions of responsibility and business.
DUBNER: You talk about us having conquered inflation, but lately you’ve been writing about the reasons why federal government can’t shrink. One of those reasons that I found really interesting — you talked about how changes in structural pricing that disproportionately affect government are huge. You talk about the Consumer Price Index from 1983 versus today and the things that have gotten relatively cheaper and the things that have gotten relatively much more expensive. Can you talk about that for a moment? I assume where that leads to is a conversation about what you economists call cost disease, yes?
SUMMERS: Yeah. Just as point of fact, we use this so-called Consumer Price Index to measure what happens to the price of different goods. It’s an index, so it’s set at a certain level at a certain year. The Consumer Price Index for all products are set — just as a convention — to be 100 in 1983. If you look at the Consumer Price Index for television sets, it’s now about 6. If you look at the Consumer Price Index for a day in a hospital room or a year in a college, it’s about 600. In other words, since 1983 the relative price of this measure of education and health care, as opposed to this canonical product, the TV set, has changed by a factor of 100. That’s got a number of consequences. One is, since government is much more involved in buying education and health care than it is in buying TVs, there’s going to be upwards pressure on the size of government relative to the rest of the economy. Another is that, because there’s been far greater productivity growth in the production of television sets than in the production of government goods, a larger fraction of the workforce is going to find itself working in the areas where there’s less productivity growth, like education and health care.
This is the phenomenon that was first noticed by the late Princeton economist William Baumol, that’s sometimes referred to Baumol’s Disease or cost disease. It refers to the fact that if workers become much more productive doing some things — and their wage has to be the same in all sectors, then there’s going to be a tendency for the price of the areas in which labor is not becoming productive to rise. That’s why it costs more to go to the theater relative to other things that it did when I was a child. That’s why tuition in colleges has risen. That’s why the cost of mental-health counseling has risen. All kinds of activities where it takes inherently a person one hour to provide a given service and where productivity growth is defeating the point. Productivity growth in education, after all, is a higher ratio of students to teachers — which is exactly the opposite of what we all want for our kids. Those structural changes are going to define our economy.
DUBNER: You are known to admire and respect raw intelligence or, perhaps even better, cultivated intelligence. How smart do you think Donald Trump is?
SUMMERS: Oh, I’m not going to be in the position of evaluating that. I don’t think that raw intelligence, in the I.Q. sense, is a terribly important attribute in being President or in leadership. Concern with understanding the issues with which one is grappling, honesty, and integrity about facts are much more important values. I, therefore, been very troubled by the President’s fairly constant statements of historical events that distort them substantially — statements of matters of objective fact, like the size of crowds at his inaugural, that are inaccurate statements of intention; like the extent to which his tax cuts will favor wealthy people — that are inconsistent with the reality of those tax cuts.
It’s not issues of intelligence that have troubled me about the President and some of his officials. It’s disregard for ascertainable fact and disregard for analysis of the consequences of possible policy actions. When the President proposed a budget that included obvious double-counting of what were probably, to start with, vastly exaggerated claims for the revenue benefits that would come from extra economic growth caused by tax cuts but then to double-count it because of an elementary logical error — you don’t necessarily expect a President to catch that type of thing, but you do expect a President to surround himself with people who are sufficiently competent that that type of thing won’t happen. You do expect a President to be alarmed if things of that kind happen. Certainly President Clinton or President Obama would have been very disturbed if somehow the budgets they put forward had had the blatant logical errors that were contained in President Trump’s budget.
DUBNER: You think you’ll serve in government again, Larry?
SUMMERS: You never know what’s going to happen. But right now and for the foreseeable future, my focus is very much on my teaching, research, and writing.
DUBNER: Are there any potential Democratic candidates in 2020 or 2024, whatever, that you’d get particularly excited about?
SUMMERS: I just try to focus on the issues, not the personalities.
DUBNER: You think President Trump will serve out at least one full term?
SUMMERS: We’ll have to see what happens. That proposition is certainly more in doubt than it’s been with any president that we’ve had in September of his first year.
DUBNER: Do you bet? Are you a gambler at all? Even like a football pool or —
SUMMERS: I’m not really a gambler. Stephen, I’m getting near the end of my time here.
DUBNER: All right, let’s say goodbye. I thank you very much for your time.
SUMMERS: All right. Thanks very much.
If you’re a gambler, and if a Democrat gets back to the White House any time soon, what do you think are the odds they’ll invite Larry Summers back to D.C.? Yeah, that’s what I think too.
On the next Freakonomics Radio: Just about every public place you go these days, you’ll hear music being played, or some kind of a soundscape. So that’s a lot of sound to deal with – after all, we aren’t born with earlids. But the one place where you really want some noise? It’s quiet as a tomb.
Steve LEVITT: Oh it’s disgusting, but honestly, I really try to avoid restrooms where there are lots of men doing fireworks, you know.
“Time to Take Back the Toilet.” That’s next time, on Freakonomics Radio.
Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Greg Rosalsky. Our staff also includes Alison Hockenberry, Stephanie Tam, Merritt Jacob, Eliza Lambert, Emma Morgenstern, Harry Huggins and Brian Gutierrez; the music you hear throughout the episode was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts. You can also find us on Twitter, Facebook, or via email at email@example.com.
Here’s where you can learn more about the people and ideas in this episode:
- Larry Summers, professor of economics at Harvard University.