Former Obama economic adviser warns on debt limit
Lawrence Summers spoke at a luncheon with the Economic Club of Washington in April 9, 2009.
JEREMY HOBSON: There's a new deadline when it comes to raising the federal debt ceiling. The Treasury Department had said August 2 was the day the U.S. would start defaulting on its obligations if the $14.3 trillion national borrowing limit isn't raised. But now the White House says July 22 is the magic date for a deal to give Congress time to dot the i's and cross the t's.
We're going to talk about that and much more now with Larry Summers. Until late last year, he was the President's top economic adviser. Now he's a professor at Harvard. Larry Summers, welcome to Marketplace.
LARRY SUMMERS: Glad to be with you.
HOBSON: Well, let me start by asking you about the debate that's going on over the debt ceiling in Washington. Is it keeping you up at night?
SUMMERS: No it's not keeping me up at night because I believe that ultimately reason will prevail. There is no alternative to the government meeting its obligations. My daughters and I may have a disagreement about how much they spend at college and who should pay for their spending. We don't have the option of not paying the Visa bill.
HOBSON: Do you think that the lawmakers are going to go right up to the limit, though, with the debate?
SUMMERS: I wouldn't be surprised if this gets pretty far along. I wouldn't be surprised if there was a moment of tension that served to remind everybody how cataclysmic the consequences would be if there was to be a default. But I think it's essentially inconceivable that there will be a default.
HOBSON: Well, play out the scenario if there is a default. Why should people be calling their lawmakers and telling them not to let this go right up to the limit?
SUMMERS: Because they want to avoid a version of the Lehman Brothers catastrophe for 2008 on steroids. Because they don't want to see the buck broken on money market funds and the ensuing financial panic. Because they don't want to live with the consequences for their purchasing power of a crash in the dollar. Because they don't want to live in a nation that is no longer a nation of law, that meets its obligations. For those reasons and many more, we all have an enormous stake in doing the elementary and the obvious thing and meeting our debt obligations.
HOBSON: It seems like republicans are successfully keeping tax increases off the table when it comes to getting the budget in balance in Washington or in states like here in California. Do you think that they have won that argument for now? For years to come?
SUMMERS: I don't think we know yet what the form of an ultimate agreement will be -- either what the form of an agreement will be in the short run, that carries us past the debt limit, or in the longer term when we reconcile our spending with our revenue capacity. All of us want to pay less in taxes. The question is whether we can bring spending down in acceptable ways to the level of current revenue collections. And that's what's going to be debated for some time to come and I don't think the question of where that debate is going to end is at all clear right now.
HOBSON: Let's talk about economic growth. You have said that China is one of the biggest potential impediments to growth. What are you worried about specifically?
SUMMERS: I worry about a number of things with respect to growth. Most profoundly I worry about lack of demand in the United States. That means that factory capacity is unused, it means that buildings sit empty, it means that too many people are unemployed. And I look for measure that will serve to promote the level of demand in the United States. That's why using this moment to repair our infrastructure is so important. That's why I believe that the payroll tax cuts that put money in people's pockets and increased employers incentives to hire are so important. And that's why I believe that opening foreign markets and promoting U.S. exports which creates more demand is so important. And China is obviously an important part of that story.
HOBSON: Well you mentioned payroll taxes. You recently called for a new stimulus in the form of a payroll tax cut. But it's been reported over and over again that within the Obama administration -- when you were in the administration -- you were actually on the side of a smaller stimulus back in 2009.
SUMMERS: Not accurately. Not accurately.
HOBSON: That's not true? You weren't pushing for a less-than $1.2 trillion stimulus?
SUMMERS: No, I mean it's a much more complicated story, but those reports are not accurate. It was my judgment as an economist that there was no danger of doing too much stimulus and one should achieve as much stimulus as possible. There were a set of political calculations having to do with what the Congress could accept that were mostly determined by the president's political advisers and ultimately by the president which pointed towards the size of the program that was ultimately passed. But the economic advice that I gave was that the stimulus program should be as large as it could be.
HOBSON: Do you think it was too small in the end?
SUMMERS: I think it in the end we would've been better served if there had been more push to the economy. We would've been better served if the measures that the president put forward in the fall of 2009 for expanded infrastructure investment, for expanded support for state and local governments that passed through the House had also passed the Senate. But the choices that were made were made in a given political context and I think given the slender margins of one vote by which the Recovery Act was passed I suspect an effort to push it to a higher level might well have backfired and resulted in legislation not passing. And at that moment that would've have catastrophic consequences in terms of depression.
HOBSON: Well politics aside, do you think there's anything that the administration should've done differently in the midst of the financial crisis or the depths of the recession?
SUMMERS: I don't know what you mean by politics aside. Administrations exist in a political context. I've already indicated that I think that the imperative was to push the economy forward. I think the administration was successful in achieving as large a fiscal program at was possible in the political environment they faced. That it would've been desirable if it was still larger fiscal program could've been passed.
HOBSON: How would you describe President Obama's economic philosophy?
SUMMERS: I think he's a deeply pragmatic economic thinker. He recognizes that the key to any society is the success of its middle class. He's focused on improving opportunities for the middle class. He wants to look at experience around the world and see what works best and pursue that. He's neither an ideologue who believes in untrammeled free markets nor an ideologue who believes that everything is best done by government. But I would describe his economic philosophy as supremely pragmatic. And I think it was a successful philosophy. There was a very real chance of depression in the winter of 2009. And that was avoided. It didn't have to be avoided, but much like the nuclear, the Cuban Missile Crisis where it's not that anything great happened in October of 1962, but disaster was avoided. In the same way the policy package that the president put forward was successful in preventing the Great Recession from becoming a second Great Depression.
HOBSON: Once we get past this debt ceiling debate, what would you advise the president is the next most important economic thing to focus on?
SUMMERS: Oh I think it's got to be job creation and demand and that goes back to tax policy, that goes back to infrastructure. That goes back to promoting exports. That goes back to assuring financial adequacy for state and local governments. That goes back to promoting business confidence.
HOBSON: Do you think that manufacturing jobs are going to be a big part of U.S. economic future?
SUMMERS: Manufacturing has a crucial role. The number of jobs in manufacturing is inherently limited by the spectacular productivity growth of manufacturing, just as the number of jobs in farming has been limited by the spectacular productivity growth that has taken place in farming. We want to have as stronger a manufacturing sector as we possibly can but the reality is that right now, only about 5 percent of American workers are engaged directly in manufacturing production. Many of those in the manufacturing sector work in advertizing or marketing for finance or distribution. And so, starting with 5 percent -- a number that has trended downwards over 40 years -- we have to be realistic about not seeing that as the primary avenue for future job creation.
HOBSON: There have been a lot of stories around recently about the U.S. dollar losing its place as the world's primary reserve currency. Do you see that as something that will not last for more than another couple of decades?
SUMMERS: A very to see out beyond the last couple of decades. What I'm struck by is that in time of economic trouble, even when the economic trouble has originated in the United States, investors tend to come to the dollar rather than go from the dollar. And that's a reflection of structural features, the great liquidity of dollar markets, and it's also a reflection of frankly the weakness of the alternatives given the problems that the Japanese economy has had for two decades now, given the possibilities looming of defaults in Europe, given that the Chinese restrict in all sorts of was access to the renminbi. The dollar remains a very preferential alternative.
HOBSON: Finally, you're back at Harvard now. Anything you miss about being in the middle of the storm in the administration?
SUMMERS: I'm enjoying the fact that you can go a full day when you're not working in Washington without a moment of intense frustration. And that's been very satisfying for me and I've felt able to keep in close touch with my former colleagues and get my views in there. So I'm very happy with the opportunity I now have to think about longer range questions.
HOBSON: Larry Summers, former head of the National Economic Council, now back at Harvard. Thanks so much for joining us.
SUMMERS: Thank you.