Larry Summers on Macroeconomics, Mentorship, and Avoiding Complacency | Conversations with Tyler

I'm here with Larry Summers. Of course, Larry has many notable achievements, but for me personally, the most important one is that of all the classes I took at Harvard University, he taught the very best one, and that was PhD Macro 1. So I'd like to start with a question about education and this idea of mentoring. In your career, you've mentored a large number of very successful people. Alan Krueger from my class, Ed Balls, Sheryl Sandberg, Natasha Siren, who's here with us today. Uh, what is your philosophy of mentoring? How do you think about this analytically? And what can the rest of us learn from this?

So I should say first, uh, Tyler, since you were kind enough to compliment my class, that when my wife heard that I was, uh, doing this interview with you, she thought it was really exciting. Because you had written the only economics book that she had ever enjoyed reading. That book being about where and how to find good food.

Yes.

So she really, you know, working in the White House, that was fine. But being interviewed by Tyler Cowen, that meant I had really arrived.

Thank you.

You know, I don't really think of it as mentoring. I think of it as finding people who are as talented as I can to work with, and then trying to make sure that it's something that works for both people. And so each of the people you've mentioned, I've got an enormous amount out of the working relationship as we collaborated on various kinds of projects. Projects, and I tried to give back as well by helping people advance in their careers. And in each of the cases you formed, I— you described, I formed friendships that have lasted for a long time. So I thought of it as something that was very much— I didn't think of it as some huge act of generosity on my part. Very much the contrary. Getting to work with Sheryl Sandberg, I was a much better Treasury Secretary because I had Sheryl Sandberg as a chief of staff. Something similar is true of each of the people I've worked with. I think my experience working with people is that if you pick able people, and you make clear that you think very highly of their talents, they will welcome it if you tell them the truth about what they've done better and what they have done worse. And so I've had a relatively direct approach with the people who I've, who I've worked with, and I've encouraged them to have a very direct approach with me, and that's tended to work out for both of us.

Who's innovating in higher education right now, and what are they learning from this innovation?

Not enough people are innovating enough in higher education. You know, the place to start is General Electric looks nothing like it looked in 1975. Harvard or Yale or Princeton or Stanford look a lot like they looked in 1975. They're about the same size to within a factor of 2. They're about the same number of buildings. They operate on about the same calendar. They have many of the same people, or some number of the same people, in significant positions. So I think the main thing to say is that for something that's all about ideas, and for something that's all about young people, The pace of innovation in higher education is stunningly slow. We're still on a system where the break is in the summer, and the reason we're on that system is that when everybody went to pick the plants, that was the natural way to organize school, and it's still going, uh, that way. You know, I think the action in— the potential action in higher education is probably heavily through distance learning and artificial intelligence and learning technologies of, uh, various kinds. Because if you think about it, the unique capacity that online education has is that on the one hand, there are huge economies of scale. Once the lecture's filmed, 100,000 people can watch it at the same cost as 100 people watching it. And on the other hand, you can have much more personalization. You can re-listen to the bit you didn't understand. You can insert diagnostic questions and have a different lecture for people depending on how they do on the diagnostic questions. So it permits what's usually very rare, which is more differentiation and more economies of scale. But I would say, to date, it hasn't yet been pursued on a scale and with a degree of energy that is commensurate with the real challenge. You know, a number of universities have made what Clay Christensen would say is the first elementary error. They said that their MOOC efforts, or their, distance learning efforts are gonna all be designed to be complementary of better education on their campuses. Well, that's, there's certain logic to that in terms of faculty politics and in terms of faculty comfort and all of that, but the essence of Clay Christensen's lessons about disruptive innovation is if you wanna do something all new, You have to separate it from the original mission, not judge it by the standards of the original product, and let it be separate. And what I've been struck by in the distance education efforts is that they tend to be very much within paradigm and not set up in separate ways. So I think there's— I think the main thing to say about innovation in higher education is that there's much too little of it.

Regular economics. One hears increasingly these days that the higher concentration ratios in the American economy are an economically relevant fact. We all know those ratios are up somewhat, but at the same time, consumers don't in an obvious way seem to feel the burden of monopoly if you just look at product choice and variety. Productivity may be slow. The growth of manufacturing output appears to be quite steady. There's not obviously a break in that series where all the monopolies restrict output. So we have all these different pieces of data, high share values, high measured profits, very steady output behavior, a lot of product variety. How do you think about the issue of monopoly in the American economy right now? Is it significant or not?

I'm not, most things I might be right or wrong, but I'm confident. This is one where I'm not certain. On the one hand, Tyler, higher concentration ratios, higher profit with lower investment manifest in lower interest rates. More monopoly power sort of fits the story, right? On the other hand, take a thing like Apple Pay. Apple Pay means that Apple, which is already the largest company in America, is even larger. And so you could say that's kind of more monopoly and more market power, or you could say there's a whole financial industry that's now getting competed with from outside the financial industry, and so it's making things more competitive. And both those views have merit. I kind of think the second may have more merit than the first. So some of the rhetoric one hears recently, which kind of leave you with the impression that we're seeing an era of a lot of new Standard Oils, seems to me to be quite overdone with respect to the facts as I understand them. On the other hand, uh, are there combinations of, uh, healthcare systems in cities where we go from having some real competition to there being one dominant provider and clearly the consumer's benefits? I think there's almost certainly a, uh, almost certainly some problems there. Are there difficult issues when information is central, um, as it would be with a Facebook or a Google? Yes, there are difficult issues, privacy, reliance on information, networks, um, but are those best thought of through the prism of antitrust and monopoly? I'm not at all sure that that is the best way to think about them. After all, in some sense, the products in those two examples are given away to consumers for free. I think one of the most important issues for economists to figure out over the next year or two, next couple of years, is how to think about these trends. I think there are some selective grounds for concern. I think it's much more likely that antitrust has been insufficiently tough than it is that it's been too tough over the last decade. But I also think one needs to, Be careful about the fact that being a successful business will tend to cause you to have more profits. And we usually think of that as a good thing, not a bad thing.

Here's a real softball question. What's the optimal rate of tax on capital income?

Closer to the tax rate on other income than to zero. Would be my answer to that. A fair amount of capital income reflects rents of one kind or another. Capital income is substantially held by those at the high end. There's a fair amount of what's really capital income in the form of unrealized capital gains. That never gets taxed. So I think the right aggregate capital income tax rate is closer to the— what would go with a comprehensive income tax than it is to the alternative idea that capital income taxation is just a way of taxing future consumption, and therefore you should You should tax future consumption and present consumption at the same rate, and the tax rate should be zero.

If we think about the 1980s, there are a lot of models from that time, some coming from your research, where you have an infinite horizon model with a zero tax rate on capital income. At some point, enough capital accumulates so that even wages are higher, and there is a kind of steady state long-run argument that still the number should be zero. What has changed that makes those models less applicable? Is it that we think the elasticity is different or is it some other variable? What's changed in our knowledge or your understanding?

At the technical level, there's been some mathematical work showing that some of the results that you're referring to from the 1980s were just mathematically wrong. That's one part. I think the second and more consequential part is that the premise of those models was essentially that the supply of capital was infinitely elastic. And so you would— whatever the tax rate, you would drive capital to the point where the after-tax rate of return was some fixed number. And that just now looks like a very poor description of reality. Reality. We've seen real interest rates fluctuate substantially, and we just don't see that when real interest rates are higher, savings is lots higher, and when real interest rates are lower, savings is lots lower, in the way that many people, including me in the early 1980s, uh, would have expected. And so in the absence of, uh, that kind of evidence, I think the argument is very much attenuated.

What if someone said, well, for the special 20-year period, we lived through Bernanke's East Asian savings glut, so there was always enough capital, real rates were very low, arguably for demographic reasons that's starting to end, and we'll end up back in an era where actually the supply of capital with respect to the rate of return will be high again. Is that possible, unlikely, too far away to matter?

First, one word one shouldn't— should never use in economics is never. And so I, I don't want to preclude any possibility completely. Second, um, you, you uncharacteristically made an analytic conflation there. You conflated the idea that the saving— that the savings rate would fall for a variety of reasons, with the idea that the savings rate would become more elastic, which is a separate— it is a separate issue. I don't see any reason to think the savings rate will become more elastic. And with respect to the savings rate falling, my reading of the evidence would be different. I think that the structural factors driving low interest rates including longer life expectancy, which makes people save more, increased insecurity, more inequality, are more likely to be semi-permanent than they are to prove transient. And I think a variety of the factors holding down investment— the demographic factor, the fact that you can buy an enormous amount of capital for a very low cost— think about my iPhone— All of that, I think, operates in the direction of meaning that we're likely to have this phenomenon of low real interest rates and secular stagnation for quite a long time to come.

Let's say you're advising a philanthropist in St. Louis, and that person has $100 million to help the city. For general background, there are poor public schools, a fair amount of crime, a lot of racial segregation, but some good universities, hospitals, it's a biotech hub. What kind of advice would you give? How should they start thinking about this problem?

Wait, let me see. You're asking me about a philanthropist I've never met. Who has $100 million. In a city in which I've spent a day and a half. That has relatively generic urban problems.

You can make it—

What should the philanthropists do?

Or the poorer parts of Boston, if you prefer.

That's the— I was kind of trying to temporize a bit while I thought. But that's the question. So look, I would tell the philanthropist a few general things. One is I would say your temptation is going to be to spread the butter uniformly across the bread and to try to do everything. And that your $100 million is a lot of money, but the budget of the city of St. Louis is measured in the low billions of dollars, and so you can't do everything, and if you try to do a little bit of everything, you won't see anything you did. So you should look for a targeted couple of interventions that will be most effective. That's the first thing I'd say. Second thing I'd say is, you need to be very careful to make sure that whatever you think you're buying is what you're actually buying. That if you give more money to the health budget of the city and the city responds by reallocating its own money from healthcare to other things, then you'll have demonstrated fungibility. You won't have spurred healthcare. So have a strategy for addressing for addressing fungibility. I would probably say that if you can do something meaningful in education to create positive examples in education, which can then be emulated.

And this is Kathy Brown.

That's like, yeah, that's likely to be the most effective thing thing that you can do, but that you need to be very careful not to succeed by cannibalization. That many, too many philanthropists interested in education decide they're going to set up a charter school, only their charter school is only going to admit highly motivated kids with highly motivated parents, and their charter school's going to pay 20% more than the regular schools, and cherry-pick the best teachers out of the regular schools, and then they're going to be really thrilled about how they have better achievement than the regular public schools when it's clear from the nature of their model, selecting the kids and cherry-picking the teachers, that it is supremely non-replicable. So I would say impose a replicability constraint on yourself and innovate in the area of education. My general view has been that a lot of the way successful innovation happens is alongside big systems. So I don't know whether it's preschool before kindergarten, I don't know whether it's summer programs. I've been active in Boston with Citizen Schools, an organization that does after-school programs, but I'd probably, as a vehicle for getting an education, look at something that wasn't either joining the public schools or going to war with the public schools, but was acting constructively alongside the public schools in the after-school or preschool or transition from high school or summer school or some such would probably be the advice I'd give.

Now, there may be a few people in the audience who don't know you've actually delivered a lecture at University of Chicago Law School on the Herman Melville short story, "Paradise of Bachelors, Tartarus of Maids." What did you learn from engaging with that story with respect to social change or segregation or gender issues? Anything from that story as you read it as an economist and social scientist?

Well, the first thing I learned was that I should probably stick to my day job of economics. Because while I typically find myself reasonably cogent relative to others in discussing economic issues, attending that literary conference, I did not find myself relatively cogent relative to other literary experts. And I'm not sure I would have made it through that experience without the help of my wife, who is a professor of English at Harvard. I guess what I took, what I learned I took away from that was that literature had a way of evoking the non-pecuni— what an economist would call the non-pecuniary aspects of work that is sort of lacking when you say non-pecuniary aspects of work and you write a mathematical function, utility of consumption leisure and job attributes, and that there was a kind of texture of alienation and depersonalization that was provided by Melville that one missed if one thought about things in the economic paradigm, is what I learned.

Now speaking of work, your last op-ed was on labor unions. And you suggested a hope for a future where labor unions are stronger. Let me tell you my worry and see if you can talk me out of it. If I look at the labor economics literature, it seems to me the union wage premium is declining. It used to be about 15%, now maybe it's 7 or 8%. Some studies find it's zero. And if you'd say it's 7 or 8%, if you take the 7 or 8%, a lot of that's a tax on capital, but surely some of it turns up in the form of higher prices, so labor gives back some of it. Surely some of it turns up in the form of lower demand for labor, so some people don't get that jobs. So if I think of unions being much stronger, even without worrying about allocative efficiency costs, I just see this one-time bump upwards of like maybe 3, 4%, which would be a gain but wouldn't change the fundamental reality on the ground. Now, can you talk me into more optimism on this? Or do you just think, well, 3% or 4% is a lot, let's do it?

3% or 4% is pretty large relative to real wage growth that's taken place over the last generation.

Mm-hmm.

That's the first thing I'd say. Second thing I'd say is that, as I learned reading Melville, there are important non-pecuniary aspects of jobs. And if you look at, um, If you look at turnover, which is a kind of measure of job satisfaction, it's much lower in union employers. If you look at the way in which employee grievances are dealt with, it is more respectful of those potentially discriminated against. In union workplaces. If you look at job safety, it appears to be better in union workplaces. So I think looking at wages is a good way to miss the local benefits of unions. I think the third thing is that, and again, this would depend on one's broad policy views, but that more successful unions push for policies like the preservation of Social Security, the expansion of the healthcare safety net, that are for the benefit of everyone. And so the political impact of a society in which labor is better organized on the broad contours of policy is another way in which stronger unions can make a difference. But part of the argument of that piece was, I don't know what exactly the right level of unionization is, And I don't know exactly what would be optimal, but if we've got a system where if somebody tries to organize the workers at a company and the company fires the attempted organizer, and the only remedy the organizer has is to spend 5 years fighting through the courts, where if they win, they'll get back salary less whatever they earned in whatever new job they got, the cost-benefit for the employer has to be that it's incredibly attractive to fire the would-be organizer. So we don't have a remotely level playing field where workers are given an opportunity to make whatever choice they prefer. And that seems, that seems wrong to me. So I look at an America where corporate profits rose last year by 16% and wages have been stagnant. And it It seems to me that more bargaining power for workers almost certainly has to be good, but I agree with you that the technological dynamics, the globalization dynamics of a modern economy mean that it's not clear just how large the benefits of more, of more bargaining power will be, but it's like the question of how much weight I should lose. I don't know how much weight I should lose, but I kind of know which direction I should be moving. And that's kind of how I feel about more labor power.

Now in the middle of all of these conversations, we have an interlude where I ask the interviewees about table tennis. And I understand that this summer you played in the table tennis Jewish Olympics in Tel Aviv. Is that correct?

That is correct.

What mental qualities make for a good table tennis player?

Judging by my performance, qualities that I do not possess. I, I think a deft wrist, a certain capacity for concentration and a great deal of practice. And while I practiced intensely in the run-up to the activity, there were other participants who had been practicing intensely for decades, and that gave them a substantial advantage. I also probably was not the quickest participant in that competition, even in the 60 and over division, which was the division in which I was participating. But I found it enormously satisfying to be on an Olympic team, which— It's not something I ever thought about. You heard about that, I suspect, because some magazine wrote a story about it. And the reporter who wrote the story said to me, Mr. Summers, you used to be Treasury Secretary, whatever you did at Harvard, how did it feel like running out, putting a tracksuit on, and running out with 800 other people, 800 other Americans into a stadium. And I said, well, you know, 10-year-olds dream a lot more about international athletic competition than they do about fiscal or monetary policy.

What is the rate of productivity improvement in table tennis amongst the very best players? So someone like Jan-Ove Waldner, or Ding Ning, are they a lot better than the best players of 20, 30 years ago or just a little better?

I don't know. You know, look, obviously I don't know. I tend, I am struck in general by the fact that a good college track athlete can now run a 4-minute mile, and nobody in the world had ever run a 4-minute mile before 1954. That the world record in swimming events in 1964 wouldn't qualify you for the NCAA championships. In 2017. So in the sports where we can measure things, there's vast and rapid improvement and huge improvement. So I'm not sure why people debate whether Shaq is better or worse than Wilt Chamberlain or whether people debate whether today's best, best baseball players compare with Willy Mays or whether they debate whether Rafael Nadal could beat Bill Tilden. My assumption is that of course Rafael Nadal could beat Bill Tilden even with the same equipment and I would assume that the same thing is true in table tennis. Better learning about technique, better training approaches, greater intensity and better equipment, I assume mean that the quality of play in all these things is much higher than it used to be. And I think it's a mistake that people generally make to acknowledge progress in the places where it can be readily and concretely measured and then be in doubt about whether there is progress in the spheres where it can't be measured. I think the right first approximation is to think that there's progress in all spheres. And to take it to someplace that's outside of athletics, where I've been very struck, I think the evidence is overwhelming or at least very strong— not overwhelming, very strong— in favor of the so-called Flynn effect, which suggests that all over the world, if you administer any kind of constant IQ test, averages in populations have been getting smarter for a long time. And I think that's probably right as well.

Now, we're here in Washington, D.C. I'm gonna ask you some kind of short bullet questions about supercurrent policy issues. Feel free to pass. You can give just a soundbite answer, but if you want to go on, please do. Right now on the Fed, there are only 3 seats being held, and it seems if things go according to plan, by the beginning of 2019, everyone on that board will have been appointed by President Trump. Now, you've been a lifelong Democrat, so probably your dream candidates are not the ones who are going to be appointed. But if you could give advice to the Republicans that they possibly might listen to, what would that advice be for filling these seats?

Serious, thoughtful people with real expertise who will set monetary policy based on a pragmatic reading of data rather than a strong ideology or a political orientation.

The DREAM Act is in the news right now. What's the best way to think about where the limits to immigration should be? So you've spoken out in favor of renewing the DREAM Act or possibly doing more. But what's the margin at which we say no more?

Well, look, I think on the DREAM Act, because the people are here, and they've invested their lives, we as a country made a commitment to them, I think it's kind of a no-brainer to find ways to enable them to stay. I think the right deal on— the right broad deal on immigration is— Yes, there should be immigration, but at least my view is the idea of the melting pot, which has become kind of unfashionable in many circles, is actually a good idea. And the understanding should be that if you immigrate to the United States, you're immigrating to the United States to become an American.

Mm-hmm.

And that reflects a kind of acculturation, one crucial part of which is speaking English. And understanding that you're gonna be learning English and that you're gonna be carrying on your life in English. And I think if we had more acceptance of the idea that immigration was about becoming American, we would have more acceptance of higher levels of immigration than generate comfort right now. But I think that one does need to understand that any country should make policy in the interests of its current citizens. Would be in the interests of America's current citizens to have more immigrants come for all sorts of economic reasons and many ways in which it would support the economy. But I think that when the argument is framed in terms of broad obligation to humanity and so forth, it's understandable. That there's some reluctance to accept that argument.

Today it was announced a 3-month extension of the debt ceiling. Virtually all economists think there should be no debt ceiling. But that said, what's striking is Trump seems to be doing this with the Democrats. Do you see a kind of shift in regime where Trump will try to govern as an independent and possibly get nothing done, or do you think there will now be agreements with Democrats in Congress?

I'd be surprised if there was much where there could be agreements with Democrats. I think the debt ceiling is in some ways— is in some ways more sui generis than it is a template for things to come. I can't imagine, for example, on tax reform or on health care reform there being some— coalitional arrangement of that kind.

Now, you're active on Twitter now. I saw a tweet not long ago. It read something like this: I'm going to sell all of my Ethereum and double down in VIX. See you in hell. If you were tweeting back to that person, Ethereum and ICOs seem to be priced very high. VIX seems to be remarkably low for what at least to observers feels like like a very volatile period in our history, either nationally or globally. What do you— how do you think about those asset prices?

I don't know from where Ethereum— from where Ethereum is going. It makes me nervous whenever I see an asset where I think most of the demanders are buying it in the anticipation of selling it to somebody else at a higher price rather than buying it in the anticipation of some use they'll put, put it to or some set of cash flows they'll receive. So I tend to be nervous about cyber currencies. And I think in particular some of the more libertarian arguments that are made in their favor— governments are going to debauch the regular currencies, or this will permit avoidance of excruciating regulation and the like— I'd be pretty skeptical of. That said, I think blockchain's a fundamental technology, and there will be winners that come out of its use. Which cryptocurrency it will be— I don't know, but some of what's said makes me uneasy. With respect to the VIX, first of all, it was up 30% yesterday, so whatever anomaly one saw is a lot less anomalous today. Second, the VIX— people tend to underappreciate this— the volatility of the market moves very much with the level of the market. And the reason is that if a company has $100 of debt and $100 of equity, and then the stock market goes up, it's sort of 50-50 levered. But if it goes up— if the stock market goes up by $100, then it has $100 of debt and $200 of equity, and it's only one-third levered. So when the stock market goes up, its volatility naturally goes down. And the stock market has gone way up. Over the last 10 months. And that's a factor operating to make its volatility, make its volatility go significantly down. It's also the case if you look at surprises, the magnitude of errors in the consensus estimates of company profits or the consensus estimates of industrial production or what have you. Numbers have been coming in close to consensus to an unusual degree over the last few months. I think all those things contribute to the relatively low level of the VIX. But those are more in the way of ex post explanations. I wouldn't— if you had told me everything that was going on in the world, and asked me to guess where the VIX would be, I would expect it to have been a little higher than it is right now.

Today, Dennis Rodman offered to mediate between President Donald Trump and the leader of North Korea, Kim Jong-un. Now, you wouldn't sell yourself as an expert on North Korea, but as an economist, people who've negotiated with the North Koreans swear they're rational. Is your instinct to apply a rational actor model to trying to understand what's going on there, or do you think it's more like a version of behavioral economics where other ends are being pursued?

Here's the— I don't think I can answer that. I think what I'd say is my instinct is the rational actor model is probably right. But that means I'm 80% sure that that's right. And the consequence of getting it wrong could really be huge. And so I sure want to pursue the rational actor model in a way that's doing a lot of hedging against a set of possibilities that there are behavioral aspects.

Okay. It seems the Fed keeps—

That answer seemed a little evasive.

No, no, no.

It was perfect.

Tyler Cowen. The Fed seems to consistently come in under 2% for inflation. Do you think this is just a systematic mistake? You think it's a plan motivated by political economy concerns, that there's a high political cost to being above 2% but a much lower cost to being below 2%? Do you think the implications of the semi-liquidity trap have not been fully digested yet? Do you think it's a lag from an earlier error still percolating through the system? Or how do you think about the failure to meet 2% in an environment where, of course, it seems if we had inflation being a bit higher, it would not be a major cost?

I think the Fed has not fully grasped the reality of secular stagnation. The reality of secular stagnation is that we've got a very high savings propensity and a very low investment propensity. And that means that the neutral real interest rate the real interest rate that's consistent with full employment, is very low. And that means that interest rates, which would historically have been highly expansionary interest rates, are not highly expansionary. And the Fed has underestimated the extent to which that's true. And therefore, they've been disappointed by how little inflation they've generated. I think that's the primary explanation. A sort of analytical misjudgment on their part of the change in the neutral interest rate. I think secondarily, the factors we were referring to a few moments ago having to do with the reductions in workers' leverage and bargaining power means that the degree of tightness in labor markets that would, in an earlier point, have set off a wage spiral, no longer sets off a wage spiral because of how nervous workers are. And so the Phillips curve relationship has either broken down or shifted, and that the Fed has also underestimated that. And then I think, like, those are two aspects. Then separate from those two aspects, I think the Fed has is confused in what it's prepared to target. It says that it has a 2% inflation target. But if you have a 2% inflation target and it is, as the Fed claims, symmetric, that means you should be above 2% as often as you've been below 2%. Well, we've been below 2% for 9 years now. And we're in the 9th year of an economic recovery and the unemployment rate is at 4.3%. So if there was ever a time when you were going to be above 2%, it would seem like now, assuming recovery continues for several more years, would be that time. And yet not a single dot in the history of the FOMC has ever been above 2%. At least since the Great Financial Crisis. So I think there's a disconnect between what they're prepared to forecast and what they're— what they say is the nature of the 2% target. If my instincts would be to be more genuinely symmetric about the 2% and more recognizing the current policy is not quite as expansionary as they suppose, both of which would operate in the direction of caution with respect to monetary tightening.

If there's an ongoing demand shortfall, as is suggested by many secular stagnation approaches, does that mean monopoly cannot be a major economic problem because that's from the supply side and that the supply side constraint isn't really binding? If you think of there as being multiple Lagrangians, forgive me for getting technical for a moment, but do you see what I'm saying?

That wouldn't have been the way I'd have thought about it, Tyler, but that might be, but what you're saying might be right. I think I'd be inclined to say that if there's more monopoly, there's more money going to monopoly firms, where there's a low propensity to spend it, both because the firms don't invest and because the owners of the firms tend to be rich or endowments that have a low propensity to spend. And so the greater monopoly power, to the extent that it exists, is one factor operating to raise savings and reduce investment, which contributes to secular stagnation, contributes to demand shortfalls and secular stagnation. I also think that there's likely to be less entry and competition in markets that aren't growing rapidly than there is in markets that are growing rapidly. So there's a sense in which less demand over time creates its own lack of supply.

Let me ask you a deliberately too naïve question, and that is, Don't wealthy people invest almost all of their money, and thus why is that an aggregate demand shortfall?

Wealthy people don't put it all under their mattress. They put it all in financial assets of one kind or other. But when they put it all in financial assets of one kind or another, they drive up the prices of those financial assets, which is driving down the return on those assets. Which is driving down the natural or neutral level of interest rates.

But in a Q theory framework, won't that increase investment if the price of the stock market goes up?

It operates in the direction of raising investment, but if there are limits on how far interest rates can fall, because safe interest rates can't fall much below zero, and other interest rates have to hold spreads relative to safe interest rates, you may not be able to get the system to equilibrate. And even if at a particular moment the safe interest rates are above zero, the awareness that at some future moment when demand falls, you will not be able to reduce interest rates sufficiently operates as a deterrent that holds asset prices and demand down.

What's the best framework for thinking about how the Federal Reserve's monetary policy decisions affect emerging economies? There's been work coming out of Princeton, Helen Ray. How well do we understand this, and what framework do you look to first on these questions?

I think we don't fully understand why there are so many places where the long-term interest rate is more responsive to what the central bank in Washington does than what the central bank in their capital city does. And I think that's an important puzzle that I don't think the economics, uh, profession fully understands at this point. I don't know that we've got a framework that is in a profound sense better than the Dornbusch overshooting model for thinking about a range of exchange rate fluctuations.

If I think about the economy of Mexico, they have NAFTA, which I've always thought was a good idea. They've done significant reforms. They have a much, much higher level of professionalism in their government than they did several decades ago. But typically they grow in the range of 2 to 2.5%. And this to me is somewhat of a puzzle. What's your take on why Mexico hasn't done better?

I agree with you that it's a puzzle, and if you had described to me in 1995, after the— 1996, after our bailout, if you had said to me, this is going to be the quality of Mexican economic management, this is going to be the kind of leadership that Mexico is going to have, how fast do you think they'll grow? I would have expected more convergence with the United States than we've had. And I think in terms of understanding it— so I agree with you that it's a puzzle, and it's not what I would have expected. I think in terms of understanding it, I would highlight two things. One is Mexico has still some very serious rule of law issues, some very serious security issues associated with risks of becoming more like Colombia than it wants to be. And I suspect those are larger issues than many outside Mexico appreciate. I think that's one part of it. I think the other part of it is a much broader phenomenon, which is those who— in some ways, I think Mexico's problem is the same problem as Michigan's problem. We have this tremendous phenomenon of globalization, and there's some who are able to seize the opportunity to produce and to build supply chains across many countries to sell their products into a global economy rather than into a domestic economy. And there's some who, by being part of the global economy, like hundreds of millions of people in China or India, are lifted to an entirely new level than they were before. But But there's a group in between those who are levering the global economy and those who are being pulled along by the global economy who can't really turn the global economy into an opportunity and don't really want to compete with Chinese labor who are a bit left behind and frustrated. And I think there would be many in Latin America who would be in that group. Including Mexico, and I think it's a very profound social and economic problem.

Speaking of puzzles, you mentioned China. We're still witnessing this ongoing race between Chinese debt and Chinese nominal GDP, and I would say since maybe 2006, at least I have been expecting some kind of discrete event to occur in China where we all say, "Uh-oh, now it's happened." It actually hasn't been the case. That to me is a puzzle. And after 11 years, I wonder what's going on. Can you imagine that we're finally at a frontier where you think Chinese nominal GDP can outrace Chinese debt? Or do you think we still ought to expect some discrete event?

I think it's important to remember that a large part of Chinese debt is— explicitly or implicitly government guaranteed, and that the fiscal capacity of the Chinese government is very large, especially given rapid economic growth. And so I think the application of Western thinking that understates the extent to which the debts are really internal government debts probably leads to more alarm about a sudden breakdown of Chinese finances that is warranted.

So you could imagine a smooth glide into a lower growth path?

I could. I mean, yes, I could definitely imagine. I could definitely imagine that. And, you know, my best guess would be that Chinese growth will slow, but I would not be confident that China will have an event like the Asian countries had in 1997. It wouldn't amaze me if they did, but I would not want to predict that within the next 5 years they will have an event of that kind simply because the government is standing behind so large a part of the economy.

Do you worry about the fact that so much is guaranteed that they're simply stacking on top, and at some point you end up getting a lot of bad investment decisions? You only need so many roads or so many— high-speed rail lines, and until they at some margin pull away those guarantees, they're just doubling down and the debts will get bigger and provincial governments will fall and there'll be defaults on corporate bonds and then they'll be in a very difficult situation? Or do you think that moral hazard problem they'll somehow keep on managing to maintain within acceptable levels?

I think both are possible. Look, I think there's a very difficult question. You know, you're a— You're a rapidly growing Asian country, and you decide to build an airport somewhere where there aren't very many people. And you do that because it's gonna be cheap to build it now when there aren't a lot of people around, and it's important to establish the land. And then, 15 years later, If you've grown fast, you're a brilliant hero of masterful long-term planning. And if you've grown slow, you're an idiot who was building an airport where nobody wanted to go. And it's hard to know which is the case. And so I think the Japanese probably look stupider than they really were because they built in anticipation of more growth than they in fact were able to generate. And I don't know quite what's going to happen with respect to China. You know, it's not unlike, uh, Dulles Airport. Today we think of Dulles Airport as an important strategic stroke that cemented and made possible a hugely vibrant technological economy in Northern Virginia. I'm old enough to remember in the late '70s or early '80s, when it was a generation after Dulles Airport was built, and like it was a ridiculous idea, built like a million miles from anywhere, and like why did they— why did we build that? And so I think it's very difficult to judge some of these infrastructure investments except in the very, very long run. And even when you judge them in the very, very long run, you can make a judgment ex post as to whether they were a good idea,. But even then, it's going to be even more difficult to make a judgment about whether they were ex ante sensible or ex ante not sensible.

If I think about Russia and its recent history, I'm never sure if I should feel it's gone better than we could have expected or if it's gone worse. But if one redoes that whole history, and I'm not sure who is the relevant we here, But what could have been done differently and better with regard to Russia? Again, with the we variable, the choice variable being a bit undefined here. What do you think of as the lost opportunity in that regard? Or was there none?

Well, factually, if you had told any of us who worked with President Clinton as he prepared for his first summit with Boris Yeltsin in 1993, where the Russian economy, Russia's government, and Russian relations with the United States were going to be in 2017, we would have been appalled.

Sure, but in 1988, you might have thought it was an okay deal.

Right. So by the standards of what one was hoping for, in the aftermath of the Berlin Wall falling and the end of the Cold War, where the models would have been West Germany 24 years after 1945. It's 26 years after 1945. You have to say it's been a big disappointment. And I've thought a lot about that. I think one big part of it is 60 years of communism, not a clear defeat. It was just harder to have it join the world than it was to repair Europe after the Second World War, and the structural reasons why it was more difficult were things we overestimated. Second, I guess this is maybe the important point, I think in retrospect, there was not enough respect shown to what once had been a proud nation that didn't think of itself as having been defeated. And that manifested itself in, some of the efforts to push NATO very far towards its borders that manifests itself in the way in which conditionality was applied by the international financial— applied by the international financial institutions to some extent, by the G7 countries, including the United States. I think there were probably errors in not providing enough funding quickly enough at the very beginning, at the moment of maximum malleability. Those were errors probably primarily of the late Bush administration, but perhaps errors of our administration. As well at the beginning of 1993. But I think in retrospect, my judgment would be that repairing Russia's economy was a much more difficult challenge than we appreciated.

Two final questions. My first one is about what I call the Larry Summers production function. So you were successful at quite a young age, but what I find striking after reviewing a lot of what you've done and a lot of talks you've given is I find at your current age, 62, that when you answer questions on YouTube, in general, your answers are in some way better or richer than they would have been 5, 10 years ago, and they were already obviously quite good to have gotten you to where you are. So for people who are already famous and to some extent well off at the age margin of whatever to 62, for their answers still to be getting better, this is what I find striking. You don't have to be modest here, but what is there in the Larry Summers production function that explains this?

Well, part of the answer I think is The— goes back to the first question that you asked. I've always tried to surround myself and be around extraordinarily able young people. And they probably do learn some things from me, but I learn a lot from them, both from things they say and know that I don't, and from the questions they ask, which keep me on my toes. I think that's one answer. I think another answer, and by the way, I'm flattered that you think it's true. I don't know if it's true. I don't know if it's true or not. One thing I've always tried to define myself by, and sometimes it's been more successful than other times, is opposition to complacency. Not being satisfied with any institution, with myself, or with anybody, and always thinking things can be better. And that's sort of the attitude I have to myself as well. So, you know, I'll be on a plane, I'll be on a plane back tonight, and I'll be thinking about the various questions you asked and which questions I could have given better answers to. And then I'll think about those answers, and the next time I'm somewhere, I'll give better answers or be better at discussing things because I wasn't complacent or satisfied. So those would probably be the answers I'd give.

Before Q&A, my final question. This relates to a piece by your wife. She's a professor at Harvard in the English department, Elisa New. And in a magazine called Tablet, she has a piece on what she calls final acts, namely wonderful things people do at the very end of their careers. She focuses on Philip Roth and Harold Bloom. And I would ask, can you think of a senior economist you have known or interacted with where they truly ended their career on something wonderful as a sort of final act where you look at that and admire that, and what would that be?

Let me first say—

You can cite relatives, by the way, if you want.

Let me just— let me say I began by saying how much my wife admired you because of your book on food. That will be as nothing compared to the fact that you had looked up her writings in preparation for this.

That's also not— that's my non-complacency.

Ken Arrow was my uncle. And he was a brilliant man who— could talk with extraordinary intelligence on any subject, who died this past March at the age of 94. But 6 months before he died, he was the stalwart with the best attendance record. At the Mathematical Economics Institute that he had led for the previous 25 years in Jerusalem and was, I'm told, as active as any participant and more sharply contributing than the vast majority. And I think to be able to do that at the age of 93 with enthusiasm and zest is extraordinary and is a great example for me and for many others.

Larry Summers, thank you very much. For Q&A, we have a microphone. There will be a line. The rule is this is not your time to make statements. The purpose is to ask a question of Professor Summers, and if you make a statement, I absolutely will cut you off. We are all here to learn from Larry Summers. First question. First of all, thank you so much for the great exchange. The question is very simple. US economy current growth, 2%. Is this really the new normal, which is to say that the postwar average of 3% was an aberration, or are we going to find new ways, and what will be the new ways, that's the question, to go back to 3%?

Mostly new normal because the labor force was growing much, much more rapidly because of the population dynamics, because of immigration, and because of the tailwind from more women working through most of the postwar period than it's likely to be going forward. So productivity may accelerate a bit, but historical average growth we're unlikely to see.

Next question.

I'm Mike Nelson. I work for Cloudflare, which is a web security firm. So I'm mostly concerned about the digital economy. And I'm very concerned that economists haven't really explored a lot of really important issues. And as a result, policymakers are making bad choices uninformed by economics. Example from copyright.

Question, question, question. OK.

The question is basically, are there 2 or 3 really important issues that economists should be looking at in the world of the digital economy, like the value of copyright, that would, you think, need more attention?

So this is a homework assignment for economists looking for hot new topics.

I think there's a lot of work to be done on intellectual property. It's marketing and the ways in which— intellectual property is enforced. I think there's a lot of work to be done on market structure in digital industries and what constitutes increased competition and what constitutes measures that foreclose competition. And I think there's a lot of work to be done on intangible infrastructures that promote exchange, blockchain being one example. But I don't understand why there should still be 3-day financial settlements on anything in the world of today's technology. Thank you. Hi, I've got a question about your paper with Natasha Sarin.

So you talk about the decline in bank franchise value, and you're slightly critical of the regulatory stress tests for being over-reliant on regulatory measures of capital. Capital. So my question is, what would you redesign about the CCAR stress tests if you had the chance?

I would put more emphasis on market values. It's madness that in the fall— in the spring of 2008, when the stock prices of all the banks was collapsing, everybody was saying they were totally splendidly capitalized. And all was well. So I would put more reliance on market instruments. I wouldn't allow the market to satisfy me that everything was okay, because sometimes markets are wrong and they don't see problems. But if markets were alarmed, I would tend to think I should be alarmed as well, and to build more of that apparatus, build more of that apparatus in. I think the fact that the stress tests are saying that even if we have an event substantially worse than the 2008 crisis, no bank will need to raise capital, that says more to me about the stress tests than it does about the banks.

Thank you.

Following up on your remark that governments should pursue policies that are in the interest of their current citizens. Chinese merger law considers both the effect of a merger and acquisition on competition, also considers the effect on the Chinese economy. US merger law was adopted prior to globalization. Should we be considering things like effects on employment? And effects on the long-term competitive position of the US economy when we approve mergers? Probably we should pay some attention to measures of long-term economic health. Employment gets me nervous, because if you successfully do something that's much more— much more efficient, the effect will be that you'll compete with somebody and that may lead to reduced employment, but I don't think we want to become France where job preservation is a central goal relative to economic dynamism. In the past few years, have your views on alternative targets for central bank policy changed? Evolved? For example, 2 years ago you gave an interview to Politico where you discussed NGDP targeting. I think secular stagnation is a sufficiently serious problem that the zero lower bound is sufficiently likely to constrain when a next recession comes that I wouldn't be satisfied with the status quo. Whether a higher inflation target, some form of price level targeting, or some form of nominal GDP targeting is best is not something where I have a certain answer to. Right now, I have an instinct towards nominal GDP targeting since I think it has the attractive attribute that the slower the underlying rate of growth, which would tend to point towards a more serious secular stagnation problem, the higher the level of inflation that you're prepared to tolerate is. So that would be my instinct at this point, but if I had responsibility in this area, I would feel a need to make much more study before coming to a definitive conclusion. If the Trump administration pulls us from NAFTA or the Korean Free Trade Agreement, uh, or both, uh, how great do you see the risk of another depression? Neither the extra trade caused by Korea or NAFTA is large enough relative to our $17 trillion economy to mean that those direct impacts would cause a depression. What the psychological effect of that would be on the— either of those actions on the global trading system, I think that's harder. To say, I cannot imagine a crazier strategy at this instant with what is going on on the Korean Peninsula than for us to say to Korea, we don't have your back, we're fussing around about our trade deficit right now. I cannot imagine a strategy better calculated to foster doubt uncertainty among people who have heretofore been our allies. And so I think it would be a grave error. But I think economists make a mistake, most recently in the Brexit debate, when they're quick to say that anything they think constitutes a mistake will cause a depression. And I wouldn't go that far with respect to this.

Thank you.

I'm a Washington correspondent of the Japanese opinion magazine, The Liberty, and I remember clearly you had been clearly against the consumption tax hike by Prime Minister Abe, and your warning has been proved right. And you gave a grade, incomplete, to Abenomics, I think 2 years ago, as far as I remember. And Prime Minister Abe declared a couple of weeks ago he would raise the consumption tax again from 8% to 8%. So what do you think will happen after the consumption tax hike? I think there's a huge tendency in Japan and in other countries when you see the first shoots of spring to declare that spring is here and to take down the storm windows and put on the screens. And I think it's usually a mistake. And so I would, if I were in Japan, I would defer increases in the consumption. Consumption tax at this point.

3 more questions, very quick. 1, 2, 3. First.

Very tall.

Good afternoon. My question will relate to federal and state funding on maintaining bridges and roads.

Specifically, companies like Amazon use every road in the nation. Weyerhaeuser uses its roads to deliver logs. Kimberly-Clark to deliver diapers. So assuming that none of these pay 35% tax rate, how would you pursue getting corporate America to fund the maintenance of our infrastructure, bridges and roads? I think we all need to— we all use our roads and we all need to fund our infrastructure. After all, corporations aren't separate entities, they're creatures of their shareholders. I think there's a lot that can be done to close corporate tax shelters of many different kinds, and I would look particularly at issues relating to earnings stripping and relating to transfer pricing, where profits that genuinely should be taxed in the United States are transferred to tax havens. As an alternative would be the first place I'd look.

Good afternoon.

If you were in charge of Her Majesty's Treasury in England, what would you do over the next few years to help protect the pound? To what? To help protect the pound.

To help protect the pound.

The pound sterling. The pound sterling.

The pound sterling.

I'm not sure that if I were head of Her Majesty's Treasury, I have to get a new accent. But if I was, other than that, if I was head of Her Majesty's Treasury, I don't think I'd define my objective in terms of the level of the pound. I think I would define my objectives in terms of the level of the British economy. And the first thing I would do is try to talk everybody out of Brexit, which I think is a costly, unforced error that will ultimately make the British people poorer and less influential in the world. Second thing I would, that's the most important thing. Second thing is if I had to stick with Brexit, I would try to preserve as much common access to the European market as I could as a way of attracting investment. And I guess the last thing I'd say is I would try to make— create an environment that was relatively hospitable to business so I could encourage capital inflows, which would both spur growth and create demand for pounds, which in terms of your question would help preserve the value of the pound.

That's the end of our questions. Larry, thank you very much.