Tuesday, September 02, 2014


Features

Interview: Economist Summers Sees 'Long Road' For Europe, Upside For U.S.

Lawrence Summers in New York in October
Lawrence Summers in New York in October
Lawrence Summers' ascent was steep after becoming one of Harvard University's youngest-ever tenured professors. He was named chief economist of the World Bank in the early 1990s before joining U.S. President Bill Clinton’s economic team. And by the end of Clinton’s presidency, Summers had become secretary of the U.S. Treasury. After a tenure as president of Harvard that was marred by controversy, Summers returned to the White House as director of the National Economic Council, one of the principal architects of President Barack Obama’s economic stimulus plan, a response to the recession of the late 2000s. Summers returned to Harvard as a professor in 2011.

In an interview with RFE/RL correspondent Richard Solash, the 58-year-old Summers warns of a tough road ahead for the eurozone, cautions against the potential pitfalls of a Eurasian Union, and foresees a brighter future for the U.S. economy.

RFE/RL: Earlier this month, the European Union's statistics agency, Eurostat, released data showing that the bloc's economy shrank for a record sixth consecutive quarter in the first three months of 2013. Is teetering on the verge of recession going to be the continent's new "normal"?

Lawrence Summers: I think it's a very long road for Europe. There is an inherent brittleness in the single-currency system which doesn't allow exchange-rate adjustments and doesn't allow other adjustments, like those of migration, and central taxation, and spending, that we have within the United States. The challenge of regaining competitiveness in the periphery [of the eurozone] is very profound, and there are large structural issues as well, so I admired greatly what [European Central Bank President] Mario Draghi has done, and I think the risks of a major financial accident are much less than they once were. But the prospect for growth to remain very slow or negative for a long time is, I'm afraid, still very much present.

RFE/RL: Now to another union. Russian President Vladimir Putin has pushed for the creation of a Eurasian Union that would unite several former Soviet republics under one economic roof. Several Central Asian countries have expressed tentative support for the plan, even as critics say it's an effort for Moscow to reclaim some of the Soviet Union. What do you see as the advantages or pitfalls of this Russian attempt?

Summers: Very, very often, more open trade is a good thing. It permits more exchange, more specialization, people to get the products they want at lower costs. I think that very frequently the movement of capital and technology can help to make poorer countries, especially, more prosperous. I'm always very hesitant to make political predictions for even the United States, let alone other countries, but I would think that profound changes in political arrangements between nations should be approached very cautiously and with an enormous care to make sure that coercion is not involved and that consent is sought before there were going to be any efforts to amalgamate what today are separate countries into any kind of union.

So I think this is an area where very much the devil is in the details; but as we move from things that were more like a free-trade area to things that were more like common government, my concern would increase.

RFE/RL: In the past several years, the emerging economic power of the BRICS countries -- Brazil, Russia, India, China, and South Africa -- has garnered a lot of attention. Now some analysts say the countries are not living up to their hype, pointing to slowing growth rates. How much economic power do you see the BRICS group leveraging in the years to come?

Summers: I don't think there's any question that the center of gravity in the global economy is moving to the east and moving to the south; nor is there any question that what have come to be called emerging markets will continue to emerge, powered by growing populations and by shifts in technology. They are very likely to enjoy growth rates greater than those of the industrial world.

At the same time, my expectation would be that the next decade will not see as rapid growth in Brazil, Russia, India, and China as the last decade has. In Brazil, the process of economic reform has slowed. Russia faces formidable demographic challenges, challenges of governance. India faces very substantial political obstacles, it has to keep the economy performing rapidly even to keep its growth rate where it has been. And China has built up very substantial imbalances -- excessive levels of debt in some sectors, imbalances between investment and consumption, between state and private enterprises -- that will be complex to manage in the years ahead.

So, yes, emerging markets will emerge, but I think it will likely be less rapid. [It is] what we economists and statisticians call "regression to the mean."

RFE/RL: You were one of the main planners of President Barack Obama's response to the recent financial crisis. How would you assess the Obama administration's efforts toward economic recovery and the results since you left the White House?

Summers: I think there was one central question for economic policy when President Obama came into office. If you looked at the GDP statistics, the industrial production statistics, the stock market, the measures of global trade, they were collapsing more rapidly between the fall of 2008 and the winter of 2009 than they had collapsed after the fall of 1929 [the Wall Street Crash]. So the question was, would there be another [Great] Depression? And the answer is absolutely clear: There was nothing like another [Great] Depression.

We can hardly be satisfied with the level of joblessness we now have -- the economy is still producing well short of its potential -- but the fundamental task of avoiding economic collapse and depression was achieved. I believe that reflects the fact that President Obama was prepared to lead boldly, supporting a Recovery Act that injected nearly $1 trillion into the economy and moving strongly to make the financial system more transparent and to assure that it was adequately capitalized.

Would I have liked to see more of President Obama's initiatives, his measures to increase infrastructure spending, for example, pass through the Congress? Yes, I would have. But to say that not everything President Obama wanted to do -- that I believe would have been constructive -- has happened is not to take away from what I think is a very substantial leadership achievement.

RFE/RL: What do you foresee as the single greatest risk to the world economy in the next decade?

Summers: I think the biggest risk to the world economy is that there will be a continuing reluctance to face the fact that we have a demand shortage and that there's not enough demand for goods and services, and that there will be a continuing desire to move to long-run issues and that the result will be a kind of secular stagnation not unlike what we've seen in Japan over the last quarter century. It is that kind of deflationary stagnation that I think is the greatest risk. I think with prudent policy it can be avoided, but it will take prudent policy to avoid it.
 
RFE/RL: What might be the biggest surprise for the world's economy in the next decade?

Summers: I think it's possible that the U.S. economy is going to come back faster than many people suppose. We have the advantages of lower-priced energy, a housing sector that is really turning (improving), a substantial deleveraging [or reduction of debt levels] that has already taken place, and reductions in fiscal policy which have reduced demand have largely played out.

There's a chance that the United States will surprise on the upside in the next few years. We may see the kind of cycle we saw in the 1990s, with a stronger economy leading to lower deficits and lower deficits leading to a stronger economy.

RFE/RL: As a former president of Harvard and a professor, one question on education: While many industries and areas of life have undergone profound changes due to technical innovation in recent years, some say education is comparatively stuck in the past. How do you see technology changing education around the world in the coming years?

Summers: I think you're going to see much more use of software and technology. It's a remarkable feature of MOOCs -- massive online open courses -- that they are going to, on the one hand, be able to reach larger audiences than ever before and, on the other hand, provide more individualized instruction than ever before.

So I think there's the real prospect of very substantial change and disruption in higher education. When you look at industries that are revolutionized, you usually see a combination of a burning platform (something that forces radical change) and substantial new opportunity. The Internet is the new opportunity; the combination of rising costs, reduced prospects for graduates, and more pressure on public budgets are the burning platform.

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