Larry Summers is an American economist. He served as chief economist for the World Bank from 1991 to 1993, U.S. treasury secretary from 1999 to 2001 and president of Harvard University from 2001 to 2006. Summers is currently a professor at Harvard and a member of the Berggruen Institute’s 21st Century Council. He recently spoke to The WorldPost about globalization in the era of U.S. President Donald Trump and Brexit.
What are the key policies of a centrist politics that is pro-globalization? In the wake of Brexit and Trump’s election, you have called for a “responsible nationalism” that responds to the needs of those voters. What does that mean in practice?
First of all, some of this is about policies. But some is about the extent to which we are projecting a global attitude that sees everyone in the world as a fellow human being and the extent to which you are projecting a concern for certain people because they are American.
'As a global leader, we have not necessarily displayed the uppermost concern for Americans in our policies.'
As a global leader, we have not necessarily displayed the uppermost concern for Americans in our policies. So, some of it is a matter of what is projected.
I would say these are the most important policies:
- A policy of investment in infrastructure; building things that everyone shares and can be proud of. This has the virtue of employing people who are having a tough time in the current economy. It is the best way to provide a general economic stimulus. A trillion-dollar commitment over the next 10 years would be a great step ― paid for by carbon taxes or other measures that are pro-environment.
- A commitment to monetary policies that create an economy in which we’d face a shortage of workers rather than a shortage of jobs. That creates a more equal leverage between employers and employees, which is the condition for real wage growth for ordinary workers. We don’t even have a central bank that takes a 2 percent inflation target seriously. We’ve gone eight years with inflation nowhere near that. We need to target 2 percent, not just be comfortable with the forecasts of inflation inching minimally up.
- We need a much greater level of investment in young people and their transition to work. Some of that has to do with the debt burden of a college education. But more importantly, we don’t do anything for people who don’t go to college. They are left to either sink or swim, and mostly they sink. I’m thinking here of the kind of vocational apprentice arrangements that Germany has implemented successfully.
- We need to reorient our international economic policy toward what benefits people, instead of benefiting the rich and focusing on the priorities of corporations. Why is it that corporate tax loopholes, which mean that ordinary Americans need to pay more taxes, is not a priority? Instead, intellectual property protection for pharmaceutical companies are at the top of the international agenda. U.S. Commerce Secretary Wilbur Ross was recently very proud about getting credit rating agencies into China. Who cares? The shareholders come from all over the world ― and the jobs will be created for Chinese people in China. Why not tackle tax competition, jurisdiction arbitrage and tax shifting instead, all of which allow corporations to avoid their tax obligations. Tax avoidance and tax havens are the clearest example of bad international policy. And international agreement should aim as well at stopping races to the bottom on labor and environmental standards.
This should be the orientation – protecting regular people rather than protecting the interests of the people who know a lot about the international system and how to game it.
Right now, when we discuss the global economy, we mainly talk about things that improve “competitiveness” and are painful to the regular worker ― things that are aimed at promoting the interest of companies headquartered in the United States with global scope.
No wonder people don’t like globalism.
Is the greatest threat to jobs displacement and inequality from rapid technological advance or globalization?
It is pretty clearly it is from technology. Manufacturing employment as a share of GDP is substantially less in both Germany and China ― the big surplus export states ― than it was in 1990. So, I don’t see how you can avoid the conclusion that technology is the larger and more fundamental issue. And wealth is concentrating in the big tech companies. We are going to need to find ways of more progressive taxation if there is to be acceptance of the market system as a model. We should be moving toward more progressive taxation.
'If we are going to employ everybody, we’re going to have to find ways of making sure that that work can get done.'
Also, in terms of inequality, I think the idea of wage subsidies should be seriously considered. There is an important distinction between an “earning subsidy” and a “wage subsidy.” In an earned income tax credit, if I earn $20,000, the state gives me $10,000. If I am earning $30,000, the state gives me $5,000. If I earn $50,000, the state doesn’t give me anything and I pay taxes.
A wage subsidy works like this: I earn $8 an hour and the government pays an extra $4 for every hour I work. If I earn $10 an hour, the government gives me $3 dollars. In other words, because it is based on my wage rate, it doesn’t distort my level of effort. It is more complicated to enforce, but more attractive. It is a better alternative to universal basic income where no level of effort is required. I think people want to work.
There are all kinds of important work in our society to do ― such as elderly care, child care, practicing preventive medicine ― for which there is not a readily apparent business model. If we are going to employ everybody, we’re going to have to find ways of making sure that that work can get done.
Another important thing to understand about wages and costs in this context is how the world has changed. If we assume consumer prices at 100 in 1983, the consumer price for a TV in 2017 is much, much less because the technology has improved and made it much cheaper. But the cost of a year of college has skyrocketed ― it is 600 today to compared to 100 in 1983. So, there has been a huge change in relative prices of those two goods.
It is hard to believe in that context that we shouldn’t have more spending by the government to help pay for one ― college costs ― and not the other.
Some have argued that the centrist “third way” politics practiced by you, former U.S. President Bill Clinton and former British Prime Minister Tony Blair failed because of its blind spot on financial deregulation. In retrospect do you think so?
We’ve done a lot with Dodd-Frank in the U.S. and with the various global versions of financial regulatory reform.
There are still problem areas ― shadow banking probably the largest among them. Surely finance was under-regulated before 2008. But I don’t think more regulation of finance is the foremost issue today. The place that had the biggest bubble and biggest crash was Japan ― yet it was and is a highly regulated financial system. They didn’t have derivatives or financial innovation. Continental Europe has a far less financial culture than U.S. or Great Britain, and they have performed worse over recent years.
Before 2008, yes, we should have had more regulation. Is there a fundamental principle around redefining the financial sector as a public utility? I don’t think so.
'There is no question that the center of global economic gravity is moving to the South and East.'
The Chinese see the center of gravity moving to the developing world and are describing a new phase of globalization in which their “Belt and Road” investment in infrastructure initiative boosts that growth to the benefit of the entire global economy. Do you agree with them?
There is no question that center of global economic gravity is moving to the South and East. There is no question that the dislocations associated with trade are greater when the wage rates in the developed world are five to eight times greater than in the developing world. It is a dislocation that wouldn’t take place if you were talking about economies with similar levels of development and wages. We’ve never seen anything quite like China that has a total economy of immense scale and huge financial power ― $3 trillion in reserves ― but has average income levels that are 20 percent of what America has.
We just haven’t seen history put together that kind of combination before. It is hard to guess how it will play out. There is no question that economies that are large by virtue of population rather than being at the cutting edge of productivity are going to be much more defining of the global system in the future than they have been in the past.
China’s “Belt and Road” initiative is constructive – connectivity and infrastructure is constructive. It is constructive to help countries develop. The question will be if it is done in the spirit of altruism that ultimately also benefits the altruist, or a more narrow, mercantile interest on the part of China. I don’t think the path is entirely clear
Should the U.S. join up with one of the central institutions of that effort, the China-led Asian Infrastructure Investment Bank?
Yes. It was a mistake for the U.S. to not join the AIIB during the Obama years. We would be well advised to join it now.
Despite our not having joined it, there are Westerners such as Germany and France in prominent roles. It is open to American companies for procurement contracts. Projects so far have been co-financed with the traditional development banks so they have the kind of environmental and transparency standards that we advocate. Is that true of all the various institutions and practices involved in the Belt and Road initiative? I’m not so sure.
'It was a mistake for the U.S. to not join the Asian Infrastructure Investment Bank.'
Economists such as Laura Tyson and Branko Milanovic are stressing the notion of “pre-distribution” policies to tackles inequality. That means investing in public higher education and finding ways to share the wealth before taxation instead of relying solely on redistribution of wealth after it is created. Do you share that view?
Yes, if it means bolstering the educational system, investing in human capital. That is central. No, if the emphasis is on giving away capital. Yes, if it means supporting universal health care and affordable housing. No, if it means regulating wages in economies beyond the minimum wage or governments getting involved in capping compensation. Here I’m more skeptical about the degree of disruption that will result. Yes, if it means leveling the playing field of opportunity.
Countries like Singapore share the wealth with all their citizens through a mandatory national savings and investment scheme ― the Central Provident Fund ― in which all share in the returns on profitable investment. Wouldn’t a scheme like that help spread the wealth and reduce inequality in the U.S.?
There is a case for a more aggressive investment of Social Security trust funds in diversified pools of equities. Yes. These proposals deserve serious attention. On balance, it would give more people more stake in the profitability of the entire country’s economy.
In the U.S. context, though, I’m skeptical of the merits of establishing a fund so the government can allocate capital. In a small export-oriented economy like Singapore where you are looking across a whole range of global opportunities for returns, that works. But the way you establish funds like that is to build chronic budget surpluses – not something the U.S. is likely to see for a long while.
This interview has been edited and condensed for clarity.