I’ve always had a bit of a cognitive disconnect with respect to Larry Summers. Many of the people I respect the most, and pretty much everybody I know who has spent much time with him, are clear: he’s absolutely brilliant. Most of them would give him some kind of Japanese-style Living National Treasure status.
On the other hand, if you judge Summers by his actions, either in word or in deed, he’s much less impressive. Reading his journalism tends to feel like wading through sludge while being nagged by a persistent feeling that he’s not writing for you anyway. Seeing him interviewed isn’t much more fun, at least when he’s holding political office. And everywhere he goes he’s accompanied by controversy, be it memos at the World Bank or financial deregulation at Treasury. As for Harvard, his career there has been academically successful but otherwise disastrous, whether you’re talking about interest-rate swaps or speeches about women’s aptitude or scandal over Andrei Shleifer’s role in Russia in the late 90s.
But Summers is out of the White House now, and clearly doesn’t have much in the way of immediate ambitions: he’s not going to re-enter politics for the foreseeable future, and he’s certainly not going to become president of Harvard again. He’s free to take lucrative gigs at companies like Square and Andreessen Horowitz, and live the very comfortable life of a Harvard University Professor. And so he’s loosening up a bit, and in his interview with Walter Isaacson at Fortune Brainstorm yesterday you can see why people come away from talking to him so very impressed. (And you can also see why the likes of Square and Andreessen Horowitz love to have access to him.)
This is Larry at his most relaxed and brilliant: when he isn’t overthinking what he wants to say and how he wants to say it, he has a natural fluency with ideas and can actually get them across very clearly indeed.
He starts off disarmingly, talking about the Winkelvii: “if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o’clock, there are two possibilities,” he said. “One is that they’re looking for a job and have an interview; the other is that they are an asshole. This was the latter case.”
Then he launches into one of the best summaries of our present macroeconomic situation that I’ve seen. It’s worth quoting at length:
I think the biggest problem the country has right now is not the budget deficit. The biggest problem the country has right now is the jobs deficit. Yes, there’s a risk that we will misplay things and make the mistakes of the 1970′s, and have inflation and have excessive borrowing.
But far and away the larger risk is that we will make the mistakes of 1937, and that we will not have a recovery that is sustained, that we will make the mistakes that Japan made, and that we will have a decade or two of stagnation. The right question to be focused on is how to stimulate demand.
Look out there, guys. The Treasury bond rate, Treasury note rate for ten years is 2.85 percent. Nobody is failing to invest because 2.85 percent is too much. They are failing to invest because there are no customers in their store. They are failing to invest because their factories are sitting empty. They are failing to innovate because they’re not sure how large the market for the product will be.
That is the problem that we need to address. By the way, an extra percent a year on the growth rate for the next five years will do more for the budget than any amount of the entitlement-cutting that’s under discussion.
So I think the President has been right to be focused, and I think he could even focus more intensely on what is, I think, the central problem, which is how to get enough demand and enough confidence going, so that this economy achieves escape velocity from the recession.
We’ve been flying out of the recession, but we’ve been flying out of it dangerously close to stall speed, and doing something about that should be our top priority. I mean it is crazy.
MR. ISAACSON: Does that mean more stimulus?
DR. SUMMERS: Well, you can call it that. That’s one part of it. It is crazy if you think about it, that we have schools across this country where we tell our kids that education is the most important thing in the world, but we ask them to study in classrooms where the paint is chipping off the walls.
We can borrow money to invest in fixing that, at 2.8 percent. Twenty percent of the people in the country who are doing construction are unemployed, and we’re not trying to do something about that, when we have a major demand problem? It just doesn’t make any sense.
We have infrastructure in this country — I mean you can argue whether we need a new high speed rail system or whether we don’t need a new high speed rail system. But I don’t know what the argument is for letting bridges collapse. I don’t know what the argument is.
I mean every time, and unfortunately it’s fairly often, I fly in and out of Kennedy Airport to any other airport in the world that you might fly to from Kennedy — you can fly to Europe, you can fly to Asia, any of those places, and you compare Kennedy Airport with the airport where you land, and you ask yourself which is the airport of the greatest country, richest, most powerful country in the world?
I mean, and you know, you can say airports aren’t that important or whatever. But it is symbolic of an approach to infrastructure that probably never made any sense, and certainly doesn’t make any sense when you can borrow money at 2.8 percent and you’ve got 20 percent of the construction workers unemployed.
So I’d rather see us focus on the jobs deficit. I’d rather see us focus on the public investment deficit. I’d rather see us focus on the human capital deficit. Those are deficits that we need to focus on also.
Yes, in the long run right now, thanks mostly to what happened during the Bush administration, the United States of America taxes 14 percent of GDP. Fourteen percent. That’s about four and a half percent below the average of what we’ve done over the post World War II period, and we now have the oldest population that we’re ever going to have, a larger debt than we had before.
We have, apart from the aging of the population, a public sector that’s heavily involved in health care, and in every country in the world, health care has grown relative to GDP. The idea that somehow 14 percent is adequate, or that the priorities starting at 14 percent should be to cut taxes, is crazy.
Summers covers a lot of bases here, in plain English. “I’d rather see us focus on the jobs deficit. I’d rather see us focus on the public investment deficit. I’d rather see us focus on the human capital deficit.” That’s powerful, and undeniably true, and it’s a cause for great regret that no one in the Obama administration seems to be capable of saying such things in public.
Later on, Summers has great insights about the move from a manufacturing economy to a services-based economy and how the importance of advances in healthcare to national wellbeing, even if such things don’t show up in GDP statistics. He also has this very interesting observation:
If you look at the price earnings ratio for technology companies relative to the price earnings ratios for all industrial companies, you take that ratio, PE technology divided by PE industrial, you can plot that ratio over the last 40 years, and it is at the lowest point that it’s ever been.
Does someone have this chart to hand? I’d love to see it. Obviously, Summers is talking his book here, now that he’s a venture capitalist. But at the same time, his arguments are strong:
The Internet, the last time there was an Internet bubble, was 120 million people dialing up.
The Internet today is two billion people and two billion mobile devices, with wireless connectivity at a far more rapid pace. Today, the businesses have cash flow, which they didn’t ten years ago. So I think it’s a little facile to assume that just because the numbers are big, that it’s obviously a bubble.
This, then, is the Summers who is liked and admired by the people who like and admire him; I’m glad he’s finally giving the rest of us a glimpse of that Larry. And I’m beginning to think that instead of asking him to write a monthly column for us, we at Reuters should just phone him up unexpectedly, ask him a couple of good questions, and simply transcribe the answers. The result would probably be significantly more fluent and more interesting than anything he laboriously constructs on his own.