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Summers: Tax-Cut Extension Averted Economic ‘Catastrophe’

December 17, 2010 at 6:41 PM EDT
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President Obama's outgoing economic adviser, Larry Summers, speaks with Jeffrey Brown about the economics behind the new tax-cut extension and the state of the Obama administration's economic policy.

JEFFREY BROWN: And now: more on the tax cut deal and President Obama’s broader agenda.

As director of the National Economic Council, Lawrence Summers has been a leading architect of economic policy for the last two years.He’s leaving the administration at the end of this month to return to Harvard University.I sat down with him yesterday at his office next to the White House.

Lawrence Summers, welcome.

Is the tax cut deal good economics, or just necessary politics?How do you think about it?

LAWRENCE SUMMERS, director, White House National Economic Council:Oh, I think it’s very good economics.

It’s very good economics for the catastrophe that it averts.If we had not been able to reach an agreement, and the middle-class tax cut had gone away, and family income taxes had gone up by $2,000, the risk to the economy would have been very, very great.

Moreover, the elements that are contained in this agreement, all of that is going to provide an important impetus to the economy at a moment when we very much need it. Now, the bill is not perfect. There are…

JEFFREY BROWN: It’s not perfect.And you have called it a compromise.You call it a compromise, no question, right?

LAWRENCE SUMMERS: It’s a compromise.

From the president’s perspective — and economics very much supports him on this — giving relief to the highest-income families, giving relief, in particular, on very large estates of a kind that only go to a few thousand people, none of that is the best way to move the economy forward.

JEFFREY BROWN: In fact, it’s something he talked about as a core value.

LAWRENCE SUMMERS: We think it’s a real mistake.

On the other hand, the country has to move forward.And we move forward by taking ideas from both sides.But I will tell you this.Compromise that was right with a weak economy in 2010 will be very wrong two years from now, as the economy recovers and progresses.

JEFFREY BROWN: Well, but — OK, that’s — but you have been in Washington a long time.I mean, do you think that, realistically, the politics change in what will be a presidential campaign, an election year, that you would…

LAWRENCE SUMMERS: I think they do.I think they do change in important ways, because I think they derive, importantly, from what the right economics is.

And when the right economics is that the economy needs more demand, and recovery hasn’t been as rapid as we like, then you have one kind of politics.And when we have had a chance to have a broad discussion of tax reform and of the tax system over two years, when the recovery has, as I expect it will, gained momentum, then you’re going to have a very different kind of political context.

JEFFREY BROWN: So, compromise now, but not in 2012?

LAWRENCE SUMMERS: Not on the question of special tax relief for the wealthiest families.

JEFFREY BROWN: Earlier this month, we saw the latest jobs number.It was widely characterized as extremely disappointing, just 39,000 new jobs added.Did you anticipate that the economic recovery would be as weak as it has?And what is your explanation, as we sit here?

LAWRENCE SUMMERS: Well, the first thing to say, I think, is that, while that jobs number was very disappointing, most of the statistics, on industrial production, on retail sales, the weekly unemployment insurance numbers, for the last couple months, have actually been coming up better than expected.

And that’s why almost all economic forecasters have been revising their forecasts for the fourth quarter of 2010 and for the year of 2011 in an upwards direction.But I don’t think there’s any question that, when you’re going through the kind of crisis the United States is going through now, recovery doesn’t come as rapidly as one would like.

That’s why the president believes we have to keep our foot on the accelerator.The tax bill is one part of that.Investments in infrastructure are another.Making sure that we’re doubling our exports over the next five years is a third.We cannot be satisfied with where the economy is right now.

JEFFREY BROWN: We had a stimulus plan, 2009.In retrospect, was there not enough put into that?Do we — as you sit here now, do we need more?

LAWRENCE SUMMERS: Well, I think, right now, the tax measures that we saw are very welcome.The president has put forward a range of other proposals, such as taking advantage of this moment, when we have remarkably low interest rates, close to 4 percent, money for 30 years, when we have 20 percent construction unemployment, that is surely the right moment for the country to rebuild an infrastructure that is badly decaying.

So, I think there’s a lot more that has to be done.The president will be talking about competitiveness.The president will be talking about doing what’s necessary to preserve America as the envy of the world in his State of the Union address.

JEFFREY BROWN: Now, we’re having this tax cut debate.We have the stimulus debate at the same time as there’s this rising fear about deficits and debts.And I — I think it’s confusing to people.When do we switch to acting on the deficit?

LAWRENCE SUMMERS: Great question.

When recovery is fully and clearly established.It is imperative that we turn to deficit reduction.Look, what we need to do is tilt the path.In the short run, we need to make sure we’re doing everything we can to support demand.In the long run, the problem is exactly the opposite.We need to make sure that spending and taxing are in much better parity.

JEFFREY BROWN: In the longer run, you look now at what’s going on in Europe, where austerity is the name of the game.Do Americans face a future like that?Do we have to be prepared for fewer government services, a kind of future of cuts at all levels?

LAWRENCE SUMMERS: If you look at the scale of the adjustment that’s necessary in the United States, it is important, relative to our current political challenges and our current political process, but it is dwarfed by a factor of four, five, eight by the magnitude of the fiscal adjustments that are necessary in many countries in Europe.

There will obviously be things we will do that we wish we didn’t have to do.But I don’t think any of the kind of wholesale abdication of public responsibility that is being forced, because of extraordinary financial exigency on the European countries, lies in our future.

JEFFREY BROWN: We look at the politics of today, which, to many people, looks very toxic and very partisan.Can Washington get together to deal with the kind of long-term problems you’re talking about, so that we don’t eventually face a Europe-type situation?

LAWRENCE SUMMERS: Here’s what I know.The president really wants to.

You know, people have an enormous number of things that they’re pessimistic about Washington — what Washington can do, gridlock and all of that.And they have got reason for it.On the other hand, I dare to be hopeful.

In the last month, we have seen a coming together on a major tax compromise.We have seen a major trade agreement pass and be supported by a major union.We have seen, in the so-called Bowles-Simpson commission, bipartisan support from both parties for the idea that tax expenditures are expenditures, and that something needs to be done with respect to our tax system.

So, I have been very gratified in this, my final six weeks in government, that, during the period after the election, you actually see some convergence and some action on a significant range of issues.

JEFFREY BROWN: One last issue:What about the danger of replaying the financial meltdown?Here we are, two years later.People look, and we see that some of the banks are bigger than they were.Many of the corporate heads, the CEOs, are still in place.

This administration has faced some charges of being too cozy, at times, with Wall Street.What do you say to people who feel that not enough has been done to prevent a future meltdown?

LAWRENCE SUMMERS: Well, I think you have to look at each institution.

And I think what you will find is that the capital ratios, the reserve that the institutions have, has been mandated to be far greater than it was coming into the crisis.I think what you will find is that there are a whole set of restrictions that limit the ability of one institution in trouble to infect the entire system, for example, that instead of being traded in the shadows, derivatives now all have to be traded in — on clearinghouses and the like, where the parties are responsible for monitoring each other and where they’re all liable if something happens.

So, I think the risks of financial strain are still there.And there are very serious problems in Europe.There are problems in some American municipalities.There are parts of the country where the housing issues have not been fully worked through.

But, if you look at where our major financial institutions are in terms of the size of their buffers, in terms of the value of their equity, it’s really in a position that I don’t think anyone would have dared to hope 18 months ago.

JEFFREY BROWN: All right, Lawrence Summers, thanks for talking to us.