SENATE FINANCE COMMITTEE
HEARING
MARCH 8, 2007
PROF. LAWRENCE H. SUMMERS
PREPARED REMARKS
Mr. Chairman, Members of the Committee, I
appreciate very much this opportunity to testify before the Senate Finance
Committee at what I believe is a critical juncture for
Start
with technology. As Alan Greenspan noted
several years ago while the value of our GDP rises each year its mass is
constant or actually declining as value comes increasingly to reside in
information rather than physical substance.[1] This, along with dramatic improvements in
communication and transportation technology increases the extent of
international integration and the range of areas in which international
competition is possible. Alan
Blinder, while noting that offshoring has not had yet a major impact on the
Equally remarkable is what is happening in the developing world,
especially in
These
developments have in their totality had profoundly positive consequences. After 20 years of slow productivity growth
following the 1973 oil shock, technological changes have spurred rapid
productivity growth making it possible for the American economy to grow faster
on a sustained basis than its industrial country competitors for the first time
since World War II. Technology and
global integration have supported a great moderation in the cyclicality of the
American economy which has experienced only two relatively mild recessions in
the last generation. The spur of foreign
competition has played an important role in permitting the American economy to
sustain sub 5 percent unemployment and inflation in the 2 percent range--a
combination that would have been thought impossible not so long ago. And an open global capital market has enabled
American mortgage rates to remain below 6 percent far into an economic
expansion – permitting the achievement of record levels of home-ownership.
Without the combination of technological change, deeper global
integration and rapid progress in the developing world the American economy
would have performed less well over the last decade.
Nonetheless, globalization presents us
with profound policy challenges. Four stand out.
First, the
Furthermore, it is clear that this flow
of capital from the developing world to the 
There is no one who believes that the
While the focus of this hearing is on
globalization, I cannot overemphasize the linkage between it and this
committee’s responsibilities in the areas of tax and expenditure policies. The
Second, we need a national investment
strategy to assure that our firms are as competitive as possible. From the end of the Second World War until
the mid nineteen-seventies, Americans benefited from rapid productivity
growth. Subsequently, a sharp slowdown
in productivity growth manifested itself and lasted until the mid
nineteen-nineties. Since then,
productivity growth has been quite rapid, though there are signs that it may be
slowing once again. Economists do not
fully understand all the determinants of these trends.
There can be no certainty as to how best
to increase productivity growth going forward in the
First, our investments in research and
development, after increasing rapidly since the nineteen-nineties, have
lagged. In a time when the world stands
on the brink of revolutionary progress in the life sciences, it cannot be
rational for the NIH budget to decline as it did this past year for the first
time in nearly forty years. If one looks
at funding levels adjusted for inflation, the decline in our national
commitment to basic research is even more remarkable.
The second key element of public
investment in productivity growth is education funding. Ultimately, nothing is more important to our
prosperity than the quality of the American labor force. It is particularly important that investments
be made to ensure all of our citizens have a chance to fully participate and
share in our prosperity. A growing body
of evidence suggests that pre-school education has an enormous rate of return,
particularly for children from disadvantaged background, and funding these kinds
of programs should be a high priority.
There is also a major need for national
investment to ensure the affordability of higher education for all of our
citizens. One of the most disturbing
statistics I encountered in recent years is the observation that just ten
percent of students attending our leading universities come from the lower half
of the American income distribution.
The third crucial area of investment is
in infrastructure. Here, there are
clearly areas in which there has been excess national investment in response to
political pressures. But there are also
key areas such as transportation and other infrastructure facilities where
investment has been grossly inadequate.
Third, and perhaps most urgently, we
need to find creative policy responses to rising inequality so as to assure
that most Americans share in the growing prosperity that globalization can
bring. The figure below points to a
disturbing trend. In 1979, the top 1
percent of the population earned as much as the lower 27 percent combined; by
1990 the figure had risen to 36 percent; by 2004 it was 46 percent. Given the strong trend growth in inequality
we may be on the brink of the moment when the top 1 percent of the population
earns as much as the lower half of the population combined and the top 1/10 of
1 percent earns as much as the lower third combined.
These trends are complemented by
parallel developments. As inequality has
increased so has its transmission from generation to generation. The difference between the life chances of
the children of the affluent and the poor has never been greater.
The precise cause of these developments
is not clear. Surely technology has
reinforced those with high levels of skill.
And trade and globalization have surely benefited those fortunate few in
a position to take great advantage of new opportunities while at the same time
raising competitive pressures on ordinary workers. Perhaps also greater
competition in general has led to more ruthlessness in pay decisions.
Whatever their precise causes, increases
in inequality and volatility of the magnitude we have observed, even when
coupled with rapid GDP growth, represent a serious economic challenge. They may overtime undermine our commitment to
the market system and an open global economy. They stratify society and
undermine the middle class. And they
mean that too many Americans experience themselves as falling behind or in
great danger of falling behind.
It is important to recognize the
magnitude of the changes we have observed.
Since 1979, the share of income going to the top 1 percent has risen by
7 percent of total income and the share going to the bottom 80 percent has
declined by an approximately equal amount as the table below demonstrates.
|
|
Decline in Before-Tax Share for Bottom/Middle |
Increase in Before-Tax Share for the Top |
$ “Loss” For Bottom/Middle in 2004 ($billions) |
|
1979 – 2004, Bottom 80% vs. Top 1% |
-7.4% |
+7.0% |
-$664 |
|
1990 – 2004, Bottom 80% vs. Top 1% |
-4.0% |
+4.2% |
-$359 |
To offset these changes would require a
transfer of nearly 664 billion dollars from the top 1 percent to the lower 80
percent. Similar calculations looking
only at the changes inequality since 1990 would suggest transfers of about 359
billion dollars.
While globalization is only one of the
causes of inequality, these calculations suggest that its consequences dwarf
the kind of compensatory adjustment programs that are usually contemplated
alongside trade agreements.
What is the right policy response? It is important to recognize that most of
globalization’s impact on the
Rather, I believe the main policy levers
for addressing inequality and insecurity lie outside the trade domain. They include improving the effectiveness of
the tax system while at the same time increasing its progressivity and
fairness. The biggest gains here potentially come from making a serious assault
on the tax gap resulting from non-compliance with the Internal Revenue Code – a
subject, Mr. Chairman, on which I know you have been a leader on in the
Congress. Using the most recently
available IRS data and extrapolating from that into the future, it is
conceivable that by 2015 the gross tax gap will be as much as $751 billion per
year. Over the next 10 years, as much as 5.8 [3]
trillion dollars in tax revenue will be lost to non-compliance with the Code. I would note the tax gap is greatest for
those categories of income that go disproportionately to the upper ends of the
income distribution. There are also important issues and abuses associated with
transfer pricing and the sheltering of both individual and corporate income
that require Congressional attention. I am convinced that substantial revenues
can be obtained from these sources – revenue that could potentially be devoted
to ameliorating the dislocating effects of technological change and
globalization.
We also need to recognize that in a
world where jobs are going to be increasingly impermanent, economic security
cannot come only from the employment relationship. This will require new approaches in the areas
of health insurance and other benefits.
I believe it is also appropriate that consideration be given to thinking
about methods of wage insurance that would enable increasingly inevitable
economic mobility to take place without significant and painful dislocation.
A third type of response involves taking
comprehensive and systematic policy approaches to the future of key industries
and regions. Indeed, reliance on
clusters is, it seems to me, profoundly important for our economic future. Any individual faces the possibility of
competition from a lower earning and equally skilled individual, but it is much
more difficult to compete with or replicate entire clusters of economic
activity. Indeed, the supremacy of
While the impact of trade agreements on
inequality may not be great, the impact on inequality on Americans willingness
to support international integration is great.
It cannot be an accident that the Marshall Plan came at roughly the same
time as major new commitments to the GI bill and to making credit available for
ordinary families to buy houses through the FHA. This underscores the
importance of addressing the anxieties facing middle class families.
The fourth critical priority is assuring
that the
All of this is to say that we as a
country have a great stake in continued progress towards a more open trading
system and in being perceived as a leader in promoting more open trade. To be
sure, it is important that trade agreements be based on bipartisan consensus, and
developed with the close involvement of both the executive and legislative
branches. It is also important to recognize that the promotion of trade must be
approached within the overall context of our efforts to promote global economic
and social progress. And it is important to be clear with other nations that
trade agreements are a two way street and that the
All of this said, it is critical in my
judgment that the
While the economic merits of specific
bilateral trade agreements are more debatable than in the case of multilateral
agreements, there is, it seems to me, a strong case for maintaining the
flexibility to enter into bilateral agreements. Such agreements can play an
important geo-strategic role in reinforcing our allies in their efforts in
economic reform. They can also play an important role in assuring that the
Mr. Chairman, I am very much aware of
the intense feelings aroused by trade and globalization. To sum up my views, it
is essential not to confuse ongoing globalization, which is driven by
technology, and the success of developing countries with the effects of
particular trade agreements. It is maybe possible to prevent new trade
agreements or to repeal old ones, but globalization and technological change
cannot be stopped. The real policy challenge is to respond to their adverse
consequences by embracing the full set of measures that ensure inclusive growth
for middle class families.