June 2, 2020
55 Minutes and 51 Seconds
Are the COVID-19 stimulus measures doing their job? How can we improve the nation’s economic outlook while controlling the pandemic and saving lives? Listen to this Wiener Conference Call with Lawrence H. Summers, Frank and Denie Weil Director of the Mossavar-Rahmani Center for Business and Government and Charles W. Eliot University Professor, to hear answers to these questions and more.
Wiener Conference Calls recognize Malcolm Wiener’s role in proposing and supporting this series as well as the Wiener Center for Social Policy at Harvard Kennedy School.
Good day everyone. I am Mari Megias in the Office of Alumni Relations and Resource Development at Harvard Kennedy School, and I’m very pleased to welcome you to this Wiener Conference Call.
As we all continue to navigate the new normal, we’re providing more opportunities for you to connect with Harvard Kennedy School faculty, so watch your emails for future invitations. Also, given that we are running these calls remotely, please accept our apologies for any technical issues we may experience.
Today, we are joined by Lawrence H. Summers who is President Emeritus of Harvard University, Charles W. Eliot University Professor, and Frank and Denie Weil Director of the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School. During the past decades he has served in a series of senior policy positions, including Vice President of Development Economics and Chief Economist to the World Bank, Undersecretary of the Treasury for International Affairs, Director of the National Economic Council for the Obama Administration, and Secretary of the Treasury of the United States.
We are so fortunate that Professor Summers has chosen to share his thoughts on the current U.S. economic outlook with Kennedy School Alumni and friends. Professor Summers.
Lawrence H. Summers:
Thank you very much and let me say I’m glad to be with all of you. And I’m going to attempt to be relatively brief so that we discuss whatever is on your minds. Let me say to those of you who provide support to the Kennedy School, I can’t imagine a moment when the breadth of issues that the Kennedy School takes on and the roles that it trains people to fulfill have been more important to the future of the world.
My topic is the economy and I will get to it in just a moment. But I can’t fail to observe that economics began as the study of political economy, that economics and politics are fundamentally intertwined. That whether you are of pro-market or pro-government sensibility you believe that an effective government and a certain cohesion within society are necessary prerequisites for economic success. Without broad societal legitimacy, there can be no enduring prosperity, and broad societal legitimacy, it seems to me, is under question right now in a way that has not taken place in the United States since the late 1960s.
And just as those times continue to cast a shadow onto the political and economic debates that we’re having more than 50 years later, I think it’s very possible that, in a way that was not true of financial crisis or in a way that was not true of 9/11, the events surrounding COVID and now the coincident events surrounding the most recent events, may cast a very substantial historical shadow forward.
The economy. I think Jason Furman’s concept, that you can think of the economy’s evolution in three stages, collapse, bounce back, and slog forward, is a useful one. We think we’re at the end or nearing the end of the collapse stage. Barring a second wave, I think that’s probably correct. But that does not mean that the bounce back is going to be without incident. The unemployment rate will likely peak this month or next. My guess is it will peak at 18 or 19%. That represents nearly three and a half times, three times as large an increase as we saw during the great financial crisis.
The first major uncertainty surrounding the bounce back is going to be what happens to the virus. Ultimately, it doesn’t matter what the interest rate is, nobody is going to go out and buy a washing machine or a new car if they think they’ve got a chance of contracting a grave disease when they walk into the showroom.
I am very worried, based on a combination of conversations with the epidemiologists I most respect and a simple bit of analysis, which I’ll now go through. R0, the rate of contagion, the number of people who will be exposed, who will get COVID if one additional person gets COVID and then spread it, is about two and a half when we live in normal ways. It declined during the period of maximum lockdown on an across the United States basis to .8 or .9. Let’s assume that it was .9. It follows that if you go 1/16 back to normal it will become one, and if you go 1/8 of the way back to normal it will become 1.1, at which point the virus will be spreading, not declining.
It appears to me that we are on a trajectory to going substantially more than at 1/8 of the way from lockdown back to normal, and therefore we are setting the stage for a resurgence of the disease. We may not see it for a time because things are better in the summer, because we’re all outdoors. It’s possible that we’ll catch a break and the disease will mutate in a more benign direction. As Richard Zeckhauser, there are heterogeneity and super-spreader effects which mean that the people who are most prone to catch the disease and to spread it most virulently may already have it, and the remaining population may therefore be less dangerous than the population that has already contracted the disease.
All of these things are possible, but they don’t justify a very substantial move towards opening unless something else is happening that is going to slow the spreading and growth of the disease. What could such things be? Vaccination, but it’s a substantial distance off.
My life experience teaches me, and I suspect your life experience teaches you, that complex human projects are much more likely to encounter surprise delays than to encounter surprise accelerations. It’s one thing to have a victory in a laboratory, it’s another thing to have a vaccine successfully distributed to hundreds of millions of Americans and billions of denizens of planet earth. If that has happened on July 1st 2021, I will think it has been a very good outcome, probably in the 15% optimistic tail of my probability distribution.
I think the prospects are better for therapies, but we received not such good news in the most recent trial on Remdesivir, and the therapies that are likely to be developed are not likely to be entirely simple therapies to live with, and in many cases will involve hospitalization.
And there’s a growing recognition that, if you are unlucky enough to get the virus, the risk that you will die of it is only a part, perhaps half, of what is bad. If you survive, there may be continuing consequences for your health and some foreshortening of life expectancy. I suspect that people who have had COVID will find it rather difficult to purchase life insurance at conventional rates, and so in that way I think we may be understating the health burden here.
We are not as a country making at this point, and it does not appear to me that we are making an affective effort to make very substantial progress using testing and contact tracing to reduce R0. Academics like Paul Romer believe we need 30 million tests a day, so every American’s getting tested once every 10 days, to decisively stamp out or contain the virus. If we get to a 10th of that three months from now, I think we will be doing quite well as a country.
So, I think the risks that we will see a substantial resurgence, that there will be a period when for the United States as a whole, if not for New York City, the virus rate will be greater than what we’ve experienced so far, are probably better than half.
I think it’s important to recognize that the evidence we have so far suggests that policy is less important, and confidence is more important than we would have guessed. If people are confident, they ignore lockdown orders. If people are not confident, you cannot lock them up, but they won’t actually go do very much.
I think about myself. I’m not much influenced by anything Governor Baker does. If Governor Baker told me that I was free to go eat in any restaurant, I would not go eat in any restaurant. So, unless we have confidence that risks are very low, which fundamentally will require bringing the baseline rate in the population down by a factor of five or eight from where we are now, I don’t think we’re going to have a very full economic recovery, even though we’re going to have some bounce back from what’s been extraordinary.
After that, if we have a vaccine, I am slightly more in the optimistic camp that the kinds of dynamics that set in in Cape Cod between spring and summer, or that set in after earthquakes, where once the basic problem has been removed, repair comes surprisingly rapidly. I’m guardedly optimistic about that. I think it’ll be more rapid than the recovery from a financial crisis. But I don’t think that day is coming for another 15 to 18 months. And I think at that point the economy will be in a fair-sized hole and it’ll be another two or three years after that point until everything is fully back to normal.
A few other economic issues to comment on more quickly. There’s a pretty strong disjunction between what I’m saying and what markets are reflecting. It causes me to have a little less confidence in what I’m saying than I otherwise would, but also causes me to wonder about markets. Some of the apparent disjunction is because the technology stocks have benefited in many ways, think about Amazon, from COVID, now account for a substantial part of the market and are actually significantly up.
So, the typical stock is down much, much more than the market as a whole. Some of it has to do with the fact that markets are discounted values with cash flows, and with a much lower discount factor the asset prices are higher, and the market now believes that real interest rates are going to be negative out for 30 years. And in that context, it’s not hard to get high present discounted values on assets. Some of it is a confidence that the Fed will do whatever’s necessary to prevent anything too bad from happening, and the Fed thinks the market falling by very much at all is a bad thing. On balance, it seems to me there’s considerably more room for negative surprise than there is for positive surprise, as I look at the period ahead. But I would have said that a few weeks ago and I would have been wrong.
Fiscal and monetary policy. We are running budget deficits at truly extraordinary rates. If one computes the budget deficit for the third and fourth quarters of fiscal 2020, that is the quarters that we’re in the midst of right now, ending on October 1st, the US budget deficit will run at 30% of GDP. That’s more than it ran at during most of the Second World War. That is obviously not sustainable. It’s being sustained without inflationary pressure, in part because people can’t buy. The personal savings rate was 30% in April.
When people are able to buy, we’re not going to be able to run much deficits of anything like that magnitude with sustainability, but I don’t think anybody’s planning to run budget deficits of that magnitude. If we run the kind of budget deficit that we go with a normal recession, that will be closer to 9 or 10% of GDP. That is not sustainable for the very long run. But it is important in thinking about the consequences of these budget deficits to be aware of three things.
One, any time you think about debt you need to think about debt service as well, and while the debt burden measured relative to GDP will be extraordinarily high, the debt service burden measured relative to GDP will actually be at typical or below typical levels simply because of very low interest rates. We have an ability to control those interest rates and a significant part of the borrowing should be done, whether it will be done or not is a question, over the longer term.
Two, any assessment of debt needs to depend on what is debt to pay for. To the extent that debt is used to make investment activities, broadly defined, whether that is renewing the country’s infrastructure, whether that is in bringing some measure of educational equity to public schools, or whether it’s in a variety of other public functions like preventing future pandemics, debt that finances investment that gives the wherewithal to repay the debt is fiscally prudent, not fiscally imprudent.
And third, this point goes more to monetary policy, that we’ve had a fundamental change in the monetary regime towards a regime in which monetary policy is set in terms of interest rates and in which money pays interest.
So, when one speaks of the Fed printing money, one is not thinking about Milton Freedman’s proverbial dollar bills which became a hot potato amidst high inflation. One’s thinking about something that’s essentially equivalent to floating rate Treasury debt and the urge to get rid of it, which is the original theory of inflation, isn’t really operative in the context where it’s paying a market rate of interest. And so quantitative easing is better thought of as a switching of financial assets, rather than as something analogous to traditional monetary policy. That doesn’t necessarily make it right, but it means that the risks of inflation becoming explosive are I think, as the Japanese experience or the experience in the United States when these fears were around during 2010 illustrates, I think the risks of inflation are somewhat overstated.
So, it’s a somber outlook. It’s an outlook that probably depends more on health policy than it does on macroeconomic policy. We need to investing substantially more on the health side. And ultimately when the issues return to macroeconomic policy, they will be more about fiscal policy than they have been traditionally about monetary policy. Inflation will be less of a threat and deflation and sluggishness, secular stagnation, if you like, caused by the difficult of absorbing savings, will be more of a threat.
Let me stop there.
Q: What existing, longer-term trends are sped up or slowed down by the pandemic, and will those changes linger?"
With one exception, I think in general things that are accelerated are likely to stay accelerated and maybe even accelerated faster, and things that are just due to the pandemic, there’ll be more tendency for things to revert to normal.
I think we’re already seeing increased emphasis on resilience relative to efficiency, towards just in case, relative to just in time, towards more emphasis in corporate strategy and national policy, on self-reliance. And I think all of that will be driven forward.
I think we’ve seen 10 years’ movement forward in interlinking through technology, rather than personal presence. I think that will affect the extent to which we travel. We’ll travel less for business and interact by video more. I think it will affect how frequently we work in the office and how frequently we work at home. I think that will in turn affect the quality of the spaces that we want. I think realtors will soon discover that when they’re selling suburban houses includes a study will be a more valuable feature than it once was, and something corresponding will happen with respect to apartments.
I think that this call will be revealed within a year to be an anachronism, and it’s now the case that 70 or 75% of events of this kind that I’m associating with, speaking or listening, happen via Zoom. I expect within a year it will be 90 or 95%. That in turn and the increasing comfort and familiarity with it, will lead to the development of better technologies.
EdTech, MedTech and FinTech will all be accelerated by what has taken place. I think parenthetically the most important strategic issue for Harvard over the next 12 months will be whether or not it moves to take advantage of one of the world’s half dozen greatest brands, to provide higher education to very, very large potential audiences at a moment when there are all kinds of people who would rather get their education from Harvard. If they’re going to be sitting at home getting their education on a computer, would rather be getting it from something with Harvard quality and the Harvard label, than with the alternatives.
I think there’s a vast potential for the University to broaden its influence and its contribution, and not irrelevantly at this moment its revenue base, from doing that. Whether it will happen or not I don’t know, but I think that’s what will happen with EdTech. I think many, many, many of us will do many things with doctors from the comfort of our home, in part because it will become possible and we will have become accustomed, in part because we will be increasingly reluctant to go to germ-present places, which is likely to be any place where doctors and their patients congregate. And I think, since we will be buying things in very different ways, we will be paying for things in very different ways, which will drive a great deal of fintech innovation.
Most of that was in train before this happened. What I’m less sure of is I think that we may be passing a peak in terms of urbanization in superstar cities. In a world where exciting, surging crowds are to be avoided, in a world where work is to be de-densified, in a world where mass transit may become less viable, and in a world where the subsidy to public services associated with large cities represented by the state and local tax deduction has been eliminated and there’s very substantial succession of the successful, I think that we may see the decades-long trend in which the relative price of an apartment on Madison Avenue and a home in Scarsdale has changed very dramatically in favor of the apartment on Madison Avenue. I’m not sure that trend is going to continue, and I suspect for some time it may move in reverse. And if instead of Scarsdale I said Outer Palm Beach, the phenomenon may be even more pronounced.
Q: My question is, it used to not be that infrastructure spending was a partisan issue, but it seems like nothing has come out of Washington in the last three years. There seems to be a lack of consensus as to whether to move forward with a large infrastructure bill. The Democrats seem to be for it and, depending on the day, the President has also indicated his support. But the Republican majority in the Senate has dragged its feet. Why do you think that is and why has infrastructure spending become a partisan issue? Thank you.
Some of it is, for whatever reason, more and more things have become partisan issues which goes to political science. Some of it goes to what are legitimate concerns. In my view, Democrats are right about the importance of investing significantly more heavily in infrastructure. Some of the traditional Republican concerns about regulation and procurement practices, though, have important merit as well.
France is not usually thought of as a paragon of efficiency, but they built the Paris subway at one-fifth the cost in terms of per kilometer cost as the First Avenue subway was built in New York. You’ve all studied at the Kennedy School, you know the bridge by the Kennedy School connecting Harvard Square and the Harvard Business School. That bridge in the state of Massachusetts was under repair with a lane of traffic blocked for 62 months. 62 months. That’s to say five and a sixth years.
To put that into perspective, Patton built a bridge across a span of the Rhine 10 times as long as that bridge covers in one day. Julius Caesar spanned not 300 feet of Rhine but 2,000 feet of Rhine with a bridge that he built in nine days. It took the state Massachusetts in the United States of America, in the middle of the 21st century, 5.2 years.
So, the desire to address some of the issues around regulation, permitting, procurement, that slow things down as part of a package, is in my view not an unreasonable one. But yes, absolutely, we should be getting on with it.
Q: Do you foresee major American cities hollowing out, not in terms of square footage but in terms of workforce?
I’m skeptical that anybody can see the future in these regards and I’m not the person with the most expertise on this topic. My instinct is that there’s going to be significant decentralization here. I think you’ve seen the governors of both New Jersey and Connecticut remark on how the five day a week commute into the city is over, and some combination of the train is more problematic, the elevator is more problematic, the office space is more problematic, and the working from home functions better than you thought it could.
And once you realize that the working from home works better, then you don’t need to locate people. Then you can locate people halfway between New York and Philadelphia, rather than close to the Hudson. Or you can locate them where the weather’s better in South Carolina. Then when they can’t come, there’s less need for other people to come. I think on the work side, there’s going to be very substantial hollowing out, and I think on the leisure side there’s going to be something similar that’s going to happen.
Look, I think a lot depends on another unknowable, which is something like this: we’ll have a vaccine four years from now, virtually for sure. I think we’ll have it much sooner, but you can’t be certain. Is there going to be a lasting influence on people’s willingness to be in crowds? It may be that there’ll be none of that and so everything will come back in terms of crowded restaurants and theaters and the joy of living in the city. It may be.
But it may also be that we’re headed into a period where there’s going to be more concern about crime. Even if all the problems are on the business side, there’s going to be a material effect on revenue and the tax base, which can set off a spiral of exiting. And this will not be the last pandemic we face and that will leave a residue of apprehension behind. So, my instinct is yes, it will lead to a hollowing out of great cities, which in the process will become less great. But I don’t want to state that view with excessive confidence.
Q: I have been spending a lot of time with the GAO talking about the need to stop having debt grow faster than the economy. Clearly, as Chairman Powell said, this is not the time to focus on that. But at some point, we are going to begin to come out of the recession, and at some point, we are going to have to deal with the fact that it is unsustainable. By definition, if debt continues to grow faster than the economy, even at low interest rates, I would argue that’s unsustainable.
What are your thoughts about how to think of that in a reasonable way, since you don’t want to just suddenly start to say we’ve got to just cut back or just lengthen ... it worsens the economy? And related to that is you weren’t really saying that you wanted to allow more borrowing if it was for investment but not if it was for something else in the budget process, were you? That’s two questions.
Your first question was about how long the debt can grow, and you’re right that the debt can’t indefinitely grow faster than the economy. On the other hand, you can’t indefinitely fail to maintain the country’s infrastructure. You can’t indefinitely succeed in educating to the contemporary standard a shrinking fraction of American children. You can’t indefinitely continue the process of undercutting the IRS’s ability to enforce taxes.
So, because the debt to GDP ratio is so numerical, it exerts I think an excessive magnetic pull on thinking. And among my list of problems to solve, even when the economy starts growing more rapidly, the rising debt to GDP ratio would not be the one at the top of the list.
I think the Bowles-Simpson mindset, that the nation kicked into much too early in the recovery for the 2009 financial crisis, did substantial damage to the pace of the recovery, and I don’t think did a lot of good in terms of reducing what the ultimate debt to GDP ratio would be. Indeed, it was a subtle contributor to our inadequate pandemic preparedness. So, yes, I recognize the same arithmetic you point out, but I think there are other priorities that are more on the investment side.
I did not mean to suggest that the federal government should pursue a policy like the state governments where debt can be associated with capital projects and debt cannot be associated with non-capital projects. I meant to suggest that I think one should view with very substantially greater tolerance debt that is making a contribution to reducing burdens on future generations. Whether that contribution comes from addressing deferred maintenance or increasing their potential to produce, I think one should view borrowing of that kind quite differently than one views permanent for consumption type of borrowing.
Q: I know that you have written about the need for the Treasury to come forward with more support for the developing world and the impact the pandemic will have there. Why do you think the Treasury is currently so reluctant to issue major SDRs for the developing countries, and why isn’t Wall Street pushing them to convince the administration? Thank you.
Look, the Administration propounded the doctrine in its first months in office. Gary Cohn and H.R. McMaster, who one would have viewed as among the more thoughtful and internationalist members of the Trump Administration, put forward the concept that there was no such thing as international community, only the ceaseless struggle between nations for advantage. If that’s your Manichean view of the world, you’re unlikely to support global cooperative measures like SDRs, and I that’s essentially what’s going on.
My guess is that most, many, maybe even most on Wall Street would agree with you and would agree with me on the desirability of the further issuance of special drawing rights as you suggest. On the other hand, it is a truth about the business community that it tends to devote far more effort and force to issues that are directly commercial for its own bottom line than issues that are constructive for the global economy on which it depends. So, it doesn’t surprise me that major banks will send a representative to the meeting of a coalition for international financial support, and will send their CEO to the meeting about bank capital levels. That’s human nature and it’s natural enough, but I think that’s the basic answer to your question.
Q: My question is very simple. What would you recommend to public leaders, to presidents, ministers for finance, for economic development, what would you say are the three things that they should consider in economic recovery plans for the next months? In Latin America, the perspectives are really, really, really bad. We just heard yesterday that in Mexico we lost 12 million jobs just in April, so there’s an urgency for the authorities to put together these economic recovery packages. What are the three things that you would think are the most important to consider? Thank you.
One, health first. Figure out how to test, to separate, to mask, and do the things that minimize the pandemic, because if you don’t do those things you’re not going to be able to do things that help the economy. Second, recognize the extraordinary nature of the situation and be prepared to borrow to finance employment-creating investment that ultimately helps create prosperity through this period. And third, collaborate with the international community to try to keep markets open, to try to attract necessary financial support from the international institutions. And keep pushing for a framework in which debts can be addressed in sustainable ways.
Q: Just wondering if you could speak for a second to, all of the problems that you’ve lined up suggest that any kind of recovery or bounce back is going to be down a couple of years in the future. And a lot of us have been looking at trends associated with baby boomers going from savers to spenders and the income that’s going to have on tax policy and investment policy and infrastructure, all that kind of stuff. I wonder if you could speak to whether you think that’s going to have as big an impact and how it might affect all the other things you’ve talked about today?
Look, I think the crucial question for baby boomers in many ways is going to be how long they’re able to keep working and how long it’s going to be viable and effective. I’m 65 and I feel like I’ve still got my fastball. I’m aware that when I was 45 there were a lot of people who were 65 who I thought had lost their fastball and they didn’t think they’d lost their fastball, so I haven’t forgotten that and that goes into judgments. But I think that real policy answers are going to lie in the direction of finding ways for people to keep working and keep contributing and keep earning for a larger fraction of their lives. I don’t think it’s going to be viable for people to have 30-year retirements. And as life expectancy for many subgroups within the population rises, and in some sectors there’s increasing pressure for people to retire earlier. You’re getting to the situations where the 30-year retirement is something that happens, and I don’t think that’s healthy in human or economic terms.
Perhaps a silver lining in the disruption is going to be that since all jobs are going to change in their form there’ll be more scope for making flexible accommodations to people throughout their life cycle. I think one of the very big challenges that in many organizations we tend to have the idea that you begin your career and you climb the ladder and you climb the ladder and you climb the ladder and maybe at some point you plateau, then you do that for a while and then you retire.
And I think in many ways we’re going to have to envision the parabolic career where people’s peak in terms of responsibility, and perhaps in terms of compensation and perhaps in terms of intensity of effort, occurs somewhere closer to midlife, perhaps at age 50, and they continue to do important and meaningful, if in some ways less significant, work than they were doing when they were 50, later and longer in life.
Q: Professor Summers, given that unemployment is nearing 20%, and the fact that the pandemic has expedited certain structural changes in the economy, considering some of the policy measures taken to date, I was wondering what your best guesstimate would be for the additional dollar volume of investment necessary to avoid a potential depression scenario?
A part of what I’ve been stressing is that I think the most important investments are the health investments, and they’re measured in the tens of billions of dollars, not in the trillions of dollars. My guess would be that we will, over the next 12 months, have another two and a half to $3 trillion – $2.5 trillion–in extra spending and tax cutting around the economic problems that the country’s facing. And my guess is that that will be sufficient, and that if we fail it won’t be because of the lack of quantity of spending.
Great, well thank you very much for that question and answer, and thank you to everyone who called to listen in. Special thanks to Professor Lawrence Summers.
Lawrence H. Summers:
Thank you. Good to be with all of you. Bye-bye.