“Whether they do it in the collective interest or in their own is very much in question,” Summers told me. “I use as a parable for a lot of things what happens in developing countries, where the urban electric system doesn’t work well, and therefore the businesses start building their own generators to take care of themselves, and therefore there’s no longer a constituency or pressure to fix the existing electricity system, and meanwhile the society is falling apart.”
The economy is on a sugar high, and tax cuts won’t help
Consensus expectations for 2018 are only marginally greater today than they were before the election.
.. The U.S. stock market has been very strong, rising by close to 25 percent since the election, which is far more than most observers expected a year ago. This appears to be heavily driven by increases in corporate profits. But performance is running behind that of Japan and Germany, belying the idea that the market is being driven by U.S.-specific policy factors.
.. If something fundamental had happened to improve the U.S. business environment, we would have seen capital inflows and an appreciating currency.
.. Even very innovative companies such as Apple and Google cannot find enough high-return investments and so choose to engage in large-scale share repurchases.
.. There will be no meaningful and sustained growth in workers’ take-home pay without successful measures both to raise productivity growth and to achieve greater equality. Only in this way can we achieve healthy growth.
.. The bipartisan Simpson-Bowles budget commission was surely not biased toward big government. Yet it concluded that the federal government needed a revenue base equal to 21 percent of gross domestic product. The tax-cut legislation now under consideration would leave the federal government with a revenue basis of 17 percent of GDP — a difference that works out to $1 trillion a year within the budget window... This will further starve already inadequate levels of public investment in infrastructure, human capital and science. It will likely mean further cuts in safety-net programs and cause more people to fall behind. And because it will also mean higher deficits and capital costs, it will likely crowd out as much private investment as it stimulates.
Lawrence Summers on the Wrong Way to Think About Trade
They’re wrong because each of those were good deals. If you looked at how much trade barriers in the U.S. were reduced, and at how much trade barriers in the other countries were reduced, in every case they were reduced two, three, four, five times as much in the other countries as in the U.S.
.. The main thing these trade agreements have done is to open other markets to our businesses and to our exports. You don’t have to get into abstractions of free trade. If you just look at it as mercantilism, we’re tearing down their barriers lots more than we’re reducing any of our barriers, mostly because we didn’t have any barriers to start with.
.. if we repeal them, other countries’ trade barriers are going to go up much more than any kind of protection we’re going to be in a position to impose, and so it’s going to hurt our economy.
.. Bilateral trade deficits as a concept don’t make any sense. I run a huge bilateral trade surplus with Harvard [where he is president emeritus and a professor]. I run a huge bilateral trade deficit with my golf club. It makes sense to think about whether I’m selling more to the rest of the economy than I’m buying from the rest of the economy. It makes no sense to think about that entity by entity.
.. The clearest example is China. In the agreement that let China into the WTO, we did not reduce a single tariff in the U.S. We kept them at the same level that they had been for the previous 10 years. The reason there was a trade surge was changes that were taking place in China, not changes in our trade policies.
.. MR. IP: What happens to our growth and our trade balances if we exit these agreements?
MR. SUMMERS: Probably our trade deficits go up a little bit because of the reduced capacity to export to those countries.
.. MR. IP: What happens to our growth and our trade balances if we exit these agreements?
MR. SUMMERS: Probably our trade deficits go up a little bit because of the reduced capacity to export to those countries.
.. MR. IP: Treasury Secretary Steven Mnuchin said the tax cut being planned in the House and the Senate will pay for itself. He said even if we only get 30 or 40 basis points more of economic growth, this will pay for itself. Is he right?
MR. SUMMERS: Could it turn out that growth accelerated? Yes. If you were about [to roll] a die and I predicted that it was going to come up 12, I could turn out to be right, but it would be a crazy prediction.
I don’t think there is any rational basis for the judgment that the tax cut will pay for itself. There is nothing in the experience of past tax cuts, nor in the experience of a large number of modeling exercises that suggest that this tax cut would pay for itself.
I read carefully what the secretary said here last night and he said the Treasury had published a study that demonstrated this. We have sought to receive that publication, and there is no publication.
And I would make this judgment: I am still familiar with the kind of models and analysis that the career professionals at the Treasury do, and their career professional analysis, I am 99% certain, will not support the judgment that this tax cut will raise revenue.
But there’s a profound responsibility for people in positions of responsibility who are making factual claims about the economy to have a basis for those factual claims, when they indicate that they’re based on publications, to be prepared to come forward with those publications. And I’m afraid I haven’t seen that from the Treasury Department.
The Link Between Productivity and Pay Is Very Much Alive, Summers Paper Finds
But a new study co-authored by Harvard University economist Lawrence Summers says that’s wrong. He and Anna Stansbury, a doctoral student at Harvard, found a strong and persistent link between hourly productivity and a variety of wage measures since 1973. The problem, they conclude, is that the positive influence of productivity on pay has been overwhelmed by other forces pushing the other way.
.. between 1973 and 2015, they found that a one-percentage-point increase in productivity growth generally led to a 0.5- to one-percentage-point increase in average or median pay growth, depending on the type of workers measured. Yet while productivity and wage growth tended to moved together over these short periods of time, there was enough of a difference in growth rates that over time a huge gap opened up between the pay and productivity. By 2015, productivity was up 73% from 1973 but wages were up just 12%.
.. they say other forces such as weaker unions were eating away at the ability of workers to share fully in the rise in productivity.
.. The late 1990s was one of the few times since 1973 when worker pay grew briskly, but that, he says, was probably because unemployment was around 4%, not because productivity was growing rapidly.
.. Productivity almost always grows faster than pay. “It’s a matter of whether you want to look at the glass half full or half empty,” Mr. Mishel says. “We’re saying it’s half empty, at best.”