Brainstorm Tech video: Larry Summers on debt, bubbles, and ObamaJuly 19, 2011: 11:10 PM ET
Larry Summers, former Treasury Secretary and former adviser to President Obama, spoke to the Aspen Institute's Walter Isaacson at Fortune's Brainstorm Tech conference about everything from the deficit crisis to the technology bubble to his character in The Social Network.
MR. ISAACSON: So was that scene in the social network true?
DR. SUMMERS: I've heard it said that I can be arrogant.
DR. SUMMERS: If that's true, I surely was on that occasion. One of the things you learn as a college president is that if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o'clock, there are two possibilities. One is that they're looking for a job and have an interview; the other is that they are an asshole.
DR. SUMMERS: This was the latter case. Rarely, have I encountered such swagger, and I tried to respond in kind.
MR. ISAACSON: So what's happening with the debt ceiling talks, do you think, and what should be done?
DR. SUMMERS: And now for something completely different. Look, if we default on August 2nd, it's going to be what happened after Lehman collapsed on steroids. It's going to be financial Armageddon.
The idea that adults who have some agenda, whatever the merits of their agenda, are really prepared to threaten sending the United States into default, to pursue their agenda, is beyond belief.
You know, I have had arguments with my college-aged children about spending, and sometimes we discuss whether they should spend less, whether they should pay, whether I should pay. We don't entertain the option that because we can't resolve our argument, Visa should get stiffed.
DR. SUMMERS: And that's what's going on here. I mean it is outrageous. The idea that these people are threatening to make the country default so they can get their way is beyond belief.
Look, on the merits of the deficit policies and the budget policies, I obviously tend to share the President's views. But you can make perfectly reasonable arguments for, in the direction of what the House majority favors.
But threatening to make the country default? I mean it is not something that should be treated as a civilized discourse.
MR. ISAACSON: Do you think --
DR. SUMMERS: My guess is, my pretty confident guess is that yet again, Churchill's dictum will prove correct. Churchill says the United States does the right thing, but only after exhausting the alternatives.
DR. SUMMERS: And so I think you'll see a certain amount of Perils of Pauline stuff. But I am very confident that on August 3rd, we will not be in default.
MR. ISAACSON: Do you think the Gang of Six thing is serious, just in your outside guess of it, that they will make a deal in the Senate, the moderates?
DR. SUMMERS: I think it's an encouraging step in the process. I think the recognition that you need revenues and expenditures both; the idea that addressing the deficit problem can be combined with a tax reform agenda that has needed to be pushed for quite some time, towards broadening the tax base, I think that's very encouraging.
I think if you look at the details, you'll see that there's a lot in the Gang of Six that is a plan to have a plan, rather than a plan. You'll see that there's a Senate and that there's a House. You'll see that the proposal that actually came today didn't explicitly address the debt limit.
So I think it's a positive development, but I think of it more as a positive development signaling ideological changes and ideological evolution that may be helpful, than as an immediate response to the current problems.
MR. ISAACSON: Do you think that President Obama waited too long to get deeply engaged?
DR. SUMMERS: No. I mean I think you can make that argument. Look, 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.
Yes, there's all kinds of reform we should do in the tax system. There are all kinds of loopholes and evasions that need to be looked at, but these are some of the approaches that I think we should be thinking about, and I guess this competitive green eye shading, that is the character of too much of the Washington debate, is pushing some policies in favorable directions.
But I think it's kind of a bit beside the point of what's going to make the American economy as strong as it can possibly be in 2030 and 2040, and that seems to me to be the profoundly important question.
MR. ISAACSON: Where are jobs going to come from in the next, between now and 2030?
DR. SUMMERS: Look, the most rapidly growing sector of jobs over the last decade, and in the forecasts for the next decade, is health care, and education is in the top five. So we need to embrace that. We need to figure out how to make those jobs be better targeted; we need to figure out how to make them be better jobs; we need to do that.
But we do need to recognize that it is those kind of service industries that are going to be major providers of jobs in our economy.
MR. ISAACSON: Is that a true productivity for the economy?
DR. SUMMERS: Is it true productivity that -- you and I had a conversation before -- is it true productivity that two months ago you were limping around, and now you're able to go on hikes because you replaced your knee? Yes, I think that's -- and that wouldn't have been possible for somebody 20 years ago.
Yes, I think that's true productivity. Is it true productivity that there are a variety of cancers that we used to not be able to cure, that we're now able to cure? Yes. It doesn't show up that much in the GDP statistics, but if you look at what's happened in the life sciences and what it's done to improve the quality of people's lives, it's immensely important.
That's not to make an excuse for malpractice-driven defensive medicine. That's not to make an excuse for doctors who are doing it to collect the fees, for the fact that, you know, certain procedures are done three times as often in one place as in another place, and there's no data that's used to study it.
So we've got to do a lot about health care. But we've got to recognize that the jobs that are there to be had are heavily going to be jobs involved in providing services to each other. The reality is that manufacturing employment has been trending downwards for 50 years.
That production -- there are the fraction of all the workers in the United States who are engaged in manufacturing production right now, is less than a fraction of the workers who were engaged in farming in the late 1950's, and it's a very similar phenomenon.
Spectacular productivity growth means you can produce all that you need with relatively few people, and that frees up people to do other things. That's basically a positive, but it involves a lot of dislocation that has to be sensibly managed.
So I think as we think about jobs, we've got to think about the service sector. We've got to think about conditions of employment in the service sector. We've got to think about how the service sector can be made a larger employment generator. We've got to recognize that many of the activities, where there is the greatest needs in our society, health care.
We don't really have a problem that there aren't enough television sets in our society. We really don't. I mean we did once. I mean it used to be that some people had television sets and some people don't. We don't have that problem anymore in America.
You know, if you think about it, there aren't that many manufactured goods that actually, even families beneath the poverty line, don't have. Where we have huge gaps are in the provision of services that the people in this room take for granted, for themselves and for their children, that actually aren't available to a large fraction of Americans.
So as we think about job creation, we're going to have to think much more about the service sector.
MR. ISAACSON: Speaking of job creation and technology, the three technologies that could be either significant or insignificant in this process, and maybe you could rank them. Green technology, biotechnology, information technology. Which will be significant and which are rather insignificant for the future, of job growth?
DR. SUMMERS: Look, I think it's a bit Sophie's Choice, because I think innovation is profoundly important, and I think it's profoundly important in all of its aspects. My own sense, looking at them, is that while energy efficiency technologies can make significant contributions with respect to global climate change, can make significant contributions with respect to our dependence on foreign energy, it's important to remember that energy is about six percent of the economy.
At the end of the day, if you have renewable energy or you don't have renewable energy, you still plug their lamp in to the plug and get electricity. So you don't have the kind of transformation that the automobile or the Internet represented, where people are able to do things that they had not previously been able to do.
In contrast, if I look at information technology, what I see is that whether it is manufacturing or retailing, whether it is -- whether it is publishing or wholesaling, I cannot see a sector of the economy that is not being profoundly transformed by what information technology is making possible, and that again and again with respect to information technology, it's not -- it is that things we used to do are becoming easier to do.
But it is even to a much greater extent that things that we didn't used to imagine thinking about doing now becoming possible because of information and technology. So it seems to me that when this era is looked back on, the revolution in information technology will be a very large part of it.
With respect -- I think the life sciences are sort of in an intermediate category. You know, maybe because I've been a beneficiary of medical research that came along about seven years early enough to be in time for me, I feel this particularly strongly.
But I think if you ask yourself the question, and think about this question. Which would you rather have, 2011 standards of living and 1951 health care, or 1951 standards of living and 2011 health care? Most people think about that, I've done this a fair number of times, people aren't sure. Some people think one, some people think the other. You can argue both sides of the question.
But if you think about it, it's kind of remarkable, because what that's saying is that the progress in one small sector of the economy, one relatively small, albeit growing sector of the economy, driven by scientific research, has added as much to our well-being as all the material progress in the rest of the economy.
So while I don't think the, you know, I don't think there's been a year when the biotech industry as a whole made profits, and I don't think that when somebody writes the economic history of the United States, the biotech contribution is likely to loom large 50 years from now in the way that the information technology does.
When somebody writes the human history of Americans, the fact that 25 years from now we will have done most of the following: cure Alzheimer's, apply stem cells to prevent diabetes, develop approaches that enable most of us to be the weight we want to be, rather than the weight we are, and find a solution for dementia, the fact that 25 years from now we will have done not all of those things, but we will have done most of those things, I think that looms enormously large.
I think it's a -- you know, one feature of technology is that it's driven, of course, as you all know, by exponential growth. If you think about exponential growth, one-two-four-eight-sixteen-thirty-two. You know, 32 minus 16 is more than all the technological progress, all the progress that happened from 1 to 16.
So as we make progress, and as the base of that growth gets larger, the amount of change that we are able to drive over the next two decades will be greater than has been possible in any previous two decades. So for my judgment would be that all the technological innovation is going to be profoundly important, but economically what happens that information technology and humanly, what happens in life sciences technology, is really going to be revolutionary.
MR. ISAACSON: On the euphoria you've expressed about information technology, it sort of brings to mind Fortune's cover this week. One of my favorite bumper stickers out in Silicon Valley is "Oh Lord, please grant us just one more bubble."
MR. ISAACSON: Of course, the old line too being "Be careful of what you wish for. The gods may grant it to you." Do you think, you're now at Square, you're now at Andreesen Horowitz. Do you think we're in danger of being too euphoric and having a bubble here?
DR. SUMMERS: Nobody who's ever been a government financial official ever will answer a question saying "No, I am not concerned about a bubble."
DR. SUMMERS: That is a prescription for being -- nobody will remember that you said that, unless of course the bubble bursts, in which case you will be the example of the stupid euphoria that generated the bubble. So you're not going to get me to be dismissive of the idea of a bubble and, you know, I think it is always useful to keep in mind, the way somebody said it to me, is the three most dangerous words on a ski slope are "follow me dad," and the --
DR. SUMMERS: And the four most dangerous words in markets are "it's different this time."
DR. SUMMERS: Having said that, having said that, here's some things that I think complicate the story relative to some of what's written. If you look at Apple, and you make some elementary kinds of adjustments, and you take out, for example, their substantial holdings of cash, the price earnings ratio of Apple is about two-thirds the price earnings ratio of GE.
Oh, maybe Apple has lots less growth prospects than GE, but it's not an immediately intuitive thing, you know, the iPad, iPod, I don't know. Just cloud. It just doesn't seem immediately intuitive.
That's not atypical. 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.
So if you look at the large tech sector, it's very, very hard to see a bubble. Now you'd say well okay, maybe that isn't a bubble, but what about the Linked-Ins and the Zingas and the stuff that's on second market and all of that? That's much, much harder to evaluate.
Of course, you might think it has something to do, you know. Linked-In's now on the public markets. You might think there was some arbitrage that went on between old technology and new technology. What is true is that 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.
But as I go through these arguments and I can produce a few more in the same direction, I am sobered by the thought that every bubble has its wise guy, and it's the guy who has a set of explanations of how it's different this time. So I think it's a very difficult set of judgments to make, but I guess I am surprised by those who approach this question with certitude.
Those who are confident that it's not a bubble, you know, who can look at history and be confident that things aren't a bubble? Those who are confident that it is a bubble don't seem to me to have looked at some of the kinds of facts that I just cited.
So I don't quite understand thoughtful people having positions that don't include some agnosticism.
MR. ISAACSON: Last question before I get a few from the audience. What's the difference between working for Barack Obama and Bill Clinton?
DR. SUMMERS: Okay. So you're working for Bill Clinton. Well, let's do it differently. Let's do it the other way. You're working for Barack Obama. If you have a meeting scheduled at ten o'clock, there's a 25 percent chance that the meeting will begin before ten o'clock, and there's a -- you know what's coming, and there's a 70 percent chance that the meeting will have begun by 10:15.
If you wrote Barack Obama a memo before the meeting, it is a virtual certainty that he will have read it. If you seek to explain the memo you wrote to him during the meeting, he will cut you off, and he will be irritated. If he, as the leader of the meeting, will ask one or two questions to kick the tires, but will basically focus on how whatever subject you're talking about fits with the broad vision and approaches of his presidency.
He will basically take the attitude if you're his financial advisor, that if you can't -- it's up to you to figure out whether preferred stock or subordinated debt is the appropriate financial instrument for your bailout, and that if he doesn't trust you to figure it out, he'll get a new financial adviser, but that is not the question on which he is going to spend time.
So it's a very focused executive, big picture guidance, disciplined approach. At the appointed time, his secretary will come in and will bring a card that says it's time for his next meeting, and you will be out of that office within five minutes. It is a certainty. That's working for Barack Obama, and it is a wonderful experience.
Working for Bill Clinton is also a wonderful experience. It is a different experience.
DR. SUMMERS: The probability that your meeting will begin before ten o'clock is zero.
DR. SUMMERS: The probability that there is compensation for the fact that your meeting will begin late, it is virtually certain to end late. Bill Clinton has a 30 percent chance of having read your memo before the memo. Bill Clinton will, however, with near certainty, have some set of quite detailed and thoughtful perspectives to offer on your topic.
He will say things like "I was in the White House library reading the Journal of Finance, and there's some really interesting thinking about the role of dividends in the system." "I went to a conference at the Brookings Institution 11 years ago, and do you know that there's a really interesting experiment with providing credit access in Tennessee?"
"Did you read the latest issue of -- the Asian edition of The Economist? It had a perspective on Thailand that you might want to think about." There was a stunning, I mean you know, while he wasn't reading your memo, it wasn't that he wasn't doing anything about it.
DR. SUMMERS: So it was a very different kind of experience that was also extraordinary in its way. I think the nation has been fortunate to have two such thoughtful, purposeful, highly intelligent and focused people, who have served as President, and it's certainly been my good fortune to work for both of them, with their rather different styles.
MR. ISAACSON: Questions here? Yes, Andy Sorwa (ph). You don't get to ask many questions in life, do you.
MR. SORWA: (off mic) Larry, can I ask you, have the Republicans -- taking from the last --
MR. ISAACSON: I'll repeat it, yes.
MR. SORWA: Is there anything the Republicans have done that is laudatory?
MR. ISAACSON: Anything the Republicans have done that you think is laudatory?
DR. SUMMERS: Look. The wiseguy answer is to say something like -- the wiseguy answer would be to say something like well, a number of them have really good voting records in the Senate, or to say that a number of them are very good to their children. I mean there are all kinds of wisecracks for answering that question.
But I don't actually believe that. I think that -- no, no, I don't mean it that way. Sorry. That was unintentional. That was unintentional.
DR. SUMMERS: Yes. I think that the Republicans have quite properly focused attention on the cost control aspects associated with health care. I think the Republican view that the American tort system is a substantial tax on American prosperity is correct. I think the Republican view that in recession, you need to be thoughtful about the approach you take to regulation, and that you need to recognize that regulation has a range of costs.
Yes, the FDA protects us from bad drugs, but in the process, it may also delay the availability of good drugs. Yes, I think there's enormous benefit that comes from the perspective that Republicans have brought, and I think there are -- I'm not going to get into naming, dividing Republicans or Democrats into two categories.
But I think there are any number of Republican officials who have been -- who have made enormous contributions and continue to make enormous contributions to the development of American public policy. Frankly, without a focused opposition, I think there is substantial danger that progressives would go off in directions that might well not be the right directions for creating prosperity.
I do think the movement that has emerged, principally within the Republican Party, to government by a kind of terrorism, to try to get your way around the national debt, is profoundly irresponsible, and really does serve to weaken the country. So I think that is not an example of successful loyal opposition. But I think there's much else that is.
MR. ISAACSON: President Summers, thank you very much. That was awesome. Appreciate it.