The Myron Scholes Global Markets Forum is a speaker series sponsored by the Initiative on Global Markets and run by Chicago Booth faculty for the purpose of bringing business leaders, policy makers, and distinguished academics to campus. Former US Secretary of the Treasury and Harvard professor Larry Summers joined MacArthur fellow and Chicago Booth professor Kevin M. Murphy to discuss growth prospects for the US economy, in a conversation moderated by Booth’s Anil Kashyap. This is an edited excerpt of Summers’s remarks.
Let me begin with two facts that I think should be cause for concern. First, since the summer of 2009, the US economy has grown at about 2 percent. Two percent isn't a very good growth rate. Second, the 10-year interest rate at the end of trading today [February 18, 2016] was just a bit below 1.8 percent.
That we are having trouble achieving—even over the long term—a 2 percent inflation target has to be a matter of concern. Of course, this is the judgment of a market that thinks that the Fed is not going to do anything like what it says it’s going to do. This is the judgment of a market that thinks the Fed is not going to raise rates at all this year. The real interest rate is at least a kind of measure of the certainty equivalent of the productivity of capital. If the market is saying that’s below 1 percent, that has to be of concern as well.
The Fed has been substantially too optimistic in its one-year-ahead forecast every year for the last six.
What’s the way to think about these two facts together? I believe that we are dealing with a situation that goes beyond the usual cyclical issues associated with recession—and for many years the policy debate has been confounded by that. The Fed has been substantially too optimistic in its one-year-ahead forecast every year for the last six, and its forecasts are pretty close to the consensus forecasts. The prevailing expectation in markets has always been that significant tightening will take place in nine months. That’s been true for the last six years. It has not happened yet.
If you accept all of this, what should be done? I would suggest four things at a minimum. First, there is an overwhelming case in the United States for expanded public infrastructure investment. Is anyone proud of Kennedy airport? Is there anyone in this room who is proud of LaGuardia? I’m too polite to ask about O’Hare. If you think about it, money has never been cheaper, and unemployment and nonemployment rates for construction workers remain high. Materials costs, given what’s happened to commodities, are at near record lows.
It’s hard to imagine a better time for expanded infrastructure investment, yet the rate of infrastructure investment is lower now than it’s been anytime since 1947. If you take depreciation out, federal infrastructure investment is negative. Think about the water supply in Flint, Michigan. Think about 20,000 American schools where the paint is chipping off the walls. Think about the fact that the major air-traffic-control technology of the US relies on white paper strips and radar screens of a kind that were used during World War II.
In the short run, expanded infrastructure investment would put people to work, create demand, and move the economy forward. In the medium run, it would expand the economy’s capacity, and reduce burdens on my children. Why do I say it would reduce burdens on my children? Because debt is a burden on my children. So also is deferred maintenance, because it’s not like we’re going to let the infrastructure completely collapse. I am virtually certain that deferred maintenance compounds at a rate that is far higher than the sub-1-percent real rate that the government pays on its debts.
So first, we should expand public investment. Second, we should increase support for private investment in infrastructure. There is a set of problems, and that goes to building cellphone towers, to replacing power plants, to a lot of things. Some of you may know about a bridge that connects Harvard Business School with Harvard Square. It was built in 1912 in nine months. We are now in the 52nd month of its repair. I have made some substantial investigation in the matter. I’ve learned that while our bridge is 400 square feet, there is a span of the Rhine that is 1,200 square feet, and Julius Caesar built a bridge over it in nine days.
With respect to private investment, tax reform is critical.
Permit me an analogy here. Imagine that you are running a library and that there is a substantial volume of overdue books. You might offer amnesty to get people to return the books. You might announce you will never offer amnesty, so people will take fines seriously and return the books. Only an idiot would put a sign on the door saying, “No amnesty now, but we’re thinking hard about amnesty for next month.”
You laugh, but American corporations have $2 trillion-plus overseas. If they bring that cash back right now, they pay 35 percent. If you’ve picked up any newspaper in the last seven years, you’ll know that Congress has been actively debating changes to that policy—for seven years. Just like the sign on the door of the library saying they’re thinking about amnesty for next month. It would be hard to conceive a policy better designed to keep that cash outside the US and not invested in the US than the policy we have pursued. That’s why I stress business tax reform as important for economic growth.
Many highly skilled, potential immigrants are going to start companies wherever they live, and it’s hard to see why it’s not in our interest for them to start those companies here in the US.
Third, we should grow our effective labor force. This is something that plays out over longer periods of time. Eighty percent of the labor force that we’re going to have in the late 2020s, we already have today. If their schooling wasn’t good, we’re not going to be able to fix it. What we do to educate our workforce matters. What we do to incentivize our workforce—through the design of our social safety net, and through disability insurance—matters. What we do to change our immigration policies—particularly our immigration policies on highly skilled workers—matters. Many highly skilled, potential immigrants are going to start companies wherever they live, and it’s hard to see why it’s not in our interest for them to start those companies here in the US.
When I was president of Harvard, I encountered a brilliant chemistry graduate student whom I’ll never forget. He was working with his advisor on what was going to be his first paper. His father died. He went back to China for the funeral. He spent 10 months trying to get back into the US, and the paper had to be published without him. That is not the way to attract talent and entrepreneurship. That’s why I see a need to support the substantial growth of an effective labor force.
Fourth, our financial system requires continuing attention. I’m hoping that these scholars associated with Chicago Booth’s Initiative on Global Markets can figure out exactly what form that attention should take. We have a financial system that has repeatedly produced substantial crises—the 1987 crash, the 1990 real-estate bubble, the S&L crash, the Mexican financial crisis, the Asian financial crisis, the internet bubble, Enron, and then the Great Recession of 2008. On average, a crisis every three years for the last 30 years. That surely has taken a toll on growth.
At the same time, because pendulums swing, at a time of substantial unemployment, a large number of middle-class Americans are not able to get mortgages today with reasonable down payments. It appears, though the matter is in some dispute, that there are significant impediments in the flow of capital to small businesses as well. Financial reform, labor-force support, stimulus to private investment, increases in public investment—this stuff is not rocket science. Most of it operates on both the demand side and the supply side. Whatever exactly your theory is, it’s a good thing and it is hugely important.
I would say to you that whatever you care about, if all you care about is that we’ve got an excessive federal debt, the most important determinant of the debt-to-GDP ratio in 2030 is how rapidly the economy grows between now and then. If what you care about is American national security, the most important determinant of how much we are respected and how much influence we have in the world is how well our economy performs. If what you care about is inequality and poverty, the most important determinant of the employment prospects of the poor is how rapidly the economy is growing.
I would suggest to you that there is no more important question for the American prospect than accelerating the rate of economic growth. It seems to me, whether you’re a demand sider or a supply sider, a Democrat or a Republican, there’s a great deal of common sense that should lead you to support increased economic growth.