lawrence summers

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Lawrence Summers Lawrence Summers Jun 9, 2014 06:00 UTC With Thomas Piketty's book, Capital in the 21st Century, rising to number 1 on best-seller lists, inequality has become central to the public debate over economic policy. Piketty, and much of this discussion, focuses on the sharp increases in the share of income and wealth going to the top 1 percent, .1 percent and .01 percent of the population. This is indeed a critical issue. Whatever the resolution of particular numerical arguments, it is almost certain that the share of income going to the top 1 percent of the population has risen by 10 percentage points over the last generation, and that the share of the bottom 90 percent has fallen by a comparable amount. The only groups that have seen faster income growth than the top 1 percent are the top .1 percent and top .01 percent.

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Lawrence SummersJun 9, 2014 06:00 UTCWith Thomas Piketty's book, Capital in the 21st Century, rising...

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Page 1: Lawrence Summers

Lawrence Summers

Lawrence Summers

Jun 9, 2014 06:00 UTC

With Thomas Piketty's book, Capital in the 21st Century, rising to number 1 on best-seller lists,inequality has become central to the public debate over economic policy. Piketty, and much of thisdiscussion, focuses on the sharp increases in the share of income and wealth going to the top 1percent, .1 percent and .01 percent of the population.

This is indeed a critical issue. Whatever the resolution of particular numerical arguments, it isalmost certain that the share of income going to the top 1 percent of the population has risen by 10percentage points over the last generation, and that the share of the bottom 90 percent has fallen bya comparable amount. The only groups that have seen faster income growth than the top 1 percentare the top .1 percent and top .01 percent.

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This discussion helps push policy inconstructive directions. Taxes can be reformed to eliminate loopholes and become more progressive,while also promoting a more efficient allocation of investment. In areas ranging from local zoninglaws to intellectual property protection, from financial regulation to energy subsidies, public policynow bestows great fortunes on those whose primary skill is working the political system rather thanproducing great products and services. There is a clear case for policy measures to reduce profitsfrom such rent- seeking activities, as a number of economists, notably Dean Baker and the lateMancur Olsen, have emphasized.

Unless one regards envy as a virtue, the key reason for concern about inequality is that lower- andmiddle-income workers have too little -- not that the rich have too much. So in judging policiesrelating to inequality, the criterion should be what their impact will be on the middle class and thepoor. On any reasonable reading of the evidence starting where the United States is today, morecould be done to increase tax progressivity without doing any noticeable damage to the prospectsfor economic growth.

It is important to remember, however, that important aspects of inequality are unlikely to betransformed just by limited income redistribution. Consider two fundamental components of life:health and the ability to provide opportunity for children.

Lawrence Summers

May 5, 2014 13:53 UTC

Page 3: Lawrence Summers

The British economy has experienced the most rapid growth in the G7 over the last few months. Itincreased at an annual rate of more than 3 percent in the last quarter -- even as the U.S. economybarely grew, continental Europe remained in the doldrums and Japan struggled to maintainmomentum in the face of a major new valued added tax increase.

Many have seized on Britain's strong performance as vindication of the austerity policy that Britainhas followed since 2010, and evidence against the secular stagnation idea that lack of demand is amedium-term constraint on growth in the industrial world.

Interpreting the British strategy correctly is http://THEADSHOPTC.COM crucial because of thepolitical stakes in Britain, the question of future British economic policy and, most important,because the British experience influences economic policy debates around the globe. Unfortunately,when properly interpreted, the British experience refutes the austerity advocates and confirms JohnMaynard Keynes's warning about the dangers of indiscriminate budget cutting during an economicdownturn.

Lawrence Summers

Apr 7, 2014 12:57 UTC

Page 4: Lawrence Summers

The world's finance ministers and central bank governors will gather in Washington this week forthe twice yearly meetings of the International Monetary Fund. Though there will not be the sense ofalarm that dominated these meetings after the financial crisis, the unfortunate reality is that theglobal economy's medium-term prospects have not been so cloudy for a long time.

The IMF in its current World Economic Outlook essentially endorses the secular stagnationhypothesis -- noting that the real interest rate necessary to bring about enough demand for fullemployment has declined significantly and is likely to remain depressed for a substantial period.This is evident because inflation is well below target throughout the industrial world and is likely todecline further this year.

Without robust growth in industrial world markets, growth in emerging markets is likely to subside -- even without considering the political challenges facing countries as diverse as Brazil, China, SouthAfrica, Russia and Turkey.

Lawrence Summers

Mar 10, 2014 15:25 UTC

Page 5: Lawrence Summers

The events in Ukraine have now made effective external support for successful economic andpolitical reform there even more crucial. The world community is rising to the occasion, withconcrete indications of aid coming not just from the International Monetary Fund and otherinternational financial institutions but also the United States, the European Union and the G20.

At one level, the Ukraine situation is unique -- particularly the geopolitical aspects associated withRussia's presence in Crimea and the issues raised by Ukraine's strategically sensitive locationbetween Russia and Europe.

At a broader level, the world community has seen many examples over the last generation where anillegitimate, or at least highly problematic, government was brought down and the world communitysought to support economic reform and a new, presumably more democratic and legitimate one.Think of the transitions after the Berlin Wall fell or the Arab Spring.

Lawrence Summers

Feb 17, 2014 04:29 UTC

Page 6: Lawrence Summers

Inequality has emerged as a major economic issue in the United States and beyond.

Sharp increases in the share of income going to the top 1 percent of earners, a rising share ofincome going to profits, stagnant real wages, and a rising gap between productivity growth andgrowth in median family income are all valid causes for concern. A generation ago, it could havebeen plausibly asserted that the economy's overall growth rate was the dominant determinant ofgrowth in middle-class incomes and progress in reducing poverty. This is no longer plausible. TheUnited States may well be on the way to becoming a Downton Abbey economy.

So concern about inequality and its concomitants is warranted. Issues associated with anincreasingly unequal distribution of economic rewards will likely be with us long after the cyclicalconditions have normalized and budget deficits finally addressed.

Lawrence Summers

Jan 6, 2014 12:42 UTC

Last month in this space I argued that we may be in aperiod of secular stagnation in which sluggish growth, output and employment at levels well below

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potential, and problematically low real interest rates might coincide for quite some time to come.Since the beginning of this century U.S. GDP growth has averaged less than 1.8 percent per year.Right now the economy is operating at nearly 10 percent -- or more than $1.6 trillion -- below whatwas judged to be its potential path as recently as 2007. And all this is in the face of negative realinterest rates out for more than 5 years and extraordinarily easy monetary policies.

It is true that even some forecasters who have had the wisdom to remain pessimistic about growthprospects for the last few years are coming around to more optimistic views about growth in 2014,at least in the U.S. This is encouraging, but optimism should be qualified by the recognition thateven optimistic forecasts show output and employment remaining well below previous trends formany years. More troubling even with the current high degree of slack in the economy and wageand price inflation slowing, there are increasing signs of eroding credit standards and inflated assetvalues. If we were to enjoy several years of healthy growth with anything like current creditconditions, there is every reason to expect a return to the kind of problems we saw in 2005-2007long before output and employment returned to trend or inflation accelerated.

The secular stagnation challenge then is not just to achieve reasonable growth, but to do so in a

financially sustainable way. What then is to be done? Essentiallythree approaches compete for policymakers' attention. The first emphasizes what is seen as theeconomy's deep supply side fundamentals -- the skills of the workforce, companies' capacity forinnovation, structural tax reform, and assuring the long-run sustainability of entitlement programs.All of this is intuitively appealing, if politically difficult, and would indeed make a great contributionto the economy's health over the long run. But it is very unlikely to do much over the next 5 to 10years. Apart from obvious lags like those with which education operates, there is the reality that oureconomy is constrained by lack of demand rather than lack of supply. Increasing our capacity toproduce will not translate into increased output unless there is more demand for goods and services.Training programs or reform of social insurance, for instance, may affect which workers get jobs,but they will not affect how many get jobs. Indeed measures that raised supply could have theperverse effect of magnifying deflationary pressures.

Lawrence Summers

Dec 16, 2013 12:31 UTC

Some time ago speaking at the IMF, I joined others who have invoked the old idea of secularstagnation and raised the possibility that the American and global economies could not rely on

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normal market mechanisms to assure full employment and strong growth without sustainedunconventional policy support. My concern rested on a number of considerations. First, even thoughfinancial repair had largely taken place four years ago, recovery since that time has only kept upwith population growth and normal productivity growth in the United States, and has been worseelsewhere in the industrial world. Second, manifestly unsustainable bubbles and loosening of creditstandards during the middle of the last decade, along with very easy money, were sufficient to driveonly moderate economic growth. Third, short-term interest rates are severely constrained by zerolower bound and there is very little scope for further reductions in either term premia or creditspreads, and so real interest rates may not be able to fall far enough to spur enough investment tolead to full employment. Fourth, in such a situation falling wages and prices or inflation at slower-than-expected rates is likely to worsen economic performance by encouraging consumers andinvestors to delay spending, and to redistribute income and wealth from higher spending debtors tolower spending creditors.

The implication of these considerations is that the presumption that runs through most policydiscussion -- that normal economic and policy conditions will return at some point -- cannot bemaintained. The point is demonstrated by the Japanese experience, where gross domestic producttoday is less than two-thirds of what most observers predicted a generation ago, even as interestrates have been at zero for many years. It bears emphasis that Japanese GDP disappointed less inthe five years after the bubbles burst at the end of the 1980s than the United States has since 2008.GDP today in the United States is more than 10 percent below what was predicted before thefinancial crisis.

If secular stagnation concerns are relevant to our current economic situation, there are obviouslyprofound policy implications that I will address in a subsequent column. Before turning to policy,though, there are two central issues regarding the secular stagnation thesis that have to beaddressed.

Lawrence Summers

Nov 11, 2013 10:11 UTC

As the president has recognized, the failure of hisadministration to deliver a functioning website that Americans can use to enroll in Obamacarerepresents an inexcusable error. Having succeeded after more than a century of failed efforts inachieving the progressive dream goal of legislating universal health insurance in America, it is tragicto be falling short on the mundane task of allowing Americans to actually enroll in the healthcareexchanges. Even if the goal of getting the health insurance exchanges working by November 30 isachieved, and this cannot be regarded by objective observers as a certainty, a shadow has been caston the core competence of the federal government.

What should be learned from this episode? It is too soon to know with confidence, but worth

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reaching some preliminary judgments while the issue is front of mind.

At a basic level the implications go to public management. The dismal track record of theimplementation of large-scale information technology initiatives, even in rigorous and focusedcorporate environments, points up their difficulty. Unexpected obstacles always arise, deadlines areusually missed, and budgets are usually overrun. Maximizing the prospect of success requiresproviding for slack in the schedule and the budget, structuring projects with very clearaccountabilities and frequent checkpoints, and assigning oversight responsibility to people withextensive IT experience, rather than general managers with programmatic commitments.

Lawrence Summers

Oct 14, 2013 11:48 UTC

This month Washington is consumed by the impasseover reopening the government and raising the debt limit. It seems likely that this episode, like the1995-96 government shutdowns and the 2011 debt limit scare, will be remembered mainly by thepeople directly involved. But there is a chance future historians will see today's crisis as the turningpoint where American democracy was shown to be dysfunctional -- an example to be avoided ratherthan emulated.

The tragedy is compounded by the fact that most of the substance being debated in the currentcrisis is only tangentially relevant to the major challenges and opportunities facing the UnitedStates. This is the case with respect to the endless discussions about the precise timing ofcontinuing resolutions and debt limit extensions, or the proposals to change Congressional staffhealthcare packages or cut a medical device tax that represents only about .015 percent of GDP.

More fundamental is this: current and future budget deficits are now a second order problemrelative to other more pressing issues facing the American economy. Projections that there will be amajor deficit problem are highly uncertain. And policies that indirectly address deficit issues byfocusing on growth are sounder in economic terms and more plausible in political terms than thelong-run budget deals with which much of the policy community is obsessed.

Lawrence Summers

Jul 8, 2013 11:20 UTC

Page 10: Lawrence Summers

No one is satisfied with the U.S. corporate tax system.From one perspective the main problem is that at a time when corporate profits are extraordinarilyhigh relative to GDP, tax collections are very low relative to GDP. And many very successfulcompanies pay little or nothing in taxes at a time when the budget deficit is a major concern andwhen hundreds of thousands of defense workers are being furloughed and lotteries are being held todetermine which children Head Start can no longer afford to help. From another perspective, themain problem is that the United States has a higher corporate tax rate than any other major countryand, unlike other countries, it imposes severe taxes on income earned outside its borders. Manyargue that this unfairly burdens companies engaged in international competition, discourages therepatriation of profits earned abroad, and-because of the patterns of investment that result-benefitsforeign workers at the expense of their counterparts.

These two perspectives on corporate taxes seem to point in opposite directions with respect toreform. The former perspective points towards the desirability of raising revenues by closingloopholes, whereas the latter perspective seems to call for a reduction in corporate tax burdens.Little wonder, then, that corporate tax reform debates are so divisive. Many can get behind the ideaof "broadening the base and lowering the rate," but consensus tends to collapse when the issuebecomes the means to broaden the base. Indeed a principal objective of many business-orientedreformers seems to be narrowing the corporate tax base by reducing the taxation of foreign earningsthrough movement to a territorial system.

Where then should the debate go? Despite the tension between the critical perspectives oncorporate tax reform, the current debate has landed us in so perverse a place that win-win reform iseasy to achieve. The center of the issue is the taxation of global companies. Under current law U.S.companies are taxed on their foreign profits (with a credit for taxes paid to other governments) onlywhen they repatriate these profits to the United States. Right now U.S. companies are holdingnearly $2 trillion in cash abroad. Â The companies argue, with some validity, that current rulesburden them by making it expensive to bring money home without raising much revenue for thegovernment because it has no claim against foreign profits that are not repatriated. They hope forand call for relief arguing that it will help them bring money home at a minimum for the benefit oftheir shareholders and possibly to increase investment.

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