Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Larry Summers (Harvard Economics Professor) on His Career In Academic Economics, Government, University Leadership and Corporate America

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Larry Summers (Harvard Economics Professor) on His Career In Academic Economics, Government, University Leadership and Corporate America · The Capitalism and Freedom in the Twenty-First Century Podcast

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Welcome to the new Books Network.
1:05
>> John Hartley: This is the capitalism and freedom in the 21st century podcast
1:08
where we talk about economics, markets and public policy.
1:12
I'm John Hartley, your host.
1:13
Today, I am joined by Larry Summers, who served as the 71st US secretary of
1:18
the treasury from 1999 to 2001 in the Clinton administration and
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served as the director of the White House National Economic Council in the Obama
1:27
administration from 2009 to 2011.
1:30
Larry, when not serving in government positions in Washington, DC,
1:34
has spent his career as a professor of economics at Harvard University and
1:38
served as the 27th president of Harvard from 2001 to 2006.
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As an academic, Larry has made many seminal contributions to the fields of
1:46
macro economics, public economics, labor economics, and financial economics,
1:50
and was awarded the John Bates Clark Medal in 1993.
1:53
Larry also sits on the boards of many corporations,
1:55
including most recently joining the board of OpenAI, and is one of the world's most
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sought after commentators on economic policy and in the macroeconomy.
2:03
Welcome Larry.
2:04
>> Larry Summers: Good to be with you.
2:05
>> John Hartley: Larry, thank you so much for joining us.
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You've reached the heights of so many different areas in your career,
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academic economics, government, public policy, university leadership, and
2:14
corporate America.
2:15
I want to spend a bit of time on each of these.
2:17
First, you come from a family of great economists.
2:19
Both your parents were phenomenal economists.
2:21
You have several uncles who are Nobel Prize winning economists.
2:24
Was there any possibility that a young Larry Summers could have done
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something other than becoming a great economist?
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>> Larry Summers: Well, I have two brothers and
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neither of them became economists.
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One of my brothers is a psychiatrist in Philadelphia and
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the other brother is a lawyer in Philadelphia where we grew up.
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So people used to say that my parents had a dream jewish experience,
2:50
a doctor, a lawyer, and someone to go into the family business.
2:56
But I suppose that I was oriented to doing analytical things,
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and I was oriented to caring about public policy from a young age.
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And those two things came together in a career as an economist.
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>> John Hartley: At one point, you were studying physics, I think, a bit.
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>> Larry Summers: Very early on as a freshman at MIT,
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I was studying physics and mathematics, and
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I realized that there was a kind of level of physics in
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mathematics that some people were at and I was not at.
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And there was a big difference between being a very good high school
3:40
student in a field and being world class in a field, and
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I certainly wasn't in physics or mathematics.
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>> John Hartley: I'm sure some people would argue that you could very well
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become a world class physicist as well, but as a fellow economist, wonderful that
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you chose to become an economist, given how many careers you've inspired.
3:58
So I wanna talk about Larry, the academic economist.
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I think since you've seen so much of economics go in an empirical direction,
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largely departments like Harvard, MIT,
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which you've been at along with other departments leading the charge, you've
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been a huge part of that shift to empirics in many subfields, labor economics,
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public economics, financial economics, and macroeconomics, to name just a few.
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For that work that you were awarded the John Bates Clark Medal in 1993,
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I'm reminding of your exchange in 1986,
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as part of this exchange with Ed Prescott about macroeconomics.
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He wrote an article for the Minneapolis foot correlate was titled some skeptical
4:36
observations on real business cycle theory, challenging Prescott's very
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theory first approach with a more empirical kind of practical approach.
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The key insight of your 1985 Uje article with Greg Mankiw and Julio Rodtenburg
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is that you don't find much empirical evidence of intertemporal substitution.
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I'm curious, where do you see yourself fitting into the history of economic
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thought as a macroeconomist today?
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How would you describe your framework?
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Would you describe yourself,
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your own macro views as more of a ISLM, old keynesian style macro economist,
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like Harvard predominantly was prior to the 1990s,
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something which Paul Krugman has pointed a lot to, really, since the great Recession?
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Or would you describe yourself as more of a new Keynesian,
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which has this sort of RBC, intertemporal substitution core, but
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with some nominal rigidities laid on top so that policy matters, the latter
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being the direction that much of the macroeconomic fashion taken since the 90s.
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>> Larry Summers: I would put myself very much in a Keynesian tradition by which I
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actually mean the tradition of the kind of thinking in which
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John Maynard Keynes was engaged.
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At a technical level, that means conceptualizing
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issues around full employment and the business cycle
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critically through the challenge of assuring that all
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savings is absorbed into investment at full employment.
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And recognizing the difficulties in that intermediation problem,
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particularly as mediated through financial markets,
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as a central source of business cycle fluctuations.
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That was what was behind the work I did on secular stagnation.
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That was what was behind the work I did earlier
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with Olivier Blanchard on hysteresis.
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That was behind what's been a continuing theme in my work,
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the sense that business cycle fluctuations
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are problematic not just because they involve variation and
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the second moment of activity or employment, but
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they're problematic because economies fall short.
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And so I like to say that economic time series should be
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thought of more like a time series on the fever of a human being.
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There's some regular cycles through the day, through the month,
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whatever, but mostly there are big fluctuations,
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and when there's a big fluctuation, it's usually bad and
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not offset by some extra fluctuation in the opposite direction.
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I also think of myself as a Keynesian in a broader way,
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believing in the connection between economic theory and
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public policy decision making.
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In believing in his public philosophy,
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that the role of government is to make it possible for
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the market system to operate,
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by addressing egregious inequality,
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by providing public goods.
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By responding to various kinds of market failures,
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including the difficulty that unfettered capitalism has
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in avoiding catastrophic economic declines.
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I've also shared Keynes's instincts
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to understand the broad world in
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a broad way, by looking at many,
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many different sources of evidence
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rather than a single statistical
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finding of one kind or other.
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And as I argued in my paper on the scientific illusion,
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the purpose in many ways of empirical work,
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the purpose of analysis is to persuade.
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And seeing efforts as persuading in favor of a worldview or
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a way of understanding what is happening,
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seems to me to be a better conceptualization
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of what a scholar in economics does.
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Than accepting or rejecting a particular hypothesis.
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So in all of those ways, I've tried
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in a small way to be a descendant of Keynes.
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And I have always found the most inspiring
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passage about being an economist to be from
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Keynes's eulogy for Alfred Marshall.
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Where in fact, I think he's describing his own virtues at
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least as much as he is describing Marshall's.
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>> John Hartley: I think it's fascinating, a lot of people don't appreciate that
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Keynes was largely a journalist, and I think he was a great communicator and
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a great policy advocate on top of being a great academic.
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And I think if you think about great economists of the 20th century,
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also Milton Friedman, he wasn't just a great academic, but he was also a great
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policy communicator, or a great policy advocate and communicator.
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Having all three of those, and also being very broad across fields,
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I feel like it's something that you share with them.
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I'm curious, in your mind, has academic macroeconomics become too mathy for
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policymakers?
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Is something Paul Romer talked a bit about.
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Do you think that central bankers around the world are really paying attention to
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the intricacies of DSGE model mechanics?
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Or rather, in your mind, are they going really by your own adage of sort of
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waiting for the whites to the eyes of inflation or another crisis.
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And sort of being reactionary to events, something of a data dependent basis,
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with a fairly straightforward monetary policy reaction function akin to
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almost like- >> Larry Summers: Respectfully, John,
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I don't think it's quite the right question.
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There was a time when if you wanted to build a suspension bridge,
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you would consult a physicist to decide whether it would hold up or not.
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Over time, there came to be division of labor, and
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you consulted a structural engineer.
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And so I think in the same way, there has been a growing
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division of labor between economists to think about
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the conceptual foundations of our discipline, and
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economists who are engaged in giving near term advice.
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And I think of that as being the instance of progress.
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And I don't think that whether a method is immediately accessible,
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or even accessible with explication.
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To a person who's charged with carrying out current policy,
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is the right way to make judgments about whether something is too mathy.
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So I would reject completely the idea
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that the field in some overall sense
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has an appropriate level of mathiness.
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And even apart from whatever my view is, I'm a huge believer in academic freedom.
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And so I think that people who are doing things that other people
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find interesting should very much be given license to do it,
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even if I don't find it particularly valuable.
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That said, I have to say that the extreme and
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extensive elaboration of the canonical
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new Keynesian model does not seem to me
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to have yielded important insights,
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that have pushed policy forward in valuable ways.
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I know that most of my friends and
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many people I very much respect would dissent from that judgment.
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But I don't find that doing great
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microeconomic rigor with a certain
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amount of price rigidity grafted on,
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has been terribly enlightening for any purpose.
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I think that, for example, whatever kinds of
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costs there are that might lead prices to be rigid,
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would likely also lead people to be off of short run supply curves,
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demand curves, or reaction functions.
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So I find the idea that markets with price
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rigidity clear on the demand side, rather than,
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as we more traditionally assume in price theory,
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clear on the minimum side of the market to be an odd one.
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So I think the desire to use certain
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kinds of statistical techniques,
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has led to a lot of looking under lampposts,
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even when a lot of the truth lies somewhere in between.
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And in particular, I think once you have assumed,
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as essentially new keynesian models do,
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that the average level of output through a Time
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series is determined outside the model,
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you've assumed away a large part of what is
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interesting about the field of macroeconomics.
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So in some critiques about mathiness don't seem to me to be a very fruitful approach.
16:23
But the extensive elaboration of the new Keynesian paradigm,
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it seems to me, has will ultimately be
16:34
judged by history to be a bit of a cul de sac.
16:39
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>> John Hartley: It's fascinating, and
17:11
we'll see if there is a new Keynesian Nobel prize, there hasn't been one yet.
17:15
I'm curious, in terms of the Phillips curve, do you think we can still rely
17:18
closely on it or any thoughts on the Phillips curve in general as a concept?
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>> Larry Summers: I think that economists do not at this moment
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have a very satisfactory theory of price
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level determination and inflation.
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I think there's power in the Phillips curve notion,
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but it is looking increasingly like
17:48
Ptolemaic astronomy with the invention of
17:53
ever more complexities to achieve a fit with
17:58
the assumption of substantially varying
18:03
nairus with various kinds of ad hocery added.
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And I have always been troubled by the absence of
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a connection between Phillips curve type theories and
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the theories economists use to describe the most dramatic instances of inflation,
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such as what is happening in Argentina today.
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So I don't feel like monetarism any longer
18:39
stands as a very satisfactory theory of inflation and
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fluctuations in the inflation rate.
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I have yet to be persuaded of the realism of
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the mechanisms of expectation formation that
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underlie the fiscal theory of the price level,
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or of its ability to make credible
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predictions rather than to provide ex
19:20
post explanations for known phenomena.
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But I think it's a very valuable endeavor to be pursuing.
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But I would say that economists have for sense and
19:39
intuition, but not very satisfactory science
19:45
around the topic of inflation at this point.
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It gives me no pleasure to say that, but
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that is my assessment of the current state of the art.
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>> John Hartley: Great, so I wanna pivot to Larry, the economic policy advisor,
20:01
as treasury secretary in the late nineties you were
20:03
instrumental in creating the treasury inflation protected securities,
20:07
inflation linked securities market.
20:09
As an asset class you helped lead the economic response to various international
20:14
financial crises in the 1990s in the Clinton administration.
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And then you helped lead the Obama administration response to the great
20:22
Recession in the late two thousands.
20:24
I'm curious, what policy accomplishments across your career are most meaningful to
20:28
you, and what should the public learn or remember about them?
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And to the aspiring policy economists out there, what advice would you give them?
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>> Larry Summers: Let me go in reverse order, my advice to
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people who want to be policy economists is
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you have to propose a course of action.
20:53
As Tim Dayton used to say, plan beats no plan,
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you have to be prepared to come to a judgment,
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not simply point up aspects of problems that need to be thought about.
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Too often the vice of my fellow academics is when they're
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asked what to do, they say, be sure to consider x.
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And that only takes you so far, which isn't very far.
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I would urge that in making policy judgments,
21:30
there is a need to take as holistic a view as possible,
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that goes back to what we were talking about regarding Keynes.
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One needs to recognize not just what
21:48
a particular economic model says, but
21:53
the complexities outside the model,
21:58
the possibility of future uncertainties,
22:03
the ways in which other actors will respond,
22:09
the exigent political circumstances,
22:14
the precedent being set, and much, much more.
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I think it's important in formulating
22:26
policy to start with objectives,
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then formulate a broad strategy and
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theory of the approach, and
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then move to tactical implementation.
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I went into economics because I realized at
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a young age that a doctor could treat patients and
22:54
make an enormous difference in the lives of a certain number of patients.
23:02
That an economist who did something that reduced
23:06
the unemployment rate by 1 10th of 1% for one month.
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Would cause 160,000 more people to see that they had jobs and
23:19
that their children could look at them with pride
23:25
as they went to work rather than with concern as they stayed home.
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And I hope, through my various efforts in
23:37
responding to financial crises,
23:41
in establishing institutions and
23:45
regulations that addressed various kinds of financial flows,
23:52
that altered tax policies and directions that made them.
23:59
Fairer and more efficient, I hope that
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the consequence of that is that some number
24:10
of people have been enabled to live better and
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more satisfying [COUGH] lives and
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have encountered less friction and
24:25
less adverse circumstance in pursuit of their dreams.
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>> John Hartley: That's terrific, I'm curious I wanna really just a little bit
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more on fiscal policy and what you think we've learned about fiscal policy between
24:41
the great recession, fiscal stimulus that you were part of negotiating that some
24:46
argued was too small but of course yielded no inflationary response.
24:50
And the COVID pandemic and its fiscal stimulus response more recently, which
24:55
many have argued, including yourself, was maybe too big and had too large
24:59
of an inflationary response [CROSSTALK] >> Larry Summers: I think the fiscal,
25:04
I think we've learned that fiscal policy matters and
25:08
that fiscal policy has a meaningful impact on aggregate demand and
25:14
through aggregate demand on what happens in economies.
25:19
I argued in 2008 that the stimulus should be significantly larger and
25:27
longer, given the magnitude of the recession,
25:32
the politics of the moment and the imperatives of getting
25:38
some stimulus made that not politically feasible.
25:43
And President Obama, relying on the advice of his political advisors,
25:48
which I found to be correct, supported and
25:52
signed into law the stimulus bill that was passed.
25:56
Certainly he wished it could have been larger,
26:01
I wish it could have been larger,
26:05
given the magnitude of the GDP gap at that time, seven or
26:11
8% GDP gap, a 2% of GDP stimulus put in place for
26:17
two years, looked less than was appropriate.
26:22
Relative to the size of the gap, the fiscal
26:27
stimulus provided in 2021 was perhaps five
26:32
times as large as the Obama stimulus had been.
26:38
You had a gap that was perhaps two or
26:43
3% of GDP, and you perhaps 4% of GDP,
26:50
and you had fiscal stimulus that
26:55
was well over 10% of GDP.
27:00
So it seemed to me entirely predictable, and
27:04
that would lead to an overheat of the economy,
27:08
which would create both economic and
27:11
political challenges forthcoming, and so it did.
27:16
The secret sauce of economics is arithmetic,
27:21
and the great failure of so much of the commentariat
27:27
was to say we had too little fiscal stimulus in 2008 and
27:34
therefore we need more and not to think about
27:39
the relative magnitude given the relative gap.
27:45
>> John Hartley: Fascinating, I wanna shift to Larry, the university president,
27:49
you've been president of Harvard, obviously, the university academy is
27:53
at a controversial high with its response to the October 7 Hamas attacks in Israel,
27:58
the ongoing conflict.
28:00
Where do you see the academy at today, and what hope do you see for it going forward?
28:04
In terms of solutions, do you think it's incumbent on alumni and boards to become
28:08
more active, like you've seen at certain schools in the past months?
28:12
Or do you see upstarts like the University of Austin or others having success?
28:17
>> Larry Summers: All of the above universities,
28:20
because they train future leaders and form the ideas and
28:26
concepts that drive both scientific progress and
28:31
human understanding, are centrally important
28:37
to their societies, for good or for ill.
28:42
What they stand for, what they model, and
28:46
what they represent is profoundly important, as is illustrated in many ways,
28:53
including the central role of German universities in
28:58
promoting doctrine of Nazism in the 1930s.
29:03
I believe that this is a time of moral testing for
29:08
American universities, they have shifted too far
29:14
from the aspiration of seeking truth to the pursuit
29:19
of particular concepts of social justice.
29:24
They have elevated comfort, and
29:30
the avoidance of discomfort,
29:35
and the celebration of feeling
29:40
over the values of rigorous
29:44
excellence and argument.
29:49
They have too frequently allowed prejudice
29:54
of certain sorts that are fashionable to
29:59
the kinds of people who choose to be professors
30:05
to become too pervasive on their campus.
30:10
And I think it is appropriate that there be some substantial
30:18
accountability to the outside world and
30:23
that the outside world seek to push back on universities.
30:31
I think, and this has not always been done,
30:35
that that needs to be done with humility, with care,
30:40
and with respect to the idea of academic freedom.
30:45
Those most energized by the idea that trustees
30:51
should put universities back on a sound course
30:56
should recall that trustees were pushing for
31:02
the removal of the Samuelson textbook because
31:07
of its emphasis on Keynesian economics.
31:12
Those most insistent that university presidents
31:17
declare what is right and what is wrong should consider
31:23
the track record of presidents in the past on issues
31:28
ranging from homosexuality to antisemitism.
31:34
But there is surely a need for innovation both from outside and
31:41
from inside leading institutions.
31:46
And certainly, there has been a failure of trustees and
31:52
external leaders of universities to meet some
31:57
of their basic obligations as fiduciaries, and
32:02
that has in important ways been pointed up by recent events.
32:09
>> John Hartley: And finally, I wanna pivot to Larry,
32:11
the corporate board member, you recently joined the board of OpenAI.
32:16
And I've served on many corporate boards,
32:19
giving you a very unique insight to how some of the world's most innovative firms
32:23
function in the aftermath of the financial crisis in the great recession.
32:27
In your own thought leadership during much of the 2010s, you argued that we were
32:32
in a period of low growth secular stagnation, much like Harvard economist
32:36
Alvin Hanson described the economy in the aftermath of the Great Depression.
32:41
And curious now if in the post COVID pandemic world in 2024 going forward,
32:46
you see a different story for American in global growth,
32:50
going forward with the adventure?
32:52
>> Larry Summers: John, very briefly, given the magnitude of budget deficits,
32:58
given the extent of investment in environmental values in
33:03
resilience in implementing artificial intelligence.
33:08
I don't think the chronic excess of savings over investment that
33:13
prevailed through much of the post financial crisis period is likely to
33:18
be nearly as defining going forward, at least in the United States.
33:23
And I certainly think that artificial intelligence
33:28
offers vast potential for forward progress.
33:32
>> John Hartley: Well, thank you so much for joining today, Larry,
33:35
it's been a real joy for us to hear about all the aspects of your amazing career and
33:39
your amazing thought leadership, a true honor to have you on.
33:42
>> Larry Summers: Good to be with you.
33:43
>> John Hartley: Today our guest was Larry Summers, who is a professor of economics
33:46
at Harvard University and has served as us secretary of the treasury and
33:50
director of the White House National Economic Council.
33:53
He is also one of the leading voices of our time on issues surrounding economic
33:58
policy and the macroeconomy.
34:00
This is the capitalism and
34:01
freedom in the 21st century podcast where we talk about economics, markets and
34:06
public policy, I'm John Hurtley, your host, thanks so much for joining us.
34:10
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