Interview With Larry Summers

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L.G.: The Republicans generally seem to have had a lot of success in boiling down what they're doing to this very attractive idea of four words really: "low taxes, small government." Those are simple concepts to communicate in the next 58 days or whatever it is. Is there a simple, elegant, campaign-ready way to communicate the Obama plan?

L.S.: You know, I try to do policy, not spin. Yes, it may be that policy over the last eight years has been simple to describe, but the descriptions haven't fit the reality, since spending has gotten completely out of control on bridges to nowhere and much else, and the consequences for ordinary families have been disastrous. So I prefer thoughtful economic policy that may take whole sentences to describe over simple economic policies that can be summarized in four words, but the four words don't actually correspond to what's done, and the consequences are pretty serious. I think Obama's economic policies would involve government providing a foundation and the necessary... assistance to enable people to maximize their potential in the marketplace. And I think that's a much sounder approach.

L.G.: Do you have any idea where the bottom of the housing crisis is? Have we reached it yet or do you think it will be, as Yale economist Robert Shiller has said, perhaps worse than the Great Depression?

L.S.: Oh, I don't minimize at all the seriousness of our economic problems. There are a zillion statistics you can compare. I don't think it's realistic to suggest that somehow America is going to suffer in the way that it did during the Great Depression, when the unemployment rate was 25 percent and more than half the homes in the country were foreclosed. At the same time, I fear that we've got some significant room to go in the housing market, and I'd expect further price declines for another six to nine months.

L.G.: How does the current global credit crisis compare with the Asian and Russian crises of 1998 that you had to deal with?

L.S.: Well, I think the central difference is that this crisis this time is about us, not about them, and that makes it that much more immediate and painful. Some of the very same mistakes—of excessive budget deficits, failure to regulate financial institutions, excessive leverage—that led to those problems, are what led to our problems. That's why we were so focused in the 1990s on fiscal prudence, on proper regulation of financial institutions, you know. I think one thing we learned in the course of responding to those crises was that you never see the end of a crisis. You can usually date the end of the crisis to the first moment when a public official makes a forecast that proves too pessimistic. And I think, unfortunately there's been some tendency of the administration, and certainly of Senator McCain, to cheerlead their way through the situation by talking about how strong the economy is, and I actually think the moment will come when we address this crisis, when it's described in frank terms. It's from that point that you can begin to see repair, but I think there have been some real failures of recognition and acknowledgment in the response over the last year.

L.G.: But isn't that just human nature at work as well?

L.S.: Sure. Hindsight is always twenty-twenty. And I'm sure with the benefit of hindsight, in some areas, we no doubt would've made different judgments. But I think if you look at the responses and the comments that Chairman Greenspan and Secretary Rubin and I tried to use during the 1990s—President Clinton above all—we didn't try to minimize or deny problems that everybody saw were there. I think it's an important part of addressing these problems, and so I've been surprised by the political figures who said that this was just whining or the political figures that said the economy was really strong, or that this was a temporary dip. This is something the United States can manage, but I don't think we'll manage it successfully by minimizing its significance.

L.G.: You mentioned Alan Greenspan. A lot of fingers have been pointed at him, as you know, for helping create the conditions that caused the subprime crisis to happen. Do you think that's a fair or unfair criticism of his role?

L.S.: Lloyd, I think, looked at over 17 years, Alan Greenspan had a tremendous record as Fed chairman. It's easy to look at things with hindsight, and often decisions look different with hindsight than they do with foresight. And, unfortunately, you have to make them with foresight. Battlefield medicine is never perfect, and that's certainly true in the financial sector. But I think if you look at Alan Greenspan's record in its totality, it's a strong one.

L.G.: I was intrigued to read a comment of yours on the death of Milton Friedman, that in some sense we're all Friedmanites now, in the same way Nixon said we're all Keynesians. What did you mean by that?

L.S.: I mean that I think we've all come to a much greater appreciation of the role of prices, the role of incentives, and the role of markets. I mean, to take just one example, now the pro-environmental alternative is a cap and trade system or a tax on carbon emissions. I tend to support a cap and trade system, and I think if we ever make progress against global warming,—as I hope we will, as we need to—it will come through some kind of cap and trade system. Well, that's relying on markets, and that's a very different place than where the country was, and where thought was, when I went to college or graduate school, when the assumption was, to address a problem like that, you would use command and control regulation. And it was only a few isolated people who would support the use of market instruments in the same way. Almost everyone today supports charter schools and some elements of competition within education. That was a heretical notion a generation ago. So I think the kind of emphasis that Friedman has brought on what markets can do has gained quite wide acceptance. Where I would still very much part company with Friedman is in believing that while market outcomes may be efficient, they may be profoundly unfair, and there's a need for government to do things to redress the balance—and in believing that a market system can only work within a broader legal framework that only government can establish.

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