deziloooooo
Senior Associate
Joined: Dec 20, 2010 16:22:04 GMT -5
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Post by deziloooooo on Jul 18, 2011 10:24:52 GMT -5
As promised , the transcript with Larry summers..some interesting points here, granted some of the commentators after the show didn't agree with him, but he does make a point and I agree, it's the size of the order book that will dictate hiring again, not profits, the American businesses are profitable today, and doing it with 7 million less workers then before the melt down.
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ZAKARIA: As of this moment, there are exactly 16 days until the United States begins to default on its debt, barring a deal in Congress. But such a deal, sadly, continues to be illusive, as it has been for many weeks and months. Our politicians can't seem to muster the courage of their convictions to compromise for the sake of the country.
To help us put all this in perspective and to talk about much more, I am joined by the former President of Harvard, the former Treasury Secretary, and the former Director of the National Economic Council, Larry Summers.
LARRY SUMMERS, FORMER U.S. TREASURY SECRETARY: Good to be with you.
ZAKARIA: You were Treasury Secretary. Walk us through what happens if there is an actual default.
SUMMERS: With an actual default, that the United States does not pay back money, principal and interest on its debt. At that point, the country is declared to be in default. Financial instruments that people hold that have been regarded as safe cease to be regarded as safe. A panic begins on money market funds and many other parts of the financial system, and a cascade that makes Lehman Brothers look like a very small event unfolds.
It seems to me that it is an unthinkable financial risk to take. And it seems to me also important to remember that once that threshold has been crossed, there is an uncertainty premium that will continue for a very long time to come.
ZAKARIA: In other words, it would take a lot of - it would take people a long time to get comfortable again.
SUMMERS: A long, long, long - a long, long, long time, and that means that the question cannot be how we will have a default, how we will manage a default, how we will prioritize payments. The question has to be what's the formula going to be for avoiding such a catastrophe.
ZAKARIA: If there were a default, some people have said, you can imagine the borrowing costs for the United States would go up by one percentage point, 100 basis points, which would add $150 billion to the deficit every year. Does that strike you as in the range?
SUMMERS: That's a number you could imagine. I am less worried about the borrowing costs and more worried about the disruption, as there were runs on banks, runs on money market funds, exchanges face the prospect of collapse. Institutions that have been built over decades were swept away, and, as they were swept away, the ability to carry on routine financial business, to clear checks, to pay bills, to meet obligations would be - would be lost. It would be a cataclysm, and it would be a totally self-inflicted cataclysm.
There are countries in the world where there's an issue of whether they can meet their obligations. There's no question the United States can meet its obligations. The question is whether we will.
You know, Fareed, the way I liked to say it is, my daughters are in college. We can argue about how much they should spend, we can argue about how much I should pay, we should argue about how much they can pay. The only thing that you can't really argue about is that we do have to pay the Visa bill. Our family does.
And this idea that somehow that we can not pay because we're having a political fight over how to handle the spending and taxing really is an example of democracy functioning in the worst possible way.
ZAKARIA: So take me through what the - what you think the calculation is, because you were there in the White House. Many of the same characters in the Republican Party. You know, let's talk about what they think.
Eric Cantor, John Boehner, Mitch McConnell say, here's the problem. We always get these deals, and the spending cuts never materialize and the tax raises do, and so we don't want a deal that - that sort of promises cuts in the future. We want something that is rock solid now.
SUMMERS: Well, let's begin with the fact that when a Democrat left the White House, Bill Clinton in 2001, and the Treasury Secretary, me, left the White House, the country was in surplus and was paying back its debt. And then, a set of proposals put forward by a Republican president, enthusiastically supported by a Republican majority in both the Senate and the House were passed, and, as a result -
ZAKARIA: These are the tax cuts?
SUMMERS: The tax cuts, the Iraq War, the prescription drug benefits, huge increases in discretionary spending, much larger than anything that took place during the Clinton years. And, as a consequence, the economy was in substantial deficit. And then, the economy was, because of other problems, poised with a bubble for a crash, and it then crashed.
So they're in no position, I would argue, to lecture others about fiscal responsibility.
Where are we in this debate? The president's health care bill contained very substantial cuts in Medicare. The president has even raised the prospect of raise - of pushing upwards on the Medicare age, something that was unthinkable to many Democrats. The president has indicated a willingness to consider changes in social security.
A Republican like Alan Simpson, who is of the Budget Commission, has said that it is not the president who is to be faulted for an unwillingness to compromise. There is plenty of movement to entertain spending cuts. The question is whether it's going to be 100 percent spending cuts of one type or whether there's going to be any balance.
It's not that the president and his colleagues have talked about the prospect of raising taxes on middle class families. It's not that they've even talked about raising income tax rates. They've talked about eliminating a special tax break for the owners of corporate jets.
ZAKARIA: But those are trivial numbers. You'd have to do a lot more than that.
SUMMERS: Even though that you would have to do - you would ultimately perhaps have to do more, but even corporate jets and hedge fund special treatment is too much revenue increase for the Congressional majority.
So I don't think there should be any confusion here about who's willing to walk a mile to compromise so far. The president has shown that in any of a variety of ways, and the president has never said that it's my way or default. The president would be happy to see an agreement to move us past the prospect of default on almost any terms.
It is the House Majority, the Republican House Majority, that has indicated that they want to use the credit worthiness of the country as a hostage to pursue a particular agenda and to pursue it without compromise. I don't think that's the right way to advance the interests of the country.
SUMMERS: The most important thing that makes businesses confident is a thick order book. The most important thing that makes store owners happy is a lot of people coming into their store.
ZAKARIA: And we are back, talking about the fate of the U.S. economy with Larry Summers, the former Secretary of Treasury.
Larry, you wrote a very important piece in "The Financial Times" in which you say actually no matter how this debt issue is resolved, as long as it's resolved, it's - the most important thing is actually to get - to move beyond it. None of these long-term deals matter. Why do you say that?
SUMMERS: The deals matter, but what matters much more is whether the economy grows. Do we create jobs for14 million Americans who are unemployed? Do we lose a generation of college graduates who don't get the first-rung jobs on which they can build a career? Do we lose 10 years early a large group of workers in their 50s who lose their jobs and then never find another one?
That's the most important question, and that's why we need more demand in this economy.
ZAKARIA: But it's -
SUMMERS: Is there ever been a time when, with interest rates below 3 percent, potholes in roads, infrastructure decaying and unemployment rates among the groups that build things close to 20 percent? There has never been a better time to renew and rebuild our infrastructure. And that's an important part of what we should be focusing on.
It is every bit as much a deficit when we let our bridges decay, when we fail to fix our roads, when we allow our schools to collapse, when kids have to go to school in classrooms where the paint is peeling off the walls. That is a deficit of maintenance, that is a deficit of preparation for the future in just the same way that borrowing money is a deficit. And, by addressing that deficit, we can put people back to work.
ZAKARIA: And you make the point in the FT, with very specific numbers, that actually by doing this, by creating more demand, by the government effectively spending money one way or the other, you actually make the deficit better because you get GDP growth up which produces more tax revenues. How sure are you of those numbers?
SUMMERS: Look, the most important determinant of where the deficit is going to be three, four years from now is how fast the economy grows. If the economy stagnates, no matter what we do with deficit deals, that deficit's going to be in a terrible place, and that's why growing the economy is so important.
ZAKARIA: And you say you can do it. Now, there are a lot of people who say this is failed Keynesian economics. They tried it. The stimulus was tried. It didn't do much for growth.
SUMMERS: If you compare where the economy is with where it would have been in the absence of stimulus, it is a very different place. Make no mistake, a depression was a serious possibility in the winter of 2009. It didn't happen, and the Recovery Act is an important part of the reason why.
Look at the countries that did more to push their economies forward, countries like China, countries like Germany. Those countries saw larger results. Look at the countries that made less efforts to push their economies forward. They have had patterns of much more stagnation.
ZAKARIA: We're looking at Britain, for instance.
SUMMERS: Looking at Britain, for example.
We've - we've done this experiment in the United States. For the first term of his presidency, Franklin Roosevelt focused on getting the economy to grow and the economy enjoyed rapid growth from the floor of the Depression. Then, in 1937, he turned his attention to deficit cutting, and by the time you got to the 1940 election, unemployment was over 14 percent.
It's very important to avoid an excessively rapid move away from maintaining demand in a situation like this.
ZAKARIA: What do you say to people who say, well, this is temporary. You know, you're going to do it for another year, and then the money will run out, that the long-term solution has got to be that you'd stimulate business investment, that you'd stimulate private sector, and, to do that, you need businesses to feel more confident - confident and comfortable with the economy and the government. You've heard this many times.
SUMMERS: I have indeed heard it many times.
The most important thing that makes businesses confident is a thick order book. The most important thing that makes store owners happy is a lot of people coming into their store. And so creating customers is the most important thing we can do to make businesses be confident.
Some people think we should take from workers, take from other people and give it to business. You know, it's very interesting to look at the statistics. If you look at the corporate sector in the United States, corporate output, the amount the corporations are producing, is actually lower than it was at the end of 2007. Despite that, corporate profits are more than 20 percent higher, even after adjusting for inflation. So we've done a lot to give more to corporations.
That's not the problem, that they don't have profitability. The problem is why should they hire more people if they don't have the demand for their product? Why should they invest in new capacity if the factories they have now aren't being fully utilized?
That's why, for most economists, it comes back to making sure that we have enough demand.
ZAKARIA: Do you think that if the - if we did a major debt deal, would businesses gain confidence? Would that be - would that be some kind of a powerful boost for the economy? Or are you saying even that, at the end of the day, is not as important as a thick order book?
SUMMERS: I think a thick order book is the most important thing. Would it help to have a sense that we were on a more sustainable path? Absolutely.
ZAKARIA: But you say -
SUMMERS: That's why I hope we will make those long-run decisions.
ZAKARIA: But you -
SUMMERS: But the most important thing, strengthen today's order book.
ZAKARIA: If Tim Geithner leaves the - his job as Secretary of Treasury, would you be willing to do a second round?
SUMMERS: Oh, I'm - I had my time in government as Treasury Secretary and at the NEC, and I'm enjoying the opportunity I have now to reflect in a longer term way.
ZAKARIA: But you're a young man. If the president asked you -
SUMMERS: Reflect in a longer term way on the policy - on the policy choices that we - that we face and the problems that aren't this year's problems, but are the problems like innovation, like education that are over the horizon.
ZAKARIA: I will code that as having sidestepped the question.
Larry Summers, thank you very much.
SUMMERS: Thank you.
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