Larry Summers (Harvard Economics Professor) on His Career In Academic Economics, Government, University Leadership and Corporate America

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Welcome to the new Books Network.

>> John Hartley: This is the capitalism and freedom in the 21st century podcast where we talk about economics, markets and public policy. I'm John Hartley, your host. Today, I am joined by Larry Summers, who served as the 71st US secretary of the treasury from 1999 to 2001 in the Clinton administration and served as the director of the White House National Economic Council in the Obama administration from 2009 to 2011.

Larry, when not serving in government positions in Washington, DC, has spent his career as a professor of economics at Harvard University and served as the 27th president of Harvard from 2001 to 2006. As an academic, Larry has made many seminal contributions to the fields of macro economics, public economics, labor economics, and financial economics, and was awarded the John Bates Clark Medal in 1993.

Larry also sits on the boards of many corporations, including most recently joining the board of OpenAI, and is one of the world's most sought after commentators on economic policy and in the macroeconomy. Welcome Larry.

>> Larry Summers: Good to be with you.

>> John Hartley: Larry, thank you so much for joining us.

You've reached the heights of so many different areas in your career, academic economics, government, public policy, university leadership, and corporate America. I want to spend a bit of time on each of these. First, you come from a family of great economists. Both your parents were phenomenal economists. You have several uncles who are Nobel Prize winning economists.

Was there any possibility that a young Larry Summers could have done something other than becoming a great economist?

>> Larry Summers: Well, I have two brothers and neither of them became economists. One of my brothers is a psychiatrist in Philadelphia and the other brother is a lawyer in Philadelphia where we grew up.

So people used to say that my parents had a dream jewish experience, a doctor, a lawyer, and someone to go into the family business. But I suppose that I was oriented to doing analytical things, and I was oriented to caring about public policy from a young age. And those two things came together in a career as an economist.

>> John Hartley: At one point, you were studying physics, I think, a bit.

>> Larry Summers: Very early on as a freshman at MIT, I was studying physics and mathematics, and I realized that there was a kind of level of physics in mathematics that some people were at and I was not at.

And there was a big difference between being a very good high school student in a field and being world class in a field, and I certainly wasn't in physics or mathematics.

>> John Hartley: I'm sure some people would argue that you could very well become a world class physicist as well, but as a fellow economist, wonderful that you chose to become an economist, given how many careers you've inspired.

So I wanna talk about Larry, the academic economist. I think since you've seen so much of economics go in an empirical direction, largely departments like Harvard, MIT, which you've been at along with other departments leading the charge, you've been a huge part of that shift to empirics in many subfields, labor economics, public economics, financial economics, and macroeconomics, to name just a few.

For that work that you were awarded the John Bates Clark Medal in 1993, I'm reminding of your exchange in 1986, as part of this exchange with Ed Prescott about macroeconomics. He wrote an article for the Minneapolis foot correlate was titled some skeptical observations on real business cycle theory, challenging Prescott's very theory first approach with a more empirical kind of practical approach.

The key insight of your 1985 Uje article with Greg Mankiw and Julio Rodtenburg is that you don't find much empirical evidence of intertemporal substitution. I'm curious, where do you see yourself fitting into the history of economic thought as a macroeconomist today? How would you describe your framework? Would you describe yourself, your own macro views as more of a ISLM, old keynesian style macro economist, like Harvard predominantly was prior to the 1990s, something which Paul Krugman has pointed a lot to, really, since the great Recession?

Or would you describe yourself as more of a new Keynesian, which has this sort of RBC, intertemporal substitution core, but with some nominal rigidities laid on top so that policy matters, the latter being the direction that much of the macroeconomic fashion taken since the 90s.

>> Larry Summers: I would put myself very much in a Keynesian tradition by which I actually mean the tradition of the kind of thinking in which John Maynard Keynes was engaged.

At a technical level, that means conceptualizing issues around full employment and the business cycle critically through the challenge of assuring that all savings is absorbed into investment at full employment. And recognizing the difficulties in that intermediation problem, particularly as mediated through financial markets, as a central source of business cycle fluctuations.

That was what was behind the work I did on secular stagnation. That was what was behind the work I did earlier with Olivier Blanchard on hysteresis. That was behind what's been a continuing theme in my work, the sense that business cycle fluctuations are problematic not just because they involve variation and the second moment of activity or employment, but they're problematic because economies fall short.

And so I like to say that economic time series should be thought of more like a time series on the fever of a human being. There's some regular cycles through the day, through the month, whatever, but mostly there are big fluctuations, and when there's a big fluctuation, it's usually bad and not offset by some extra fluctuation in the opposite direction.

I also think of myself as a Keynesian in a broader way, believing in the connection between economic theory and public policy decision making. In believing in his public philosophy, that the role of government is to make it possible for the market system to operate, by addressing egregious inequality, by providing public goods.

By responding to various kinds of market failures, including the difficulty that unfettered capitalism has in avoiding catastrophic economic declines. I've also shared Keynes's instincts to understand the broad world in a broad way, by looking at many, many different sources of evidence rather than a single statistical finding of one kind or other.

And as I argued in my paper on the scientific illusion, the purpose in many ways of empirical work, the purpose of analysis is to persuade. And seeing efforts as persuading in favor of a worldview or a way of understanding what is happening, seems to me to be a better conceptualization of what a scholar in economics does.

Than accepting or rejecting a particular hypothesis. So in all of those ways, I've tried in a small way to be a descendant of Keynes. And I have always found the most inspiring passage about being an economist to be from Keynes's eulogy for Alfred Marshall. Where in fact, I think he's describing his own virtues at least as much as he is describing Marshall's.

>> John Hartley: I think it's fascinating, a lot of people don't appreciate that Keynes was largely a journalist, and I think he was a great communicator and a great policy advocate on top of being a great academic. And I think if you think about great economists of the 20th century, also Milton Friedman, he wasn't just a great academic, but he was also a great policy communicator, or a great policy advocate and communicator.

Having all three of those, and also being very broad across fields, I feel like it's something that you share with them. I'm curious, in your mind, has academic macroeconomics become too mathy for policymakers? Is something Paul Romer talked a bit about. Do you think that central bankers around the world are really paying attention to the intricacies of DSGE model mechanics?

Or rather, in your mind, are they going really by your own adage of sort of waiting for the whites to the eyes of inflation or another crisis. And sort of being reactionary to events, something of a data dependent basis, with a fairly straightforward monetary policy reaction function akin to almost like-

>> Larry Summers: Respectfully, John, I don't think it's quite the right question. There was a time when if you wanted to build a suspension bridge, you would consult a physicist to decide whether it would hold up or not. Over time, there came to be division of labor, and you consulted a structural engineer.

And so I think in the same way, there has been a growing division of labor between economists to think about the conceptual foundations of our discipline, and economists who are engaged in giving near term advice. And I think of that as being the instance of progress. And I don't think that whether a method is immediately accessible, or even accessible with explication.

To a person who's charged with carrying out current policy, is the right way to make judgments about whether something is too mathy. So I would reject completely the idea that the field in some overall sense has an appropriate level of mathiness. And even apart from whatever my view is, I'm a huge believer in academic freedom.

And so I think that people who are doing things that other people find interesting should very much be given license to do it, even if I don't find it particularly valuable. That said, I have to say that the extreme and extensive elaboration of the canonical new Keynesian model does not seem to me to have yielded important insights, that have pushed policy forward in valuable ways.

I know that most of my friends and many people I very much respect would dissent from that judgment. But I don't find that doing great microeconomic rigor with a certain amount of price rigidity grafted on, has been terribly enlightening for any purpose. I think that, for example, whatever kinds of costs there are that might lead prices to be rigid, would likely also lead people to be off of short run supply curves, demand curves, or reaction functions.

So I find the idea that markets with price rigidity clear on the demand side, rather than, as we more traditionally assume in price theory, clear on the minimum side of the market to be an odd one. So I think the desire to use certain kinds of statistical techniques, has led to a lot of looking under lampposts, even when a lot of the truth lies somewhere in between.

And in particular, I think once you have assumed, as essentially new keynesian models do, that the average level of output through a Time series is determined outside the model, you've assumed away a large part of what is interesting about the field of macroeconomics. So in some critiques about mathiness don't seem to me to be a very fruitful approach.

But the extensive elaboration of the new Keynesian paradigm, it seems to me, has will ultimately be judged by history to be a bit of a cul de sac.

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>> John Hartley: It's fascinating, and we'll see if there is a new Keynesian Nobel prize, there hasn't been one yet. I'm curious, in terms of the Phillips curve, do you think we can still rely closely on it or any thoughts on the Phillips curve in general as a concept?

>> Larry Summers: I think that economists do not at this moment have a very satisfactory theory of price level determination and inflation. I think there's power in the Phillips curve notion, but it is looking increasingly like Ptolemaic astronomy with the invention of ever more complexities to achieve a fit with the assumption of substantially varying nairus with various kinds of ad hocery added.

And I have always been troubled by the absence of a connection between Phillips curve type theories and the theories economists use to describe the most dramatic instances of inflation, such as what is happening in Argentina today. So I don't feel like monetarism any longer stands as a very satisfactory theory of inflation and fluctuations in the inflation rate.

I have yet to be persuaded of the realism of the mechanisms of expectation formation that underlie the fiscal theory of the price level, or of its ability to make credible predictions rather than to provide ex post explanations for known phenomena. But I think it's a very valuable endeavor to be pursuing.

But I would say that economists have for sense and intuition, but not very satisfactory science around the topic of inflation at this point. It gives me no pleasure to say that, but that is my assessment of the current state of the art.

>> John Hartley: Great, so I wanna pivot to Larry, the economic policy advisor, as treasury secretary in the late nineties you were instrumental in creating the treasury inflation protected securities, inflation linked securities market.

As an asset class you helped lead the economic response to various international financial crises in the 1990s in the Clinton administration. And then you helped lead the Obama administration response to the great Recession in the late two thousands. I'm curious, what policy accomplishments across your career are most meaningful to you, and what should the public learn or remember about them?

And to the aspiring policy economists out there, what advice would you give them?

>> Larry Summers: Let me go in reverse order, my advice to people who want to be policy economists is you have to propose a course of action. As Tim Dayton used to say, plan beats no plan, you have to be prepared to come to a judgment, not simply point up aspects of problems that need to be thought about.

Too often the vice of my fellow academics is when they're asked what to do, they say, be sure to consider x. And that only takes you so far, which isn't very far. I would urge that in making policy judgments, there is a need to take as holistic a view as possible, that goes back to what we were talking about regarding Keynes.

One needs to recognize not just what a particular economic model says, but the complexities outside the model, the possibility of future uncertainties, the ways in which other actors will respond, the exigent political circumstances, the precedent being set, and much, much more. I think it's important in formulating policy to start with objectives, then formulate a broad strategy and theory of the approach, and then move to tactical implementation.

I went into economics because I realized at a young age that a doctor could treat patients and make an enormous difference in the lives of a certain number of patients. That an economist who did something that reduced the unemployment rate by 1 10th of 1% for one month.

Would cause 160,000 more people to see that they had jobs and that their children could look at them with pride as they went to work rather than with concern as they stayed home. And I hope, through my various efforts in responding to financial crises, in establishing institutions and regulations that addressed various kinds of financial flows, that altered tax policies and directions that made them.

Fairer and more efficient, I hope that the consequence of that is that some number of people have been enabled to live better and more satisfying lives and have encountered less friction and less adverse circumstance in pursuit of their dreams.

>> John Hartley: That's terrific, I'm curious I wanna really just a little bit more on fiscal policy and what you think we've learned about fiscal policy between the great recession, fiscal stimulus that you were part of negotiating that some argued was too small but of course yielded no inflationary response.

And the COVID pandemic and its fiscal stimulus response more recently, which many have argued, including yourself, was maybe too big and had too large of an inflationary response

>> Larry Summers: I think the fiscal, I think we've learned that fiscal policy matters and that fiscal policy has a meaningful impact on aggregate demand and through aggregate demand on what happens in economies.

I argued in 2008 that the stimulus should be significantly larger and longer, given the magnitude of the recession, the politics of the moment and the imperatives of getting some stimulus made that not politically feasible. And President Obama, relying on the advice of his political advisors, which I found to be correct, supported and signed into law the stimulus bill that was passed.

Certainly he wished it could have been larger, I wish it could have been larger, given the magnitude of the GDP gap at that time, seven or 8% GDP gap, a 2% of GDP stimulus put in place for two years, looked less than was appropriate. Relative to the size of the gap, the fiscal stimulus provided in 2021 was perhaps five times as large as the Obama stimulus had been.

You had a gap that was perhaps two or 3% of GDP, and you perhaps 4% of GDP, and you had fiscal stimulus that was well over 10% of GDP. So it seemed to me entirely predictable, and that would lead to an overheat of the economy, which would create both economic and political challenges forthcoming, and so it did.

The secret sauce of economics is arithmetic, and the great failure of so much of the commentariat was to say we had too little fiscal stimulus in 2008 and therefore we need more and not to think about the relative magnitude given the relative gap.

>> John Hartley: Fascinating, I wanna shift to Larry, the university president, you've been president of Harvard, obviously, the university academy is at a controversial high with its response to the October 7 Hamas attacks in Israel, the ongoing conflict.

Where do you see the academy at today, and what hope do you see for it going forward? In terms of solutions, do you think it's incumbent on alumni and boards to become more active, like you've seen at certain schools in the past months? Or do you see upstarts like the University of Austin or others having success?

>> Larry Summers: All of the above universities, because they train future leaders and form the ideas and concepts that drive both scientific progress and human understanding, are centrally important to their societies, for good or for ill. What they stand for, what they model, and what they represent is profoundly important, as is illustrated in many ways, including the central role of German universities in promoting doctrine of Nazism in the 1930s.

I believe that this is a time of moral testing for American universities, they have shifted too far from the aspiration of seeking truth to the pursuit of particular concepts of social justice. They have elevated comfort, and the avoidance of discomfort, and the celebration of feeling over the values of rigorous excellence and argument.

They have too frequently allowed prejudice of certain sorts that are fashionable to the kinds of people who choose to be professors to become too pervasive on their campus. And I think it is appropriate that there be some substantial accountability to the outside world and that the outside world seek to push back on universities.

I think, and this has not always been done, that that needs to be done with humility, with care, and with respect to the idea of academic freedom. Those most energized by the idea that trustees should put universities back on a sound course should recall that trustees were pushing for the removal of the Samuelson textbook because of its emphasis on Keynesian economics.

Those most insistent that university presidents declare what is right and what is wrong should consider the track record of presidents in the past on issues ranging from homosexuality to antisemitism. But there is surely a need for innovation both from outside and from inside leading institutions. And certainly, there has been a failure of trustees and external leaders of universities to meet some of their basic obligations as fiduciaries, and that has in important ways been pointed up by recent events.

>> John Hartley: And finally, I wanna pivot to Larry, the corporate board member, you recently joined the board of OpenAI. And I've served on many corporate boards, giving you a very unique insight to how some of the world's most innovative firms function in the aftermath of the financial crisis in the great recession.

In your own thought leadership during much of the 2010s, you argued that we were in a period of low growth secular stagnation, much like Harvard economist Alvin Hanson described the economy in the aftermath of the Great Depression. And curious now if in the post COVID pandemic world in 2024 going forward, you see a different story for American in global growth, going forward with the adventure?

>> Larry Summers: John, very briefly, given the magnitude of budget deficits, given the extent of investment in environmental values in resilience in implementing artificial intelligence. I don't think the chronic excess of savings over investment that prevailed through much of the post financial crisis period is likely to be nearly as defining going forward, at least in the United States.

And I certainly think that artificial intelligence offers vast potential for forward progress.

>> John Hartley: Well, thank you so much for joining today, Larry, it's been a real joy for us to hear about all the aspects of your amazing career and your amazing thought leadership, a true honor to have you on.

>> Larry Summers: Good to be with you.

>> John Hartley: Today our guest was Larry Summers, who is a professor of economics at Harvard University and has served as us secretary of the treasury and director of the White House National Economic Council. He is also one of the leading voices of our time on issues surrounding economic policy and the macroeconomy.

This is the capitalism and freedom in the 21st century podcast where we talk about economics, markets and public policy, I'm John Hurtley, your host, thanks so much for joining us.