Alex Paterson

Event recap: Larry Summers sizes up the fiscal cliff in Ottawa

November 10, 2012

8 November 2012 (Ottawa) – Canada 2020 and TD brought renowned economist Lawrence H. Summers to Ottawa Thursday night for a free public lecture. His talk ‘The Global Economy, the U.S. Election and the Fiscal Cliff’ was delivered to a standing-room only crowd at Ottawa’s Château Laurier Hotel.

Dr. Summers, now the Charles Eliot University Professor at Harvard University, is one of the most distinguished economic minds of his generation with a long and celebrated career of both public service and academic excellence. He has held the posts of Undersecretary of the U.S. Treasury during the Clinton Administration, Chief Economist of the World Bank, President of Harvard University and Director of the White House National Economic Council for the Obama Administration.

Following introductions from Canada 2020 Co-Founder Tim Barber, and TD Canada Trust President and CEO, Tim Hockey, Dr. Summers took the stage to the longest ovation ever heard at a Canada 2020 event. Standing casually beside the podium, Dr. Summers’ demeanour was relaxed but his message was anything but: the fiscal cliff – a confluence of legislated tax increases and spending cuts in the United States that would remove approximately $600B in demand from the American economy – should be avoided at all costs.

Dr. Summers opened with praise for the think tank community in north America, calling this one of its “great strengths”.

He then went on to outline three ‘categories’ of economic problems that the U.S, must address. The first is assuring rapid recovery – primarily by targeting growth rates at or above a 2-2.5% pace (a minimum for starting to bring down unemployment).

The second is placing the nation’s finances on a long-term, sustainable path. In this regard, Dr. Summers called for investment, especially, in public infrastructure, to take advantage of historically low interest rates.

The last, and perhaps most important, of the U.S. economic problems, is searching for a plan that addresses the structural issues that are plaguing the American economy and creating cyclical shocks and period of slow or stagnant growth. In this regard, Dr. Summers turned to investments in education and health – both of which require a properly implemented plan that could cut costs, increase competitiveness, and even be a major source of employment.

On a less optimistic note, he pointed out that in 1965, one in twenty American men between the ages of 25-54 were out of work. Now the figure is one in five. Even with a recovery, that is not likely to improve to more than one in six. This underlines the structural challenge face by the U.S. (and other mature economies). [Despite this, he later suggested that supporting manufacturing as a path to job creation made no sense, though he could see value in it because of links to technological progress.]

In describing the fiscal cliff – and how it came about – Larry likened the current U.S. fiscal situation to that of an unsustainable business model. Whereas a business may, from time to time, borrow to cover prudent investments or one-off emergencies, borrowing to cover pay roll is simply not viable. It is worth quoting Dr. Summers in full here:

“A business whose long-run plan includes borrowing to cover pay roll year after year even in good times is on a path to failure. And any rational projection of the U.S. fiscal situation, even if you assume a full economic recovery, on the current path not only are we borrowing, not only are we spending more than taxing, but we are doing so in way that leaves our debt in relation to any interesting denominator – our income, our number of people, our size of government – to be behaving explosively. That is a situation where adjustment is necessary, and it is best that those adjustments be put in place with substantial lead times so as to give confidence, and to avoid the need for wrenching change.

That is the motivation for the fiscal cliff – but if you think about it, the fiscal cliff is an odd thing. It’s not a hurricane, it’s not a war – it’s a catastrophe that we legislated in order to spur ourselves to action. It’s a little like the theory of automobile safety that recommends putting daggers in steering wheels, because if there were just daggers in steering wheels people would drive more prudently, then there wouldn’t be any accidents. That is where are.”

From there, Dr. Summers outlined the areas in which we can expect to see Congress and the President wrangle over cuts, spending and savings. The action, said Dr. Summers, is largely in two places: revenues (i.e. the tax base), and entitlements (i.e. Medicare/Medicaid and social security). Military spending is not, in his, view a candidate for substantial cuts.

To avoid removing the $600B of demand from the U.S. economy that the fiscal cliff legislates, Congress would need to slash entitlements by 25%, or raise revenues by 1/6th, or some combination of the two. “Both of these courses of action are substantial changes” said Dr. Summers, “and get to the heart of the kind of society you want to be.”

He did note, with a degree of optimism, that the Republicans now recognize the need for greater tax revenues and the Democrats for a review of entitlements, which may presage progress.

During the Q&A with Canada 2020 Chair Don Newman, Dr. Summers made it clear that he was “guardedly optimistic” that we will see some sort of resolution prior to January 1 or shortly thereafter – but that a solution may not come easily, and that the stakes are extremely high.

Ending his talk, Dr. Summers warned: “Make no mistake: U.S. legitimacy as a wise power and a well-governed nation – as well as our national security – is at stake with the fiscal cliff.”

Larry Summers, quotable as always:

  • On the fiscal cliff: “It’s an odd thing, really. It’s not a hurricane, it’s not a war – it’s a catastrophe that we legislated in order to spur ourselves to action.”
  • On the election results: “It came out in the right way… The President was recognized and appreciated for pursuing an economic strategy that contained the threat of the economic crisis.”
  • On slow economic growth: “Confidence is the cheapest form of stimulus.”
  • On President Obama’s mandate: “What was started in 2008 with President Obama’s election was either going to be confirmed or denied in 2012. It was confirmed… He now has as much of a mandate as you could reasonably expect. What will he do with the next four years? Looking at the timeline, and the pressures of office and election cycles, its important to remember that in reality he has 2 years to make any significant headway.”
  • On the financial melt-down of 2008 and the recovery effort: “When you look at the stock market, unemployment, goods and services, commodities – the deterioration in the fall of 2008 was faster than that of the fall of 1929. But say what you will about politics and policies, but we are in a profoundly different place today than we were in the fall of 1932.”

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