At a time of historically low interest rates and nervousness about the outlook for global economic growth, why aren’t governments investing more? In this interview with McKinsey’s Rik Kirkland, former US treasury secretary Larry Summers urges policy makers to invest aggressively in everything from infrastructure to education. Summers also believes that in a world of rising inequality and rapid technological advances, there is going to be a need for more progressive taxation. An edited transcript of his comments follows.
Reforming our institutions
Confidence is the cheapest form of stimulus. Governments need to recognize that fairness and inequality and sharing the benefits of growth more widely are crucial issues going forward, but they need to do it without invoking a politics of envy. That can be very debilitating to business investment.
I think growth probably is going to be slower in terms of aggregate GDP over the next 50 years than it has been over the last 50 years. We’ve already seen some trend toward decline and, if I had to guess, that trend will persist. But that’s a reason why we’ve got to do all we can.
For example, if we’re not going to have as much quantitative improvement to the labor force, we’re going to need qualitative improvement. That goes back to issues of education—to issues of the transition from school to work. We’re also going to need a much greater effort at innovation. Science has more promise today than ever before, yet the fraction of our resources being devoted to science has gone down in the United States. That’s not how it should be.
There’s plenty of work in our society that needs to be done: think about healthcare, think about education, think about taking care of the aged. But whether we’ve got the social institutions that will permit that work to get done is going to be a very large question. We’re going to have to think in very fundamental ways about how our society changes in response to technology, just as we have seen our society change in very fundamental ways because of what came about in the Industrial Revolution.
We’re going to need to do more to protect people from change. It’s going to be rarer and rarer for people to spend their whole lives at a single employer. Employers are going to be less and less the source of social insurance for people, and that’s going to need a larger public role. We’re probably going to need a larger public role to accommodate the fact that more of our economy is going to be in health and education than has been the case traditionally. I suspect in a world of rising inequality, there’s going to be a need for more progressive taxation as well.
Investment, investment, investment
We need to focus on raising the demand for capital and stimulating investment. That means more public-sector infrastructure. If a moment when we can borrow money in the long term at well below 2 percent, in a currency we print ourselves, is not the right time to fix Kennedy Airport, I don’t know when that moment will ever come.
But this is not only a public-sector investment issue. Taking oil around on trains is a 20th-century technology—and not the last third of the 20th century. We need a far greater pipeline infrastructure than we have now; we need a much more satisfactory broadband architecture than we have now. We need a commitment to investment on a large scale. It is absolutely essential to protect the environment, but that is no reason why basic permitting decisions should take years and years to make.
We need to recognize that there’s a great deal that needs to be regulated in the financial sector; there are important problems that have not been resolved in the financial sector. But even as there are important problems that aren’t resolved in the financial sector, we need a more satisfactory flow of credit for housing, a more satisfactory flow of credit to small and medium-sized businesses. That’s a particularly important issue in Europe.
So it’s the promotion of both public and private investment for growth that I believe is crucial if we’re going to push the economy forward.
About the authors
Lawrence H. Summers is the Charles W. Eliot University Professor and president emeritus at Harvard University. From 1999 to 2001, he was the US treasury secretary under President Bill Clinton. From 2009 to 2011, he was the director of the US National Economic Council under President Barack Obama. This interview was conducted by Rik Kirkland, senior managing editor of McKinsey Publishing, who is based in McKinsey’s New York office.