Faculty Focus: Lawrence Summers shares his perspective on U.S. economic issues

By Khurram Ali, MPP’14, Correspondent

Last week, I had the opportunity to sit down with ex-Harvard President and current Charles W. Eliot Professor of Harvard University, Lawrence Summers.

Known as one of the most brilliant economists of his time, Larry Summers has also served as the U.S. Secretary of Treasury under Bill Clinton and as Director of the National Economic Council for President Barack Obama.

I had the chance to ask Professor Summers about inequality in the United States and other pressing economic issues. First, I wanted to know whether inequality is solely a distributional concern (which, in itself, is a deeply important issue), or also a hindrance to general economic well-being (and the mechanisms through which it affects the economy’s health).

Summers acknowledges that inequality has roots in moral and philosophical thinking, but its effects are real and felt. He calls inequality “a central issue for middle-class families” especially in light of U.S. economic history: “Productivity growth, real wages and median income all move very closely together in the first 60 percent of the postwar period. But over the last generation, wages and family income fall short of productivity growth.”

Summers argues that you should care about inequality because of the concept of diminishing marginal utility, “that an extra dollar means much more to an average working family than it does to Bill Gates or the average wealthy individual.” It is particularly important for the middle class, he argues.

When asked whether inequality gets enough attention as an economic issue, Summers argues that it is starting to get substantial attention. He explains that “societies with more inequality may have less good health care performance and may have less good ultimate growth impacts” too.

Given that some have argued that consumption taxes are less distortionary than income taxes, I asked Professor Summers about the effects of placing more emphasis on consumption. His response suggests that it is far from clear if consumption taxes are actually more efficient. Further, Summers explains that people might have a tendency to convert consumption income into capital. The implication here is that consumption taxes are especially susceptible to tax shelters.

“There is the further issue,” Summers adds, “that if you try to exempt specific items, you get various kinds of absurdities like people buying jacket and trousers separately when buying suits, to fall under minimums.” And of course, “every time you narrow the base of any tax, including a consumption tax, you make it necessary to raise the rate even higher.”
On the topic of the Occupy Wall Street movement and some variants that have tried to reshape the teaching of introductory economics courses, Summers added that he rejects the characterization that standard economics doesn’t consider issues of equity and efficiency. In fact, “any policy decision has to weight economics and has to weight equity,” he said.

As a student of economics, I found Summers’ next point particularly intriguing:  He argued that “the economists’ idea of Pareto optimality is precisely designed to reflect the fact that economists can’t speak to issues based on efficiency alone but can only speak to issues when you recognize questions of fairness.” Clever.

Though we normally associate Pareto optimality with questions of efficiency only, the concept inherently limits what we can do: you can’t make someone better off without making someone else worse off in a Pareto-efficient world.

Finally, Summers discusses his teaching experience at the Kennedy School. “I have particularly enjoyed, given my recent experience, the opportunity to interact with Kennedy School students who are pursuing careers in government, who in many cases have impressive experiences in government and the private sector.” Summers provided one piece of advice for students looking to building their careers in economics: “Don’t be fungible. Develop some kind of specific expertise, develop some kind of orientation that makes you somebody who would be the desired person for some situation, not just one of many abled people.”

“Make yourself something special,” he concludes.

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