Lawrence Summers on the Euro Crisis 'It Was Always Understood the European System Would Evolve'
Part 2: 'It Was Always Likely a Crisis of this Magnitude Would Take Long To Resolve'
SPIEGEL: If you can't raise taxes, you have to cut spending even more. The timing couldn't be worse, either, given the economic stagnation. Doesn't the US economy need greater support through public spending?
Summers: We need to be focused on the jobs deficit as much as we need to be focused on the budget deficit. For the immediate future, our concern has to be strengthening demand. By strengthening demand you improve the performance of the economy and put people back to work.
SPIEGEL: So does that mean another stimulus program to the tune of billions of dollars?
Summers: There should be a set of measures, whether you want to call it a stimulus or not. I think the payroll tax cuts should be extended. I believe the country is badly underinvesting in infrastructure. We are not even spending enough on basic road maintenance. There is also a strong case for state and local governments to be supported at a time when many kids only go to school four days a week because the funding for schools has been cut so much.
SPIEGEL: Isn't that wishful thinking in the current political environment? Right now Obama is offering trillions of dollars in budget cuts to strike a deal with Republicans on the debt ceiling.
Summers: More will be possible in the short run to support the economy if you have a credible plan to reduce the deficit in the long term.
SPIEGEL: You often compared the global financial crisis to the Great Depression in the 1930s. One of the big mistakes then was to cut off government stimulus too early so that the recovery collapsed. Is the US making the same mistake again?
Summers: There is a serious risk that in excessive enthusiasm for immediate deficit reduction we could do real damage to the prospect of growth for the next two years. And, ironically, the most important determinative for where the deficit is going to be five years from now is the pace of recovery between now and then.
SPIEGEL: In 2008, you were brought in to save the US economy. Now the country still has an unemployment rate of more than 9 percent and sluggish growth. What went wrong?
Summers: It was always likely that a crisis of this magnitude would take a long time to resolve. There was a real risk that we would have seen a situation like in the 1930s, with the economy spinning out of control. The measures President Obama took were successful in avoiding that outcome. But it will take a long time to generate the kind of unemployment rates that Americans had become accustomed to.
SPIEGEL: Would you have done things differently in retrospect?
Summers: We sought more stimulus than Congress was willing to provide, and I think in retrospect that is unfortunate -- and it might have even been desirable to have more stimulus than we sought.
SPIEGEL: Many American unemployed have now been out of work for more than six months.
Summers: That is a huge problem. The longer this downturn is perpetuated, people who are out of work for a long time might lose their qualifications. And it is a huge structural problem: A statistical projection based on current trends suggests that one out every five men between the age of 25 and 54 will be out of work after the economy has fully recovered.
SPIEGEL: The US economy is not really prepared to deal with long-term unemployment.
Summers: Yes, and some of the things that are done in Germany, such as the success in helping workers transition from secondary education to employment, or training unemployed workers, are all positive examples from which the US can learn.
SPIEGEL: Another way out could be cutting remuneration even more in the US and competing in the global race to the bottom on wages. That is how some states in the US south try to attract manufacturing jobs that would otherwise go to China.
Summers: In some sectors and parts of the country we have indeed seen significant reductions of labor costs. Ultimately, it is important to remember that the vast majority of new jobs in the American economy will be in the service sector. Manufacturing is going through the transition agriculture went through in the 1920s in which tremendous technological progress is enabling us to produce more and more with less and less people.
SPIEGEL: But President Obama is still making the promise that manufacturing will boom again in America.
Summers: When the economy recovers, manufacturing will recover. Also, one of the most important things the Obama administration did was to rescue the automobile industry. But to suppose that manufacturing can be the basis for the US economy going forward is to fly in the face of largely unchangeable trends.
SPIEGEL: Can Obama be re-elected if the US unemployment rate remains higher than 9 percent?
Summers: History suggests that presidents are re-elected not on the basis of any single indicator but on the basis of whether the country feels that they have a strategy and are taking the nation forward. Voters also compare that vision with that of the opposition. And while it may be hard for some people to see, President Obama averted what could have been a financial catastrophe and he has moved the country forward in important areas like health care or financial reform. So I am very optimistic about his political future.
SPIEGEL: You just signed on as a senior advisor to a huge venture capital firm in Silicon Valley. Do you want to spot the next Mark Zuckerberg?
Summers: It is a fascinating environment. And it is still one of the great strengths of the US economy that you can raise your first $100 million before you buy your first suit.
SPIEGEL: So America is still the greatest place on earth for the lucky few like Zuckerberg, but an increasingly difficult place for the "Average Joe"?
Summers: There is no question that the ability of those with ideas to leverage them in the global economy has contributed to rising inequality and to more rewards for those very few with great ideas -- and less progress for average Americans. That is why universal access to health care or creating a financial system that protects middle class Americans have been such important achievements of the Obama administration.
SPIEGEL: Liberals see that differently. They think Obama has betrayed his progressive roots -- and that he has been too close to Wall Street, not Main Street, by putting people like you in charge of his economic agenda.
Summers: If you look at legislative sessions most historians would tell you that in terms of productive legislation more was done to protect the middle class than was done since the 1960s, or perhaps even since the 1930s. But listen, the left thinks we are too close to Wall Street. The right accuses Obama of "European socialism." In political life it is usually a sign that you are doing the right thing when you are attacked by both sides. By this standard, Obama is clearly doing the right thing.
SPIEGEL: Professor Summers, we thank you for this interview.
Interview conducted by Gregor Peter Schmitz and Thomas Schulz
- Part 1: 'It Was Always Understood the European System Would Evolve'
- Part 2: 'It Was Always Likely a Crisis of this Magnitude Would Take Long To Resolve'