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Economic Outlook

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Lawrence H. Summers
Former Secretary of the Treasury
Thursday, December 20, 2007; 12:00 PM

Lawrence H. Summers, former Secretary of the Treasury, was online to discuss his view of the U.S. economy Thursday, Dec. 20 at Noon ET.

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He tells The Post that it is "distinctly possible" that the nation will experience its worst economic conditions since the stagflation of the 1970s and severe recessions of the early 80s. Read more.

A transcript follows.

Summers is currently a professor at Harvard University and a co-editor of the Brookings Papers on Economic Activity. From 2001 to 2006, he served as Harvard's 27th president. Before that, he served as the U.S. Secretary of the Treasury during the Clinton administration. He also once served as the chief economist of the World Bank.

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Ellicott City, Md.: The U.S. has the best university education in the world. If that's the case, why are we running such large trade deficits? Why does the brainpower of this country not translate into a productive economy? It sounds like our whole economy is based on selling houses to one another and borrowing from the Chinese.

Lawrence H. Summers: The main reason we are running such large trade deficits is that we are saving very little and therefore have to borrow money from abroad. The way this happens is for us to import more than we export.

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Washington, D.C.: Several suggestions for addressing the current downturn in the housing market include increasing the regulation of mortgages, and accordingly reducing the availability of mortgage credit. Examples include Rep. Frank's bill and the Fed's recent HOEPA proposal. Is this the right time to increase market uncertainty, via legal risk to mortgage investors?

Lawrence H. Summers: It is a difficult question of balance. The right objective of policy is much more complex than simply maximizing the flow mortgages--we have just seen a period when imprudent and in some cases predatory mortgages were written to no one except the originators' ultimate benefit. Discouraging this kind of flow through deterrence makes the economy function better.

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Tampa, Fla.: Do you think we're heading for recession? And however you answer that, please also answer this: What economic signs are out there in the future might that might make you change your mind?

Lawrence H. Summers: I think the odds are rising and are now better than 50-50. Among other variables I would look at credit spreads, the behavior of cylical stocks, and measures of consumer and business sentiment in adjusting my views.

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Cincinnati, Ohio: Why are you expecting a severe recession when unemployment rate is around 4.5 and inflation averages 3 - 3.5 percent? What is alarming at this point?

Thanks

Xavier Univesrity

Lawrence H. Summers: I am concerned about the housing sector, financial market conditions, and the overstretched consumer.

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Laurel, Md.: Among the parallels between today's economy and that entering the 70s is one that I don't think gets enough attention. The inflation years of the late 60s to early 80s also corresponded to the entry of the baby boom generation into the labor force, which forced up the price of the trappings of family formation -- housing, cars, furniture, etc.

Today the baby boom echo, begun in 1982, is the same age the boomers were when Nixon abrogated the Bretton Woods agreement in 1971. Is the fact that there's going to be about a 10-year period when both generations are in the labor force going to push prices upward for everyone?

Lawrence H. Summers: It is an interesting question. I think you may overstate the impact of demography on inflation. And at this moment at least I am more worried about too little consumption than too much.

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Princeton, N.J.: I am a mathematician, not an economist. I recognize that you are one of the foremost economists in the world so I am loathe to make recommend policies. I was taught that when a recession looms, one should cut taxes and follow three rules. One, the cuts should take effect immediately. Two, the cuts should be temporary. Three, the cuts should be mainly for the poorer segment of the population who will put the money rapidly back into the economy.

I am not sure that your recommendations follow rules one and three. Cutting taxes across the board takes a while to affect people and disproportionately goes to the wealthy. Could you please comment?

Lawrence H. Summers: we agree completely. I am sorry if I was unclear. I meant uniformly--the same amount to each person. I summarize the goals as timely, targetted, and temporary. My hope would be to cut taxes in a way that would influence withthoding almost immediately

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Laurel, Md.: Mr. Summers, President Bush the Elder was also criticized for not doing enough about the early 90s recession, but many economists believe that his inaction helped keep that one short and set up the very vigorous recovery afterward.

Aren't there well-balanced arguments on both side?

Lawrence H. Summers: There are two sides of every argument. I think President Bush played an important role in starting us on the road to fiscal health with the budget agreement of 1990. I think more could have been done sooner to shorten the 1991 period recession.

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Waldorf, Md.: Mr. Summers,

Is it correct that the national debt applies to the total debt we have as a nation, and that a federal deficit or surplus only applies to a limited period of time, such as a fiscal year?

Also, how does the fact that we have a huge national debt have an impact on the average middle-class citizen?

Lawrence H. Summers: yes debt refers to the stock of what we owe, the deficit refers to its change over 1 year.

A high national debt means that as a taxpayer you have a liability for its future servicing. In present value this obligation could be as large as 100,000 dollar for a family of four. the fact of the debt also bids up interest rates.

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Alexandria, Va.: Where can people who do not have extensive training in finance or economics get a better understanding of the global economy and the policies that influence it? It seems that there is an overwhelming amount of information available in many types. Where should one begin and what types of periodic information would you recommend to someone who is interested in the subject but has a little more than a basic understanding of financial markets?

Lawrence H. Summers: on finance read peter bernstein's books on capital ideas, and on globalization read martin wolf's book on globalization. To follow markets read the financial times as well as the washington post.

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New York: Which government spending should be cut to pay for a tax cut?

Lawrence H. Summers: comprehensive health care reform could ultimately lower government spending

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Princeton, N.J.: Actually, I had in mind a flat payment to each citizen so the people who don't pay income tax benefit.

Lawrence H. Summers: exactly

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Bowie, Md.: A lot of people say the price of housing should crash, or least come down significantly, because it shouldn't have gone up so much in the first place.

But isn't the (national average) house price up about as much as the Yen, Euro and broadest commodity index; and don't these usually move together? If so, basically houses are reflecting the weaker dollar as a hard asset should.

Lawrence H. Summers: in last year the dollar has fallen substantially and house prices have as well. This is an unusual pattern and part of the cause for concern

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Ft. Myers, Fla.: Mr. Secretary,

How long will the subprime and mortage loan issues continue to effect our overall credit concerns?

Lawrence H. Summers:2-3 years in my view

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Silver Spring, Md.: Please please please convince me that housing markets are really having an effect on the average American and would drive us into a recession. Here in the D.C. area, if you bought property within the past five years and are now trying to sell, I can understand how you might be forced to take a loss. But everyone else? They still stand to make money on the sale of their homes. And so what if foreclosures drive down prices; doesn't that allow a renter like me a better opportunity for home-ownership? We're not losing jobs and most of us aren't being forced to sell our homes for a loss....so why the recession??

Lawrence H. Summers: no certainties in economics. General view would be that falling house values make people feel poorer and spend less which slows economy down. Also damage to financial ssytem makes borrowing and lending more problematic which does not help.

I agree with you that there are always winner and losers whever change happens.

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Vero Beach, Fla.: The question from Ellicott City, Maryland brings to mind that universities--lots of excellent ones--are possibly America's greatest assets for future economic growth. Yet here in Florida, the inadequate state universities are facing severe cutbacks exactly when they need to expand to accomodate growing demand. I'm worried.

On the side, the Post held a discussion earlier this week with retired Harvard professor James Kugel, whose Bible class evidently was as popular as a famed economics class (Gregory Mankiw's?). What a university!

washingtonpost.com: Discussion with James Kugel (Dec. 18)

Lawrence H. Summers: prof kugel was an icon here. Our universities are great assets and we need to make sure we take good care of them. I am especially worried about restrictions we place on the ability of foreign students to come in to this country.

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Chicago, Ill.: Professor Summers,

I am concerned by the rise of protectionist and populist sentiment within the Democratic party and beyond. How can politicians, particularly those catering to liberal Democrats such as myself, diffuse this political trend.

Lawrence H. Summers: It is an interesting phenomenon and not one I completely understand. Woodrow Wilson after all was a great free trader. I think that if we more credibly address some of the distributional issues of rising inequality we would be on a stronger footing to advocate freer trade.

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Ellicott City, Md.: I asked the question about trade deficits earlier. Sorry that I wasn't more clear. What I was really after is, why aren't we exporting more? Why aren't we producing things that other countries want? We clearly have the resources (which is what I meant by brainpower) to be a productive society. Why aren't we?

Lawrence H. Summers: I am not sure the roots of trade deficit ar ein inadquate exports rather than insufficient imports.

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Princeton, N.J.: I really appreciate your short clear answers. As for paying for payments, while I agree with your health care comment, i don't think we should avoid deficits when times are bad, but we should pay back when times are good, i.e. raise taxes.

Also, I understand why house prices go up when the dollar goes down, but why isn't that happening now?

Lawrence H. Summers: because lack of confidence in our financial system is driving both houses and the dollar down

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washingtonpost.com: Our thanks to former Treasury Secretary Lawrence H. Summers for participating in this discussion. For more on his recent thoughts, read Summers Criticizes Handling of Crises by Washington Post staff writer Neil Irwin.

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Editor's Note: washingtonpost.com moderators retain editorial control over Discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. washingtonpost.com is not responsible for any content posted by third parties.


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