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Speaker 1: For his thoughts on where we should be heading in

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Speaker 1: twenty twenty four. Welcome now our very special contributor, Larry

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Speaker 1: Summers of Harvard. So Larry, welcome back. Great to have

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Speaker 1: you here. We've talked about some aspects of this before.

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Speaker 1: I mean, I could say it's guns, butter and deficit,

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Speaker 1: the question of defense spending, the question of investing in

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Speaker 1: future productivity, question of deficit. If you were the architect

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Speaker 1: once again, have US fiscal policy over the longer term?

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Speaker 1: Where should we be heading?

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Speaker 2: Let's start with the recognition that our fiscal problems are

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Speaker 2: much more serious than they were in nineteen ninety one

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Speaker 2: or nineteen ninety three. Then we had budget deficit, budget

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Speaker 2: debts relative to GDP and the thirty percent range, with

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Speaker 2: out ear deficits perhaps in the five percent range on

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Speaker 2: honest forecasts. Today we have a debt to GDP ratio

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Speaker 2: above one hundred percent, with out your debts in the

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Speaker 2: ten percent of GDP range. So we've got a much

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Speaker 2: more serious is problem number one? Number two? Then we

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Speaker 2: were reaping a Cold War dividend from the end of

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Speaker 2: the Cold War, and we could reasonably expect defense spending

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Speaker 2: as a share of GDP to be falling today, though

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Speaker 2: it's not reflected in the CBO forecast, Almost certainly we

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Speaker 2: are going to have to substantially increase defense spending and

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Speaker 2: spending on a broader range of what a sensor international

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Speaker 2: security activities, issues like global health, issues like resilience, most

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Speaker 2: importantly climate change. So we've got a very different kind

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Speaker 2: of problem. There are places where we're going to need

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Speaker 2: to cut government spending. We need to control cost growth

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Speaker 2: in healthcare, but we've already controlled it substantially over the

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Speaker 2: next decade, and I suspect the challenge is going to

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Speaker 2: be to maintain our momentum, not lose that momentum, and

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Speaker 2: it's going to be very difficult to get even more

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Speaker 2: momentum out of healthcare costs.

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Speaker 1: So similar you were there in the Clin administration when

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Speaker 1: there was the tax increase from the Clint administration that

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Speaker 1: got through politically, it's never popular increased taxes. Now, what

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Speaker 1: effect did they have in productivity? And to what extent

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Speaker 1: was that masked by the internet coming online that really

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Speaker 1: increased productivity. So one of the questions people ask is

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Speaker 1: did you increase taxes? Are you going to reduce productivity?

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Speaker 2: No, First of all, the last time we did it

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Speaker 2: in nineteen ninety three. Productivity sword affords when we had

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Speaker 2: much higher tax rates in the United States. In the fifties,

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Speaker 2: the sixties, and the early seventies, productivity growth was more

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Speaker 2: rapid than it has been in recent years. The vast

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Speaker 2: majority of the funds that flow into venture capital come

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Speaker 2: from institutions like state pension funds university endowments that are

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Speaker 2: tax free investments. It defies belief that the young Bill Gates,

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Speaker 2: the young Mark Zuckerberg, the young Steve Jobs would have

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Speaker 2: not done their projects if they thought they would have

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Speaker 2: had to pay a bit higher capital gains taxes, and

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Speaker 2: we would have been without those companies.

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Speaker 1: We have our set of challenges in the United States economically.

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Speaker 1: What about China, the second largest economy in the world.

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Speaker 1: I know you've just gotten back from China. They reported

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Speaker 1: GDP numbers that were encouraging better than they thought. Some

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Speaker 1: people question those. At the same time, the demographic numbers

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Speaker 1: were bad. They've got a real problem with foreign direct investment.

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Speaker 1: What did you learn from your China trip?

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Speaker 2: I came away as I went with substantial concerns about

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Speaker 2: China's growth prospects. They have so much savings, so much

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Speaker 2: money that in a normal country would be flowing into

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Speaker 2: household consumption. In the United States, household consumption is seventy

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Speaker 2: percent of GDP. In Japan or Korea in their glory years,

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Speaker 2: it was something like the high fifties or sixty percent

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Speaker 2: of GDP. In China it's in the high thirties. So

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Speaker 2: they have this huge foregoing of consumption, and then the

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Speaker 2: question is where's all that money going to go. And

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Speaker 2: for a while it went into exports and try to

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Speaker 2: get demand, but the rest of the world isn't going

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Speaker 2: to tolerate huge increases in China's exports. For a while,

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Speaker 2: it went into real estate, but they've got vast acres,

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Speaker 2: not acres, called square kilometers of empty half finished apartment

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Speaker 2: buildings because of overbuilding. For a while it went into infrastructure,

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Speaker 2: but they told me about, for example, one of the

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Speaker 2: most remote provinces in China that has I don't know,

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Speaker 2: twenty of the world's top one hundred highest longest suspension bridges,

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Speaker 2: And you know, that's just a kind of wasteful over investment.

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Speaker 2: And when you have wasteful over investment, not long after

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Speaker 2: you have bad debt, and when you have lack of demand,

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Speaker 2: you start having deflation. And when you have deflation and

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Speaker 2: you have debt, the debt gets more burdensome, and the

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Speaker 2: whole thing cycles. That's basically why Japan had a very

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Speaker 2: weak generation of economic growth nineteen ninety and China is

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Speaker 2: facing similar kinds of challenges. And never count the Chinese out.

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Speaker 1: And finally, Laurie, give us your thoughts on one specific transaction.

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Speaker 1: We have Nippon Steele seeking to buy US steel. We've

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Speaker 1: heard from regulatory authorities it's going to take a good

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Speaker 1: long time. They have some concerns about it.

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Speaker 2: This is a test for the Biden administration. Has their

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Speaker 2: commitment to resilience and industrial policy been a serious commitment

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Speaker 2: based on a desire to strengthen and make more resilient

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Speaker 2: the economy, or is it a cloak for protectionists pandering

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Speaker 2: to traditional industries with no genuine national security rationale. There

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Speaker 2: is no remotely plausible national security rationale for questioning the

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Speaker 2: Nipon Steel Nipon US steel transaction. The Japan is a

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Speaker 2: staunch ally. The production will continue to take place in

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Speaker 2: the United States. The result will be the infusion of

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Speaker 2: more capital into the US steel industry. The result will

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Speaker 2: be lower price steel as an input when a hundred

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Speaker 2: times as many US workers are in industries that use

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Speaker 2: steal as are in the steel industry itself. So this

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Speaker 2: should be a layup for policy makers who have the

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Speaker 2: right motivations, and if it's not, it is a sign

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Speaker 2: of very troubling economic nationalism on the part of the

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Speaker 2: United States.

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Speaker 1: Okay, Larry, thank you so much for being back with

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Speaker 1: us again this week. That is Larry Summers, our very

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Speaker 1: special contributor here on Wall Street Week