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May 2, 2013
Boom, Bust or What?
By ADAM DAVIDSON
One cold late-winter afternoon, Larry Summers was standing by the free-throw line at Lavietes Pavilion, on
the Harvard campus, somberly shooting a basketball. In the past couple of years, Summers has sworn off
Diet Coke, gluten and junk food and lost a fair amount of weight. As a result, his gray White House T-shirt
billowed over his loose gym shorts. Summers, the former Treasury secretary and celebrated economist, is
well known for his cutting wit and laserlike focus; he is less well known for his jump shot. But Summers,
who recalls with anguish being cut from his high-school basketball team, never let his gaze wander as he
took, and missed, nearly every shot. Two Harvard players ran down his rebounds.
After practice, Tommy Amaker, the Harvard basketball coach, invited Summers into a lounge to address his
team. Over pizza — his gluten-free pie sat off to the side — Summers delivered a 30-minute speech that
was part motivational and mostly scholarly. (Imagine what Bobby Knight might sound like if he had an
advanced degree in public economics.) The theme was adjustments. Summers began by recalling a recent
Harvard game against Brown. The Crimson had blown a 22-point lead in the second half but came back and
eked out a win in double overtime. “It’s not that people who win never make mistakes,” Summers said.
Then he transitioned to his old boss, President Barack Obama, who botched his first debate against Mitt
Romney before adjusting his plan and winning the next two. “Like the president,” he said, “you finished
strong!”
Summers segued to an explanation for how he chose a career in economics. The field, he said, provided
tools that can be used to make the world, or a basketball team, better. The key is reading data and
recognizing what it tells you. Then Summers paused and asked the assembled players a rhetorical
question: Did they believe a shooter could get a “hot hand” and go on a streak in which he made shot after
shot after shot? All the players nodded uniformly. Summers paused again, relishing the moment. “The
answer is no,” he said. “People apply patterns to random data.” A statistical analysis of player performance
reveals that streaks are random events. The players listened respectfully. They perked up when it was
noted that Summers grew up in the same school district as Kobe Bryant.
A few days later, I witnessed an equally unusual discussion of basketball and economics. Before a crowded
lecture hall at Columbia University, the economist and former adviser to both Bush presidents, Glenn
Hubbard, wrote a series of words on the blackboard. Among them: Milton Friedman, Yeats, basketball.
Hubbard, a mild and genial man, looks as if he entered the world fully formed, wearing a conservative suit
with a side part in his hair and an accountant’s pair of thick eyeglasses. Close your eyes and picture an
economist — that’s Hubbard. For the next hour, he maintained an oddly cheery tone as he laid out a
dystopian vision of the United States’ economic future. He ticked off a series of empires — Rome, medieval
China, Spain, 19th-century Britain — and argued that they fell because their leadership ossified and
squashed free trade, technological progress or other forces of economic growth.
Hubbard fears that the United States is also veering away from the forces that made it grow into the world’s
most powerful economy. Rather than corrupt Roman senators or courtly Spanish twits, he argued, our
culprits are myopic politicians who are creating a middle-class entitlement state. If those politicians don’t
make fundamental changes to lower our debt — especially by changing the rules governing increasingly
expensive Social Security and Medicare policies — the United States may collapse, too.
As he wrapped up, Hubbard pointed to the good news: results can change when the right adjustments are
made. This is where he brought up basketball. By the 1940s, he said, the sport had become boring,
dominated by extremely tall players who planted themselves next to the rim. Then a Columbia University
graduate student who also coached basketball wrote a Ph.D. dissertation arguing that the game could be
saved by innovations, like the 3-point shot, which created an incentive to move action away from the hoop.
It took decades for the N.B.A. to adopt the 3-pointer, but since its implementation, it has helped make
basketball one of the most popular and lucrative sports on earth.
The U.S. economy, in other words, desperately needs to find its own 3-point shot.
Larry Summers and Glenn Hubbard have shadowed each other for decades. In the late ’70s and early ’80s,
they were young academic stars, part of a revolution in economics taking place at Harvard. New computer
technology and large data sets allowed them to explore with unprecedented precision how government
policy affected the economic behavior of people and companies. Many of their peers went on to become
influential public figures. Jeffrey Sachs, Paul Krugman, Ben Bernanke and Greg Mankiw were all at Harvard
or nearby M.I.T. around the same time. But by the 1990s, it was Hubbard and Summers who, above others,
translated the leading economic research into Washington policy. While only in his 30s, Summers had
already made major contributions in the fields of unemployment, taxation, savings and the role of central
banks, among others. Hubbard, meanwhile, spent the 1980s zeroing in on Social Security and tax policy.
Over the intervening decades, they helped define economic policy at the highest levels. Summers held
several key roles in the Clinton administration, ultimately becoming Treasury secretary. In 2008, Obama
named him National Economic Council director, placing him in charge of White House economic policymaking. Hubbard, a Treasury official under George H. W. Bush, became chairman of the Council of
Economic Advisers in the George W. Bush administration and was widely expected to be named Treasury
secretary in a Romney administration. Summers, the former president of Harvard, now teaches there.
Hubbard is dean of Columbia Business School. Through their own work and that of their protégés, much
of the economic policy now advocated by moderate Democrats can be traced to the ideas of Summers.
(“I’m progressive, but not of the ideological left,” Summers told me.) And many Republican policies,
especially dealing with taxation, can be credited, in some way, to Hubbard on the right. (“I’m a pragmatist,”
he says of his conservatism. “I’m not doctrinaire.”) The space between their views roughly defines the
American center.
Economically speaking, that center has never been more important or more fraught. Even these two, with
such similar training and moderate impulses, are remarkably far apart on basic questions. Hubbard argues
that the imperative of the moment — our 3-point shot — is rolling back federal benefits for wealthier and
middle-class Americans. If it’s done right, he says, taxes will fall and “more entrepreneurs will start
businesses. Corporate investment would rise, creating more jobs. Individuals will work harder and save
more. The country would have faster growth. The benefits are quite broad.” If we stay the present course,
though, Social Security, Medicare and Medicaid will keep growing unchecked, and the United States,
paralyzed by debt, could burn like Rome.
Summers, who once told me “I don’t do apocalypse,” acknowledged that some entitlement reform is
inevitable, but that it is not the real adjustment that needs to be made. “That is playing defense,” he said.
“It is essential but insufficient.” Instead, Summers wants the country to start playing offense: the crisis that
demands our attention now, he says, is long-term unemployment. Millions of Americans have been out of
work for more than half a year, many for much longer; not only are they suffering, but the overall economy
is poorer without their contribution. Summers argues that the U.S. government can address this problem
in several ways, especially by committing to more government spending, notably on infrastructure.
So, there’s the political stalemate, two apparently incompatible worldviews. Over the last several months, I
spoke extensively to Summers and Hubbard, together and apart, in classrooms and in their offices, hopeful
that two men who consider themselves empiricists and share the same economic training could help cut
through the confusing and overwrought political debate. And even if they couldn’t, that they might at least
help clarify the choices that will define the future of our economy.
For two men who are so smart and analytical, neither could fully articulate how they came to understand
their field in such fundamentally different ways. During our many conversations, each referred to opinions
shaped early in life. Summers and Hubbard were born in the 1950s, but they had remarkably different
upbringings. Summers’s parents were well-respected economists at the University of Pennsylvania. Two of
his uncles won Nobel Prizes in the field, including Paul Samuelson, who advised President Kennedy and
wrote “Economics,” an enormously influential textbook. His family and their friends were committed
Democrats who celebrated the expansionary programs under Lyndon Johnson. Some of them even helped
design those programs.
Hubbard, on the other hand, grew up in a remote agricultural town in Central Florida. His parents were
public-school teachers. The programs that were beloved by Summers’s family struck many Southerners as
another sign of government growing too large. Hubbard told me that a favorite book in high school was
Friedrich Hayek’s “Road to Serfdom,” a 1944 treatise against big government that remains a sacred text
among conservatives, including Paul Ryan.
On some level, their upbringings seem to have influenced their work from the beginning. When Hubbard
was at Harvard, in the early ’80s, he built a computer model of the U.S. economy that allowed him to
investigate how Social Security distorted savings. The results were devastating. His model suggested that
for every dollar worth of future benefits, Americans saved 33 cents less in their private accounts. Later, he
focused on the taxes needed to pay for these programs and concluded that higher taxes discouraged
companies from investing and potential entrepreneurs from starting new businesses. In one paper, he
looked at a long-term study of 5,000 households and projected that when the top tax rate was raised to 39.6
percent from 31 percent, as many as 20 percent fewer wealthy Americans would become entrepreneurs.
This research, Hubbard concluded, shows that Social Security and Medicare and high taxes can hurt the
country: Americans save less, companies invest less and the economy slows down. This, of course, reflects
what conservative economists have argued since Social Security began in the 1930s. But when Republicans
make the argument now, they point to Hubbard’s work as support.
Around this time, Summers was working on his own pivotal research project. In a 1986 paper, he and
Olivier Blanchard, now the chief economist of the International Monetary Fund, argued that increases in
unemployment during recessions seriously harm an economy for years afterward — companies adjust to
smaller work forces and the long-term unemployed give up on working altogether. A few years later,
Summers studied the 1987 market crash and other historical events to determine why financial markets
sometimes acted so irrationally. His work pointed to the influence of “noise traders,” speculators who
added volatility and inefficiency to the markets. The markets weren’t perfect, it suggested, and you needed
strong government assistance when they stumbled.
How did two men, whose work is widely respected, reach such different conclusions from data about the
same economy? As I read their papers, I realized that they simply asked different questions. Hubbard was
fascinated by analyzing the ways in which government intervention can distort otherwise efficient markets;
many of Summers’s papers explored the reasons markets aren’t always perfectly efficient.
So one morning this spring, I met Summers and Hubbard in a small, well-appointed room at the Council
on Foreign Relations on Manhattan’s Upper East Side to hear them battle it out as if they were preparing to
brief the president and leaders of Congress on what must be done to fix our economy right now — what,
in other words, is our best 3-point shot. I wanted to hear their answers, of course, but I was also interested
in how they made them. I wanted to understand the extent to which empirical economic research can
provide objective guidance for policy — and at what point even brilliant, highly trained economists resort
to articles of faith.
As we settled in that morning, Hubbard quickly zeroed in on the issue that has defined his career. In
regard to the size of the government, Hubbard said the real challenge is the steady rise in so-called
entitlement spending. Going forward, he said, government debt will rise partly on account of the increase
in the cost of Social Security, Medicare and Medicaid. Already these programs take up around half of all
U.S. government spending. As the population ages and as health care costs rise far faster than inflation,
these programs could double in cost by 2040. Hubbard goes into great, semi-apocalyptic detail about the
effects of taxes and debt in his forthcoming book, “Balance.” It’s a mode he slips into rather easily in
person too. Hubbard, usually regarded as a centrist Republican, suddenly started to sound like a member
of the Tea Party. “Entitlement programs are on autopilot,” he said. “I’m alarmed. We’re close to the danger
zone.”
Then he presented his solution. “I see no reason we need programs that are exactly the same for all
Americans,” he said. Hubbard suggested turning Social Security and Medicare into smaller programs that
help “the least well off among us.” With smaller social-insurance programs, the government can prevent
tax increases and shrink the debt burden. That, he said, would lead to broad economic growth. As he
spoke, I began seeing the arc in my mind: a young boy grows up in Central Florida reading Hayek, charts
Social Security’s distortions in graduate school and eventually argues to overturn the system. Hubbard
would go on to become the architect of George W. Bush’s famous tax cuts, which slashed taxation on
dividends and capital gains. His views all seemed to coalesce around a fairly simple idea: the U.S. economy
is better off when the government gets out of the way. Cutting the entitlement programs was an extension
of this. It could free up more capital to further enable virtually everyone to contribute to the economy.
Summers’s worldview seemed to take into account more moving pieces. “It would surely be better to
address long-run fiscal issues sooner rather than later,” he said. “But this needs to be done in a balanced
way. The highest priority is getting the economy growing.” Summers said that he expected the government
debt to grow, because the cost of services that the government pays for — like education and health care
— are rising far faster than many of those bought in the private sector. He considered this a problem but a
separate one that needed addressing on its own. “We have an enormous amount of work to do as a society
to figure out how to contain health care costs,” he said.
As he slid comfortably into the professorial mode I glimpsed a few weeks earlier at Harvard, Summers
started to take on Hubbard’s argument directly. He had told me that if tax rates were so dominant in
determining economic health, “it wouldn’t be the case that the economy grew fastest when top tax rates
were highest.” After all, the U.S. economy did grow quite quickly in the 1950s and 1960s when top tax rates
were far higher (income tax was once as high as 91 percent). Lowering taxes on the rich and cutting
benefits to the middle class, he said, could also have the opposite of Hubbard’s intended effect. Ambitious
middle-class people might see no point in taking risks, fearing that the fix was in and that only the rich
could get richer. At some point, Summers became emotional in his defense. He told me that Social Security
and Medicare were among the best things about America. They took the group of people that were most
vulnerable in our society — the elderly — and made them secure. “Why would you want to get rid of that?”
Summers asked rhetorically.
As they continued to trade arguments, seeking to undercut each other, Summers and Hubbard remained
calm. Neither raised his voice or interrupted. Hubbard, leaning forward, smiling, began responses with “I
want to agree with Larry on . . .” before explaining his many, many disagreements.
Their views were especially incompatible when the talk veered to rising inequality. Summers said he would
limit benefits for the rich like “carried interest” rules that allowed private-equity managers (including, I
recalled, Mitt Romney) to convert their income, which would be taxed close to 40 percent, into something
that looked just like capital gains, which are taxed at 20 percent. He also said that the very wealthy should
pay higher inheritance taxes. Dynastic wealth is “highly problematic in a society committed to freedom of
opportunity,” he said.
For Hubbard, though, the rich aren’t the problem. The pursuit of wealth, he said, is an engine that powers
the economy, and it makes no sense to address inequality by redistributing the very thing that fuels
growth. “The real question is ‘What can we do to improve the earnings of lower- and middle-income
Americans?’ ” he said. “That’s about increased education and skills training, and that may require higher
government spending.” (Hubbard’s belief in more education financing sets him apart from more
doctrinaire conservatives.) Hubbard also dismissed Summers’s concerns about dynastic wealth. So few
Americans have that kind of money, he said, that taxing them doesn’t make a major impact on the nation’s
finances.
In the end, it became clear that Hubbard sees many of our economic challenges — rising entitlements,
inequality and even the financial crisis — as different manifestations of the same basic problem:
unsustainable debt. Those challenges also have the same solution. If Congress and the White House can
agree on a long-term plan to reduce the entitlements, everything will begin to look better. With a
permanent solution in sight, investors will gain confidence from the fact that their country’s finances are in
good shape and that their future tax burden will be lower; companies will hire workers. Then, once the big
fiscal problem is solved, the government can redouble its efforts on education and help the truly needy.
At moments, Summers seemed close to exasperated. “I don’t think Bill Gates, in his garage, was calculating
his marginal tax rate,” Summers told me, before referring back to sustained growth during the 1950s and
1960s. “There is no serious statistical evidence in support of the view that tax rates at current levels have a
major disincentive effect on economic growth,” he said. He suggested, pointedly, comparing the rapid
economic growth during the Clinton years with the comparatively worse performance of the post-tax-cut
Bush period.
Then Summers settled on his point: The United States, he said, is not simply facing one unified problem
that could be solved through one straightforward solution. The country is facing myriad challenges,
starting with unemployment and slow growth. These immediate challenges, he said, can be addressed with
a 10-year commitment by the government to spend $1 trillion on infrastructure. In 2009, Summers helped
design the $800 billion stimulus package. He said he wished it could have been larger, but he and many
others feared that political concerns with the word “trillion” would have freaked out Congress. One trillion
is still a very scary number in Washington, but the long-term unemployment crisis in America justifies it, he
said. Returning millions of workers to productive jobs will eventually generate the economic growth
needed to pay off the extra debt.
I found Summers’s opinions harder to categorize ideologically. His academic work covered so many
different areas, and some of it even seemed more in line with Hubbard’s political opinions. (Hubbard likes
to point to some of Summers’s own academic research supporting the idea that taxes can suppress
investment.) Some of Summers’s views, like his support of stimulus spending, are core left-leaning
Keynesian economics. Other times, though, he sounds like a moderate Republican who wants to let private
markets function with minimal government intervention, at least when times are good. It is for this reason
that Summers is a polarizing figure on the left. I spoke to many progressive economists and activists who
said they were deeply disappointed when President Obama appointed him as National Economic Council
director. Dean Baker, an economist with the left-leaning Center for Economic and Policy Research, told me,
“I think Summers has had a negative impact.” He said he would have preferred Obama to appoint an
economist who wanted to break up the large banks, supported labor unions more aggressively and pushed
for more-effective business regulation.
Hubbard is also out of step with the more radical members of his party. He is quick to dismiss the theories
of Ron Paul and his followers about abolishing the Federal Reserve and reinstating the gold standard. And
unlike many Tea Party activists and libertarian economists, he doesn’t imagine the government playing a
substantially smaller role in much of what it does. He doesn’t want to eliminate public education or the
post office or the national parks.
But many of his own ideas seem nearly as politically outlandish. I suggested to Hubbard, in one of our last
conversations, that aggressive entitlement reform seems rather unlikely to be enacted. I asked if shrinking
the wildly popular Social Security and Medicare programs, if ever seriously put forward, wasn’t quite likely
to meet the same fate as George W. Bush’s failed Social Security privatization plan, one of the most hastily
rejected presidential initiatives in recent memory. Hubbard said that Americans didn’t realize the equation
between these programs and taxes — that “taxes would have to go up a lot on middle-class people. You
can tax all the high-income people and barely put a dent in the problem.”
Then he paused for a long moment. They may not realize it now, he said, but they will when the crisis
arrives, perhaps in the next decade and they are forced to choose between his path and Summers’s. And by
that point, it wouldn’t be much of a choice.
Before I met Summers and Hubbard, I had this little fantasy that I would get the two of them to agree, in
my presence, to some sort of grand compromise that both parties might at least consider. Especially these
two, trained around the same time, in the same place, to use the same analytical tools. Surely they could
get their pencils out and come up with a tax-and-entitlement-reform plan that neither would find perfect
but that would still be a huge improvement over what we have now. Yet both men took evident satisfaction
in sticking to their guns, leaving me feeling the frustration that many do these days: Why can’t these two
sides just work something out?
Sean West, a young political analyst at Eurasia Group, a consulting firm, has been remarkably prescient. He
told me that my fantasy — one big, bipartisan solution — is common these days. Given the current
circumstances, though, any reform to our economic system will have to be incremental and ultimately
unsatisfying to all of those clamoring on the left and the right for significant change. And that starts with tax
reform. Nearly every economist feels that some clear reforms are needed, as Hubbard and Summers
certainly do. Our current tax system presents many opportunities for little fixes that both parties could
chalk up as victories, like a cap on total deductions that any person could take, which would increase
government revenue while also allowing the top marginal tax rate to be lowered. Who’s against that?
West recently told me that he thinks there’s about a 50-50 chance that Congress will pass a tax-reform bill
suitable for Obama’s signature in the next two years. It will be a step in the right direction, but it won’t
solve everything. West added — only partly joking — that he has come to think of the presidential election
of 2016 as a battle between whoever will hire Larry Summers and whoever will hire Glenn Hubbard.
Because somewhere in those following four years, he said, the fiscal crisis will become unavoidable,
Congress will have to act, and it will have to work with the White House.
When that happens, though, West said the edge will very likely go to Summers’s path. There is little
popular support for Hubbard’s drastic solutions. Just as Summers and Hubbard held on to the ideals of
their upbringings, tens of millions of middle-class Americans won’t just let go of the retirement benefits
that they have expected to collect their entire lives. As both men know, you can’t separate economics from
politics.
Adam Davidson writes the It’s the Economy column for the magazine. He is co-founder of NPR’s “Planet
Money,” a podcast and blog.
Editor: Jon Kelly