Former Treasury Secretary Summers on student debt and the economy

Former Treasury Secretary Lawrence H. Summers joins Yahoo Finance Live to discuss a range of topics, including economic policy, government, investment and student debt.

Video Transcript

MYLES UDLAND: We are talking now about the transition between the Trump administration and the Biden administration, the future for monetary policy, fiscal policy, here in the US, and few better guests to join us for that conversation than Larry Summers. He's the former Treasury Secretary, as well as the former president of Harvard University, among other distinguished titles.

And, Larry, it's great to talk with you this morning. I'd love to begin our conversation with a piece that you wrote recently to the future incoming Treasury Secretary about the unique challenges that that office will face, as the administration gets fleshed out here. And I'd love if you could just outline for our viewers some of the unique challenges that you see facing the next Treasury, again, as-- as things come into focus here for the Biden administration.

LAWRENCE SUMMERS: My piece focused on a global economy and those aspects, but, broadly, the challenge is restoring reasonable economic growth and maintaining it in the post-COVID environment. I think it's going to be a very different environment than most of us grew up in. It's going to be an environment where there's going to be slow and sluggish growth of demand, where interest rates are going to be, essentially, on the floor. So there's not much that the Fed can do.

It's going to be an environment where the issue is going to be more insufficient inflation than excessive inflation. It's going to be an environment where, because of the shortage of investment opportunity, there's going to be a tendency for savings to flow into purchasing existing assets and bid them up, leading to more leverage and more possibility of financial instability.

So I think it's going to be a challenging opportunity-- environment. On the other hand, an opportune-- an environment of such low interest rates is an opportunity with historic opportunities to invest and earn very high returns. And so, taking advantage of this high saving, low investment, low private investment opportunity to do really important public sector things is going to be a major challenge for the next Treasury Secretary.

JULIE HYMAN: And-- and what about where growth in real assets and growth in the underlying economy is going to come from? I mean, what you're describing is-- is something that has characterized the past, say, decade or so in terms of markets going up and investors benefiting from the low interest rate environment, as rates have gotten ever lower. But what about the underlying economy? What about the need for--

LAWRENCE SUMMERS: [AUDIO OUT] opportunities, there are millions of children under five who should be getting more education than they are in pre-K. There are huge opportunities for environmental investments that would have a huge payoff down the road in terms of averting climate change. We've got an infrastructure, both in terms of traditional things like roads with potholes, an air traffic control system that still uses vacuum tubes, and we've got more modern challenges like building out 5G.

But government is going to have to be a catalyst if all that investment is going to take place. It's going to be the job of a new Treasury Secretary to lead that strategic thrust of government towards the promotion of investment, which is both a demand-side imperative and, ultimately, a growing our economic potential as a country imperative.

BRIAN SOZZI: Mr. Summers, in your view, how severe will the economic scarring be from the pandemic? And, because of that scarring, you know, do you think some of these tax hikes that President-Elect Joe Biden has proposed will be off the table?

LAWRENCE SUMMERS: I don't think that right now is the moment for tax hikes, but I think we need to put in place a satisfactory revenue system for our country. What I'd start working on now, my most important recommendation in the tax area, would be we could collect a trillion dollars over the next decade, at least, from better enforcement on the $7 trillion that is owed, but not paid, with most of that coming from the richest taxpayers.

And so, restoring audit rates to previous levels, having modern information technology, having reporting on all income flows, not just wage income, these are all things where we can do better. This isn't a partisan view. Former IRS Commissioner Charles Rossotti is advocating that, and he's actually rather more optimistic than I am.

You're showing Joe Biden's tax plan. I don't think that's what's likely to be legislated in this political environment, and it's not what I'm talking about. So I'm not sure why you have that graphic.

JULIE HYMAN: Larry, to come back to the-- the memo that you wrote to the future Treasury Secretary, I have to ask, were you envisioning anyone as you were writing that memo, picturing anyone in your mind?

LAWRENCE SUMMERS: [AUDIO OUT] answer, getting to questions like that.

JULIE HYMAN: No, you don't want to even say who-- what would the qualities be of the person who should take this?

LAWRENCE SUMMERS: I'm not going there. You were told that beforehand.

JULIE HYMAN: I wasn't, in fact, but I wouldn't be doing my job if I didn't ask it. All right, Myles, why don't you pick it up?

MYLES UDLAND: Yeah, you know, Larry, I want to talk about, you know, something you were talking on-- touching on earlier. And, of course, I think, right now, going back to your secular stagnation thesis from some years back is quite an interesting frame in an environment where I think there's a major risk that too little is done, probably, on the fiscal side, particularly with the other side of the virus coming into focus.

And you wrote about how fiscal policy is really in charge now, whereas monetary policy, perhaps, was more important in earlier cycles. And, as you're thinking through that and talking to, you know, folks about this dynamic, is it maybe understated, perhaps, in policy circles how significant of a shift that really is?

LAWRENCE SUMMERS: Yeah, I-- certainly, I believe so. I think that, if the dominant concerns of economic policy between 1980 and 2010 were about yielding to the temptation to inflate and were about running excessive deficits that crowded out valuable private investment, in today's world where there's no investment that's being inhibited by excessive costs of capital, none at all, where, product price inflation, the problem is that there's too little, and, asset price inflation, the problem is that there's too much, that's a fundamentally different environment that requires fundamentally different solutions.

I believe those are much more fiscal and structural solutions than they are monetary and liquidity solutions. And that's why I've advocated both more expansionary fiscal policy and a revision of norms about sustainable debt to reflect the fact that we've got these very large-- very low interest rates and, also, measures like strengthening pay as you go social security, measures like successfully promoting the redistribution of income that, even without changing the budget deficit, will expand the level of demand and push the economy forward. But I think there's no question that this is a very different period than we've had in the past, and it requires very different solutions.

BRIAN SOZZI: Mr. Summers, how-- how should the new Treasury Secretary, whoever that is-- how should they go about rebuilding relations with foreign countries?

LAWRENCE SUMMERS: A lot of it's being there. A lot of it is diplomacy. A lot of it is showing a willingness to-- to listen. A lot of it is being willing to meet our obligations to the US international financial institutions in a more generous way than we have in the past. A lot of it is not blocking the initiatives of other countries.

We should be for a major SDR allocation agreed at the spring meetings of the IMF and World Bank. We should be for an energetic program of involving other countries and, especially, involving private banks in appropriate debt write-offs for the poorest countries. We should be for a much more aggressive financial approach coming out of the World Bank and the other development banks.

We should be for an enhanced, substantially enhanced, cooperation in environmental lending. If we are prepared to join with the rest of the world on what it cares about, they will be more responsive to us on what we care about. Obviously, at the top of that agenda is rejoining the Paris Agreement and being an energetic participant in global environmental diplomacy.

MYLES UDLAND: And, Larry, I'd love to conclude with a conversation that I think is certainly unique in fiscal policy or, you know, policy circles, but has come up recently, which is the discussion around student debt. We have seen several lawmakers talk about, perhaps, forgiving or canceling some amount of debt. And you're speaking quite a bit about demand-side policies we can, perhaps, put in place. Have you thought about this idea? What kind of conversations have you had? Does it make any sense to you?

LAWRENCE SUMMERS: I think there are clearly cases where relief is needed. There are clearly cases where it's not possible to restructure student debt, and it should be. I'd be rather skeptical of across-the-board, massive student debt reduction programs because I think many of those programs would benefit the well-off who made an investment in themselves, are earning a high return in-- on that investment.

And, fundamentally, I'm more worried about the Americans who don't go to college than the Americans who do. So I worry that, unless it's done carefully, this could be upwards redistribution of income, rather than downwards redistribution of income.

MYLES UDLAND: All right, former Treasury Secretary Larry Summers, Larry, I really appreciate you taking the time to speak with us this morning. I hope we can talk soon.

LAWRENCE SUMMERS: Thank you. Bye bye.