The Middle Class Problem
Lawrence Summers says the failure to help the middle class is the “defining problem of the United States from which most of our other problems follow.”
Summers, whose resume includes stints as U.S. Secretary of the Treasury, chief economist at the World Bank and president of Harvard University, directed the White House National Economic Council from January 2009 until December 2010, helping to shape the Obama administration’s response to the Great Recession. He spoke at Tufts on Oct. 27 as part of the Tisch College Distinguished Speaker Series.
The session was led by Daniel Richards, professor and chair of the economics department, who asked Summers about a wide range of issues, from the causes of the economic collapse and what might have been done to prevent it to his views on academic freedom.
Asked about the problems affecting the middle class, Summers said that “the dysfunctional politics of the tea party, Donald Trump and gridlock result heavily from middle class frustration and anger and a lurching toward non-establishment alternatives. There is a disturbing sense many around the world have that America is turning inward and is not prepared to play its traditional role of underwriting the global system, and it goes back crucially to frustrated citizens at home.” Summers said he is alarmed, but as with most economic problems, there is no single silver-bullet solution.
Asked about the causes of the Great Recession, Summers said there were several reasons for the economic downturn, and that he is still “haunted” by what might have been done to prevent it.
First, he said, a long period of economic success led to complacency, so that Americans borrowed too much, over-invested and spent too much, creating vulnerability. Then, because no financial institution had yet failed, regulators ignored warning signs, such as a drop in the value of bank stocks. Banks were heavily regulated, but other financial institutions were not. “Just as water finds a way through a dam, areas we weren’t regulating found their way into parts of the banking system,” he said.
Allowing the failure of Lehman Brothers, a global financial services firm that went bankrupt in 2008, was another cause, Summers said. “There’s a great debate as to whether a different choice could have been made, but it was allowed to fail, and that was like throwing a match in a very dry forest,” he said. The bankruptcy was the largest failure of an investment bank in nearly 20 years, and was followed by a major drop in the stock market.
With the benefit of hindsight, Summers said, it is clear that something like the Dodd-Frank Act, with its regulatory procedures and consumer protection, should have already been put in place. “I thought predatory lending for mortgages was a big problem, and Andrew Cuomo and I wrote a report saying it needed to be cleaned up, but the Republican Congress wouldn’t go near it,” he said. Summers said he also argued that Fannie Mae and Freddie Mac, government-sponsored enterprises that owned or backed mortgages, were “major accidents waiting to happen, but nobody had the appetite” to do anything about them.
Summers said he supported the 1999 repeal of the Glass-Steagall Act, which prohibits commercial banks from engaging in investments. “The idea that this was somehow the cause of the financial crisis is on the edge of absurd,” he said. “Bear Stearns, Lehmann Brothers, AIG—none of these were touched by Glass-Steagall. So it’s hard to relate Glass-Steagall to anything to do with the financial crisis. And in general, you shouldn’t regulate unless you have a reason to and can regulate effectively.”
He pointed out that the United States recovered from the economic crisis faster than other countries. “We engineered a turnaround much more quickly . . . because we made some basic judgments that it was better to do too much than too little, and to stand behind the financial system,” he said.
Summers noted that Timothy Geithner, secretary of the treasury under President Obama from 2009 to 2013, said a choice had to be made about whether, in the aftermath of the financial collapse, the government’s goal was to punish the banks and financial institutions or to restore the financial system. Ultimately it was agreed that confidence in the system was of utmost importance.
Asked about academic freedom, Summers, A12P, said it is an issue that is important to him. He noted that he finds it distressing when universities extend invitations to speakers only to see them withdraw following demonstrations and protests. Former Secretary of State Condoleeza Rice was supposed to speak at Rutgers and Christine Lagarde, managing director of the International Monetary Fund, at Smith; both withdrew.
“Universities ought to be places where any idea can be expressed—nothing should be unutterable or undebatable on university campuses,” Summers said. “When the pressure of the crowd leads to the censoring of speakers, the failure to represent points of view or the decision to uninvite speakers, then something deplorable has happened.”
Summers said he believes in diversity in all its forms, including ideological diversity. Too many campuses, he said, are reluctant to give a full airing to conservative or religious points of view. In addition, he said, no one should use a university to support a political point of view. “That’s why the notion of divestment or the notion of academic boycotts seems to me so profoundly offensive.”
Marjorie Howard is a senior writer at Tufts Now.