Larry Summers and a “New Washington Consensus”

First, it is supposed that the idea of economic policy is to maximize the creation of jobs rather than to maximize the availability of goods at low cost to consumers and firms. Both the officials responsible for competition policy and those responsible for international trade have explicitly rejected economic efficiency as a central guide for economic policy. This, I would suggest, is a costly and consequential error. …

The second misconception is that these have not been good decades for the American economy in international perspective. I first got to know my friend Ted Truman well when he was long into his career as the head of the Federal Reserve’s International Economic Section. and I was a new undersecretary of the Treasury for international Affairs. We were involved in making various long term economic projections for the world. None of them would have believed that US GDP as a share of global GDP would have remained robust for the entirety of the next generation. And if we had been told how spectacularly China was going to do over the next 30 years, we would have been that much more pessimistic. … The truth is that the United States has done extraordinarily well. …

Third, the world has fared very well. Relative to the time when I was chief
economist of the World Bank at the beginning of the 1990s, child mortality rates are less than half of what they were then. Literacy rates are more than twice what they were then. Poverty rates, terms of extreme poverty are less than 40% of what they were then. And in some ways most fundamental and important, this month, we celebrate the 78th anniversary of a situation where there has been no direct war between major powers. You cannot find a period of 78 years since Christ was born when that was the case. So, the idea that we’ve been doing it all wrong is, I would suggest, a substantial misconception.

Fourth, the problems that we have are not due to trade liberalization. … Yes, China’s tremendous economic progress did lead to far more sale of goods in the United States. But it is hard to imagine a less credible approach to the problem [then] the adding up all the losers from the imports without taking any account of the jobs created and the economic impacts of the goods we sold to China, of the lower cost inputs we received because of imports from China, [or] of the enhanced real wages and associated with greater spending caused by those lower prices. And the lower capital costs associated with the inflows of capital that we received from China. When those calculations have been done, as they’ve now been done by Rob Feenstra and several other teams of economists, they show that, in fact, as with NAFTA, the net benefit to the US economy has been substantial.

The fifth misconception is that domestic industrialization and some kind of renaissance of manufacturing is somehow the central issue for US
prosperity going forward. This is simply not a realistic idea. … Rapid productivity growth, relatively inelastic demand, rapidly declining relative prices created abundance without substantial and with declining levels of [manufacturing] employment. And there is nothing in the coming robotic revolution to suggest that these trends are likely to do anything other than accelerate going forward. … The idea that we can build an economy on growing our manufacturing sector is just not realistic and it is potentially counterproductive. I would just note that there are about 100 times as many workers in steel-using industries as there are in the steel industry as evidence of the potential costs of domestic content requirements motivated by the desire to create capacity.

Finally, I would suggest that substantial and accumulating deficits and debts are a substantial threat to national security and national power, contrary to what is often believed in what sometimes seems like a post budget constraint era of economic thinking. … The budget deficits a decade out comfortably in double digits as a share of GDP now seem a reasonable projection … This is without the assumption of the need for vast mobilization for meeting contingencies, military or non-military. And I think it is reasonable to ask the question: How long can or will the world’s greatest debtor be able to maintain its position as the world’s greatest power?

I’ll add the “Washington consensus” in the title of the lecture strikes me as a mischievous use of the term. For the uninitiated, the “Washington consensus” among economists refers to a specific set of policies identified by John Williamson back in 1989, in an effort to spell out what policies were being encouraged at that time by the IMF and the World Bank. But as Summers notes, “Those who speak of a new Washington consensus mostly have never heard of John Williamson.” Among non-economists, “Washington consensus” has often come to mean any policies oriented toward free markets or limited government. For those who would like an overview of what Williamson actually said, and a discussion of the evidence on how well his list of “consensus” policies has performed and aged, a useful starting point is the symposium on the “Washington Consensus Revisited” in the Summer 2021 issue of the Journal of Economic Perspectives (where I work as Managing Editor). The four papers are: