Lawrence Summers, the director of the White House's National Economic Council, is the Obama administration's most influential economist. A former Treasury secretary under President Clinton and later president of Harvard University, Mr. Summers has played a leading role in crafting the administration's interventions in the economy and planning its exit strategy. He talked with The Wall Street Journal's Bob Davis about the evolving role of government in the economy. Below is an edited transcript.
The Wall Street Journal: What do you think will be the lasting effect on business from government interventions across the economy?
Mr. Summers: The government's direct actions to invest money in companies were once-a-generation or once-every-two-generation responses to a once-every-two-generation emergency. They were designed to be, and have proven to be, temporary. There is no aspiration of any kind to change the private-sector basis of our economy. …
WSJ: The response to the Great Depression was done on an ad hoc basis, but it produced lasting changes in U.S. capitalism and the U.S. government. This time it seems the only new institutions you're proposing are a consumer protection agency and perhaps a new systemic-risk regulator. Do you expect deeper institutional change?
Mr. Summers: You had a very different landscape in the 1930s than you do today. In the 1930s, large swaths of activity, like finance, were essentially untouched by the federal government. So the natural response to problems was the proposal of new institutions. Today, given that government touches more of the economy, the response to problems is more reform of institutions than the creation of new institutions. That being said, the creation, for the first time in American history, of an independent consumer protection agency is a notable development.
Dominant Social Theme: Summers and the Obama administration are grown ups. They can be trusted.
Free-Market Analysis: The interesting thing about this interview is that Summers felt he had to give it. The frustrating thing is what is left unspoken. It is all well and good for Summers to maintain that the administration is not interested in accumulating anymore power over the private sector. Certainly this would belie the drift of the past umpteen years, but let us grant Summers his credibility. Perhaps he is sincere.
Regardless, however, it is the SYSTEM itself that concentrates power in the hands of the American federal government, and overseas as well. It is not after all a complex process. Set up a money stimulation machine like a central bank, along with a progressive income tax system, and watch the economy swell and then implode. The government will inevitably pick up the pieces. And each time it does so, it will end up with more control. Here's some more from the interview:
WSJ: One of the big pushes that you've been making in the financial sector concerns executive compensation. Is your goal to change compensation practices only in the financial sector or outside that area, too?
Mr. Summers: We've been very clear in saying that there needs to be careful attention to compensation practices. The president, for example, was a vocal supporter even in his time in the Senate for say-on-pay legislation to give shareholders a vote on executive pay. We want to make sure that shareholder interests are being protected, that shareholder views are represented, and that there isn't managerial self-aggrandizement. That's been something we've seen as necessary everywhere. We've also been clear that a whole variety of special protections are necessary when taxpayers' money is being put into companies, whether it's a financial company or an automobile company. And where compensation affects incentives in areas that the government regulates, such as the risk-taking of financial institutions, we've also urged that there be careful attention to the incentive effects of compensation practices. But it's certainly not our objective to try to have government codes for compensation throughout the economy.
WSJ: There seems to be a kind of ambivalence in some of the interventions. In the financial sector, for instance, the Treasury and the White House have been urging more lending, but bankers say that regulators have been warning them against lending.
Mr. Summers: I think that the administration's position is clear. We believe that there is scope for increased creditworthy lending. And we think that all actors in financial institutions and in regulatory institutions need to be very attentive to opportunities for responsible lending. But we don't believe that irresponsible lending can lead to durable recovery. And we don't believe that the private incentives are sufficient to deter irresponsible lending, which is why a strong role for government regulation is necessary.
We can see from the above that despite Summers self-professed respect for the marketplace, he is not apt to slow the federal governments efforts to control salaries in the private sector. This is yet another form of price-fixing and perhaps the most pernicious one of all. Between health care and private sector salary caps, the Obama administration is aggressively socializing America – much moreso than in the past.
While it is true that America and the West in general has not yet arrived at the place occupied by the Soviet Union not so many years ago, it is getting there. Just as with the USSR, the outward political show gave little hint as to who was really running the country – but the power certainly resided in the hands of a few. The result was a command-and-control economy where everyone "pretended" to work and the state "pretended" to pay.
Summers can say what he wants. The Obama administration can put any spin on its actions that it wishes to. But ultimately, what is going on is that more power is passing into the hands of the federal government, a monolithic entity that disburses trillions and via horse-trading is not, despite its protestations, the best instrument to use to manage the American economy. Inevitably, every law, every demand, every regulation passed by the Obama administration – as administrations before – is a kind of price fix.
Price fixing damages market signals and inevitably ends up in shortages, lines and worse. It is the system of central banking itself, with its booms and busts that has made the concentration of power so much more pernicious in the past century. Until the West deals with central banking – which fixes the price of money itself – the ongoing centralization of power in public hands will continue, no matter the protestations otherwise.
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