Larry Summers delivers the Susan Bies Lecture on Economics and Public Policy

Lawrence H. Summers called for the U.S. to invest in infrastructure and focus on raising growth and reducing income inequality, in his remarks during the Susan Bies Lecture on Economics and Public Policy at Northwestern University on Wednesday. He also provided young economists advice on the uses and limits of models in policymaking.

Summers is a former Secretary of the Treasury and former Director of the National Economic Council who is currently the Charles W. Eliot University Professor and President Emeritus at Harvard University. He described how macroeconomic theory needs to be revised to better account for “periodic economic tsunamis.”

He examined the similarities between GDP shocks of the Great Depression and of the decade since the 2008 financial crisis. This time around, he says, “there hasn’t been a comparable questioning of orthodoxy, change of thinking, or alteration of policy paradigms.”

Turning to the nation’s ongoing economic recovery, Summers defined “the right package” of infrastructure investment as a combination of funding, regulatory streamlining, and procurement efficiency. “One of those is a more progressive idea, and one of those is a more conservative idea. That kind of thinking—some of mine, some of yours, let’s do things—can be constructive.”

Later he discussed ways to mitigate the increases in income and wealth inequality. Summers recommended moving to more progressive taxation, supporting job creation in sectors such as infrastructure construction, and getting specific about which geographic areas may need more or different help.

“Thinking about policies for areas where people are being disproportionally left behind is something that is very important,” Summers said, referring to “place-based policies.”

The 90-minute lecture took the form of a conversation with Kellogg’s Janice Eberly, the James R. and Helen D. Russell Professor of Finance and a former Assistant Secretary for Economic Policy at the U.S. Treasury.

Summers addressed how economic policymakers and academics have different roles in policy development and discussion.

“You build up intellectual capital when you are in academia and you draw on that capital when you are in government,” Summers said. “In government, you don’t have the option of saying ‘I don’t know,’ or ‘the problem is too hard.’ You have to act.”

Summers also discussed the uses and limitations of economic models—and how their functions differ between research and policymaking.

“Models are a useful tool [in policymaking], but if you try to present them as dispassionate technocratic expertise, that is not right,” he said. “In a lot of models, the conclusions are more built-in than derived.”

Summers described a rule he developed to test the reasonableness of model-based conclusions others presented him: he required them to go through a back-of-the-envelope calculation that he could understand and that landed near the same conclusion as the model.

“Lots of people who use models use them in a mechanical way,” Summers said. “But you need to have discipline about whether there was a thoughtful assumption about the model’s key parameters.”