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Remarks at Resources for the Future’s 50th Anniversary Symposium and Gala Dinner

Introduction: Moderator Thomas L. Friedman

I was reminded by something Bill Emmott said when he spoke about America as the most powerful country in the world today. Maybe, more powerful than any country, ever, in the world. A few years ago, when I was working on my book Lexus and the Olive Tree, I went to interview Larry Summers, then the treasury secretary. We were talking about the American economy, possibly the most powerful economy in the world. And Larry said something to me that I quoted in the book, “The only thing that we have to fear is the lack of fear itself.” And, I now think of that in the context of those who speak about our national power as opposed to our national economy. And sometimes that humility is a good caution.

Larry needs no introduction as a former Treasury secretary, former deputy secretary, former under secretary of the Treasury, longtime economist at Harvard, and currently the president of Harvard University. Larry Summers.

Presentation by Lawrence H. Summers

Thank you very much Tom, for that kind introduction. I wish I had managed my portfolio — something more in line with that observation. The only thing we have to fear is lack of fear itself. Perhaps, so do many others. Paul, friends of Resources for the Future, it is very good to be here and I’m honored to have been included in this 50th anniversary celebration.

When I lived here in Washington, and worked at the Treasury, I not infrequently had occasion to speak at events that were sponsored by Washington think tanks. And, I would remark that Keynes had famously written of how everything policymakers said was, in fact, the distilled frenzy of a defunct academic scribbler. That it seemed to be in the intervening 60 years that technology had changed and lags had shortened. And now, much of what policymakers said was the distilled frenzy of a fax or email from a Washington think tank. And, certainly, Resources for the Future made its contributions on those debates, whether on Superfund policy, tropical forests, or any of a number of subjects.

But, unlike many think tanks, Resources for the Future has been, as Jonathan Rausch put it in the current National Journal, not just ahead of the curve on many crucial issues, but ahead of being ahead of the curve. I tried to think about when I first encountered Resources for the Future’s work and the ideas that were being pushed, and I have a number of actually quite vivid memories from my time as an undergraduate in the early 1970s. I remember reading Lavin Seskin’s Science magazine article that documented, through careful regression analysis, that tens of thousands of people were dying because of air pollution in different cities. And, being struck both by the magnitude of that finding, and, by the fact that regression analysis could be used to find out things that were so morally important. I remember very well being taught of the significance of effluent taxes as we called them then; of the idea that harnessing market mechanisms to stop pollution. I drank the Kool-Aid pretty completely at that time, but most of the other people I met thought that they were licenses to pollute and an evil and immoral idea. And, I remember some sort of combination for Resources For the Future’s analysis, and Bob Solow’s analysis and wit, leading me to the conclusion that limits to growth had more to do with limits to intelligence, than limits to actual growth, sometime in the 1970s.

In all of these ways, and this is something that is not so frequent, among think tanks that are engaged in policy analysis, Resources for the Future was not just influencing the current debate, but was changing the climate that it would influence many years later.

There are other examples. To my knowledge, Resources for the Future was the first to propose spectrum auctions, though I suspect you did not propose some of the precise bidding schemes that we have come to. And it is my guess, and I’ll say a little more about this later, that the work in which you have been engaged recently — on the common problem posed by the tendency of bacteria to evolve and develop — will prove to point the way towards an enormous area of future policy consideration that will be much more central in the years ahead.

And so, you have much to celebrate in your 50 years. It seems to me that in a different sense, you exemplify something that is profoundly important and is too little recognized. And that is, the longer I was here in Washington, the more I came to think that while we all ran around at very high speed, doing all the things that we did — making deals, setting direction, making policies, negotiating agreements and so forth — in a sense that I did not at first appreciate, we were all snakes in a tunnel. Wriggling around but in a tunnel. And what determined the position of that tunnel was an intellectual climate, a prevailing set of ideas that defined the range of discussion and debate. And what positioned that tunnel, that intellectual climate, was the research of the decade or two that preceded us. And though the lags may be long, to use a term we use when talking about variable monetary policy, the lags may be long and variable. It is a grave mistake to underestimate the long-run influence of policy analysis like the analysis that is done at Resources for the Future.

Let me make one other point. People speak of American exceptionalism and the strength of the United States. In many ways there are hundreds of aspects of that phenomenon. One that I think is remarked on too little is the permanent ability of the American government. American government is fairly unique in the number of officials who go in and out of work from the academic sector, from work in the private sector, and work in other places. The American system is unique in the plethora of institutions like the Resources for the Future, like the Brookings Institute, like the AEI, like the Heritage Foundation, that are in a position to have substantial and continuing influence on policy debates. And we are a much more creative, and a much better governed country for the constant stimulus to the motivation that these institutions provide and the constant scrutiny of activity that these institutions provide.

You know the great virtue of democracy, or among the great virtues of democracy, is that it provides for accountability through the consent of the governed. But, as numerous political philosophers have pointed out, that is a mechanism that works extremely well on large and straightforward issues. It is a mechanism that works poorly on significant and technical issues. No one votes a congressman out because he got the polybenzene standard wrong. And so, if there is to be accountability, someone needs to be watching, monitoring, commenting, publicizing and proposing. That is a niche that, in our system, is performed very importantly by public-interested think tanks. It is a niche that in many other countries isn’t performed at all, to their very substantial detriment. As policy becomes more complex, and as the role of money in politics becomes more pervasive, this very important benefit of our think tank system and of Resources for the Future in particular, will become ever more important.

I was asked to speak today about governance and global markets. Let me begin with a story that I told Tom many years ago and he was kind enough to include in his book. I visited Africa in 1996. We went to Cote D’Ivoire. Because there was a young treasury official who had died some time before, we went to visit a small village about two and half hours outside of Cote D’Ivoire. I was to turn the handle on a well that for the first time would provide fresh water to that village. We got to that village by riding across a lagoon in a large kayak. We got there and we did the things that we were going to do and participated in local ceremonies. Then we were riding back across that lagoon and somebody stuck a telephone in my face and said, “Bob Rubin has a question.”

And there was Bob Rubin with his question about whatever it had to do with the IRS budget. And all I could think about was that it had been all of eight years before that I happen to have a vivid memory of being in the back of a limousine in Chicago. That was 1988 and the limousine had a telephone in the back seat. I called everyone I knew because I was in a car with a telephone. Eight years later I was being called in the middle of Africa.

Now what does that story tell you about? To me, it tells you about four things, perhaps three things. Firstly, it tells you about technology and the way in which the world is coming together through profound technological changes. I happened to be interested a few days ago in understanding the economic literature bearing on the subject of deflation. Sitting at my computer at midnight, in an hour, I more effectively marshaled the literature on deflation than I could have in a day walking around the library at the time when I was a professor at Harvard. One could give more and more examples of this profound technological change.

The second thing that the story stands for is the power of market. Because guess what? It was not a state-owned telephone company that put that cell phone service in my hands in the middle of Africa.

The third thing that the story stands for is the convergence and coming together, or perhaps, the divergence and coming apart if things don’t work out. It is about the less developed world and the more developed world at a time when the entire world’s developing population growth is going to come together in the world.

The fourth thing that the story stands for, in very important ways, is the subject of your last panel. It is the very special role of the United States in the global economy today. So, as we think about governance and global markets, think about this coming together. And think about the strength of the market system.

I want to make three broad observations this morning. The first is that properly functioning markets are the best way to organize human activity. That is a proposition that one ignores at one’s peril. But, it is a profoundly counterintuitive proposition. It has been demonstrated by the people who study these things that if you ask almost any intelligent human being who has not been trained with respect to the subject, they will tell you that it is intuitively obvious that a heavier body will fall more rapidly than a lighter body. And they will tell you that an object in motion will tend to stop unless it is continually pushed along. Both of these propositions were, of course, asserted by a highly intelligent human being, Aristotle. And it was a great triumph of science that they were realized, through experiments, to be false. Through a process of education, almost all educated people understand them to be false and now understand some of the consequences of their falsehood. In the same way that Aristotelian physics reflects basic human intuition, and Newtonian physics does not, mercantilist economics reflects basic human intuition and good, accurate economics does not.

Think about this. How many people do you know, or how well can you resonate to the story of an individual doing a mediocre job at a firm that was being managed with mediocre effectiveness? It found itself going out of business and blamed the situation on national trade and the great sucking sound from Mexico or some such. Feels like something one hears all the time. Now I ask you, have you ever met anyone who says, “You know, I’m really not that great. My company’s really not that great. But, there was this surge in export demand and really they didn’t have any other choice but to promote me because I was the only one there.” There is an enormous human tendency to internalize credit and externalize blame. And that tendency works toward economic misunderstanding.

Take another example. I have never met the person who on Christmas morning said, “It is really terrific that we have trade with China. Without trade with China, I would have only been able to buy half as many toys for my kids with what I was able to spend.” And indeed, if you listen to what was said, we, the economists, fought this battle with an administration with modest success, increasing success over time, but modest success to have a non-mercantilist argument made in favor of free trade. A preferred argument for free trade was, if we have free trade we’ll export more and we’ll create more jobs. That was the preferred argument for free trade. Of course, not the right argument for free trade. The right argument for free trade was that we’d import and we’d be richer because people would be able to buy things they wanted at lower costs. But, that was not an argument that ever resonated. If economists like me believe that a basic instruction in economics is a crucial part of being educated, it is in part to correct these kinds of unaided intuitions.

Let me give you two other examples of the kind of perspective that thinking carefully about markets brings. Here’s a fact to think about. No one in the history of the world has ever washed a rented car. Why is that? It’s because they didn’t own it, someone else did. So, preserving its value wasn’t very important. That’s a deep truth. How about when our soil is excessively depleted by farmers who don’t own the land they are farming? How about when our trees are cut down too rapidly because the person with the right to cut them doesn’t have a stake in the forest 25 years later? Our lakes are over-fished when no one has a strong and secure property right in them.

Take a final example. It’s common at the moment to be a bit down on the market system because of the profound corruption that has been revealed in recent months. But, you know, if you think about that corruption, it has as much to do with a lack of well-functioning markets as it does with overly well-functioning markets. What is emblematic of that corruption? Emblematic of that corruption is the apparently pervasive phenomenon of awarding shares in initial public offerings. Done when one wants to induce someone, some would say bribe someone, to get business. So the idea is that I want Tom’s business so I give him shares in an IPO that’s likely to pop. Tom feels good and brings me his business. But if you think about it, what is the root of the problem? If that IPO was offered at a market-clearing price, I wouldn’t have anything to give Tom and there wouldn’t be the possibility of corruption.

Look around the world. There can’t be a black market without a price control. There cannot be a bribed customs inspector without a tariff or a quota that he is supposed to enforce. Much less reason to bribe a banker, if he’s not allocating credit at a below market rate. One could go on with these examples. The corruption that is often used to discredit markets is all too often a consequence of a lack of markets. It has, I think, been persuasively demonstrated that the single most important thing that the United States ever did to reduce corruption was the repeal of prohibition. And once again, what one sees, is that it is the inability to run markets that is the source of corruption, not the opposite.

Second observation I would make is about principles that Resources for the Future has stood for a very long time. It is that advocates of market-based solutions have nothing to concede at the moral level. There is a tendency for these debates to be framed as the practical, hardheaded, slightly amoral market advocate versus the moral, but, perhaps, wishy-washy advocates of a better world. I don’t think there is anything morally attractive about telling people who chose to take jobs working for $1.25 a day that they can’t have them because we don’t want to buy the fruits of their labor, leaving them with the inferior alternatives that result. I don’t think there is anything morally attractive about saying that we need to analyze as we pursue global health, which ways of spending money will produce more benefits, and which ways of spending money will produce less benefits and using the money as effectively as we possibly can. I don’t think there is anything immoral about seeking to achieve a given environmental benefit at the lowest possible cost. Indeed it seems to me the more you care about environmental protection, the tighter standard of environmental excellence that you want to achieve. The more important it is that you pursue that objective at the lowest possible cost, rather than at the higher cost.

And so, there are enormous issues of design. There are enormous issues of how to craft institutions that work well. It is not enough to simply say we’re going to have a market system and let it rip. So, too, was the shambles that was California energy deregulation, making that very important point. But to say that the establishment of market institutions is complex and needs to be done with enormous care is not to suggest that there is any moral superiority to discretionary non-market means of regulation or allocation of resources.

Thirdly, let me make an observation on the global challenge. It seems to me that the challenge here is to manage what I like to think of as a trilemma between three elements. The first element is international integration, the coming together of nations as more trade, more capital, more flow of people and more foreign investment. The second element is sovereignty, the desire of nations to make their own rules. They decide what their air pollution standard is. They decide how progressive their tax system is going to be. They decide what the rules for listing on their stock exchange are going to be and, so forth. The trilemma includes international integration, sovereignty and the pursuit of public happiness, whether it is keeping the air clean, maintaining a fair income distribution, providing a safe workplace or what have you.

It’s actually rather easy to devise a consistent framework for achieving any two of these objectives. Milton Friedman had a clear view on these things. He thinks international integration is terrific. He thinks sovereignty is terrific. And if mobility of people and mobility of firms across international borders makes it impossible to have very progressive taxation or strong regulation, because of competitive concerns, well they’re extraordinarily inefficient anyway and it makes the world a better place.

Pat Buchanan also has no problem with the trilemma. We sure need to preserve our sovereignty. There’s a lot that needs to be done in terms of rules governing America. And what do we need with all the foreigners anyway. He has no enthusiasm for international integration.

There are many, none of whom work in policy positions in Washington, who also have an easy time with this trilemma. They think we should have a global government to set global environmental standards, global labor standards, global taxation, global everything standards and who are prepared to sacrifice sovereignty. None of these three alternatives can command substantial support globally.

The challenge of policy design, I would suggest, is issue by issue, to find the right balance between these three objectives. On some objectives, it will mean more giving up of sovereignty than on others. For example, it is clear that the world will not combat global warming without some set of national understandings with respect to what will be done in different nations that will, to some degree, limit national sovereignty. It is also clear that the most effective approaches will be ones that preserve the maximum sovereignty possible by dictating the objective, but not dictating the means, by which reductions in global gasses will be achieved.

To take another example, what about local pollution problems? It is much less obvious that, with respect to local pollution problems, we wouldn’t allow individual nations to make their own judgments. Reflecting which way the wind blows, there are countries reflecting the taste of their citizens in what the right level of regulation is — sovereignty in the determination of public purpose. Allowing international integration is probably, to a much greater extent, the right way to go.

We could talk about a number of public policy problems. What I want to suggest is really echoing a theme that came up at the end of your last panel. It is that the question of policy design will increasingly be one of not asserting absolute principles but of finding practical and prudent compromises. And that’s what Resources for the Future has been providing for the last 50 years to the great benefit of this nation, and, increasingly to the great benefit of the world. I hope and trust that we’ll be involved for the next 50 years, for we can predict almost nothing. Think about how different a symposium like this would have been if it had been held 10 or 12 years ago. With respect to all the views of the world, we can predict almost nothing with great certainty. The centrality of resources issues, in the way in which economies perform and people live, is something that we will live with for a long time. I would suggest to you that our basic market mechanisms and the question of their perfectibility, and possible improvement, would be with us for a long time. That’s why I’m very glad that Resources for the Future will be with us for a long time as well. Thank you very much.