Harvard is some 360 years old and has always had a tradition, going back to its founding, of not wanting to be an ivory tower but of wanting to be a university that teaches and develops knowledge in ways that contribute to making the world a better place.
The instantiation of that commitment over these last 35 years has been the Kennedy School of Government, which draws its strength not just from the superb research and teaching of its faculty, but also from a commitment to remain connected and relevant. Under its terrific new dean, David Ellwood, the school is trying hard to do just that.
This program – which brings new members of Congress together, gives them a chance to interact with each other, and exposes them to people with some relevant experience – is an important part of that commitment. So we are very glad that you are here and grateful to you for coming.
What I thought I would do this morning is offer you, if I might be so presumptuous, three pieces of advice for your time in Washington, based on what I had a chance to observe during my eight years at Treasury and my time working with many members of Congress. And then I would like to offer three observations on the economic issues facing the country.
Your Time in Washington
First, decide what your niche is as a member of Congress. Almost everybody in Washington and almost everybody in most leadership positions spread themselves too thin. You are a member of Congress and the scarcest resource you have is the 12 hours or 14 hours a day that you’re going to be able to work. And you can’t be everything.
If you decide you want to be one of your party’s two leading experts on housing policy, you can develop that expertise. If you decide you want to be one of your party’s experts on housing policy and also be an expert on Rwanda, you are actually unlikely to succeed in being a major respected expert in two areas during your early years in Congress.
You can decide, if it’s what you decide you want to do, that you are going to be one of those key members of Congress who is a swing vote, who takes a centrist position, who is friendly with the other party, and who works to cut the deal on difficult matters near the middle. Or you can decide that you’re going to be your leadership’s best friend, ready to defend your leadership’s position on any issue in a very vivid, clear way that will come through in the press. If you decide you’re going to be both, you will end up being neither.
You can decide that you are going to be the best provider of constituent service and the best advocate of local issues that your district has ever seen. But if you decide that, you’re going to have to make a continuing commitment to do so, you are going to use up a very substantial fraction of your time and you are going to be a smaller player in your caucus as a consequence.
So there are many different kinds of successful careers in Congress, just as there are many different successful animals in the jungle. But the people who are most successful are the people who find a way to reflect on what it is they want to be, what it is they want to do, and what it is that, after they’ve served five terms, if somebody asks what was Congressman Smith about, they know the answer to the question.
And if you think the answer is, he was a great congressman who was involved in all national issues, did a superb job in serving his district, and was a trusted friend to members of both parties, that means you haven’t decided what kind of congressperson you want to be.
Different people here will make different choices, but I would predict that the people who define a role for themselves will be the people who have the most fulfilling kind of experiences and feel that they have served most effectively.
Second piece of advice: you will be not much better and not much worse than the people whom you hire. This is something that I learned when I was at the Treasury Department and something that I’ve learned here.
There is on the order of eight to 10 times more that your congressional office needs to do as one person is capable of doing in the course of a work year. Most of what your office does, most of the constituents who interact with your office, most of the letters that are sent out under your signature, most or many of the votes that you cast, and a significant number of the statements that you make are not, in fact, going to be authored by you. Or if they are, you are going to be leveraging yourself much less effectively than most of the other members of Congress.
That means who you have working with you and the way in which you work with them is going to be central to your success. While I don’t agree with the secretary of defense on a number of things, he has said one thing that I think is very wise. He said A’s hire A’s and B’s hire C’s. It’s a very important principle in life.
The most important decision that you have already made, or will make in the next three months, is who are going to be the two most important people on your staff, and whether the two most important people on your staff: (a) are going to be effective, (b) are going to be people whom you will trust and listen to and who will tell you when your instinct is wrong, and (c) will remain loyal to you, which in turn will depend upon how you treat and regard them.
Remember, you have the satisfaction of taking the oath of office. You have the satisfaction of being well-known in your local community. You have the satisfaction of joining a very elite group, the members of Congress of the United States. Your staff have the satisfaction of working for you.
So it is terribly important to recruit the best people that you can and then cause them to feel empowered and involved in everything that you do, because at the end of the day, you will not be much better or worse than the staff that you have while you’re in Congress.
My third proposition involves a balance and it’s not unrelated to the first proposition. My father once said something to me about someone that stuck with me. Of this person, my father said, “He believes that he is indispensable, but he is not willing to put the proposition to a test.”
There is a huge tendency for many of us, particularly when we first start out in these kinds of positions, to believe that the caucus just won’t be the same without us. The reception that evening just won’t be the same without us. The world will stop turning if we don’t attend a funeral in the district. There is no alternative but to participate in the social event of a certain kind that we have been invited to.
If you run yourself ragged to the point where you are not yourself, your family does not recognize you, and you are not relaxed and happy with what you are doing, it’s a terribly short-sighted thing to do, because you won’t actually be very good at doing your job as well.
This is really easy advice to give. It’s actually much harder advice to take. I’m better at giving the advice myself than I am at taking it, and I can hear a little snickering from my staff at hearing me give this advice. But it is very much worth thinking about.
You’ll find in every walk of life – and I’m sure you found it during your campaigns – that many of you are here because you projected a sense of calm, positive happiness and control through the course of your campaign, more effectively than your opponents did. That’s going to be a very important asset for you going forward.
You’re going to be pulled in a thousand directions and you’re only going to be comfortable dealing with those tugs if you get used to the idea that sometimes you’re going to say no to tugs on you that feel very important.
So, remember you’re not indispensable. Remember that your people are your most important choices. And figure out who you want to be. This is my general advice on some elements of succeeding in careers in Washington.
Reflections on the Economy
The economy. Here’s the good news. You really wouldn’t want to be a policymaker for any economy other than the United States more than you would want to be a policymaker for the United States.
For some set of reasons – probably at root having to do with an underlying dynamism driven by the capacity to adapt to new technology – the basic capacity of the American economy to grow at this point in the world appears to be substantially greater than the capacity of any other high-income economy.
Of course, Japan and China, where standards of living are 10 percent of American standards of living, are going to grow more rapidly, but they’re going to grow by catching up to things that we know. But if you compare the United States with industrialized economies, for now it looks like we are extraordinarily strong. And that is a major source of our strength.
I used to joke during the 1990s that the United States was the only country where you could raise your first $100 million before you bought your first suit in order to start a business. That captures an important truth about what’s happened in information technology that has led to the creation of great fortunes.
So while there is much to be concerned about, it’s important to begin by recognizing that most of the world, where either people are poor, growth is sclerotic, or both, would regard our problems as relatively high-class problems. That said, what do I worry about? There are three things I worry about.
First, low national savings and enormous dependence on foreign debt. There’s a number that economists like to calculate and this relates to Stan Collender’s discussion of the budget, which follows my talk. It’s called the national savings rate.
The national savings rate is the amount that we, as a country, save. It’s the saving of all the households plus the profits that aren’t paid out of all the corporations less the borrowing that the government does. It’s the pool of American savings that is available to invest in capital investments in our country that is financed domestically rather than being financed from abroad.
The national savings rate through the 1950s, 1960s, and 1970s was 8 percent or 9 percent in the United States. It fell during the 1980s. It reached a low in the early 1990s, when we were thought to have a budget crisis, to about 3 percent. Then with the progress that was made in reducing the budget deficit during the 1990s, the national savings rate rose to about 6 percent.
The national savings rate in the United States today is fluctuating between 1 percent and 2 percent. That is to say, of every dollar Americans as a people are earning, we are consuming at the individual or government level between $ .98 and $ .99.
What does that mean? Insofar as we want to invest in new capital equipment, we either have to not invest or we have to borrow very substantially from abroad. We have a low investment rate. Our investment rate has fallen by about one-quarter over the last five years. And we are borrowing from abroad at an unprecedented rate.
Some of you will have heard about the major current account deficit/trade deficit problem that we had in the 1980s. It was about 3 percent of GNP. Today we’re borrowing close to 6 percent of GNP from abroad.
Now if you think about household borrowing, or if you think about a business borrowing, there’s good borrowing and there’s bad borrowing. If you’re a growing, thriving business and you’re mortgaging a new warehouse, you would tend to say that the borrowing was a source of strength. If you’re a household and you went and got another credit card to keep it all going, you would tend to say that that was unhealthy borrowing.
Something similar applies at the level of the country. So you can ask the question, where is our borrowing coming from? Investment’s down, consumption’s up. That tells you that the borrowing is for consumption rather than for investment.
Investment in export-oriented sectors, manufacturing and tradable services, is down. Investment in real estate is up. That tells you that whatever we’re investing in when we are investing is not in the kinds of investments that give us the capacity to export and pay back the debt.
And here’s the third thing. The financing is not coming from private investors who think the United States is a profitable place to invest. It’s coming from foreign governments.
Of the $550 billion a year that the United States is now borrowing – it varies a little bit from year to year – roughly $350 billion a year is being lent to us by foreign central banks, principally in Asia. Now one could argue that a kind of balance of financial terror will prevail, that they like to lend us the money because it keeps their currencies at a level where they’re able to export to us, that if they were to start selling their bonds it would be terrible for them because then their bonds would go down in price, so why would they want to sell them, and so we shouldn’t worry.
One can make that argument. That argument has held for a while, but it’s probably not going to hold forever. As Herb Stein, who was a prominent Washington economist for many years, said, things which can’t be sustained aren’t. Borrowing on this scale has that character.
What are the nature of the necessary adjustments? As a country, we’re probably not going to stay the world’s greatest power if we’re the world’s greatest borrower. We’re probably not going to have as healthy an economy in the next 20 years as we had in the last 20 if there’s essentially no capital available for investment that’s financed domestically.
So a central challenge for the next administration and Congress is this: finding ways of increasing national savings and then finding ways of working with the rest of the world to assure that as we increase national savings and rely less on imports, foreign economies continue to grow in a healthy way so that they’re able to continue to accept our exports.
What are the elements? One element has to be reducing the budget deficit. A second element has to be finding ways to increase personal savings, the savings of households, which have plummeted over the last decade.
The second economic challenge concerns inequality and, in particular, inequality of opportunity. Here’s something I feel strongly about as the president of a university.
As I said, we have enjoyed terrific economic growth in this country in the last 20 years. But the incomes of the top 1 percent have grown about 10 times as rapidly as the incomes of the median family. Now I think that’s good. I don’t begrudge that. I think that in the process, we’ve had enormous entrepreneurship that has done an enormous amount of good.
But what’s more disturbing – and the data on this are not altogether clear because it’s hard to do this study – is that it appears the correlation between the incomes of fathers and their sons or between mothers and their daughters has gone up. That is to say, the children of the successful are more likely to be successful than they used to be, and the children of the less successful are more likely to be unsuccessful than they used to be.
Indeed, if you look at the gap in the chance of going to college between children in the lowest part of the income distribution and children in the highest part of the income distribution, it’s gone up. Of course, that’s in part because children from the high-income distribution are more able on average than children from the lower-income families, but as one observer put it, the brightest poor kids are less likely to go to college in America today than the dumbest rich kids.
This comes at a time when education is becoming much, much more important to any kind of success in life. It used to be that there were any number of CEOs who hadn’t gone to college. It used to be there were people in all kinds of fields who hadn’t gone to college. That’s very substantially diminishing.
It seems to me that the question of not just inequality but inequality of opportunity is a central one, in addition to the question of the accessibility of higher education at a point when it’s becoming more and more a passport to success.
We’re fortunate at Harvard. We’ve got resources, frankly, that other people envy. We’re just lucky. So we were able to do something I think quite significant about this. We announced that for any family with an income under $40,000 we would expect no parental contribution. We’ve sent a set of student recruiters out across the country recruiting kids from disadvantaged families and we’ve established a summer program for kids from disadvantaged backgrounds that works with them in 9th grade, 10th grade and 11th grade to give them a chance to prepare themselves, even if they’re at a weak high school for selective higher education.
There are other things like this going on at a number of universities, and I think it’s a very important thing. But it’s a very important public responsibility as well. I hope that while it’s inevitable that there will be and there should be disagreements between the political parties on questions relating to redistribution, inequality, and entrepreneurship, that this question of equality of opportunity – which I think is actually central to the idea of America and which I think almost everybody accepts as an important objective – be very seriously considered in the years ahead.
The third thing I want to do is just say a cautionary word about the question of international trade and competition in the new global economy, issues where you will be under the most political pressure to take positions that are – at least in my view – are irresponsible from the point of view of the country.
There is no question where the short-run politics lie: saving jobs in the district, blaming the foreigners, standing up for America, and not letting the businesses go abroad. If I were your political consultant, there’s no question what advice I would give you. I’m realistic enough to know that you don’t get to do anything for America if you’re voted out of office. Therefore, you need to accommodate that pressure somewhat.
What I would only tell you is that the great fallacy of international trade is that everybody sees the costs and exaggerates them, and nobody sees the benefits. How many people are there who, in fact, were mediocre guys doing a mediocre job at a mediocre company, who lost that job and then say it was the great sucking sound to Mexico or China, whether that was exactly true or not? Think about that.
Then ask yourself how many people, when they were able to buy twice as many toys for their children at Christmas because toys costs less because of international trade, said thank you very much China WTO agreement for all that I was able to do at Christmastime? How many people who actually weren’t very good at their jobs, who got promoted because there was a surge of export orders and they were there and somebody had to do the job and so they got promoted, ever said thank you very much international trade for that?
There is an enormous human tendency to internalize credit and externalize blame, which leads to a set of perceptions of international trade that are quite incommensurate with the reality. Is this a big deal?
Historians argue about this a lot; they don’t really know and they will probably never know. But if you ask what was the darkest period for humanity, perhaps ever, certainly in the last century, you would say that it was the period from the late 1920s to 1945. There were many, many causes of the Depression and many, many causes of the Second World War, but if you look carefully, the imposition of tariffs, the pitting of nation against nation, the disintegration of the concept of a global economy and all that followed from that was a very important part of what caused those problems.
So I would just urge you to recognize that there are very big stakes in trade and what is convenient and popular to think can also be somewhat dangerous on these issues, and to strike your balance in a way that’s attentive to that.
Thank you very much.