 Larry, it's great to be here with you, and I wanted to say to everyone who is here you have made a great choice of how to spend your time. I have been asking Larry questions since I was 19 years old, a student, and he has never failed to offer brilliant answers, whether it was how to reform the economy of the Lithuanian-Soviet-Socialist Republic, how to save the world economy in 1998 or 2008, or, and this is a sign of what a great friend and human being Larry is, what to do when my mother was dying of cancer. So we are all in for a really wonderful session. I'm a journalist, so I pulled a few people beforehand and I said, okay, what should I ask Larry? The top of the agenda, Larry, was people wanted to know, given your experience in the Treasury with Bill Clinton, in the White House with Barack Obama, what is your view of the U.S. economy right now, and what advice as someone who has been an insider but is a little bit on the outside, and the president is re-elected so you can speak your mind, what should he do? Look, I think people have counted the United States out before. John Kennedy died believing that the Soviet Union surpassed the United States by 1985. Every issue of the Harvard Business Review in 1991 had a version of the joke that the Cold War was over and Japan had won. And I think people make that mistake now with respect to our economy and with respect to our politics. I think if we seize the moment, we have huge and unique opportunities in the world. This is a moment for broad renewal that corrects all the deficits that we have. Yes, we must put our finances on a sustainable basis over the next several years. The budget deficit is not our only budget deficit. Everybody in this room has been through Kennedy Airport. No one, I suspect, is proud to think of it as the gateway to the greatest city in the greatest country in the world. If a moment when the federal government can borrow money at negative 75 basis points in real terms for 10 years and construction unemployment is well into double digits is not the moment to do something about it, I don't know when that moment will be. This is the moment to renew our health care system. And we're on the way with respect to assuring access. But we're not everywhere we need to be in terms of containing health care and costs. This is the moment when we have a profound deficit with respect to the way in which we are providing opportunity to children in the lower half of the population who are falling further behind in terms of education and who are even falling further behind in terms of what's most fundamental death rates and how long they live. And this is the moment when we can correct that deficit. So if we can in our public life, in our corporate life, and in our individual life, we can each turn our attentions more to the future and away from the press of the present. This can be a profoundly important moment for the United States and for its role in the world. I want to follow up on your starting comment about the deficit. You are an alumnus of Bob Rubin. It sounds as if maybe you think we shouldn't be emphasizing the deficit all that much. Are you moving into the Krugman camp on this one? I don't know that I'm going to do camps. But look, in 1993, here's what the situation was. Rural costs were really high. The trade deficit was really big. And if you looked at a graph of average wages and the productivity of American workers, the average productivity in the economy, those two graphs lay on top of each other. And so bringing down the deficit, reducing capital costs, spurring investment, raising productivity growth was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton. That was the advice Bill Clinton followed, and they were right. Today, the long-term interest rate is negligible. The constraint on investment is lack of demand. Productivity has vastly outstripped wage growth. And the syllogism that reduced deficits spur investment and you'll get more middle-class wages doesn't work nearly the same way. Now that doesn't mean that the deficit is inconsequential. It is central to prudent defense. If you don't get the deficit under control, at some point we're going to have a macroeconomic catastrophe. But whereas in 1993, a focus on the deficit constituted a compelling growth strategy when you start with today's interest rates, when you start with today's gaps between productivity growth and wages, deficit reduction is necessary, hygiene to protect against economic disaster. It does not constitute the basis for a satisfactory growth strategy. And that's why the emphasis on spurring the right kinds of investment, when people talk about infrastructure, yes that does mean Kennedy Airport, yes that does mean no potholes. But it also means why do I get the same test four times in the course of six months? Because medical records take place on paper folders and the average doctor's office has less technology than the average 7-11. That's a task of private infrastructure. So is broadband. So is much else. So that's why growth strategy today, when the interest rate is already so low, when you're in a knowledge economy, can't just be about removing the obstacle of government debt. So whether you're a reporter in the room or watching, my advice as an editor is that's a very good snap headline right there. Following on from your focus on growth, there is an argument which I hear more and more people taking seriously, I think advanced maybe most boldly by Tyler Cohen, that maybe growth, maybe innovation, maybe this productivity growth you were talking about is over. Because he puts it the low hanging fruit has been pipped and we're kind of in this stagnant period. Do you buy that? Not a bit of it. Everybody in this room was required to turn off their device a few minutes ago. The device you were required to turn off, here are three things about it. It had more computing power than the entire Apollo project. It gave you better access to information than being able to walk freely around the Library of Congress. There's more, all the information is there and it's a lot better cataloged on your device. And in terms of reaching people all over the planet, you would trade John Kennedy's White House communication system even up for your iPhone. And that was an inconceivable thing 20 years ago and five billion people on Earth are going to have it five years from now. So I don't see how anybody can say we are not making fundamental and profound progress. And one other thing, the profits of doom can't have it both ways. You cannot simultaneously say that software is eating the economy, 3D printing is taking away manufacturing jobs, the Google car is taking away driving jobs, there's self-checkout in every retail establishment so there aren't going to be any jobs for regular people anymore. And say nothing's happening that's important for productivity growth. You just can't say both of those things. And as between those two if you want to have a dystopian idea and think about a problem, I think the much more fundamental idea is what technology is doing to the middle skilled and what that's going to mean for the inequality. And the risk is that you're going to have designers and devices who are going to combine to produce fantastic wealth for designers with less for everybody else. And how are we going to manage that as a society? That's a problem and that's a very serious problem and I think that's probably the best single way to think about the inequality challenge. But I think that's a much more serious problem than the idea that somehow there's nothing new that is augmenting anybody's capacity here. And one other thing, I see my friend Francis Collins sitting here and he knows infinitely more about this than I do. Probably the wisest aphorism I learned in graduate school was my teacher in the late Rudy Dornbush who used to come to Davos saying to me that things take longer to happen than you think they will and then they happen faster than you thought they could. He mostly meant that with respect to unsustainable financial policies and fixed exchange rates and stuff like that which obviously has some resonances for the moment. But I think it is also very powerful with respect to technologies. It was famously observed in 1987 that the computers were everywhere except in the productivity statistics and then you saw what happened. And I suspect that with respect to the life sciences, the set of things that come from genomics, the set of capacities for augmenting human capacity, I think are just going to be staggering. Ponder this, through the 20th century for a century, human life expectancy went up three months every year and there is no evidence that that trend is slowing. And some reason to think that it might accelerate and the best view as I understand it, although this is debatable, is that probably healthy life is going up at least as rapidly as total life. So I think we've got huge potential for betterment and just as I think my grandchildren, just as I think as my grandparents envy the kinds of lives, if they were alive, would envy the kind of lives we get to lead, I have very little doubt that we will envy the kinds of lives that our children and our grandchildren get to lead. And look, one other thing that suggests this progress is going to continue. It is a slightly freaky but actually compelling finding of social science, known as the Flynn Effect, that human populations almost everywhere get smarter every year, that average IQs go up two or three points a decade. And if you kind of don't believe that, just turn on the leading TV show of my childhood, the Beverly Hillbillies, and then turn on a leading TV show of a few years ago, like West Wing, and ask yourself what intellectual demands they place on the watcher. And you will see that. So I think the progress in understanding and comprehension in so many things is staggering. And by the way, I think that's an important part of why, as my Harvard colleague Steve Pinker has demonstrated, there's with fluctuations a trend towards much less violence in the world. And that's very much at the heart of what the president talked about in his inaugural address when he spoke of Selma and Stonewall, the widening circle of inclusion, tolerance, and opportunity. We could make huge mistakes. We could blow it. There could be reversals. But fundamentally, I think, long-term progress by free and freer societies is about as secure a bet as there is. Okay. You're a cheerleader. And when I go home, I'm going to tell my kids Larry Summers says they are smarter than I am, which they will be very happy to hear. I'm sure Tyler Cohen is watching this. So consider the gauntlet, throbbed Tyler. I want to get your blog response. You touched Larry on another issue that I know you think is very important, which is this issue of inequality and the shape of the economy. My sort of journalistic hyperbole about kind of the dystopian possibility is maybe we're going to be divided into a society of a few geniuses who invent Google and iPhones and everybody else who gives them massages. How much are you worried about the economic forces pushing us in those directions, the gap that we're seeing opening up between productivity gains and wages, and what should we do about it? I think it's the right thing to worry about. And I think there are troubling trends in the direction that you suggest, Christian. I think you're absolutely right that the system will, as economists like to explain, the system will equilibrate at full employment. But maybe the way it will equilibrate is that full employment is there'll be specialists in cleaning the shallow end and the deep end of rich people's swimming pools. And that's a problematic way for a society to function. I think we've got to think very hard about making sure that there's competition in the activities where the leaders are leading so that that competition, that success manifests itself in lower prices and not just in higher profits. And so making sure there's competitive markets is there is, and the reduction and elimination of barriers to entry is I think something that is very, very important. I think we do have to look at fairness in the way our tax systems function. Some of that is about tax rates. Some of that is about technical tax provisions, which are boring to listen to me talk about but are hugely important that don't even rise to the level of being tax expenditures. The tax expenditure table but mean that the largest part of the accumulation of wealth and the passage of wealth from generation to generation passes almost with no taxation. And whether it's devices for avoiding the estate taxation or whether it's the basic fact that the creation of fortunes takes place in the form of capital gains, which largely escape taxation and death, there is a serious tax reform agenda that has the potential to be very important that's about provisions that nobody much thinks about. The carried interest provision that people have talked a lot about is the tip of a very large iceberg of stuff like it that lies under the surface that ultimately I think is an agenda that can make an important difference in terms of equality. And the other part of this though is education and the development of both the intellectual and the character logical traits that are necessary to have a distinctive niche in the world that is important if people are going to be able to maximize their opportunities. The most important advice I always gave young people during my time as president of Harvard was figure out something you care about and can be good at. Don't make yourself fungible. If you're doing something that 50 other people are doing because it's more comfortable for you to be part of a pack, the rewards to that are going to steadily diminish because you are going to be fungible. Figure out something where you've got some distinctive niche and we're going to have to figure out in our educational systems how to help more and more people discover those kinds of attributes. You've touched Larry just now on that answer on capital gains, on treatment, tax treatment of carried interest. That's part of this bigger issue of financial services, how they are functioning in the economy. As you know, there's a very lively debate. Has re-regulation gone too far? Has it not gone far enough? There's been a loosening of Basel III. Where do you come out on all of that? Look, in 30 years of my, 25 years of my adult life involved studying and then being near this stuff, we had the 1987 stock market crash. We had the Brady plan to resolve the Latin American debt crisis. We had the SNL crisis. We had the Mexican financial crisis. We had the Asian financial crisis. We had Russia and LTCM. We had the internet bubble. We had Enron and the problems in the high-yield market. And then we had the big crisis. And that works out to once every three years a financial system whose function is supposed to be to distribute and manage risk ended up being a source of risk that hugely damaged the lives of hundreds of thousands, if not millions of people. And so there is an imperative to have this be under better control than it historically has been. And certainly the errors historically have been of insufficient attention to risk and to its cascading consequences in both the private and the public sector. And so we've got to make very sure as we implement these rules and as we consider what comes next that we are on the side of containing risks rather than on the side of allowing them to go unchecked. It is an enormously complex thing to do effectively and there is a risk that if you don't know what you're doing you can be counterproductive with the actions that you take. But this requires enormous and disinterested attention and I have to say as one who's not especially given to populist instinct the four and a half lobbyists at a cost of about a million dollars per member of the House and Senate who worked Dodd-Frank for a year. Four and a half members per member of the House and Senate does give one some pause about how that process was working. Now the great danger is that you go with that to the idea that an idea must be good if a bank doesn't like it. And that's also not a valid idea but I think we need an enormous amount more than we have had to date of fundamental thinking about how to keep the structure of the system stable. And the clearest evidence of that is something which is only addressed to a small degree in everything that's happened. Which is if you look at Bear, Lehman, Wamu, Wachovia, Fanny and Freddie, AIG. Every one of them was judged by their regulator roughly an hour and a half before they failed. A month before they, not an hour and a half, that was said for effect. A month or two before they failed to be very well capitalized according to the concepts of capitalization with which we were operating. And that suggests that merely increasing capital standards in the way we have thought about capital may not entirely nail this problem. And look, it is precisely because I have so much admiration for Jamie Dimon and some of his colleagues at JP Morgan that the saga of the whale is, it seems to me, so troubling. Because they really did have strong, they had every incentive to not have that happen, really every incentive to not have that happen. And if they couldn't make it not happen, you've got to sort of wonder whether a group of civil servants watching intermittently are how and in what ways they're going to be able to contain risks. I think this needs a lot more reflection than it's received. I am sure that the combination of the fears engendered by what has happened and the steps that have been taken have operated in the direction of reducing risk. But this will take a lot. This is not a challenge for a day or a week or a year. This is a continuing challenge that needs to be managed. Any hints on in which direction the answer lies? Is it improving the type of capital? Is it breaking up these institutions? Is it around liquidity? Liquidity is part of it. Reliance on markets and automaticity is another part of it. Reducing interdependence in any situation, anytime you have a situation where it's good to be first to the exit, you have the potential for substantial instability. In general, I'd be looking not as an alternative to regulation, but as a supplement to a little more looking at signals that are coming from the market as a sign of when there's potential for serious problems. Okay, our time is almost running out. I'm going to try to squeeze in two more questions, so let's do them at a speed rate. Economists often feel jealous of natural scientists like physicists because they can do actual experiments in a laboratory. But the global economy is a laboratory of sorts, and we're seeing some very different approaches in countries like Japan, Britain, the U.S. to some similar challenges. What is macroeconomics learning from this? Look, I think three years from now, people are going to be able to look at what's happened in Japan and look at what's happened in Britain and learn something. If Japan has worked its way into hyperinflation and Britain is thriving, it's going to be impossible for Paul Krugman and other Keynesians to keep talking the way they have talked. Conversely, if Britain is stagnant and Japan has turned around after 20 years of stagnation, those who dismiss the idea of stimulus and believe that austerity is the answer are going to have a much more difficult time leaning their views. I try to apply a discipline to myself, which I guess I think journalists should apply to everybody who thinks and writes in this stuff. What could you see in the next several years that would lead you to think you'd been importantly wrong and would cause you to think you should change your mind? I think that people should think about where they are on what's happening in Britain and Japan and that's got the potential to be a powerful, not perfect in a variety of things that aren't controlled for and the like, but I think that's got the potential to be a powerful test. Okay, we have you on the record. Where are you placing your bets? I'm going to go somewhere in between. I think austerity is not the route to prosperity in any country where the interest rate is near zero, not ever. The right kinds of expansionary policies carried out with some prudence, I think, can be very availing. That's my reading of the Recovery Act in the United States. It's not yet clear just where Japan is going to go, but I think they have the prospect, if they manage this right, of from a very low baseline producing some significant improvement in performance. Okay, I'm going to take you up on your challenge. Where with hindsight do you see the biggest intellectual mistake you've made and how has that changed your thinking? Well, it's like the old interview question, what's your biggest flaw? I'm really too conscientious, gosh. So I could do one about where I failed to persuade people. That's a classic one. I'll go back some distance. I think in retrospect, and it was a consequential thing, as we addressed Indonesia in the 1990s, I think we insufficiently understood that what we interpreted with some legitimacy as supporting resistance to corruption was, as it was implemented on the ground, a threat to an ethnic minority, the Chinese population that had a very large amount of money in a small minority, and probably generated more capital flight and instability than it did confidence by some significant margin. And I choose that example because a distinction Bob Rubin always drew, and it's one that I think is very important, is anybody who makes a lot of choices makes lots of choices that expose, they wish they had made differently. You know, if you play poker and you choose not to draw to an inside straight, you know, every so often you made a mistake by not drawing your insight. I wish you had drawn to the inside straight, but you did the right thing. That's a case, and I think this is always the right test to apply. Not do you wish exposed you've done something different because that'll always happen if you make decisions in an uncertain world, but could you have made a better decision with the basis of the information available? There's a reasonable argument that we in the IMF could have made that decision in a better way. Okay, last question. We've run overtime, but I hope you'll forgive me for taking just a couple more minutes and just turning to a personal side of things. I have watched you now in a number of different incarnations, and what I have been struck by is consistently you have remained incredibly intellectually engaged and intellectually curious, both about the challenges of your particular job and just also about what's the new new thing, what's the frontiers of thinking. You've never kind of stopped. How do you keep on doing that? I guess it's sort of, I'm not sure that it's true. I'd like to think it is. I guess I think complacency is the enemy of improvement. And you just, I just don't think there's anything that doesn't get improved on by thinking about it hard and challenging its premises. And I guess it's always been my sense before I knew the phrase that what's most important in the world is probably the idea of, was probably the authority of ideas rather than the idea of authority. And it seems to me that fostering that wherever one is is a never believing that because I said so, or because someone said so constitutes a good reason for doing something, is the way in which you make the most progress. I think ultimately it's from ideas that the world moves forward. And as I tried to explain before, I think the world has moved forward immensely, and I think it probably will move forward immensely in the future. Okay, well thank you. That's a rousing concluding note. Plus we have to be optimistic about human progress and America. We are going to hold you to the Britain versus Japan bet. We'll come back to that. And if you see Larry around later on, my unasked question you can ask him personally is his personal health and fitness secret. Because he is looking sleeker than I have ever seen. So thank you very much. I've got to do this for a friend. Dr. Mark Hyman is sitting in this room somewhere. And there he is, right there in second row. We'll be at Davos. My wife dragged me more or less kicking and screaming to see him. I did what he told me. And there has been progress in there being less of me since that took place. I had a stock joke that I used in all kinds of settings, you know, how much should we improve American education, people would say, or how much should we reduce the budget deficit. And I'd always say, you know, that's like asking how much weight I should lose. I don't know exactly, but there's very little danger that I'll lose too much. That's still true. But it's less true than it was at the various times when I made the joke. Thank you.