FEBRUARY 2015

A recipe for
economic growth

Former US treasury secretary Lawrence H. Summers believes

institutional reforms and significant investment are required to
push the world economy forward.

At a time of historically low interest rates and nervousness about the outlook for global economic

growth, why arent governments investing more? In this interview with McKinseys Rik Kirkland,
former US treasury secretary Larry Summers urges policy makers to invest aggressively in
everything from infrastructure to education. Summers also believes that in a world of rising inequality
and rapid technological advances, there is going to be a need for more progressive taxation. An
edited transcript of his comments follows.

Reforming our institutions

Confidence is the cheapest form of stimulus. Governments need to recognize that fairness
and inequality and sharing the benefits of growth more widely are crucial issues going forward,
but they need to do it without invoking a politics of envy. That can be very debilitating to
business investment.
I think growth probably is going to be slower in terms of aggregate GDP over the next 50 years than
it has been over the last 50 years. Weve already seen some trend toward decline and, if I had to
guess, that trend will persist. But thats a reason why weve got to do all we can.
For example, if were not going to have as much quantitative improvement to the labor force, were
going to need qualitative improvement. That goes back to issues of educationto issues of the

transition from school to work. Were also going to need a much greater effort at innovation.
Science has more promise today than ever before, yet the fraction of our resources being devoted
to science has gone down in the United States. Thats not how it should be.
Theres plenty of work in our society that needs to be done: think about healthcare, think about
education, think about taking care of the aged. But whether weve got the social institutions that
will permit that work to get done is going to be a very large question. Were going to have to think
in very fundamental ways about how our society changes in response to technology, just as we
have seen our society change in very fundamental ways because of what came about in the
Industrial Revolution.
Were going to need to do more to protect people from change. Its going to be rarer and rarer for
people to spend their whole lives at a single employer. Employers are going to be less and less the
source of social insurance for people, and thats going to need a larger public role. Were probably
going to need a larger public role to accommodate the fact that more of our economy is going to be
in health and education than has been the case traditionally. I suspect in a world of rising
inequality, theres going to be a need for more progressive taxation as well.

Investment, investment, investment

We need to focus on raising the demand for capital and stimulating investment. That means more
public-sector infrastructure. If a moment when we can borrow money in the long term at well
below 2 percent, in a currency we print ourselves, is not the right time to fix Kennedy Airport, I
dont know when that moment will ever come.
But this is not only a public-sector investment issue. Taking oil around on trains is a 20th-century
technologyand not the last third of the 20th century. We need a far greater pipeline
infrastructure than we have now; we need a much more satisfactory broadband architecture than
we have now. We need a commitment to investment on a large scale. It is absolutely essential to
protect the environment, but that is no reason why basic permitting decisions should take years
and years to make.
We need to recognize that theres a great deal that needs to be regulated in the financial sector;
there are important problems that have not been resolved in the financial sector. But even as there
are important problems that arent resolved in the financial sector, we need a more satisfactory
flow of credit for housing, a more satisfactory flow of credit to small and medium-sized businesses.
Thats a particularly important issue in Europe.

So its the promotion of both public and private investment for growth that I believe is crucial if
were going to push the economy forward.
Lawrence H. Summers is the Charles W. Eliot University Professor and president emeritus
at Harvard University. From 1999 to 2001, he was the US treasury secretary under President Bill
Clinton. From 2009 to 2011, he was the director of the US National Economic Council under
President Barack Obama. This interview was conducted by Rik Kirkland, senior managing
editor of McKinsey Publishing, who is based in McKinseys New York office.
Copyright 2015 McKinsey & Company. All rights reserved.