From our studios in new york city, this is charlie rose. Larry summers is here. He is president of harvard university. He served as director of president obamas economic council. The ecb said they will buy more than one trillion in assets. I am pleased to have Larry Summers back at the table. You were at davos, i was at davos. What was the sense about the economy and the state of the world . The theme was said to be the context. Charlie, it was something intermediate. It was not euphoric but not as dark as it was in 2009 or 2010 at the height of the financial crisis. There is a growing concern about a deflationary psychology, a sense of stagnation. Almost pathologically low Interest Rates. Taking hold in many places. There was an undertow of concern. I think people admired what mario draghi did. They admired it more than they were confident it would be sufficient to solve europes profound problems. That is your position. That is what i believe. I think people were also not 100 certain about any place outside of the u. S. Or the u. S. Growth prospect. They felt better about that than they had at any time earlier. They asked the question i had asked. How long can the World Economy continue to fly on a single american engine. The answer was it did not end up flying that much longer. We headed into recession. We have to be mindful of it. I think we are in uncharted territory economically. Driven by . The problem is the lack of demand, not supplied. Inflation is too low. Not that it is too high. The problem today is not that Central Banks are being too activist. It is that they may have trouble being activist enough. The problem today is theres too much savings and too little spending. Too little investment. It is a very different world then we are used to. Give us an economic professors understanding of the threat of inflation and deflation, or the lack of inflation. The usual view, would have been what we had taught our students until a few years ago it would have been about inflation. That when prices were rising rapidly, it was harder to keep track of things. Interest rates were much higher. Because Interest Rates were higher, people wasted a lot of effort making sure they had funds earning interest and the like. It really wouldnt do for a yard to be 36 inches yard one year and 38 inches the next, having the price level rising at a rapid and changing rate they did harder for people to think and plan. We were best off avoiding inflation. If we just committed and were credible and strong against inflation, we could avoid it. That was really no good that came of inflation. It was always tempting because in the short run, you could boost the economy a bit with inflation. It then it all caught up with you. That is not the opinion today . People still that way. If we had the problem of high inflation, they would have that view. We are in a different world. Independent Central Banks, that institution was conceived to prevent too much inflation. Today, the problem is we do not have enough inflation. If you look at indexed bonds linked to the cpi. You can get a market measure of expected inflation. If you look at europe, japan, or the u. S. Inflation is expected to be below the 2 target. Not just right now. Not just a couple of years from now. Between 2020 and 2025. The problem is we have inflation at too low a level. Because we have inflation at too low a level and because in europe and japan deflation is still a continuing issue what is deflation . It is one prices are falling to theres another thing, lowflation. When prices are rising but rising slower than 2 a year. When you talk about the price of things, we are talking about markets for commodities. Financial markets. The price of products and wages. Economists, they are talking about the price of everything people buy. The price of a dining room table or a shirt. Food. Also the price of taking the bus. The price of taking a vacation. The fees associated with getting a bank account. The fees associated with sending your kid to college or going to the hospital. It is not the price of buying a stock. That is different. It is not the wage rate. It is a generalized price level. The price of commodities. That is an important input. When you have a situation when prices are falling, people say to themselves, why should i buy something now, it will be cheaper . You get a negative psychology where people do not spend. They think things are going to be cheaper next year. Because they do not spend, there is enormous pressure to reduce prices. The more prices are reduced, the more people do not spend. You get a negative kind of psychology and it can be a kind of trap that an economy can fall in. Related in terms of the cost of deflation. In any economy, there are some people who borrow and some lend. It tends to be richer people who lend and poorer who borrow. When prices are falling, when there is not the inflation that was expected, the borrowers are getting poor because they are having to pay and more valuable dollars than expected. The creditors are getting richer. That also operates to reduce spending and cause economic contraction. It also operates to taking from people who are more in need and giving to people who are less in need. It also makes bankruptcies more likely because it is easier to pay back in dollars that are getting less viable than more valuable. That is why this phenomenon of deflation and lowflation are so potentially toxic. They do not just make the economy function a little less well. They run the risk of creating a situation where there is not enough spending or demand. Too many problems in finance. For the economy to be able to employ everybody or produce as much as it could. I want to get to a number of things. You were at the center for American Progress. You talked about inclusive prosperity. A commission. The conclusion was sustained increases in wages and Living Standards are essential. Thats right. We were convened by the center for American Progress to think about progressive agendas to address common challenges like globalization. Technology. That are applying not just in the u. S. But around the world. It was an effort to build on the kind of discussions that had taken place globally in the 1990s under president clinton and then tony blair. I think the biggest difference between then and now is the centrality of inequality as something that is affecting the middle class and affecting the prospects for middleclass growth. If the Income Distribution in the u. S. Was the same as 1979, there would be 1 trillion more in the hands of the lower 80 . 11,000 per family. There would be 1 trillion less in the hands of the top 1 . Largely the top 1 . The other 19 is not changed very much. That would be 750,000 dollars on less per family. There has been a redistribution that has worked to the detriment of the middle class. We have made it worse for the middle class with a set of changes that have come in. Less progressive taxation than we did then. We are investing less in the Public Sector than we did then. Less in the way of protections to strengthen Worker Rights as we moved to a kind of task rabbit economy where people get hired to perform tasks without benefits where the Union Movement has not been supported as strongly as it could have been. There have been a variety of changes beyond the financial crisis. They have exacerbated the inequality in the lack of growth. That is what we call for. We stress, this is an important point, because i think some people are fatalistic and i think that is wrong. There are countries, canada and australia, by focusing on these basic investments and empowering workers, by strengthening education regulatory mechanisms. They have succeeded in having rising standards of living for the middle class in ways we have not been as successful. Should we cut it what they did . Whats we should not copy. Every country has to pursue its own approach. We have a comprehensive agenda. Closing tax shelters. Infrastructure investment in environmental protection. Airports and roads. On the infrastructure, you have heard me say this before. We have a moment when we can borrow money at 1. 7 for 10 years. Currency move print ourselves. If that is not the moment to invest in making Laguardia Airport look like it should, i dont know when that moment will ever come. There are lots of examples. Let me give you one other. It really struck me. I have been using that example about kennedy and Laguardia Airport. Eventually a guy from the Port Authority called me. He discussed the plans we had to fix it. He said some in that was right. He said the real outrage the air Traffic Control system. We in the u. S. Have a air Traffic Control system based on vacuum tubes. Like the oldfashioned television sets. As a consequence, it does not have enough capacity for all the flights. Sometimes they use yellow stickies to the track of all the flights. Apart from the fact that it does not make me feel safe, it means less flights fly and more circling the airport which wastes energy. They are not training any new 25yearolds to fix backing tubes. Eventually the people who know how to make it work are going to retire. We have a lot of fundamental infrastructure investment. Making them is a major source of middleclass jobs. This is something that increases demand, puts people to work. Increases the supply potential of the economy. Takes a big burden off our children. The idea that when we borrow money, that is burdening our children, but if we defer maintenance and allow the government to run down, that is not make sense. Differing maintenance is just as much of a burden as repressing the deficit. What is the consequence of not doing something about income inequality . If you look at the Public Opinion polls, you find confidence in almost every institution has gone down. At its root, that is because most people see that their incomes are not going up fast if at all. They dont have confidence their children are going to live better lives than they did. They are able to see that a very small group seems to be getting a very large fraction of the which breeds a sense of unfairness. Lack of confidence. We get caught in a cycle which is very problematic. People lose confidence in government and business. Because they lose confidence they make it harder for his this and government to do anything. When they do not do anything they lose more confidence. John kennedy was able to ask people, ask not what your country can do for you, ask what you can do for your country. That was after the country had delivered 3 a year increase in Living Standards since the second world war. That was after the interstate highway system had been built. That was after the f h a had created the suburbs. That was after the g. I. Bill had sent a generation to work. The government could call on its citizens because the country had delivered for its middle class. If the country does not deliver for its middle class, it becomes much harder for it to call on its middleclass, whether it is to protect the environment. In response to a National Security concern. Whether it is to look out for the poor, which is obvious he a continuing issue for us. It degrades ultimately the character of our democracy. My conviction has always been, and latin america in other illustrates this, democracy does not just mean government by the people. It has to mean government for the people. The way people judge that is by what is happening to them in their ordinary lives. When they do not feel like they are being protected from large forces, that is when they become disillusioned. I do not think there is any more important issue. How do you create an economy that is better for the middle class, that creates jobs, that enables people to have a better tomorrow than yesterday . There is broad agreement that is the and. There is disagreement about whether framing it that way is it that way is our highest priority. Some people would say our highest priority is to contain growth in Government Debt. That is a perspective. I think our chances of controlling Government Debt are greater if we are able to grow incomes for the middle class. The way to deal with deficits is to grow. That was my argument at that time. Experience has tended to bear it out. Especially with deficits. That is exactly right. Yes, there is now a large number of people talking about the importance of the middle class and recognizing inequality. It will probably be central to the 2016 political campaign. Im an economist, not a politician, but i think that is right. Oil and energy. The new equation in oil and energy. You and other people say it is a perfect time for a carbon tax. What is the impact on shale oil and the action of saudi arabia and driving down the price of energy . A fantastic thing has happened. We are on our way to being the new saudi arabia. Our growth in Energy Supply has change the fundamental allens. Thats why the price of oil has fallen. Whether that can be sustained is a question. We need an agenda that goes with it. If ever there was a right moment to put carbon taxes on for the long run global climate, it is a moment when the of gasoline is lower than people ever thought it would be. If ever there was a good moment to put a gasoline tax in place to fund infrastructure, now would be the time. If ever there was a right moment to eliminate what restrictions made sense, we would put restrictions in the 1970s. We did not want people to avoid the restrictions by exporting oil. That made sense then. Right now, it makes no sense to say the u. S. Can export gasoline but cannot export crude oil. That makes no sense. If we allowed the u. S. To export crude oil, ironically the result would be lower gasoline prices. The oil right now get stuck in texas. Gasoline prices in most of the country are tied to what is called the brent price of oil. The world benchmark. If we allowed will to be exported, there would be more in the world market which would reduce the price in the world market. Would operate to reduce the price of gasoline. Plus, it would create jobs Encouraging Energy production. In the u. S. Part of the right response, in addition to carbon taxes and gasoline taxes, is an emphasis on freeing up restrictions for export. We need to make sure that we regulate fracking and other new technologies in a rigorous way. We need to figure out how to regulate rigorously and also quickly. We have tended to have trouble doing that. We delay things too long. That is a serious problem. There was a huge opportunity before us. When you come down on the Keystone Pipeline . Dont hedge, give me an answer. I have been an advocate of the Keystone Pipeline. What im not sure of, in the current economic realities whether it any longer makes sense economically. Given the other investments that canada has made. Given the changes in the world oil market. I am not sure it is economic to build the Keystone Pipeline. I have supported the Keystone Pipeline because i believe shipping oil around on trucks and trains is a 20th Century Technology and not the last third of the 20th century. We need a satisfactory pipeline infrastructure. The Keystone Pipeline is one part. I dont think people who think it is the be all of the u. S. Economic Development Strategy are right. I wish we had gotten on with it. This is todays wall street journal. Fed flags rate hike for later. Do you agree with janet yellen . I believe the fed should not raise rates until and unless there is clear evidence of rising inflation. Whatever happens to the real economy. I do not think we have yet seen any evidence of rising inflation. If anything, the evidence is pointing to, in the mediumterm, a reduction. Janet yellen is right to say it has to hinge on the data. She is right to say the fed is going to be flexible and respond as events come you read the data different than she does . I dont know. I think we both read it the same at this moment. Im not sure how they will read the data. I would not raise Interest Rates as i thought the economy was overheating because it had grown fast. I want to see the proof in what is happening to inflation before it would be appropriate to raise rates. The reason i think that is if we let the, inflation raise slightly. We have seen it before. We know how to control it. If we allow deflation to happen, that is potentially catastrophic. That is where i would be avoiding risk. On the side of deflation excessively low inflation, that would be the thing i would be most worried about. Greece had an election. We do not know exactly what the new coalition will do. A coalition between right and left. Suppose they say, we demand you renegotiate the debt. You know these people. What do you think the germans will say . Other members of the eurozone . And what should they say . I have been quick goal of the germans for imposing too much a story on the rest of europe. Not providing enough stimulus for europe. The evidence has tended to bear me out. That said, there is only so much load that can be carried. The greeks are making a case for adjustments at least and how much they have to pay on the debt for the next few years. They have a strong case on that. They are making a strong case. I think they have a case to make. They are asked to make too many payments for the next few years. It will hurt their economy, slow down growth, and be counterproductive. They have demands to slow down or eliminate privatization. Another is having new spending. Rejecting eu policy as far sanctions for russia are concerned. The greeks cannot expect there to be flexibility on all of these dimensions. The most important dimension for there to be flexibility is debt payments over the next three or four years. It doesnt make very much difference whether we declare now that the debt is due in 2029 or reduce it. What does make a difference is how much we insist the greeks pay over the next few years. The amount they would be asked to pay under current