US will have to save more, buy less, says Larry Summers

We caught up with Larry Summers, Obama adviser (and former Treasury Secretary under Clinton) as he prepared to speak to graduates of his alma mater, Harriton High School in Rosemont, last night.  A partial transcript:

(You're back in Washington as Obama's economist. How's it different from your time as Treasury Secretary under Clinton?)

...The biggest difference is the magnitude of the problems we're facing.  Under Clinton, I was involved in addressing financial problems in other countries. The difficulties in the financial system and the sharp declines in output that President Obama inherited are are happening in the United States. That gives it a very different feel...

President Obama is a remarkable man to work with. He has an ability to stay completely calm and cool in making all the decisions he has to make.  He is incredibly intelligent and has a great seriousness of purpose... He has a wonderful sense of humor, including teasing me about my attachment to probabilistic thinking – an approach I began to learn under my parents' roof and here at Harriton.

(As a former Treasury Secretary yourself, how is your working relationship with Treasury Secretary Tim Geithner?)

Tim and I work very closely together, for example on the task force on automobile companies and in developing a strategy to reform the financial system to reduce risk and increase consumer protections.  Tim is as principled as anyone who's ever worked in government...

(What do you mean, principled?)

Being principled means having an absolute unwillingness to do the expedient thing for a good press story for one day. Being principled means you do the right thing.

(Do you see signs that the markets are improving?).

It's not just the markets.. The underlying economy feels better now than three months ago.  If you look at the statistics on the confidence of consumers, for example. We're still nowhere near where we would like it to be. We still have a long way to go. But three months ago it felt like a ball rolling off a table That's certainly not the sense today. The statistics are now much more mixed.

(Does that mean lower expectations for Americans, a lower standard of living?).

No, a higher savings rate can still go with a rising standard of living as long as income is growing.  I believe that people are going to have a higher savings rate than they did historically and that they'll be better prepared for retirement than Americans have been in recent years.

(But doesn't more savings mean less consumption?)

Yes. But the quality and innovation of the American workforce are better than any other economy in the world. In that context we can expect to cointinue to enjoy increases in the standard of living. I have no doubt my children's generation will enjoy things that my generation did not. Just as my generation enjoys things my parents did not.

We have serious problems in this country.  But having spent a lot of time traveling around the world, I'd rather have our problems than theirs.