Q&A: Summers says middle class feels pinch

• Summers calls for new federal stimulus
• Technological changes could mean slower economic and job growth
• Former Obama adviser says income inequality should be addressed

Larry Summers, Treasury secretary under former president Bill Clinton and President Obama's chief economic adviser during the recession's darkest days, has been tossing cold water lately on generally optimistic economic forecasts. He argues that technological changes have widened the divide between rich and poor and could mean slower economic growth for a long period unless Congress passes another stimulus to increase spending.

USA TODAY economics reporter Paul Davidson spoke Monday with Summers, who was attending the annual economic policy conference of the National Association for Business Economics. Here's what he had to say:

Q. You paint a pretty bleak picture of the economy. Why is that?

A. It doesn't have to be bleak, but demand may be a challenge. I think that changes in the structure of the economy mean reduced demand for investment. It's a much more mass-less economy, a lighter economy where a WhatsApp (purchased by Facebook last week in a deal valued at $19 billion) can be worth more than a Sony.

When start-ups (such as WhatsApp) can be seeded with hundreds of thousand of dollars, it's a positive thing, but it presents challenges. Technology means there's less need for new investment than there was. When more people are shopping on Amazon, there's no need to build malls. When people can teleconference, there's less need for hotels.

It then makes recession more likely. These trends have been underway for some time. The unfortunate fact is it's been a long time since we've observed simultaneous rapid growth, high capacity and (a lack of bubbles, such as in housing or the stock market).

Q. Many economists are looking for stronger growth this year now that consumers have paid off much of their debt, household wealth is rising, and the housing recovery is picking up. Do you disagree?

A. I hope they're right. But the first month and a half have not been that encouraging. I think it's probably more than weather. It looks pretty pervasive across the country, and the weather hasn't been bad everywhere. I think we may have gotten a little excessively optimistic at the end of last year (because of business stockpiling), and now that needs to be worked off.

Q. How much growth are you forecasting?

A. I suspect in the 2%-2.5% range (for the gross domestic product). I was hoping for more than 3%, but I think that looks like less than a 50/50 shot. We're hoping for acceleration, but unless we can take stronger policy actions to increase confidence, I'm not sure it will happen.

I think there is a set of very important headwinds. I think there's also risk from what happens in emerging markets, risks from what happens in the remainder of the industrialized world.

Q. How do we get out of this rut?

A. It's a combination of measures to promote exports, measures to support private investment and public investment (federal spending). If we simply get ourselves going, it's much easier to keep going than it is to accelerate. What we need is to accelerate right now, and that will then create pressures for employment and investment that tend to make the recovery more self-sustaining.

Q. The conventional wisdom is that technology reduces job growth in the short term but increases it in the long term as productivity leads to higher incomes and spending. Is that no longer the case?

A. Certainly the hope is that increased technology will create new jobs to an extent greater than the number of jobs it displaces, but that's not something that can be taken for granted. And the process of adjustment will take a very long time. I don't think we can count on that.

It may be that given the presence of technology, the productivity in some categories of labor — particularly those that perform routine tasks — will be substantially lower.

Q. You're touching on the much-lamented disappearance of middle-wage jobs and the shrinking of the middle-class. What's your view of that?

A. I think what we've seen is a great increase at the top and things have been OK at the low end, but there hasn't been a great increase in the middle.

Q. What can be done about it?

A. I think education has a central role to play. I think the kinds of jobs that would be created by public investment programs would be very much the kinds of jobs that support middle-class standards.

Q. How do you see the problem of income inequality?

A. I think globalization and technological change are raising the rewards to the most entrepreneurial and able among us. But they're pulling away from everyone else. And that creates a real challenge to social cohesion.

Q. What's the solution?

A. Solutions lie in education that empowers everyone. They lie in more progressive taxation (that imposes higher taxes on the wealthy to fund programs that benefit the poor and middle-class).

Q. Would increasing the minimum wage help?

A. I think increasing the minimum wage is constructive. It's not the most fundamental thing.

Q. A Congressional Budget Office report last week concluded that that raising the minimum wage would lift 900,000 Americans out of poverty but also could mean 500,000 fewer jobs. Does that cast doubt on the idea?

A. I think the income-producing benefits for low-income people offset any likely job displacement.