DAVID GREGORY: But first, the president's chief economic adviser, the director of the National Economic Council, Dr. Larry Summers. Welcome back to MEET THE PRESS.

DR. LAWRENCE SUMMERS: Good to be with you, David.

MR. GREGORY: So the big news this week is that the economy shrank in the second quarter of the year, but less than expected; and, as so many Americans know, unemployment is still a big problem. Is the recession over?

DR. SUMMERS: We're certainly in a very different place than we were. Six months ago, the economy was in a nosedive, people were talking about the possibility of another depression, the statistics all suggested a vertical decline. None of that is the situation right now. We're certainly starting to see a turnaround, a turnaround in production that leads most professional forecasters to expect that if you look at economic output over the next six months, it's actually likely to start to increase. Now the jobs picture's going to be serious for a long time to come. The best that can be said so far is the rate at which we're losing jobs is declining; but there, too, the picture is improving. We've got a long way to go, we're going to need to carry through with the full program that the president has put in place. We're going to need to continue to take steps to stimulate the economy, like the very successful Cash for Clunkers program, so that we're keeping at doing everything we can to push this economy forward. But we are in a very different situation. We have walked back from what we were facing six months ago, and that is because of the policies that were put in place.

MR. GREGORY: When do you think the economy starts growing again?

DR. SUMMERS: I think if you look at the overall output statistics, the GDP, as economists call it, a very great likelihood--and this is what most professional forecasters say--is that we'll see growth going forward in the second half of this year. Why? Inventories have been run down and firms are going to have to build those inventories back. The evidence is that from a very, very low base housing production, automobile sales are likely to start to increase, and the recovery and reinvestment program is going to gather force over the next six months, that people are able to spend more of the extraordinary tax assistance they've received as more and more of the 3,000 projects come on line and start to spend out. Already in Florida you've seen 14,000 teachers' jobs that wouldn't have been there this spring preserved as a consequence of the Recovery Act. So all these factors, the rising impact of the Recovery Act, inventory accumulation, what's going to happen in housing and automobiles, these all are leading--and, you know, don't trust those of us in the administration, most professional forecasters, too, expect output growth. Now, historically--and this is why we are absolutely not complacent, we continue to be just very dissatisfied with where the economy is--historically, increased hiring typically lags increases in output, so it's going to take time before you see it in the unemployment and the employment statistics, so we've got to keep pushing.

MR. GREGORY: I want to stop you on that point because I want to return to jobs in just a moment. The question is when there's recovery in the economy. One economist this week, who's been rather skeptical all along, has said it's going to feel a lot like the recession. To that point, you've got housing prices that are down 17 percent from where they were a year ago. And here's the headline in the lead story in The New York Times today, "Prolonged aid to unemployed is running out." Is the administration to this point going to have to extend those unemployment benefits? It's already been expended at a historic level. Will there have to be further extensions?

DR. SUMMERS: We'll work with Congress to make sure that unemployment insurance continues to perform its basic function of protecting the unemployed. That was an important element in the recovery and reinvestment program. It's helped people who've become unemployed; it also helped the economy by maintaining spending. And we'll do what's necessary to make appropriate, appropriate unemployment benefits available. We're seeing--you mentioned housing--already 200,000 Americans have seen modifications under the president's program, it's increasing by 30,000 or more a week. We expect it to be half a million by November 1st. And we're going to be holding the banks accountable for performance under that program. Just this week, you're going to see for the first time publication of data, institution, banking institution by banking institution on how much they're doing, what fraction of their mortgages are, are being adjusted. So we're very focused on making sure that we implement as vigorously and with the best possible management accountability all of these measures.

MR. GREGORY: The criticism of this administration is that it has misread the impact of the stimulus on the economy, and here are the raw numbers when it comes to the unemployment rate. As of February 17th of 2009, the day that the stimulus plan was signed, unemployment was at 7.6 percent, it's now at 9.5 percent. Experts like yourself believe it's going to go up over 10 percent. Roughly two million jobs have been lost since the stimulus came on line, after this administration said in a report that if you pass a stimulus plan, we'll hold unemployment steady at 8 percent. What went wrong?

DR. SUMMERS: David, I, I think that's really very, with great respect, I think that's really a very misleading way of putting it. The administration's report was very clear that the stimulus would build over time, that less than 10 percent of the job creation would take place during 2009, that the largest impacts would be felt as the program took effect, as all of those projects got started. So we forecast that there would be a meaningful impact felt right away, but that that effect would increase very substantially.

MR. GREGORY: Wait a minute, that--is that fair to say I'm misleading...

DR. SUMMERS: And that's what's--and that's, and that's what...

MR. GREGORY: ...when he says he would keep it at 8 percent?

DR. SUMMERS: ...and that's what's happened. Now, it's true that unemployment is higher. It's higher than almost anyone forecast at the beginning of the year; and it's higher because, frankly, what we inherited was much worse. Most of the surprise increase had already taken place by March, and you can hardly hold the administration accountable for that. It turned out that businesses were even more scared than we realized; and, therefore, relative to past recessions, as demand for their products declined, they were much quicker to lay people off than they, than they have been. And so there was a surprise in the employment statistics, but that didn't have to do with the impact of the stimulus. That had to do with the baseline that we were dealing with. You saw that. You see evidence for that also, David, in this last economic report. In addition to giving us the data for the second quarter, which is what everybody's talked about, the negative 1 percent, it also gave us data on revisions of the whole history of GDP. And what those revisions showed us is that last winter the economy was much weaker than we thought it was at the time.

MR. GREGORY: OK, but, Doctor...

DR. SUMMERS: So, yes, there's been a surprise.

MR. GREGORY: OK.

DR. SUMMERS: But it's got nothing that bears on what the impact of the stimulus has been as distinct from an uncertainty we very much recognized, which is the uncertainty about how bad the economy is...

MR. GREGORY: All right. But wait, but wait a second.

DR. SUMMERS: ...and what the baseline was.

MR. GREGORY: But, Dr. Summers, wait a minute. You say it was misleading to bring up the 8 percent. The reality is that you wanted near-term economic impact from the stimulus. You gave a speech within the last two weeks during which you said unemployment is a real problem, that it was a surprise. My question is if you didn't get the near-term economic benefit that you wanted, you were surprised by that, does it have an impact on whether or not the president would consider repealing any of the long-term spending, given the deficit problem?

DR. SUMMERS: The president is very focused and will come to this, I hope, on the long-term deficit problem; but he is very committed to carrying through on the Recovery and Reinvestment Act, which is really a program over the next two years. Let me say, let me say it again, because this is an important point for your viewers, the economy surprised on the downside. We didn't know how bad it was last winter. That's what we've learned from the data revision. Because we didn't know how bad it was, unemployment is high. That does not speak to the efficacy, the extra impact that we've gotten from the administration's program. That's right on track. You can count the jobs, the 14,000 jobs, teacher's jobs in Florida, the jobs saved across the country of cops and teachers. You can see it in the other people whose state and local governments haven't laid off. You can see it in the contracts and the hiring for construction projects. You can see it in a sign that consumer confidence, which had been collapsing, as people have gotten used to having higher pay checks, consumer confidence has improved somewhat. So, yes, the situation's even worse than we thought, but that actually makes the kind of recovery program, the investments in the country's future, the measures to support the financial system not less important, but actually much more important.

MR. GREGORY: So you stand by your claim that this stimulus act will create three to four million jobs when it's all said and done.

DR. SUMMERS: This stimulus, this stimulus program will create more jobs. We were always very careful, very, very careful to say we'll save or create. What that was intended to say very clearly is relative to what would have taken place in its absence. We recognize nobody can know where the economy is going to be with any precision, but what we can know is that if we prevent cops and teachers from being laid off, if we enable consumers to spend more, if we put people to work investing in weatherizing 75 percent of federal buildings, then more people are going to be working than if we don't do any of those, any of those things.

MR. GREGORY: So you can't...(unintelligible)...those three to four million jobs.

DR. SUMMERS: No. We can predict that there will be three to four million more jobs than there otherwise would've been, but we can't predict what the baseline is with great precision. We were always clear in saying that.

MR. GREGORY: I--you bring up near-term economic interests. This is a big, a big factor, and I want to get to that in just a minute. But, actually, I don't want to let one point go, which is this long-term spending picture, the investment part of the stimulus plan, which the president and you have said "very, very important." I just want to go back to that point. If the near-term impact is not as great, do you consider repealing any of the longer-term spending given the deficit problem?

DR. SUMMERS: The stimulus bill is a bill that's going to largely play out in the next couple of years. The long-term deficit's a central problem. That's why we need to reform health care. We need to reform health care in terms of the ways in which we reimburse for Medicare. We need to reform health care in terms of the ways in which we encourage preventive care, the ways in which we do research to assure that people get the care they need, but you don't have the kind of care situation where people are getting three times the rate of some type of surgery in one city as they are. That's why the president has made health care a central issue in long-term deficit reduction. It's going to be the largest part of the federal, the federal budget. It's the thing that's most important for business's competitiveness and for workers' take-home pay. So we're going right at the deficit, but we're going at the issue that's measured in the hundreds of billions of dollars, federal dollars, which is federal health care spending. And that's the big fight the president's committed to.

MR. GREGORY: But I'm asking about the spending in the stimulus--there's long-term spending in the stimulus plan.

DR. SUMMERS: The--there's--actually, the vast majority of the stimulus is actually relatively short-term. There are some measures, for example, providing over five years for computerized medical records at a time when the average supermarket has more information technology in it than the average doctor's office. No, the president's not going to think about repealing that.

MR. GREGORY: OK.

DR. SUMMERS: That's a hugely important investment in the future. No, the president's not going to think about repealing substantial increases in solar energy and wind energy which are crucial to reducing our dependence on foreign oil. No, we're not going to abandon the effort to modernize schools at a time when we tell our kids that their education is the most important thing and paint chips are falling off the walls in their, in their classrooms. No. Those fundamental kinds of investments in the country's future, which--some of which are going to take more than two years to accomplish, are crucial aspects of a kind of foundation that the president's trying to lay for the country's future.

MR. GREGORY: Given the deficit, how big the deficit is, how big it's projected to be, can there be sustained growth in this economy unless the deficit is reduced?

DR. SUMMERS: Certainly there can be sustained growth, and we can start laying a foundation for sustained growth in the next couple of years by making sure that there is an adequate level of demand in the economy. For the medium term, the way in which we need to make sure that that growth is stable is to do something about the deficit. But the way you do something about the deficit, David, is you go and you look at the large sections of the federal budget. You look at health, you look at health care, as I talked about. You look at entitlements. You look at the presence of substantial loopholes that, for example, enable some companies to hide income overseas and not pay taxes on it to the United States and actually get an economic incentive to move some of their production abroad.

You look at those kinds of fundamental issues. And that's what we've already started doing with great emphasis in health care. That's what, as we move towards the president's 2011 budget, we're going to be doing, you know, more systematic, in a more systematic way. But we're not--but we are going to recognize that the budget deficit is absolutely crucial. But so is the deficit in what this country's done in education; so is the deficit in what this country's done in, in infrastructure. There are a number of deficits that we have to address if we're going to compete going forward, and the president's committed to doing--to addressing all of those deficits.

MR. GREGORY: You--you've said in, in a speech recently that there's a danger--this is what you said in--July 17th, "Experience during the U.S. Depression and in Japan during the 1990s teaches the danger of premature declarations of victory and withdrawals of stimulative policy." It's difficult, because there's a lot of opposition to the stimulus, how much federal money is being spent. We're seeing that playing out in the opinion polls as well. Do you think there's going to be a need for additional stimulus, and is there the political will for it?

DR. SUMMERS: As I said, as I said a little earlier, David, our stimulus is going to increase with the passage of time because some of the money that's already spent is going to have an impact with a lag, and because more money's going to be spent going forward, and some of the biggest employment creating projects took some time to get started. So the focus for now needs to be on implementing the Recovery and Reinvestment Act, carrying through on that foreclosure relief program, whose numbers will grow rapidly, continuing to support the flow of, the flow of credit in the economy.

We've got the right framework in place. We're seeing results of that framework. The economy is no longer in free fall. Outside observers are looking towards, towards, towards growth. People are speculating about when the recession is going to end rather than about whether it's going to turn into a depression. The priority has to be to go with a plan that's working and implement it as vigorously as possible.

MR. GREGORY: Let me ask you a couple of questions about health care. The difficulty of deadlines being missed and more public opposition to health care leads to the question of whether or not the president is losing the economic argument, that is the argument that health care is essential as an economic fix.

DR. SUMMERS: It is essential as an economic fix. It's essential because of how much of the federal budget health care represents. It's essential because it's so important for the competitiveness of American businesses. You know, for some of the automobile companies, the health insurance companies are actually their largest supplier. And it's essential to slow the growth of health costs if American families are going to see rising wages that rise ahead of inflation. So it is essential.

MR. GREGORY: But is the president losing that argument?

DR. SUMMERS: What's, what, what about, what about the, what about the argument--there has been, there have now been healthcare bills voted out of four congressional committees. That is four more congressional committees than have voted, that have voted comprehensive healthcare legislation in the last, in the last generation. Yes, it's going to take time to work out, to work out the argument. Yes, there are continuing controversies, as there should be. But let's not forget that we are closer to comprehensive healthcare reform than this country has ever been. Let's not forget how we're doing it. We passed tax cuts at the beginning of this decade. We passed a prescription drug benefit at the beginning of this decade. Nobody even thought about the question of how they were going to be paid for. Nobody set an aspiration of doing it in a balanced-budget way. Yes, we're having a lot of arguments about how best to do it in a balanced-budget way, and there's tension in those arguments. But how much better it is to be doing these things this way, the way this president is doing it, by insisting on the pay for, by insisting that it be done in a balanced-budget framework...

MR. GREGORY: Well, let's talk about that point.

DR. SUMMERS: ...even recognizing that's going to lead to some arguments.

MR. GREGORY: That's a very important point, and yet the CBO, the Congressional Budget Office, has looked at this, a nonpartisan actor in this debate, and has said there is a shortfall in paying for it even over the first decade, and that shortfall grows in subsequent decades. As you look at these healthcare plans, do there have to be fundamental changes if you're going to avoid adding to the deficit down the line?

DR. SUMMERS: CBO said that about one of the bills that's passed, one of the committees. This is why the discussions are continuing. No bill is going to move forward that is not over the first 10 years scored by the CBO as budget neutral. But the president's, in addition to insisting on budget neutrality, which we didn't use to do, the president's doing another important thing. It's what we've called a belt and suspenders approach. There's some things--how we pay drug companies, for example--where you can do the accounting very accurately and you can see what happens to the deficit. There are other things--encouraging prevent, encouraging preventive care, taking the whole reimbursement system out of politics--where it's much more difficult to do the exact calculation. And so the CBO doesn't give us any credit for them even though most people would say that, over time, they're likely to have some benefit. And so we're doing both sets of things. And so I think we've got a lot of basis for being optimistic that, whatever the CBO says, it's going to end up better. But we're being very conservative. That's why it's belt and suspenders. We're not taking any account of that second set of changes, the preventive care and all of that.

This is the most fiscally responsible approach to introducing a major structural change in the economy that's ever been pursued. If you look at what happened with Medicare, if you look at what happened with prescription drugs, if you look at what happened when food stamps was introduced, there has never been this degree of careful scrutiny of long-run, long, long-run cost impacts. And it's right because the center of this has to be containing healthcare costs, otherwise it's not going to work for most families.

MR. GREGORY: Before you go, I do want to ask you about the banks. One of the things we're seeing on Wall Street is that bonuses are back, a lot of people making a lot of money. You said recently that banks should never lose sight of their obligations to their fellow citizens. Are they meeting their obligations?

DR. SUMMERS: Some are. Some aren't. All need to pay attention to it. How? They need to make sure that they are cooperating and setting up the kind of financial regulatory system that will make sure there're the right risk controls and things like this don't happen again. They need to each do their part with respect to foreclosure relief. And we'll see how different banks are doing when the numbers are reported this week. They need to recognize the needs of their communities as they set lend, as they set lending strategies. But they need to recognize what's happened, how--what a near miss it was. And we hope they will join us in working to create the right kind of regulatory system.

And a crucial part of that regulatory system is an agency that protects consumers, that has as its focus not the health of banks, but something we haven't had before. And if we had, we wouldn't have had these subprime mortgages in the same way, we wouldn't have needed to pass a credit card reform bill to stop outrageous escalations in rates, which is a consumer financial protection agency. And I hope and trust that the banking industry will join, join in supporting that regulatory step and other regulatory steps to contain the risks so that never again do we have the problems we've seen in the last two years.

MR. GREGORY: Would you like to be chairman of the Federal Reserve?

DR. SUMMERS: I am totally consumed by all the issues that we've talked about--the issues of energy, the issues of long-run structural planning. That's where my all my focus is, David.

MR. GREGORY: You're confident in Chairman Bernanke?

DR. SUMMERS: David, I'm very--totally focused on the work, on the work that I'm doing.

MR. GREGORY: All right. Dr. Larry Summers, thank you, as always. Appreciate it. Thanks very much.