WEBVTT - Former US Treasury Secretary Larry Summers Talks Recession

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio.

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<v Speaker 2>News for our Bloomberg audiences worldwide. I'm David Weston, and

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<v Speaker 2>I'm delighted to be joined by Larry Summer's former Sector

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<v Speaker 2>of the Treasury and now at Harvard. Larry, thank you

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<v Speaker 2>so much for being with us today. The talk of

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<v Speaker 2>the town are the markets. I won't pressure on the markets,

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<v Speaker 2>but tell us about the economic numbers underlying this, because

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<v Speaker 2>there are indications of a slowing economy.

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<v Speaker 3>David, I think we've seen a sea change in perception

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<v Speaker 3>in the just almost two months since President Trump was inaugurated.

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<v Speaker 3>At that time, the prevailing view was very strong economy,

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<v Speaker 3>possibly inflation risk, United States exceptionalism relative to.

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<v Speaker 1>The rest of the world, likely to.

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<v Speaker 3>Manifest itself in continued US out performance. But the combination

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<v Speaker 3>of substantial immigration restrictions, substantial layoffs, impossible prospect from the

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<v Speaker 3>federal government, the damage to US competitiveness and to US

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<v Speaker 3>production done by terrification, and above all a big increase

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<v Speaker 3>in risk premiums have led to sharp productions in spending

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<v Speaker 3>on the part of both consumers and on the part

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<v Speaker 3>of businesses, and even more sharp productions in intended future spending.

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<v Speaker 3>You saw that for example, when Delta Airlines reported a

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<v Speaker 3>soft first quarter and a very soft set of reservation

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<v Speaker 3>requests going forward last night. So you take all that together,

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<v Speaker 3>you take the fact that markets were starting at a

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<v Speaker 3>very high level in terms of valuation, and I think

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<v Speaker 3>you have to say that there's in the range of

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<v Speaker 3>i'd say, still slightly below a fifty percent chance of

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<v Speaker 3>a recession starting this year. You know, I've watched economic

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<v Speaker 3>forecast for a long time, and one thing I've observed

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<v Speaker 3>is when they start being revised in a direction, there

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<v Speaker 3>tends to be momentum, and all the revisions are going

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<v Speaker 3>one way at this point, which is towards less growth.

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<v Speaker 3>So I think we've got a real uncertainty problem. I

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<v Speaker 3>think it's going to be hard to fix that. And

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<v Speaker 3>we're looking at a slow down relative to what was forecast,

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<v Speaker 3>almost for sure, and serious near fifty percent prospective recession.

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<v Speaker 2>So taking you very literally about that close to fifty percent,

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<v Speaker 2>chants for our audience, what numbers should they be looking

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<v Speaker 2>at to determine what side of that fifty percent we

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<v Speaker 2>end up on.

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<v Speaker 3>They should be looking at what the slope of the

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<v Speaker 3>yield curve is and what people are expecting the Federal

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<v Speaker 3>Reserve to do. The more people are looking for sharp

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<v Speaker 3>cuts by the Fed, the more they're judging that a

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<v Speaker 3>recession is likely. They should be looking at what's happening

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<v Speaker 3>to stocks, and particularly stocks in traditionally cyclical industries.

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<v Speaker 1>They should be.

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<v Speaker 3>Looking at data that points a little bit over the horizon,

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<v Speaker 3>data on order books of businesses, data on consumer intentions

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<v Speaker 3>to buy a car or to buy a house in

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<v Speaker 3>the next several months, as an indicator for judging what

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<v Speaker 3>is going to.

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<v Speaker 1>Happen.

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<v Speaker 3>All those things, taken together, I think will tell a story.

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<v Speaker 3>There's also information in what is happening to commodity prices,

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<v Speaker 3>and I pay a lot of attention to the various

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<v Speaker 3>compilations that come from investment analysts who are very close

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<v Speaker 3>to firms, who were report which way the firms are

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<v Speaker 3>revising their own forecasts of future revenue and future earnings.

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<v Speaker 1>All of that are the sort.

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<v Speaker 3>Of indicators of what's happening in the economy. I think

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<v Speaker 3>at a different level, the thing to be looking at

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<v Speaker 3>is are we getting more policy certainty or are we

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<v Speaker 3>getting more policy uncertainty? Every time there's a major vacillation,

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<v Speaker 3>every time there's a question about commitment to law and

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<v Speaker 3>to commitment.

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<v Speaker 1>To following the law.

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<v Speaker 3>In any sphere, you're going to be getting more uncertainty

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<v Speaker 3>that is ultimately a prospect for chilling investment.

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<v Speaker 2>So President Trump has addressed this and said we're going

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<v Speaker 2>through what he called a transition period on the way

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<v Speaker 2>to what he called something very big. Here to try

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<v Speaker 2>to argue his side of it, is this a necessary

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<v Speaker 2>sort of transition to rebalance the economy, get the government

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<v Speaker 2>out of the economy to the extent that it was,

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<v Speaker 2>and really go forward to a better future for the economy.

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<v Speaker 3>No, look, David, transition period, doesn't it sound like a

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<v Speaker 3>lot like the word transitory. The idea of transittory inflation

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<v Speaker 3>when it was put forward by the Biden administration and

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<v Speaker 3>the FED when things weren't going well didn't work out

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<v Speaker 3>very well. And I don't think the idea that this

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<v Speaker 3>is some kind of transition period is going to.

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<v Speaker 1>Work out very well at all.

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<v Speaker 3>And why do we think that it is going to

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<v Speaker 3>help the US economy to not be able to use

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<v Speaker 3>Mexico in Canada as a production partner, given that we

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<v Speaker 3>are competing with Asia and Europe.

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<v Speaker 1>I don't see what that logic is.

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<v Speaker 3>Why is scaring people about whether they're going to get

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<v Speaker 3>their social Security benefits, scaring people about whether the United

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<v Speaker 3>States is going to continue to develop new medicines at

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<v Speaker 3>the NIH. Why are those things fought likely to increase confidence.

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<v Speaker 3>If this was going to increase confidence and people saw it,

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<v Speaker 3>you'd expect to see surveys of consumer confidence showing and

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<v Speaker 3>improvement in conditions, and you don't see that at all.

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<v Speaker 3>If this was going to increase it was just a

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<v Speaker 3>temporary dip that was going to increase the prospects of businesses.

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<v Speaker 3>You see their stock market use going upwards, knock downwards.

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<v Speaker 1>I think, by.

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<v Speaker 3>Far the more likely saying is that we are in

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<v Speaker 3>the shallow end and we're walking towards the deep end,

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<v Speaker 3>and the problems are only going to increase with the

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<v Speaker 3>passage of time. You know, this is not the first

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<v Speaker 3>time that a country got a new leader who gave

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<v Speaker 3>a lot of orders and imposed a lot of tariffs.

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<v Speaker 3>That populist policy mix is a standard around the world,

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<v Speaker 3>particularly common in Latin America, and what the studies show

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<v Speaker 3>is that it can go either way in terms of

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<v Speaker 3>its impacts in the short run, but it's almost always

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<v Speaker 3>bad over the medium to long run. So i'd expect,

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<v Speaker 3>unless there's a reversal in policy, I would expect this

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<v Speaker 3>situation to get more serious. And every time the President

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<v Speaker 3>uses rhetoric that conveys steadfastness on this policy course of

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<v Speaker 3>clarification of economic nationalism, of greatly expanded concept of government action,

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<v Speaker 3>and vast wide interpretation of government power, every time he recommits,

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<v Speaker 3>pessimism increases. And so I think those explanations of downturn

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<v Speaker 3>being temporary are actually quite counterproductive.

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<v Speaker 2>Larry to play devil's advocate. I think that if somebody

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<v Speaker 2>were here from the Trump administration, they say, the transition

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<v Speaker 2>is to a world where we have a bigger manufacturing base.

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<v Speaker 2>We had Sean Fain from the UAW just recently say

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<v Speaker 2>he thinks what you're doing, he's exactly right, because we've

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<v Speaker 2>lost so many jobs. Is there an argument that, in fact,

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<v Speaker 2>we could be rebuilding the manufacturing base that could help

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<v Speaker 2>the economy in the long term.

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<v Speaker 3>Manufacturing has trended downwards for sixty years. It has trended

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<v Speaker 3>downwards in Germany as a share of the economy. It

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<v Speaker 3>is even trended downwards in China as a share of

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<v Speaker 3>the economy. There's a reason, which is that there's just

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<v Speaker 3>lots that used to be done by people on assembly

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<v Speaker 3>lines that can now be done by machines.

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<v Speaker 1>And there may be blips from.

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<v Speaker 3>One year to the next, but the idea that we

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<v Speaker 3>were going to have some kind of durable manufacturing renaissance

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<v Speaker 3>was a schimero when Joe Biden said it, and it's

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<v Speaker 3>an illusion when Donald Trump says it. And the much

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<v Speaker 3>more likely thing is that the particular kinds of protection

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<v Speaker 3>that the Trump administration is stressing are actually going to

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<v Speaker 3>hurt manufacturing. Think, for example, of those promised aluminium steel tariffs.

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<v Speaker 3>Sixty times as many people useuminum of businesses use aluminum

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<v Speaker 3>and steel in their production as are in the aluminum

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<v Speaker 3>and steel industries.

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<v Speaker 1>So we're raising costs.

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<v Speaker 3>What this administration can't understand, or seems.

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<v Speaker 1>Not to be able to understand, is.

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<v Speaker 3>That today we live in a world of supply change,

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<v Speaker 3>and in that world of supply change, when you tariff things,

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<v Speaker 3>you're increasing the price of inputs that would have gone

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<v Speaker 3>into exports or would have gone into competition with totally

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<v Speaker 3>imported goods from further abroad. So I think the idea

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<v Speaker 3>that we're going to have some manufacturing renaissance of employment

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<v Speaker 3>is misguided, and I think in terms of strategy for

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<v Speaker 3>getting there, it would be if you wanted to have

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<v Speaker 3>that as an objective, your chances would be much better

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<v Speaker 3>subsidizing their outputs than raising the price of manufacturers inputs.

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<v Speaker 3>So I think this is protectionist policy, which as an

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<v Speaker 3>economist I don't like, but entirely separate from that, it's

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<v Speaker 3>misguided and confused protectionist policy, even if one accepted the

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<v Speaker 3>protectionist philosophy.

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<v Speaker 2>Larry one last one. Here we are going into fom

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<v Speaker 2>see Federal Open Marketing Committee meetings. We're supposed to have

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<v Speaker 2>statement of economic projections coming on. How on earth does

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<v Speaker 2>the Federal Reserve issue a statement of economic projections?

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<v Speaker 3>Given the uncertainties, I think they should follow the consensus,

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<v Speaker 3>and the consensus is moving downwards. I hope they don't

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<v Speaker 3>set them in stone too far in advance of the meeting,

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<v Speaker 3>because I think we've got a rapidly evolving situation, and

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<v Speaker 3>I think the Fed's in a delicate situation. On the

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<v Speaker 3>one hand, from people, no doubt we'll think that as

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<v Speaker 3>the economy weakens, you should be moving more towards signaling

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<v Speaker 3>strong interest rate cuts. On the other hand, for the Fed,

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<v Speaker 3>to send that kind of signal would be alarming to people,

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<v Speaker 3>would have a material effect on sentiments, and I'm not

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<v Speaker 3>sure search just how much it matters. If a car

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<v Speaker 3>is a lemon, or you're worried that a car might

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<v Speaker 3>be a lemon, You're not going to buy it because

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<v Speaker 3>somebody gives you a discount or cuts the loan rate.

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<v Speaker 3>In the same way, when there's so much swirling uncertainty

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<v Speaker 3>and the props from under your investment might be removed

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<v Speaker 3>by some new policy coming out of some decree, you're

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<v Speaker 3>going to wait before you invest in. The exact level

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<v Speaker 3>of the interest rate isn't going to matter very much.

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<v Speaker 3>So I think the FED needs to express its concerns

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<v Speaker 3>about the economy in the context of the current moment.

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<v Speaker 3>It wouldn't be the first time central banks have expressed

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<v Speaker 3>concern about rigidities. They've expressed concern about budget deficits before.

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<v Speaker 3>I think they need to highlight just the very substantial

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<v Speaker 3>toll that uncertainty is taking on the economy, and note

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<v Speaker 3>that they've only got very limited capacity to respond to

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<v Speaker 3>that uncertainty. And I think they need to remind us

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<v Speaker 3>all of something. They need to remind us that the

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<v Speaker 3>test of policy is economic performance. Sometimes this administration seems

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<v Speaker 3>to be saying that as long as the ten year

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<v Speaker 3>interest rate is coming down, things are going well well.

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<v Speaker 1>The ten year interest rate.

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<v Speaker 3>Fell the fastest during the financial crisis, it fell the

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<v Speaker 3>fastest after as the two thousand and one recession was starting,

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<v Speaker 3>so fell the fastest at the beginning of COVID. So

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<v Speaker 3>the idea that somehow trying to get the ten year

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<v Speaker 3>rate down fast is some measure of how well you're

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<v Speaker 3>doing policy, which is another thing we've heard from the administration.

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<v Speaker 3>I think he isn't right, and I hope as he

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<v Speaker 3>answers questions and talks about things, Chairman Powell can emphasize

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<v Speaker 3>the centrality of simply trying to have stable economic performance.

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<v Speaker 2>Larry, thank you so much for joining us today. It

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<v Speaker 2>was really important to hear from you. That's Larry Summer's

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<v Speaker 2>former Secretary of the Treasury, now a special contributor for

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<v Speaker 2>Wall Street Week