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Speaker 1: Pushkin from Pushkin Industries. This is Deep Background, the show

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Speaker 1: where we explore the stories behind the stories in the news.

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Speaker 1: I'm Noah Feldman. As the coronavirus pandemic continues, the economic

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Speaker 1: situation is becoming more dire by the day. Not only

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Speaker 1: have an enormous number of businesses closed, but more people

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Speaker 1: have filed for unemployment here in the United States, faster

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Speaker 1: than at any other time in our history. Meanwhile, no

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Speaker 1: one can say for certain when this will end. What

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Speaker 1: should the government be doing to help our massive bailout

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Speaker 1: or stimulus packages that inject money into the economy actually effective.

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Speaker 1: What other options are there facing us? To discuss these

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Speaker 1: extremely pressing questions, We're joined by Laurence Summers of Harvard University.

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Speaker 1: Larry was chief economist of the World Bank. He was

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Speaker 1: first Deputy Secretary of the Treasury under President Linton, and

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Speaker 1: then Secretary of the Treasury. He was president of Harvard University,

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Speaker 1: and then as an adviser to Barack Obama. He helped

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Speaker 1: pull our country through another financial crisis, the one in

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Speaker 1: two thousand and eight. We spoke on Monday afternoon. Larry,

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Speaker 1: without hyperbole, I think it's fair to say that there's

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Speaker 1: no one alive who knows more than you do about

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Speaker 1: bailout stimulus, not only in theory, but in its real

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Speaker 1: world implementation. And I really want to hear your big

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Speaker 1: picture and your small picture account of where we are

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Speaker 1: and where we're going here. You've said that the two

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Speaker 1: big uncertainties facing us are how long will this last?

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Speaker 1: And how fast can the economy reopen? And I agree

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Speaker 1: that those are radically uncertain questions. Now, do you have

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Speaker 1: something that you want to say on either of those topics, Well,

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Speaker 1: I'd start with this. This is a profoundly different economic

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Speaker 1: problem than any that I have dealt with in the past,

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Speaker 1: or than anyone else has dealt with in the past.

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Speaker 1: All the various problems we have dealt with in the

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Speaker 1: past were fundamentally about demand and fundamentally about whether the

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Speaker 1: economy could produce the demand and keep everything going in

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Speaker 1: a way that would enable adequate employment. This is a

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Speaker 1: quite different problem. This is a problem of supply. The

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Speaker 1: primary reason why the US economy is weak right now

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Speaker 1: is that thirty percent of us basically can't work productively

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Speaker 1: because we can't work in our workplace, we can't take

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Speaker 1: our work home, and that's the main reason why output

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Speaker 1: is down and unemployment is up. So any idea that

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Speaker 1: this can all be solved with sufficiently ingenious fiscal policy

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Speaker 1: or monetary policy is a confusion. The role of fiscal

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Speaker 1: monetary policy is a palliative that maintains a measure of

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Speaker 1: spending power for those who are unable to be paid,

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Speaker 1: and to try to maximize the potential of the economy

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Speaker 1: to recover when health conditions permit. But the fundamental constraint

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Speaker 1: on the situation lies in the area of health policy,

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Speaker 1: not in the area of financial policy or economic policy. Alright,

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Speaker 1: you use the word palliative, so let me just get

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Speaker 1: some clarity around that, because palliative sometimes sounds like we're

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Speaker 1: just making you feel better until you die. I take

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Speaker 1: it what you mean is that it's effectively, to use

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Speaker 1: a medical metaphor, it's life support. The economy would die

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Speaker 1: without the kind of bailout funds that are being passed along,

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Speaker 1: But they're not a stimulus in that they're not going

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Speaker 1: to stimulate further demand. The only thing that's going to

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Speaker 1: change that, if I hear you correctly, is actually reopening

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Speaker 1: businesses so that people can get back out as soon

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Speaker 1: as it's healthy to do that, and then that would

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Speaker 1: eventually restimulate the economy almost they might stimulate demand, but

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Speaker 1: stimulating demand doesn't do anything if supply is constrained. I see.

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Speaker 1: So the example is I badly want to go to

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Speaker 1: a bar right now. I mean, I really want to

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Speaker 1: go to a bar, So the demand is there. The

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Speaker 1: problem is the bars are not open, so there's no

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Speaker 1: supply available for me. Exactly. The story of toilet paper

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Speaker 1: is actually illuminating. There's a major toilet paper shortage that

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Speaker 1: many of us have encountered when we've gone to the

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Speaker 1: grocery store. The original theory that was offered for that

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Speaker 1: shortage was people were hoarding just in case. If that

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Speaker 1: were the correct theory, at a certain point, after people

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Speaker 1: had hoarded enormous supplies, they would stop buying and the

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Speaker 1: problem would naturally solve itself. That we might even get

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Speaker 1: a toilet paper glut in the stores because people didn't

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Speaker 1: need to buy anymore given the inventories they accumulated. That

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Speaker 1: is not actually what has happened. What has actually happened

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Speaker 1: is it turns out that people are spending a much

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Speaker 1: larger fraction of their time in their homes rather than

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Speaker 1: in their offices or in restaurants or in bars. And

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Speaker 1: it turns out that the nature of the toilet paper

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Speaker 1: that is sold for people to use at home is

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Speaker 1: different than institutional toilet paper. And so in fact we

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Speaker 1: have a genuine shortage of home toilet paper, which is

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Speaker 1: a higher softer quality, and we have a potential glut

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Speaker 1: of institutional toilet paper. And fundamentally, our problem in the

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Speaker 1: toilet paper example is that not all the demand for

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Speaker 1: home toilet paper can be fulfilled. If all we do

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Speaker 1: is increase purchasing power and we don't increase supply, we're

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Speaker 1: not going to increase the level of output. Got it.

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Speaker 1: So even if I were prepared to spend twenty bucks

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Speaker 1: a roll on toilet paper, it doesn't matter because the

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Speaker 1: supply is at present not there for the right kind

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Speaker 1: of toilet paper. Right. Or to put it in a

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Speaker 1: different way, if you gave purchasing power to people, it

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Speaker 1: wouldn't do anything to raise toilet paper production because there's

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Speaker 1: no demand for the kind of toilet paper that can

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Speaker 1: be produced, and it would just go to bid up

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Speaker 1: the price of the kind of toilet paper that is

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Speaker 1: already in excess demand. So the point is that in

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Speaker 1: order to increase the overall level of output in the economy,

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Speaker 1: the really fundamental problem is increasing supply, and that means

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Speaker 1: creating situations where people can go back to work in

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Speaker 1: productive ways. So some of that would be creating situations

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Speaker 1: where people were back at work, and therefore the demand

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Speaker 1: for toilet paper was again filling its normal pattern. Some

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Speaker 1: of it would be addressed if you could find ways

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Speaker 1: of converting institutional toilet paper production capacity into the production

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Speaker 1: of soft home toilet paper. But fundamentally you have to

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Speaker 1: address the problem on the supply side. What are the

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Speaker 1: implications of that analysis for what will happen when and

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Speaker 1: if we are able to, in some gradual stepped way,

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Speaker 1: start getting workers back into the productive parts of the

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Speaker 1: economy where they can help restore the supply. It would

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Speaker 1: seem to imply that the difficulty of getting the match

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Speaker 1: up and running would be addressed, maybe much more quickly

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Speaker 1: than under circumstances of a more ordinary demand crisis. Is

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Speaker 1: that a fair implication? I think potentially that's right. I

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Speaker 1: have used the example of what happens in Truro, Massachusetts,

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Speaker 1: where I'm speaking from right now. Truro is a vacation

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Speaker 1: town on the tip of Cape Cod. Every winter Truro

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Speaker 1: has what, in a certain sense is a terrible depression.

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Speaker 1: It's employment level, it's GDP go down by more than

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Speaker 1: fifty percent, and every summer it rises up. And so

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Speaker 1: I think if we're able to prevent the destruction of

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Speaker 1: enterprises through bankruptcy and liquidation, I think there's the prospect

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Speaker 1: that if we can get health conditions back to normal,

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Speaker 1: then we can move back fairly quickly in terms of

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Speaker 1: economic performance. I think it's basically misguided in light of

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Speaker 1: this analysis, that we're spending trillions and trillions on broad

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Speaker 1: gaged economic and financial policies and we're scrimping on health

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Speaker 1: policies that have the prospect for bringing back the economy faster.

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Speaker 1: The overwhelming priority should be every possible experiment in terms

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Speaker 1: of developing more tests, in terms of alternative contact tracing systems,

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Speaker 1: anything that can put the health crisis behind us is

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Speaker 1: by far the highest payoff investment in this moment. And

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Speaker 1: that's obviously, in parts a matter of dollars, but it's

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Speaker 1: also a matter of proper organization. Larry, with respect to

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Speaker 1: your seasonal analogy, it's one of the more hopeful things

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Speaker 1: that I've heard, and I just want to ask you

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Speaker 1: a question about it. A few weeks ago I interviewed

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Speaker 1: for the podcast one of your colleagues in the economics

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Speaker 1: department at Harvard, Stephanie Stansheva, and one of the points

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Speaker 1: that she made is that as economic relationships break down

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Speaker 1: as people are out of work, the transaction cost of

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Speaker 1: getting people back to recreate those relationships rises, and so

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Speaker 1: it becomes hard to do. Now. In your example of

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Speaker 1: Truro or any vacation community which in a sense has

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Speaker 1: a big decline out of season, usually long term economic

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Speaker 1: relationships are retained even over the out of season period

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Speaker 1: of time. Right, people have the shops that they go to,

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Speaker 1: and they have the caretakers who work on their homes,

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Speaker 1: and their contractors and so forth and so on. Is

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Speaker 1: there a danger do you think in this particular circumstance

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Speaker 1: that the re establishment of those relationships will just be

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Speaker 1: much more difficult in the wake of the worksoppages that

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Speaker 1: we have now than it is in a seasonal response situation.

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Speaker 1: It depends on how long it takes, and it depends

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Speaker 1: on the nature of the relationships in Truro, Massachusetts or

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Speaker 1: a vacation town. As you move from July to September,

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Speaker 1: and then you go around again until July. There are

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Speaker 1: probably two kinds of things that happen. They're the chefs

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Speaker 1: at the restaurants, and they're the shops that I remain

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Speaker 1: loyal to. And it turns out that people have long

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Speaker 1: memories and they do other things during the summer, and

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Speaker 1: then they find their way back. Then there are other

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Speaker 1: kinds of relationships, the waitresses in the restaurants, where there

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Speaker 1: probably isn't such long memory, but where there isn't such

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Speaker 1: great costs to a restaurant to having a different workforce

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Speaker 1: of waitresses in twenty twenty than they had in twenty nineteen.

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Speaker 1: But I think it's easy to overdo this idea that

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Speaker 1: we're doomed because a relationship has been separated for some

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Speaker 1: substantial interval. And I think it is very much wrong

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Speaker 1: to think that people have to continue being in the workplace.

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Speaker 1: It's a ubiquitous feature. For example, over decades of automobile

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Speaker 1: companies that in recessions they quote laid off automobile workers

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Speaker 1: who remained attached to those companies, who received significant unemployment insurance,

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Speaker 1: and then when demand picked back up they were rehired.

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Speaker 1: So I think we need to protect the peace people.

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Speaker 1: There are more market mechanisms than people appreciate for protecting

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Speaker 1: other aspects. Suppose I am a shopkeeper in a shopping

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Speaker 1: center and I can't open because I'm a clothing store

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Speaker 1: and I'm not deemed to be essential during the corona period,

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Speaker 1: I will stop paying my rent. Now it's possible that

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Speaker 1: my landlord will evict me and that my shop will

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Speaker 1: be lost. On the other hand, my landlord's likely to

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Speaker 1: look at the situation and say, well, if I evict him,

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Speaker 1: who am I going to get to come into his

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Speaker 1: place in the midst of this? And this will probably

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Speaker 1: be over in a few months, and he'll be able

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Speaker 1: to pay rent again if he was before, and will

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Speaker 1: work some solution out with respect to the period when

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Speaker 1: he couldn't earn revenue, and the relationship will be deserved.

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Speaker 1: So I am more optimistic about the economy's ability to

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Speaker 1: remain resilient. If the health problems can be put behind us,

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Speaker 1: then some of my friends are we'll be back in

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Speaker 1: just a moment. Larry, I find it very compelling to

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Speaker 1: say that we would very quickly recoup any investment that

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Speaker 1: we made in technology that would let us get back

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Speaker 1: to work and testing is a really good example of that.

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Speaker 1: The challenge that I'm struggling with in that context is

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Speaker 1: sort of why we aren't doing more at that level,

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Speaker 1: And as far as I can make out, the reason

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Speaker 1: seems to be a perception, maybe an accurate perception, that

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Speaker 1: there are a whole number of bottlenecks in enabling testing

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Speaker 1: on the kind of scale of you, on the order

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Speaker 1: of millions of tests a day in the United States

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Speaker 1: that would be necessary to get this going. Now, that's

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Speaker 1: not an argument for not trying, but it does raise

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Speaker 1: the question of real world distribution bottlenecks, and I mean

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Speaker 1: things like the number of swabs, the number of chemical

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Speaker 1: reagents available. And there could, of course be technological innovations

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Speaker 1: that would let us do these things faster and without

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Speaker 1: their techniques, and of course in principle that's all possible,

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Speaker 1: but it raises the question of time scale, and maybe

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Speaker 1: what a lot of people are thinking is it doesn't

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Speaker 1: make sense to invest heavily in this given the improbability

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Speaker 1: of success. Let's be concrete for a moment, our lost

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Speaker 1: GDP as a consequence of this crisis is about eighty

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Speaker 1: billion dollars a week. So if we accelerate the recovery

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Speaker 1: path by one week, that's worth eighty billion dollars. That

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Speaker 1: dwarfs any number that anybody is remotely thinking of. In

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Speaker 1: terms of testing. Economies are remarkably flexible things, and they

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Speaker 1: do respond to incentives. They may not respond in three days,

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Speaker 1: but they really do respond over time. This is not

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Speaker 1: a time to be worried about efficient pricing of swabs,

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Speaker 1: given the magnitude of the stakes. This is a reason

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Speaker 1: to be trying everything. If the probability of success on

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Speaker 1: something that's worth eighty billion dollars a week is only

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Speaker 1: one fourth, well, that's twenty billion dollars a week. It's

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Speaker 1: been estimated that tests cost fifty dollars. At fifty dollars

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Speaker 1: a very small fraction of twenty billion dollars a week.

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Speaker 1: And that's assuming it's one week with the twenty five

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Speaker 1: percent probability of success. Larry, I want to ask you

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Speaker 1: One of the points that you've made repeatedly is that

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Speaker 1: there's real fundamental loss that's happening under these circumstances, that

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Speaker 1: this isn't the kind of set of economic problems that

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Speaker 1: can be solved or mitigated just by printing money or

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Speaker 1: lowering interest rates. So that means there is real loss

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Speaker 1: that's going to take place in the economy. The bailout

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Speaker 1: process is just beginning, and inevitably corporate America will have

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Speaker 1: its hand out seeking bailouts. And you've had lots of

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Speaker 1: first hand experience with this. What's your view. I mean,

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Speaker 1: should the airline shareholders have to take a big hit here,

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Speaker 1: or should the airlines be bailed out as after nine

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Speaker 1: to eleven and so on and so forth. For other industries,

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Speaker 1: including maybe most prominently the oil and gas industry, I

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Speaker 1: think there's almost no reason why shareholders be insulated from

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Speaker 1: these losses. Shareholders are people who invested money with the

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Speaker 1: expectation that, unlike people who put their money in a

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Speaker 1: bank or bought US government financial instruments, they would earn

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Speaker 1: a premium of four or five percent a year. And

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Speaker 1: the reason they would earn that premium is that they

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Speaker 1: were taking the risk that if something predictable and uncertain happened,

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Speaker 1: they would lose money or that if something unpredictable and

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Speaker 1: uncertain happened, they would lose money, that they were being

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Speaker 1: compensated for subjecting themselves to what Donald Rumsfeld called unknown unknowns.

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Speaker 1: And now an unknown unknown has happened, and they got

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Speaker 1: paid for taking this risk, and it seems to me

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Speaker 1: it would be very wrong to try to insulate them

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Speaker 1: from that risk. All the more because the distribution of

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Speaker 1: shareholder is a distribution of people who are far, far,

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Speaker 1: far more affluent than most American citizens. Now, there will

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Speaker 1: certainly be cases where you can't really protect workers without

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Speaker 1: protecting the enterprises of which they're apart. So, just as

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Speaker 1: there are unintended victims of necessary actions in wartime, there

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Speaker 1: are unintended beneficiaries of necessary financial bailouts. But the objective

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Speaker 1: should be to maintain economic activity for the benefit of

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Speaker 1: customers and workers, not for the benefit of shareholders or

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Speaker 1: lenders who have accepted substantial risk in return for over

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Speaker 1: many years having been paid a premium interest rate. The

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Speaker 1: airline industry, in a way is a classic instance, because

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Speaker 1: there are half a dozen instances in the last twenty

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Speaker 1: years when airlines have gone through bankruptcy, their debts have

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Speaker 1: been written down, their share prices have been written way

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Speaker 1: way down and they've continued to fly. And most of us,

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Speaker 1: as we stood in line to get on board, had

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Speaker 1: no idea whether an airline was bankrupt or not. So

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Speaker 1: we need to stop confusing bankruptcy with the destruction of

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Speaker 1: an enterprise's productive capacity. Just in support of your argument, Larry,

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Speaker 1: I think it's even fair to say that pandemic doesn't

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Speaker 1: count as an unknown unknown in Donald Rumsselo's formulation. It's

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Speaker 1: a known unknown. You know, from the time that I

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Speaker 1: was in seventh grade, a central part of our curriculum

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Speaker 1: was pandemic is a thing. It has occurred historically, it

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Speaker 1: can occur again. Their circumstances of globalization that can give

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Speaker 1: rise to it. We've seen various potential pandemics being limited

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Speaker 1: or constraint that may have led people to make a

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Speaker 1: mistake in terms of the probabilities of an actual pandemics

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Speaker 1: breaking out, But that such a thing could exist was

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Speaker 1: certainly very clear to everybody and should have been therefore

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Speaker 1: a known unknown rather than an unknown unknown. I think

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Speaker 1: that's right. The idea that we could have a pandemic

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Speaker 1: should have been in people's minds. Most of the leading

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Speaker 1: financial authorities who were involved in the effort to establish

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Speaker 1: new financial regulation said sometime in the last few years

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Speaker 1: that they thought we would never have a financial crisis

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Speaker 1: as serious as two thousand and eight in their lifetimes.

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Speaker 1: One of the many reasons why I didn't join that

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Speaker 1: view was an awareness that if we had pandemic flew

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Speaker 1: of the kind we'd had nineteen eighteen, it would probably

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Speaker 1: be an immense financial crisis, and that that was a

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Speaker 1: significant risk. So I think you're right, Larry. Before I

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Speaker 1: let you go, I just want to ask you one

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Speaker 1: last sort of macroeconomic question that's puzzling me. And it's

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Speaker 1: Corona adjacent, let's say, and that is the role that

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Speaker 1: the United States has just played, the President Trump has

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Speaker 1: just played in attempting to broker a deal with other

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Speaker 1: large petroleum producing companies to shore up oil prices. Now,

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Speaker 1: on the one hand, you know, there are lots of

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Speaker 1: people in the United States who were working in energy

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Speaker 1: related businesses or in oil related businesses, and so I

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Speaker 1: suppose this could be justified on the grounds that it's

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Speaker 1: an attempt to help out American workers in shore up

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Speaker 1: in American industry. On the other hand, it sort of

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Speaker 1: looks like the United States participating, or it is the

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Speaker 1: United States participating very directly in the kind of cartelization

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Speaker 1: that historically we as a country have been at least

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Speaker 1: publicly skeptical about. You know, the United States was never

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Speaker 1: a member of OPEC and at least actually never talk

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Speaker 1: the talk of how great it is to assure that

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Speaker 1: prices would be protected from real world changes, in this instance,

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Speaker 1: in the demand side rather than the supply side. Can

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Speaker 1: you just give me a you know. Larry Summer's reaction

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Speaker 1: to this, was this something the United States should have done?

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Speaker 1: And if so, why, because it can be a little

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Speaker 1: hard to see from the outside. I think if I

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Speaker 1: had been the policymaker, I would not have done it,

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Speaker 1: essentially for the reason you describe this is a cartel.

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Speaker 1: We don't usually believe in supporting cartels. And it's not

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Speaker 1: like our only interest is as an exporter. We have

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Speaker 1: moved in the last few years and so now we're

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Speaker 1: just about self sufficient. But that means the US consumer

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Speaker 1: interest is about comparable to the US producer interest, and

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Speaker 1: the consumer interest, of course loses when we push prices up.

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Speaker 1: Most of the other winners from higher prices are places

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Speaker 1: like Russia and Saudi Arabia where it's not at all

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Speaker 1: clear that our national interests are served by their becoming wealthier.

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Speaker 1: So I would not have done this. That said, there

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Speaker 1: is a problem, which is the tendency towards what economists

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Speaker 1: call a cobweb cycle. And if you allow the price

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Speaker 1: to collapse, then the profits collapse, and then the funds

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Speaker 1: for investment collapse, and then down the road you have

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Speaker 1: a big supply shortage and the price spikes right back up.

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Speaker 1: So there is that concern. I think it would be

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Speaker 1: better met by reinforcing investment during this difficult period. I

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Speaker 1: also think that you're a ted idealistic on the these

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Speaker 1: kinds of arrangements. I remember when I served in President

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Speaker 1: Clinton's administration being the dissenting voice, but the dissenting voice

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Speaker 1: who lost the argument when the United States was an

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Speaker 1: enthusiastic participant in the organization of an aluminum cartel, with

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Speaker 1: the rationale being to protect American aluminum producers who employed

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Speaker 1: a fair number of people, and to be supportive of

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Speaker 1: Russia at a time when we were trying to support

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Speaker 1: President Yelson and they were a substantial aluminum exporter. So

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Speaker 1: I think it would be wrong to think that this

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Speaker 1: was anything like the first time the United States had

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Speaker 1: been substantially supportive of a cartel in a key global

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Speaker 1: commodity on grounds of price stability, although the rationale here

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Speaker 1: may also be a domestic rationale goal of helping an

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Speaker 1: industry with which the president and his party are seen

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Speaker 1: as being pretty closely aligned. If I can say something

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Speaker 1: the opposite of idealistic, as I said in the aluminum example,

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Speaker 1: that was also part of the calculation. I'm with the

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Speaker 1: economics profession and a lack of enthusiasm for cartels, but

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Speaker 1: it'd be a mistake to overstate the strength of the

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Speaker 1: American tradition in opposing them. Larry, thank you very much

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Speaker 1: for your analysis and your time. There's a lot to

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Speaker 1: think about there, some of it a little more hopeful

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Speaker 1: and some of it a little more pessimistic than other

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Speaker 1: things that I've heard, but all of it deeply insightful

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Speaker 1: and informed by your distinctive combination of knowing the theory

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Speaker 1: and having done the reality. So thank you very very much.

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Speaker 1: Thank you. Speaking to Larry Summers, you get a strong

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Speaker 1: sense of both how serious the challenges are that are

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Speaker 1: facing our economy now and also a hint of greater

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Speaker 1: optimism than some other sources have expressed about the probabilities

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Speaker 1: of our being able to turn it around. On the

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Speaker 1: one hand, Larry is crystal clear that this is not

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Speaker 1: the same kind of economic crisis that we've faced before,

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Speaker 1: and that therefore government money to ordinary people and to

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Speaker 1: businesses is not going to take the form of a

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Speaker 1: stimulus that will get things going again. To the contrary,

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Speaker 1: Larry says very very clearly, it's just to keep us

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Speaker 1: going for now. It's not going to turn things around.

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Speaker 1: That's a serious, serious concern, and one that I think

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Speaker 1: is all too often missed by people who think about

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Speaker 1: this crisis in terms of past crises. On the other hand,

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Speaker 1: Larry also thinks that there's an argument for seeing this

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Speaker 1: current crisis as a bit like a seasonal stoppage in

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Speaker 1: an industry that operates by the seasons. And if he's

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Speaker 1: right about that, then our capacity to restart the economy

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Speaker 1: once health and safety concerns have been alleviated may actually

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Speaker 1: be substantially greater than other analysts have such tested. There's

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Speaker 1: a bit of each in Larry's analysis, some sense of

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Speaker 1: the gravity of the situation, some cautious optimism about the

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Speaker 1: potential for the future. You can be sure that we're

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Speaker 1: going to continue to stay very closely on top of

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Speaker 1: the story of the economic consequences of the current pandemic

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Speaker 1: and how we bounce back from it until the next

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Speaker 1: time I speak to you. Be careful, be safe, and

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Speaker 1: be well. Deep Background is brought to you by Pushkin Industries.

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Speaker 1: Our producer is Lydia Genecott, with research help from Zooe Wynn.

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Speaker 1: Mastering is by Jason Gambrel and Martin Gonzalez. Our showrunner

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Speaker 1: is Sophie mcibbon. Our theme music is composed by Luis

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Speaker 1: gera special thanks to the Pushkin Brass, Malcolm Gladwell, Jacob Weisberg,

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Speaker 1: and Mia Lobel. I'm Noah Feldon. I also write a

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Speaker 1: regular column from Bloomberg Opinion, which you can find out

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Speaker 1: of Bloomberg dot Com slash Felton. To discover Bloomberg's original

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Speaker 1: slate of podcasts, go to Bloomberg dot Com Podcasts. You

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Speaker 1: can follow me on Twitter at Noah are Felt. This

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Speaker 1: is Deep Background