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Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the

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Speaker 1: global economy to you, and we're dedicating this week's episode

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Speaker 1: to a conversation I had the other day with the

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Speaker 1: economist and friend of Stephanomics, Larry Summers, former US Treasury secretary,

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Speaker 1: now a professor of economics at Harvard and an energetic

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Speaker 1: contributor to public policy debates. We spoke at an event

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Speaker 1: hosted by the Council and Foreign Relations about the economic

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Speaker 1: fallout from the war in Ukraine, future of the G twenty,

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Speaker 1: and of course inflation. Larry was one of the first

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Speaker 1: to predict You'll remember over a year ago the surge

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Speaker 1: in prices were now living through. Now the US Federal Reserve,

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Speaker 1: the Central Bank has belatedly accepted that interest rates will

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Speaker 1: need to go up quickly and often to get control

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Speaker 1: of prices, which in turn has some people worried about

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Speaker 1: the future of the recovery. So I started by asking

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Speaker 1: Larry whether he believed that the recession in the US

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Speaker 1: was now inevitable. I think it's the most likely thing.

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Speaker 1: If you look at history, there has never been a

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Speaker 1: moment when inflation was above four and unemployment was below five.

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Speaker 1: When we did not have a recession within the next

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Speaker 1: two years. So I think the odds are a hard

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Speaker 1: landing within the next two years are certainly better than half,

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Speaker 1: and quite possibly two thirds or more. I don't think

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Speaker 1: the idea that is still embodied in FED forecasts that

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Speaker 1: we could have continuing super tight labor markets at three

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Speaker 1: and a half percent unemployment and we could have inflation

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Speaker 1: come down rapidly is a terribly plausible one. That's a

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Speaker 1: resident two of team transitory. And the key fact one

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Speaker 1: has to recognize, I think to grasp the current situation

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Speaker 1: is that wage inflation is now running above six percent

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Speaker 1: on the best data, which is the Atlanta FED indicator.

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Speaker 1: And if wage inflation is running at six percent, that's

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Speaker 1: a kind of ultimate core inflation, pointing to price inflation

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Speaker 1: at four and a half or five. So I think

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Speaker 1: we're either gonna live with that for quite a while,

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Speaker 1: in which case we'll have an even bigger recession later,

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Speaker 1: or some set of events involving monetary policy and involving

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Speaker 1: what happens in the real economy are going to force

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Speaker 1: a hard landing. I'm much more agnostic on how high

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Speaker 1: interest rates are going to have to go to generate

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Speaker 1: a hard landing and disinflation. Then I am on the

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Speaker 1: likelihood that at the end of the day we're gonna

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Speaker 1: see a fairly hard land Just to dig in a

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Speaker 1: little bit in terms of what you think the mechanism

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Speaker 1: is going to be that will bring the US into

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Speaker 1: a recession, I mean, we we know, and in fact

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Speaker 1: was part of your argument that the stimulus that was

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Speaker 1: so large a year ago in the US, it left

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Speaker 1: household excess savings quite high, certainly by historical standards, even

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Speaker 1: in the lower half of the income distribution UM Debt

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Speaker 1: service from households is now at a forty year low.

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Speaker 1: They are looking they're coming into this with quite a

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Speaker 1: strong position, even with the inflation that we're seeing. So so,

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Speaker 1: what is the mechanism that's going to bring the US

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Speaker 1: into a recession? I think the two two classes of

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Speaker 1: mechanisms that are operative, and which one is going to

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Speaker 1: get their first and their relative timing is something where

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Speaker 1: I don't have a confident judgment. One class of mechanisms

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Speaker 1: is monetary policy. I think monetary policy is going to

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Speaker 1: have to keep going until we see disinflation, and we're

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Speaker 1: not going to see disinflation back towards the target range

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Speaker 1: until we see unemployment rise meaningfully. That's one source of

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Speaker 1: uncertainty monetary policy doing what it has to do. The

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Speaker 1: other is the countervailing mechanisms to what you described, the

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Speaker 1: fact that inflation has eroded real incomes and the value

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Speaker 1: of savings, the fact that there's significant fragility in financial markets,

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Speaker 1: the fact that mortgage rates have drought have risen by

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Speaker 1: two hundred basis points in UH the last four months,

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Speaker 1: and we're seeing for the first time in many years

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Speaker 1: that lots of people are starting the mortgage process and

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Speaker 1: not finishing the mortgage process. We're seeing evidence in certain

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Speaker 1: sectors of significantly reduced traffic. So I think it's hard

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Speaker 1: to know when, when, and to what extent the economy

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Speaker 1: is going to turn over itself, and to what extent

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Speaker 1: it is going to be induced by monetary policy. But

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Speaker 1: I think the judgment it's hard to escape is that

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Speaker 1: inflation is not going to get near reasonable levels if

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Speaker 1: the economy doesn't at least substantially slow. You talk about

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Speaker 1: potentially the need or necessity of unemployment to go up.

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Speaker 1: Some of your critics would say, we've got to an

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Speaker 1: amazing point in the US economy in which US workers

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Speaker 1: have been on the back foot for so long that

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Speaker 1: you have the unemployment rate that there's previously unheard of

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Speaker 1: three point six percent. We've got reported in Indiana where

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Speaker 1: there's less than one unemployment and workers in those places

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Speaker 1: have a position of power that they haven't had in

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Speaker 1: many years. What is wrong with having produced that situation? Look, Stephanie,

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Speaker 1: it's a it's a hugely important question. The first academic

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Speaker 1: work I did was on how important hype high pressure

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Speaker 1: labor markets were for the disadvantage. I showed what was

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Speaker 1: novel at that moment, that a one percent increase in

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Speaker 1: the employment ratio for white men was associated with a

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Speaker 1: six percent increase in the employment ratio for African American teenagers.

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Speaker 1: So I yield to no one in my belief in

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Speaker 1: the importance of helping the disadvantaged and in recognizing that

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Speaker 1: tight labor markets do benefit uh those who are action

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Speaker 1: lee left behind. But the three problems. The first is

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Speaker 1: that overall this higher inflation has gone with falling, not

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Speaker 1: increasing real wages. You know, if you look at a

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Speaker 1: graph of the nominal wage growth in the United States

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Speaker 1: on one axis, and real wage growth growth and purchasing

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Speaker 1: power on the other axis, it looks like a turned

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Speaker 1: over parabola. Living standards grow most rapidly with wages arising

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Speaker 1: at four percent, and then they fall off as you

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Speaker 1: start to see wage growth at five, six, seven, eight percent.

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Speaker 1: So the first thing to say is that what we're

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Speaker 1: doing is uh we're having lower real wage growth for

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Speaker 1: the vast majority of the populations and consequences. The second

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Speaker 1: is the core lesson we have learned is that there's

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Speaker 1: not a stable trade off between unemployment and inflation. There's

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Speaker 1: a stable trade off between unemployment and the acceleration of inflation.

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Speaker 1: And if we run an overheated economy, it's not that

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Speaker 1: we'll have to live with four percent inflation forever. It's

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Speaker 1: that will live with steadily rising inflation and set up

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Speaker 1: at ever greater price that we have to pay. Prudent

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Speaker 1: policy makers don't just pay attention to the current moment.

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Speaker 1: They pay attention to what happens over the longer term.

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Speaker 1: And the consequence of overheating is that it has to

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Speaker 1: be followed by something that ultimately stabilizes things. And the

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Speaker 1: history is that if you look at the overall path,

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Speaker 1: the poor are worse off once you go through that

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Speaker 1: whole process, then they would have been if you kept

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Speaker 1: things stay bole all along. That's why the fed's new

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Speaker 1: woke rhetoric in was so dangerously misguided. And I fear

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Speaker 1: that down the road, the people who they were most

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Speaker 1: concerned to help with that rhetoric are going to be

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Speaker 1: the victims if, as I expect, we have some kind

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Speaker 1: of hard landing. Even that you've started by saying you

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Speaker 1: think that's the most likely scenario and that you want

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Speaker 1: the FED to be looking down the track, I guess

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Speaker 1: the other inevitable question is how do you think they

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Speaker 1: should be responding to a recession. I think the FED

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Speaker 1: has to stay focused on bringing down the inflation rate

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Speaker 1: and bringing down the expected inflation rate. I don't think

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Speaker 1: there is any alternative that doesn't set a stage for

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Speaker 1: greater pain. We can have an argument about two versus

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Speaker 1: some number a bit greater UH than UH two, But

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Speaker 1: I think we need to recognize the think about this,

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Speaker 1: frankly in the old fashioned way, which is less in

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Speaker 1: terms of numerical targets, and that is price stability is

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Speaker 1: when people aren't talking all the time and focused on

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Speaker 1: the overall changes in the price level. By that definition,

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Speaker 1: we had about thirty five years of price stability between

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Speaker 1: the mid eighties and and by that definition, we have

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Speaker 1: lost price stability in the United States. UH. Inflation is

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Speaker 1: now the number one economic issue. It's driving vast erosion

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Speaker 1: in confidence in government, and the FED has to do

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Speaker 1: what's necessary to restore a sense of price stability. I

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Speaker 1: can't say exactly what that means in numerical terms, but

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Speaker 1: I know that we are well away from it UH

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Speaker 1: now in the judgment of the American UH people, I

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Speaker 1: think that's what's going to be necessary. UH. In terms

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Speaker 1: of UH monetary policy, I welcome the particularly the most

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Speaker 1: recent speech of Chairman Powell, which I think UH moved

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Speaker 1: a long way towards being in the right place. I'd

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Speaker 1: like to see the FED signal a commitment to raise

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Speaker 1: interest rates until real rates are clearly positive, or until

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Speaker 1: it's clear that price to reality has been restored. And

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Speaker 1: I think they've moved a long way in that direction.

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Speaker 1: That's good of late, but I think they've got UH

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Speaker 1: some distance to go before they achieve it. It has

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Speaker 1: become an extraordinarily salient issue politically inflation. I mean President

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Speaker 1: Biden did in his State of the Union he had

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Speaker 1: said this is going to be his number one goal

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Speaker 1: or one one of his primary objectives in the next

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Speaker 1: year and beyond bringing down inflation. And I think some

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Speaker 1: of us were left sort of scratching our heads, thinking,

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Speaker 1: we'll hang on, what can the administration do? Since it's

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Speaker 1: the FED job to be reducing inflation? What can the

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Speaker 1: administration do to reduce inflation? Look the net effect of

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Speaker 1: the things the administration talks about in terms of micro

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Speaker 1: policies to reduce inflation, this gouging talk is frivolous, non serious,

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Speaker 1: and utterly ineffectual. A guest price holiday would ultimately push

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Speaker 1: up prices uh by raising demand. The student loan relief

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Speaker 1: yesterday is injecting resources into the economy at a hundred

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Speaker 1: billion dollar a year annual rate when the economy needs

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Speaker 1: to be cooled off uh not uh heated up. The

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Speaker 1: administration could be much more constructive than it has been

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Speaker 1: with respect to energy supply. So I don't think the

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Speaker 1: administrations by America policies operate in the direction of raising prices,

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Speaker 1: as do various policies they pursue to raise small business.

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Speaker 1: So the micro economic policies of the administration are have

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Speaker 1: been a wash with respect to inflation at best, what

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Speaker 1: could they do? UH? The Peterson Institute just released a

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Speaker 1: study that I helped instigate and discussed. It's on their

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Speaker 1: website that estimates that a realistic program of trade liberalization

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Speaker 1: could take one point three off the cp I. Their

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Speaker 1: scope for regulates for UH policies to increase immigration that

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Speaker 1: we take substantial pressures off the labor market. But the

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Speaker 1: approaches UH that would work, our approaches that would emphasize

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Speaker 1: UM increasing the level of competition for American producers, not

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Speaker 1: seeking to protect American producers. That's the that's the element

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Speaker 1: U of micro economic policy that has a prospect for success.

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Speaker 1: And I fear that the more popular themes around corporate

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Speaker 1: gouging and the like are simply diversionary. The FED had

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Speaker 1: one job. It is monumentally failed on that job on

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Speaker 1: a consistent way for the last year and potentially into

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Speaker 1: the future with this strategy. If a fund made manager

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Speaker 1: made that kind of bad call for such a long time,

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Speaker 1: there would be pretty concrete consequences. If an elected politician

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Speaker 1: made that kind of mistake, they would almost certainly be consequences.

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Speaker 1: Do you do you think there should be greater accountability

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Speaker 1: for this particular failure and potentially for the forecasting system

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Speaker 1: that produced it, but even potentially individuals. I I think

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Speaker 1: the FED should be much more visibly acknowledging that it's

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Speaker 1: been wrong and seeking to understand and learn from its

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Speaker 1: errors than have been UH the case. And I think

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Speaker 1: the failure for there to be some institutional review, you know,

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Speaker 1: after bad battles, armies have after action reviews. The I

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Speaker 1: m F has blundered in various situations, and there have

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Speaker 1: been very thoughtful reviews of what in its culture and

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Speaker 1: what in its mode led to those errors, and I

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Speaker 1: think the FED should be engaged in more of that.

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Speaker 1: I think, in fairness to the FED UM, the views

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Speaker 1: they were expressing were relatively close two UH consensus views,

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Speaker 1: not frankly this last fall, when I think they were

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Speaker 1: behind the consensus and still sticking with their views, But

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Speaker 1: for much of last year their views were tracking consensus views.

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Speaker 1: And so I think the soul searching is less about

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Speaker 1: accountable individuals at the FED, and then about how those

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Speaker 1: consensus views UH were formed. And I guess I have

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Speaker 1: been struck by a certain UH blitheness with which some

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Speaker 1: of my UH friends in the economics community have kind

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Speaker 1: of pivoted two addressing the current moment without thinking about

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Speaker 1: what led them to be wrong in the past. Okay,

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Speaker 1: let's let's um, let's get onto Ukraine, Russia and the

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Speaker 1: fallout from the crisis. You were a senior Treasury official

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Speaker 1: throughout those two Clinton administrations in the nineties, which were

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Speaker 1: really kind of trying to think through after the end

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Speaker 1: of the Cold War, how Russia was going to fit

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Speaker 1: into the international economic system, decisions around whether it should

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Speaker 1: join the G seven, all of those things. Should we

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Speaker 1: be doing more to hurt Russia economically? Now? What what's

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Speaker 1: your take on the kind of coordinated sanctions that have

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Speaker 1: that have been achieved and the other actions that have

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Speaker 1: been taken. I think by the standards of history and tradition,

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Speaker 1: we've done a great deal. By the standards of the

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Speaker 1: magnitude of the problem, there's a lot more to do.

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Speaker 1: Understand this. The ruble is now trading at the same

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Speaker 1: exchange rate that it was before the war started. Russian

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Speaker 1: banks are not experiencing runs every day. Russia is getting

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Speaker 1: revenues from the export of its energy products that are

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Speaker 1: comparable to or greater than they were receiving before the war.

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Speaker 1: Because of increased energy prices, the limitation on the sale

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Speaker 1: of goods to Russia has not been nearly as comprehensive

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Speaker 1: as was imposed on Iran at earlier UH moments. The

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Speaker 1: truth is that, in a sense, and I strongly support this,

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Speaker 1: using economic tools is trying to fight a war without

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Speaker 1: costs and blood. That is the right thing, But in

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Speaker 1: important respects, we've been trying to fight an economic war

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Speaker 1: without costs two households from the first moment when the

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Speaker 1: sanctions were introduced, and as it was explained that simultaneously

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Speaker 1: we're gonna be doing everything we could to keep guest

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Speaker 1: prices under control, I have felt that there was a

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Speaker 1: moral failure. And if this is a unique and extraordinary

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Speaker 1: worst threat in seventy years of naked aggression, then we

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Speaker 1: need to be prepared to make sacrifices at the level

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Speaker 1: of accepting higher energy prices, wearing sweaters on days with

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Speaker 1: cool weather being a little hotter when UH we can't

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Speaker 1: run air conditioners as strongly as we did before, sacrificing

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Speaker 1: luxury exports UH to UH Russia, and sacrificing mercantile UH

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Speaker 1: commercial UH interests. I do not believe that enough has

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Speaker 1: been done. I believe that much more needs to be done.

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Speaker 1: I was glad to see the step that was taken

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Speaker 1: to stop the Russians from using their froe and reserves

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Speaker 1: to pay debt, but in a way, it was an

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Speaker 1: extraordinary and remarkable thing that for the six previous weeks

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Speaker 1: they had been allowed to use their frozen reserves to

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Speaker 1: prevent them UH from doing it. So I think that

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Speaker 1: we have a long way to go in raising the

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Speaker 1: pressure that we impose on sanctions, and frankly, I would

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Speaker 1: prefer less rhetoric about the war criminality of what's going on,

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Speaker 1: which it seems to me does not bring pressure to

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Speaker 1: produce peace, if anything, slightly the opposite, by meaning that

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Speaker 1: there's no exit strategy from this, less emphasis on that rhetoric,

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Speaker 1: and much more emphasis on the imposition of UH economic

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Speaker 1: pain we saw in the United States in two thousand

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Speaker 1: and eight. What cascading lack of confidence in finance can

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Speaker 1: do to destroy the performance of an economy. It's extraordinarily

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Speaker 1: counterintuitive for any financial person, but I think we need

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Speaker 1: to engage exactly those forces as forces of destruction with

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Speaker 1: respect to the Russian economy right now. Recognizing that that

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Speaker 1: may have some collateral implications for some few financial institutions

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Speaker 1: in the West and being provided being prepared to provide

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Speaker 1: the necessary UH kind of support. But I don't think

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Speaker 1: we have yet stepped up fully in terms of engaging

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Speaker 1: the tools of UH financial warfare. That's how I see

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Speaker 1: it from UH the outside. But what I have is

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Speaker 1: an outsider's view, and I've been an insider, and I

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Speaker 1: have seen outsiders with naive views making it sound simpler

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Speaker 1: than it is. And in fairness to those who are

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Speaker 1: making the decisions, it may be that there are a

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Speaker 1: whole set of collateral costs that they have thought through

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Speaker 1: very carefully. But my instinct is that there's a good

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Speaker 1: deal more that could be done, and I'd like to

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Speaker 1: see some long queues outside some Russian financial institutions. I'd

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Speaker 1: like to see some Russian defaults followed by the seizures

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Speaker 1: of key Russian assets, and I'd like to see the

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Speaker 1: ruble in free fall as part of judging the efficacy

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Speaker 1: of a sactions program. You know, one of the other

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Speaker 1: things that happened UM and that your watch the Treasury

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Speaker 1: when we're working together in the late ninety nineties was

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Speaker 1: the beginnings of the g twenty, which was pretty evident

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Speaker 1: in the global financial crisis in the global response to that,

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Speaker 1: but has been pretty absent in recent years, and certainly

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Speaker 1: in response to this crisis, or indeed the inflation crisis

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Speaker 1: that's now and cost of living crunch that's coming for

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Speaker 1: so many countries. Um, I wonder, do you think it's

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Speaker 1: the end of the G twenty. Look, I think the

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Speaker 1: G twenty had a premise. The premise of the G

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Speaker 1: twenty was that all countries wanted all other countries to

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Speaker 1: do better, that we all gained from a more open,

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Speaker 1: more rapidly growing economy, That the United States wanted China

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Speaker 1: to grow faster, that China wanted the US to grow faster,

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Speaker 1: That we all wanted to solve global problems together. And

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Speaker 1: that was the premise of the G twenty. And that

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Speaker 1: was basically true in the two thousand and eight financial crisis.

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Speaker 1: Everybody wanted the crisis to be successfully weathered and the

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Speaker 1: global economy to grow again. That is in very profound

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Speaker 1: questions today. Self Evidently, it is not the objective of

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Speaker 1: the other member, most of the other members of the

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Speaker 1: G twenty to support Russia's economic flourishing. It is a

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Speaker 1: substantial question whether we are hoping for the success of

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Speaker 1: the Chinese economy and whether China is hoping for the

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Speaker 1: success of our of our economy. So the premise of

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Speaker 1: the G twenty, which was a forum for devising means

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Speaker 1: to shared ends, is much less evidently true today. And

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Speaker 1: before one talks about what you should convene a G

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Speaker 1: twenty meeting to do and what kind of statement G

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Speaker 1: twenty should make, it seems to me one has to

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Speaker 1: get straight these questions about which communities have which shared ends.

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Speaker 1: Right now, I perceive a bit of a vacuum in

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Speaker 1: clear thinking on the is with some traditionalists wanting to

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Speaker 1: just kind of keep going with the G twenty and

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Speaker 1: have do stuff, and others have what seemed to me

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Speaker 1: to be rather naive given the world we live in,

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Speaker 1: conceptions of communities of democracy, which it seems to me

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Speaker 1: do so much to exclude so many major stakeholders in

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Speaker 1: the economic system that there's a real question as to

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Speaker 1: whether they can be meaningfully affective. So I think we

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Speaker 1: need some serious reflection on the mechanisms of international fora

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Speaker 1: and consultation. I don't know that we're in the right

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Speaker 1: place right now, but I think it takes a kind

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Speaker 1: of realism that balances sort of two cliches. Uh one,

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Speaker 1: some sharing of ends is a prerequisite to successful cooperation,

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Speaker 1: and the other is you don't make peace with your friends,

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Speaker 1: you make peace with your potential adversaries. And so I

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Speaker 1: suspect we need to use the European term some kind

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Speaker 1: of variable architecture, in which there are some faora where

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Speaker 1: there's more in common among the participants but less reach,

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Speaker 1: and other foura in which there is less in common

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Speaker 1: among the participants but more uh reach. Anyone who thinks

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Speaker 1: that these descriptions and that these kinds of issues and

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Speaker 1: this is a place where I've gone from naive and

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Speaker 1: stupid to less naive and stupid. I used to think

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Speaker 1: that serious people discuss serious things, and diplomats discussed the

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Speaker 1: shape of tables. And I think I've now come to

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Speaker 1: realize how important the shape and composition of groups could be.

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Speaker 1: And anyone who doubted that proposition needs to consider how

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Speaker 1: consequential the rather loose statements that were made about allowing

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Speaker 1: Ukraine into NATO UM proved to be in terms of

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Speaker 1: what they set off. Larry Thomas, thanks very much for

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Speaker 1: an excellent exchange on issues that I may will be

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Speaker 1: of great interest to all the people listening in. Thank you, Stephanie.

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Speaker 1: Well that's it for this episode. Thanks for listening. We'll

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Speaker 1: have more from around the world next week and in

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Speaker 1: the meantime, remember you can always find us on the

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Speaker 1: Bloomberg Terminal, website, app or wherever you get your podcasts,

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Speaker 1: and for more news and analysis from Bloomberg Economics, follow

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Speaker 1: our Economics on Twitter. This episode was produced by Magnus Henrickson,

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Speaker 1: with special thanks to Sommer Sadi, Larry Summers, and the

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Speaker 1: Council on Foreign Relations in New York. Mike Sasso is

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Speaker 1: the executive producer of Stephanomics and the head of Bloomberg

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Speaker 1: Podcast is Francesca Levy m