Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the
Speaker 1: global economy to you, and we're dedicating this week's episode
Speaker 1: to a conversation I had the other day with the
Speaker 1: economist and friend of Stephanomics, Larry Summers, former US Treasury secretary,
Speaker 1: now a professor of economics at Harvard and an energetic
Speaker 1: contributor to public policy debates. We spoke at an event
Speaker 1: hosted by the Council and Foreign Relations about the economic
Speaker 1: fallout from the war in Ukraine, future of the G twenty,
Speaker 1: and of course inflation. Larry was one of the first
Speaker 1: to predict You'll remember over a year ago the surge
Speaker 1: in prices were now living through. Now the US Federal Reserve,
Speaker 1: the Central Bank has belatedly accepted that interest rates will
Speaker 1: need to go up quickly and often to get control
Speaker 1: of prices, which in turn has some people worried about
Speaker 1: the future of the recovery. So I started by asking
Speaker 1: Larry whether he believed that the recession in the US
Speaker 1: was now inevitable. I think it's the most likely thing.
Speaker 1: If you look at history, there has never been a
Speaker 1: moment when inflation was above four and unemployment was below five.
Speaker 1: When we did not have a recession within the next
Speaker 1: two years. So I think the odds are a hard
Speaker 1: landing within the next two years are certainly better than half,
Speaker 1: and quite possibly two thirds or more. I don't think
Speaker 1: the idea that is still embodied in FED forecasts that
Speaker 1: we could have continuing super tight labor markets at three
Speaker 1: and a half percent unemployment and we could have inflation
Speaker 1: come down rapidly is a terribly plausible one. That's a
Speaker 1: resident two of team transitory. And the key fact one
Speaker 1: has to recognize, I think to grasp the current situation
Speaker 1: is that wage inflation is now running above six percent
Speaker 1: on the best data, which is the Atlanta FED indicator.
Speaker 1: And if wage inflation is running at six percent, that's
Speaker 1: a kind of ultimate core inflation, pointing to price inflation
Speaker 1: at four and a half or five. So I think
Speaker 1: we're either gonna live with that for quite a while,
Speaker 1: in which case we'll have an even bigger recession later,
Speaker 1: or some set of events involving monetary policy and involving
Speaker 1: what happens in the real economy are going to force
Speaker 1: a hard landing. I'm much more agnostic on how high
Speaker 1: interest rates are going to have to go to generate
Speaker 1: a hard landing and disinflation. Then I am on the
Speaker 1: likelihood that at the end of the day we're gonna
Speaker 1: see a fairly hard land Just to dig in a
Speaker 1: little bit in terms of what you think the mechanism
Speaker 1: is going to be that will bring the US into
Speaker 1: a recession, I mean, we we know, and in fact
Speaker 1: was part of your argument that the stimulus that was
Speaker 1: so large a year ago in the US, it left
Speaker 1: household excess savings quite high, certainly by historical standards, even
Speaker 1: in the lower half of the income distribution UM Debt
Speaker 1: service from households is now at a forty year low.
Speaker 1: They are looking they're coming into this with quite a
Speaker 1: strong position, even with the inflation that we're seeing. So so,
Speaker 1: what is the mechanism that's going to bring the US
Speaker 1: into a recession? I think the two two classes of
Speaker 1: mechanisms that are operative, and which one is going to
Speaker 1: get their first and their relative timing is something where
Speaker 1: I don't have a confident judgment. One class of mechanisms
Speaker 1: is monetary policy. I think monetary policy is going to
Speaker 1: have to keep going until we see disinflation, and we're
Speaker 1: not going to see disinflation back towards the target range
Speaker 1: until we see unemployment rise meaningfully. That's one source of
Speaker 1: uncertainty monetary policy doing what it has to do. The
Speaker 1: other is the countervailing mechanisms to what you described, the
Speaker 1: fact that inflation has eroded real incomes and the value
Speaker 1: of savings, the fact that there's significant fragility in financial markets,
Speaker 1: the fact that mortgage rates have drought have risen by
Speaker 1: two hundred basis points in UH the last four months,
Speaker 1: and we're seeing for the first time in many years
Speaker 1: that lots of people are starting the mortgage process and
Speaker 1: not finishing the mortgage process. We're seeing evidence in certain
Speaker 1: sectors of significantly reduced traffic. So I think it's hard
Speaker 1: to know when, when, and to what extent the economy
Speaker 1: is going to turn over itself, and to what extent
Speaker 1: it is going to be induced by monetary policy. But
Speaker 1: I think the judgment it's hard to escape is that
Speaker 1: inflation is not going to get near reasonable levels if
Speaker 1: the economy doesn't at least substantially slow. You talk about
Speaker 1: potentially the need or necessity of unemployment to go up.
Speaker 1: Some of your critics would say, we've got to an
Speaker 1: amazing point in the US economy in which US workers
Speaker 1: have been on the back foot for so long that
Speaker 1: you have the unemployment rate that there's previously unheard of
Speaker 1: three point six percent. We've got reported in Indiana where
Speaker 1: there's less than one unemployment and workers in those places
Speaker 1: have a position of power that they haven't had in
Speaker 1: many years. What is wrong with having produced that situation? Look, Stephanie,
Speaker 1: it's a it's a hugely important question. The first academic
Speaker 1: work I did was on how important hype high pressure
Speaker 1: labor markets were for the disadvantage. I showed what was
Speaker 1: novel at that moment, that a one percent increase in
Speaker 1: the employment ratio for white men was associated with a
Speaker 1: six percent increase in the employment ratio for African American teenagers.
Speaker 1: So I yield to no one in my belief in
Speaker 1: the importance of helping the disadvantaged and in recognizing that
Speaker 1: tight labor markets do benefit uh those who are action
Speaker 1: lee left behind. But the three problems. The first is
Speaker 1: that overall this higher inflation has gone with falling, not
Speaker 1: increasing real wages. You know, if you look at a
Speaker 1: graph of the nominal wage growth in the United States
Speaker 1: on one axis, and real wage growth growth and purchasing
Speaker 1: power on the other axis, it looks like a turned
Speaker 1: over parabola. Living standards grow most rapidly with wages arising
Speaker 1: at four percent, and then they fall off as you
Speaker 1: start to see wage growth at five, six, seven, eight percent.
Speaker 1: So the first thing to say is that what we're
Speaker 1: doing is uh we're having lower real wage growth for
Speaker 1: the vast majority of the populations and consequences. The second
Speaker 1: is the core lesson we have learned is that there's
Speaker 1: not a stable trade off between unemployment and inflation. There's
Speaker 1: a stable trade off between unemployment and the acceleration of inflation.
Speaker 1: And if we run an overheated economy, it's not that
Speaker 1: we'll have to live with four percent inflation forever. It's
Speaker 1: that will live with steadily rising inflation and set up
Speaker 1: at ever greater price that we have to pay. Prudent
Speaker 1: policy makers don't just pay attention to the current moment.
Speaker 1: They pay attention to what happens over the longer term.
Speaker 1: And the consequence of overheating is that it has to
Speaker 1: be followed by something that ultimately stabilizes things. And the
Speaker 1: history is that if you look at the overall path,
Speaker 1: the poor are worse off once you go through that
Speaker 1: whole process, then they would have been if you kept
Speaker 1: things stay bole all along. That's why the fed's new
Speaker 1: woke rhetoric in was so dangerously misguided. And I fear
Speaker 1: that down the road, the people who they were most
Speaker 1: concerned to help with that rhetoric are going to be
Speaker 1: the victims if, as I expect, we have some kind
Speaker 1: of hard landing. Even that you've started by saying you
Speaker 1: think that's the most likely scenario and that you want
Speaker 1: the FED to be looking down the track, I guess
Speaker 1: the other inevitable question is how do you think they
Speaker 1: should be responding to a recession. I think the FED
Speaker 1: has to stay focused on bringing down the inflation rate
Speaker 1: and bringing down the expected inflation rate. I don't think
Speaker 1: there is any alternative that doesn't set a stage for
Speaker 1: greater pain. We can have an argument about two versus
Speaker 1: some number a bit greater UH than UH two, But
Speaker 1: I think we need to recognize the think about this,
Speaker 1: frankly in the old fashioned way, which is less in
Speaker 1: terms of numerical targets, and that is price stability is
Speaker 1: when people aren't talking all the time and focused on
Speaker 1: the overall changes in the price level. By that definition,
Speaker 1: we had about thirty five years of price stability between
Speaker 1: the mid eighties and and by that definition, we have
Speaker 1: lost price stability in the United States. UH. Inflation is
Speaker 1: now the number one economic issue. It's driving vast erosion
Speaker 1: in confidence in government, and the FED has to do
Speaker 1: what's necessary to restore a sense of price stability. I
Speaker 1: can't say exactly what that means in numerical terms, but
Speaker 1: I know that we are well away from it UH
Speaker 1: now in the judgment of the American UH people, I
Speaker 1: think that's what's going to be necessary. UH. In terms
Speaker 1: of UH monetary policy, I welcome the particularly the most
Speaker 1: recent speech of Chairman Powell, which I think UH moved
Speaker 1: a long way towards being in the right place. I'd
Speaker 1: like to see the FED signal a commitment to raise
Speaker 1: interest rates until real rates are clearly positive, or until
Speaker 1: it's clear that price to reality has been restored. And
Speaker 1: I think they've moved a long way in that direction.
Speaker 1: That's good of late, but I think they've got UH
Speaker 1: some distance to go before they achieve it. It has
Speaker 1: become an extraordinarily salient issue politically inflation. I mean President
Speaker 1: Biden did in his State of the Union he had
Speaker 1: said this is going to be his number one goal
Speaker 1: or one one of his primary objectives in the next
Speaker 1: year and beyond bringing down inflation. And I think some
Speaker 1: of us were left sort of scratching our heads, thinking,
Speaker 1: we'll hang on, what can the administration do? Since it's
Speaker 1: the FED job to be reducing inflation? What can the
Speaker 1: administration do to reduce inflation? Look the net effect of
Speaker 1: the things the administration talks about in terms of micro
Speaker 1: policies to reduce inflation, this gouging talk is frivolous, non serious,
Speaker 1: and utterly ineffectual. A guest price holiday would ultimately push
Speaker 1: up prices uh by raising demand. The student loan relief
Speaker 1: yesterday is injecting resources into the economy at a hundred
Speaker 1: billion dollar a year annual rate when the economy needs
Speaker 1: to be cooled off uh not uh heated up. The
Speaker 1: administration could be much more constructive than it has been
Speaker 1: with respect to energy supply. So I don't think the
Speaker 1: administrations by America policies operate in the direction of raising prices,
Speaker 1: as do various policies they pursue to raise small business.
Speaker 1: So the micro economic policies of the administration are have
Speaker 1: been a wash with respect to inflation at best, what
Speaker 1: could they do? UH? The Peterson Institute just released a
Speaker 1: study that I helped instigate and discussed. It's on their
Speaker 1: website that estimates that a realistic program of trade liberalization
Speaker 1: could take one point three off the cp I. Their
Speaker 1: scope for regulates for UH policies to increase immigration that
Speaker 1: we take substantial pressures off the labor market. But the
Speaker 1: approaches UH that would work, our approaches that would emphasize
Speaker 1: UM increasing the level of competition for American producers, not
Speaker 1: seeking to protect American producers. That's the that's the element
Speaker 1: U of micro economic policy that has a prospect for success.
Speaker 1: And I fear that the more popular themes around corporate
Speaker 1: gouging and the like are simply diversionary. The FED had
Speaker 1: one job. It is monumentally failed on that job on
Speaker 1: a consistent way for the last year and potentially into
Speaker 1: the future with this strategy. If a fund made manager
Speaker 1: made that kind of bad call for such a long time,
Speaker 1: there would be pretty concrete consequences. If an elected politician
Speaker 1: made that kind of mistake, they would almost certainly be consequences.
Speaker 1: Do you do you think there should be greater accountability
Speaker 1: for this particular failure and potentially for the forecasting system
Speaker 1: that produced it, but even potentially individuals. I I think
Speaker 1: the FED should be much more visibly acknowledging that it's
Speaker 1: been wrong and seeking to understand and learn from its
Speaker 1: errors than have been UH the case. And I think
Speaker 1: the failure for there to be some institutional review, you know,
Speaker 1: after bad battles, armies have after action reviews. The I
Speaker 1: m F has blundered in various situations, and there have
Speaker 1: been very thoughtful reviews of what in its culture and
Speaker 1: what in its mode led to those errors, and I
Speaker 1: think the FED should be engaged in more of that.
Speaker 1: I think, in fairness to the FED UM, the views
Speaker 1: they were expressing were relatively close two UH consensus views,
Speaker 1: not frankly this last fall, when I think they were
Speaker 1: behind the consensus and still sticking with their views, But
Speaker 1: for much of last year their views were tracking consensus views.
Speaker 1: And so I think the soul searching is less about
Speaker 1: accountable individuals at the FED, and then about how those
Speaker 1: consensus views UH were formed. And I guess I have
Speaker 1: been struck by a certain UH blitheness with which some
Speaker 1: of my UH friends in the economics community have kind
Speaker 1: of pivoted two addressing the current moment without thinking about
Speaker 1: what led them to be wrong in the past. Okay,
Speaker 1: let's let's um, let's get onto Ukraine, Russia and the
Speaker 1: fallout from the crisis. You were a senior Treasury official
Speaker 1: throughout those two Clinton administrations in the nineties, which were
Speaker 1: really kind of trying to think through after the end
Speaker 1: of the Cold War, how Russia was going to fit
Speaker 1: into the international economic system, decisions around whether it should
Speaker 1: join the G seven, all of those things. Should we
Speaker 1: be doing more to hurt Russia economically? Now? What what's
Speaker 1: your take on the kind of coordinated sanctions that have
Speaker 1: that have been achieved and the other actions that have
Speaker 1: been taken. I think by the standards of history and tradition,
Speaker 1: we've done a great deal. By the standards of the
Speaker 1: magnitude of the problem, there's a lot more to do.
Speaker 1: Understand this. The ruble is now trading at the same
Speaker 1: exchange rate that it was before the war started. Russian
Speaker 1: banks are not experiencing runs every day. Russia is getting
Speaker 1: revenues from the export of its energy products that are
Speaker 1: comparable to or greater than they were receiving before the war.
Speaker 1: Because of increased energy prices, the limitation on the sale
Speaker 1: of goods to Russia has not been nearly as comprehensive
Speaker 1: as was imposed on Iran at earlier UH moments. The
Speaker 1: truth is that, in a sense, and I strongly support this,
Speaker 1: using economic tools is trying to fight a war without
Speaker 1: costs and blood. That is the right thing, But in
Speaker 1: important respects, we've been trying to fight an economic war
Speaker 1: without costs two households from the first moment when the
Speaker 1: sanctions were introduced, and as it was explained that simultaneously
Speaker 1: we're gonna be doing everything we could to keep guest
Speaker 1: prices under control, I have felt that there was a
Speaker 1: moral failure. And if this is a unique and extraordinary
Speaker 1: worst threat in seventy years of naked aggression, then we
Speaker 1: need to be prepared to make sacrifices at the level
Speaker 1: of accepting higher energy prices, wearing sweaters on days with
Speaker 1: cool weather being a little hotter when UH we can't
Speaker 1: run air conditioners as strongly as we did before, sacrificing
Speaker 1: luxury exports UH to UH Russia, and sacrificing mercantile UH
Speaker 1: commercial UH interests. I do not believe that enough has
Speaker 1: been done. I believe that much more needs to be done.
Speaker 1: I was glad to see the step that was taken
Speaker 1: to stop the Russians from using their froe and reserves
Speaker 1: to pay debt, but in a way, it was an
Speaker 1: extraordinary and remarkable thing that for the six previous weeks
Speaker 1: they had been allowed to use their frozen reserves to
Speaker 1: prevent them UH from doing it. So I think that
Speaker 1: we have a long way to go in raising the
Speaker 1: pressure that we impose on sanctions, and frankly, I would
Speaker 1: prefer less rhetoric about the war criminality of what's going on,
Speaker 1: which it seems to me does not bring pressure to
Speaker 1: produce peace, if anything, slightly the opposite, by meaning that
Speaker 1: there's no exit strategy from this, less emphasis on that rhetoric,
Speaker 1: and much more emphasis on the imposition of UH economic
Speaker 1: pain we saw in the United States in two thousand
Speaker 1: and eight. What cascading lack of confidence in finance can
Speaker 1: do to destroy the performance of an economy. It's extraordinarily
Speaker 1: counterintuitive for any financial person, but I think we need
Speaker 1: to engage exactly those forces as forces of destruction with
Speaker 1: respect to the Russian economy right now. Recognizing that that
Speaker 1: may have some collateral implications for some few financial institutions
Speaker 1: in the West and being provided being prepared to provide
Speaker 1: the necessary UH kind of support. But I don't think
Speaker 1: we have yet stepped up fully in terms of engaging
Speaker 1: the tools of UH financial warfare. That's how I see
Speaker 1: it from UH the outside. But what I have is
Speaker 1: an outsider's view, and I've been an insider, and I
Speaker 1: have seen outsiders with naive views making it sound simpler
Speaker 1: than it is. And in fairness to those who are
Speaker 1: making the decisions, it may be that there are a
Speaker 1: whole set of collateral costs that they have thought through
Speaker 1: very carefully. But my instinct is that there's a good
Speaker 1: deal more that could be done, and I'd like to
Speaker 1: see some long queues outside some Russian financial institutions. I'd
Speaker 1: like to see some Russian defaults followed by the seizures
Speaker 1: of key Russian assets, and I'd like to see the
Speaker 1: ruble in free fall as part of judging the efficacy
Speaker 1: of a sactions program. You know, one of the other
Speaker 1: things that happened UM and that your watch the Treasury
Speaker 1: when we're working together in the late ninety nineties was
Speaker 1: the beginnings of the g twenty, which was pretty evident
Speaker 1: in the global financial crisis in the global response to that,
Speaker 1: but has been pretty absent in recent years, and certainly
Speaker 1: in response to this crisis, or indeed the inflation crisis
Speaker 1: that's now and cost of living crunch that's coming for
Speaker 1: so many countries. Um, I wonder, do you think it's
Speaker 1: the end of the G twenty. Look, I think the
Speaker 1: G twenty had a premise. The premise of the G
Speaker 1: twenty was that all countries wanted all other countries to
Speaker 1: do better, that we all gained from a more open,
Speaker 1: more rapidly growing economy, That the United States wanted China
Speaker 1: to grow faster, that China wanted the US to grow faster,
Speaker 1: That we all wanted to solve global problems together. And
Speaker 1: that was the premise of the G twenty. And that
Speaker 1: was basically true in the two thousand and eight financial crisis.
Speaker 1: Everybody wanted the crisis to be successfully weathered and the
Speaker 1: global economy to grow again. That is in very profound
Speaker 1: questions today. Self Evidently, it is not the objective of
Speaker 1: the other member, most of the other members of the
Speaker 1: G twenty to support Russia's economic flourishing. It is a
Speaker 1: substantial question whether we are hoping for the success of
Speaker 1: the Chinese economy and whether China is hoping for the
Speaker 1: success of our of our economy. So the premise of
Speaker 1: the G twenty, which was a forum for devising means
Speaker 1: to shared ends, is much less evidently true today. And
Speaker 1: before one talks about what you should convene a G
Speaker 1: twenty meeting to do and what kind of statement G
Speaker 1: twenty should make, it seems to me one has to
Speaker 1: get straight these questions about which communities have which shared ends.
Speaker 1: Right now, I perceive a bit of a vacuum in
Speaker 1: clear thinking on the is with some traditionalists wanting to
Speaker 1: just kind of keep going with the G twenty and
Speaker 1: have do stuff, and others have what seemed to me
Speaker 1: to be rather naive given the world we live in,
Speaker 1: conceptions of communities of democracy, which it seems to me
Speaker 1: do so much to exclude so many major stakeholders in
Speaker 1: the economic system that there's a real question as to
Speaker 1: whether they can be meaningfully affective. So I think we
Speaker 1: need some serious reflection on the mechanisms of international fora
Speaker 1: and consultation. I don't know that we're in the right
Speaker 1: place right now, but I think it takes a kind
Speaker 1: of realism that balances sort of two cliches. Uh one,
Speaker 1: some sharing of ends is a prerequisite to successful cooperation,
Speaker 1: and the other is you don't make peace with your friends,
Speaker 1: you make peace with your potential adversaries. And so I
Speaker 1: suspect we need to use the European term some kind
Speaker 1: of variable architecture, in which there are some faora where
Speaker 1: there's more in common among the participants but less reach,
Speaker 1: and other foura in which there is less in common
Speaker 1: among the participants but more uh reach. Anyone who thinks
Speaker 1: that these descriptions and that these kinds of issues and
Speaker 1: this is a place where I've gone from naive and
Speaker 1: stupid to less naive and stupid. I used to think
Speaker 1: that serious people discuss serious things, and diplomats discussed the
Speaker 1: shape of tables. And I think I've now come to
Speaker 1: realize how important the shape and composition of groups could be.
Speaker 1: And anyone who doubted that proposition needs to consider how
Speaker 1: consequential the rather loose statements that were made about allowing
Speaker 1: Ukraine into NATO UM proved to be in terms of
Speaker 1: what they set off. Larry Thomas, thanks very much for
Speaker 1: an excellent exchange on issues that I may will be
Speaker 1: of great interest to all the people listening in. Thank you, Stephanie.
Speaker 1: Well that's it for this episode. Thanks for listening. We'll
Speaker 1: have more from around the world next week and in
Speaker 1: the meantime, remember you can always find us on the
Speaker 1: Bloomberg Terminal, website, app or wherever you get your podcasts,
Speaker 1: and for more news and analysis from Bloomberg Economics, follow
Speaker 1: our Economics on Twitter. This episode was produced by Magnus Henrickson,
Speaker 1: with special thanks to Sommer Sadi, Larry Summers, and the
Speaker 1: Council on Foreign Relations in New York. Mike Sasso is
Speaker 1: the executive producer of Stephanomics and the head of Bloomberg
Speaker 1: Podcast is Francesca Levy m