WEBVTT - Larry Summers Talks Inflation, Macro Outlook

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>And we start with the backward looking economic conmbers of

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<v Speaker 2>the United States this week and the forward looking statement

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<v Speaker 2>of economic productions from the FED and what the chair

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<v Speaker 2>Jay Powell had to say about it. And we welcome

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<v Speaker 2>back our very special contributor. He's Larry Summers of Harvard. So, Larry,

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<v Speaker 2>great to have you with us. What did you make

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<v Speaker 2>out if we had some encouraging numbers actually on inflation.

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<v Speaker 2>The same time, the FED is a little reluctant to

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<v Speaker 2>talk too quickly about cutting.

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<v Speaker 1>The numbers were encouraging. It's one month, but you know,

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<v Speaker 1>every month is data, and I think the right posture

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<v Speaker 1>has to be agnosticism about where we are going forward.

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<v Speaker 1>It's hard to interpret the Fed's forecast speak because they

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<v Speaker 1>probably had a lot of inertia with everybody having set

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<v Speaker 1>their view coming into the meeting, so it's not really

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<v Speaker 1>clear that the projections that people were making genuinely reflected

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<v Speaker 1>the new numbers. That was a point that Chairman Bowell stressed.

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<v Speaker 2>We also have fiscal policy issues coming up in a

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<v Speaker 2>sense around the ballot come November. There's increasing discussion about

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<v Speaker 2>the alternatives between Joe Biden and Donald Trump. There's a

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<v Speaker 2>fiscal policy, and you've been outspoken on the question, as

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<v Speaker 2>others have been about the possibility of inflation with the

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<v Speaker 2>Trump economic policy. Take us through that.

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<v Speaker 1>Look. I don't think there's been a more inflationary presidential

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<v Speaker 1>economic policy platform in my lifetime. Perhaps George McGovern in

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<v Speaker 1>nineteen seventy two in some ways would be a comparison,

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<v Speaker 1>But other than that, I don't think there's been remotely

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<v Speaker 1>comparably irresponsible set of proposals. His tariff proposals are the

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<v Speaker 1>biggest supply shock, pushing up prices not just of imported goods,

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<v Speaker 1>but of all the goods that compete with imported goods.

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<v Speaker 1>That anybody who's worried about gouging should think that more competition,

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<v Speaker 1>including from abroad, is a very very important step. And

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<v Speaker 1>he's for much greater restrictions on the supply of labor,

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<v Speaker 1>leading to more wage inflation pressures. And he's for scaling

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<v Speaker 1>back the subsidies to renewable energy, raising energy costs. So

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<v Speaker 1>look at it from demand, look at it from supply.

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<v Speaker 1>This is a prescription for a major increase in inflation,

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<v Speaker 1>and of course, the expectation of that major increase in inflation,

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<v Speaker 1>and possibly the fact that the FED will be under

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<v Speaker 1>much more pressure to prove that it's credible. This could

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<v Speaker 1>easily be a prescription for a ten percent mortgage rate,

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<v Speaker 1>something that I lived through and I bought my first house,

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<v Speaker 1>but that I didn't think we were going to see

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<v Speaker 1>again in the United States. This is really dangerous stuff.

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<v Speaker 2>Literally, we pick up on the tariff's issue specifically, as

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<v Speaker 2>we know, President former President Trump traveled to Capitol Hill

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<v Speaker 2>this week and there were reports in the press that

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<v Speaker 2>he floated, at least as an idea replacing some are

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<v Speaker 2>all of income tax with tariffs. There was one report

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<v Speaker 2>that actually would just replace it entirely. What would that

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<v Speaker 2>do from an macroeconomic point of view?

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<v Speaker 1>Look, people miss people misspeak. Sometimes they're not serious about

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<v Speaker 1>the things they say. That's probably a feature of candidate Trump.

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<v Speaker 1>But replacing the income tax with revenue with tariff would

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<v Speaker 1>be the worst macroeconomic policy proposal in US history. It

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<v Speaker 1>of course burdens the middle class and the poor who

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<v Speaker 1>purchased goods goods that exist on international markets. So it's regressive,

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<v Speaker 1>as many economic commentators have suggested. But that is actually

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<v Speaker 1>the least of it. Think about it this way. The

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<v Speaker 1>Smoot Hawley tariffs, which did enormous damage some people would

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<v Speaker 1>say made the depression great, were six tenths of one

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<v Speaker 1>percent of GDP. If you replaced half of income tax revenues,

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<v Speaker 1>not all like he talked about, if you replaced half

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<v Speaker 1>of income tax revenues with tariffs, those would be tax

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<v Speaker 1>those would be tariffs six times smooth Hally levels. That's

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<v Speaker 1>got the potential to do enormous damage to the competitiveness

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<v Speaker 1>of every US exporter, to do huge damage to all

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<v Speaker 1>kinds of workers who use imported goods in what their

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<v Speaker 1>businesses produce, to create a downward spiral, as much higher

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<v Speaker 1>prices for everything we import means consumers have less to

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<v Speaker 1>spend on everything else, create worldwide economic warfare as the

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<v Speaker 1>rest of the world responds. This is a prescription for

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<v Speaker 1>the mother of all stagflations. Now, I don't think it's

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<v Speaker 1>likely to happen even if President Trump is elected, so

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<v Speaker 1>I don't know that markets should be discounting all of that.

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<v Speaker 1>But this is something that I think should be viewed

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<v Speaker 1>very ominously.

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<v Speaker 2>Let me turn to another subject that you and I

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<v Speaker 2>have talked about in the past, but we had developments

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<v Speaker 2>this week over in Barrie, Italy with the meeting of

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<v Speaker 2>the G seven as they took action actually on the

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<v Speaker 2>Russian assets. As I understand, it's not so much the

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<v Speaker 2>principle but the interest off of them that would back

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<v Speaker 2>a bond. You early on in this program called for

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<v Speaker 2>the use of those Russian assets, the central back assets,

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<v Speaker 2>the government assets, to be used for Ukraine. Are you

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<v Speaker 2>pleased with what they've done? Have they gone far enough?

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<v Speaker 1>There's a major step forward. I am very pleased, but

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<v Speaker 1>I don't think they've done everything that could be done. Look,

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<v Speaker 1>the best estimate is that there's in the neighborhood of

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<v Speaker 1>three hundred billion dollars of frozen Russian assets. Those assets

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<v Speaker 1>have already been frozen. Nobody thinks they're going back to Russia.

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<v Speaker 1>So if there are issues about expectations about fairness, any

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<v Speaker 1>of that, we crossed that rubicon two years ago. The

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<v Speaker 1>big step they took was not just authorizing the use

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<v Speaker 1>of the interest, but setting up a loan mechanism. Today

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<v Speaker 1>the Ukrainians are going to get access not just to

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<v Speaker 1>this year's interest payments, but to interest payments out over

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<v Speaker 1>quite a number of years, perhaps totaling fifty billion dollars

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<v Speaker 1>or more. I think ultimately the right thing to do

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<v Speaker 1>is going to be to simply take these assets or

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<v Speaker 1>take the perpetuity of all the income that they will generate.

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<v Speaker 1>But fifty billion dollars is a lot of money. It

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<v Speaker 1>comes at a very important time to provide a shot

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<v Speaker 1>in the arm for Ukraine. It's going to be crucial

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<v Speaker 1>for US, for the international financial institutions to work with

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<v Speaker 1>the Ukrainians to make sure that those resources are used

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<v Speaker 1>with maximum effectiveness. And this also David does something else

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<v Speaker 1>that's important. If this had not been done, I and

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<v Speaker 1>others were very concerned that even if resources from Ukraine

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<v Speaker 1>could be found in national budgets, it would come out

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<v Speaker 1>of other vital international expenditures to come back global warming,

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<v Speaker 1>to protect against pandemic threats, to reduce global poverty, and

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<v Speaker 1>so this is also an important step for internationalism more broadly.

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<v Speaker 1>It's been a long road on this, and while it

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<v Speaker 1>didn't start with as aggressive an effort from the US

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<v Speaker 1>government as I might have hoped. I really want to

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<v Speaker 1>congratulate Secretary Yellen, especially people at the National Security Council,

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<v Speaker 1>her deputy Wallyadieimo Sherpa Deleep Singh for having driven something

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<v Speaker 1>that is really profoundly important. This was US leadership with

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<v Speaker 1>others being reluctant, and it was a case study in

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<v Speaker 1>the last few months of effective, determined, creative economic diplomacy.

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<v Speaker 2>Okay, Larry, thank you so very much for being with us.

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<v Speaker 2>That's Larry Summers of Harvard, our very special contributor here

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<v Speaker 2>on Wall Street Week