Speaker 1: Hello, and welcome to stephanois the podcast that brings the
Speaker 1: global economy to you, and we have a special episode
Speaker 1: today in honor of the holiday season. A conversation with
Speaker 1: the economist Larry Summers, Professor at Harvard, former Treasury Secretary,
Speaker 1: frequent participant in the public debate about all things economic.
Speaker 1: Also my friend and former boss, Larry. I mean, it
Speaker 1: is the end of the year. I guess we can
Speaker 1: start with a little gloating. I mean, in any given year,
Speaker 1: economists get a lot wrong, and this year and especially
Speaker 1: large number of them wrongly assumed inflation was going to
Speaker 1: be a fleeting phenomenon. But you sounded the alarm early
Speaker 1: in the year, and we're considered a bit of a
Speaker 1: crank for doing so initially, but not anymore. What did
Speaker 1: you see that others didn't see? Definitely, you know, I've
Speaker 1: been right this year, but they've been plenty of years
Speaker 1: when I've been wrong. I did what I thought was
Speaker 1: a straightforward analysis of the situation. I looked at how
Speaker 1: short incomes were of trend, and I saw that they
Speaker 1: were about twenty five or thirty billion dollars short of
Speaker 1: trend each month, and that that number was declining, and
Speaker 1: then I saw that the proposed transfer payments and other
Speaker 1: stimulus represented close to two hundred billion dollars a month,
Speaker 1: and so I thought, if you were filling a thirty
Speaker 1: billion dollar hole with two hundred billion dollars of spending,
Speaker 1: there was likely to be some overflow, and that overflow
Speaker 1: would translate into inflation. I did the same calculation, essentially
Speaker 1: looking at g d P, and I saw a two
Speaker 1: or three percent GDP gap met with about fifteen percent
Speaker 1: of stimulus. I had thought a lot about the Obama period,
Speaker 1: and I agreed with the concern. Indeed, I expressed them
Speaker 1: at the time that that stimulus was too small. That
Speaker 1: stimulus and its first year was perhaps half of the
Speaker 1: g d P gap. This proposed stimulus was a significant
Speaker 1: multiple of the GDP gap. I thought there was a
Speaker 1: case that the Obama stimulus might have been low by
Speaker 1: might have been low by it surely was not low
Speaker 1: by a factor of five to ten. So it seemed
Speaker 1: to me that we were over stimulating the economy. That
Speaker 1: people had not seen inflation in forty years, so they
Speaker 1: assumed it was something you didn't need to worry about,
Speaker 1: but that if you just did a straightforward analysis, demand
Speaker 1: was going to run ahead of supply. I have to say,
Speaker 1: I think that's pretty much what we've seen. I don't
Speaker 1: think that the analyzes suggesting that this is all bottlenecks
Speaker 1: are right. Nine percent of CPI components show inflation above
Speaker 1: three percent, more than above the FEDS target. If I
Speaker 1: look at what's happening in the labor market, it looks
Speaker 1: to me like we've got substantial labor shortages that push
Speaker 1: wages up, but only with a lag, because wages aren't
Speaker 1: reset constantly. We've got substantial pressures in the housing market
Speaker 1: that have not manifest themselves at all really in the
Speaker 1: official price in disease UH yet, So I think we've
Speaker 1: got a fairly serious inflationary situation that's been growing for
Speaker 1: quite some time. If wages do go up, and it's
Speaker 1: true that we haven't seen as much as you might
Speaker 1: have expected in the last few months, but if they
Speaker 1: if they do go up, the last twenty years, we
Speaker 1: haven't seen a follow through from higher wages to higher inflation.
Speaker 1: Even in the Fed Zone model doesn't include much response
Speaker 1: from inflation. So why do you think this time will
Speaker 1: be different? Well, there are two different questions. One is
Speaker 1: the response of prices to wages, and the other is
Speaker 1: the responsive wages to unemployment. With respect to wages to prices,
Speaker 1: we just haven't seen very much variation in UH the
Speaker 1: level of wage growth, and therefore it would be hard
Speaker 1: to find a relationship with prices. I'm much more influenced
Speaker 1: by the experience of my own talking to businesses and
Speaker 1: even more people like those Bloomberg employees who spend their
Speaker 1: lives talking to companies, and they all say more or
Speaker 1: less the same thing. We're gonna have to push up
Speaker 1: wages because of labor shortages, and when we do, we
Speaker 1: have plenty of pricing power. And I guess I trust
Speaker 1: those anecdotes more than I trust econometric relationships estimated over
Speaker 1: periods when there's been very little variation. We did have
Speaker 1: some months in with low unemployment and not extremely rapid
Speaker 1: wage pressure, but that's one several month experience in twenty years.
Speaker 1: I don't think there's any support in the data for
Speaker 1: the view the FED took that the economy can enjoy
Speaker 1: three and a half percent unemployment for multiple years with
Speaker 1: significantly declining UH inflation. Indeed, the FEDS forecasts call for
Speaker 1: unemployment below its estimates of the normal level interest rates
Speaker 1: never reaching in the next few years. It's uncept of
Speaker 1: the normal level and nonetheless continuous deceleration of inflation that
Speaker 1: might happen, but it doesn't seem to me that it
Speaker 1: is the most in joyitive reading of our macroeconomic history.
Speaker 1: Just to follow up briefly on the on the wages
Speaker 1: and prices thing, you're you're obviously right that that companies
Speaker 1: have been complaining about labor shortages, have been talking archly
Speaker 1: about rising costs, meaning they were going to have to
Speaker 1: push up prices, and they clearly do have pricing power.
Speaker 1: All the data that we've looked at, and we discussed
Speaker 1: it on the on the podcast a few weeks ago
Speaker 1: suggested that they've already used that power to raise profit
Speaker 1: margins this year, well beyond any increasing costs. And it's
Speaker 1: not obvious that they couldn't absorb some of this increase
Speaker 1: wages in profit margins. I mean, inherently that wouldn't be
Speaker 1: such a bad thing, right if you had more wages
Speaker 1: for workers and companies absorbed some of it in profit margins,
Speaker 1: which in some cases are historically high. You know, Stephanie,
Speaker 1: prices are set by supply and demand, and we're seeing
Speaker 1: in a very wide range of sectors rising demand. For example,
Speaker 1: retailers are engaged, apparently, is best one can tell from
Speaker 1: the anecdotes, in much less promotional activity this Christmas than
Speaker 1: they have been in previous Christmas. That's showing up in
Speaker 1: higher margins for them and for their suppliers. I don't
Speaker 1: think there's anything nefarious about that. That's just what goes
Speaker 1: with an economy where UH stores are stores are full. Um.
Speaker 1: I don't know that, you know. I think the diagnosis
Speaker 1: that you're implicitly offering is the one that the Nixon
Speaker 1: administration rather unsuccessfully offered, that rising prices necessitate price controls
Speaker 1: so as to contain profits and reduce inflation. That worked
Speaker 1: out rather spectacularly badly, and fortunately that's not an idea
Speaker 1: we've heard this time around. I think trying to restrict
Speaker 1: prices would be the best way I could imagine two
Speaker 1: lengthen the period of shortages, UH bottlenecks, and disillusion me.
Speaker 1: We tried that strategy with respect to gasoline in the
Speaker 1: late nineties seventies. I don't know why businesses would not
Speaker 1: be pushing on prices when they had shortages of goods
Speaker 1: and supply. I guess well, I'm tripping up over is
Speaker 1: that you've written quite a lot in the past. An
Speaker 1: important academic is actually about the decline in labor bargaining
Speaker 1: power and the impact that this had had, and that
Speaker 1: particularly how the scales had shifted in favor of employers
Speaker 1: in many parts of the labor market. Um, it just
Speaker 1: sort of feels in the analysis that you're giving. I
Speaker 1: don't recall you accuse me of proposing price controls. I
Speaker 1: don't recall ever saying that, but I'll check the transcript.
Speaker 1: But the description you're giving suggests there is no way
Speaker 1: to reset that balance or perhaps even in the sort
Speaker 1: of macro terms, start having a higher share of national
Speaker 1: income going to labor relative to capital, you know, reversal
Speaker 1: of what we've had in the last few years. Because
Speaker 1: if if wages go up faster than productivity, you're saying
Speaker 1: the FED should definitely put on the brakes in response
Speaker 1: to that, and if it doesn't, companies will inevitably just
Speaker 1: pass on any wage increase and it will just result
Speaker 1: in more and more inflation. It doesn't feel like there's
Speaker 1: any way to reverse that psycho we've seen over the
Speaker 1: last few decades. That's that's really not what I'm saying, Stephanie.
Speaker 1: I mean, first, just on the facts. This period of
Speaker 1: high inflation has coincided with more rapid reel wage reduction
Speaker 1: than we had seen previously. So for the majority of workers,
Speaker 1: it's working out badly so far, not working out well.
Speaker 1: That's a political response to inflation that we're observing. Second,
Speaker 1: I am a strong supporter of the type of labor
Speaker 1: law reforms that the administration has worked on. My colleague
Speaker 1: in the labor power paper that you wrote referred to
Speaker 1: Anna Stansbury, has done very important work showing that when
Speaker 1: you put reasonable penalties on it influences behavior and allows
Speaker 1: union organizing to take place. I am a strong supporter
Speaker 1: of measures to strengthen labor through UH, the labor movement
Speaker 1: in unions, through a range of innovations that would encourage
Speaker 1: labor power. What I don't agree with is UH the
Speaker 1: idea that's simply running the economy hot on an unlimited
Speaker 1: basis can do it. If I thought we could sustainably
Speaker 1: run the economy in a red hot way, that would
Speaker 1: be a wonderful thing. But the consequence, and this is
Speaker 1: the excruciating lesson we learned in the nine seventies. Consequence
Speaker 1: of an overheating economy is not merely elevated inflation, but
Speaker 1: constantly rising inflation. And that's why my fear is that
Speaker 1: we are already reaching a point where it will be
Speaker 1: challenging to reduce inflation without giving rise to recession. Should
Speaker 1: we do all kinds of things. Should we raise a
Speaker 1: minimum wage, absolutely, Should we empower unions, yes, but this
Speaker 1: kind of policy, there are no examples of successful inflationary
Speaker 1: policy that has worked out to the benefit of workers.
Speaker 1: And there are dozens of examples, from the Labor Party
Speaker 1: in Britain in the nineties seventies to multiple Latin American
Speaker 1: experiences to our own experience in UH the nineteen sixties
Speaker 1: and seventies, where it backfired with respect to the very
Speaker 1: people it was trying to help. Do you think biden
Speaker 1: nomics deserves a dictionary entry or will deserve a dictionary
Speaker 1: entry when the dictionaries get rewritten or revised? Does it
Speaker 1: does it amount to anything in your view? I mean,
Speaker 1: we've had any twelve months. I think we'll have to
Speaker 1: see what happens down down the road. UH. The hope
Speaker 1: would be that it represents a kind of progressive supply
Speaker 1: side economics that emphasizes supply and does so through public investment. Unfortunately,
Speaker 1: the share of the spending that represents transfer payments rather
Speaker 1: than public investment has been sufficiently high that I'm not
Speaker 1: sure how great the benefits will be, and I'm concerned
Speaker 1: that there's been insufficient incent impulse to making the public
Speaker 1: investments uh cost effective, streamlining infrastructure investment, for example. On
Speaker 1: the other hand, Uh, Stephanie, I think that the recognition
Speaker 1: that we have On the one hand, on your flight,
Speaker 1: you can now watch television in the seat in front
Speaker 1: of you in a way that would have been inconceivable
Speaker 1: thirty years ago. On the other hand, it takes half
Speaker 1: an hour more to get from Boston to Washington than
Speaker 1: it did thirty years ago, just because of the decaying infrastructure.
Speaker 1: That's a kind of misplaced priority, and it's a metaphor
Speaker 1: for what's going wrong, um, in important parts of the
Speaker 1: way our economic system has functioned. I mean, I've known
Speaker 1: you for a long time and through a lot of
Speaker 1: that time, and certainly when you and I were the
Speaker 1: Treasury Department in the late nineties. The kind of default
Speaker 1: view of most government government governments was that government should
Speaker 1: meddle as little as possible in mark and set the
Speaker 1: rules for markets, but then let the chips fall where
Speaker 1: they may, especially on trade, um and potentially the environment,
Speaker 1: industrial policy, all those things we tended to be a
Speaker 1: sort of default was to be suspicious of these things. Um,
Speaker 1: do you have you had a change of heart on
Speaker 1: those things? I mean, I notice notice that Janet Yellen
Speaker 1: recently talked about needing to be less reliant on other
Speaker 1: countries for critical goods. And I've seen you have talked
Speaker 1: a bit about in the environment of wanting a more
Speaker 1: sort of muscular approach to government. Are you Are you
Speaker 1: rethinking your view of government. I think that there's been
Speaker 1: this extraordinary change in relative prices stuff. Um, if you
Speaker 1: look at the relative price of the day in a
Speaker 1: hospital and a television set, it's changed by a factor
Speaker 1: of a hundred since the night. That means we're in
Speaker 1: a very different economy and a much larger share of
Speaker 1: the economy, a much larger share of the people working
Speaker 1: ari in sectors that have a range of market face years.
Speaker 1: And certainly there's a case for government involvement in those
Speaker 1: But I think what needs to be very very careful
Speaker 1: about how governments will carry out any kind of industrial
Speaker 1: policy intervention. And I have to say that when I
Speaker 1: hear about in industrial policy in the name of achieving
Speaker 1: green objectives, I'm much more sympathetic, for example, than when
Speaker 1: I hear about it in the name of preserving jobs.
Speaker 1: I think the available evidence on protectionist strategies is that
Speaker 1: they mostly cost a million dollars a job saved or
Speaker 1: more once you work through their full UH impacts. Take
Speaker 1: for example, UH steal protection. UH steal textion operates to
Speaker 1: save potentially fifty tho jobs of steel workers, sixth as
Speaker 1: many as we have manicurists in the United States, but
Speaker 1: it makes industries with five million people that you steal
Speaker 1: less competitive than the otherwise would be. Going back to
Speaker 1: the Janet yelling comments, a lot of people look at
Speaker 1: the supply chain snarl ups, the lines of container ships
Speaker 1: outside Long Beach and other big ports and say Donald
Speaker 1: Trump was right, we should be less reliant on all
Speaker 1: these foreign manufacturers. It's important to understand why we have
Speaker 1: those supplies, why we have those long lines. It is
Speaker 1: not because of anything that China is doing. It is
Speaker 1: because our demand for goods searched and I would much
Speaker 1: rather see us be better at expanding port capacity quickly.
Speaker 1: Do we need to pay attention to rare earths and
Speaker 1: other goods that are highly concentrated in the world for
Speaker 1: our national security? Yes, we do. Should we institute some
Speaker 1: broader program of non reliance on trade, I suspect there
Speaker 1: would be very substantial inefficiencies from doing that. I do
Speaker 1: think we need to manage the global economy much more
Speaker 1: than we have. That's why I was such a strong
Speaker 1: supporter of the initiatives that Secretary yell And brought to
Speaker 1: completion to harmonize corporate taxes around the world so capital
Speaker 1: could run, but it couldn't hide and would be taxed
Speaker 1: in uh reasonable ways. That's why I think the right
Speaker 1: trade agreements pay attention also to the context in which
Speaker 1: trade takes place. What kind to regulations, uh there are?
Speaker 1: What kinds of rules there are for workers? What kind
Speaker 1: of exchange rate arrangements? Uh there are? But I think
Speaker 1: a strategy of actively pursuing disintegration is not likely to
Speaker 1: make us more secure. And certainly the first order effect
Speaker 1: of stopping us from buying goods from abroad when they
Speaker 1: are cheapest will be to exacerbate inflation rather than to
Speaker 1: reduce inflation. So the idea of cutting off cheap supply
Speaker 1: as a strategy for reducing inflation at a moment when
Speaker 1: that's our principal economic problem seems to short run economic
Speaker 1: problem seems to me bizarre at two very quick ones.
Speaker 1: Because you mentioned trade. One of the areas where President
Speaker 1: Biden has been probably most similar to his predecessor is
Speaker 1: in relations to China, um general attitude to China. Do
Speaker 1: you basically agree with that? I think we have not
Speaker 1: yet formulated a satisfactory China strategy. I don't think President
Speaker 1: Trump had one. I think two of the struculence is
Speaker 1: very risky, and we have had a lot of that.
Speaker 1: I hope we'll see evolution in the months ahead. Just
Speaker 1: going back to what we were talking about the beginning,
Speaker 1: and you you painted a picture where you thought it
Speaker 1: was much more likely than not that we were ending
Speaker 1: a period. But we're starting a period that was going
Speaker 1: to be quite hard to control inflation, and inflation could
Speaker 1: continue for some time. You know, people will remember for
Speaker 1: many years you were talking about secular stagnation. If you
Speaker 1: look at the bond market, very low interest rates still
Speaker 1: out into the long term future. There's the suggestions meems
Speaker 1: to be from them that secular stagnation is still here,
Speaker 1: that we still have structurally low growth prospects. How is
Speaker 1: do you still believe in secular stagnation? Do you now
Speaker 1: believe in secular stagflation? I think secular stagnations are real
Speaker 1: risk looking out a few years. I certainly think that's
Speaker 1: what the market is, as you say, Stephanie, pricing in
Speaker 1: I'm surprised by how low long term interest rates are.
Speaker 1: That's something I didn't get right. I would have forecast
Speaker 1: larger increases in interest rates given conditions. I think part
Speaker 1: of it is that markets are foreseeing that we will
Speaker 1: do what's necessary to contain inflation, and that process will
Speaker 1: be quite contractionary, and that's part of what I think
Speaker 1: is being factored into the level of markets. But I
Speaker 1: do think there's a real chance that there will be
Speaker 1: a return to secular stagnation. I'm not sure you know.
Speaker 1: In some ways, Stephanie, this current episode of a very
Speaker 1: large infusion of spending brings back memories of World War Two,
Speaker 1: and there was an expectation that after World War Two
Speaker 1: the economy would return to the kind of secular stagnation
Speaker 1: depression that it had been and for a variety of
Speaker 1: reasons that never materialized. I'm really not sure what's going
Speaker 1: to come after uh this current episode. I'm certainly not
Speaker 1: confident that we're going to have sustained excess demand for
Speaker 1: many years. I think the challenges that we've pumped up
Speaker 1: aggregate demand now and then who knows how we're going
Speaker 1: to work our way through back to more normal levels
Speaker 1: of demand. Well, you've paid it a pretty worrying picture
Speaker 1: for the next year, for twenty two. So I kind
Speaker 1: of hope for all our sakes that you're more wrong
Speaker 1: next year than you were this year. But I hope
Speaker 1: you have a happy new year. And thank you very much,
Speaker 1: Larry something, thank you. And that is it for this
Speaker 1: special episode of Stephanomics. We'll be back next week with
Speaker 1: a special look ahead to two. In the meantime, enjoy
Speaker 1: your holidays if you get any, and follow at Economics
Speaker 1: on Twitter if you feel like escaping into news and
Speaker 1: analysis from Bloomberg Economics. This episode was produced, as ever
Speaker 1: by A Mangus Henrickson, with special thanks to Larry Summers,
Speaker 1: Kelly Friendly and Julie Shampoo. Mike sasso Is executive producer
Speaker 1: of Stephonomics and the head of Bloomberg Podcast is francesco Leavie.