June 12, 2021

Lawrence Summers

Former Treasury Secretary and Harvard economist Lawrence H. Summers discusses his concerns about an overheated post-pandemic economy leading to inflation and what he believes the White House and the Fed should do about it.

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The heat is on… THIS WEEK on Firing Line.

Summers: I was on the worried side about inflation and it’s all moved much faster, much sooner than I had predicted.

Economist and former treasury secretary Larry Summers has worked for two Democratic presidents. And now has a warning for a third.

Summers: The economy may be charging towards a wall. 

He says stimulus overkill has the economy in overdrive, And he’s sounding the alarm on inflation…

Summers: I think this is the least responsible macroeconomic policies we had in the last 40 years

Not everyone is buying it. 

Jared Bernstein: With respect to Larry and his piece, it’s just flat-out wrong that our team is, quote, “dismissive” of inflationary risks. 

But with prices on the rise… And jobs to fill… What does Larry Summers say now?

‘Firing Line with Margaret Hoover’ is made possible in part by… and by… Corporate funding is provided by…

HOOVER: Larry Summers, welcome to Firing Line.

SUMMERS: Glad to be with you. I watched Firing Line in my youth, so I never thought I’d have the chance to be on the Firing Line. 

HOOVER: Listen, in the past year, we have seen a historic drop in economic growth, followed by a historic rise in growth. The stock market has both plunged and soared. Unemployment was at its highest rate observed by the Bureau of Labor and Statistics. And now there are reports of labor shortages. Meanwhile, public debt has risen to highs not seen since World War Two, while at the same time household debt service has dropped to a 40-year low. Professor Summers, is it fair to say that the economy is in completely uncharted waters right now? 

SUMMERS: Yeah, I think it’s a very different set of economic phenomena than we’ve seen before. In many ways, the right analogies are not analogies from past business cycles, they’re analogies from past natural events. What happens to the economy of Boston with a blizzard? But obviously, while we’ve seen many blizzards, we haven’t seen many pandemics that cause the majority of the population to be essentially locked in their homes for periods of months. And so it’s an environment that nobody can confidently predict. And therefore it’s an environment in which, when you can’t predict what’s underneath you, it’s usually a good idea to step somewhat gingerly.

HOOVER: Right. So the issue of inflation, it’s on the minds of many economists and policymakers right now, as you know. And it’s an economic condition unknown to tens of millions of Americans who didn’t live through widespread inflation in the 1970s. So for these viewers, can you describe the concern about inflation in plain terms.

SUMMERS: Look, most of us are accustomed to an economy where prices are, broadly speaking, stable. Money as a measuring rod is kind of something that is constant. But it hasn’t always been that way. There were periods in the 1970s when the price of a can of Coca-Cola was doubling in four or five years. And so inflation is a situation where the measuring rod of money isn’t something that you can rely on as being at fixed length. And I think the concern right now is that a totally necessary thing — insulating and protecting the population from Covid — somehow by our political process may have been taken further than we would have liked. And so if you looked at how the economy was coming into this year, we had total wages and salaries coming to people were 20 or 30 billion dollars a month lower because many of them had to be home because of Covid and the economy was slowed. But we put in a stimulus that was putting into the economy more than 200 billion dollars a month. And so when you take a hole and you overfill it, you’re likely to have problems. And that’s started to manifest itself. It manifests itself in the fact that even though people say there’s high unemployment, the number of businesses with vacant jobs is higher than it’s ever been. Another indicator that economists use to kind of sort things out is how many people are quitting, because when times are really tight in the labor market, people feel like they can quit. So on all these kinds of indicators, you’re seeing, it seems to me, some inflationary psychology take hold. And I think we know that inflation’s like a lot of other things. It’s a lot easier to prevent than it is to cure. And I think the credibility of policymakers, including those that the Fed is much easier to preserve than it is to restore. And I think we need a bit more of that mindset right now. The broad objectives of President Biden, they are totally right: investing in our country’s future, doing more for kids, protecting middle class families, making investments in a green economy given that climate change is a huge threat to all of us — that is all right. But we need to do it in a way that will be macroeconomically credible or I’m afraid we’ll be setting ourselves up for bigger collisions in the future. 

HOOVER: So help us understand, Professor Summers, the root causes of the inflationary worries. Is it bottlenecks in the supply chain across the various industries? Or is it pent up demand and excess savings from consumers who spent a year hiding from coronavirus? Is it, you know, fiscal policy that’s ultimately the Covid stimulus that the government has induced consumption? How do you pinpoint the root causes?

SUMMERS: The answer to those questions is yes. 

HOOVER: All of the above.

SUMMERS: Yeah, all of the above. Everything in economics, Margaret, goes back to supply and demand. So you cited a number of factors. Some of the factors increased demand, some of the factors reduced supply. And the question, it seems to me, is where are we on that balance? And I guess what I see right now as I look at the economy is that most of the forecasters are saying that demand is going to increase by 10 percent or more over the next couple of quarters. And so if demand rises faster than supply, that’s going to be a factor pushing towards inflation. And of course, one of the things about inflation, it’s important to understand, is the importance of expectations. 

HOOVER: Yeah.

SUMMERS: If people think that prices are going up, they’re going to accelerate their buying and that’s going to make prices go up. And you’re seeing a lot of that in the housing market.

HOOVER: Here is Treasury Secretary Janet Yellen on the topic of inflation last month. Take a look at this.

JANET YELLIN CLIPS: I really doubt that we’re going to see an inflationary cycle. // The recent inflation we have seen will be temporary. //  We’ll continue, I believe, through the rest of the year, to see higher inflation rates, maybe around 3 percent. But I personally believe that this represents transitory factors.

HOOVER: So is the White House underplaying how serious the risk of inflation is, or are they trying to manage inflationary expectations? 

SUMMERS: I think Janet Yellin’s a person of great judgment and great integrity, and she’s calling it as she sees it, and I sure hope she’s right. Maybe it’ll end up being transitory, but I see a lot of factors pointing the other way. I see the housing market and none of that has yet shown forward in the price indices. I see the labor market where the shortages of labor are getting worse and worse and wage growth is accelerating. So it might be that inflation is transient, but I don’t think that’s something that we can count on at this point. And in some ways when you say inflation is transient, people conclude you’re not going to do anything to slow it down. And when they reach that conclusion, that itself can turn out to accelerate inflation. I do think you have to look at a balance of risks. And six months ago, the balance of risk was, who knew what was going to happen in the pandemic. There were a lot of people unemployed. The economy might slip back into recession. Today with the biggest labor shortages in history, with growth in the second quarter predicted to be above 10 percent by many people, a recession is not the main risk. The main risk is that our economy’s going to overheat. And then once it overheats, it’s going to be hard to put out the fire without doing a lot of damage and causing a lot of problems. And so I’d like to see us shift towards a policy concern. I mean, let me give you a, let me give you another example. We’ve got houses, the housing market is an incredible place. For the first time since they started having these statistics, the majority of houses are selling above their asking price. Why in the face of a housing market on fire, should the Fed be intervening in the markets to buy up mortgage backed securities and subsidize mortgages? Seems like that’s adding gasoline

HOOVER: In January 1968, with inflation rising, William F. Buckley Jr. welcomed economist Milton Friedman to the original incarnation of Firing Line for a conversation titled The Economic Crisis. Watch this.

MILTON FRIEDMAN: I personally believe that we do not know enough to fine tune with either fiscal or monetary policy, and that the best thing we can do is to try to keep either fiscal policy or monetary policy from disturbing the economy. You know, this is a funny thing. It’s much broader in scope, Bill. The natural tendency for people if anything is wrong is to say let’s pass a law and have the government deal with it without asking themselves whether the thing that is wrong may not have been produced by the government. 

HOOVER: That was half a century ago. Professor Summers, what have we learned since then? 

SUMMERS: I don’t share Milton Friedman’s kind of conviction. I think the government has an important role in stabilizing the economy. It just needs to use good sense in setting stabilization policies. Milton Friedman had a very strong ideology that you shouldn’t ever try to stabilize the economy. And if you tried to use that ideology, I think the financial crisis of 2008 would have turned into a depression. I think a variety of the other problems we had would have been very serious. So I’m not someone who believes that the best government is the least government. I’m somebody who believes very strongly in public investment. I’m somebody who believes that the market system leaves a residue of many important problems — the environment and inequality are two examples — that require strong government actions. So I respect Milton Friedman as a thinker. But I did not share — did not and do not share — his views at all. And, you know, Milton Friedman would have opposed the kinds of tax increases that are under discussion right now. And I actually think they’re very important for our country’s economy. 

HOOVER: So if you were the Chairman of the Federal Reserve, how would you guide the Fed in this moment? 

SUMMERS: Well, I already indicated that I think that it’s time to be at least moving towards the end of the quantitative easing policies. We don’t have a need for pushing the accelerator to the floor. The effect of quantitative easing policies for taxpayers is that they’re substituting short term debt for long term debt. Well, if you’re buying a house right now, I think this would be a good time to have a long term mortgage, not a short term mortgage.

HOOVER: Right.

SUMMERS: But look, it’s a very fundamental principle in monetary policy, which is you don’t want to surprise and jolt people. And we’ve built up a set of expectations. And so, as I said at the very beginning, when you’re on uncertain floor, you need to walk gingerly. And so I think Jay Powell and his colleagues have to be very careful as they set these policies. But the direction for me would be one of starting to lift that accelerator up from the floor. 

HOOVER: When it comes to income inequality and quantitative easing, do you reflect back on these historically long periods of low interest rates as having contributed or been a catalyst for the wealth gap that we see now? 

SUMMERS: I’m not sure. I certainly know that argument. It’s an argument that’s made by many conservative thinkers. And I certainly understand the argument that lower interest rates cause asset prices to go up, and it’s the wealthy who have assets. And that’s a way to look at it. A different way to look at it is that, on average, the wealthy lend and the middle class borrows. And so lower interest rates mean lower returns to wealthy people and lower costs of borrowing for middle class and poor people. And that goes in the opposite direction. And I think sorting out which way it balances is a tricky thing. So I don’t think that’s the best argument for concern about where we are. I think the real concerns go to, is the economy going to overheat? How’s this going to play out over the longer term? 

HOOVER: You called this year’s 1.9 trillion dollar stimulus legislation, quote, “the least responsible macroeconomic policy we have had in the last 40 years.”

SUMMERS: I called the monetary policy and the fiscal policy taken together, both the 900 billion and then the 1.9 trillion, I did call that irresponsible and I think it was irresponsible. But I wanted to caution, people say, well, you’re against this spending, so you must be against all spending. That would be very much that would be very much not my view. 

HOOVER: That isn’t your view. And you’ve been clear. I mean, your former colleague Jason Furman, the former chair of President Obama’s Council on Economic Advisers, tweeted, quote, “It was my sense based on talking to academic macroeconomists that are not part of the D.C. debate, that about 90-plus percent of the American Rescue Plan was too large and 70-plus percent think the Fed is currently too dovish.” In other words, he backed up your position. 

SUMMERS: Look, nobody knows what’s going to happen. And everybody’s operating in a measure of uncertainty, and consensus forecasts turn out to be wrong all the time. But the views that I was expressing that the rescue plan was excessive relative to the macroeconomics as it stood, I think those were the views of most people who were trying to view it in an analytical or detached way. But I think it would be a grave mistake if, having made that, what I think was a mistake, having made it, we took it as license now to not make fundamental investments in the future of our country. And so when I see myself quoted by various conservatives in Congress, I’m on the one hand flattered by the attention, and I’m grateful that they’re internalizing some of the concerns that I’ve expressed. But I also know that they’re taking my views quite out of context.

HOOVER: The May jobs report showed 559 thousand jobs were added to the economy, pushing the unemployment rate down to 5.8 percent but more and more employers are saying that they’re unable to fill vacant positions. The Labor Department has reported an all time high of 9.3 million job openings in April. And the quit rate, as you mentioned, is also at a two-decade high as the post-pandemic economy opens up. Why is this happening? 

SUMMERS: Why are we having job shortages? I think we’re having job shortages for a combination of reasons. Some people still feel unable to work given the risks associated with Covid,  though that’s changing fast. Some people retired during the Covid period and they’re just not going to come back to work. I think we made a decision that may have been appropriate when we first made it, but by now is completely inappropriate to provide unemployment insurance on excessively generous terms where we’re giving people more money for not working than they would have earned working. I think that problem will tend to solve itself over the summer as states pull back their unemployment insurance programs and the thing ends in September. 

HOOVER: The Washington Post reported last week, as you know, that you and President Biden had a conversation, he called directly to hear about your policy concerns. Look, what is it that the White House needs to understand?

SUMMERS: I don’t have anything to say about conversations I have with the president. 

HOOVER: I understand that. But what do they need to know that isn’t reflected in their policymaking?

SUMMERS: I think they need to internalize the fact that conditions have changed more rapidly than they usually do and that the paradigm, which was a reasonable paradigm as President Biden was transitioning into office is no longer the right paradigm. And the right paradigm today is that we have an economy that is either overheating or on the edge of overheating. And that thinking about how we can keep the take the take our foot off the accelerator prudently needs to be the priority for a safe journey into the future. That’s a rather different paradigm. 

HOOVER: I want to ask you about cryptocurrencies. Could cryptocurrency become a threat to the dollar or even to central banking? 

SUMMERS: I don’t think that’s very likely. Ultimately, you know, cryptocurrency transactions take a hundred times as long as transactions with your Visa credit card to try to clear. Cryptocurrencies have very high volatility, that’s part of what attracts people to them. But I don’t think in the foreseeable future they’re going to be a threat to the dollar’s role in the international financial system. They may be a meaningful diversification asset for many investors. I think the blockchain is going to be a fundamental innovation, it’s going to permit a great deal more exchange. But ultimately, I think the strength of the dollar rests on the credibility of US macroeconomic policy and the integrity of U.S. markets. And that’s where we need to focus if we’re worried about the dollar. I do think we have to make sure the cryptocurrency succeeds when it succeeds because it’s meeting genuine needs for people in the financial system, not because it’s serving as a way to keep things secret and avoid paying taxes or avoid reporting money transfers. And so I think that, as with almost any technological innovation, you want to have an environment that is permissive and enables it to succeed as long as it’s succeeding by being better, not succeeding by permitting the circumvention of law. 

HOOVER: January 2016, you said that there seemed to be, quote, “a kind of creeping totalitarianism in terms of what kind of ideas are acceptable and debatable on college campuses.” From what you have witnessed since then as a professor at Harvard, is there a space to challenge one another’s ideas anymore?

SUMMERS: I think there are spaces to challenge. I certainly try to create one in my own classroom. I don’t think there are as many spaces as I’d like there to as I’d like there to be on many college campuses. I don’t think the range of voices that are heard is always as wide as I’d like it to be. I’m a progressive, but I feel like my progressive arguments are stronger when I debate with people who have views more like yours, Margaret, than when I debate or have conversations with people who already have my views. And I think we deny that opportunity too much to our students. And I think universities need to see themselves as places committed to intellectual excellence and openness to all ideas. And that too often in recent years, they have seen themselves as social justice warrior institutions. And, you know, I’m usually on their, usually on the side of the social justice people or the people who fashion themselves that way. But I think that universities need to be very careful to remain open to all kinds of views. And when you have stifling orthodoxies, it tends to lead to very big mistakes, mistakes like the Vietnam War, which reflected a kind of orthodoxy in foreign policy of that time, mistakes like the inflation of the late 60s and 70s that we were discussing, mistakes like the growth of inequality in the United States and the price we’ve paid for what was not a well-managed response to the pandemic. So I’m a person who believes that stifling orthodoxy should be resisted everywhere. 

HOOVER: Professor Larry Summers, thank you for joining me on Firing Line.

SUMMERS: Thank you.

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