Summers Was Right About Inflation. What About a Recession?

BIANNA GOLODRYGA: Well, back in the U.S., voting is expected to begin in the Senate this week on the climate and health care bill known as the Inflation Reduction Act. A group of top economists has penned a letter praising the bill saying that it will lower prices for American consumers. Our next guest agrees and even helped convince Senator Joe Manchin to support it. Larry Summer was treasury secretary under President Clinton and formerly the chief economist at the world bank. He speaks to Walter Isaacson about how to fight inflation without triggering a recession.

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WALTER ISAACSON, HOST: Thank you, Bianna. And Professor Larry Summers, welcome back to the show.

LAWRENCE SUMMERS, FORMER U.S. TREASURY SECRETARY, FORMER DIRECTOR, U.S. NATIONAL ECONOMIC COUNCIL: Good to be with you.

ISAACSON: You turned out to be right about inflation for better or worse. The stimulus that we did over-heated the economy. How necessary and likely, do you think, it is that we will need a recession to wring this inflation out of our economy?

SUMMERS: Experience in offering down inflation from these levels without a recession, soft landings, represent the triumph of hope over experience. So, I’ll the chances that we’ll have a recession within 18 months or two years are three and four I — at least. I doubt we are there now. But I do think we will get there if inflation is going to be wrung out of the system. There is another which is that just as some — people sometimes people don’t take all their antibiotics and stop when they feel better. And we will relent here and create more of a stagflationary dynamic than a recession. But that’s postponing the recession not making it unnecessary. So, I think there is turbulence and difficulty ahead. And that’s, of course, what’s priced into markets with the expectation that before too long, the Fed is going to cutting interest rates with what’s happened in cyclical stocks in the stock market. So, I think there probably is a recession in our future, unfortunately.

ISAACSON: The economists have a formula that tries to gauge how much unemployment is going to have to rise in order to bring down each point of inflation. How much do you think we’ll be facing — we are very low on unemployment right now, but facing higher unemployment?

SUMMERS: I think there’s enormous uncertainty surrounding a calculation like that but I would be surprised if we got inflation durably back to two percent without unemployment crossing six percent, and perhaps above six percent for some time. That’s a pretty serious move from where we are on one hand. On the other hand, it’s nowhere near back to the great financial crisis where our unemployment crossed 10. We’re back to bulk of this inflation where unemployment crossed 10. So, I think this is going to be, most likely, a meaningful recession that is going to involve a significant distress. But at the same time, I don’t think there’s going to be a major event in economic and financial history when that event is written.

ISAACSON: Yes, but it could be very difficult for people and politically disruptive. I mean, every one-tenth of one percent that unemployment rises, it means there’s 150,000 people who are not going to work that day. 150,000 kids whose parents say they do not have jobs. Is there some way that you could say that perhaps we don’t need to get inflation down to two percent? Is it worth living with inflation at four percent if we can keep unemployment down?

SUMMERS: Walter, look, you’re absolutely right about how terrible unemployment is. I wrote on my essays when I was saying I wanted to go and become an economist that I thought the most important thing I could do in my life was to think about how to reduce that risk of unemployment. So, you’re absolutely right. On the other hand, I think you have to think very carefully, not just about short-run pain but about the longer term. And the risk is that if you start accepting higher rates of inflation, it’s a slippery slope. And then you end up having to have an even bigger recession in the future. The kind of thing I just heard you saying, is the kind of thing that was said all the time by progressives during the 1970s. And set the stage for Ronald Reagan’s election and the great recession that followed. So, do we need to be religious about 2.0? No. We do not need to be religious about 2.0. It was the Fed making a mistake when it set a specific numerical target rather than doing what an earlier era of Feds had done and talked about price stability in a more general way. I would have stuck with the idea of price stability. But can we, just sort of, squirm out of this without accepting any pain? I think that’s a dangerous and problematic course. Not because I care about financial chevalets (ph) but because I care about unemployment today. And I care about unemployment in the future. That is why I am glad that Jay Powell renounced the idea of forward guidance and making a whole set of prior commitments, in favor of the idea of making the best judgments they could as things go.

ISAACSON: You were involved in talking to Senator Manchin and others about why this new reconciliation bill called an Inflation Reduction Bill, would actually reduce inflation. Give me the arguments and it’s not by raising unemployment, you think it will reduce inflation how?

SUMMERS: Three ways, and I think it’s a very good and important bill. It reduces demand because we raised taxes more than we increase spending, thereby reducing deficits. It increases supply by stimulating energy infrastructure and stimulating (ph) and subsidizing and supporting renewables. And it uses purchasing power of the government in the pharmaceutical sector to bring down pharmaceutical prices and to reduce consumers’ health insurance costs. So, better bargaining, more supply, less demand, that means more price growth and that ultimately means less inflation and take some of the burden off the Fed.

ISAACSON: You say that this bill will bring inflation down and it does so in ways that doesn’t seem to add to unemployment. Are there any other things we can do to reduce inflation like this, whether it be lowering tariffs and other things, that might help us fight inflation without pushing us into a recession or higher unemployment?

SUMMERS: I think one has to be honest and say that the primary burden rests with monetary policy, and that rests with demand. But I’d like to see a much-reduced tariff in a meaningful way. I’d like to see us put more effort at supporting low-cost purchasing. For example, the Jones Act says that you can’t ship a whale from Texas to Newark, except on an American carrier. That raises prices. The — we have rules that say that British Airways can’t fly me from Boston to San Francisco. That reduces competition and increases prices. We have rules on procurement by the federal government that both hugely slow down infrastructure projects and often make them cost much more than they should. I saw a statistic that the New York subway was costing five times as much per mile as the French subway, and France is known as a country that doesn’t respect labor rights or a country that does things in maximally inexpensive ways. So, I think there are a variety of things we can look up at — look at in terms of affordability and economics that would be constructive. But again, I think the primary responsibility has to rest with demand management policy.

ISAACSON: One of the things that Senator Manchin pushed for, that you’ve just talked about, is allowing infrastructure and allowing, for that matter, both clean energy and pipelines and others to be permitted more rapidly. How much of — is that just something that would be a little bit of easier for producers, or is that something that can really affect the economy? If we started building infrastructure in ways that didn’t require so much permitting and red tape?

SUMMERS: It adds up with respect to energy. Look, it is insane that we are as a country, on large-scale shipping petroleum products in trucks that have tanks associated — have tanks attached to them. It’s bad for the environment. It raises the risk of major accidents. It’s much more expensive. It’s absurd how hard it is to build a pipeline in the United States. So, yes, I think Senator Manchin is right about that. I think it’s true in many areas. I’ve been flying from Boston to Washington, for all kinds of reasons, for 40 years now. It used to take an hour and a quarter, now it takes an hour and 45 minutes. It’s not because the planes have gotten slower, it’s not because the airports are in different places, it’s all because of lagging and inadequate infrastructure and that is something that should be fixed.

ISAACSON: What fundamental changes, if any, have happened to the U.S. labor market, to everything from COVID to what is called the great resignation? Are we in a place with a number of vacancies, is in as correlated to unemployment or has the job market changed significantly?

SUMMERS: I think the great resignation has shaken things up. And so, when things are all shook up, you get more unemployment, and you get more vacancies at the same time. And by the way, that’s a lot of the reason why wages are going up so fast, adding to inflation pressure. And I think that’s just something we’re going to have to recognize. Over time, that’s a process that is likely to readjust. We’ve got to try to do things to make it easy for seniors who want to stay in the labor force, to stay at work. I think we need to be thinking much more creatively than we have traditionally about second careers of — for people. I think there are big opportunities to add to our labor force by helping mothers who have stayed out of the workforce for years while their kids are growing up, to get back into the workforce. I think if we can change the zoning rules at nimby in a variety of places, we can make it easier for people to get to the places where jobs are. I think all of that will both make our economy function better and tend to bring down the rate of inflation. And I have to say that while the problems and the challenges are immense, the fact that in the last couple of months, last month really, President Biden has been able to move forward the semiconductor legislation. And at last, he’s going to move towards insulating us from being totally dependent on some of the world’s dangerous places for semiconductors. The fact that we are taking the necessary steps on health care costs, making the biggest investments in clean energy than any country who’s ever made. I think that those things aren’t the end. They’re probably not even the beginning of the end. But as Churchill famously said during World War II, I think they are the end of the beginning with respect to undertaking some quite broad structural reforms in our country.

ISAACSON: If we’re going to improve our economy and if we’re going to be pushing back on Russia and other things, do you think it makes sense to have a better relationship with China? And how can we go about that?

SUMMERS: Look, Walter, I think we need to recognize that the China we knew a decade ago is not Xi Jinping’s China. It’s not Xi Jinping’s China in terms of what they are doing militarily. And it’s not the China we knew in terms of a gradual trend towards opening up. It’s not the China we knew in terms of industrial espionage practices. It’s not the China we knew in terms of collaborating with other countries. So, we can’t have any kind of romantic illusion. I think we need to try to practice what might be called strategic empathy and understand how the world looks from their perspective as well as simply insisting on how it looks from our perspective. So, I think that that’s the balance that we need to strike and it’s an enormously challenging and difficult balance to strike. I think our errors over the last 18 months have all been on the side of being more truculent than might have been necessary. But at the same time, I don’t think we should be viewing China with any illusion that it is an entirely benign force in the world.

ISAACSON: Professor Larry Summers, thank you for joining us.

SUMMERS: Good to be with you, Walter. Thank you.