tv Fmr. Treasury Secretary Larry Summers on Inflation CSPAN June 1, 2022 12:53am-1:23am EDT
assigned to kennedy on the day he died. if i can't ever go to the bathroom, i won't go. i promise you i won't go anywhere, i will stay behind these black gates. >> presidential recordings, find it on the c-span now mobile app or wherever you get your podcast. >> former treasury secretary larry summers discusses the state of the economy and high inflation. he sat down with -- from the washington post and they talked about the housing and labor market and criticism from jeff reseau's on biden an administration tax policy. this is 25 minutes.
, president of harvard university, and, also a contributing columnists for the washington post. welcome to washington post live. >> good to be with you, david. >> let's start with today's news, president biden is meeting today with fed chairman jay powell. you had some significant criticisms of both regarding inflation. i just want to ask, what you would like to see come out of this? specifically, what do you hope fed chairman powell say to the president about what he's doing? >> i think the president calling today in the wall street journal articulated the right principles
that inflation is now our preeminent short run economic problem, that you have to take priorities over other problems. that's the first part for any strategy and it has to be monetary policy that the president has to respect the independence of the federal reserve as the federal reserve does what's necessary to contain inflation. frankly, it has been my view that the fed was way slow to recognize the gravity of the gathering of inflation, even though there was substantial evidence of it. but in recent weeks, and even the last several months, by chairman powell statements about the importance and centrality of inflation. i think the question is going to
come in terms of policy going forward. i think the right presumption is that you have to increase interest rates by more than inflation has gone up if you want to have any prospect of containing inflation. in inflation has gone up a lot. it depends on what measure you use and measures brought up 7%, i think that's an exaggeration, but it's hard to find a measure where inflation has gone up less than 3% or four percentage points. i think that's a kind of increase in interest rates that at a minimum, we are going to need if we are going to have a prospect to contain inflation. unless of course the economy heads towards recession, which, given the turbulence in the stock market and given some of
the disturbing indicators about consumer confidence, is also a possibility. but i think that we need to recognize that a soft landing is going to be very difficult in these circumstances. quakes that's a pretty pessimistic forecast. if i hear you right, either we will have a recession from external causes, disruption in the global economy, or we will have a substantial increase in u.s. interest rates because of fed policy on the order of 4%. but it seems almost certain of the producer. is that something that our viewers should just assume is, in the future as a result of policy, or just circumstances in the world? >> david, nothing is certain in economics. so, no forecast should be made with greater than a 75 or 80%
probability. but we do know this, we know, as your clip introducing this quoted me to say, that when inflation has been above 4% and unemployment has been below 4%, we've always had a recession within the next two years. and right now, inflation is well above 4% and unemployment is properly measured well below 4%. so i think the likelihood is that we are not going to get through this with a soft landing. the consensus forecast is more optimistic than that, it may turn out to be correct. but, my own judgment is that, given where we have been, it is going to be very difficult to
get through this. that we now have wage inflation running out a close to 6% range, and otitis labor markets we've ever seen. i don't see how we can get inflation to substantially decelerate without wage inflation falling substantially, and i don't see any reason to think wage inflation will fall substantially unless there is a substantial loosening and labor markets, which would >> you have been critical of fed chairman powell. you have also been discussed as a potential head of the federal reserve yourself. what would you do if you are fed
chairman now that is not being done? are there additional instruments, tools that could be used that could smooth this process to make it a little less bumpy? >> you have been critical of fed chairman powell. fed to use. i wish they would stay more sharply between the quantitative easing policies with respect to mortgage securities and with respect to treasuries than the fed has because i think that needlessly exacerbated the housing bubble. i do think there needs to be considerable soul-searching at the fed as to how they missed this as badly as they did. they were declaring inflation would be transitory through most
of 2021. even as it was becoming clearer and clearer to a growing number of observers that inflation was not a path to being purely transitory. some review of the modeling and forecasting techniques the fed uses is in order. i think it would give confidence that these kinds of mistakes are less likely to be repeated in the future. an experiment i'm not sure was done exactly right and i'm sure people would quibble with the way it is done, but i asked a research assistant to take the
macro economic model and simulate a hypothetical experiment in which we added 10% of the budget deficit every year for six or seven years and see what happens to inflation. that model said at the end of those six or seven years it would go up by 70 basis points. if that is close to right, that says much more about the model used at the fed then it says about the u.s. economy. i think there does need to be some soul-searching here at the bed, some after action analysis of what happened. it may be that that is underway.
i know chairman powell are always looking for outside advice as to what best do. i think that is something that would be in order. >> i'm curious if chairman powell and others at the fed soccer advice -- sought your advice. mr. summers: i have a long-standing rule that if i talk to officials and government -- to officials in government i don't discuss it with the washington post or other journalists. >> i'm sorry to hear that but we will accept that. mr. summers: let's dial back to your earliest warnings in february of 2021, one month
after president biden took office. you are warned at the time he was crafting his stimulus package that the stimulus could set off inflationary pressures of a kind we have not seen in a generation. that warning was correct. i'm curious what you heard from the administration. if you don't want to talk about that, what your sins is if they really took that in -- what your sense is if they really took that in. mr. summers: i am happy to talk economics with you that i will not talk the personalities within the administration. >> let me introduce another personality, that is jeff bezos.
you publicly good-sized the former ceo of amazon and owner of the washington post for a tweet he made that question whether raising taxes was effective. i'm quoting your tweet, "it is reasonable to raise taxes to contain inflation and the increases should be as progressive as possible. explain that and why you thought that was initially -- why that was an issue, bezos's tweet. mr. summers: jeff bezos is a leading figure in the country by virtue of being the second wealthiest citizen. he attacked the administration by saying to confuse the
discussion of tax policy with the discussion of inflation, that if they were somehow completely separate and if it was misleading and disingenuous of the administration to suggest otherwise. i thought that was just wrong. i thought it was natural to think of reducing demand as an important part of inflation strategy and reasonable to think of tax increases as an appropriate part of a strategy for reducing demand. i did not think the argument which was being widely discussed was a logical one and i thought it was appropriate to point that out. >> on this question of stimulus and the administration, not only
legislation that was passed, but plans for additional stimulus in the order of $2 trillion, i wonder if you think senator joe manchin who was the opponent of additional spending a vote of thanks for something that could have contributed even more to the inflation. >> i have great respect for senator manchin. i thought a compromise between senator manchin and the administration -- excuse me. to macroeconomic stabilization.
the difference between the rescue act, which i was in the build back better act worthy proposals were not paid for. yes, the government spending was going to increase demand but the tax increase was going to reduce demand. i think the right program of raising taxes and making necessary public estimates -- public investments would have been an important step forward for the environment. it would have been an important step forward in poverty reduction and i'm sorry it did not take lace -- take place. i don't think it would have been appropriate to do it in a way that further stimulated the economy, but that was not
necessary part of the proper grammar -- the program the administration was advocating. >> go back to the question of inflation and help us think about the trajectory downwards. inflation fell a little bit in april to 8.3%. it is still near a 40 year high. you talked about significant additional interest rate increases. how long you think it would take to bring inflation down? mr. summers: it is very hard to say because no one can forecast what will happen to oil prices and no one can forecast what will happen to commodity prices. there are things right now that are very much in the realm of geopolitics.
it is difficult to forecast what is going to happen. would -- what i would be watching is what is going to happen in the labor market. i don't think there is durable reduction of inflation without a meaningful reduction in wage growth. right now with the labor markets so tight, i don't see such a meaningful reduction in wage growth taking place. perhaps it will and there are signs that some firms that were short on labor three months ago are now reporting that, if anything, they no longer have a big problem in hiring workers. perhaps we will see a distant visionary process -- a diss inflationary -- disinflationary
process take hold. i would not be surprised if we have inflation way above the 2% target. it would surprise me if we returned to the 2% target exterior. -- 2% target next year. mr. summers: you were -- david: you are critical of a forecast that was way more optimistic than what you just said which predicted by the fourth quarter of this year, year-over-year inflation will drop over 4%. the year after that in the fourth quarter of 2023 will fall to 2.3%. you said that was the least possible cbo forecast you could remember in 40 years. expand on that a little bit. why do you think it was so wrong? mr. summers: in fairness, i
think the cbo has been a bastion of credibility over time. most of its forecasts have been reasonable and honest and very sound. the worst prediction by the cbo is like lebron james's worst game, there is little for it to be compared to. i go back to the basic object -- the basic logic of economics. one says that wage inflation is unlikely to slow -- is likely to slow -- another way of looking at this is to look at the behaviors of
interest rates. economists focus on the real interest rate, the interest rate subtracting the inflation rate, the purchasing power. those are at extra ordinary low levels. usually easy money is manifest in low interest rates shows up as higher inflation. in the absence of positive real interest rates in the presence of overheated labor markets, i am not sure why one would form as one's best guest -- best guess the economy would be strong and inflation would not come down. we don't have any examples historically where inflation has come down substantially without
meaningful economics lack. i'm natural what the basis is for thinking this will be the first time. in fairness, mine is more pessimistic than consensus view. that view proved to be right on your ago. i will hope -- proved to be right a year ago. i hope it won't prove to be right now. david: i ask you here at the end of our time to talk about another criticism you made recently. the headline was that you were criticizing hipster anti-trump policies that could drive inflation higher.
i want to quote your comment in full and ask you to explain it. you were responding to a speech by jonathan kanter who talked about his concerns about private equity. what you said is what is badly misguided and potentially dangerous to our economic future is is that of doctrines that people refer to as hipster antitrust. there is a theory that it should not be -- maximizing consumers but other objections such as dealing with private equity. that tilts very easily into a kind of dangerous populism. i wanted to ask if you could explain to our viewers what you are concerned about. mr. summers: sure. i am all for competition. i think we have not exercised the antitrust laws vigorously enough.
i think mergers of major hospitals within the same city that create large amounts of monopoly power should be subject to more attack than they have been in the past. those are attacks on monopolies that raise prices. there is another older idea about antitrust. it is the idea that says we should not let walmart expand because it hurts small merchants. it is the idea that says farms that are able to produce more efficiently, but because they are producing more efficiently need fewer workers should not be allowed to realize that the economy. it is the argument that says that farms that are able to be
aggressive about reducing crisis should not be able to do that. those theories, which are basically theories that lower prices are bad, seemed to be not in our broader economic interest, and certainly by definition when they are saying the passes are bad or a negative from the point of view of reducing inflation. in the writings of the ftc chair , at least how i interpreted some of those in that speech, those arguments seem to be doesn't. it is -- seem to be present. it is early days yet. it is the deeds that matter, not the words. i think we all want to be able to agree, wherever we are on the political spectrum, that if
you're making expected for consumers by reducing prices, that is presumptively good. and if you are raising prices, that is presumptively bad. if the government is going to start interfering with efforts to reduce prices, it had better be awfully careful. david: fascinating comment. this is a rare discussion about economics that i wish could go on for another hour. i want to thank larry summers for joining us to discuss these issues. thanks for being with us, i hope you come back. mr. summers: very good to be with you. david: please join us for other washington post live programming. go to washington post -- [captioning performed by the national captioning institute,
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