C. Peter McColough Series on International Economics With Lawrence H. Summers

Wednesday, April 21, 2021
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Charles W. Eliot University Professor and President Emeritus, Harvard Kennedy School; Former U.S. Secretary of the Treasury; CFR Member


Chair of the Editorial Board and Editor-at-Large, Financial Times

Lawrence H. Summers discusses the U.S. economic recovery, the Biden administration's stimulus and infrastructure plans, possible inflation risks, and the implications for the global economy.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

TETT: Thank you very much indeed. And welcome to everybody who is watching today's event. It's my great pleasure to be moderating this discussion with Professor Larry Summers, a man who I first met—I was working it out the other day—about twenty-five years ago in Tokyo when I was reporting there for the Financial Times. I currently chair the editorial board of the FT in the Americas. You were visiting, Larry, because you were with the U.S. Treasury then trying to grapple with the Asian financial crisis and the Japanese banking crisis. And over the years, we have often chatted in your various, many roles, both as a luminary of the economics world, and also, of course, in Washington serving a series of Democratic administrations as Treasury secretary and as White House economic adviser. But today, you are in many ways liberated. You are able to speak your mind more freely than, frankly, ever before. And you have just done so in a particularly striking way. If anyone who's watching hasn't seen the fabulous interview that my colleague, Martin Wolf, did with you recently on your economic thought, I would urge you to read the interview with Larry Summers. We have a long transcript, several thousand words, which really lays out very clearly your thoughts on what's happening with the current Biden administration. But the top takeaway is really that you think they're doing too much stimulus too fast with potentially too dangerous a consequence.

So let me start by asking you about that because I think that's something that all the CFR members would be very curious to hear about whatever their political persuasions, whether they are pro-Biden, anti-Biden, or anything else. What you specifically said recently was that you see, quote, "I see the Fed with its foot on the accelerator as hard as any Fed has ever done.” We're drowning in monetary stimulus. And yet you also “see serious discussion of trillions of dollars more in fiscal stimulus,” and you argue that in terms of the monetary support, “I see a substantial risk that the amount of water,” i.e., support being poured into the hole, i.e., the gap on demand, “vastly exceeds the size of the bathtub,” i.e., we're heading for a nasty mess. Can you explain to us, firstly, why did you feel that now is a moment to say that? Are you not concerned that you're undermining the current Democratic administration? And secondly, how did the Biden administration react to your comments?

SUMMERS: Gillian, I suppose you just asked the questions that a reporter should ask, but they're not quite the questions I'm going to answer. The issue for me is trying to understand what's going to happen in the economy. I think the more robust and the better the discussion of economic risks, the better the economic policy will be. So I thought it was my job as an academic economist to share my concerns about the trajectory of the economy. The analysis isn't very difficult. We have a hole as measured by lost labor income, labor income below trend, that is on the order of $20 or $30 billion a month and declining. So that's perhaps $200 or $250 billion this year. We are providing $2.8 trillion in stimulus or about $250 billion a month and then planning more stimulus from the Fed, more stimulus from the follow-on packages, and substantial stimulus coming to the economy both from the savings overhang of money that people couldn't spend last year and from the effects of COVID being removed. And so it seemed to me that economics comes back to demand and supply. And we were providing demand well in excess of over the next couple of years of any plausible estimate of the economy's potential to produce and that meant substantial price increases. If you look at houses, if you look at used cars, if you look at commodities, if you look at labor shortages, if you look at businesses reporting price increases, if you look at surveys of purchasing managers, all the signs are of inflation starting to breakout. It might not happen. Economists don't have a great track record on this. It seems to me that the risks are very substantial, and it seems to me that we'll make better policy if we think better about all the risks in the situation. My job as a professional economist is to share my concerns.

TETT: Right. Well, I think in many ways you are in a fascinating role because, of course, you have been in the administration and yet you obviously have this strong academic pedigree to talk about what's happening right now. But a couple of questions. What do you say to people around President Biden right now, who I've spoken to, who say that actually the only way to tackle income inequality and really help people who have been so disadvantaged at this time is to run the economy ultra-red hot? What would you say to that?

SUMMERS: I'm all for running the economy as hot as is sustainable. All the evidence is that inflation is a terrible thing for the poor. All of the evidence is that a recession is a terrible thing for the poor. If we produce the pattern of overheating followed by a dramatic Fed response, followed by a recession, the worst victims of that will be the Fed. If we produce massive asset price bubbles, the biggest beneficiaries of that will be the people who are most wealthy. And so the argument—of course, it's a good idea to get as close to full employment as we can. But if we generate large-scale labor shortages and inflation and we force a substantial upwards movement in interest rates, that's not control. That would be a very bad thing for the poor. Another thing I don't understand is how does the Biden administration—I’ll put it in terms of the Biden administration—but how do serious economists assert that we are in an entirely dramatically new social revolution of policy, which they do, and that nobody should change their expectations about the inflation process because inflation is entirely anchored as they unleash this new revolution in policy? It seems to me that the expectation would be that if we're going to have monetary and fiscal policy conducted in an entirely different way, that we're likely to have a different set of expectations. Experience suggests that inflation is self-fulfilling.

TETT: Right.

SUMMERS: The last time we tried something like this was when driven by progressive imperatives. In the 1960s, we attempted to have a great society and fight the Vietnam War at the same time. The fiscal expansion was much smaller. The Fed rhetoric was much less bold in terms of inflation serenity, and the consequence was, anyway, that inflation went from having a one handle in 1966 to having a five handle in 1969—a six handle actually at one point in 1969—before there was a single adverse supply shock. And so it seems to me that we're taking an enormous risk. Look, economists don't know what drives this stuff. They're not sure. There's an output gap-type theory, which I tend to subscribe to. That is flashing a red alarm. There's a monetarist theory that looks at money aggregates. That is flashing a red alarm. There is a fiscal theory that looks at the ultimate consequences of deficits. That is flashing a red alarm. We're seeing discussion we haven't seen three months into the administration, a comprehensive budget from the administration laying out fiscal policy for ten years. We're seeing new announcements that tend to be inflationary. For example, a whole set of new executive actions, which are probably good ideas—I support most of them, maybe all of them—on green issues. We're seeing already discussion of continuing unemployment insurance benefits beyond September. All of this is adding up to more and more stimulus. And the principal argument made in the Council of Economic Advisers’ recent memo is that we shouldn't look at year-over-year figures. Well, you're right. We shouldn't look at year-over-year figures. Why don't we look at month-over-month figures? And why don't we look at people's expectations? And it seems to me that they are all moving to suggest more inflation. Now, it might be that this all works out, but it seems to me we're taking very substantial risks.

TETT: Right. Well, I should say a couple of things. I messed up the beginning logistically. I forgot to mention that this meeting is part of the CFR’s C. Peter McColough Series on International Economics. And I will come back to you later, Larry, I’m sorry, Professor Summers, and ask you about what you think this means for the dollar and the global economy. And I also should have mentioned that anyone who wants to ask a question, please do. We are already getting people getting into the queue. So get yourself ready, and we'll turn to questions quite soon. But I have two or three more questions I want to ask. Firstly, if what you're saying implies that there's going to be inflation, do you think it was a mistake for the Fed to raise its inflation target from an average of—well, essentially to say it will let inflation run above 2 percent for a period? Has that been another red light that could potentially be dangerous or indicate danger ahead? And secondly, should the Fed simply raise rates if we're going to have this huge amount of fiscal stimulus to try and counteract that?

SUMMERS: I don't think the Fed should raise rates today. I don't think it makes sense for the Fed to try to persuade people that it's not going to raise rates for three more years. I don't think that, you know, the Fed has traditionally acted and spoken in ways that were designed to preempt inflation fears. Today, the Fed speaks in a way that's designed to preempt the idea that the Fed might have inflation fears. That's a very different thing, and a thing that it seems to me is likely to contribute to the development of an inflation psychology. Look, the famous doctrine of the Fed has always been William McChesney Martin's remark about how the Fed's job is to take away the punchbowl before the party gets out of hand. And what we've now said is, we're not going to do anything until we see a bunch of drunk people staggering around. We're not going to worry about how inflation might come. We're not going to worry about inflation expectations. We're going to wait till the inflation is there. Well, the one thing we know is that monetary policy acts with a lag of a year to eighteen months. And so a judgment that we're not going to act until we've already had proven that there are substantial inflationary expectations is taking, it seems to me, a very significant risk. So on current facts, should rates currently be increased? No, I definitely think not. But should, in the face of the 20-odd percent of fiscal stimulus that's going to be delivered over the next three years, should there be statements trying to convince people that nominal rates will stay at zero for the next three years? Should there be the largest expansions of the Fed balance sheet in history directed at shortening the overall maturity structure of the federal debt going on for years to come? It seems to me that a balance of risks, if one thinks about the risk of asset price bubbles, if one thinks about the risks of having excessively short-term debt on the national balance sheet, if one thinks about the risks of inflation breaking out, it seems to me that a balance of risks would counsel expressing some concern about all of these things. I haven't heard purchasing managers, houses, used-car prices, commodity prices, labor shortages, vacancy rates, small business surveys, all of these things that many in the markets are seeing as concerns about inflation, we don't hear about them from our macroeconomic policy authorities. That's got to make one skeptical of their assertions that they're on the case and that they'll act promptly and that if there is any inflation they'll get it under control. And that's why I'm quite concerned.

TETT: Well, I don't think you're expressing concerns, I think you're shouting it from the rooftops. But I'm curious about what you think this would imply for the next couple of years. Because in this magisterial interview with you where you lay out very clearly your calculations, your sums about what you think is going to happen and where we're heading, and also, I should stress, your views on secular stagnation, which is something which really propelled you into the limelight two years ago, like five years ago, you have a really interesting passage about what happens next with the U.S. dollar. And you say that you can see two potential scenarios. One, a “Reagan-deficit scenario—a temporary boom, rising current account deficit, increased protectionism, a strong dollar and a magnification of the debts of others.” In some ways that’s the least bad scenario. The other one is the much scarier “pre-Bretton Woods scenario or the Carter administration scenario” where America prints so much debt that other people don't want to hold it and you end up with a debt crisis. I mean, neither of these are great. And worse of all, you say that you can imagine them both taking place one after the other. Tell us how you think that would play out? I mean, are you concerned that we are heading towards a full-blown debt crisis in America because of this approach?

SUMMERS: So, the least of my concerns is around fiscal sustainability and whether the United States is going to be able to mobilize sufficient tax revenue to pay back its debt. That's not the center of my concern. At some point that could be a concern. But as Jason Furman and I have pointed out, in a world of low real interest rates the capacity to borrow is considerably greater than it is in a world of high real interest rates. So I'm not an indiscriminate alarmist. I do think that it's very easy to have a view on medium- and longer-term interest rates in this environment. The kind of concerns I'm expressing are right. They are not priced into medium- and long-term debt, and so the implication of what I'm saying is that medium- and long-term debt rates will rise much faster than it's currently priced into the market. I don't think it's so easy to know what will happen with respect to the dollar because on the one hand, sugar highs tend to be associated with capital inflows and strong currencies. And on the other hand, ultimately, inflationary policies tend to be associated with significant declines in the value of the currency. I don't think the situations are parallel, but they have some similarities. And the Latin American experience with major excessive fiscal expansions motivated by a desire to get to super full employment as rapidly as possible, that experience tends to be associated with increases in currency values for an interval followed by very precipitous declines and inflation cycles. And so I think that kind of thing is certainly a risk in this environment. I confess that when I hear explanations about, “Well, it's a base effect and it's due to the supply chain this,” when I read ad hoc case-by-case explanations of high-inflation figures, I hear echoes of the G. William Miller Fed and I hear echoes of the Carter administration economic team. I'm not saying we're going to get to nearly those kinds of inflation rates. I think that would be extremely implausible in this environment. But I do think the risks are very much there on that side. What the timing is with respect to the dollar, part of, I think, being a reasonable economic commentator is knowing what you don't know and not having confident opinions about it. I don't have a strong opinion about the dollar just as I have tended to be on the serene side of inflation through the last half dozen inflation scares, which seemed to me were mostly unwarranted.

TETT: So how has the Biden administration reacted to you saying this so publicly?

SUMMERS: Well, insofar as I've had private discussions with them, I'm not going to share them with the 497 participants on this call as you can understand. You know, I read very carefully, and with great interest, the memo by Jared Bernstein and Ernie Tedeschi that was put out addressing these things. And I guess it seemed to me that it failed to address the calculations about GDP gap. It failed to address the concerns from a wide variety of indicators. It focused on labor market issues without focusing at all on any of the suggestions in the data that there might be emerging labor market shortages. And it didn't recognize the nature of the lags issues with respect to monetary policy. So I guess I'd have to say that if that was the best case for being less concerned, it was—if that was the best case to be made for inflation serenity, I'm even more concerned about inflation after encountering it.

TETT: Well, speaking as someone who for many years has had memos or phone calls from you dressing me down for my columns, I think what you just said counts as an official dressing down of that memo. But I'm curious, another way to interpret what's going on is that for years the White House has really displayed tremendous respect towards the macroeconomic profession. Now you have been, if you like, the rabbis and priests of the policymaking world. One way to interpret what's going on today inside the White House is that they are demoting the macroeconomists. Maybe they're turning to labor market economists, a different branch of economists, but this is not the branch of economics that you have spent your career upholding, Professor Summers. What would you say to that?

SUMMERS: Certainly, God knows, six or seven years of writing about secular stagnation should be a sign that I certainly would count myself among those who are very critical of a lot of macroeconomic orthodoxy. Certainly, I felt that the recovery was much slower than it could have been from the financial crisis. So I think there's a lot to be critical of what has happened from a macroeconomic point of view. You can believe that the 2008 stimulus, 2009 stimulus was too small. And I think everybody agrees that it was. They may debate whether that was caused politically or caused economically, but everybody agrees that it was too small. But I am aware of no one, no one anywhere who thinks that it was too small by a factor of six. And that's the logic you have to believe, to believe that the size of stimulus we're now delivering is appropriate. So I think that the qualitative arguments are right, but economics is a quantitative science. Economics is a quantitative field. A company that sought to project its earnings and talk about how it had optimistic prospects and people were too pessimistic about it but didn't use any numbers wouldn't be a very convincing company. And the question I've asked is—and nobody probably should feel any obligation to answer me—but it does seem to me that some quantitative analysis where you explain how big the fiscal stimulus is, you explain what you think about the multiplier, you explain how it all sort of works out is a reasonable thing to expect? I don't think it makes any difference at all whether you pay attention to macroeconomists or to labor economists but, yes, I do absolutely think that number-using economics, relying on quantities is the right way to think about these issues.

TETT: Right. Well, we could debate that all day, Larry, because as you know I'm trained as a cultural anthropologist. I have great respect for quantitative approaches, but I also think they need to be combined with qualitative.

SUMMERS: Absolutely.

TETT: But it isn't the right time to discuss it because I can see we have about a dozen people dying to ask you questions. So I'm going to open up the questions and hand over to the CFR staff to monitor the questions that I'm sure you have sparked with great passion.

STAFF: We'll take our first question from Anders Aslund. Please accept the unmute now button.

Q: Thank you very much. Great to see you, Larry. Great to see you, Gillian. And very good explanations. I would like to take you in another direction, Larry. One of the biggest issues now is corporate taxation and coordination with the review from OECD. I have a series of questions on that. Do you think this is realistic? Will it come about? Is it a good idea? Or do you think [inaudible] of it? Thank you. Great to see you.

SUMMERS: Good to see you, Anders. I'm pretty optimistic about this. I have thought and written for years that the U.S. needs to make a fundamental decision. Is its goal to win a race to the bottom in corporate taxation so as to attract corporations or is its goal to end the race to the bottom so that governments all over the world can effectively tax corporate income for the benefit of the public sector rather than have to rely more and more on taxing working people? And the United States has now changed its fundamental philosophy towards controlling the race rather than trying to win it. I think the particular formulas involving a global minimum tax on corporate income offer an approach that for a variety of technical reasons is incentive compatible. And if the major countries agree, there isn't a substantial advantage for the smaller countries to defect from it. Basically, if Ireland cuts its tax rate, it doesn't help Ireland that much because companies are going to have to pay the global minimum tax anyway. So I think this is a strong approach. I think it's got a good chance of success. The devil is in the details, but I salute the Biden administration and I salute Secretary Yellen for changing U.S. policy in this area and doing what I think is appropriate, which is bringing tax cooperation to the top table of international economic issues where it's never been before.

STAFF: We'll take the next question from Nili Gilbert.

Q: Good day, thanks so much to both of you for leading this important conversation. My name is Nili Gilbert, I chair the investment committee for the David Rockefeller Fund, among other roles. Larry, when you talk about the lessons from the great financial crisis and what's being done today that's different, two additional topics come to mind. One is a sense that the prior stimulus, in addition to being too small, didn't last for long enough for the lowest income and opportunity folks in the country to be able to participate in the games. And when I listen to folks in the administration talk, that's one of the things that they seem to want to address. Another is a grander sense that there's a broad set of long-term readjustments that merit being made for the country. One is dealing with the climate transition, and the other is also related to addressing social inequalities. And so if we're going to spend to make a difference on those topics, now seems like a great time because of the need for stimulus and because these issues are time sensitive. And so when you talk about now wanting to bring more of a quantitative economic modeling lens to these problems, I'm hard pressed to point to the models or formulas that would help us understand how to move in this way. I wonder if you can offer any guidance on how we could think about those objectives, especially in the context of formal economic analysis. Thank you, again.

SUMMERS: Nili, you can count and you can care. I could not agree more with both of your very important points. On the second one, part of my concern was that we were spending $2.8 trillion, 14 percent of GDP, without a penny of fundamental investment in anything green, anything directed at improving the country's infrastructure. And it seemed to me, and even in a much smaller stimulus bill that was passed in 2009, there was significant attention to green issues, there was significant attention to broadband infrastructure and so forth. So I'm delighted and I've endorsed the American Jobs Act precisely because it makes those fundamental investments. But there is by now a large literature on climate venture investing, on the social return to infrastructure investment. I think, in some ways, the most important economics paper over the last eighteen months is the paper of [Nathaniel] Hendren and [Ben] Sprung-Keyser demonstrating that a vast range of public investments generates sufficiently high returns that they pay for themselves back in revenues. So absolutely, I agree with you 100 percent on those investments.

If we'd had a $5 trillion investment program at the beginning that was a decade-long program of renewing America, I would have led the charge of enthusiasm for it. It's a transitory program of inordinate scale that caused me a significant concern. I yield to no one in my enthusiasm for the refundable child credit for poor families. It is a fundamental positive and hugely important step. Its cost is about 3 percent of the $2.8 trillion in stimulus, if that. So I am all for it. I think it is terrific. I do not think sending $2,000 checks to my children is a particularly valuable use of public resources. I do not think that providing unemployment insurance benefits that are 130 percent of the value of the unemployed is a particularly valuable use of public resources. I do not think that providing small business relief funds for the benefit of the Aspen Institute is a particularly valuable use of public resources. So I am with you 100 percent on the importance of focusing on the poor and on the importance of making fundamental public investments. I just think we need to make sure we're doing the analysis in careful ways so that we can maximize the prospects that that is what actually happens. And I think progressives have to think very carefully about what they're doing. When I read, for example, Senator Warren's proposals to forgive the college debt of bankers working in investment banks, I just think that somehow team progressive has lost its way a bit on what the most important things are. So this is not about whether you should have progressive values. This is about whether you should be effective in what you do. And if we turn out to have high inflation—the last time we did that experiment, we elected Richard Nixon in backlash against it. And then we elected Ronald Reagan in backlash against the further inflation. So this is about how best to pursue progressive values, not about whether to be progressive.

Q: Thank you.

STAFF: We'll take our next question from Larry Meyer.

Q: Thank you. So, Larry, I think it's very constructive that you were talking about the risk of overheating. It's real. But when you go from that to what I call “inflation hyperbole,” then people dismiss what you're saying. We're worried about 5 percent inflation. I think sometimes you said double digits, even like the ‘70s. I think people dismiss that, as they should.

SUMMERS: Just to be clear, I have used the 1970s as a qualitative analogy. I think every time I've referred to the 1970s, including earlier today, I have tried, at least, I may have failed, to be clear that I am not predicting anything like double-digit inflation. I don't see a scenario out of current events towards double-digit inflation. I agree with you completely about inflation hyperbole.

Q: Okay, so the next this is, as you know, the Fed in its new framework wants to increase and overshoot two and a quarter, two and a half as a sweet spot. Hey, if that's what you're aiming for it could easily be 3 percent or a bit above, not a catastrophe. The Fed has the tools to deal with it. Inflation expectations are likely to be relatively stable in my view. And the third thing is, I think you're misrepresenting the FOMC’s policy, strategy, and message. When you say they’re trying to persuade people that they won’t increase rates through 2023, that's not what they’re saying. They’re saying we’ll do what we have to do, policy is outcome based. That's our forecast. Forecasts are always wrong. You know that and I know that. We can be sure of this that they'll do what they need to do as the outlook changes. And I think that's the message.

SUMMERS: So perhaps that's true, Larry. On the other hand, the characterization of the outlook tends to never refer to the elements in the outlook that might point towards more concern about inflation. We can each have our own views about the very substantial amount of Fed speech that there is. Certainly there's an effort underway to convince people that it's going to be a slow road to scaling back QE and that one's going to have to go through that whole road before one would get to a place where one would contemplate rate increases. You've spent your life much more specifically focused on the Fed than I have. So in a different forum I could probably learn from you. But my own sense of business cycle history is that prior to 1980, when we used to have moments of overheating and inflation eruption, almost always the Fed was unsuccessful in containing the inflation eruption without a generating a recession. Our Fed never before had the challenge of operating in a world where there was as much an exchange rate issue as there is today or where the fiscal picture was as problematic as it is today. So when the Fed says, unlike all previous Feds, we can wait until we actually see the inflation before we act on it, and we're confident that we're going to be able to get things under control, and when there's been a decades-long tendency for the Fed to display exquisite sensitivity to the possibility of a meaningful asset price decline, I think that you're in an environment where expectations are going to be a bit more fragile than you suppose. I don't know why one would think that they were more anchored today than they were in 1966.

But look, I have tried to be clear that I think these are real risks. What I've said is that I think there's a one-third chance that we will get a substantial increase in inflation, and expectations will become on anchor; a one-third chance that what the Fed does to control things will not end up being completely controlled, and we'll get to recession or substantial financial disruption; and a one-third chance that somehow we'll work our way through all this, and we'll be glad that we had a higher-pressure economy. So I don't mean at all to be precluding the possibility that you're right. I'd be more optimistic that you were right if I felt there was a little more sense of concern as these indicators mount. But nothing would give me more pleasure than to be wrong and for us to be able to run the unemployment rate down towards 3 percent, gradually increase interest rates, have inflation peak at 2.9 percent settling in for a several year period in the low-mid-twos, and whenever the next recession comes along exogenously drift back to two and have this be recognized as a period of immensely successful macroeconomic management. That's not my bet as to what's going to happen, but I would be the first to recognize that it's a real possibility. You know, one question that I guess I would put to people is, was there anyone late last year saying that we needed as much fiscal stimulus as we are getting? And I'm not aware of the economic analyses that were pointing to the desirability of fiscal stimulus on the scale we're seeing. I think instead fiscal stimulus on the scale we're seeing arose out of a whole set of political dynamics. If I'm wrong about that, I'd like to see the laying out of the strategy that brought us to this point.

STAFF: We'll take the next question from Paul Sheard.

Q: Thank you very much. Paul Sheard from Harvard Kennedy School. Your center, Larry. I'd like to just get your thoughts on how you're now seeing the secular stagnation debate, the low r-star debate, in the light of your concerns about all of this stimulus leading to an anchoring of inflation expectations. You know, if that's the world that we're in, what does that imply about, you know, where r-star is going and the whole secular stagnation debate? I guess to finish off, could it be, and what I'm wondering is, could it be that the same kind of set of factors, maybe on the supply side, more so than the demand side, that are behind the low r-star could also intervene in a way that sort of breaks this link between the stimulus and inflation picking up?

SUMMERS: So I'm glad you asked the question. Look, my view prior to the last year or so was that we had a major issue for macroeconomic policy. The major issue was that even at a zero real interest rate, and normal budget deficits at 3 or 4 percent of GDP, that we were likely to see a gap between private saving and private investment of 3 or 4 percent. And that gap was going to lead to sluggish growth, low inflation, and because there was limited investment would lead to major increases in asset prices and asset bubbles. That was my view, and I thought savings absorption was the central macro problem. But I find myself a little bit like a minimum wage advocate confronting a proposal for a $22 minimum wage. There was that gap. But what is now being done is so large that it's substantially more than filling that gap. And that's why I'm now worried about overheating. If all this fiscal policy proves to be completely transient in its impact, I think the secular stagnation concern will become a concern again in the middle part of this decade. But again, I'm not a believer that anybody can do economics to two significant figures, maybe not even to anything after the decimal place. But when I look at 14 percent deficits on top of a big saving overhang, I see something that's very large relative to the gaps that I talked about in terms of secular stagnation.

Look, I think Alvin Hansen was basically right in his analysis of the American economy in 1938. It was the right analysis. World War II was such a large event and the savings overhang after World War II was such a large event that so much was done in terms of public infrastructure that his kinds of concerns about secular stagnation were not the right concerns to focus on in 1943 or 1946. And I don't know what the right thing is going to be to focus on in 2025, but I don't think it's currently secular stagnation. If I'm wrong, if it turns out that everything I've said is wrong, the basic reason will be that the private economy is so inherently sluggish that actually it needs this much extraordinary public action. So ironically, if I turn out to be wrong, it will be because I underestimated the basic force of high saving and weak investment. And so you could do all of this extraordinary level of stuff, and it didn't overstimulate the economy. As I said in answer to the previous question, that could well happen. There's probably a one in three chance that something like that will happen, but it's not my bet. But you have to believe in some extraordinary inherent private sluggishness to believe that this much public fuel is going to stay controlled.

STAFF: We'll take our last question from Grace Gu.

Q: Larry, good to meet you again in a virtual forum. I am a partner at Two Sigma and the portfolio manager of its scientific discretionary strategies. So Larry, I'm curious, it's a different topic. I'm curious if you see Bitcoin and, broadly speaking, digital currencies as a big challenge to the U.S. dollar system. And what you suggest to the administration to strongly regulate this space before it becomes too entrenched and institutionalized? Thank you.

SUMMERS: No, I think there are two things going on both of which are very important, but neither of which implicate what you spoke about. I think that Bitcoin, and perhaps crypto more generally, is emerging as a kind of digital gold. And there's a kind of social convention around ultimate risk protection assets. I think there's a good chance that they are going to occupy that niche. They are an inherently finite supply, and more and more people are deciding that they occupy that niche. So my best guess is that they are here to stay. I also believe that there's a whole set of revolutions going on in payments. It's not the first time that's happened. I described to slightly stunned younger audiences how when I was a college student I used to go to the MIT check cashing place and wait on line for half an hour to cash a check so that I would have cash for the weekend and that if I was foolish enough to go at 3:03 in the afternoon on Friday rather than 2:55 in the afternoon on Friday, I was out of luck for the weekend. And so the whole way in which payments happens has changed fundamentally. And I think it's likely to change fundamentally again.

Do I think that that's going to mean that in any foreseeable future the Fed is going to lose the ability to determine credit conditions substantially in the United States by setting interest rates in the way that at certain points the Argentine central bank loses the ability to regulate the Argentine economy because all the transacting is being done in dollars? I think that's an extremely remote risk, and it's not something that's going to happen anytime very soon. Do I think that there is some risk that we need to be attentive to not so much on the economic side of the foreign policy house, but on the geopolitical side of the foreign policy house that our ability to pursue sanctions policies is going to be diminished when the dollar loses some monopoly as a means of international payments? Yes, I do think that that is a significant risk. So on international grounds and on maximum efficiency and payments grounds, I think that my instincts would be to be a bit more aggressive about thinking about central bank digital currencies than I think the Fed is. I would be worried about being quite as laggard relative to other central banks as it seems to be our strategy to be. But if you ask is this some kind of fundamental threat to our ability to do monetary policy, that's not something I see right now but it's characteristic of people my age to miss revolutions like that. So I'm very much open minded to the possibility that I'll change my mind on that question. Thank you for a very good question, Grace.

TETT: Well, thank you very much, indeed, Professor Summers. We are almost entirely out of time. I should say I don't think I've ever heard you say, “I may change my mind” or “there's a one-third chance that I'm going to be wrong.” I think the fact you have said that, though, indicates three very important things that I take away from this conversation. Firstly, we all know that we are at a time of unprecedented monetary policy experiments. We're about to engage on a big fiscal policy experiment. But there's also an intellectual policy experiment going on at the heart of the White House about the reliance on macroeconomic models and orthodoxies, which leads me to my second point. Amid this experimentation, it is absolutely crucial we have open debate and scrutiny even or especially amongst the ranks of those who are progressive because without that there's a danger of the honeymoon phase potentially turning sour. And my third point, very well illustrated by the discussion today, is that thank heavens you're not in government right now, Professor Summers, because it does mean that you can advance an alternative point of view, provocative ideas, and fresh thinking in your usual trenchant style. After twenty-five years of having you comment, often, quite forcefully on my columns and why you disagree, I know that that's not always a comfortable thing to hear but I very much appreciate how you have shared your thoughts with us today. It's a great time to be a journalist. The intellectual crosscurrents and experiments are fascinating. It's probably rather more challenging for all of you who try to navigate the markets and the world of economics. But I dare say, thank you, Professor Summers, and good luck to all of you trying to navigate this.

SUMMERS: Thank you, thank you for your very thoughtful questions. Thank the audience for their very thoughtful questions. If I change my mind it will be neither the first, nor the last. I tend to live by something Keynes said. Somebody pointed out to Keynes that what he was saying was different from what he had been saying sometime before. And Keynes looked back at the guy and he said, "Sir, when I get new information, I alter my views. What about you?” And I think it's the essence of living, especially in turbulent times, to be prepared to always consider the possibility that one needs to change one's views.

TETT: Well, that sounds like an appeal for a rematch. Perhaps we can have a rematch in a year's time. But anyway, thank you.

SUMMERS: Thank you.


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