Summers: Most Inflationary Policy Proposal of My Lifetime

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Bloomberg Jun 17 02:15 · 3559 Views

Lawrence H. Summers, Former US Treasury Secretary and Wall Street Week warns of supply shocks coming out of Donald Trump's economic proposals, which could lead to a surge in inflation.

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Transcript

  • 00:00 What did you make out if we had some encouraging numbers actually on inflation same time the Fed is a little reluctant to talk too quickly about cutting
  • 00:08 the numbers were encouraging.
  • 00:10 It's one month, but you know every month is
  • 00:14 data and I think the right posture has to be agnosticism
  • 00:19 about where we are going forward.
  • 00:22 It's hard to interpret the Feds forecasts because
  • 00:26 they
  • 00:27 probably had a lot of inertia
  • 00:30 with everybody having set their view coming into the meeting.
  • 00:34 So it's not really clear that the projections that people were making genuinely reflected
  • 00:42 the new numbers.
  • 00:43 That was a point that Chairman Powell stressed.
  • 00:46 We also have fiscal policy issues coming up that in a sense are on the ballot come November.
  • 00:50 There's increasing discussion about the alternatives between Joe Biden and Donald Trump.
  • 00:54 This is the fiscal policy and you've been out, you've spoken in the question, as others have been about the possibility of inflation with the Trump economic policy.
  • 01:01 Take us through that.
  • 01:03 Look, I,
  • 01:04 I don't think there's been a
  • 01:06 more inflationary
  • 01:10 presidential economic policy platform
  • 01:14 in my lifetime.
  • 01:17 Perhaps
  • 01:18 George McGovern in 1972 in some ways would be a comparison,
  • 01:23 but other than that, I don't think there's been remotely
  • 01:28 comparably irresponsible set of
  • 01:32 proposals.
  • 01:33 His tariff proposals are the biggest
  • 01:37 supply shock,
  • 01:38 pushing up
  • 01:40 prices not just of imported goods,
  • 01:43 but of all the goods that compete
  • 01:46 with
  • 01:48 imported goods,
  • 01:50 that
  • 01:51 anybody who's worried about gouging
  • 01:53 should think that more competition, including from abroad,
  • 01:58 is
  • 01:59 a very, very
  • 02:01 important step.
  • 02:03 And he's for much greater restrictions
  • 02:06 on the supply of Labor,
  • 02:09 leading to more wage inflation
  • 02:13 pressures.
  • 02:15 And he's for scaling back the subsidies to renewable energy,
  • 02:20 raising
  • 02:21 energy costs.
  • 02:23 So look at it from demand.
  • 02:25 Look at it from supply.
  • 02:27 This is a prescription
  • 02:29 for a major increase in
  • 02:33 inflation
  • 02:34 and of course, the expectation of that major increase in inflation
  • 02:39 and possibly the fact that the Fed will be under much more pressure to prove that it's
  • 02:46 credible.
  • 02:47 This could easily be a prescription for
  • 02:51 a 10% mortgage rate,
  • 02:54 something that I lived through when I bought my first house,
  • 02:58 but that I didn't think we were going to see
  • 03:00 again
  • 03:01 in
  • 03:03 the United States.
  • 03:04 This is
  • 03:06 really dangerous
  • 03:08 stuff.
  • 03:09 Larry.
  • 03:09 Let me pick up on the tariffs issues specifically.
  • 03:11 As we know, President, former President Trump traveled to Capitol Hill this week
  • 03:15 and there were reports in the press that he floated, at least as an idea,
  • 03:20 replacing some or all of income tax with tariffs.
  • 03:23 There was one report that actually would just replace it entirely.
  • 03:26 What would that do from an AT macroeconomic point of view?
  • 03:30 Look,
  • 03:32 people miss,
  • 03:34 people misspeak sometimes.
  • 03:35 They're not serious
  • 03:37 about the things they say.
  • 03:40 That's
  • 03:40 probably
  • 03:42 a feature of
  • 03:44 candidate
  • 03:46 Trump,
  • 03:47 but replacing the
  • 03:49 income tax
  • 03:51 with
  • 03:52 revenue
  • 03:53 with tariff
  • 03:55 would be the
  • 03:57 worst macroeconomic policy proposal
  • 04:01 in
  • 04:03 U.S.
  • 04:03 history.
  • 04:04 It, of course
  • 04:06 burdens the middle class and
  • 04:10 the poor.
  • 04:11 Who purchase goods we
  • 04:14 goods that exist on
  • 04:16 international markets.
  • 04:18 So it's regressive as many economic commentators have suggested,
  • 04:23 but that is actually the least of it.
  • 04:26 Think about it this way,
  • 04:28 the Smoot Hawley tariffs,
  • 04:30 which did enormous damage
  • 04:33 some people would say made the depression great,
  • 04:37 were 6/10 of 1%
  • 04:39 of GDP.
  • 04:41 If you replaced
  • 04:43 half
  • 04:44 of income tax revenues, not all like he talked about, if you replaced half
  • 04:50 of
  • 04:51 income
  • 04:53 tax revenues with
  • 04:55 tariffs,
  • 04:56 those would be taxed.
  • 04:58 Those would be tariffs.
  • 05:00 Six times
  • 05:01 Smoot Hawley
  • 05:04 levels.
  • 05:05 That's got the potential to do enormous damage to the competitiveness of every
  • 05:10 US exporter,
  • 05:11 to do huge damage to
  • 05:15 all kinds of workers who use imported goods in what their businesses
  • 05:21 produce
  • 05:23 to
  • 05:24 create a downward spiral, as much higher prices for everything we import means consumers have less to spend
  • 05:33 on
  • 05:35 everything
  • 05:37 else.
  • 05:38 Create worldwide economic world warfare.
  • 05:42 As the rest of the world
  • 05:45 responds.
  • 05:47 This is a
  • 05:48 prescription
  • 05:50 for
  • 05:51 the mother of
  • 05:53 all stagflations.
  • 05:56 Now, I don't think it's likely to happen
  • 05:59 even if President Trump
  • 06:01 is elected, so I don't know that markets should be discounting
  • 06:06 all of that.
  • 06:08 But this is
  • 06:11 something that I think should be viewed
  • 06:14 very ominously.
  • 06:15 Larry, Let me turn to another subject that you and I have talked about in the past.
  • 06:18 But we had developments this week over in Bari, Italy with the meeting, the G7 as they took action actually on the Russian frozen assets, as I understand, it's not so much the principle, but the interest off of them that would back a bond.
  • 06:30 You early on this program called for the use of those Russian assets, the central back assets, the government assets to be used for Ukraine.
  • 06:38 Are you pleased with what they've done?
  • 06:39 Have they gone far enough?
  • 06:41 This is a major step forward.
  • 06:43 I am
  • 06:45 very pleased, but I don't think they've done everything that could be done.
  • 06:50 Look, the best estimate is that there's in the neighborhood of $300 billion
  • 06:55 of frozen Russian assets.
  • 06:58 Those assets have already been frozen.
  • 07:00 Nobody thinks they're going back
  • 07:03 to Russia.
  • 07:04 So if there are issues about expectations, about fairness, any of that,
  • 07:10 we cross that Rubicon.
  • 07:13 Two years
  • 07:14 ago,
  • 07:15 the big step they took was not just authorizing the use of the interest,
  • 07:22 but setting up a loan mechanism.
  • 07:25 So today,
  • 07:26 the Ukrainians are going to get access
  • 07:29 not just to this year's interest payments,
  • 07:33 but to interest payments out
  • 07:35 over quite a number of years,
  • 07:37 perhaps totaling $50 billion
  • 07:40 or more.
  • 07:42 I think ultimately the right thing to do is going to be to simply
  • 07:46 take
  • 07:47 these assets or take the perpetuity of all the income
  • 07:51 that they will
  • 07:53 generate.
  • 07:54 But $50 billion is a lot of money.
  • 07:58 It comes at a very important time to provide a shot in the arm
  • 08:02 for
  • 08:04 Ukraine.
  • 08:04 It's going to be crucial for
  • 08:07 us, for the international financial institutions to work with the Ukrainians
  • 08:12 to make sure that those resources
  • 08:14 are used with maximum effectiveness.
  • 08:18 And this also, David,
  • 08:20 does something else that's important.
  • 08:23 If this had not been done,
  • 08:25 I and others were very concerned
  • 08:29 that
  • 08:30 even if resources from
  • 08:33 Ukraine could be found in national budgets,
  • 08:37 it would come out of
  • 08:39 other vital international expenditures
  • 08:42 to combat global warming,
  • 08:44 to protect against
  • 08:47 pandemic threats,
  • 08:48 to reduce
  • 08:50 global poverty.
  • 08:52 And so this is also
  • 08:55 an important step
  • 08:57 for internationalism
  • 09:00 more broadly.
  • 09:02 It's been a
  • 09:04 long road
  • 09:06 on this.
  • 09:07 And,
  • 09:08 well,
  • 09:09 it didn't start with as aggressive an effort from the US government as
  • 09:15 I might have hoped.
  • 09:17 I really want to congratulate
  • 09:19 Secretary Yellen,
  • 09:22 especially people at the National Security Council, her deputy Wali Yadi Amo Sherpa,
  • 09:29 Dileep Singh,
  • 09:31 for having driven something that is really profoundly important.
  • 09:36 This was
  • 09:38 US leadership,
  • 09:41 with others
  • 09:43 being reluctant,
  • 09:45 and
  • 09:46 it was a case study in the last few months
  • 09:49 of effective, determined
  • 09:52 creative economic diplomacy.