With U.S. stocks off to a dismal start in 2016 and China's economic growth slowing, Here & Now's Jeremy Hobson checks in with Harvard economist Larry Summers. Summers says there's a 1 in 3 chance the U.S. is heading for a recession. He also says he's supporting Hillary Clinton for the presidency.
Are you worried about the volatility of the stock market and the direction of the U.S. economy?
“Yes I am. Markets often overreact and are always volatile, frequently more volatile than is justified by fundamentals. On the other hand, if you look at the consensus of professional forecasters, the Congressional Budget Office, or the U.S. administration, they’ve predicted zero of the last five recessions. So, markets will have false negatives, but the consensus will tend to miss problems also. I think you have to look at what’s happening in markets with concern, and it’s not happening divorced from reality. You’re seeing a capital outflow from emerging markets at record rates. You’re seeing a number of the economic statistics in a downshift. Industrial production, retail sales, these numbers are coming in less strongly than they had been a few months ago. The last employment report was certainly a very encouraging report, but employment has a tendency to be a lagging indicator, and the United States is embedded in a weakening economy.”
Its sounds like you’re saying we’re due for a recession.
“I think that would be a substantially premature judgement. I think we have a risk of a recession. I’ve estimated the chance of recession at 1 in 3. I think if the Fed actually carried through on its forecast of raising rates four times this year, then the odds would probably be closer to 1 in 2. But, I don’t expect the Fed will carry through because I think the Fed will recognize the gathering weakness, and indeed markets have now very heavily discounted the Fed’s forecast of what it will do, to the point that markets are now looking for one rise over the next year, rather than the four that the Fed forecasted for itself.”
Did the Fed make a mistake in raising rates last month?
“I said at the time that I thought it was a mistake. At the moment that it was done, it had been signaled so strongly that there really wasn’t an alternative. Positioning itself for a rate increase was a very poor risk-benefit judgement. The great risk for our economy is slipping off into recession, is allowing expectations about inflation to become unanchored and for the risks of chronic lowflation or deflation to become an important barrier to growth, as has become the case in Europe and Japan. What the Fed did was a step that increased that risk, rather than reduced that risk. They were worried about a different risk; a risk of overheating of the economy, perhaps a risk of financial bubbles. Whatever the risk was that we had bubbles, that risk is taking care of itself as we look at what happens to the market every day. I find it very hard to see evidence of overheating in this economy, so I think the prudent course is to minimize the risk of a deflationary trap. There’s some very fundamental things that have happened to our economy. People are more nervous and saving more, more of the income is going to high-income people who have a high savings propensity. On the other hand, there’s much less need for capital investment than there used to be. A smartphone has as much computing power as a supercomputer used to, people are shopping with e-commerce, and there are fewer malls that need to be built. All of that operates to mean that we’ve got more savings, less investment, lower normal interest rates, and mean that we don’t have the kind of room to raise interest rates and tighten policy that we once did. So I am concerned with the path of policy.”
On income inequality and a potential “wealth tax”
“I don’t think global wealth tax idea is likely politically viable in any near-term horizon. I do think there’s a lot we can do to make our income tax system more progressive. There’s no reason why the kinds of gains that Bill Gates enjoys, or Steve Jobs enjoyed, or Mark Zuckerberg enjoys should entirely escape taxation. If the stock is not sold, you’ll look at the profits of American companies. You’d think the greatest profits would be in places like China, Japan and Germany that have big economies. In fact, the biggest profits are in places like Luxembourg, Ireland and the Cayman Islands that have the lowest tax rates and provide a basis for tax sheltering. I’m for taxation that addresses inequality, but I think there are better, more politically practical and feasible ideas than through a wealth tax.”
On Bernie Sanders’ income inequality comments
“I think his emphasis on the excessive power of financial interests is legitimate and correct. I think his concern that bankers should not be running the Federal Reserve System, by law in the charter of the Federal Reserve System, is a legitimate concern. I agree with him. I don’t think some of the particular proposals he made would advance the interests of the economy. I don’t see any particular virtue in banks being big for the sake of banks being big, but I worry that some of the approaches that he would take in breaking them up would deny access to credit for a large number of American businesses, as took place before the Depression. I think the impulse that he has, to be concerned about money in politics, is exactly right. I think one has to take a careful, issue-by-issue look at these things, and I do think senator Sanders makes a mistake by over-simplifying the issue into ‘all regulation is good, and all non-regulation is bad.’”
Are you endorsing a candidate?
“I have not made an endorsement. I’m not a political figure, but I have a lot of admiration for Mrs. Clinton, who I have known for a very long time.”
Would you serve in a Clinton administration, if asked?
“I am focused on what I do as a professor here at Harvard and someone who comments on economic and financial issues. I had two stints in government, and I think that’s probably enough for my family.”
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