Ezra Klein, host of “The Ezra Klein Show,” recently interviewed Larry Summers, a high profile economist and a former Treasury Secretary- who told Klein that, according to his analysis the United States has a good chance of landing in trouble because of the actions of Democrat Joe Biden, who was guided by disastrous “Progressive” policies, and now all of America is going to have to deal with the consequences.
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“I think the likelihood is that we will not return to 2 percent inflation without having at least a mild recession. I think that the magnitude of the imbalances and excess demand in the labor market are sufficiently great that the odds are probably three and four that we will not get inflation down without running a recession,” Summers told Klein.
“If you look at the last 75 years of American business cycle history and you just ask the question — suppose that the unemployment rate is below 4 and the inflation rate is above 4, what are the odds that the economy will go into a recession in the next year and what are the odds that the economy will go into recession in the next two years? Depending on just how you calculate the answer, it’s about 50 percent that it will go in the next year and about 75 percent that it will go in the next two years,” Summers said.
The interview is being described as highly important by other economists, such as Scott Lincicome from the Cato Institute:
"Ezra Klein has a must read interview of Larry Summers. One of Ezra’s questions is interesting. No, “interesting” isn’t quite right, it’s the single most revealing question I’ve ever seen from a reporter in my entire life." 🔥https://t.co/52Ujs3ULu4 pic.twitter.com/gmHJ92YGZf
— Scott Lincicome (@scottlincicome) March 31, 2022
Summers described his motivation for being an economist:
I went into economics because I believe that by controlling recessions and preventing downturns, you could change livelihoods for millions of families. Listen here to my conversation w @ezraklein https://t.co/VidYHWJefd
— Lawrence H. Summers (@LHSummers) March 29, 2022
Klein had a lengthy interview with Summers about his insights.
“Summers has been this relentless, loud, frustrating economic Cassandra. He’s been saying often and to everyone that the risk of inflation was way higher than most economists believed. He flayed President Biden’s American Rescue Plan for being way too much stimulus too fast, Klein told his audiences,” Klein told his audiences.
Month after month, he said that the inflation — it wasn’t just transitory. It wasn’t just going to go away. These weren’t just supply chain problems that would unkink. That this wasn’t just going to be a problem of autos and energy. That the markets were wrong, and the forecasters were wrong, and the pundits were wrong, and the Fed was wrong, and we were headed for a serious bout of inflation.
Klien talked to Summers about whether or not his forecasting has changed due to recent events, including Russia’s invasion of Ukraine and new pandemic lockdowns in China.
From a full transcript from the New York Times, Klein made some of the following observations:
” I’m probably as apprehensive about the prospects for a soft landing of the U.S. economy as I have been any time in the last year. Probably actually a bit more apprehensive. In a way, the situation continues to resemble the 1970s, Ezra,” Summers told Klien.
“And then we caught really terrible luck with bad supply shocks from OPEC, bad supply shocks from elsewhere. And it all added up to a macroeconomic mess,” Summers said.
“And so now I think we’ve got a real problem of high underlying inflation that I don’t think will come down to anything like acceptable levels of its own accord. And so very difficult dilemmas as to whether to accept economic restraint or to live with high and quite possibly accelerating inflation. So I don’t envy the tasks that the Fed has before it,” he told Klein.
Klein tried to simplify and said, So I want to pull some pieces of this apart and get some of this into more natural language. So inflation can have a demand side and a supply side. And the demand side is too much money chasing too few goods, or even just chasing the normal amount of goods. But too much money, too much — people are buying too much.”
LARRY SUMMERS: That’s right.
EZRA KLEIN: And then there’s a supply side. We are not being able to produce the goods. Factories are not being able to do things. There’s a war where an important natural resource is developed or there’s a lockdown where there’s a lot of manufacturing capacity.
LARRY SUMMERS: I think that’s right in part, but I think it restates what I think is a bit of a popular confusion in the following sense — supply is what it is. Monetary policy can’t change it. Fiscal policy can’t change it, except in the long-run. And so given what supply is, it’s the task of demand to balance supply. And if demand is greater than supply, then you’re going to have excess inflation and you’re going to have the problems of financial excess.
So the job of the demand managers, principally the Fed, is to judge what supply is and calibrate appropriately. It’s not an excuse for inflation to blame it on supply. It’s a reality in the environment that you have to deal with. And so the job is to look for measures of overheating, and when you see measures of overheating, to apply restraint.
The stimulus was short-run, but its acts were long-term. People estimate that only about 30 percent of the stimulus checks were spent. So in terms of the impact on the economy, we’re feeling very substantial stimulus on a continuing basis for the next several years. Monetary policy acts with a substantial lag. And the rising inflation meant more expansionary monetary policy because of lower real interest rates and that’s feeding through to affect the economy today.
Third, the stimulus had the effect of kick-starting the economy. You got a lot of people hired. Then those people were earning incomes. Then those people spent. Then other people invested. And the cycle continued. So I think the stimulative impact, both because of the lags in the effects of stimulus and because of the kick-starting effect, is something that was very much present.
That’s why almost all forecasts of growth this year are forecast to say that the economy is going to grow more rapidly than its potential. They say that the unemployment rate is going to decline. And so if you have an economy where this year the forecast is that demand is going to grow faster than supply normally grows, that’s an economy where the inflation problems are potentially going to get worse, not, in their fundamental sense, going to get better. And that’s why I have been so concerned.
And so there are a lot of policies that came together — I mean, there was a reason the Biden administration wanted to run the economy hot. There was a long period when it didn’t just feel, the economic data showed, that expansions were not reaching people on the margins. And it felt, finally, like we were reaching people on the margins. We were putting a lot of firepower to do that. But even in this terrible time, this horrifying pandemic, we were giving people who needed it quite a bit of help.
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And then for that to then turn into this horrifying inflation problem, which is now eating back those wage increases, potentially going to require much sharper action from the Fed— I recognize the world doesn’t have to please me, but it is maddening. And I think one of the hard questions, before we even get into Ukraine and China— I think one of the hard questions is, does it have to be this way? Did it have to be this way? Is there some way for this to end without the people we were finally helping suffering?
And I highlighted that much of unemployment was not just frictional unemployment but was long-term structural unemployment that destroyed families. And so it was terribly, terribly important to avoid recessions. I went into economics because I believe that by controlling recessions and preventing downturns, you could change the livelihoods for millions of families.
So I share completely the emotional feelings that you describe around the benefits of a strong economy. But I think it’s very important not to be shortsighted and to recognize that what we care about is not just the level of employment this year, but the level of employment averaged over the next 10 years. That we care not just about wages and opportunities this year, but we care about wages and opportunities over the long-term.
And the doctor who prescribes you painkillers that make you feel good to which you become addicted is generous and compassionate, but ultimately is very damaging to you. And while the example is a bit melodramatic, the pursuit of excessively expansionary policies that ultimately lead to inflation, which reduces people’s purchasing power, and the need for sharply contractionary policies, which hurt the biggest victims, the most disadvantaged in the society, that’s not doing the people we care most about any favor. It’s, in fact, hurting them.