Creon Butler
Well, hello, everyone. My name is Creon Butler, and I’m the Director of the Global Economy and Finance Programme at Chatham House, and I’m very welcome – I’m very pleased to welcome you all to this, the latest in our Chatham House series of conversations with leading thinkers in international economics.
And as today’s guest, I’m really delighted that we are joined by Dr Lawrence Summers. Dr Summers is without question, one of the world’s most influential economic thinkers. He has had a highly distinguished career in public policy, having served, at various times, as US Treasury Secretary in the Clinton administration, Director of the White House National Economic Council in the Obama administration, President of Harvard University, and Chief Economist of the World Bank. He’s currently the Charles W Eliot Professor at Harvard University, and Director of the University’s Mossavar-Rahmani Center for Business and Government.
We will very shortly be hearing from Dr Summers, but first a few quick housekeeping points. Firstly, this is a on the record session, after the discussion, the initial parts of the discussion, we’ll open it up for questions from the audience, and I’d invite everybody to put their questions into the Q&A function in Zoom. Please do keep your questions as precise and to the point as possible, so that we can take as many as we can. And depending on the time, I may just read them out, or I may – we may unmute you and ask you to put your question directly. We have a hard stop, after 45 minutes, so we need to, as I say, get as much into that period as we can.
And Dr Summers, maybe I can just start with the question that’s on top of everyone’s mind at the moment, Russia’s attack on Ukraine, the desperate plight of the Ukrainian people, and the response taken by the West. And the package of economic sanctions launched by the West is unprecedented in scope and depth, with the ban on transactions with the Russian Central Bank being a critical feature, and one which has really never been applied before, to an economy as large or as significant as Russia’s.
But there are many other elements as well, including those significant restrictions on Russia’s access to international markets for goods and services. So, what is your view of the package that has been applied so far, do you think it can work when combined with the other measures that the West’s taking, and helping Ukraine survive and hopefully prosper? And also, what do you think the long-term effects on the global economy will be, of the measures that have been taken, this time round?
Dr Lawrence Summers
I think first just to say Creon, that I’m very glad to be back with Chatham House, and look forward to whatever moment it becomes possible for me to be with you in person. And to say something self-evident, I’m an Economist, not a geopolitical expert, but I’m enough of a geopolitical expert to recognise that what we’re seeing potentially represents a seismic change in the global word. I think one has to be impressed by the speed and extent of the sanctions, by the standard of what has come before. One has to be impressed by the multilateralism and one has to be impressed by the reach.
On the other hand, I think there is a real question as to whether we are treating these sanctions as war, or whether we are treating these sanctions as expressive punishment. The unfortunate fact is that the rouble is essentially where it was before the war started, despite everything we’re doing to the Russian Central Bank. That while the numbers are not altogether clear, it does appear that very substantial foreign currency receipts are being enjoyed by arms of the Russian Government. It does appear that substantial importation by Russia, of a wide variety of key products, is taking place.
So I’m not sure that sanctions are exerting pain and pressure on Russia, to the necessary extent, given the threat. I think we should be moving to a world in which oil exports from Russia are cut off. I think without doing that, there are inevitably going to be large loopholes in the sanctions regime. I think if one looks at the sacrifices being made by the Ukrainian people, to uphold an international order, they are to orders of magnitude, greater than the sacrifices being made by others.
I think if one thinks about the sanctions that are being asked of populations in the West, they are relatively small, compared to the sacrifices that have been made in earlier generations. And so, I would very much like to see an escalation of the sanctions regime. I would hope that we will be able to do all we can to arm the Ukrainians. It seems to me that they have earned that, with the way in which we have fought, they have fought. And it seems to me that given the positions that we have taken around President Putin being a war criminal, that we do not have great alternatives to striving for a very strong victory in this conflict.
Creon Butler
I think on your particular point on purchases of hydrocarbons from Russia, I mean, particularly, as you know, the issue is in Europe where the dependence is greatest, the US has already committed to stop importing hydrocarbon goods from Russia, as indeed the UK has, by the end of the year. But Germany has said that they will stop importing oil by this summer, and that they will end imports of gas by the middle of next year. I mean, that’s one of the most important countries.
Now that, you know, that compared with what might have been conceivable beforehand, is an extraordinary statement, although as you say, given the immediacy of the pressure on the Ukrainian people, you know, even that may not be sufficient. But doesn’t the fact that these statements have been made and these commitments have been made, in a way, carry weight as well? I mean, in a way, Russia is, on the one hand, it’s facing pressure on the market side, it’s losing a big chunk of its market, ‘cause it can’t really sell gas elsewhere, and it’s also facing enormous pressure on the supply side, because it won’t have access to technology, won’t have access to finance and so on. So, do you – isn’t that also a powerful part of the pressure, even though in a way, it’s not an immediate thing in the way that, as you say, might be necessary or desirable?
Dr Lawrence Summers
I think that’s weak, to be honest, Creon. Look at where the rouble is trading, that’s telling you something about what kind of damage this is doing to the Russian economy or what kind of damage it is not doing. I think in the midst of a war like this, next year, the end of this year, these look pretty far into the future.
Creon Butler
Yeah, yeah, I would assume.
Dr Lawrence Summers
Well, I question is much less about statements made now, about what will be done many months in the future, and is much more about immediate actions that need to be larger releases from reserves than have already been announced, and they need to be larger releases from reserves.
I think that in terms of the world oil market, there’s a quite consequential development underway, which is that lockdown in China is likely to spread further and be necessary to a greater extent, for longer, than most people would have guessed a month ago. And presumably that should free up some substantial amount of oil, that should enable stronger actions to be taken by the Europeans.
I think one of the key lessons of crisis is that you have to judge what you do not by the standards of what you’ve done in the past, but why what’s necessary to respond to the crisis. And from that point of view, I think we have more distance to go. I think we also have room to take further steps to try to engage the forces of financial panic, as a destructive force, in the Russian economy. Trying to set off financial panic is extraordinarily counterintuitive, for finance ministry officials and Central Bank officials, but it is I think, what the current moment demands.
Creon Butler
Yeah, well, that’s maybe a good point to broaden the picture a little, and you mentioned the, you know, the fact that China’s current situation with COVID and the fact it’s continuing it’s no COVID strategy, may actually free up some additional supply of oil for the global economy. But at the same time, there’s very clearly a considerable additional impetus to inflation, from developments in the Ukraine, to the impetus we already faced as we were coming out of the pandemic.
And it would be good – great to have your view on firstly, the inflationary pressures in the global economy, more broadly, how serious you think the risk is that inflationary expectations will get embedded? So the second-round effects are things that central banks have to worry about, and if you see a kind of difference between what’s required in the US, versus what’s required in the Eurozone, given in a sense they’re very different situations, vis-à-vis imports of oil from Russia?
Dr Lawrence Summers
There are a lot of parts to that question. My – I don’t think my inflation views have been a big secret to people who follow these things. Starting with the United States, I have to say I see some increasing parallels between the 60s/70s period, and the present one. My concern, some months ago, was that we were replicating the mistakes of the LBJ guns and butter period, in which overly expansionary fiscal policy, overly accommodated by monetary policy, were leading to an undercutting of price stability norms, leading to substantially more rapid wage growth, and setting off a pattern of leapfrog inflation.
I think that dynamic was and is importantly present in the United States, and as took place in the 1970s, it has been compounded by really bad luck. Really bad luck, in terms of what’s happened to commodity prices, associated with the Ukraine conflict and associated with developments in China. And so, I think we are running very substantial risks, in the United States, of establishing new and higher inflation norms. I think preventing that from happening, with monetary policy, is a very delicate kind of operation. Historically, we’ve essentially never succeeded. At all moments when unemployment was below four, and inflation was above four, the United States had a recession, within two years. So, I think one has to very concerned that achieving a soft landing is a very difficult thing, given where the United States is.
There’s much discussion of how much inflation is due to supply and how inflation is due to demand, and for some purposes, that’s a very important conversation. On the other hand, macroeconomic policy kind of affects demand, it can’t affect supply, and so, in some sense, the task is to accommodate the level of demand to the level of supply in aggregate, so as to prevent inflation norms from being established.
The fact that we now have base wage inflation running above 6% in the United States, suggests to me that we have lost control and we’ll need to regain control with respect to those inflation norms. I think in Continental Europe, the situation is somewhat different, because I don’t think there is quite the same degree of extreme labour shortage.
I don’t think that there have been policies that were pursued that were as strongly expansionary, and I think the underlying position relative to potential is different. And so I think more restraint – less restrained policy is probably more appropriate in Continental Europe than is the case in the United States. But I think that we are headed into a period of increasing global challenge on inflation, and I certainly think that is the case with respect to the United Kingdom.
I think a very important question that I have not yet seen careful and rigorous analysis of, is the implication of Chinese lockdowns for inflation. On the one hand, there is a deflationary force coming from reduced commodity demand and reduced Chinese demand more broadly. On the other hand, they’re likely to be substantial interferences with supply chains, as you pointed out. The unmet impact for inflation is something I don’t feel I can judge confidently.
Creon Butler
Indeed, I mean, one of the factors, or one of the kind of legacy aspects of the pandemic that’s getting increasing focus is potentially the impact of long COVID. So, in Western economies, I mean, Europe and the US, a great many people have had COVID, and I mean, the figures initially were that roughly half of those who had COVID had some experience of long COVID, quite how much of that is going to be a very prolonged effect is still unclear.
But clearly one of the things, I’m sure in the mind of the Chinese authorities is, and in particular in their approach to continuing the no COVID policy, is, you know, exactly what does this mean? Not just for, you know, immediate deaths, where there is a massive difference between China and the West, but also, just what it may mean in terms of the long-term impact on the population.
I mean, so that’s one aspect of the legacy of the pandemic, are there other – I mean, you may want to comment on that one in particular, and how serious it is, and in a sense, personally, I feel it needs extra research urgently, but are there other aspects of the pandemic that you think policymakers in the West, really ought to be giving more focus to, than they have hitherto? And where there’s a risk, if you like, with the Ukraine crisis, that the attention will not be there that should be.
Dr Lawrence Summers
I haven’t seen careful, comprehensive numbers on long COVID that ask the question and answer the question. As COVID becomes more mild, as a higher fraction of those who get COVID are vaccinated, how does that affect the probability that people will get long COVID, and how does that effect the severity of long COVID, if they get it? And I just haven’t seen careful analysis of that. I think it’s a reasonable guess, in the United States, that half the population has had COVID. If 1% of that group are not able to work afterwards, that is the equivalent of 1% to the unemployment rate, in terms of the number of people who can – who are eligible to work. So I think this is a potentially quite significant factor.
I think there’s – but I think I want to temper that by saying I think there’s a kind of confusion. People assume that if more people want to participate in the labour force, that’ll lower wages and that’ll be deflationary. And there is that aspect, but if more people participate in the labour force, and the unemployment rate doesn’t go up, that will also mean more people are working, earning and spending, and that will operate to push up wages. So I don’t think the idea that labour force participation is going to increase, therefore, it’s going to be deflationary, is quite as well established as many people choose to believe, Creon.
In terms of other affects, I think so far, looking at the United States, the judgment I expressed early in COVID, that closing down an economy and reopening it was going to be a little bit like my summer resort town of Truro in Massachusetts, every summer and every winter. And that there was not going to be that large a destruction of potential output. I think some part of that is looking to have been correct as a judgement.
I think the long running impacts on productivity are hard to judge. Chatham House is more productive because it’s now in the habit of having Zoom meetings, like this, and that has raised the productivity of your members, who get to participate in your meetings, without braving the London traffic, to come and be physical participants, and there are obviously a whole set of effects that work in that direction.
On the other hand, I think there are many workers, I think of Nurses in hospitals, who are exhausted by what they have been through, during this period of labour shortage. And I suspect that they’re going to need to work less hard for a while, and that’s going to operate to reduce productivity and so what the net effects of this is going to be, on growth of productivity is, I think, a very important aspect, but not one that I would presume to judge.
My sense is that people have learned a fairly profound lesson about wanting to spend less time commuting, less time travelling, less time dressing up, and that a fair amount of that is going to be with us for some time to come. So, I think this is probably going to be somewhat egalitarian, in terms of economic geography. Fewer people are going to want to live and commute into New York or London. But those still are rather tentative guesses.
Creon Butler
Yeah, indeed. I mean, I hope very much we do hang onto at least some of the stuff we’ve learnt. But there’s, as well as the impacts on, if you like, as you say, on the use of technology and so on, we’ve also seen, say in the US, I think if you look at the IMF’s projection back in October, it was that by 2026, the US debt to GDP ratio would be up 25%, relative to what it would otherwise have been. So it’s an order of that magnitude.
Europe is significantly less, you know, about 10%, and obviously emerging economies and the poorest countries are basically very little at all. Do you worry much about that element of doubt? I mean, I notice, in your earlier discussion, your focus in terms of fiscal policy was on the impact on inflation rather than, you know, that it might create a, you know, additional debt. Just it’d be good to have your take on that.
Dr Lawrence Summers
Yeah, I think that I am probably less alarmed around fiscal sustainability issues than many of my friends. And I say that for a couple of kinds of reasons, the most important of which is the salience of debt service relative to debt stocks. You know, when the Maastricht criteria were adopted in, whenever they were in the early 1990s, the nominal interest rate in Germany was 9% and the real interest rate was about 5%. And people decided that 60% of GDP, as a debt ratio, and so, if you just apply the logic, at 3% as a real interest debt service cost was an acceptable level. Today, almost everywhere, real interest rates are negative, even if one chooses to use nominal interest rates, nominal interest rates, after their spike in the United States, are running in the twos, contrasted with that nine.
When I advised my daughter recently, on what kind of apartment she could buy, I did not think of the value of the debt in ratio to her income, nearly as saliently as I thought of the value of the debt relative to the house she was – to the apartment she was buying, and the value of the debt service relative to her income. And so, I think that if you look at fiscal sustainability, even on fairly pessimistic assumptions about interest rates going up, the flow-to-flow measure, or the stock relative to the debt stock relative to the relevant asset, which is the future present value of tax collections, does not look in an extremely unfavourable place.
I also think that for a nation, as for a family, it is important to look at what debt is being used for. And if debt is being used to finance public investment, that is a very different thing than if debt is being used or is being used to respond to a one-time transitory decline in income, that’s a very different thing, than if it’s being used to meet ordinary expenditures. For those reasons, my own view is much more oriented to concern about inflation and overheating, than it is to the concern about debt sustainability at this point. Though, obviously, that’s something that has to be monitored.
Creon Butler
Yeah, thank you. So I would like to bring in a few of the questions we’ve had from participants now, and there’s quite a wide range, but maybe I could start with one which is about the future reserve currency. Clearly, the action taken in relation to the Ukraine has given profile to this, I mean, it’s, in a sense, it’s demonstrated the fact that the only convertible currencies basically are ones that are provided by Western liberal democracies, as we are now, genuinely convertible currencies, and that seems something that is pretty unavoidable. I mean, unless, you know, China changes its – the conclusion it reached back in, I think 2015/2016, that it wasn’t going to remove significant capital controls and so on. But could you give us your view on the likely evolution of reserve currencies, and particularly clearly the role of the dollar, but also, whether one could see at some point an alternative to Western liberal democratic convertible currencies emerging?
Dr Lawrence Summers
Never say never. But I am quite confident that for the foreseeable future, the dollar will retain its role as a reserve currency, and I think if the dollar does not maintain its role as a reserve currency, it will be the least of our problems. If one thinks about the pound’s loss of its role as a major reserve currency, and asks whether that was a cause of British economic problems in the second half of the 20th Century, or a consequence of British economic problems in the 20th Cen – second half of the 20th Century, I think it was much more a consequence. And so, if we mismanage our economy sufficiently and egregiously, anything could happen. But I think that it is hard to see scenarios in which you will be able to transact in euros or Norwegian krona or Japanese yen, if you are not permitted to transact in the dollar. And so, moving from one Western liberal currency to another, it seems to me is not likely to be an availing strategy.
It seems to me very unlikely that there will be a sufficient system in Crypto of any kind, that one will not ultimately need to go back from Crypto to more conventional government backed currencies. And so it hard for me to see the dollar being displaced, in any important sense, in major countries, by Crypto. That leads authoritarians, apart from the reluctance of authoritarians to have convertible currencies, there’s the further point that now that the idea is around that countries can seize each other’s reserves, that countries can put blockades on reserves, all of that, would that make one more willing to hold large amounts of renminbi, or would that make one less willing to hold large amounts of renminbi? I rather suspect the latter.
So I think the dollar is fortunate in its alternatives, and it will continue to be a reserve currency, somewhat longer than the United States continues to be a leading nation.
Creon Butler
Do you think there’s a case for the countries that have convertible currencies, to set out sort of principles to govern the way in which they would use this, what is quite a tremendous power, in future? I mean, I think most would agree that the action taken by Russia is of such a scale that in a way, the response has been what it has been. But it raises a whole set of other sort of steps that are on that intermediate level, between what Russia has done and much less severe actions. Do you think there should be some signalling from the owners of the reserve currencies, as to when they might deploy this in the future? I mean, it’d be pretty hard to agree, but do you think there should be an attempt to do that?
Dr Lawrence Summers
I don’t know. I don’t know the answer to that question. I am sceptical, because I’m sceptical about the ability to anticipate all the contingencies. I’m sceptical about giving people lines and limits that they can come up to, without being – without having currencies seized. And in general, I tend to believe that ambiguity can be a more powerful tool than academics think it should be.
Academics tend to think that everything should be thought through in advance and a clear framework provided. I like to ask, do you think governments should have public guidelines for ransom policies? So that there’s no government in the world that doesn’t, on occasion, do something that’s like paying ransom. But I think that one’s more likely to manage those situations well, without providing a detailed roadmap as to how those situations will be managed. And I’m inclined to think that something similar is true in this case.
Creon Butler
I mean, it’s very like the lender of resort arguments as well, where there’s been – long been an argument there should be constructive ambiguity around lender of last resort. I guess it’s a similar kind of role here.
Dr Lawrence Summers
So, it is quite similar. The more homely example that I like to use is to Professor’s Summers policy with respect to makeup exams. Will a student get a makeup exam? Of course, the answer is, in certain circumstances, the student will get a makeup exam, but I don’t walk in on the first day of class and say “These are the rules on makeup exams.” I say, “It’s assumed that people will take the exam at the normal time.”
Creon Butler
Yes, indeed. So, a further question we’ve had, and it’s a very, you know, not surprising there is this question, it’s about your views on the drive to net-zero, the response to climate change. And I guess we’re now in a situation where the speed with which action has to happen is now so short, because of the fact we’ve not done enough up to now, the scale of the funding that’s needed, I mean, the estimate’s around $1 trillion a year, from some sources, and that speed suggests that something very radical is needed. So – and this is on top of the pandemic and the global financial crisis, and everything else. So, if you were to sort of take an overarching – if somebody asked you for a framework, how should we tackle this enormous transformation that’s required, what advice would you give?
Dr Lawrence Summers
I’d sure like to layout a global strategy for climate change, in the three minutes you want me to spend answering this question. I guess the remarks I would make are that I tend to not like the world will end advocacy. Particularly when what’s going to being advocated – when what’s being advocated is unlikely with that cap. And so, I think that we are unlikely to do, over the next five years, the full programme that the most alarmist advocates put forward. And at the end of five years, they’re not going to – they are not – they themselves are not likely to declare that the planet cannot be saved and has gone irrevocably off a break. So, in general, I think that we should all step back a bit from apocalyptic rhetoric.
I think the most important lesson that we have learned in the environmental area is that technology does come along and technology does accelerate change, and that it tends to come along more rapidly than we expect. And so, I think a strategy that puts a little bit more emphasis on technology encouragement and technology forcing, and a little bit less emphasis on sacrifice, is likely to be a better and a more availing strategy than some of the style of advocacy that has been pursued to date. I think that there is a tendency – I think that the or nothing character of a lot of climate rhetoric, has been quite counterproductive in leading people to think they just can’t solve the problem. I think that shunting the problem more effectively and recognising a potential role for more incremental solutions is a valuable aspect of this.
Creon Butler
Yeah, I mean, I think very well-made point about the role of technology, but we’ve also seen the role of economies of scale being enormously as powerful as well. So when you’re looking at wind and solar and you go back to the, sort of, let’s say, six or seven years ago, there was a strong drive to put more public spending into basic technology and so on, and generate a private sector response, something called ‘mission innovation’, which was a key part of the Paris Agreement, or at least the support for the Paris Agreement. But then it was, if you like, German subsidies and the economies of scale that that drove, for solar particularly, that had an enormous effect. I mean, that was a global gift in a way, so how do you think one should balance, if you like, the technology versus just getting on with it, with whatever technology you’ve got, albeit very expensively, in order to get those economies of scale?
Dr Lawrence Summers
Yeah, I was including ratcheting down learning curves, as part of technological improvement in what I said, and I certainly think there is a case for substantial subsidies of those kinds. I have to say that I also think that it’s the essence of wisdom in policy, to be able to distinguish degrees of bad, and capacity for least worst thinking. And I think the German decision to move away from nuclear power represented a major failing in that area. That I understand why people had concerns about nuclear power, but life’s about choices, and I think that was a very, very costly choice, given the greater adverse aspects of the use of fossil fuels.
Creon Butler
Indeed, well, you’re going to hate me for doing this, but the one topic that we said we would try and cover, which we’ve not actually been able to, but I wanted just to see if you were able just to give us a couple of minutes’ thoughts, is the whole question of populism, and its role in relation to economic policy. And obviously with the French election, you know, we are seeing that playing out in a very critical way.
We have only, unfortunately, two or three minutes, but I mean, what is your take on how economic policymakers should factor in the risk that the policies that make sense in many respects, may also be fuel for populace, with other consequences that they clearly don’t want to have?
Dr Lawrence Summers
I wish I knew. It’s the question that haunts me, and it seems to me should haunt an institution like Chatham House. That the estrangement of regular people in all our countries from the kinds of ideas that are generated and pushed by elites, leading to revanchist, populist, nationalist short-sighted policies, is it seems to me, the ultimate threat to the security and the prosperity of people everywhere. And that for all of us who think in technocratic and analytical kinds of ways, about policy questions, trying to do a much better job of grasping, not just empathetically, but sympathetically, the instincts of our fellow citizens, and adapting our policies to them, is I think immensely important. And I wish I had more in the way of answers, but it has certainly lead me to reflect differently on a variety of concerns that I have had over time.
Creon Butler
Indeed, I think a very good pointer for work we should be doing here. Well, Dr Summers, unfortunately, that’s all we’ve got time for. Thank you so much for sharing your insights with us. I think certainly you’ve given us an awful lot to think about, some great perspectives, and as you say, a work agenda for Chatham House in the future as well, which is much appreciated.
So with that, I’d like to thank you, but also to thank our audience for their questions and for their participation and for listening.
Dr Lawrence Summers
Thank you.
Creon Butler
Thank you. Until the next time.
Dr Lawrence Summers
Good to be with you. Bye, bye.
Creon Butler
Bye.
