We are pleased to welcome Lawrence H. Summers to the Teneo Insights Series. Summers is one of America’s leading economists, having served as U.S. Secretary of the Treasury in the Clinton administration and as Director of the National Economic Council in the Obama administration. Summers is currently the Charles W. Eliot University Professor and President Emeritus of Harvard University.
Summers, well known for his views on inflation, shares his perspectives on a range of issues, including: monetary and fiscal policy options; the impact of higher rates and less stimulus on growth; the implications of less abundant capital in the midst of economic populism; rethinking of supply chains and the green energy transition; the effectiveness of ever increasing economic sanctions; the rise of digital currencies; and China’s impact on the global economy.
The Current Economic Situation
Despite the health shock of the pandemic being far greater than ever anticipated, the U.S. economy has demonstrated significant resilience throughout the pandemic and has bounced back faster than expected. However, despite the relatively fast rate of recovery, inflation has hit a 40-year high at 7%. Some of this inflation, such as car prices increasing by 40% in the last year, is a transitory aftermath of the COVID-19 crisis. Other industries however, such as medical care and housing, are dealing with rising inflation which will likely continue for a prolonged period of time.
Causes of Inflation
The Federal Reserve and most economists believe that this year’s record rise in inflation was a one-off event caused by the pandemic and supply-chain issues. Others, such as Senator Warren, have suggested that corporate greed is to blame for inflation as the supply and demand imbalance have given corporations tremendous pricing power that has been used irresponsibly. While the pandemic is partly to blame for the record high inflation levels, Lawrence Summers believes that inflation will continue to rise if the amount of stimulus being pumped into the economy is not reduced.
Working hours for the average worker has increased, but productivity still lags behind wage growth. There are some measurement issues at hand as the increased quality of work isn’t considered when measuring productivity. It is vital to invest in research and infrastructure to increase the level of productivity across the country. Poorly maintained infrastructure creates costly bottlenecks that greatly decrease productivity. Additionally, strict U.S. immigration policies have made it harder for researchers, engineers and science students to come to the U.S., which has further drained productivity.
Business leaders can’t ignore the voice of the market when they make decisions. CEOs who continue investing heavily in areas where the market is penalizing them are wasting capital which will in turn negatively impact their shareholders. However, decisions cannot be totally driven by the market, so leaders must be very prudent in their actions.
Monetary and Fiscal Policy
Monetary policies should be humble and nimble rather than prescriptive. Inflation will likely continue to rise, and companies should be prepared for that. In order to slow inflation, we must distinguish between relief and demand-based fiscal policy. The Build Back Better bill, for example, is largely paid for and represents investments on the demand side for our economy, so it isn’t likely to be highly inflationary. Demand-based stimulus, however, should be avoided. The emphasis should be on targeted and efficient investments that support the well-being of the greater economy.
While large companies do need to be regulated more, we also need to recognize the importance of entrepreneurship and private initiative. The approach to industrial policy should therefore be based around enablement, rather than strategic direction and planning. There are items such as semi-conductors that the government should direct investments towards, but the best enactors of industrial policy are those who aren’t looking to supplant private markets more than is necessary.
More often than not, economic sanctions are the middle-option between doing nothing and taking violent military actions. Therefore, those who criticize sanctions should think about what alternative approaches the U.S. should take instead. Sanctions are hard to target perfectly, have collateral consequences and are sometimes self-defeating, but they are an important tool that shouldn’t be dismissed without first considering what other viable alternatives are available.
Primacy of the U.S. Dollar
One way countries are trying to work around sanctions is to move away from the primacy of the U.S. dollar in international business, and the rise of cryptocurrencies and central bank digital currencies could be a direct threat to this primacy. Summers believes it could be possible for the U.S. to abuse sanctions to the point that people set up alternatives to the dollar, but it is made unlikely by the lack of real competition. As the quip goes, Europe is a museum, Japan is a nursing home, China is a jail and Bitcoin is an experiment, meaning there still isn’t a real alternative to the U.S. dollar that people can count on.