Yahoo Finance Presents: Former Treasury Secretary Larry Summers

In this episode of Yahoo Finance Presents, correspondent Akiko Fujita speaks with Larry Summers the former Treasury Secretary for Bill Clinton, former Director of the National Economic Council for President Obama, and Harvard Professor. The discussion is a wide range of topics from the U.S. COVID-19 pandemic response to how best to reopen the economy and jump start the workforce.

Video Transcript


AKIKO FUJITA: Welcome to Yahoo Finance Presents. I'm Akiko Fujita, and this-- we are today joined by Larry Summers. He is, of course, the former Treasury secretary under president Bill Clinton. He was also the director of the economic council under President Obama, and is currently a professor at Harvard University. Larry, it is great to have you on today.


I'd love to start with the broader picture because we are coming off of another week where we've got some pretty devastating economic data. Retail sales plummeting in April, we are now looking at unemployment well over 35 million people. As you look over the last two months, how far along are we in understanding the full impact of this pandemic on the economy?

LARRY SUMMERS: Well, I think we understand it better than we did. We have a much greater recognition that this is not going to be an entirely temporary phenomenon but is going to be one that's likely to be with us for quite some time. I-- I think we've made some real progress in understanding it.

In terms of the total amount of economic pain, I don't think we are yet a long way part through it. I think, in general, unemployment goes up the escalator and goes down the staircase, so it will take some real time for us to recover from this. And my guess is that we still have not hit bottom, that there will be a range of knock-on effects from the disruptions we've taken place that are likely to be significant relative to the effects of people coming back. So I'm pretty concerned about the economic outlook, not just for the next few months but for the next few years.

AKIKO FUJITA: When you say the bottom, what does that look like? If we're looking at more than 35 million, what would that number ultimately be and how many of these people will actually come back to the workforce?

LARRY SUMMERS: Well, it's 35 million people who have claimed unemployment insurance. It's not 35 million people yet who are-- who are counted as unemployed. Or it's not that the level of employment, as much as it's dropped, has dropped by 35 million people.

But it's still something that is immense relative to the financial crisis. And surely there will be people-- people who are in their early 60s who will plan on taking an earlier retirement than they had otherwise planned on. There will, no doubt, be people coming out of high school who get off on the wrong road, and it may be a long time, if ever, before they find their way back to regular-- regular, stable work. And so I don't think that this is going to be a thing we're going to move through with any rapidity.

AKIKO FUJITA: When you look at the impact on labor markets so far, should we be looking at this as a momentary disruption or is there a fundamental change you think that will happen coming out of this?

LARRY SUMMERS: I think it's a mixture. There are disruptions that will be-- will be repaired. It's not going to be the case that airline volumes are 5% of their usual level forever. On the other hand, I think this is also going to mark a fairly profound structural change. And we're going to have very substantial increases in inequality and a very substantial reduction in any sense of solidarity in our society unless government steps up and meets this challenge.

AKIKO FUJITA: There's certainly a lot of debate happening right now about what more needs to be done in Washington to ensure that the recovery is not a 10-year recovery, and to your point, the inequality isn't exacerbated. There are those on the Republican side who have said that if you add additional funding here, too much stimulus disincentives workers going back to work. And on the Democratic side, there is certainly this argument of putting additional paychecks out there because that is exactly what's needed right now. Where do you fall on that debate? Which side-- where do you stand?

LARRY SUMMERS: I think we need to inject much more money into the economy, and we need to find ways of injecting it that reward working rather than reward not working. I do worry about social insurance measures that provide people an incentive not to work. I think that is a legitimate concern.

But I worry much more about not providing enough funding and not providing enough demand in the economy, which I think is potentially a more serious problem. I see last month, prices in aggregate fell. I see substantial risk of accumulating deflation. These would be the problems that I would be more worried about on the-- on the demand side of the economy.

AKIKO FUJITA: We are now starting to see states begin that reopening process, and you've been quite vocal in criticizing the amount of investments that have gone towards health measures before we even worry about the economic side of things. Do you think that we're starting the reopening process too soon, given the amount of testing that's available right now?

LARRY SUMMERS: I'd rather focus on getting the right amount of testing than focusing on the trade-off, given the mistake we're making. I'm sure that we can very profitably invest in more testing. I'm sure that we can very profitably invest in more contact tracing. I'm sure that we can invest better in strategic targeting to protect nursing homes.

These are higher priorities for me than, certainly, reducing the budget deficit in the near term, and frankly, than the marginal bit of economic relief expenditures. So I'd like to see at least $100 billion in fundamental health investments to drive and make possible a more rapid recovery.

AKIKO FUJITA: And help us understand how you see that tying directly to the economic recovery. You know, there-- there's been so much--

LARRY SUMMERS: They can protect themselves. They can-- they can learn if they've got some temporary immunity. If employers can test their employees when they come to work, they can provide other employees with the confidence that they're safe. They can provide the people who walk into the store with the confidence that the person behind the cash register is safe. If schools can test their students, people can go to the school with much greater confidence that they will be safe. Testing, transparency lead to confidence. Confidence leads to better economic performance.

AKIKO FUJITA: You-- you know, I take your point on the health issue and-- and the amount of money that needs to be invested on that front. We're also seeing record stimulus globally being poured in to try and support individual economies. And certainly, you know, the argument is that this is not the time to think about austerity measures. But I'm wondering what is waiting on the other end. How do we continue to pay for this? Is this kind of spending sustainable?

LARRY SUMMERS: I think what we will suffer in terms of reduced capacity to produce, in terms of lost generations of potential workers, in terms of greater social insurance burdens for those who become estranged from the workforce, the costs of not investing far exceed any costs associated with an adequate investment agenda.

Look, it's the most basic truth about borrowing money is that you can't judge the borrowing of money unless you know what it's going to be used for. That's true for a household. If you borrow money to buy a house, that's one thing. If you borrow money to go eat out a lot, that's a different thing. The same thing is true for us as a nation. And we need to borrow money to carry us through this emergency and to maintain investment in the future of our economy.

AKIKO FUJITA: I want to get your thoughts on the Fed's response to all of this. There's no question the Fed is essentially throwing everything it can at this issue over the last two months. And yet, in his most recent comments, the Fed chair, Jay Powell, seemed to suggest that they are reaching the limits of what monetary policy can do in this situation. When you look at the other levers, are negative interest rates inevitable, you think?

LARRY SUMMERS: I don't think so, and I'm not sure that negative interest rates would be effective. I think negative interest rates might quite substantially shake confidence. I think they might do considerable damage to some parts of the financial sector. I would rather see us rely on fiscal policies than rely on negative interest rates as a strategy moving forward.

AKIKO FUJITA: So let's talk about what more needs to be done on the fiscal side of things. You've talked about the amount that needs to be invested on the health measures to ensure a safe re-opening. What other measures do you think the administration needs to take?

LARRY SUMMERS: The pandemic is not the only challenge we face. We live in a country where kids had their IQ reduced because of bad water. We live in a country whose airports are an embarrassment when foreigners come and visit. We live in a country where it takes longer to take the train from Long Island to New York than it did in 1925.

We live in a country where the air traffic control system may even use vacuum tubes in some-- in traditional radar in some part of its architecture. We live in a country where extra potholes in the highways cost 75 cents a gallon in terms of extra costs for motorists. There are vast investments we need to make in modernizing and growing our economy.

We also live in a country where there is a huge challenge from climate change that we are not remotely meeting, and we need to make the necessary investments in energy efficiency, in electrifying the economy in renewable technologies. Those are investments that have a very high social return. And this is the moment to catalyze it.

AKIKO FUJITA: I want to ask, get your thoughts on where you think the world economic order, if you will, kind of shakes down on the back of this, because you wrote an op-ed, where you recently said the virus is helping to usher in a world where security depends more on exceeding a threshold of cooperation with allies and adversaries than on maintaining a balance of power. What do you mean by that?

LARRY SUMMERS: I mean that traditionally what we've looked for, like as for example during the Cold War, is a concept of mutually assured deterrence through mutually assured destruction, that if anybody launches an attack, a devastating attack will be launched back on them. And so there's a balance. And that balance preserves deterrence.

Those balance of power issues are still going to be important. But I actually think the larger issues are the issues around climate change, are the issues around pandemics, are the issues around avoiding spiraling financial instability, are the issues around mass movements of people and refugees, are the issues around terrorism. And those are issues that no one nation can meet alone, and, therefore, need to be met collectively.

AKIKO FUJITA: Having said that, it does seem like, when you look at the response to this pandemic, we've seen a more insular response. You look at what the US has done, look at, for example, what the Chinese have done, the two largest economies, we're still seeing the tensions between the two sides rise. Are we moving towards a world where there's going to be more borders that are put up? Is the lesson from all of this that there needs to be more cooperation, but that the governments are not in that position right now, or that's not the mindset of the leadership in the world right now?

LARRY SUMMERS: I-- I think we-- we need to develop a concept of cooperation without amity. We don't need to be friends. We don't need to like each other. We just need to recognize that we're on the same lifeboat and that if we don't find some ways of rowing in the same direction, we're not going to get a place that either of us wants to go.

AKIKO FUJITA: And where does the US come out of this? I mean, you know, there's been a lot made about even if you look at the demand for PPE, a lot of that has come out of China. The US has not been able to produce that the demand that's needed here at the pace where it's needed. I'm curious if you see a shift that's happening. We'd already seen sort of that this next century, if you will, looking at Asia. Is this what tips it in that direction?

LARRY SUMMERS: I think the-- I think the US is looking for its new North Star. The Soviet Union provided a North Star and containing the Soviet Union provided a North Star for some interval. A broad aspiration of global co-operative leadership provided a kind of North Star, though a North Star not without problems.

And I think in a world where Asia is rising rapidly, in a world where we have very substantial domestic challenges, we need to define our North Star. I don't think we should define it in opposition to another country. I don't think we can any longer define it as global hegemonic leadership, as being the indispensable nation in the way we did in the early Cold War period. And we need to define something different, a role in a concert of powers addressing common global challenges.

AKIKO FUJITA: Larry Summers, thank you very much for joining us today.