The Federal Reserve may not have inflation completely under control just yet, but economist Larry Summers believes the economy is looking fairly healthy, with the nation poised to experience “profound technological change’’ in the years ahead.
In a conversation at the Aspen Ideas Festival on Thursday afternoon, Harvard economics professor Larry Summer said he doesn’t see any obvious or apparent risks on the horizon that would send the country into a significant downturn.
“I think a person, in a fundamental sense, is healthy if they don’t yet know what they’re going to die of. By that standard, this economic expansion, I think, is healthy,” Summers said, noting that the factors that will spell the end of this current cycle haven’t yet emerged.
But Summers contended that there’s a “bit too much optimism” about the pace of disinflation, adding that he believes monetary policy isn’t quite as restrictive as the consensus view. While Summers has previously taken the Federal Reserve officials to task quite vigorously, he says his quibbles with the current bank policy are much smaller now. “I’ve got differences at the margin, but they’re fairly small levels of difference,” he added.
Summers believes that the U.S. won’t get inflation “durably down” to the Federal Reserve’s 2% target without a “meaningful increase” in unemployment. That said, Summers acknowledged that the Fed has been more successful so far in maintaining credibility around inflation expectations than he would have anticipated.
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But the U.S. has also experienced a range of favorable supply shocks, Summer contended, noting that he wouldn’t have predicted the price of oil to run as low as it has been given the magnitude of conflict in the Middle East. Nor, Summers said, would he have predicted that the U.S. would experience the level of labor supply to increase quite as much from immigration as it has over the last couple of years. But he’s unsure how long that trend will continue.
“I would say we have had more favorable supply shocks than I would have guessed, and therefore more success in disinflation, at least as reflected in the statistics—if not in the psyches of consumers,” Summers said.
Getting political, Summers said that the reelection of former President Donald Trump would likely do “substantial damage to the economy” over a four year period. Summers compared Trump’s campaign proposals, such as protectionism through tariffs and quotas, to strategies employed in Latin American countries.
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“Sometimes it works for six months or a year. But ultimately, it leads to…the mother of all stagflation,” Summers said. The argument that President Joe Biden should make at Thursday’s debate is that the “Trump policies are at the edge of lunatic,” Summers said.
Politics aside, Summers was fairly optimistic about the economic potential of the U.S.—particularly in regards to the benefits of artificial intelligence. “I think we’re heading for a period of really profound technological change and progress,” Summers, who is on the board of OpenAI, said Thursday.
Summers noted that there will be jobs lost in the transition. He said, for example, that he wouldn’t recommend his granddaughter go into coding, arguing that AI will likely evolve to a place to handle that fairly easily.
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But he said that AI is a “huge, new technology” and there’s a responsibility in that. He added: “When you have huge new technology, you have to figure out how to realize its potential and you also have to figure out how to contain accidents and contain potential malign uses. That’s the way it was with the jet plane. That’s the way it was with large-scale electricity generation. That’s the way it was with fires and skyscrapers.”
Write to Megan Leonhardt at megan.leonhardt@barrons.com
