Lawrence H. Summers: Fed moves are encouraging, but higher rates will impact the rest of the world
Ahead of the 13th Credit Suisse China Investment Conference, we caught up with Lawrence H. Summers, Former Secretary of the Treasury of the United States; President Emeritus and Charles W. Eliot University Professor, Harvard University, to discuss the outlook for the US economy and what it means for China.
The U.S. Federal Reserve has made it clear that more interest rate increases are in store in the battle against inflation. Is a soft landing possible for the U.S. economy?
Prof. Summers: Anything is possible and economists should never say never. But I think soft landings are like what Samuel Johnson said about second marriages. They represent the triumph of hope over experience. In general, in the United States, when inflation has been above 4%, and unemployment has been below 4%, the economy has always gone into recession. Whenever the unemployment rate has ticked up by more than half a percentage point, it has subsequently ticked up by more than two percentage points.
Starting from the kind of relatively high inflation we have now, the chance for a soft landing is quite low. The likelihood is, if we are successful in bringing down inflation, the side effects of that policy are likely to be meaningful increases in unemployment from the current levels.
The U.S. is still the world's largest economy. It is a major input for many countries, not least China, and so a slowdown in the U.S. economy will mean reduced demand, which in turn will tend to slow the global economy.
Lawrence H. Summers, Former Secretary of the Treasury of the United States; President Emeritus and Charles W. Eliot University Professor, Harvard University
What would a U.S. recession mean for China?
Prof. Summers: The U.S. is still the world's largest economy. It is a major input for many countries, not least China, and so a slowdown in the U.S. economy will mean reduced demand, which in turn will tend to slow the global economy. Furthermore, the policies that are necessary to contain inflation, involving higher interest rates, will also probably slow down the global economy, and the Chinese economy in particular.
On the other hand, a stronger dollar is likely to make exports from other countries more competitive, and a strong dollar is likely to go along with restrictive policies. On balance, my best guess is that a U.S. recession is adverse for the Chinese economy.
Where do you think central banks went wrong? Was inflation inevitable, given the impact of Covid and the size of the response?
Prof. Summers: I think it was inevitable. The size of the stimulus was excessive, given the economic situation, and the Fed was way behind the curve in responding to rising inflationary pressure, as has now been widely acknowledged. I think the Fed is now in the appropriate place in making clear its determination to do what is necessary to contain inflation and recognising that that may have adverse consequences. So I'm encouraged by the signal Fed Chairman Powell sent in Jackson Hole, and in his recent post-meeting press conference, though, of course, what will ultimately matter is the choices that the Fed makes.
Battlefield medicine is never perfect. The Fed is not the only one that allowed itself to get behind the curve on inflation, but policy in general is now moving towards more appropriate postures. One only needs to look at the United Kingdom to see that there are still large challenges to deal with.
What does a strong dollar mean for emerging Asia – and for the global economy?
Prof. Summers: The strong dollar means, on the one hand, increased competitiveness for those seeking to export to the United States, or those seeking to compete with American producers located in the United States. On the other hand, dollar-denominated debts will become that much more burdensome. So I think the impacts are likely to differ from country to country and from sector to sector.
How worried are you about the current geopolitical environment?
Prof. Summers: We are in a more problematic geopolitical environment than at any time since the fall of the Berlin Wall in 1989. You have the first cross-border land war in Europe since the Second World War, combined with volatile situations in places like Iran and North Korea. And at the same time, tensions between the United States and China are increasing for many complex reasons. It's a very difficult geopolitical environment that will test the resourcefulness, ingenuity and diplomacy of leaders in all countries.