- Former US Treasury Secretary Larry Summers is worried about the execution of the stimulus package which he says would be enormously difficult for the most competent of governments.
- Instead, he adds, “we have a government that is run like a highly opportunistic family real estate business where people who aren’t in the family aren’t treated so well.”
- The economic cost will probably be greater than it needs to be because we are not moving as fast as we could, according to Summers, and too much of that pain is going to borne by ordinary citizens.
- Summers expects about 20% of the population to be unemployed over the summer and doesn’t expect the job market to return to normal for a year and a half after we are free and clear of the disease — but he stresses that it will a long time before we are free and clear of this disease.
- The former advisor to President Barack Obama says the current administration needs to be using the Defense Production Act more effectively to mobilize supplies and testing.
- He says we should have a massive infrastructure initiative as opposed to slashing infrastructure investment as state and local budgets are hit by the crisis.
- Visit Business Insider’s homepage for more stories.
Former US Treasury Secretary and World Bank economist Larry Summers spoke to Business Insider editor-at-large Sara Silverstein about how painful this recession will be, who will be hurt, and how to quickly recover. Following is a transcript of the video.
Sara Silverstein: Larry, you have seen so many economic disruptions in your time, I’m sure nothing like this. What has been the one thing that has surprised you the most, either about the economic reaction to the coronavirus or about how leadership has behaved?
Larry Summers: I’ve been struck by how pervasive this is in almost every respect. It’s everywhere in the world. It’s affected companies of all kinds. It isn’t just about people’s wallets, it’s about their lives. It’s got a major short-run aspect, and a major long-run aspect as well. I don’t think I’ve ever seen so much history made in so short a time.
Even during the worst of the 2008 financial crisis, there were traffic jams in New York City. Even at the worst of the Asian financial crises, there were planes flying in and out of Seoul airport. Even at the worst of the depression, people were having meetings with each other around conference tables and not thinking that didn’t happen. The extent to which so much has changed so quickly is I think the unique feature of this crisis.
Silverstein: And help me understand and anyone watching, Trump removed the inspector general that was set to oversee the $2 trillion stimulus package — to avoid fraud and abuse and waste. Help us understand what does that mean and are you worried about it?
Summers: Look, it’s important to avoid fraud because it’s stealing. It’s waste of valuable money, but mostly it’s important so the people have a trust in the way things are being done. Ultimately, a society relies on trust.
You asked me to do this interview at two o’clock, and you assume that I would be here at two o’clock. We didn’t know each other before, but we trusted each other. We trusted each other to do our part because we both had — Business Insider and I had reputations of a kind. And that’s what enabled it all to happen smoothly.
And when you stop policing for fraud, and when you are unconcerned about fraud, it benefits the dishonest relative to the honest. And it erodes trust. You don’t see the adverse effect of that instantly. But over time it’s probably the most important difference between successful and unsuccessful societies is the amount of trust that they have.
Silverstein: And when you look at the $2 trillion stimulus or relief package, what parts of it are you worried about or what parts do you think will be really strong?
Summers: I think we will successfully make payments to households, to a large number of households, and I think that will be important support for those households and that’s a positive thing. Whether we will successfully and in what way we will get resources to businesses in order to preserve employment, I think that’s much less clear.
I think for the most extraordinarily competent of governments, this would be an enormous execution task, and we’ve seen enough to know that we don’t have one of the most extraordinarily competent governments. In terms of execution, we have a government that is run like a highly opportunistic family real estate business where people who aren’t in the family aren’t treated so well. And to turn the running of the United States in the most complex public policy situation in this century over to that has to give grave cause for concern.
Silverstein: And you’ve talked a little bit about how quickly you think this economic recovery can happen once things return to normal, what will be the linchpin in making sure that things move along quickly?
Summers: Look, I want to be very clear because I think I’ve been misunderstood. I’ve said that if we put the public health problems behind us, I think then there is the prospect for quite rapid recovery, but we are a long way from putting the public health problems behind us.
There is no sense right now we’re going to — we will turn the curve in terms of the pandemic sometime in the next few weeks. I’m pretty confident for that. And that curve will turn down pretty sharply. But do we have mechanisms in place that will enable us to restore normality without there being many future outbreaks? I don’t think we have those mechanisms in place.
I think in the best of situations, you couldn’t put them completely in place, and you’d have to be monitoring for a long time and we’re well short of the best of situations. We need a much greater administrative infrastructure for testing, following, responding than seems likely to be in place.
Silverstein: And what sort of longterm economic effects do you expect to survive the coronavirus?
Summers: I think it’s going to be a long time before travel is where it was. I think it’s going to be a long time before crowded sports events, crowded rock concerts are going to be where they were before.
I think there’s going to be a lasting bump to working at home and to technologies that support working at home.
I think that there are going to be involved in public health-related questions to a much greater extent than we have been previously. So I think we’re going to feel the effects of this for a long time.
I think this is going to have some profound impact on our financial system because it’s all very well to say that people shouldn’t pay their rent when they don’t have income or shouldn’t pay their mortgages when they don’t have income. But there’s a chain there, and you have to ask where are those losses going to sit? I think the perspective we’re going to need to have is that America is going to lose several trillion dollars of GDP.
And ultimately that has to be borne by something. It can be borne by households, it can be borne by corporate shareholders [inaudible] and taxes down the road. But can’t pretend that nobody’s going to be suffering losses as a consequence of this.
Silverstein: And based on how we’re reacting right now and the mechanisms we are trying to put in place, who looks like they’re going to be paying that cost?
Summers: I think it’s looking like the costs are going to be greater than they need to be because I’m not convinced we’re moving as rapidly as we could be to put in place the best health infrastructure we have for detecting this, containing after detection, treating. When those two mechanisms fall, and I think ultimately too much of the burden is going to be held by ordinary citizens. And I see things like the appropriation for the Kennedy Center that was snuck into the CARES Act. And I worry that there’s going to be too much support for those who least need it.
It’s going to be a byproduct of the support for the economy that is provided. I think it’s very important that we not do business bailouts in ways to primarily benefit fortunate shareholders. The CEO of Boeing said a week ago that if the government was going to take any equity in his company then he would pursue some of their other many options. Well, I think that’s what he ought to do, pursue some of their many other options, if that’s true. Because I can’t imagine why at a moment like this, the government should be providing support for the Boeing Corporation without taxpayers getting a commensurate benefit in terms of the possibility of sharing any upside. I don’t think the government should be a voting shareholder in Boeing.
Just to be absolutely clear, I am absolutely opposed to the government becoming a voting shareholder in any of these companies. But I think where the government provides support, taxpayers should get some of the upside if that support works out. As they did in the TARP, as they did in the automobile bailout, as they did many years ago when the Carter administration bailed out Chrysler.
But I think it’s a real mistake not to focus on the fact that everybody has to do their part and certainly the most fortunate among us need to bear their responsibility when companies that they’ve been part of that have taken risks run into a difficult period like the present.
Silverstein: One of the people in our Facebook audience is asking, what’s your advice for middle-class Americans to get through this recession?
Summers: I think you need to recognize that this is a time to be prudent. This is not a time for major new expenditures. This is not a time to take extra risks.
In general, my advice to people is that unless you have some kind of special edge, trying to trade in markets at moments like this is not a good idea. That if you’re buying somebody else is selling, you’re selling somebody else is buying and unless you think you know more about it than they do, you should probably be pretty careful about deciding to trade in markets. And most people who wake up and read the headlines and then adjust their portfolios end up regretting the adjustments they make.
Silverstein: Absolutely. How bad do you think that the unemployment situation will get as we go through this? And how long will it take for us to get back those jobs once the coronavirus is under control?
Summers: I’d expect, I don’t know how the statisticians will measure it because there’ll be many people who are, in effect, furloughed from their companies who are staying home and who are not working and just what the rules will be on whether counted as unemployed or not. I don’t know.
But in a real sense, I would expect 20% of the population to be unemployed at some point this summer. Though the measured unemployment rate may be lower than that.
I think it will take a year to a year and a half after we’re basically pretty free and clear of disease issues for the unemployment rate to get back into a normal kind of range of 5%. But don’t misunderstand me. I’m not saying that a year and a half from now we’re going to be there because I think it’s going to be quite some time before we’re free and clear of disease issues.
Silverstein: And is there something that you think that some of us are missing about how quickly we’ll be free and clear of disease issues? Because the timelines that we hear some people talking about for plans that they’re making seem a lot quicker than that.
Summers: I think we’re going to see some sets of it — I think what people need to recognize is that there’s a very wide ground between where we are right now, where we’re all basically home except those of us who have to be out, and normal. And that we’re going to be in that middle ground probably until a vaccine is pervasively available.
And I think we’ll be doing very well if a vaccine is universally available and has been universally delivered next summer. That will, I think, have been a relatively successful outcome for the world, and I very much hope it will happen and it certainly may happen. I don’t think it’s something we can count on happening.
Silverstein: What will the US-China relationship look like on the other side of this?
Summers: You would hope that a common foe would be a source of unity for the United States and China. You would hope that if there was an invasion from Mars that the United States and China would put aside some of their differences and an invasion by a virus would have some of the same character. That’s what you would hope.
You haven’t seen much of that yet if you look at some of the things that we have said, calling it the Wuhan flu. If you look at some of the things that the Chinese foreign ministry has said, blaming it on the United States in quite unreasonable ways.
But I guess hopefully as the gravity of this situation around the world becomes clear, it will provide some kind of basis for more dialogue and better cooperation between the United States and China, at least with regard to these issues. But I don’t think that’s something we can be certain about on the basis of what we’ve seen.
Silverstein: Is there any specific action that the administration isn’t taking that you think that they should be taking or vice versa? Something that they are doing that they should absolutely not be doing?
Summers: I think they need to be using the Defense Production Act more effectively to mobilize testing and adequate supplies.
I think they need to be providing funds to municipalities and to hospitals. It is a crime that nurses, physician’s assistants, technicians are being furloughed at hospitals in Massachusetts, which is at the epicenter of this epidemic.
This is a devastating blow as the economy shrinks, to state and local budgets. As a consequence, they are cutting back their infrastructure advancement. They’re doing much less maintaining of roads and highways. Maybe we should, I kind of think we should have a massive new infrastructure investment initiative, but the least we can do is not be slashing infrastructure investment at a moment like this.
And the most important thing the administration can do right now, stop making statements that are not rooted in fact and expertise. The most important asset that a government has is its credibility. When that is squandered for temporary rhetorical political advantage, the consequences for quite some time are very severe. So those would be the steps that I’d like to see change.
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