Lawrence Summers, then Director of President Barack Obama’s National Economic Council, participates in a question-and-answer session during a luncheon with the Economic Club of Washington at the J.W. Marriott April 9, 2009 in Washington, DC.
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Former Treasury Secretary Larry Summers gave a recession probability 3-in-4 odds.
“We essentially don’t have soft landings from high rates of inflation and low rates of unemployment,” he said on Andrew Sullivan’s podcast.
But he also offered a scenario in which his predictions might be wrong.
The US has a 75% chance of facing a recession in the next two years, says Former Treasury Secretary Lawrence Summers.
The idea of having a “soft landing” from inflation — meaning a modest economic pullback — would be “the triumph of hope over experience,” Summer said in an interview with conservative newsletter writer Andrew Sullivan on “The Dishcast” podcast.
“We essentially don’t have soft landings from high rates of inflation and low rates of unemployment,” Summers, a Harvard University professor, said in the podcast, which posted Friday.
Summers, who was Treasury secretary under the Clinton administration and also advised former President Barack Obama, predicted a “quite significant chance” that there would be a recession.
“The market is now judging that interest rates are likely to fall between 2023 and 2024 in a quite significant way, which is a sign that markets are expecting that there will be a recession,” he said. “And I think historically we just haven’t brought down substantial rates of inflation without a recession.”
Having two consecutive quarters of contraction meets a commonly used definition of a recession, though it’s not the full definition set forth by the National Bureau of Economic Research.
It’s up to NBER to officially rule when the US is in a downturn and the body isn’t likely to do so for months. Its definition “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Some of these factors include sustained declines in new jobs, consumer spending, manufacturing, and personal income.
Treasury Secretary Janet Yellen said during a press conference Thursday that the US was in a state of transition, not recession. A recession would include massive layoffs and business closures, among other factors, she said.
“When you look at the economy, job creation is continuing, household finances remain strong, consumers are spending and businesses are growing,” Yellen said.
Summers supports the new bill Democrats are working on
Summers has for the last year been vocal about inflation increasing the likelihood of a recession. He warned in 2021 that Democrats needed to pare back their $1.9 trillion coronavirus rescue package, saying the spending would lead to inflation.
The latest numbers, from June, found inflation rose to a 9.1% year-over-year pace. The Federal Reserve Bank of San Francisco found that the stimulus may have raised inflation by about 3 percentage points by the end of 2021, though among other factors contributing to inflation are extraordinarily strong demand and lingering supply-chain issues.
Since the comments on inflation, Summers has become a leading expert in influencing Democratic Sen. Joe Manchin of West Virginia to support new legislation on climate, healthcare, and taxes. A framework of the bill — called the Inflation Reduction Act — was released last week.
Summers was among those who convinced Manchin that the bill would help cool rising prices rather than raise the national debt and worsen inflation.
Summers appeared to plug the Inflation Reduction Act as part of “The Dishcast” interview. He predicted that raising taxes, as well as reducing the costs of pharmaceuticals and tariffs, would help lower consumer costs.
“If we are able to do some of those things, I think we could make the Fed’s job easier and raise the prospect of a soft landing,” he said. “But I do think this is a difficult problem of management and I also think it would be a mistake to think this is all about the skill of management.”
The future prices of oil added some uncertainty to the predictions, he said, though he noted that the oil market has said prices would decline substantially over the next year.
Summers left open the possibility that he could be wrong on inflation, saying “there’s a reason I said 75% not 95%.”
It could be that “this will just sort of just fade away and that the economy will have a gentle glide path to slower growth without a major increase in unemployment,” he said.
“I’m not saying that’s for sure not going to happen,” he added, “but it seems to me that is a much less frequent pattern in the United States and other countries than is the alternative.”