The Federal Reserve still doesn’t have inflation fully under control, but economist Larry Summers believes the economy is very healthy and the country is poised to experience „profound technological change” in the coming years.
In a conversation at the Aspen Ideas Festival Thursday afternoon, Harvard economics professor Larry Summers said he sees no apparent or obvious risks on the horizon that could send the country into a significant downturn.
„I think a person is healthy if, in a fundamental sense, they don’t yet know what they’re going to die of. By that standard, I think this economic expansion is healthy,” Summers said, adding that the factors that will spell the end of this current cycle have yet to emerge.
But Summers argued that there is „a bit too much optimism” about the pace of inflation, and he believes monetary policy is not as restrictive as the consensus view. While Summers has previously taken Federal Reserve officials to task more seriously, he says his quibbles with current banking policy are now much smaller. „I have marginal differences, but they’re small-scale differences,” he added.
Without a „meaningful increase” in unemployment, Summers believes the U.S. will not „sustainably” reduce inflation to the Federal Reserve’s 2% target. Summers acknowledged that the central bank has so far been more successful in maintaining credibility around inflation expectations than he expected.
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But the U.S. has also experienced a variety of favorable supply shocks, and Sumner argued that given the scale of the conflict in the Middle East, he would not have predicted lower oil prices. Nor, Summers said, would he have predicted that the U.S. would increase its labor supply from immigrants as it has in the past two years. But he is not sure how long this trend will continue.
„I would say we’ve had more positive supply shocks than I would have guessed, so more of a hit on inflation, at least reflected in the figures — if not in the psyche of consumers,” Summers said.
Politically, Summers said the re-election of former President Donald Trump would cause „significant damage to the economy” over a four-year period. Summers compared Trump’s campaign proposals, such as protectionism through tariffs and quotas, to strategies used in Latin American countries.
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„Sometimes it works for six months or a year. But in the end, it leads to…the mother of all stagnation,” Summers said. The argument President Joe Biden will have to make in Thursday’s debate is that „Trump’s policies are on the brink of insanity,” Summers said.
Politics aside, Summers is very optimistic about America’s economic potential—especially regarding the benefits of artificial intelligence. „I think we’re heading into a period of really profound technological change and progress,” Summers, of the OpenAI team, said Thursday.
Summers noted that jobs will be lost in the transition. For example, he said he wouldn’t recommend his granddaughter take up coding, arguing that AI would make it a much easier place to handle.
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But he said AI is a „huge, new technology” and comes with a responsibility. He added: “When you have a huge new technology, you have to figure out how to realize its potential, and you also have to figure out how to limit accidents and potentially harmful uses. So is a jet plane. Such was the case with large-scale power generation. So it was with fire and skyscrapers.”
Write to Megan Leonhardt at [email protected]