“I’m surprised by how low long-term interest rates are,” said Summers. “Markets are foreseeing that we will do what’s necessary to contain inflation -- and that process will be quite contractionary.”
Cost Pressures Overheat
Summers also doubted whether “running the economy hot on an unlimited basis” would be enough to force up the wages of workers as some have argued, warning instead that rising inflation would eat into households’ paychecks.
“There are no examples of successful inflationary policy that has worked out to the benefit of workers,” he said, citing historical efforts in the U.K. and U.S. in the 1970s, along with similar campaigns in Latin America. “It backfired with respect to the very people it was trying to help.”
As for the longer term, Summers said the risk remained of “secular stagnation,” a Depression-era situation in which trend economic growth rates are reduced and interest rates are lower than historic norms. He first started warning of such a mix in 2013.
“Secular stagnations are a real risk looking out a few years,” he said.
“I’m really not sure what’s going to come after this current episode,” he said. “I’m certainly not confident that we’re going to have sustained excess demand for many years. The challenge is that we’ve pumped up aggregate demand now, and then who knows how we’re going to work our way through back to more levels of demand.”
-With assistance from Michael Sasso.
This article was provided by Bloomberg News.