S6 Ep10: Larry Summers on the global economy

Episode Summary

Executive Summary: Larry Summers argues that a return to post-financial-crisis secular stagnation is possible but somewhat less likely than not, given expected investment in the green transition and resilience, alongside lower saving. He expects relatively sluggish growth because of weak population and workforce growth and uncertain productivity, while AI could change the outlook. Despite tensions with China, he sees supply-chain diversification and technology sustaining globalization.

Main Topics: Prospects for secular stagnation: Summers defines secular stagnation as chronically high saving relative to investment demand, associated with low interest rates, sluggish growth, and deflationary pressure. He says the economy may return to this condition as inflation falls, but does not consider it the most likely outcome. Investment, saving, and neutral interest rates: The future balance between saving and investment is central to monetary policy and the level of neutral interest rates. Summers expects green-transition and resilience investment to rise, while government debt, deficits, and possible dissaving by older populations may reduce saving. Long-term growth outlook: Summers expects relatively sluggish aggregate GDP growth, citing slower population and workforce growth, possible lasting effects of COVID on willingness to work, and unencouraging productivity performance. He notes that AI and other technologies could alter this outlook. Globalization amid geopolitical tensions: Although some economic links with China may weaken, Summers argues that supply-chain diversification can expand connections with other economies. Communication technology and shared global challenges, including climate change and pandemics, reinforce international economic integration.

Key Arguments: A renewed period of secular stagnation is possible as pandemic-era fiscal stimulus and supply constraints recede, but Summers estimates its likelihood at somewhat less than even. Large investment needs from the green transition and resilience efforts may support investment demand, while higher public debt and deficits and potential dissaving among older people may constrain saving; together these forces could prevent a return to exceptionally low real interest rates. Slower population and workforce growth, potential post-COVID changes in willingness to work, and weak productivity trends point toward low growth on both the demand and supply sides. AI and other technologies could produce a different growth outcome, but Summers treats that possibility as uncertain rather than his baseline expectation. China-related tensions may reduce some direct supply-chain ties, but diversification can deepen economic integration among other countries; technology and global challenges also make economic developments abroad increasingly consequential.

Data Points: Estimated chance of a return to secular stagnation: A bit less than 50% - Summers's personal estimate, explicitly described as a guess, for a return to a secular-stagnation-type economy after inflation declines. Expected aggregate GDP growth: Relatively sluggish - Summers's qualitative forecast, based on slower population and workforce growth and uncertain productivity. Interview setting: American Economic Association annual meeting, 2023 - The interview with Larry Summers took place in New Orleans.

Pivotal Quotes: "My guess is, but it's only a guess, is that that's a bit less than a 50% chance" — Larry Summers: His estimate of the likelihood that the economy will return to secular stagnation. "my best guess would be somewhat on the side of low growth" — Larry Summers: His outlook for aggregate GDP growth given population, workforce, and productivity trends. "I don't think we're likely in my lifetime, barring catastrophe, to see a period when economic policy doesn't centrally, for any country, have to take account of all of what's happening in the world." — Larry Summers: His conclusion that globalization and worldwide interdependence will remain central to economic policy.

Implications: Policymakers should not assume either a return to ultra-low rates or a strong growth rebound: investment, saving, labor supply, and productivity will shape the outlook. Businesses and governments should expect persistent international interdependence even as supply chains diversify.