11 min read.Updated: 03 Dec 2021, 01:09 AM ISTLivemint
Economist Lawrence Summers discusses the pandemic, Indian economy and cryptocurrency regulation
Lawrence H. Summers, one of America’s leading economists, believes India could be a dominant story in the world’s economic history in the second quarter of this century. Summers, who played a key role in shaping the US government’s response to various episodes of global economic stress in recent years, including as Treasury Secretary in the Bill Clinton administration, believes India’s potential for growth is unmatched by the vast majority of countries. But the country has some contradictions to tackle. In conversation with Mint’s editor-in-chief Sruthijith K.K at the Hindustan Times Leadership summit 2021 on Wednesday, Summers discusses the most relevant economic issues of today—nations’ response to the pandemic, the impact of Fed’s tapering of bond-buying and the policy framework of cryptocurrency. Edited excerpts:
You have been arguing that the US stimulus could cause persistent inflation; the response, especially from the Fed has been that inflation is likely to be transitory. Fed chairman Jerome Powell said yesterday that it’s time to retire the word ‘transitory’ in the context of describing inflation. Did you find that interesting? What are your concerns about the fallout of persistent inflation in the US if that comes to pass?
I was glad to see Jerome Powell’s statement because I think it has been a mistake for sometime now to think of inflation as only a transient issue. The term ‘transitory’ had come to be used in so many ways that it almost lost its meaning.
My own view is that the combination of a wartime level of fiscal stimulus, extraordinarily easy monetary policies, pent- up savings from the time when people won’t be able to spend due to the pandemic has lit rocket fuel under the American economy’s demand at a time when, rather predictably, supply was going to be constrained by various continuing impacts of the pandemic. All that demand facing limited supply, along with massive liquidity, was a prescription for a very substantial difficulty.
I have no doubt that some part of the 11% CPI inflation seen last month has a transient element. I believe that talking to businesses, almost all of whom say the same thing—we are having huge difficulty in getting labour, we are having serious problems getting components and we are encountering very little resistance when we pay more to get those things and when we pass the prices on to our consumers—all of that suggests to me a rather severe inflationary psychology developing.
I do not know what the impact of Omicron (the covid variant) is going to be. It is going to be too early for anyone to know about that. I think it is important to recognize that because Omicron affects both supply and demand, it is not likely to have an immense impact on the rate of inflation. My only instincts are— to put it colloquially—it will reduce the number of people who want to be bartenders and more than the number of people who want to go to bars, and that means it could tend to be inflationary.
Historical experience suggests that when unemployment rises a bit, it tends to rise a lot. The Fed, by being somewhat late in its diagnosis of the gathering pressures, has given itself a very challenging assignment going forward. But I think they are extraordinarily able people who have met very difficult challenges before and so I am hopeful.
Countries have mounted different mix of macroeconomic measures in response to the challenge. In your view, which are the approaches that got it right? Is there such a thing as an optimal mix of measures under such circumstances?
Our view on who has done extraordinarily well and who has done poorly has tended to vary over time and that we tend to think that certain countries are well positioned and then they do much less well. I have come reluctantly to the view that this is held towards being an endemic disease; that more or less everywhere, most people are going to end up having some kind of immunity from some combination of vaccines and from having had the disease, and that better strategies—different strategies—probably affect the timing of the suffering somewhat more than they affect the overall level of the suffering. In general, I think the evidence increasingly is that restrictions on mobility are transient in their ultimate impact and that success depends more on getting jabs into arms, masks on to faces and tests into noses... if the endemic consequence is going to be realized.
India certainly had an agonizing time at the early stages in this but I have to say that when I had the privilege of meeting your finance minister and hosting her at Harvard, she explained to me that by the end of October, India was going to have gotten one billion jabs in arms. I thought that was quite an extraordinary accomplishment of which India should be proud.
I have a concern that the Chinese approach of simply shutting down a country, shutting down substantial swathes of population upon the discovery of individual or a small number of cases may be setting the stage for a very difficult situation. The reluctance to import international vaccines is creating a situation from which exit will be extraordinarily difficult. I think that—to use the old professor’s line—the only grades I can give any country at this point is ‘incomplete.’
Have you found specific measures that are so effective that they could be prescribed universally?
I hesitate to give universal prescription in a world of highly differential diagnosis. My own instincts would run to supporting incomes to something just below trend levels of income. I think, in the US, we overdid that and supported incomes to the point where disposable income in 2021 was substantially greater than anyone expected it to be prior to the advent of covid. That is what I think generated the inflationary pressure. There are other countries that did much less support income. But I also think any judgment about appropriate income support has to be contingent on countries’ fiscal situation and that is a substantial variable across countries. But my own sense is that generalized income support is a better strategy than greater focus on monetary policy. I think it is better targeted at the vast majority of population rather than at asset prices. There is a tendency at a moment like this for investment to be relatively interest-insensitive. And for whatever stimulus comes from monetary policy to come primarily from inflated asset prices, which may be both problematic in terms of economic efficiency and somewhat perverse in terms of its distributional consequences. I think the easiest judgment to reach is that the world needs to be investing much more in bringing this pandemic under control and that we all can be investing more in producing vaccines, producing tests.
Powell spoke about potentially accelerating the tapering of bond buying. Could we see a repeat of the taper tantrum we saw in 2013 in emerging markets including India?
I think the world is a different place. I think any withdrawal or taper that comes now will be the most widely anticipated one in the history of the world. There is an old adage—buy on the rumour, sell on the news. There is a corollary—sell on the rumour, buy on the news. I think this has been so heavily telegraphed and so substantially discussed that I would be surprised to see in the immediate aftermath of a taper, the kind of sharp response that we saw in 2013. If anything, the 2013 fears have contributed to the maintaining of quantitative easing for too long.
What is your outlook for the prospects of the Indian economy for the medium and long term?
I have been believing in the ultimate economic power of India. I believe that rule of law, vast entrepreneurial energy and a remarkable NRI (non-resident Indian) diaspora are all sources of potential economic strength. I believe that the relatively low level of income in India, compared for example to China, offers substantial potential for catch-up growth.
I am hopeful that India could see 15 years of growth that approaches 10%. I believe that unlike the vast majority of countries in the world, that is possible for India. But I believe that it requires public policies that have historically been difficult in India. It requires a government that is not just energizing and reforming the economy but is prepared to liberate the economy from government stricture and control. It requires a sense of political stability. I am not sure that India’s friends on the outside are as confident in India’s ability to manage challenges related to ethnic divisions as they might have been confident in India 10 or 15 years ago. That is hardly a phenomenon that is unique to India. Look at all the challenges we are having in the US, look at the challenges taking place in Europe. Also, there are real challenges for India of effective state capacity. I do not know the facts: I am told in substantial parts of India, on a random Wednesday, a quarter or a third of the teachers, who are supposed to teach in schools, do not show up but receive salaries nonetheless. That is not a model for success in the modern world.
So, as one would expect, where democracy is large as in India, there are these contradictions and I think it is a hugely important story for the world what happens in terms of the play out of these contradictions. But in terms of potential for extraordinary performance, I think, India, by virtue of its current level and by virtue of its facility with what is the most important development of our time— which is things digital—really stands out as the potential to be the story, that when the economic history of the second quarter of the 21st century is written, is dominant. But I can’t quite go so far as making a prediction given the challenges that I just described. I do know that India has many friends and if it can find an internal will to drive forward in the ways that I just described, there will be immense support to engage in my country and in many others.
Would you say then that India could be an exception to the argument you made in the 2014 paper with Lant Pritchett titled ‘Asiaphoria Meets Regression to the Mean’, that growth rates tend to regress to the long term mean and India and China will follow that trajectory?
We wrote that in 2014. India had done some regression to the mean since the time we wrote that paper. Therefore, there is less room to regress to the mean than there was when we wrote that paper and a bit more potential for take-off than there was when we wrote that paper. But I do think there is the possibility of a real take-off in India.
It is not a small thing that, over all the years since 1979 until quite recently, there had not been a single year when India grew as rapidly as China but in the last several, there were years when India grew more rapidly than China. That is a hopeful harbinger of things that might come.
I think if there is a country that pioneers convergence to modern, cutting edge standards of living in the information age after the industrial age, India has greater potential than any other country of size to do that in the period ahead.
What is your view on cryptocurrencies and their place in the future of money? What should countries keep in mind as they regulate them?
Cryptocurrencies are a new means, they are not an end unto themselves. Crypto currency should be tested in the market on level-playing field. There should be no reason why it should be easier to launder money with cryptocurrency than with cash. There is also no reason why the blockchain should be opposed. So, the principle should be neutrality. You cannot avoid money laundering or know your customer rules. You cannot facilitate evasion of taxes. You cannot find it easier to engage in illicit transactions because you are using cryptocurrency.
Equally, economic freedom requires the freedom to innovate and, as long as that principle of neutrality is respected, there is no reason why I should not be able to make a transfer of funds to you using whatever technology I wish. I think it is neutrality that is the central principle that we need to use in thinking this through. It will take us to a middle way kind of position. It will be more permissive than the entrenched financial interests that do not want to see this disruptive innovation and it will be rather less permissive than the libertarians who are so committed to crypto that they would like to see it succeed not because it is overwhelmingly meritorious but simply by virtue of the fact that it permits evasion of a variety of traditional rules.
I have little doubt that the blockchain and the capacity for parties that do not trust each other to engage in exchange will be a very valuable technology that will help drive the world forward and change the architecture of how the world works.
The tariff war between the US and China started by President Donald Trump seems to be continuing under President Joe Biden. Does that mean this is a policy stance with bipartisan support? If so, what would be the consequence of diminished trade between the world’s two largest economies?
It is a policy with bipartisan support which does not make it a wise policy but the fact it is an unwise policy does not mean it can be reversed instantly except in the context of effective diplomacy between the US and the China.
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