February 16th, 2014

GPS: Larry Summers on the debt ceiling

CNN’s FAREED ZAKARIA GPS features an interview with former U.S. Treasury Secretary (Clinton Administration) and former Director of the Economic Council (Obama Administration) Larry Summers.  Dr. Summers spoke about the national economy, new Federal Reserve chair Janet Yellen, and what he feels are likely postures the Federal Reserve will take in the near term to manage the U.S. economic recovery.

A transcript and video from the interview are available after the jump.


GPS: Summers on U.S. interest rate level



FAREED ZAKARIA, HOST:  Janet Yellen didn’t have a lot of time to get settled into her new job as Fed chair before being called before Congress.  On Tuesday, just days after her tenure began, she testified before the House Financial Services Committee. Wall Street was all ears and its reaction was mostly positive, after a month of much market tumult. What was the reaction of the man who might have been Fed chair? We will ask him. Larry Summers is the former secretary of the United States Treasury, who withdrew his name from consideration for the top job at the Fed in September.  He joins me now from Cambridge, where he was the president of Harvard University and is now a professor there. Larry, welcome back to the show.


ZAKARIA:  Would you have said anything differently from what Janet Yellen said? She promised a great deal of continuity.

SUMMERS:  Oh, look, it’s very hard to judge tactics from the outside.  I think we have a Federal — we’ve had and we continue to have a Federal Reserve that recognizes that inadequate demand, inadequate growth and inadequate employment are the greatest threats to America’s economic health. And so they’ve maintained a policy bias toward expansion.  And I think that’s broadly the appropriate orientation to have. But questions of precise tactics are very, very hard to judge…

ZAKARIA:  But, Larry…

SUMMERS:  — from the outside.

ZAKARIA:  — if you look at what the Fed has done, it has kept interest rates very low, done other very extraordinary things, precisely to address the issue of slow growth and high unemployment. And yet, if you look at the unemployment numbers, you still have persistently weak employment.

SUMMERS: I don’t think that’s the right way to look at it. First, wherever you observe doctors working hardest, you’ll observe the most sick people, but that doesn’t prove that doctors are counterproductive or unproductive.  Of course, in the face of unprecedented weakness, we’ve had unprecedentedly easy monetary policy.  But that doesn’t call into question the efficacy of the monetary policy.  Where I would agree with the critics and where I’ve been a very strong critic myself is that I believe we would be doing much better if more of the spur to economic growth was coming from the side of government spending or tax reduction rather than relying on the monetary and liquidity tools, to the extent we have.  But that, of course, is not within the power of the Federal Reserve.

ZAKARIA:  Do you believe that the U.S. is going to grow, is going to surprise on the up side, as they say in market lingo, that is that the growth will be, this year, probably a little stronger than the consensus?

SUMMERS:  I’m not sure.  I think the consensus has come down a bit in the last, uh, in the last few weeks.  I probably would have said that two months ago, Fareed.  But now, I think after two soft employment reports, after a sense that there’s been a big inventory buildup that will get run down and that will come at the expense of GDP, I think that, actually, the statistics right now and the people who base their judgments on the statistics are actually a little more optimistic right now than the business folk I talk to, who have order books, who are still fairly nervous. So I wouldn’t — I’d say around the consensus forecast of about 3 percent the risks are pretty symmetric.

ZAKARIA:  Let me ask you, finally, Larry, watching this debt ceiling fiasco one more time, or the avoidance of a fiasco, do you think we should somehow find a way to abolish the debt ceiling, where I think Denmark and the United States are the only two countries that have it.  And in Denmark, it’s been essentially automatically raised? We’re unique in having this double-barreled system, where, first, you spend the money and then you have to raise the debt ceiling. Should we abolish it?

SUMMERS:  Yes.  There is no productive purpose to it.  You know, I have college-aged children.  And occasionally, we have a difference of opinion about how much money they’ve spent.  And in our family, we discuss whether they’re going to pay or whether I’m going to pay.  But we don’t discuss whether or not Visa should get stiffed, because we know that would be terrible for our family’s credit rating and that’s just not what we would do.  And in the same way, we’ve incurred all these liabilities.  We’ve spent this money.  Going through a process of discouraged whether we’re going to pay the debt we already owe is not worthy of a great nation.

ZAKARIA:  Larry Summers, thank you very much. I would love to be a fly on the wall watching a kid explaining to the former Treasury secretary why he didn’t pay his — why he doesn’t want to pay his Visa bill. Up next, What in the…

SUMMERS:  Good to be with you.

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