“I don’t think we are in a recession”

Economy / August 4, 2022 / Admin / 0

Former Treasury Secretary Larry Summers says he doesn’t think the United States is currently in a recession, but there’s a 75% chance the economy will tip into recession within the next 18 months.

“I don’t think we’re in a recession,” Summers told Yahoo Finance in an interview. “[But] given the difficulties associated with high inflation and its reduction, the necessary monetary policy response, the chances of the economy going into recession within the next 18 months are quite serious, and probably in the order of three-quarters.

Summers says he thinks if the economy finds itself in a situation where unemployment rises, it will rise quite substantially. “So I would expect that in the next two or three years the unemployment rate would be over 6%,” Summers said.

Summers’ comments come after he and four former Treasury secretaries – nominated by Republicans and Democrats – released a statement supporting the Cut Inflation Act. Summers was instrumental in getting Senator Joe Manchin to support the new bill, which is a slimmed down version of what was known as the Build Back Better Bill.

However, Summers does not believe that this legislation will be enough to contain inflation.

“This bill is definitely not enough to contain our inflation problem,” Summers said. “And even with the spill, we’re going to have inflation issues for some time to come.” The important thing, however, is that it does a whole host of things necessary for our country, while beginning the process of reducing inflationary pressure.

Lawrence Summers, looks on during the G20 High Level Independent Panel press conference at the G20 Finance Ministers and Central Bankers meeting in Venice on July 9, 2021. (Photo by ANDREAS SOLARO/AFP via Getty Images)

In a statement, the former Treasury secretaries said “the additional taxes levied on corporations do not reflect increases in the corporate tax rate, but rather the recovery of lost revenue due to tax avoidance and benefiting the wealthy”.

Adding, “The selective portrayal by some of the distributional effects of this bill overlooks the benefits to middle-class families of reduced deficits, lower prescription drug prices and more affordable energy.”

Asked about labor market impacts and business investment plans given some of the tax provisions of the bills, Summers said that, if anything, overseas jobs are more likely to be brought home than anything else.

“I don’t think the effects [of the bill] are likely to be harmful,” Summers told Yahoo Finance. “Stimulating renewable investment in particular … is likely to do much more to spur investment than plug various loopholes, which in some cases likely encourage financial manipulation, rather than real productive investments. »

Summers added: ‘And actually by expanding the taxation of their worldwide income, relative to their national income, I actually think that might encourage jobs to come home.’

“A serious mistake”

Summers’ comments and the Biden administration’s push to pass the bill come after GDP data released last week showed the economy contracted for the second straight quarter in the second quarter. Two quarters of negative GDP growth meets the informal definition of a technical recession.

The Biden administration, however, has been at pains in recent weeks to note that recessions are only officially called by the National Bureau of Economic Research. The NBER defines a recession as “a significant decline in economic activity that extends throughout the economy and lasts for more than a few months.”

The slowdown in growth also comes as the Federal Reserve continues its campaign to raise interest rates to curb inflation, with several Fed officials this week reiterating the central bank’s commitment to bringing inflation down. . Comments that come as investors pushed up stock prices and lower bond yields amid doubts over the Fed’s ability to follow through on further rate hikes and stave off recession.

Even with slowing growth, Summers says he thinks the Federal Reserve should keep the pedal on the metal when it comes to raising interest rates to calm inflation.

“If the economy seems to be slowing down, it will be tempting to stop raising interest rates, and indeed people in the market expect interest rates to come down from December or January. says Summers. “I think that would be a big mistake.”

Summers says he thinks inflation will be with us for a while given last year’s strong economic growth, as well as supply chain issues, unless we have a recession. “I think we’re unlikely to get inflation back to target levels under scenarios that don’t involve a recession at some point,” he said.