 and welcome to this IEA webinar with Dr. Lawrence H. Summers. At such an extraordinary time in both human and economic affairs it is a really great pleasure to welcome someone who's standing among the world's economists and economic policymakers is quite simply unsurpassed. Apart from being one of the most listened to analysts of economic affairs in his current role is Charles W. Elliot at Professor at Harvard. Larry has served as US Treasury Secretary in the Clinton administration, head of the National Economic Council during the Obama administration, chief economist of the World Bank and president of Harvard University among others. This afternoon Larry will share his perspectives on the American world economies at a time of unprecedented policy experimentation in response to the pandemic. Before we begin let me note that the IEA is currently celebrating its 13th anniversary with distinguished guests such as Larry joining us. Over the next week or so we'll be hosting the Taoiseach, our foreign minister, the president of the Eurogroup and the chief of columns to the European Central Bank among others. You can check out the details on IEA.com. Back to today's session it will be all on the record both the opening remarks and the Q&A. You can get involved in that Q&A using Zoom's dedicated function which you should see at the bottom of your screens. Larry, thanks again so much for joining us. The floor is yours. Thank you very much. Dan, I have very fond memories of my visit to Dublin to speak to your group a decade ago. I only wish that I had the opportunity to be returning in person rather than returning virtually. I'm grateful for that kind introduction and reminded me of how our President Johnson used to respond when he was introduced very generously. He would say I wish my parents had been here for that. My father would have appreciated it and my mother would have believed it. So I'm glad to be with you. I'm not going to make my initial remarks too long because I will learn more from responding to what's on the minds of a distinguished group like yours. But let me try to give you a sense of how you might see the world if you were living in Washington and New York and talking to people who were closely involved in American politics and American economics each day. I think the first thing you would say is that the Biden administration is off to an extraordinarily positive start. If you had said what last July, suppose that Vice President Biden is elected as president, what do we think the odds are that the COVID rate will fall by 80% in his first hundred days? That he will achieve in his first hundred days 250 million vaccinations? What do we think the odds are that in his first hundred days there will be a report that GDP growth in the first quarter was six and a half percent that that was a substantial underestimate and that it was likely to accelerate into the second and third quarters? What do we think the odds of that? I think it would have been extremely unlikely. If we had said that the first hundred days of a new presidency would go by with no major incidents of mismanagement, no dramatic failure of an attempted appointment, no gaffe by the president, no incident of substantial turbulence like that that Bill Clinton experienced over the gaze in the military issue, we would have thought that that was really quite unlikely. If you had asked what were the prospects that there would be such a strong sense of reestablishment of rapport between the United States and its traditional allies, I would say that there were high expectations for a post-Trump world and that those expectations have been met. I think it is important to begin any discussion of the U.S. outlook with the recognition of just how positive the last hundred days have been. I think that extra kudos go to the presidential leadership in the fact that with the narrowest of mandates, no majority without the vice president in the Senate, a majority of only three or four people in the House of Representatives, he has a legislative agenda put forward assigned a serious prospect of substantial passage that invites comparisons with Franklin Roosevelt. So I think that those in the president's camp, the president himself, have every reason to take enormous satisfaction from what has happened over the last 110 days and there's no impression more important than a first impression and Joe Biden reintroduced to America as its president has made an extraordinarily positive first impression. That said, I think it needs to be recognized, and this is where I'll devote more of my remarks, that there are I believe very substantial challenges ahead on the horizon and that the remainder of this year may well not be as easy as the first 110 days have been. And I will highlight as I talk four sets of issues. The macroeconomic environment in the United States, the management of globalization going forward, the question of America's impact in the public investment program and programs of increased generosity that President Biden has put forward and the broader geopolitical configuration. The macroeconomic policy environment, as some of you will have seen, I am very concerned that a valid Keynesian impulse has been taken to very substantial excess in the United States. And I think the evidence is increasingly clear that that is the case. Core, the core consumer price index this month increased at a nine tenths of a percent rate that corresponds to an annual rate of 10%. It was of the core CPI increased more rapidly than the regular CPI. The inflation rate in the first quarter of this year was very substantially more rapid than the inflation rate in the last three quarters of last year. That is only one of many indicia of concern. Reports of labor shortage are now pervasive in the United States. The vacancy rate is at record lows, suggesting very substantial tightness in labor markets. The quit rate is at record highs, suggesting that employees have a very great sense of optimism about their capacity to find subsequent jobs. Measures of inflation expectations inferred from markets are significantly up. Measures of survey inflation expectations are up. Small businesses are reporting more pressure for price increases than any time since the early 1980s. In one recent survey, 91% of the American people are either very worried or worried about inflation. There is general poo-pooing of inflation concerns coming out of the administration and coming out of the central bank. They are at great pains to stress their belief that inflation is transitory. Perhaps they will prove to be right. My own view is that with growth this year, likely to approach seven or eight or even nine percent, that labor markets will be tighter, that product markets will face even greater demand, and that the housing market, where house prices rose 18% over the last year but are measured in the price index as only having risen 2%, is the increase in the price of homes will at some stage feed through into the rental measure that appears in the price index. I am very concerned that inflation expectations will become unanchored and that the Fed will face profoundly difficult choices about either allowing inflation to further accelerate or taking steps to cool things off, which are very difficult to do in a way where things remain stable. The first large challenge is going to be of macroeconomic management, where I have, as I've expressed, very substantial concerns given the magnitude of the stimulative policies that have been pursued. The second broad issue is the management of globalization going forward. The United States has taken trade policy essentially off the table. It is very unlikely that there will be significant new initiatives to promote commercial integration. I believe that the philosophical change that Secretary Yellen has brought about from an approach to international taxation that is directed at winning a race towards the bottom towards an approach that is based on containing the race towards the bottom and establishing the regime where it's not possible for mobile capital to largely escape taxation through transfer pricing techniques and through the its choice of location of headquarters. I believe that that is philosophically appropriate, though I recognize that there's an enormous amount of complexity and challenge in the details. I believe that the United States is facing what may well be in the international economic arena, the most serious set of challenges around technological leadership that it has faced in a century. There was, to be sure, great concern that proved to be exaggerated about the United States falling behind after Sputnik in the late 1950s. There was great concern. It was widely remarked that the Cold War was over and Germany and Japan had won in the early 1990s. I think it's appropriate to be cautious in judging the Chinese challenge, but the challenge of IT enabled authoritarian capitalism is, I believe, an enormous challenge to the United States and to the West. We do not yet have a fully formulated policy response. One of the crucial issues for the Biden administration on which less has been said than most other consequential issues is how we will regard our large technology companies. Will we regard them as national champions in a profound competition with China, or will we regard them as grave threats to the tone of our national discourse, privacy, and consumer interests? Those issues are as yet unresolved. A third set of issues comes out of what I think is an important feature of this movement, this moment. I think we'll probably have global implications. Political tides run in and they run out. There was a broad pro-government progressive tide that ran from the end of the Second World War through the late 1970s and has now run out for, was running out through the 80s, 90s, and the Nauts. With the financial crisis, when started to see a broad reassessment of the role of government, it is reinforced by the financial crisis, by rising inequality, by the challenge of sustainability, and of course by the challenge of COVID, which will not be the last pandemic the world faces in my lifetime, and I'm 66. And how that is going to be managed is a major challenge in this moment. The President has proposed the most sweeping domestic legislative program between the Families Act and the Jobs Act on top of the stimulus already provided that I discussed earlier. Will he be able to generate political support for it? If he does, will the measures work? Can industrial policy replace carbon taxation in generating sustainability? How much needs to be spent and what is the right mix between public and private infrastructure? To what extent can a broad social safety net built that will support a middle class that is more trusting of each other and more trusting of government be built on a foundation that comes only from taxing those in the top 1% of the income distribution? These are profound challenges that are not yet answered, but will be answered in the policy responses. Finally, the Biden administration is started, but only started on meeting the broad geopolitical challenges of this moment. Some come from the fact that fostering global cooperation on global public goods is probably now as important for security as balancing power, and I think particularly of climate and I think particularly of pandemic risk. Some come perhaps most critically from China. China is making it as I think you in Europe are discovering. China is making it harder to reject the concept of a new Cold War than it seemed a year or two ago. A combination of wolf warrior diplomacy, heavy handed tactics towards neighbors, uncertainty about what the real story is involving COVID, increasingly menacing rhetoric with respect to its near, abroad and problematic economic practices have made the crafting of a relationship with China a larger and more difficult challenge than it appeared a year or two ago. And I think it has to be recognized that for all the success, and I think it is enormous success, that the new tone in US diplomacy has had. Our major adversaries, Russia, China, Iran seem to be drawing closer to one another, and that has to raise concerns about whether the world is going to be as well ordered from our point of view over the next generation as it has been over the last. So I look forward taking great satisfaction from the really tremendous success that I believe the administration has had over the last few months with a clear eyed view that there are enormous challenges ahead that will hopefully generate the kind of creativity and success that President Biden has enjoyed during his first few months in office. Thank you very much for the opportunity to speak with you. And thank you so much, Larry, for that very wide ranging introduction. We've got a lot to talk about there. Let me just kick off with picking up on that point about political tides that you mentioned from the 30s to the 70s and from the 70s to at least the financial crisis. Is it possible that even though the intellectual climate or intellectual view has changed with regards to government intervention or free markets, it may not make that much of a difference. Just as an example, since the 70s it's very hard to find any country in the world where government spending as a percentage of GDP has declined by much. So rolling back at the state, you heard it talked about a lot, but it doesn't show up in government spending and tax figures. You could look at the Trump administration, it was very much against hostile to globalization, yet the United States continued to globalize. Trade and investments both in and out of the US continued and increased during the Trump administration. So could I maybe suggest that while the ideas may be changing and there may be greater support for government intervention, that it may not turn out to be as long lasting a phenomenon or is particularly what's happening in the US so big now that it really is an FDR type moment? Dan, it's a fair question and I think you're right to sort of emphasize the relative importance of broad economic forces relative to particular policy debates. I guess, and you're certainly right that the size of the state has not been rolled back substantially almost anywhere. I would make these points though. I think the kinds of trends that existed as of the mid-1970s have very much not continued. And so there's a question as to what benchmark one uses. Does one use the trend or does one ask, because the absolute size of the state been scaled back? Think of one looks at top tax rates, for example, one does see rather more substantial change than you describe. One looks at the extent of economic regulation. One sees some substantial scaling back. One looks at the extent to which market forces are allowed to operate in labor markets. One sees some substantial scaling back. So I think that if I may have overestimated the force of the post-1980 changes, I think respectfully the way you frame the question perhaps underestimates the strength of those forces. I think that you're right and that I think I am surely right to be picking up the temper of the discourse in the United States, which involves a large number of comparisons to the Great Society and to the New Deal, to Franklin Roosevelt. I am reporting that accurately to my European friends. How much of it will take place? What will historians look back and say? I think that is a fair comment. I think it is useful to look back and look at the size relative to GDP of the programs of the New Deal or the programs of the Great Society. And I think you will find that they are rather smaller relative to GDP than they loom in historical imagination. And so if one looks at the size of the Families Act, the Jobs Act, the Recovery Act, measured in dollars relative to GDP, they look pretty large relative to what Roosevelt was talking about or what Johnson was talking about. But you're absolutely right in its early days. And I was endeavoring to distinguish rather sharply in the way I structured my talk between the great success of the last four months and the substantial uncertainty that lay ahead in part for exactly your reason that I think it was way premature to coronate Joe Biden as the next coming of Franklin Roosevelt. Let me come to one of the issues you raised about tightness in the US labor market, which from where we were a year ago seems extraordinary that one could worry about tightness in the US labor market. Do you see that as something that will continue? And how do you see the sectors that have been most affected by the pandemic, the hospitality, the transport, the airline sectors, will they all just bounce back within a few months? Or will there be a scarring effect? And even with this unprecedented stimulus, do you think unemployment in the US will remain higher for longer or it will drop straight back? I think the scarring look, I mean in the US and it is a tribute to policy. In the US, we are going to reach previous levels of GDP. We are more or less at previous levels of GDP right now as we make our way through the second quarter. We are going to reach previous levels of GDP adjusted for trend by the end of the year or before. So this idea of profound long-term scarring measured in terms of GDP looks much, much less frightening than people imagine it as being. To some extent, we are likely to see the productivity increases of a kind that people didn't envision, though perhaps they should have and perhaps they are some deep-sensed illusory. I live in a town just outside of Boston, Brookline, Massachusetts. My guess is that before COVID, there were eight Indian restaurants in my town, it's a big town. I would guess that this summer there will be four or five Indian restaurants because three or four, three of them will have closed. The consequence of that will be on the one hand that I will have a little less choice that when I want to go out for an Indian dinner, I will have to drive for seven minutes rather than for four. But about the same number of Indian dinners will be eaten, but fewer people will be employed in serving them because the demand will be consolidated in a smaller number of more congested restaurants. So I think that kind of thing is probably taking place in many different spheres and is going to mean that GDP is going to be relatively robust. As you probably saw, Dan, employment as reported for April was less strong than people expected it to be. There's a great debate. I think the better reading of it is that it is not because there was not demand for labor. It is because a combination of the continuing impact of COVID and very generous unemployment benefits caused people not to want to come to work. So I think we are likely to have some somewhat extended period of relatively low employment levels. But that is not going to reflect the lack of demand for labor as much as it's going to reflect the lack of willing supply of labor. From your observation of the European labor market, would you view it in a similar way or do you think that the European labor market just doesn't work as well and the risk of longer term unemployment here on this side of the Atlantic is greater? I suspect the optimal macroeconomic policy in response to COVID would have been some happy medium between ours and yours. I think as I think I've made clear that we have rather overdone it on the demand side and quite possibly have created some real problems for ourselves down the road. I think the combination of European attitudes towards stimulus, which are more austerity and enthusiastic on average, and the complexities of union, the difficulty of individual countries doing stimulus, and the difficulties of common policy means that European policy has been less stimulative than I would have liked. And I think Europe is also somewhat behind on the vaccination process. So I would not make nearly as strong a statement for, I wouldn't presume to make as strong statements for Europe in general as I do for the United States because I feel much less confident of my knowledge. But on top of that, my best guesses would be that demand is much more constraining in Europe than it is in the United States. Let me do a couple of rapid fire on some of the questions that have come in. Policy response in the U.S., do you think it will change the trajectory of earnings growth for the lower paid, famously stagnating lower incomes in the U.S.? I think that we're likely to have pretty hot labor markets for a while and that's likely to work to the benefit of the lower paid. I think that what's been done with the child credit, with the earned income tax credit, with the lump sum checks, I think all of this is probably meaningfully egalitarian in its impact. So I don't think we can treat inequality as a solved problem, but I think there probably has been meaningful progress made, particularly in what concerns me most, inequality in the circumstances of different children. Another one on the administration's infrastructure plans, your view too big, big enough, target enough? Probably not quite big enough, given the size of the public investment gap and probably with more too much attention to the quantity of public investment relative to the quality of public investment. I'd like to see more emphasis on involving the private sector, more emphasis on procuring as cheaply as possible, more emphasis on accelerating the regulatory review processes for projects. And so to take just one example, I've always thought it was ironic that in socialist Europe, almost all the airports are privately owned and in capitalist America, almost all the airports are publicly owned. And I think that's a metaphor for a fairly broad range of issues involved with infrastructure. Question here from the Irish Times newspaper, your point about this mobile capital escaping taxation. Question, what effect do you think this policy will have on Ireland where many US multinational corporations have set up European headquarters and also benefit from low corporation tax rate in Ireland? So do you think that the change position of the US and corporation tax globally will have an impact on American firms establishing either subsidiaries or changing domicile completely? With particular, obviously this question is particularly concerned about Ireland, but if you thought about Ireland, they'd be most welcome, but even more generally on a global basis. I think Ireland is an attractive location to live, an attractive location for expatriates, an attractive location to produce, and particularly with Britain outside of the European Union, an attractive location for companies from other English speaking countries to access the European continent. I think Ireland should prosper on the basis of those strong structural advantages. I do think that Ireland has prospered, that there has been an excessive attraction to location in Ireland coming from tax arbitrage, and it would be my hope and expectation that there will be negative pressure with respect to Ireland making itself attractive, not through its very substantial real advantages, but through its ability to be a location for tax arbitrage. And I suspect that will pose certain challenges for Ireland. If one looks at, for example, the differences between Irish GNP statistics and Irish GDP statistics, they do I think suggest some cause for concern. But I don't think, I don't believe that Ireland is unable to prosper on the basis of its very strong economic, it's great economic strengths rather than simply, rather than going some distance in the direction of the Cayman Islands or other tax haven jurisdictions. There's a question here on the Fed and it may be banking too much on the transience of the consumer price inflation increase. Is that a risky position for the Fed to be quite so strong in viewing the blip and inflation as being merely a blip? And another question more widely on central banks and the use of central banks balance sheets, do you think this creates risks down the line or do you think it can be managed as maybe the Japanese have managed it over the past 20 years? I am in a world where central banks pay interest on reserves. I am less alarmed than many about the growth of central bank balance sheets. I think ultimately the question of how a country manages its debt between the balance sheet of the treasury and the balance sheet of the central bank is a little bit like the question of how my wife and I manage our finances and from the rest of the world's point of view, it's what debts we take on as a couple or don't take on what assets we invest or don't invest as a couple and what is in my bank account and what is in my wife's bank account is not the paramount issue. And I feel the same way about issues when central banks buy government debt as long as they're paying interest on their monetary liabilities. I am very concerned that the Fed's analytical assessment that inflation is transitory combined with its policy move towards not being preemptive with respect to inflation will be to repeat the mistakes of the 1960s and 1970s. I see every situation is different but I see disturbing parallels in terms of the elevation of social objectives in monetary policy in terms of the dismissal of significant inflation rates by pointing to transient factors in terms of the desire to justify relatively easy policies. And I'm in particular worried that we face a potentially unfortunate cycle in which rising inflation rates mean declining real interest rates, mean looser and looser de facto monetary policy. And so not only are we not tightening with respect to inflation but the consequence of inflation is to itself generate an easing of monetary policy. Larry, thank you so much for that. We've got enough questions that we could have gone on for another 45 minutes just to answer or put the ones that are here to you. But unfortunately we've come to the end of our public event here. So let me take this opportunity to thank you once again for joining us and sharing those perspectives and thoughts on such a wide-ranging range of issues. And we wish you a good, is it a good morning, still a good morning there? Yes. Well good rest of the day and look forward to welcoming you back in person the next time. So thank you very much. Very nice to talk with you.