Yahoo Finance’s Jennifer Schonberger is joined by Former NEC Director & Former U.S. Treasury Secretary, Larry Summers, as they discuss the Inflation Reduction Act, inflation in the United States, and the possibility of a recession.
JENNIFER SCHONBERGER: Welcome to "Yahoo Finance Presents." I'm Jennifer Schonberger. Five former Treasury secretaries endorsing the slimmed down version of the Build Back Better Bill, now being dubbed the Inflation Reduction Act. Former Treasury secretaries Geithner, Lew, Paulson, Rubin, and Summers all saying in a statement, quote, "Taxes due or paid will not increase for any family making less than $400,000 a year." And the extra taxes levied on corporations do not reflect increases in the corporate tax rate, but rather the reclaiming of revenue lost to tax avoidance and provisions benefiting the most affluent."
Former Treasury Secretary Larry Summers joins me now to discuss this. Mr. Secretary, welcome to the program. Thanks so much for being here. So the Inflation Reduction Act would impose a 15% minimum corporate tax rate on companies earning a billion dollars or more in revenues. And you say, along with a handful of former Treasury secretaries, both Democratic and Republican, in a statement today, that "the extra taxes levied on corporations do not reflect increases in the corporate tax rate, but rather the reclaiming of revenue lost to tax avoidance and provisions benefiting the most affluent."
My question is, though, how do you see this impacting job creation and business investment at a time when the economy is slowing?
LARRY SUMMERS: I don't think the effects are likely to be harmful. I think that the total effects of this bill could very likely be positive. The stimulus to renewable investment, in particular, that's given by the tax credit provisions is likely to do far more to stimulate investment than closing various loopholes, which in some cases probably encourage financial manipulation rather than real productive investments.
I don't think there's any reason at all to think that asking corporations, that report themselves as profitable every year, to pay something in taxes at a minimum rate of 15% is likely to be harmful. And, in fact, by expanding the taxation of their global income relative to their domestic income, I actually think this could encourage jobs to be brought home.
JENNIFER SCHONBERGER: Republicans have argued that the bill would break President Biden's pledge to not raise taxes on those earning $400,000 or less, based on the Joint Committee on Taxation's analysis that higher taxes paid by corporations would indirectly raise the effective tax burden on those with incomes of $200,000 or less. Your rebuttal to that?
LARRY SUMMERS: I don't think that's a credible argument. The taxes are placed on corporations. They're placed only on profitable corporations. Disproportionately, they're going to fall on corporations who are making investments abroad. That's going to work out on balance favorably for the whole economy. There's no sense in which this is a tax placed on any family with income below $400,000.
JENNIFER SCHONBERGER: Sir, this bill is titled the Inflation Reduction Act. And while it does lower the deficit, some analysis out this week from Wharton finds virtually no impact on inflation, noting the estimates are, quote, "statistically indistinguishable from zero." Your reaction to that, and what is your argument for this bill decreasing inflation? Do you see that happening?
LARRY SUMMERS: So the Wharton analysis takes no account of lower prescription drug prices. The Wharton analysis takes no account of increased energy supply. The Wharton analysis is extremely conservative in its assumptions about extra government revenue from better tax enforcement. And still, the Wharton analysis acknowledges that this legislation is doing great things for the environment, great things for health access, great things for fairness, without contributing to inflation.
If Wharton, which focuses on the fiscal policy analysis, but doesn't focus on the sectoral analysis, had recognized the impact on pharmaceuticals, for example, then it would have reached the same conclusion that bipartisan Treasury secretaries reached, that this is reducing inflation.
JENNIFER SCHONBERGER: Mr. Secretary, you said that you think that the impact of this bill will be additive, will help investment, will help the economy. I'm curious, your outlook for inflation from here. The Federal Reserve has raised interest rates by 75 basis points for the past two meetings. We're still seeing high readings on CPI on the Fed's preferred inflation gauge of PCE. Granted, there's a bit of a lag indicator there. And we have seen commodity prices coming down. What is your outlook for inflation from here? And how does this bill tie-in with that?
LARRY SUMMERS: Jennifer, I think we've got real inflation problems in the country. I don't think they're going to go away quickly. I think they're a consequence of the overheating of the economy that took place last year, along with adverse supply shocks. And that's just something we're going to have to work through and live with.
I think we will do so in a better way if this bill passes. But this bill is certainly not sufficient to contain our inflation problem. And even with this bill, we're going to have inflation problems for quite some time to come. The important thing, though, is that this is doing a whole set of necessary things for our country, while beginning the process of reducing inflation pressure.
JENNIFER SCHONBERGER: You just said you think inflation is going to be with us for a long time to come. And as just noted, the Fed has been pretty aggressive. Do you think they should sustain that aggressive stance? Fed Chair Powell said at his press conference that there is a prospect of perhaps tailoring the size of those rate hikes, or minimizing, I should say, the size of those rate hikes from 75, maybe to 50 basis points in there, 25 basis points. Do you think the Fed needs to be more aggressive as we go through the latter half of this year?
LARRY SUMMERS: We'll have to see how the data unfold. I'm not prepared to make a prescription for the September Fed meeting at this point. I do think there's an important lesson that we all learn at some point in our lives. Which is, when the doctor prescribes a set of antibiotics, you have to take the whole course through. And you're making a mistake and you're compromising your potential health if you stop taking the antibiotics the moment you feel better.
And I think there's some similar principle here with respect to the Central Bank. That if inflation comes down a bit, if the economy looks like it's slowing, it will be tempting to stop raising interest rates. And indeed, people in the market are expecting that interest rates will come down beginning in December or January. And I think that would be a serious error.
JENNIFER SCHONBERGER: Interesting, OK. Before we get to your outlook on the economy, I do want to ask you, while the Fed is in the driver's seat for trying to reduce inflation, what other actions do you think the administration could take at this point? For instance, should the president dial back former President Trump's tariffs on Chinese imports? Are there other actions the administration could take to help ease inflation, perhaps when it comes to commodity prices, creating incentives for farmers, opening up more land? Or perhaps that's just an issue that has to do with the weather. Your take?
LARRY SUMMERS: I think we should be reducing tariffs not just on Chinese goods, but on goods all over. I think the consumer interest is really important. I think we need to think more about affordability economics than we tend to do. We need to put consumers first many times. I think there are things we can do in this bill and outside of this bill that would reduce energy regulation and make possible more production and even more and more distribution of energy, which would contribute to lower gasoline prices and lower energy prices.
I think, in general, if we can have more rapid permitting and less NIMBY problems, less Not In My Back Yard regulation, I think we could get more housing built, and that would contribute to more affordable housing. So in general, I think we need to think about affordability, whether the issue is higher education, whether the issue is health care. And that could make a contribution to reducing inflation. Though, I think the overwhelmingly most important determinant of inflation is going to be the cyclical performance of the economy and what monetary policies we pursue.
JENNIFER SCHONBERGER: You said just a bit ago that it would be a serious mistake for the Fed to sort of do a U-turn after hiking rates next year as the market is pricing in. Given that, I'm curious, do you think that a soft landing can be engineered here? We just saw two consecutive quarters of negative GDP growth, what some would call a common definition for recession.
Of course, the official arbiter looks at much more than that. And Secretary Yellen has argued we'd need to see massive layoffs to actually be in a recession right now. Do you think a soft landing is in the cards? Or do you think that a recession is near, or that we are in one, given what we've seen with the GDP numbers?
LARRY SUMMERS: I don't think we're in a recession. I think it's unlikely that it will be judged that in July of 2022 the American economy was in recession. I think given the difficulties associated with high inflation and bringing it down, the necessary monetary policy response, the odds that the economy will go into recession within the next 18 months are quite serious and probably in the 3/4 range. And I think that if the economy gets into a situation where unemployment rises, unemployment is likely to rise quite substantially. And so I would expect sometime within the next two or three years that the unemployment rate would cross 6%.
JENNIFER SCHONBERGER: And then, would that be the medicine that's really needed to get inflation back under control? Is a recession needed, essentially?
LARRY SUMMERS: I think we're unlikely, as I've said many, many times, I think we are unlikely to restore inflation to target levels in scenarios that don't involve a recession at some point.
JENNIFER SCHONBERGER: Mr. Secretary, thank you so much for your insight. I so appreciate it. Hope to speak with you again soon.
LARRY SUMMERS: Thank you.