(Bloomberg) -- Former Treasury Secretary Lawrence Summers said that it will be important for policy makers to allow any coming US recession to do the job of quelling inflation, and to avoid mistakes made in the 1970s, when surging prices became entrenched.
“It’s going to be very important to make sure that, if we’re going to go through a period of pain, we do slay the inflation dragon,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “There have been many failures -- the 1970s are the classic example -- of where economic policy makers did the equivalent of stopping the antibiotic when they felt better but before the 10-day dose was through.”
The extent to which an economic downturn will be needed to stabilize prices will depend on how deeply inflation has become ingrained, said Summers, a Harvard University professor and paid contributor to Bloomberg Television. If some of the price increases do prove “transitory,” that would require less pain, he said.
Some economists still see an alleviation of supply-chain bottlenecks helping to stem inflation. Others see a slowdown in growth being sufficient to temper price gains that have been running at the fastest in four decades.
Goldman Sachs Group Inc. chief economist Jan Hatzius said on Bloomberg TV earlier the Fed would likely stop raising rates by the end of 2022 as price pressures and growth ease. Inflation isn’t as “entrenched” as it was in the 1970s and 1980s, he said.
Less Bad
Summers, by contrast, said, “I still do think we have a meaningful amount of inflation that we have to get out of the system and I don’t think we’re going to do that in one or two quarters of economic slack.”
The former Treasury chief reiterated his view that a US recession is almost certain in the coming two years, with “a real risk it will come sooner.” At the same time, it’s unlikely to be as damaging as the downturns suffered when Covid-19 struck in 2020 or when the financial crisis hit in 2007-09, he said.
“Just how deep, just how long it will be -- difficult to know,” he said. But “there is no reason why this needs to resemble the recessions of the last generation,” he said.
As for the housing market, Summers said that, given the surge in mortgage rates, he wouldn’t be surprised if there’s “backtracking” in property prices in many parts of the country.
Still, “we’re in a much less precarious situation in housing than we were during the great financial crisis” and there’s unlikely to be a financial-systemic risk, he said.
©2022 Bloomberg L.P.
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