Summers in the US: "Recession Inevitable Due to Tightening... Fiscal Policy Response Needed"

▲Lawrence Summers, former U.S. Secretary of the Treasury (AP News)

[Asia Economy New York=Special Correspondent Joselgina] Larry Summers, a Harvard University professor who served as the U.S. Treasury Secretary under the Bill Clinton administration, emphasized the necessity of selective fiscal support, stating that a recession is inevitable due to the Federal Reserve's (Fed) aggressive tightening.

On the 20th (local time), Summers wrote in an op-ed for The Washington Post (WP) that "While the Fed is controlling inflation through interest rate hikes, it will not be possible to manage the risk of a recession as well."

He noted, "Every time inflation has been curbed in the past 70 years, a recession has followed," adding, "It is not surprising that many economists, including myself, expect a recession in 2023." He also predicted that unemployment could rise to the 6% range due to the recession, making the Fed's policy decisions even more difficult.

Summers accurately predicted that inflation would become a bigger problem when Fed Chair Jerome Powell and Treasury Secretary Janet Yellen underestimated inflation as a temporary phenomenon last year. Since the beginning of this year, he has consistently warned about the possibility of a recession.

However, Summers diagnosed that the likelihood of a severe recession next year is not high. Accordingly, he suggested that the Fed should continue its cautious approach by emphasizing the 2% inflation target for price stability as it is now.

He commented on the recent slowdown in various inflation indicators such as the Consumer Price Index (CPI), saying, "Prices that temporarily rose due to supply chain disruptions, such as used cars, are normalizing," and warned, "We should not be mistaken that this is a sustained decline in prices." He also dismissed the growing dovish voices within the Fed calling for a pause in rate hikes as "wrong claims."

Furthermore, he warned that adjusting the inflation target to 3% or higher, as some suggest, would rather lay the groundwork for a 'stagflation decade.'

Summers emphasized that fiscal policy should be used to respond if a recession occurs. Representative measures include tariff reductions, shortening the review period for energy projects, easing medical and student loan burdens, and reducing public procurement costs. However, he advised selective fiscal policies, stating that during a recession, "there will not be room to implement broad and large-scale fiscal policies," and efforts should be focused on specific areas such as child tax credit refunds, strengthening unemployment insurance, and early execution of government maintenance and replacement budgets.

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