Governing global imbalances

From political shocks and zero interest rates, to trade tensions between G20 economies, there are many challenges ahead. In an interview on 19 April, Larry Summers, president emeritus at Harvard University tells John Kirton, director of the G20 Research Group, what the coming months could bring

What is the current state of the global economy?

Mediocre. There are signs that growth is slowing in the United States and Europe, that growth has slowed from previous levels in China, that there’s instability in key emerging markets such as Argentina and Turkey. But forward momentum is being maintained, albeit more uneasily than in the recent past.

What central issues are facing the economy today?

The more things change, the more they stay the same. Markets are suggesting a greater concern about the return to zero interest rates in the United States, Europe and Japan, raising the prospects of brittleness if a next recession comes. There certainly doesn’t seem to be any movement towards repairing the attitudes that make trade agreements more difficult. If anything, the Brexit situation looks more fraught and more complex than it did last fall. There’s increasing confidence that an agreement will be reached between the United States and China, but no one supposes that’s anything but an interim truce. The dangers of economic nationalism, protectionism and limitations on the flows of people are as real as they were at the time of the Buenos Aires Summit. The central stabilisation policy challenge is that the world has had a basic strategy for dealing with recessions, namely to cut central bank interest rates by 500 basis points, but that kind of room is not available now. That will be a problem going forward.

What lies in store for the global economy?

The most likely guess is roughly in line with the International Monetary Fund forecasts: adequate growth without a big buzz, perhaps some slowing from the previous year. The risks, which are around 25% a year, are more of a discontinuity on the downside than an extremely positive performance. Greater difficulties in integration, larger risks of political shocks, the challenges of economic efficiency with very low interest rates — all these issues loom.

Lawrence Summers, president emeritus of Harvard University

Are rising government fiscal deficits and debts a problem?

One would always prefer that everything was smooth. I don’t think the US budget deficit is one of the more pressing problems right now. One has to, in looking at debts, look at the denominator, and US incomes are growing. Indeed, the growth rate of nominal gross domestic product significantly exceeds the interest rate, which means we’re capable of carrying sustained primary budget deficits. Moreover, at low interest rates, debt sustainability burdens – which for many purposes are a better measure than deficits and debt-to-GDP ratios – actually appear relatively sustainable. I look at the US infrastructure deficit, I look at the education deficit with respect to disadvantaged kids, I look at the innovation and science deficits, and those strike me as higher priorities than the budget deficit.

Do the G20’s leading central banks currently have the right monetary policy?

The monetary policies are broadly appropriate given the constraints on monetary policy. Rates are essentially zero in Europe and Japan, and the US Federal Reserve has signalled a clear willingness and indeed likelihood that its next rate move will be downwards. Monetary policy is unlikely to be as potent in the future than it has been in the past, given, apart from the technological challenges, the political taboos that surround zero interest rates.

Are the trade tensions among the G20’s major economies a drag on economic growth?

All of it is unhelpful. Any prospect that trade policy pressure will result in more open markets has benefits that are far exceeded by the costs of the more closed markets that exist while the tariffs are present and the inhibitions to investment created by the possibility that future tariffs will be put in place. We are driving away from the kind of integrated supply chains that offer the greatest efficiency and the lowest priced production for the benefit of global consumers. If the trade rhetoric stays as it is, if even a fraction of the actions that are threatened actually take place, there’s plenty of room for the situation to get worse.

As the global economy digitalises, how important is the regulation of digital trade in its capacity to foster growth?

I think we are going to need global agreements on data use, data sharing, privacy and data protection, and that’s a process that’s not going to be the work of one summit, but many.

What should the G20 leaders do to foster strong, sustained, balanced and inclusive growth?

They need to think very hard on how they’re going to organise and coordinate fiscal policy the next time an economic downturn happens, and how they’re going to qualify and organise financial emergency policy to ensure there are adequate safety nets for emerging markets that will likely be caught up in the next recession. The world is behind the curve on the global public goods threats such as global climate change and pandemics, so I would hope those would also figure on the agenda.