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CNBC Transcript: Larry Summers, Former US Treasury Secretary


Following is the transcript of a CNBC interview with Larry Summers, Former US Treasury Secretary. The interview was broadcast on CNBC on 20 March 2017.

All references must be sourced to a "CNBC Interview".

Interviewed by Geoff Cutmore, Anchor, CNBC at China Development Forum 2017.

Geoff Cutmore: Let me start by asking you what you think is the growth outlook here in China right now. How comfortable are you with the prospects?

Larry Summers: I think Chinese have shown a great deal of capacity to manage their economy. I think there are building strains in terms of debt accumulation, what's happening in real estate markets pressure for capital outflows. And so my suspicion would be that in order to maintain the rate of growth, they're going to have to do things that are more and more problematic in terms of long term sustainability of growth, and to some extent, growth achieved over the next year or two will be growth borrowed from the future.

GC: Where are the cracks beginning to show?

LS: It's hard to know. I think you're seeing some cracks in the magnitude of capital outflows, the combined capital outflow from China has been huge by historical standards. I think they're seeing levels of real estate prices and demand maintained through investment… that is the kind that probably can't be continued indefinitely. And those all point to potential areas where there could be a slowdown at some point.

GC: The Chinese have been responding both to the Fed hike and capital outflows by increasing their own interest rates, does that bring the likelihood of some accident closer?

LS: It may, it may. You know compared to the alternative of not responding and allowing bubbles to grow even bigger, it may well be the more sustainable path. So I certainly wouldn't want to be critical of the Bank of China. But I do think that the strains that come from the fact that they seem to need to do things to maintain demand that probably they won't be able to do forever. And so in a sense they're delaying reform is, I think, a cause for concern.

GC: Do you think honest conversations are being had here at this event, or is there a level of complacency?

LS: No I don't think there's complacency. I think there's apprehension about the challenges in China. I think there's apprehension about some of the strains in the global economy coming out of political developments in Europe and the United States there, certainly discomfort with the Baden-Baden communique and its inability to address the issue of protectionism. At the same time I think experienced people recognize that there are always problems. There are always things to be alarmed about. And in a sense what we're trying to deal with is self-denying prophecies, by predicting that things will lead to serious problems, we set in motion the adjustments that caused them not to lead to serious problems. So I, in my remarks today, spoke of worried optimism as my posture and I think both those concepts are important. I am concerned about both developments here and developments globally and developments in the United States. But at the same time I think I have a basic optimism about our capacity to manage things going forward.

GC: How damaging a signal do you think the G20 communiqué sent in that no one could agree on a line that said protectionism is bad, free trade is good?

LS: I certainly wasn't encouraged and it certainly wasn't a favorable development. Having been involved in writing many G7 and G20 communiqués I don't think the world is hanging on that prose. So I think the real question is not what words there were in the communiqué but what will happen over time. If there is an acceptance of protectionism, is something that's acceptable globally on a large scale, I think that could be really quite damaging. On the other hand if this is rhetoric and there are frictions in particular sectors but no movement towards the overall tariffs then I don't think this will be hugely consequential.

GC: We're always looking for the source of the next crisis and increasingly some of the more bearish financial strategists are pointing to excessive levels of valuations in financial assets. How worried are you that this might lead us down...

LS: It's very, very, very difficult, to know. Certainly the risks of overvaluation are greater today than they were when the market was 15 percent lower. And certainly some valuation ratios are high by historical standards. On the other hand for a whole set of structural reasons that I've talked about in connection with secular stagnation, real interest rates are likely to be lower than they've been in the past. And that itself is a reason why valuation ratios should be higher. So again I think worry is appropriate, but I certainly don't see any conclusive case that's been made that you have the kind of completely untenable asset price elevation that you had with the Internet in the year 2000 or you had with subprime real estate and U.S. housing before the financial crisis.

GC: Given the level of global pickup in growth we're seeing, is it too soon to bury secular stagnation as a theory?

LS: Yeah, I think secular stagnation still remains a crucial issue. That normal level of real interest rates still looks to be much lower than it has been historically. I think there are very serious challenges that lie ahead. We haven't seen the last recession. Another one will come, and when it does come there'll be a need to cut rates. History says by four or five hundred basis points and there's unlikely to be nearly that much room for rate cutting.

GC: There is this great desire to bring jobs back to the United States but increasingly those jobs are being filled by robots. You've already come out and called Bill Gates' bluff on his argument that we should be taxing robots. Just walk us through that argument again here. Why isn't it a good idea where companies are replacing workers with low cost technology or high cost technology and that is incredibly productive…

LS: Why is it not a good idea? First of all we don't know when do we do it. Do we do it for spellcheckers that mean there are fewer secretaries? Do we do it for PCs that mean people can process their own documents? Do we do it for dishwashers because it means people don't have to wash dishes; there's no reason to single out something called robots and very difficult to judge what kinds of capital are replacing people. But I think there's an even more fundamental point, which is it seems to me our objectives should be to grow the pie as much as possible, and then make sure that everybody gets a fair piece. That seems to me to be a much better approach than seeking to distinguish and penalize profitable investments that have the prospect to grow the pie. I mean to be a great deal of investment using information technology that can accomplish a great deal.

GC: Just to wrap up, you've been pretty scathing of most of Donald Trump's plans so far. Do you see anything different to encourage you that actually things might turn out better than you expected?

LS: No I think that making policy based on facts advancing issues based on analysis is central to the effective functioning of government. And so I'm very concerned by the repeated tendency to engage in alternative facts and to assert things that are not supported by reality. And I think over time that will do great damage to credibility. And in many ways in governing, credibility is the coin of the realm.