Wall Street Week - Full Show 01/13/2023
Inflation easing odds of a European recession dropping. And North America coming together. Maybe just a gleam of optimism for the new year. This is Bloomberg Wall Street week. I'm David Westin. This week, special contributor Larry Summers on whether we're seeing a light at the end of the inflation tunnel or a false dawn. If you think about it, it's the good
news. Was inflation running in the 60s? That's still inconceivably high. Former IBM CEO Sam Palmisano on CEOs facing a very different world. Do what's necessary to maintain strict strategic growth and drive productivity at the same time. And economist Melissa Kearney of the University of Maryland.
What declining births in the United States could mean for economic growth? You have fewer people of working age. More worryingly, it could mean lower GDP per capita at. Maybe it was just the promise of a new year or maybe, just maybe, things really are starting to look a little bit better.
As the leaders of the three nations of North America gathered in Mexico City this week and sought cooperation on a host of issues. Above all, we both committed to pursuing a better future, one grounded on peace and prosperity for all of our people. We're one of those inflection points where what we do in the next seven years to determine what the world looks like in the next two, three, four decades. In Europe, ISE, a recession are dropping, at least according to the Belgian prime minister. If you look at the economic indicators, indeed, the fear for recession is is diminishing and there are good reasons for that.
And in the United States, inflation signals reinforce what we thought we saw at the end of last year. Inflation may just may be truly coming back down the month over month CPI print negative. This number was being on the screws. Inflation is key.
When he finally got the job, Speaker Kevin McCarthy got off to a surprisingly bipartisan start, with the House almost unanimous in approving a new select committee to look at the threats posed by China. We know that China right now is. But when he called out pulsing threat, this is something not just from the military perspective, but also from an economic perspective that we've seen. Our vulnerabilities, particularly over the last couple of years, though, things weren't quite as smooth for all the other lawmakers as the new Republican member from Long Island.
Jorge Santos faces a range of investigations and growing calls for him to step aside, including from Republicans on behalf of the Nassau County Republican Committee. I am calling for his immediate resignation. We must call for the resignation of Congressman Jorge Santos, calling for Jorge Santos to resign. Calling on Jorge Santos to resign. Demand choice Santo steps staff calling him to step aside. He should resign. My office will have no interaction with Jorge Santos or his staff until he resigns. In the end, the markets this week saw
the half full part of the glass, with the S&P 500 gaining two point seven percent for the week and the Nasdaq up four point eight percent, while bonds strengthened as well with the yield on the 10 year down six basis points, ending at just about three point five percent. Take us through the week in the numbers. Welcome to Sunny Beschloss, CEO of Rock Creek, and David Bianco, D.W. s group CIO for The America. So welcome back, both of you. Good to have you here.
David, we start with you. CPI numbers encouraging inflation. Is that what's driving the markets right now? It is. And we knew that going into the week that investors would be focused on the inflation report. There were whispers that the inflation report would surprise to the downside. It didn't. King bangin on target. But it confirms that inflation is continuing to come down.
However, the battle's not over. And I think investors should. And certainly the Fed will likely stay focused on the labor market. And we still see wages really running red hot. So the inflation fight is not over. We probably have a few more hikes ahead of about 25 basis. Well, that's usually offsetting a few more hikes ahead. The question for me is it may not be
over, but how close is it to being over? What do you think the Fed's going to think when they meet at the beginning of February? I think the Fed is still trying to remain relatively hawkish. And as David said, I'm pretty sure they will do that 25 basis points in their next meeting. They aren't looking, as he said, at the employment numbers really carefully. And and also, of course, at earnings
reports that are coming out as we speak. So. So I think those two items will be important. Wage growth is starting to show a little bit of maybe a softening. We're seeing people starting to talk about laying off in certain sectors like finance and technology. So I think all of that will factor into
the next conversation about rate hikes. So, David, we're all focused on the Fed and we will be for some time to come. But I know you think that we also should be looking in other parts of Washington that may actually be affecting the investment criteria right now. And what what should we be focusing on as we go into 2023? Well, look, there's a lot of things going on. So with inflation, I would argue that the near-term focus really should be on the labor market. We do have disinflation on goods and we've had some on commodities.
But the disinflation on goods is because we're entering a goods consumption and goods production recession. And I think we'll hear more about that during earnings season. So in the near term, stay focused on the labor market for where inflation goes, what the Fed needs to do about it.
But longer term. Yes, I agree that the longer term inflation outlook has a lot to do with policies both at home and worldwide. But policies that relate to how well we spend, what type of return on investment we get on, things like energy, energy, transition, even defense and so on, so forth. So I think when we hear energy, we think of you necessarily. You've had a lot of your career tied up with energy. You studied it, as I recall, at Oxford
as well. Tell us about the federal policies right now in energy, how they may be affecting some investment decisions. The interesting thing is, obviously, when we talk about about policy makers, we think about their inflation act. But just before we go there, I think what's interesting is the concentration of the market has been on what the Fed is doing. And what is interesting is President Biden and and his team have been equally focused on removing some of the supply chain problems. We saw what they did with, for example,
that the trains unions. We saw that, for example, the energy reserves that were released and and where one of that was one of the reasons that gas prices are where they are, among other reasons, of course. So government has been much more proactive when it comes to different areas. But in terms of its policies, but particularly when it comes to energy, and I think it has quietly been quite effective in keeping energy prices down. We've seen, by the way, similar things
in Germany. And then coming back to the idea, of course, that is huge because there is the direct impact of the ISE, which is, you know, over 300 billion. But there's also the leverage impact in the sense that we're seeing already a lot of private sector deals happening, whether you look at big private equity firms that are doing very large projects, people investing in clean energy, but also in things like LNG terminals to for there for the short term. And then last but not least, venture firms are looking at hydrogen projects because they're seeing, again, with the IRS that there is potential for some of these investments that are longer term investments. So, David, when we talk about energy, we have two sides of the house. One is the fossil fuel side. This question that the release from the
SPRO, the Strategic Petroleum Reserve or something like that. But you also have investments like Iron Ionia now is something like a 700 billion dollar loan and part of energy tied to that investment inflation reduction. So as an investor, what should we be looking at as an investor? Would you want to do is look at the prospects for a return on capital and we would expect that there'll be a lot of investment spending through government programs like the Inflation Reduction Act, but the CHIPS Act, investment spending that's done by the energy sector, the alternative energy sector, the electric vehicle sector, the utilities, space, semiconductors. But the question that investors have is what's the return on investment going to be in certain industries? Have a history of producing poor returns on investment, energy, auto and I and others have done better or least least regulated like utilities.
So we do expect a lot of investment spending to come in this space. We have yet to really figure out will this be good for investors or what time to type of return on investment. We will get a silent ask you the most basic question when it comes to the green energy area that now is going to get some subsidy from U.S. government.
Is that inflationary or deflationary? Depends on, you know, how if if it brings down total energy prices, that would be obviously not inflationary. Right. In the meantime, if you say that is creating, by some accounts, 9 million new jobs over time, of course, over a long period of time, you could say that that could have an impact on people having a larger ability to spend and consume. But I think that's much longer term. I think in the short run, if it starts
bringing down the cost, overall cost of energy. That is good in terms of our worries about inflation. There would be accorded every group. Thank you so much, David, for being back with us. I say a specialist is going to be staying with us as we turn to a subject she knows particularly well at the World Economic Forum over in Davos. And they're holding it next week. Don't look like it while it may be a bit different this year.
That's next on Wall Street. Bloomberg. This is Wall Street week. I'm David Westin. The World Economic Forum will hold its annual meeting in Davos, Switzerland, next week is the first time in the winter since the pandemic. And Afsane Beschloss of Rock Creek has been to her own fair share of these gatherings over the years. And it's fair to say and she's stayed with us to give us a preview. So, Sunny, how will this when do you
think be different from what we've seen before? So, David, you're absolutely right. I've been going since the nineteen nineties in the past and and I think what's happening this time is you have the usual cast of characters. I think more than 50 heads of states, more than 300 the ministers or, you know, government officials, more than 600 CEOs of different companies. What is different is that sort of spirit of cooperation that is supposed to bring about is under question. Right. There's a lot of geopolitical strife
going on as we speak. The Chinese who did not go into their last few meetings in terms of the meetings that were not in person or the first one that was in person in the spring. I think maybe one person will have obviously now that they have the Covid reopening, they will have more people, but not too many seems to be more people from the Middle East and from Asia going.
So the competition is changing. Less people in Europe from Europe and the U.S., as you had said earlier. And Russia is not invited. So, you know, it's hard to have conversations around difficult subjects when some people are not going to be around the table. The big, big topic, David, I think, is going to be, you know, the one criticism of Douglas and the World Economic Forum, but also other meetings like that, such as COP 27 and others, is people get together and there are a lot of lofty statements that are made by governments, by corporations. And, you know, some would argue that
there's very little follow up. And that is really the big, big question. Will there will it be different this year? Well, that's just exactly what I want to ask you, because one of the subjects, for example, they say they really talk was inequality, wealth inequality, income inequality, which goodness knows is a problem around the world. And we will have some, if I can call that activists really speak up for the less fortunate and they will talk truth to power and truth will power will listen very politely. But will they hear anything of it? And I think, David, one of the issues is that you have the people who are in the building and the activists who are generally outside the building. Maybe they come for one or two sessions
in the building, as it were. So you don't really have enough of a dialogue. And I think that's one of the things that the World Economic Forum has tried to change. And it's difficult and it's probably something that it needs to spend more time on. But in terms of inequality, the fact that inequality is bigger is a very big problem. The interesting thing is that, for example, in the past, multilateral institutions have come together and talked about how to work together on big problems such as, for example, right now you're facing huge debt problems in the lowest income countries. But it sounds like that won't happen at
this meeting. And countries like in sub-Saharan Africa who are going to have the lowest growth rate, according to the World Bank, in a very long time, are not necessarily going to be on their agenda. Let me ask Afsane, because one of the really themes of the WEF over years has been globalization. There's globalization, help or hurt when it comes to inequality, because I can see it either way. Yeah, I mean, as economists, we we were taught about, you know, the theory of globalization being a good thing. I think globalize it. There's these big words, whether it's globalization or globalization means so many different things. It really depends.
Because right now we're seeing that we are equal. But in practice, we're changing the ways we are trading. Right. It's not going in the direction of trade. Like a huge amount of trade going from China into other countries. You're starting to talk about whether it is near shoring or French shoring. That is still trade.
That's still people trading with each other. So I think if we look in five years, it may not be the same trend of trade as we saw before, but the globe has come together and people are going to need each other. And we're seeing, for example, a Korean company coming to invest in Georgia in a solar, a huge solar power plant for 2.5 billion. So that is part of globalization. Really briefly here at the end. Afsane, is international trade and globalization consistent with populism? It certainly has created the problem.
David, off of moving jobs to certain places, again, you know, China was the big beneficiary and bringing wages down often to a level that is not a living wage. And that certainly has created populism. And that's why you're not seeing, for example, you go to Germany and the German government has reduced energy costs by 80 percent for people, for 80 percent of energy for people, so that the poor are not as impacted by this high energy price. That living wage will be discussed at Davos. Thank you so much. Afsane, vessels of Rock Creek faltering. We will be in Davos next week with interviews for blog Bloomberg every day of the week.
In addition to a special Davos version of our Friday program coming up, fertility rates are declining in United States and don't appear likely to come back. We'll talk to Melissa CARNEY of the Universe of Merrill about why this is and what it could mean for investors. And this is Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin every year the Aspen
Economic Strategy Group comes out with a monograph describing the state of the economy and most importantly, one of the big issues that we face. They've just come out with their most recent addition. And we welcome now the director of that group. She is Melissa CARNEY. She's professor of economics at the University of Maryland. Melissa, thank you so much for being back on Wall Street week. This is a fascinating report from
beginning to end, but particularly, Mitch, in part you authored, which has to do with fertility rates in the United States and what that could do for economic growth. First of all, give us a sense of where we are on until the fertility rates in the United States and whether this is a temporary thing or it may take care of itself. Sure, so the U.S. fertility rate has plummeted for the past 15 years. And so the problem here is that now we are at a level of fertility in this country that is below replacement level, meaning without immigration, the population will not maintain our size.
And so what's been happening is for 15 years, annual birth rates have gone down. And now we're at a point where the average number of children born to a woman in the U.S. is substantially below the sort of magic number of two point one that would keep us at replacement population level. It's now one point six seven.
My look at the data suggests that it's unlikely to turn around anytime soon. So what we've really seen is that the decrease in births is very widespread. It's coming from across demographic groups. It's coming across the country. It doesn't seem to be driven by any sort of sharp policy or economic change in the past 15 years.
Rather, it seems to reflect more recent cohorts of young adults having fewer children or remaining childless more often than cohorts in the previous past. And so this suggests that there's been a general trend away from having children, from having multiple children. And if we look to other high income countries that have been dealing with this for decades, it's it's probably going to be stubbornly low. That's my best guess.
So, Professor, here on Wall Street week, we speak to investors in particular. What are the possible consequences that in terms of economic growth? Because really we have to depend upon future economic growth. What does that decline in fertility likely to do to us? The decline in birth rates has meant a decline in population growth, and the most immediate effect of this is likely to be a shrinking size of the working age population. So the working age population in the US has been stagnant for for over a decade now. And given the decrease in birth rates we've been experiencing for the past 15 years in the not too distant future. Again, absent an increase in
immigration, we're simply going to have fewer people of working age. Now that that's consequential, both in a fiscal sense, meaning that it's going to put fiscal pressures on our social Social Security system. Funding for Medicare, disability insurance.
But it also it also poses economic headwinds in the sense that you have fewer people of working age. And that doesn't necessarily just mean fewer people to produce stuff. Lower economic and lower economic activity overall. More worryingly, it could mean lower GDP
per capita or a reduction in productivity per person, a reduction in living standards, which could have profound effects, obviously on investment, particularly in states. So what can we do about it? Can we get that fertility rate back up or do we have to find a workaround? Yeah. So here's where I think we can draw lessons from other high income countries Japan, UK, Canada, other countries in Europe, including Scandinavian countries that have been dealing with below replacement level fertility for many decades.
You know, the first thing I would note is that despite efforts to turn things around, fertility has remained below replacement level in those countries for many decades. Lot of those places have implemented explicitly pro Natalie's policies, things like baby bonuses or child tax credits, expanded parental leave, expanded subsidies for child care, all things that should make the cost of having children lower or the ability to combine work in kids easier. And yet the evidence from those kinds of incremental policies is that they might lead to some modest increase in birth rates in the short run, in particular, perhaps not persistently, but nothing of this size that we would need to really lead to a dramatic reversal of the decline in fertility or the stubbornly low fertility rates anytime soon. So that suggests that it would be hard to turn things around.
And again, because it looks like what we're seeing is really just a move away from having children or having multiple children, as opposed to any sort of temporary response to some to some discreet change suggested is going to be really hard to turn the fertility rate around. So where does that leave us? Well, the obvious thing is to think about increasing immigration now. Easier said than done in this country. Congress has been derelict when it comes to immigration reform for far too long now. But given these demographic trends, the imperative for immigration reform, for allowing more people to legally enter or stay in the country becomes that much stronger. And there's lots of sensible reforms for reform proposals out there, ways we could do this. We could certainly have more of an
employment driven immigration system where like other countries do, including Canada, where we allow more people in who are reasonably likely to contribute right away to our economic productivity. We could also increase per country caps on the number of family members who were allowed to immigrate to the country or stay in the country beyond immigration, of course. Again, these demographic headwinds emphasize the need for policies and conditions that promote innovation and productivity growth.
Easier said than done, though. Recent spending bills in Congress aimed at investments in infrastructure increases in spending on scientific development. All of those are encouraging. All of those are steps in the right direction. But getting innovation policy right is very hard. And it's and it's about it will require a lot more than just spending. It requires having the conditions in place for competitive companies and innovators to flourish and thrive. This is something that we take up in our
in our report that you mentioned. And of course, it will require a lot of investment in talent, not just importing global talent through more immigration, but also really building the talent pool among our native born population here in the U.S.. That report is from the Aspen Economic Strategy Group. And I really highly recommend it.
It's fascinating reading. It's really terribly important. Thank you so much for sharing it with us today. As Melissa. CORNISH is professor of economics at the University of Maryland. And we're going to continue this discussion about changes, fundamental changes will affect the plight of CEOs, particularly. We've talked to Sam Thompson, the former chairman and CEO of IBM, about how the paradigm has shifted for the average American CEO. That's coming up next on Wall Street on
Bloomberg. Chief executive officer has a nice ring to it. But it's harder than it looks. You have to respond to forces far
outside your control, like, say, the weather. At least if you run an airline like Southwest, we're doing everything we can to return to a normal operation. And please also hear that I'm truly sorry. And pretty much every CEO is subject to the whims of the economy overall, particularly if you're serving consumers like pure gym where concerned about consumer spending. And hence we've launched memberships which are lower priced off peak saver memberships and unconcerned about inflation in cost as well for us, of course. On top of the usual, in recent years, CEOs have had to deal with the vagaries of a President Trump declaring a trade war with China. We don't negotiate trade deals.
Trade deals get negotiated and we operate our business accordingly. And a once in a century pandemic that brought business to a halt. I was blown away. This pandemic and everything. Yeah, I'm in my office, but nobody else is. Even when things started to come back, a lot of your employees didn't, at least not in person. There's challenges around onboarding employees and entirely remote way. There's challenges around feedback and
recognition, promotions. How you organize team is how you keep them motivated. But now CEOs are facing something they haven't seen for many years. Slowing growth, higher costs, continued inflation and interest rates that are taking away those days of free money. When I talk to business leaders, certainly at the moment, they say that while the headwinds that they're facing now is almost more challenging than it was in the height of the pandemic. So if you're a CEO, you have to come up with a whole new playbook. And if you're an investor, you need to
make sure the company you're putting in your portfolio can adjust to a very different business environment. And now we turn to a seasoned CEO who has been in the C suite, has done the job through good times and bad. He is Sam Palmisano, former head of IBM. So Sam, great to have you back here with Wall Street. Thank you, David. Good to be with you this morning. OK. So the CEO always has a challenge or two in front of him or her.
Yes. About right now. And things may be turning a little different. We're seeing real inflation for the first time in a very long time. We're seeing increased interest rates. Give us your perspective on what the CEO today is due in 2023 that maybe didn't have to do in the past.
Well, you're right, David. The conditions have changed dramatically. And I think there's some offside, some misleading indicators out there because some people actually believe perhaps it's going to be a soft landing. No, I'm not smart enough to know when there will be a soft landing or a recession.
But I think the circumstances that the CEOs dealing with are the same regardless of market conditions. Why do I say that? You mentioned the points, macroeconomic slowdown, no doubt about that when there's a recession. That's how you measure things, which is slowing environment pressure on consumers, consumer spending because of the economic environment, obviously. Right. Labor costs, energy costs, material costs, all going up because of inflation. So these are the operational issues that you deal with throw on top of that supply chain, issues associated with decoupling and whatever China does or does not do.
Going out into the future. So fundamentally, it's a very complicated equation. And my perspective, if I was still doing the job with you in 0 8, you'd have an alternative plan. You would you could say, OK, these are the positive assumptions that would be perhaps the soft landing case. Well, let's have another case that says
that these factors go on longer than people are forecasting, that inflation continues, slow growth environments continue, let's say, for 18 to 24 months, that it's a different scenario that you have to plan for. So say as you suggest, we don't know what's going to happen. So you have to have more than one plan. Exactly. But take the perhaps downside or more modest case, which is lower growth.
We have had really robust growth. Yes. Similarly, in part by fiscal and monetary policy, frankly, lower growth, higher cost of capital, higher interest rates. How is your plan different? What is the different way you look at your job as a CEO? We have to do two things, which is at the same time, which sometimes it's hard to do because none of the current people have had to do it. Some old guys like us have had to do it right. But what you have to go do, it's necessary to maintain strict strategic growth and drive productivity at the same time. Yes, very MP, declared MP Dexterous.
Why is that complicated? Because if you were running a strategy was growth, growth, growth. And you were rewarded for that in the past decade. Quite honestly, because of low interest rates or free money, etc. and markets rewarded you, you have a culture in the management system in your company that says it's all about top line growth. That's changed. And so now you have to drive cash flow, margin expansion.
All the old things we used to have to do that now comes into play because you have to do both. You have to get whatever revenue you can get in this environment and you can't be. Don't be deluded by the growth because of inflation. I mean real organic revenue growth and then adjust your cost structures to maintain profitability and cash flows in that period as in everything there to be some people better at this and some people worse. At this Wall Street week, we're trying to speak to the C suite, but also to the investors in the companies. And if you're an investor and you're looking around, how do you determine which CEOs are more likely to be able to deal with this new world that you describe? Well, I think if I'm an investor, I mean, I look at it quite honestly as they have their calls, their earnings calls are coming out and you'll hear them talk about what they're doing as far as driving their strategies on revenue as well as productivity. And if they're balancing those two in
those discussions, then you you kind of make a bet on whether you believe they can execute that or not. Right. That's a track record. But I mean, I'm an investor today. Whether I am a CEO, it should either in start, observe or market. I'm a mean market conditions and those sorts of things. But I'm looking at the experience of the management team as to where we reallocate our portfolios on their ability to do these things.
Some, I think, have the ability and the experience to do that and others are have to learn. So I would I would factor that into my decisions and I'd therefore advice I give to an investor. You have to size up the management team. In the past, it was always about the business model of their segment, the growth, the great revenue at the foregoing issues around cash on balance sheet. Those kinds of things got to do a big deal.
When I say those things, that's I think that is over. You're not going to be rewarded for go to a big deal that the valuations are off the chart on. It's hard to say whether you ever get those returns that were in your models versus the world we find ourselves in today. That's reallocating portfolios.
What about allocating capital as a CEO? Because one of the challenges and certainly I've seen is it's easy to cut costs across the board. And that's almost always wrong. Wrong? Yes, always of thought. So how do you make those decisions about what are the long term strategic investments you have to keep making as opposed to where we can afford to cut back? Well, let's start with the. Top line, for example. I mean, you're you're going to have strategic investments that you've allocated capital to the top line. If those cases are still valid and given
the circumstances have changed, you have to continue those investments because you're investing for multi-year periods of time. So just you can't really you can maybe adjust them, but you can't really you should not I should say, stop them. I mean, every doubt, every downturn at IBM, we took up our day because we had the balance sheet to do so. And we believed that we could stay ahead of the competition if we accelerated the RFD of the other side of this thing, though, is just capital allocation around productivity. There's so many technology tools out there that you can allocate to to get more productivity in the workforce that you should invest in. Having said that, we've all learned and
oversee as my colleagues and say the same thing. There are lots of things that are going on in the company itself that you can put it that are very low capital allocation priority. I mean, you can kill him sometimes. You should just kill him, quite honestly, because they really aren't making a big difference. But if if for some reason and to keep them going, but really give them marginal kind of investment just to kind of stay the course, let's say.
But I would start with strategic revenue I 0 8. We are now Smarter Planet had a billion dollars in this thing called Smarter Planet. And I think an IBM story, that's the top line thing. And then productivity at the same time, we drove three or four billion in productivity by using digital technology to globalize the back office of IBM. You mentioned technology a couple of
times there. Let's have finish here. Specifically the challenges for a tech CEO right now. The bloom sort of came off the rose on big tech and investments actually in 2022. What are the challenges faced by text you? And particularly how big a factor does China play in that? Because it's not clear to me at least what President G's policy toward tech is right now. You hit the nail on the head. So what is his policy?
I mean, it's let's step back and say China is the largest or second largest technology market in the world. I mean, you can measure different ways. You say us is number one, but they're very, very close. When I was working, U.S. was a little bit. They're very, very close. It's a massive market. And you have no one can forecast. I don't believe with confidence you
can't predict Xi Jinping strategy when it comes to tech. He's just he seems to be moderating versus he was very aggressive for the past couple of years. But if you're a CEO in tech and you're looking at this opportunity for the technology as well, then of those growth in the marketplace itself, there's no consistency in the policy. It's it's it's hard. I mean, it's hard to discern what you should do. My advice would be is, quite honestly,
if you can don't get in the middle of these arguments if you can. You know, I mean, and by that, I mean government officials will try to drag you into the debate to help their side of the case. One side or the other isn't the point. You never will. I say you never want to be in the middle of two girls that are fighting. You just can't win. You can't win in that fight.
So if you can stay out of it, try to stay out of the fight. I would have a contingency plan. I mean, guys, I'm working with today as to how they start with supply chains. How do you deal risk your supply chain
because you really don't know what's going to happen. Semiconductors are a big issue in the tech industry. You need a device that you hear them talking about moving their supply chains out of mainland China. And I think that's prudent to do that. Sam, it's always great to have you. Well, certainly.
Thank you so much for being that, Sam Palmisano. He is a former chairman and CEO of IBM. Coming up, we'll wrap up the week with our special contributor, Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is Wall Street. I'm David Westin. We're joined once again by our very special contributor, Larry Summers of Harvard. So, Larry, great to have you back with
us. And there is a lot of good news this week, I might say, reopening of China. We've got a warmer winter than expected in Europe, maybe not a recession over there. And United States inflation numbers are coming down.
Are you rethinking so what you said in the past about the likelihood of recession? I think it is good news. And the evidence that there's been some wage restraint is part of the good part of it. Part of the good news. But at the same time, I think one has to be careful of false dawns. And if you think about it, the good news was inflation running in the sixes, and that's still inconceivably high by the standards of two or three years ago. So I would stick with my view that a recession this year is more likely than not. But certainly looking at some of these
trends, one has to think that the Fed's job is much, much closer to being done, feels much, much closer to being done in terms of disinflation than it did a few months ago. And I think the more optimistic possibilities, while they still would not be my bet, look more plausible today than they did several months ago. And that's got to be encouraged. And we'll have to be watching the data very, very closely. The most important day of this month, by far from a macroeconomic point of view, will be the last day of the month when the employment cost index comes out. That's the gold standard measure of labor costs and wage pressure. And that's a number they'll be studying very, very closely at the Fed.
And I suspect on Wall Street and I'll certainly be up early that morning to get that number right after that. Actually, early in February, we're going to have the meeting of the Federal Reserve, given where we are right now. And it's always data dependent, should they at least be talking about a pause, if not in February, coming after that? I think we're still not quite at that point. I don't think a pause in February would be well advised. And I don't think we have to make a definite decision beyond beyond February of 4 are right now. Again, I think the most important thing is to make sure that the job of containing inflation gets done and that they preserve their credibility. So I think it's a little bit premature
at this point to be thinking about pausing, but we're getting much closer to that day, Larry. Another big story this week had to deal with air traffic in the United States as we head to ground all the airplanes because of the apparent problem with the FAA system. This is something you've referred to in the past. Actually, some doubts about the system. Does this raise larger questions about the systems we have in the government, at the FAA and perhaps other places as well, like the IRS and the need for investment? Look, I think that refers to two things, David. I think it refers to the quantity of resources that we invest.
And it refers to the competence with which we invest. Something is wrong when tens of millions of returns sit opened at the IRS. Something is wrong. When the IRS opens the file, answers the phone less than a fifth of the time. Something is wrong when these kinds of fiascos happen with our air traffic control system. Some of this is we just don't invest the resources that we need.
Look, I'm not enough of an expert to exactly be able to compare the information technology challenges that an institution like the IRS receiving billions of forms I each year has with the information technology faced by a large bank like JP Morgan. But it feels very wrong to me that the IRS is I.T. budget is only three and a half percent of that of JP Morgan. But at the same time, and equally, this is about the competence of the investment process. Some of it goes to punitive regulation, which causes excessive delays and makes even the simplest projects drag on forever. So, Larry, it's a matter of money and confidence on the money front.
Where are we going to find that money? Because right now there's a lot of concern with the deficit. You have some members of Congress on the Republican side saying we should walk up to a maybe over the precipice of a default. A default. Would be a catastrophe. It would mean higher borrowing costs
forever. It would cost the country billions of dollars. No, I. Important benefit of all the economic debates in Washington. The debt limit debates are the dumbest ones since there's no question where they're going to end. If I've got a problem with how one of my kids have spent money, that's something my family and I have to work out. But we don't think that defaulting to
visa is an option for working through the situation. But look, I think the issues of debt accumulation are going to come back onto the national horizon. My view is in light of everything that's happening, we are going to have to very substantially increase our national security expenditures in the years ahead. Both hard power issues like direct military spending, ammunition and the like, and soft power and national security issues like climate change. China was back in the news this week once again.
And the new Congress, one of the first things they did was almost unanimously agree that should be a select committee to investigate so-called threats from China. At the same time, President Biden met with the prime minister of Japan to put some more pressure on him about semiconductor technology and China. We're about to have global Wall Street meet over in Davos, Switzerland. What is the situation that to globalization, particular respect to China? But more broadly. That won't be very much in the air on
shot in Davos. And when we're both there, David, I'll look forward to discussing it with you on on on Bloomberg. I do think that we need an approach other than an approach that's about suppressing the Chinese economy and tearing China down. We need to focus on building ourselves up as our central route to prosperity and our central route to security. Of course, there's certain technologies that we shouldn't be sharing. But as National Security Adviser Jake Sullivan has said, our approach should be small garden, high walls in defining what that set of technologies are. But the most important thing is doing
everything we can to make sure that we are always pushing the envelope and moving forward. I think we also need to emphasize in the Biden administration has done that, Larry, and we word this week that Microsoft is at least contemplating substantially increasing its investment in Open A I, which is, of course, where we got chat GP from something you brought to Wall Street week a while ago. Now, I know you've been following this closely.
Where are we with things like chat, G.P.S. and other forms of A.I.? You know what? What one hears from the experts is that there are proprietary systems inside some of the major companies that are even a generation past Jack GP, too. So I think this is coming at us very hard and is going to touch almost every aspect of life. Certainly for those of us in education,
the ability of machines to write essays is raising all kinds of questions about what constitutes a student's own work. On the other hand, those are tools that are going to enable us to figure things out and make progress on problems much faster than we did before. So this is an area where all the various stakeholders need to be thinking very, very, very, very hard.
There's enormous potential in this. But as with other innovations like the Internet, like the steam engine, there are potential implications, both good and bad. And I think it needs very much to rise in terms of how prominent it is in our national discussions. Larry, thank you so much for being back with us. That is our very special contributor here at Wall Street Weekly's Larry Summers of Harvard. Coming up, a prominent former world leaders proving once again that living well is the best revenge.
This is Wall Street week on Bloomberg. Finally, one more thought, if at first you don't succeed. Well, just go make some real money. History is full of tales of those who
tried nobly and failed Icarus with his wax wings, the Christians with just about every one of their crusades and even the ultimate man in the arena himself, Teddy Roosevelt, even he failed in his final run for president. But history also has quite a few examples of those who had to regroup, but came back stronger than ever. Of course, there's the famous tale of Steve Jobs, driven from the apple that he had created, wandering around in the wilderness, only to be brought back and take it to heights. No one could have imagined. I don't think one ever bets against Apple. I don't think you bet against, you know,
the talent of that that company. And our very own Sam Palmisano, a contributor to Wall Street Week. He started as an offensive center at Johns Hopkins. But when faced with the option to play
pro ball for the Oakland Raiders, he walked away to pursue sales. And, of course, he ended up chairman and CEO of IBM. But maybe there's no place like politics for second acts.
As Richard Nixon showed the world after losing to John F. Kennedy and ending up as president, after all, having lost a close one eight years ago and having won a close one this year, I can say this winning is a lot more fun. Even some of those who may not come back to public life are doing quite nice financially.
This week we learned about the fortunes of former British Prime Minister Theresa May. She lost her job and seemed pretty discouraged at the time. I will shortly leave the job that it has been the honor of my life to hold. I do so with no ill will, but with
enormous and enduring gratitude to have had the opportunity to serve the country. I know that Ms. Man can take heart. Since then, she has made a cool 3 million dollars from outside appearances, more than any other member of parliament. And then, of course, there's the man who bills himself as the greatest businessman of them all. Former President Donald Trump, who lost his bid for re-election two years ago but has come back with a whole new way to make money. I'm doing my first official, Donald J. Trump and FTSE collection right here.
And right now they're called Trump Digital Trading Cards. Each card comes with an automatic chance to win amazing prizes like dinner with me. I don't know. That's an amazing prize, but it's what we have. And for those who might have scoffed, the former president cleared nearly 4.5 million dollars in a matter of just a few hours as his forty five thousand cars went for ninety nine dollars each and rapidly climbed into the thousands in the aftermarket, with Mr. Trump getting a commission on every
trade made. So if you ever worry about stumbles along your way, rest assured that there may be a bigger pot of gold still at the end of your rainbow. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.