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Summers Inflation Warning: Right for the Wrong Reason?

From “Is Larry Summers Really Right About Inflation and Biden? The Harvard economist is getting plaudits for the warnings he issued early last year, but some Administration officials and economists are questioning the basis of his arguments” by John Cassidy at The New Yorker:

The first imperative, in assessing Summers’s contribution, is to clarify what he predicted. Appearing on Bloomberg’s “Wall Street Week” show on March 19, 2021, he said, “I think there is about a one-third chance that inflation will significantly accelerate over the next several years, and we’ll be in a stagflationary situation like the one that materialized between 1966 and 1969.” Summers said that there was also a one-third chance “that we won’t see inflation, but the reason we won’t see it is that the Fed hits the brakes hard, markets get very unstable, the economy skids downwards close to recession.” Finally, he added, there was “a one-third chance that the Fed and the Treasury will get what they are hoping for, and we’ll get rapid growth, which will moderate in a non-inflationary way.” Discussing Summers’s predictions, Tim Duy, a longtime Federal Reserve watcher who is now chief U.S. economist at SGH Macro Advisors, recently commented, “He certainly had those inflationary concerns very early. The counter is that he also put out plenty of other scenarios—enough that he almost couldn’t be wrong.”

….At this stage, most economists agree with Summers that, during 2021, strong demand, boosted by the American Rescue Plan, played at least some role in the inflation surge. “You’ve seen a broadening of inflation pressures in the economy, and an acceleration of wage growth,” Tim Duy, the SGH economist, said. “That’s all consistent with demand-driven inflation.” Even Sahm conceded to me that some of the extra federal spending eventually showed up in higher prices, but she added that the main cause of higher inflation was “fundamental disruptions under the hood” of the economy caused by the pandemic.

Ultimately, what matters now is whether we really are on the verge of returning to the nineteen-seventies. “I said a year ago, Vietnam is the right analogy. Inflation goes from one per cent to six per cent in four years of super-expansionary fiscal policy,” Summers told me. “Brad DeLong and the President’s Council of Economic Advisers said [to] look at World War Two and the Korean War. Those parallels, where price controls were central, so far have not proved out.”

In his most recent column in the Washington Post, Summers reiterated his call for sharply higher interest rates. He told me: “Prompter action from the Fed in the nineteen-seventies would have obviated the need for the Volcker recession, so prompt action against the threat of inflation is essential now.” With the Labor Department set to release the Consumer Price Index for March next week, the inflation-policy debate will only intensify. In the end, though, a lot of the animus toward Summers in Democratic policy circles is political. Many Democrats think that he has been giving ammunition to the Republicans, who cite him regularly, and understating the broader benefits that Biden’s policies have delivered, which include record job growth in the first year of his Presidency.

Summers said, “The benefits from the American Rescue Plan depend on a strong economy, which is threatened as overheating leads to declining real wages and, quite possibly, recession.” He added, “The Rescue Plan has crowded out political space for desirable long-term investments in the Build Back Better plan. And Carter’s demise suggests that inflation is a grave threat to progressive politics.”

Cassidy concludes, “Actually, it was Republican opposition and Senator Joe Manchin that sank the Build Back Better plan, and it’s far from certain that Manchin would have supported the initiative if the American Rescue Plan had been smaller. It’s certainly true, however, that Biden and the Democrats have been damaged politically by the inflation surge. How it plays out from here, and who is blamed, will go far to determine ultimate attitudes toward Biden’s economic record, and to the Summers critique.”

One comment on “Summers Inflation Warning: Right for the Wrong Reason?

  1. Victor on

    Biden could have predicted supply chain problems because they had already emerged during Trump’s administration.

    This discussion about monetary policy’s effects on the working class obscures that the choices discussed are whether to punish us now or later. There is no talk about solving supply chain problems.

    Supply chain problems could be a win-win if discussed using nationalist arguments (specially in a war context), the problem is Democrats totally refuse this framework.

    Instead of fixing supply problems, the left (including what are supposed to be pragmatists like the Senate Majority Leader) is focused on opening borders to bring more workers in.

    Where are the Democratic proposals to increase the labor participation rate? The only one is child care and it is not defended as a solution to this problem either (with a few exceptions like Warren).


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