Larry Summers has Concerns
Early this morning the Senate passed a budget resolution telling committees to spend an additional $ 1.9 T on Covid relief. Yesterday, Larry Summers wrote an op-ed expressing concerns about the imminent resolution. Like many many many people, I disagree in part. Oddly, I think I disagree less strongly with Summers than most US adults do.
Summers makes two arguments. The first is that the stimulus is too large
The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.
Which implies a risk of overheating and undesirably high inflation
there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply.
The second is that he argues that increased public spending is needed and the stimulus package will make it impossible
Second, long before covid-19, the U.S. economy faced fundamental problems of economic injustice, slow growth and inadequate public investment in everything from infrastructure to preschool education to renewable energy. These are at the heart of Biden’s emphasis on building back better.
If the stimulus proposal is enacted, Congress will have committed 15 percent of GDP with essentially no increase in public investment to address these challenges. After resolving the coronavirus crisis, how will political and economic space be found for the public investments that should be the nation’s highest priority?
I will discuss these in order, but first, I want to note that Summers does not make the common deficit hawk argument that the increased debt will be a burden on future generations. He doesn’t argue against this concern, he just ignores it. I agree that he is right to ignore the argument and not even mention it.
On the first concern (overheating) I note the main counterargument — the Fed can raise interest rates if the economy overheats. In contrast, it can’t cut short term safe interest rates which are at the zero lower bound. Summers mentions “commitments the Fed has made”. I am not sure what he has in mind, but I am sure that the Fed will not respect any such commitments if inflation rises well above the 2% target. The rest of the quoted passage rests on the assumption that monetary policy alone can’t bring output down to the non accelerating inflation level — hence the “and fiscal policy” after “monetary”. There is no reason to believe this — it is hard for those of us old enough to remember 1981-2 to even imagine someone believing this. I am sure Summers has another concern (remembering the 1980s) that loose fiscal and tight monetary policy will crowd out private investment (in practice mostly private investment in large new houses). I think this is the old capital formation obsessed Summers taking over from the new secular stagnation fearing Summers. But in any case, the argument makes no sense. It is known how to manage an risk of overhearting. There is a reason it hasn’t been a problem in the past 40 years.
The asymmetry in the effect of monetary policy due to the zero lower bound implies that fiscal policy should err on the side of stimulus. The fact that Krugman has written this again and again and again in the past 12 years doesn’t prevent it from being true.
Before going on, I have one of my usual pet peeves. When he discusses practical issues, like almost all macroeconomists, Summers assesses fiscal stimulus using the full employment deficit. This is based on the assumption that temporary tax cuts and cash transfers have the same effect on aggregate demand as government consumption plus investment. At the same time, macroeconomists who have some interest in DSGE models all of which have Ricardian equivalence (a set which includes neither Summers nor me) assume that temporary tax cuts and cash transfers have no effect on aggregate demand. This is impressive cognitive dissonance.
There are two arguments against the additional $1400 checks. One (Summers’s) is that there will be too much demand stimulus. The other is that the cash will just be saved, so it is inefficient demand stimulus. The arguments cancel. One does not have to believe that one off cash transfers will have no effect on demand to guess that the effect will be much smaller than, say, infrastructure spending. I find it odd that there is no standard guess based back of the envelope calculation somewhere in between assuming zero effect (as is very common) and assuming that cash transfers have the same effect as public spending.
I will discuss Summers’ second concern after the jump
OK so the second concern is about “political and economic space” for public investment. Again a lot of work is done by the “and”. There are two separate issues. The issue of economic space is a question about debt sustainability and the US Federal Government intertemporal budget constraint. The available economic space depends partly on the debt to GDP ratio but almost entirely on the difference between interest rates and GDP growth rates (oh one explanation: equally nominal interest minus nominal GDP growth or real interest minus real GDP growth — same difference). With 30 year real rates below zero, there is no reason to think the US Federal Government might be facing a binding intertemporal budget constraint.
Political space is outside of my field of specialty. I do not think that Democrats would gain political space by breaking a promise to voters. I don’t understand deficit panic and why it comes and goes. I notice however, that it doesn’t seem to have much of anything to do with the debt to GDP ratio.
I also am genuinely puzzled by “economic injustice, slow growth and inadequate public investment in everything from infrastructure to preschool education to renewable energy.” and “essentially no increase in public investment to address these challenges” .
First Summers seems to be thinking mostly of the $1400 checks and not the entire budget resolution. The resolution includes extended expanded unemployment insurance which will have a huge effect on inequality. It also includes an increase in fully refundable child credits. It is estimated that if approved they will cut the child poverty rate in half. These seem to be rather important efforts to address economic injustice. The resulution also includes funding for education and general aid to state and local governments. That is how US public education is mostly financed.
Second, he simply asserts that all of those challenges require public investment. Here again I see his old love of investment. For 35 years Summers has, off and on, argued that aggregate demand affects long run growth. Yesterday, is one of the off days in which he argues that long run growth depends on technology and invesment.
I think I can rephrase Summers’ second concern so that I agree with it. The $1400 checks will add to the public debt and we have no way of knowing whether a high debt to GDP ratio causes debt panic. Such panic would prevent public spending much more useful than mailing checks to the non-poor. The justification for $1400 for the employed is that they stimulate demand. This is not likely to be a problem and useful public investment also stimulates demand.
I might even be convinced that the checks are suboptimal policy. But, of course, they have invincible public support. There are also at least 51 Senators who will insist on phasing them out at lower incomes. I actually agree with those Senators, but, in any case, they will have their way.
I am going to conclude (in case anyone read this far) by noting that Summers’s op-ed is more balanced than one would guess given the critiques on the web (on Twitter mostly) and that his second concern makes a good deal of sense. Reading the op-ed, I was a bit surprised by the timing and had my points of disagreement (see above) but I am pretty sure that I am in the quarter of the US public which disagrees less with Summers.
https://prospect.org/blogs/tap/larry-summers-churlish-payback-to-biden/“>Larry Summers’s Churlish Payback to Biden
Robert Kuttner – February 5
Larry Summers was quietly dumped from Joe Biden’s economic team last year. I had written an investigative article on how Summers had managed to fall upwards despite successive pieces of disastrous policy advice—and why he should be kept as far from a Biden administration as possible. Mercifully, Team Biden agreed.
Now Summers, in a Washington Post column, has neatly proven my point. He’s also proven once again that he’s a vindictive SOB.
In the column, as Biden is fighting hard to deliver on his $1.9 billion relief package, Summers choses this moment to argue that the package is too big. Thank God Summers is only purveying his advice in the pages of The Washington Post, and not from inside the administration where someone might take him seriously.
But Summers has also proven once again what a lousy economist he is. After a characteristically disingenuous opening paragraph, congratulating Biden for his boldness (“Its ambition, its rejection of austerity orthodoxy and its commitment to reducing economic inequality are all admirable”), Summers then sticks in the knife.
This admirable, bold package is too large by a factor of three. Why? Summers quotes misleadingly from a Congressional Budget Office analysis. Please read this carefully:
[The] Congressional Budget Office estimates suggest that with the already enacted $900 billion package—but without any new stimulus—the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month … at least three times the size of the output shortfall.
Got it? The Biden proposal is three times the projected loss of economic output, so it’s three times too big.
But most of the Democrats’ proposal is not about a macroeconomic gap. It’s directed toward vaccine supply and distribution, and relief for struggling schools and flattened state and local budgets and public services. Only about $420 billion goes for direct payments to individuals, and some of that will replenish savings or pay down debt (as opponents of the Biden plan have argued in other contexts).
Summers is a macroeconomist, but there’s more to an effective economy and society than macro. Help with schools and vaccines may have partial spillover into macro stimulus, but it is also needed for its own sake.
Lyndon Johnson famously said, when the question arose of whether to reappoint J. Edgar Hoover as FBI director, “Better to have him inside the tent, pissing out.”
In Summers’s case, it’s better to have him outside the tent, pissing in the wind.
(One recalls that Summers had a lot to do with why the Obama
recovery package for the Great Recession of 2009 was
way to small. Just ask Janet Yellin.)
Larry Summers is on record has preferring
recovery plans that prove to be too small.
History repeats?
When George McGovern proposed giving each man, woman and child in the US $1000 as part of his stimulus plan, he was laughed at. His proposal was considered nonsense. Now, in the face of the COVID depression it is part of political discourse again.
Summers is arguing that the money would be better spent on some [handwave] infrastructure, but it is hard to think of infrastructure that would really do as much as giving the money to individuals, even without means testing. It helps to consider the two proposals from an accounting point of view.
Sending checks to those at the bottom would mean less need to cut back on things like rent and food. For those slightly better off, it might be invested, spent on things like car repairs, a modestly priced computer or deferred health care. For those who are debt constrained, it would pay down debt which would free up spending capacity for other goods. For those in good shape, it will probably be spent as the travel and leisure industries gear up again. Sure, some people will just save the money and never spend it, but most of it is going into the economy now or in the recovery. Remember, most Americans are dead broke, so winning even a small lottery ticket has a big multiplier.
Infrastructure spending is much less likely to help the economy as much. There may be lots of shovel ready projects, but we’ve seen how poorly local governments handle these things. Look at the vaccine roll out. It will be months before the money gets allocated, then there will be the fraud filled scramble by incumbents to grab a piece. It will be at least six months, maybe a year before any of it turns into paychecks for people hurting from COVID and likely to spend it. A huge chunk of the money will be turned into shareholder value. For the important infrastructure projects, the ones with the high long term payoffs, the money won’t turn into low end paychecks until 2023 or 2024.
Larry Summers works for the wealthy, so his goal is to funnel as much of the money into enterprises of the like that pay his consulting fees. We’d do much better just giving people money and letting the wealthy extract their outsized share by managing and owning the organizations that meet their needs rather than a top down approach.
Kaleburg:
Lets change this: “Infrastructure spending is much less likely to help the economy as much.” to this “Infrastructure spending is much less likely to help the economy as much sooner and it is a longer term solution.”
I really don’t give a shit. Some [a lot of] people are hurting. Money will help. Some [us, personally] are not. Hopefully, we won’t get any money.
Vaccinations are/should be Job #1.
https://prospect.org/economy/falling-upward-larry-summers/
Robert Kuttner: ‘I had written an investigative article on how Summers had managed to fall upwards despite successive pieces of disastrous policy advice—and why he should be kept as far from a Biden administration as possible. Mercifully, Team Biden agreed.’
@Fred,
Outstanding on the Kuttner article. THX<
@Dave Barnes,
Ditto, Dude.
The second argument, the political argument is utter nonsense. Deficit panic is the Republican strategy to deal with a Democratic Administration. Period. It is unrelated to the passage of any particular bill or even the actual level of the federal deficit. It is just the way they roll and the sooner you realize the sooner the politics begins to make sense.
🙂
Computer burp. But really, you can’t say it too many times!
I have never been a fan of Summers, but ignoring the political reality of the ARRA is a waste of time. The size and shape of the recovery was in almost total control of Snowe, Collins and Spector.
Economists had nothing to do with it.
February 5, 2021
Excessive Stimulus and Other Things Larry Summers Worries AboutBy Dean BakerIt seems that Larry Summers is worried * that the stimulus proposed by President Biden is too large. I will say at the onset that he could be right. However, at the most fundamental level, we have to ask what the relative risks are of too much relative to too little.If we actually are pushing the economy too hard, the argument would be that we would see serious inflationary pressures, which could result in the sort of wage-price spiral we saw in the seventies. As someone who lived through the seventies, it actually wasn’t that horrible.Okay, the fashions and hairstyles might have been horrible, and I was never a fan of disco, but the period as whole wasn’t that bad. We didn’t have mass starvation and homelessness, but yes, the inflation of the decade was definitely a problem and we would not want to see something similar in this decade.But will the Biden stimulus really cause us to see a 1970s type wage price spiral? That seems hard to imagine. We have not seen serious problems with inflation for many decades. Here’s the picture going back to the late 1990s using the personal consumption expenditure deflator, the Federal Reserve’s preferred index.[Graph]As can be seen, the only period where it is above the Fed’s 2.0 percent target (remember, this target is an average) is 2006 and 2007, and even then it is only modestly above 2.0 percent, with no clear upward trend. There is zero evidence of anything like an inflationary spiral in these data. Again, that doesn’t mean it is impossible, just that we haven’t seen anything like it for a long time.It is also worth noting that the Congressional Budget Office has consistently under-estimated the economy’s potential level of output. Back in the early days of the recovery from the Great Recession it had put the non-accelerating inflation rate of unemployment (NAIRU) — effectively the floor on sustainable unemployment — at more than 5.0 percent. We had the unemployment rate down to 3.5 percent in 2019, before the pandemic hit, and there was zero evidence of accelerating inflation. In fact, wage growth actually slowed slightly in the months immediately before the pandemic hit.Next, it is worth asking a few questions about Summers’ calculations….
* https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/
Again, the spacing just disappears making reading too difficult. This is unfortunately the fault of the new program design, and though I am meticulously careful nothing I post is properly readable.
“The arguments cancel” – No they don’t. Saved stimulus will chase demand-limited investmnt, causing asset inflation. Spent stimulus will cause actual productive investment.
Anne:
Below the asterisks is a copy and paste (as a normal poster) from the CEPR article, you are referencing. I am not sure what you are doing.
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that Larry Summers is worried that the stimulus proposed by President Biden is too large. I will say at the onset that he could be right. However, at the most fundamental level, we have to ask what the relative risks are of too much relative to too little.
If we actually are pushing the economy too hard, the argument would be that we would see serious inflationary pressures, which could result in the sort of wage-price spiral we saw in the seventies. As someone who lived through the seventies, it actually wasn’t that horrible.
Okay, the fashions and hair styles might have been horrible, and I was never a fan of disco, but the period as whole wasn’t that bad. We didn’t have mass starvation and homelessness, but yes, the inflation of the decade was definitely a problem and we would not want to see something similar in this decade.
But will the Biden stimulus really cause us to see a 1970s type wage price spiral? That seems hard to imagine. We have not seen serious problems with inflation for many decades. Here’s the picture going back to the late 1990s using the personal consumption expenditure deflator, the Fed’s preferred index.