Larry Summer is still criticizing the American Recovery Plan. Summers:
In his latest attack on the recent rush of stimulus, Summers told David Westin on Bloomberg Television’s “Wall Street Week” that “what was kindling, is now igniting” given the recovery from Covid will stoke demand pressure at the same time as fiscal policy has been aggressively eased and the Federal Reserve has “stuck to its guns” in committing to loose monetary policy.
“These are the least responsible fiscal macroeconomic policy we’ve have had for the last 40 years,” Summers said. “It’s fundamentally driven by intransigence on the Democratic left and intransigence and the completely irresponsible behavior in the whole of the Republican Party.”
Summers, a top official in the past two Democratic administrations, has emerged as one of the leading critics among Democrat-leaning economists of President Joe Biden’s $1.9 trillion pandemic plan. Summers warned in the interview the U.S. was facing a “pretty dramatic fiscal-monetary collision.”
He said there is a one-in-three chance that inflation will accelerate in the coming years and the U.S. could face stagflation. He also saw the same chance of no inflation because the Fed would hit the brakes hard and push the economy toward recession. The final possibility is that the Fed and Treasury will get rapid growth without inflation.
I don’t have any expertise on the macroeconomic issues, but I do disagree with his exclusive focus on macroeconomic policy, and with his view of the politics, especially his criticism of the Democratic left.
Let’s assume that the ARP steps too hard on the gas pedal and creates some risk of inflation/stagnation/recession. That could happen, and in a perfect world Congress might have passed a smaller bill today focused on preventing immediate suffering, and then passed additional stimulus if needed in 6 or 12 months. I think Democrats had two good reasons not to do this.
First, they have no assurance that they will be able to get additional support through Congress in 6 or 12 months if the economy falters. Given half a chance, Republicans will predictably allow the economy to flounder to damage Biden’s presidency. Democrats could easily lose control of the 50/50 Senate, and it is even possible they could lose control of the House. Passing a big bill now is insurance against this possibility. Even if Democrats maintain control, they might have difficulty whipping enough votes to get another bill through. So much can change in 6 months. What if deficit fever grips centrists again?
Democrats could have passed a more complicated bill with triggers or stronger automatic stabilizers. Maybe this would have been good policy. But it is difficult to get all 50 Senate Dems to agree to anything, and time was short. And contra Summers, it is not at all clear to me that the Democratic left was the roadblock to stronger automatic stabilizers. Many progressives favor automatic stabilizers. I don’t have any inside information here, but it is possible that resistance came from moderates worried about how CBO would score a bill that included stabilizers.
Second, Democrats used the pandemic relief bill to advance social policy goals unrelated to macroeconomic stabilization, notably increased subsidies for health insurance, and the creation of a child allowance. Getting these spending priorities enacted outside the context of pandemic relief – and reconciliation – would have been a long shot at best. Clearly, Democrats hope that once these programs are in place they will be difficult to kill.
Both these programs are incredibly important, especially, in my view, the child allowance. The way we neglect poor children in this country is a tragedy, and the long-term benefits from improving the lives of poor children are potentially substantial as well.
So, even if Summers is right on the macroeconomics, he is ignoring the political context, and his cost benefit analysis is way too narrow. If Summers wants to argue that the risk of a bad macro outcome is so serious that it outweighs the economic and political risks of macro undershooting and the potential long-run benefits from establishing a child allowance and expanding access to health insurance, that’s fine. But just ignoring these benefits and unfairly criticizing the progressive wing of the Democratic party is wrong.
For a contrary view of the macroeconomics, see Krugman here.
My previous post on child allowances here.
My previous post on the need to take politics seriously in discussions of economic policy here.