Editor’s note: Economist and former treasury secretary Larry Summers made headlines this week when the Democrat warned that the Biden Administration is misreading inflation. WRAL TechWire reached out to N.C. State economist Dr. Mike Walden for his reaction on the rapidly unfolding debate about inflation as it sparks to levels not seen in decades.
RALEIGH – Larry Summers is a smart person. He is one of the youngest persons ever tenured at Harvard, and he is related to not one – but two – Nobel Laureates in Economics. He has been the U.S. Secretary of the Treasury under President Clinton and the Chair of the National Economic Council under President Obama. He has also been considered for Chair of the Federal Reserve System (the “Fed”), which many say is the second-most powerful position in Washington. And those who disagree often do so because they think the Fed Chair is the most powerful position. Also, Larry Summers is a Democrat.
I mention the last fact only because Summers has been critical of the Biden’s Administration’s approach to inflation. In short, he thinks the Administration has been too casual about inflation, arguing it is short-lived and will disappear when the supply-chain problems are resolved.
While kinks in the supply-chain are certainly having an impact on prices, Summers argues the massive stimulus bills passed by Congress in 2020 and early 2021 also have been pushing prices higher. This is because they provided households, businesses, and public institutions with trillions of dollars to spend. Indeed, rather than dropping as they usually do during recessions, both household income and retail sales rose during 2020. Rising spending coupled with shortages in supply was the recipe for the inflationary surge we are now seeing.
Interestingly, Summers sees the two infrastructure bills – one for physical infrastructure which has been passed, and the other for social infrastructure that is still being debated – as not inflationary. This is because their spending will be spread over many years – likely a decade – and also because they could increase productivity in the economy.
I read Summers’s main concern as being that the Administration is not hitting the alarm bells hard enough over inflation. He thinks – and I agree – that it is a real threat that could linger. The worst outcome is that higher inflation could become expected by the public, meaning it becomes embedded in the economic system. This would make it hard to eradicate. The last time we had such a situation was forty years ago. It took major increases in interest rates by the Fed and two recessions to bring the inflation numbers back to earth.
When Larry Summers talks, I listen, and I think his views about inflation are worth listening to now. Perhaps ironically, the one big institution Summers did not head – the Federal Reserve – will once again have to take the lead in controlling inflation. Unfortunately, with uncertainty over the reappointment of Fed Chair Jerome Powell and other openings on the Fed’s governing board, the Fed looks rudderless.
Maybe it’s time for President Biden to heed Larry Summers’s advice by saying, “Larry, I heard you and you’re right. Now I want you to do something about inflation as the new Chairperson of the Federal Reserve!”