Former Treasury Secretary Larry Summers said Wednesday that inflation indicators were “flashing red alarm,” renewing a critique of President Biden’s $1.9 trillion COVID-19 relief bill, which was signed into law last month.
“We were providing demand well in excess over the next couple of years of any plausible estimate of the economy’s potential to produce, and that meant substantial price increases,” the prominent Democratic policy adviser said at a Council on Foreign Relations forum.
“All the signs are for inflation starting to break out,” he said, pointing to recent upticks in the costs of housing, used cars and commodities as well as labor shortages, businesses reporting price increases and surveys of purchasing managers.
Summers qualified his remarks by noting that economists disagree about some fundamental issues and said there was a 1 in 3 chance that inflation doesn’t take hold in a significant way that leads to bad outcomes.
“Look, economists don’t know what drives this stuff. They’re not sure,” he said.
But he added that based on a variety of theories, the numbers were cause for concern.
“There’s an output gap-type theory, which I tend to subscribe to. That is flashing red alarm. There’s a monetarist theory that looks at money aggregates. That is flashing a red alarm. There is a fiscal theory that looks at the ultimate consequences of deficits. That is flashing a red alarm,” he said.
Summers first raised concerns that Biden’s COVID-19 relief bill was much larger than the so-called output gap in the economy, a measure of how far off the economy is from its potential, in a February Washington Post op-ed.
Too much stimulus, he argued, would lead to substantial price increases, which would in and of themselves make life harder for the poorest and force the Federal Reserve to raise interest rates, potentially kneecapping the recovery or even creating a recession.
Federal Reserve Chairman Jerome Powell has insisted that he expects any inflation to be temporary.
The Fed, which has a mandate to keep prices relatively stable, said it could tolerate a higher level of inflation over the short term, especially given that price increases have largely fallen below the target range of 2 percent in recent years.
Republicans jumped on Summers’s analysis, saying Biden’s plan was a liberal wish list that would upend the economy and send the deficit soaring.
The White House went so far as to put out a paper by two of its top economists, Jared Bernstein and Ernie Tedeschi, arguing that inflation was likely to be transitory but should be monitored. They said that in the short run, the inflation would be the result of fleeting factors such as pent-up demand from the pandemic, supply chains and distortions in data when compared with last year, when the pandemic walloped the economy.
Summers dismissed the analysis, saying that if its arguments were the best case against worrying about inflation, he was even more worried.
“I guess it seemed to me that it failed to address the calculations about GDP [gross domestic product] gap, it failed to address concerns from a wide variety of indicators, it focused on labor market issues without focusing at all on any of the suggestions in the data that there might be emerging labor market shortages, and it didn’t recognize the nature of lags issues with respect to monetary policy,” he said.
But Summers also threw his support behind Biden’s $2.3 trillion infrastructure bill, saying that money spent on infrastructure investments would not only boost the economy but could end up covering some of their own costs.
In fact, he said he would have supported $5 trillion directed toward investment, climate change and infrastructure.
He also praised Treasury Secretary Janet Yellen’s push to negotiate a global minimum tax, which could allow the U.S. to raise the corporate tax rate without concerns of big companies moving their businesses overseas.
Summers said he had been in touch with the Biden administration about his concerns.