An encouraging fact about Joe Biden is that he is the first Democratic president in nearly 40 years not to enlist the services of Larry Summers, one of the most influential neoliberal economists in decades. Summers has been a constant power player since serving on the Ronald Reagan Council of Economic Advisers from 1982 to 1983. His Reaganite roots did not prevent him from being repeatedly promoted to leadership positions under the administrations of Bill Clinton and Barack Obama. From 1999 to 2001 he was Minister of Finance and from 2009 to 2010 Director of the National Economic Council.
The usual line of defense given by Summers’ political patrons is that while notoriously aggressive, he’s also brilliant. In 2009, Naomi Klein challenged the high marks Summers gets for his intelligence observe in the The Washington Post“For all of his appeals to absolute truths, [Summers] has always been spectacularly wrong. He was wrong not to regulate derivatives. Wrong when he helped kill the banking laws of the Depression and turn banks into great welfare monsters to fail. And since he helps to develop increasingly complex tricks and spends more and more tax dollars to keep the financial casino running, he is still wrong today. ”
Klein’s criticism is an expert distillation of the leftist criticism of Summers. There is reason to believe that even some of its former patrons have realized the truth of this charge. In 2010, Bill Clinton said The advice he received from Larry Summers and former Treasury Secretary Robert Rubin not to regulate derivatives was “wrong” and he regretted having followed it.
The growing consensus that Summers was wrong about big issues explains why he was expelled from the Biden administration. summer I guessed it briefly Candidate Biden in the summer of 2020, but the Outcry from progressives ended the Biden campaign’s relationship with the controversial economist.
The loss of access to the president’s ear did not dampen Summers’s desire to shape politics. In a much read Washington Post open on Tuesday, summer argued that the $ 1.9 trillion incentive enforced by the Democrats could be too big and overheat the economy. Summers warned, “There is a possibility that macroeconomic stimulus, closer to World War II levels than normal recession levels, will create inflationary pressures unlike any we have seen in a generation, with consequences for the value of the dollar and of financial stability. “Summers’s dire forecast relies heavily on forecasts by the Congressional Budget Office (CBO) that the US economy is already heading for a swift and robust recovery.
The danger is that there are still enough Democrats in power who respect Summers, that his alarmism could be contagious. On Tuesday, Politico reported“Everyone in the west wing reads a report by Larry Summers that is circulated among liberal politicians. Why? The summers put on paper what many liberal wins have been whispering about for weeks: President Biden’s stimulus package may be too big. “
Significantly, a number of senior officials, including Biden himself, have directly or indirectly questioned Summers’ position. Biden told reporter“The only thing we’ve learned is that we can’t do too much here. We can do too little. We can do too little and stutter.” Treasury Secretary Janet Yellen took up the idea that Biden might be too suggestive saying“I have to worry about all the risks to the economy … and the most important risk is that we are leaving workers and communities in the pandemic … that we are not doing enough.”
Biden and Yellen should ignore Summers’ unwanted advice. As it turns out, Summers is as wrong as Cassandra’s editorial side as he is as policy-making panjandrum.
Other economists have despised Summers’ claims. In one phone call, James Galbraith of the University of Texas Summers mocked confidence in the CBO’s projections. “Those silly calculations of overcapacity are the stupidest thing in the mainstream economist toolkit,” Galbraith said.
There is no reason to believe that the CBO can know what the economy will be like in the coming year since the major engine driving events are not an economic activity but a pandemic. There are all sorts of unknown factors, including the emergence of Covid-19 variants, that make predicting the future a breeze.
Indeed, the latest economic news does not point to a quick recovery, but rather to another stall and a prolonged recession. As The New York Times reported on Wednesday: “Overall, the economy had 9.1 million fewer jobs in January than a year earlier, which corresponds to a deficit of 6.1 percent. That is consistent with a severe recession. ”
Amanda Phalin, an economist at UF Warrington College of Business, is puzzled by Summers’ inflation fears. “The scolding has been predicting inflation for more than a decade and it did not occur despite historically low unemployment prior to the pandemic,” Phalin told me in an email. “There is no evidence that we are going anywhere above the usual 2%, which suggests aggregate demand is stable. If so, then what? The downside risk of not doing enough, I think, is far greater. When inflation occurs, it is also relatively easy to control – not pretty, not fun, but we don’t run the risk of becoming hyperinflated. ”
Much of Summer’s arguments are political, not economic at all. He fears that if Biden spends political capital now on a major incentive, there will be neither the capacity nor the will to spend more on necessary public investments in the future. But this political calculation makes little sense. Biden has a short window of time to get the economy back on its feet before halfway through 2022. Going back to business now like Obama did in 2009 will ensure a democratic obliteration in 2022 that could keep up with the legendary shellacking of 2010. The quickest way to lose political capital is to cut out on stimulus spending now.
Dean Baker, chief economist at the Center for Economic and Policy Research, denies Summers’ claim that the incentive will stifle public investment. “Money that goes to state and local governments enables them to make investments even if it’s not labeled as such,” Baker told me in an email. Write in The American perspectiveRobert Kuttner makes a similar argument, under note “Most of the Democrats’ proposal is not about a macroeconomic void. It aims at vaccine delivery and distribution, as well as schools in trouble and flattened state and local budgets and public services. Only about US $ 420 billion Dollars go in direct payments to individuals, some of which will replenish savings or reduce debt (as opponents of the Biden Plan have argued in other contexts). ”
Summers’ reasoning makes no economic or political sense. Kuttner describes Summers as a “vengeful SOB” whose arguments are only the sour grapes of a rejected office-seeker. Normally one would avoid such personal speculation, but given the fact that the Summers article is not pegged to reality, this conclusion is hard to resist.
Realizing that it’s always best to ignore Larry Summers was a hard-won lesson for Democrats. They must hold on to this crucial truth in the difficult months to come.