Bonhomies don’t always last. For two years, White House officials and Mr. Summers were often at odds over one of the most important debates in economics about what causes inflation and how to keep it in check. This debate is not only important to the reputation of the quarreling economists, but also to the public. The future of Democratic policymaking. With inflation plummeting while unemployment remains low, the president’s allies are looking beyond just strong economic data to a new model for policymakers: what if the government is aggressive in fighting the recession? I see it as proof that it is possible.
Mr. Summers is the most prominent expert against this. He lashed out at the administration’s $1.9 trillion 2021 stimulus package, the “American Rescue Plan,” for exacerbating inflation, arguing that the U.S. economy won’t be able to fully quell inflation until 2022. Arguing that a surge in unemployment would probably be necessary, he accused President Biden’s team of being “the least responsible.” Macroeconomic policy after 40 years. Summers said on cable television, in editorials, in interviews and even in private talks that Biden’s economic policies had overstimulated the economy. He also argued that returning inflation to the Federal Reserve’s 2% target would almost certainly require a significant slowdown and the loss of millions of jobs. (Summers said he didn’t want to see the unemployment rate rise, it just seemed likely.)
That prediction is becoming less and less likely. Inflation has fallen to 3.2% from 9%, but the unemployment rate hasn’t risen noticeably, fueling optimism within the White House that the economy can make a “soft landing.”
Summers said Mr. Biden last year needed a policy that would put millions out of work to curb inflation, according to five people familiar with the president’s personal remarks, who asked not to be identified to reflect the conversation. I instinctively rejected the idea that Mr. Allies of the president have renewed optimism that brighter economic moods will further undermine the notion that a recession is necessary to keep inflation under control.
Despite disagreements between Mr. Biden and Mr. Summers, senior White House advisers still meet frequently with Mr. Summers and seek his opinion on a regular basis. Summers has visited the White House several times this year alone, despite continuing to denounce Mr. Biden’s industrial policies, student loan forgiveness and other economic plans.
“We may or may not agree, but we have great mutual respect and always welcome Larry’s insights,” said Jared Bernstein, chairman of the White House Council of Economic Advisors. there is,” he said.
Summers, like other centrist economists, said inflation was still dangerously high and warned that inflation could pick up again. Prices rose 3.2% in July compared to a year ago, but the flat inflation rate remained at 4.7%, according to the latest inflation report. Summers said the labor market remains strong not because Biden has defied the laws of economic reality, but because the battle against inflation is still far from being won. Summers argues that the rescue plan risks causing inflation and “taking hold,” a long-term problem for consumers and businesses.
“I don’t think anyone should make final decisions until they see how things go,” Summers said in an interview. Summers said his forecasts are based on standard macroeconomic models and are not intended to be interpreted as accurate estimates. “The idea that curbing inflation has nothing to do with rising unemployment is at odds with all conventional macroeconomic assessments.”
Publicly, party leaders continue to defend a rescue plan needed for economic growth after the coronavirus recession. Inwardly, many Democrats are ambivalent about the legacies of the bill after punishing rising prices and the accompanying Republican aggression. Contrary to Summers’ predictions, if inflation continues to ease while job growth remains strong, defenders of the bailout plan will strengthen, just as Biden’s 2024 re-election campaign succeeds.
Bill Galston, a policy analyst in Washington, D.C., said, “Democrats are now divided between those who think a rescue plan for America is adequately sized and absolutely necessary, and those who think it’s too big and will do a lot of damage.” It’s split between those who think it will have an impact,” he said. Based at the Brookings Institution, which served in the Clinton administration. “This is a moral issue, but it is also a political issue. will conclude.”
Summers, an aide to Presidents Bill Clinton and Barack Obama, has a big stance against the bill, saying that when it comes into law it would be too big and could lead to runaway inflation. warned.
White House aides downplayed that possibility, arguing that if the inflation predicted by Mr. Summers did materialize, it would be only “temporary.” When it turned out to be false, the president lashed out at the staff and repeatedly contacted Mr. Summers. Summers was also a key figure in the White House’s efforts to persuade Senator Joe Manchin III, a Virginia Democrat, to back the anti-inflation bill. Despite his concerns over the 2021 law, he supported.
But Summers also makes predictions that may not yet be supported. In a speech at the London School of Economics in June 2022, when inflation had peaked at 9.1%, Summers said: Said the state would in effect “need” Unemployment needs to go up for inflation to go down.
Summers later said, “It takes five years of unemployment above 5% to keep inflation under control: two years of 7.5% unemployment, five years of 6% unemployment, and one year of 10% unemployment.” It takes years,” he said. Clarification to Slate He did not “advocate increasing unemployment as a strategy.”
Summers and co-author, same month I have written To reduce job openings by 20 percent, the unemployment rate “must rise by 3 percentage points on average,” he said. Job openings fell by about 16%, but the unemployment rate did not rise significantly.
Summers, September 2022 repeated that point against Fortune: “I don’t know if we will keep inflation under control until the unemployment rate is close to 5%. We may need 6% unemployment for some time to keep inflation under control significantly.” The unemployment rate is 3.5% and is still at the same level.
Summers defended his estimates in a recent interview, noting that inflation is still above the Fed’s 2% target. In particular, Summers stresses that while temporary factors such as higher gas prices have always pushed inflation higher, pushing it closer to 8%, the more stable “underlying” inflation rate was closer to 4.5%. .
Summers argues that even if the overall rate of inflation has fallen, underlying inflation has remained largely unchanged, but the temporary drop in prices appears to be resolving the problem.
“Given the heat of the economy, I think we can say that inflation has performed better than many standard models expected at this point,” Summers said. “But I don’t think all that is proof that the current unemployment rate is definitely on track towards 2%.”
Olivier Blanchard, former chief economist at the International Monetary Fund, also agreed that higher unemployment would be needed to “fix the overheating” of the labor market, which is pushing up prices. “It is very likely that an increase in the unemployment rate will be required to fully bring inflation under control,” Mr Blanchard said in his email. Jason Furman, a former Obama administration economist and Summers’ Harvard colleague, predicts that unemployment will reach 6.5% to reach 2% inflation, describing the view as “literally. , there is nothing to deny in the data.”
More liberal economists argued that Summers misdiagnosed the cause of high inflation and missed the cure. These economists argue that the main cause of the high prices was not excessive government stimulus, but supply chain disruptions such as the prolonged shock from the pandemic and Russia’s invasion of Ukraine. As supply chains normalized, so did inflation.
A White House official, speaking on condition of anonymity, explained the thinking of Biden aides, saying that some economic forecasters put too much emphasis on too much stimulus as a cause of inflation, suggesting that the coronavirus-induced epidemic of consumer spending is likely to continue. said it overlooked other factors, such as changes in action. Those forecasters also erroneously predicted that the decline in the workforce would be permanent, which was also not true, White House officials said.
Skanda Amarnath, executive director of Employ America, a left-wing think tank, believes that not only some idiosyncratic or temporary factors such as energy and used cars, but also home furnishings, technical equipment, wages, legal and professional services, etc. .
“Larry was very blunt and said the only way to defuse the situation was during periods of very high unemployment. Dean Baker, an economist at the Center for Economic Policy Research, said. Lindsey Owens, executive director of the left-wing group Groundwork Collaborative, said even more bluntly, “It’s time for the Democrats to change Summers’ policy forever.”
White House officials who misunderstood rising inflation are now wary of celebrating falling inflation too aggressively. In his speech, Mr. Biden was quick to emphasize that the job is not done yet. And despite differing expectations, Summers has remained in close contact with many White House officials, who have been on hand during this year’s local banking crisis and congressional disputes with Republicans over the debt ceiling. A senior White House official said he had contacted Mr. Summers.
But that doesn’t mean Biden and his aides are pulling back. Their punches are perfect.
“Remember when the experts said we needed to cut wages and raise unemployment to control inflation? We never bought that stuff.” Biden Tweeted on July 20th. “Instead, I focused on getting more Americans into the workforce, fixing broken supply chains, and cutting costs.”
Summers remained unconvinced about the bailout plan, pointing to the “great middle-class misfortune with the economic situation” over the past two years, largely driven by inflation.
However, he added: “If a soft landing is achieved, with no increase in unemployment and inflation falling to normal levels where it is not a major concern, then all would be much better than the status quo…no one is sure. You can’t have it and know.” What will be the answer? “
