Larry Summers, spurned for a Biden administration post, is famously vindictive. Lately, he has been taking victory laps, reminding everyone of how right he was and how mistaken everyone else was.
It’s hard to imagine any other prominent policy adult with this level of narcissism. His arm must be sore from patting himself on the back. He epitomizes the old line “often wrong, never in doubt.”
Let’s first give Larry partial credit on the big picture. Inflation did accelerate faster than most other economists forecast, and the Fed will raise interest rates more than Fed Chair Jay Powell predicted last fall. But Summers drastically overstates the degree to which the inflation is the result of excessive macroeconomic stimulus, as well as exaggerating his own prescience.
For starters, when President Biden sponsored the American Rescue Plan Act in March 2021, the economy was still in a deep COVID recession, and people were suffering. Most of the outlay was not intended as random macro-stimulus; it was targeted relief.
Contrary to Summers, recent price hikes have been substantially the result of two factors that Summers largely omits from his analysis—supply chain shocks and monopolistic corporations with market power taking advantage of an inflationary climate to impose opportunistic price hikes.
It’s understandable that Summers doesn’t focus on these—they are consequences of the policies of deregulation and hyper-globalism that Summers (and Bob Rubin) persuaded Bill Clinton to impose on the country.
Summers—relentlessly—is a macroeconomist; and when the only tool you have is a hammer, everything looks like a nail. He doesn’t deign to look at structural particulars, except at a level that is breathtaking in its shallowness. Search “Summers” and “monopoly pricing” and you get superficial tweets denying the problem, based on no data.
Moreover, Summers tends to backdate his predictions to make himself look prescient. What he actually forecast was often not what in fact occurred.
As John Cassidy recently observed in The New Yorker, Summers in March 2021 forecast three possible scenarios—a one-third chance of stagflation; a one-third chance that “the Fed hits the brakes hard” and we get recession; and a one-third chance of growth that “will moderate in a non-inflationary way.” (Note the spurious mathematical precision—one-third, based on what?)
Cassidy quotes financial analyst and longtime Fed watcher Tim Duy that Summers “also put out plenty of other scenarios—enough that he almost couldn’t be wrong.” Exactly so. Except that the one scenario Summers didn’t forecast was the one that actually occurred: continued robust growth and moderately high supply-driven inflation.
As a tunnel-vision globalist, Summers recently spoke at a Peterson Institute event, calling for tariff cuts as a way to reduce prices. Summers declared that “reasonable tariff reduction in the United States could take more than 1 percent off the CPI [Consumer Price Index].”
This counsel is willfully oblivious to the fact that the purpose of the tariffs that are now carefully targeted on China is to push back on China’s system of predatory, state-subsidized mercantilism. (I’ve never understood how fervent free-traders like Summers can be so indulgent of other people’s mercantilism.)
Summers’s numbers are also way off. As Taylor Buck’s research for the group Rethink Trade shows, consumer prices were stable during the period of steady tariff increases on Chinese goods between July 2018 and February 2020. Buck writes: “Contrast that with the jump in inflation over the past year while no new tariffs have been imposed. Indeed, the U.S. tariff rate on Chinese goods has remained fixed since February 2020, long before the current inflation increase began.”
And it gets even worse. The indispensable Matt Stoller took a close look at the Peterson Institute paper on which Summers bases his estimate, and finds that supposed drop in inflation from tariff cuts is the result of increased competition and—wait for it—the reduced monopoly pricing power that Summers disdains. Here again, this is not based on structural analysis of actual industries, just assumptions. Assessing the actual pricing effects of the ocean shipping cartel, Stoller finds that it has the impact of a tariff of as much as 20 percent.
As a conservative macroeconomist obsessed with averages, Summers is notoriously cavalier about the distributive impact of his recommendations. A recent tweet attacked the Biden administration for extending the moratorium on student debt. He tweeted: “At a time when the economy is overheating the Administration’s student debt action will be injecting money into the economy at a 100 billion a year annual rate. This is a macroeconomic step in the wrong direction.”
Summers’s back-of-the envelope guesses are just plain wrong. Wall Street and administration economists calculate that extending the debt moratorium increases purchasing power by $4 billion to $5 billion a month. The four-month extension adds .001 percent to the rate of inflation, according to the Council of Economic Advisers’ Jared Bernstein.
Summers, again dwelling in the realm of gross averages, also repeats the canard that the average college grad is better off than the average citizen. Take a closer look, and student debt is disproportionally incurred by lower-income college students who don’t have affluent parents to pay tuition. (Oops, that’s micro, not macro.) Some 30 percent of indebted former students had to drop out, often for economic reasons, before getting their degrees. This disproportionately affects lower-income Blacks.
Two generations of young Americans are now economically stunted by the debt burden they carry. Half of adults under 34 now live with their parents.
Larry is right where he belongs: mercifully out of government, and howling into the wind.
