J. Scott Applewhite/AP Photo
Larry Summers, then director of the National Economic Council, in December 2010
The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
Larry Summers doesn’t like to be criticized. Sen. Elizabeth Warren (D-MA) recently penned an op-ed arguing that viewing monetary policy as the sole solution to inflation is both short-sighted and dangerous, and it cited Summers’s belief that unemployment would have to jump significantly to get inflation under control. Warren’s critique of “monetary policy and my economic analysis are, I believe, misguided and if heeded could have devastating consequences for tens of millions of workers,” Summers tweeted in response. Yes, the guy who thinks workers need to be tossed out of their jobs is supremely concerned about workers.
Summers has returned to the high esteem of much of the economic punditry, if he ever really left, after predicting American inflation issues would be long-lasting back when most other economists believed they were transitory. However, despite headlines declaring otherwise, he hardly “nailed” it. The prediction itself was heavily hedged. Here’s what he actually said:
I think there is about a one-third chance that inflation will accelerate significantly over the next several years, and we’ll be in a stagflationary situation, like the one that materialized between 1966 and 1969, where inflation went from the range of ones to the range of sixes. I think there’s a one-third chance that we won’t see inflation, but the reason we won’t see it is that the Fed hits the breaks [sic] hard, markets get very unstable, the economy skids downward close to recession. And I think there’s about a one-third chance that the Fed and the Treasury will get what they’re hoping for, and we’ll get rapid growth that will moderate in a non-inflationary way.
This is a bit like saying there’s a 1-in-3 chance that tomorrow’s temperature will be warmer, colder, or about the same as today’s. Stagflation, recession, and a strong economy are three of only a handful of states the economy can ever be in at that level of abstraction.
The stagflation scenario is the one that the media generally credits as a prediction of long-running inflation, despite the fact that stagflation did not actually happen. Stagflation is long-running high inflation paired with sluggish growth and high unemployment; economic growth was strong in 2021, while even with the deceleration in 2022, unemployment is at a historic low (3.5 percent, which ties December 2019-January 2020 for the lowest since the late 1960s). All in all, Summers did not really predict the current situation, but he did allude to the possibility of high inflation sticking around, which is more than most other economists did. Give him partial credit on that, but don’t declare him prescient.
The bigger issue with Summers’s prediction is that his understanding of the source of inflation centered almost exclusively on federal fiscal stimulus starting a wage-price spiral. That’s why in his Warren-bashing Twitter thread, he touted his opposition to “massive stimulus policy and easy money.” The thing is, nowhere, in the thread or outside, has Summers actually been able to demonstrate the link between federal stimulus and prolonged inflation. Given the global nature of inflation, American domestic policy seems at best an extraordinarily weak explanation. Why would one set of $1,400 stimulus checks in the U.S. raise prices across the world?
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Summers’s howling about federal pandemic aid is also part of why his endorsement was key to getting Sen. Joe Manchin to sign on to the Inflation Reduction Act. Because Summers saturated the media with his stimulus-centric explanation after kinda sorta predicting long-term inflation, Manchin needed cover (and maybe genuine convincing) to get behind any large federal spending package—except for military funding, which politicians have never had any problem with despite economists, among many others, objecting.
Summers can take some credit for this, and if the bill’s investments in zero-carbon energy pay off, he’ll have done the world a service. But his generosity toward the planet in assisting the green transition is more than offset by his callousness toward the American worker.
FOR THE FIRST HALF OF THIS YEAR, there was still an open debate about what was causing long-term inflation. Summers was an outspoken critic of the idea that concentrated markets enabled price-gouging, despite it having a firm basis in economic literature and theory going all the way back to one of the founders of modern economics, David Ricardo. In January, I wrote about why Summers was wrong to dismiss those raising market concentration as a contributing factor.
When I wrote that piece, my take was fairly controversial. Since then, an abundance of research has come out corroborating my general argument, from the Federal Reserve Bank of Boston to the Roosevelt Institute to a number of economists, including Nobel Prize winners Joseph Stiglitz and Paul Krugman.
The public was much faster to come around to this view than economists, and for good reason: They listened to what our most powerful economic actors said. Corporate executives have repeatedly said that they were price-gouging on earnings calls, where they are legally obligated to tell the truth to shareholders. The data is there now. While some still sneer at this notion of “greedflation,” the empirical evidence is now widely available and, generally, stronger than alternative explanations.
In particular, the evidence for Summers’s own argument, that inflation is being driven largely by runaway wage growth, is especially sparse. Real wages have been falling, and even before that, wage increases lagged overall inflation. At this point, Summers is now embodying the “science denial” he accused others of months ago.
It’s also worth stripping away some of the economic jargon to make clear the moral implications of what Summers is saying. He essentially believes prices are rising because too many people have money and jobs. Thus, in order to slow inflation, Summers thinks we have to make life worse for more people. Also, note whose lives must be harder. Summers and his ilk never call for econ pundits to go out of work, nor corporate executives, nor the policymakers who, in Summers’s view, are the ones to blame. The only class of people who must be made to suffer are workers, so that wages will go down and stay low. (Incidentally, yesterday’s report on inflation numbers for July shows prices moderating without any spiking unemployment happening.)
There is one recent study that supports Summers’s position. It is written by … Larry Summers (et al.). Since much of Summers’s recent notoriety and deference is due to the fact that one of the three directions he said the economy might be headed in turned out to be sorta kinda half-correct, if the public catches on to him failing to recognize the real causes and policy solutions, his jig may be up.
It’s not that fiscal stimulus did not contribute at all to inflation, just that the contribution was fairly small and is not the primary driver. Rather, the story starts with fragile supply chains being unable to handle an increase in the demand for goods as services shut down in the pandemic. This and the pandemic’s toll on a sickened workforce led to goods and component shortages and spiking transportation costs, which were passed on to consumers. Fiscal stimulus did slightly exacerbate some of this, but the main underlying cause of our inflationary problems was these supply chain snarls.
However, since that point, market manipulation has played an integral role in sustaining inflationary pressure; corporations have been using the pandemic and the resulting inflation as a pretense for raising prices and padding profits. On top of this, oil prices spiked from fear of supply shocks due to Russia’s unprovoked invasion of Ukraine, and remained elevated as Wall Street toyed with futures markets (although those have been dropping more recently, since Democrats called out the financial shenanigans).
Though some dismiss this account as liberals whining about corporate greed and hand-waving away fiscal stimulus, it’s actually a much richer and more detailed story than Summers’s. One of these narratives recognizes that COVID-19 has been an unprecedented crisis that exposed heretofore obscure problems with our social systems. The other is an evidence-free version of the same simple narrative that’s dominated economic policy for decades.
Despite all of the evidence that corroborates the supply chain story, Summers won’t budge. Why? Well, some of it might be egotism. He simply does not want to admit that he was wrong, especially on the issue that enabled his resurgent reputation. Alternatively, it could just be a particularly powerful case of confirmation bias. Maybe he just does not care. Another, more insidious possibility is that financial incentives could color an expert’s punditry.
FOR INSTANCE, LARRY SUMMERS has been tied to companies that would actively benefit from an economic downturn.
We recently sent a letter to the president of Harvard University and top editors of Bloomberg and The Washington Post requesting that they force him to disclose his financial ties and corporate funding. While we haven’t heard anything directly, reporting by The Harvard Crimson includes a statement from Summers that he abides by Harvard’s disclosure requirements. However, RDP has reason to believe that Summers’s punditry does violate established university rules around public disclosure.
On page 19, the document says that “faculty members must make public disclosures of financial interests in related outside entities and sources of support when reasonable members of the audience would give weight to those interests in assessing the opinions, advice, or work they are presenting.” A reasonable audience member would probably consider it relevant when a company on whose board a pundit sits happens to profit from the specific policies advocated by that pundit. Here are just a few examples of ties that could impact the way audiences might view Summers’s punditry:
- Summers sits on the boards of predatory lenders that extend credit to Americans with subprime credit, including Block and Doma (which focuses on housing finance).
- Summers has previously touted crypto. He advises DCG and serves on the board of Block.
- Summers was a key proponent of generous bank bailouts in the Great Recession, after he made millions working for Citi and D.E. Shaw. According to his personal website, he still works with Citi and D.E. Shaw. He also still works with the Group of 30, which is largely funded by big banks and private equity.
Per Harvard’s policy, all of this should be disclosed, regardless of whether it is actually influencing how Summers thinks about the issues he is offering commentary on. From pages 3-4 of the university policy:
A financial conflict of interest is a matter of objective circumstance, and, therefore, a distinction between “apparent” and “actual” conflicts of interest is not useful. A conflict of interest does not depend on the character or actions of the individual. It exists (or does not exist) regardless of whether it is operative, that is, whether it is in fact influencing an individual’s judgment or actions. To recognize the existence of a financial conflict of interest is not to pass judgment on the character or actions of an individual and does not per se imply wrongdoing. [Emphasis in original]
That is, even the appearance of a potential conflict of interest should be treated as an established conflict and be disclosed accordingly. Harvard goes on to clarify that this approach should be followed regardless of whether professors are acting in their capacity as university faculty. Clarifying that even “While faculty members will not be acting on behalf of the University in any of these roles, the public ordinarily will not appreciate this distinction” (footnote 13). As a result, the University says the following:
The expectation of transparency is justifiably high when Harvard faculty members serve as expert advisers to governmental entities or to the public directly. Faculty in such roles should be mindful of this principle and publicly disclose financial interests and sources of financial support that could be seen as biasing.
Summers, despite his unavoidable presence in the media, is still ignoring much of the real economics of the ongoing inflation crisis. Moreover, he continues to bristle at any criticism that his explanation of inflation is incomplete, despite significant evidence pointing to an alternate story. His critique of Elizabeth Warren is wrong and requires willful ignorance of economic data that he doesn’t like (which is not surprising given that he sometimes just makes data up).
Whether Summers’s insistence on denying the evidence all around him is driven by egotism is hard to say given his lack of full disclosure. What is clear though is that Summers has weaponized his punditry in an attempt to sully the reputation of a key lawmaker while intentionally breaking Harvard’s own disclosure requirements and engaging in suspect investments that could benefit from widespread adoption of his policy prescriptions. Millions of workers may become unemployed, but shady lenders advised by Larry stand to make a buck, so I guess it balances out.
