In his State of the Union address Tuesday, President Joe Biden is expected to unveil a new plan to address surging prices throughout the U.S. economy, part of an effort by the White House to show voters that it is tackling one of their main concerns ahead of what could be a disastrous mid-term election for Democrats this fall. The plan will reportedly include proposals to reduce costs of consumer basics such as prescription drugs and education, promote competition, boost small businesses and strengthen supply chains.
Even in skeletal form, though, Biden’s plan raises the question of just what is causing inflation right now. Many economists have expressed doubts about the ability of the federal government to reduce inflation by doing things like subsidizing education costs and negotiating drug lower prices – useful measures, perhaps, but unlikely to move the needle in the short and medium term.
For many economists, the cause of the current inflationary trend is simple: too much relief and stimulus spending during the Covid-19 crisis. Former Treasury Secretary Larry Summers is one of the most prominent proponents of this view and has recently been taking something of a victory lap as inflation continues to come in hotter than expected.
The over-spending argument: Summers warned last year that Congress was running the risk of creating excess inflation by spending too much, too fast on Covid relief. “I think the policy is rather overdoing it,” Summers said last May, just a few weeks after Biden signed the $1.9 trillion American Rescue Plan into law. “We’re taking very substantial risks on the inflation side.”
Summers argued that the spending passed by Congress in response to the coronavirus crisis would exceed the level of spending on President Johnson’s Great Society programs and the Vietnam War – and many economists blame the latter for sparking the inflation that cropped up in the late 1960s.
“We are printing money, we are creating government bonds, we are borrowing on unprecedented scales,” Summers said. “Those are things that surely create more of a risk of a sharp dollar decline than we had before. And sharp dollar declines are much more likely to translate themselves into inflation than they were historical.”
Summers has also been critical of what he sees as excessive accommodation by the Federal Reserve and has expressed doubts about the ability of the Fed to move quickly and decisively to reduce inflationary pressure. “There are lots of reasons to suspect the Fed is well behind the curve,” Summers said earlier this month. “I suspect next month it will get worse rather than better,” he added, referring to the inflation numbers.
And given the persistence of inflation, Summers is now arguing against Biden’s plan to pass another social spending bill, even if it’s scaled back. Summers recently told Bloomberg that the American Rescue Plan was “a serious error” that “both set the stage for the inflation and politics that we have today and it eliminated the chance to make fundamental investments in our country given the political context.”
The supply chain argument: Not everyone agrees with Summers, even though he appears to have nailed the call on inflation. Slate’s Jordan Weissmann wrote in December that while Summers was clearly prescient about the risk of short-term inflation, he hedged his bets more than he admits and, perhaps more importantly, he didn’t really get it right as to why inflation could be expected to run so high.
For one thing, the dollar declines Summers warned about never materialized. For another, the overheating Summers was concerned about hasn’t quite worked out as expected.
“As far as I know, Summers never really spelled out step by step how he thought inflation would take hold, but he pretty clearly seemed to have in mind a standard textbook model, where government spending would swamp the economy with demand and drive unemployment unsustainably low, creating pressure for higher wages and eventually inflation,” Weissmann wrote. But as many economists have noted, the inflation the U.S. has experienced doesn’t fit the textbook model. “Rather, they’ve resulted from massive, stimulus-fueled consumer demand running smack dab into supply chain problems related to the pandemic,” he said. “That’s really not the toxic brew Summers expected.”
American Prospect executive editor David Dayen has recently taken up the supply-chain argument in particular, and in Thursday’s New York Times lays out the argument that instead of overheating, as Summers predicted, the economy is suffering from structural defects that were put in place under the guidance of neoliberal economists like Summers who encouraged businesses in the 1990s to trade stable and resilient production systems for speed, low prices, and high profits.
“Democrats put their faith in an economics profession that is far too distant from on-the-ground realities to grasp the consequences of globalization, monopolization, financialization, deregulation, and just-in-time logistics,” Dayen writes. “They failed to recognize how things could crumble because of the vulnerability they engineered.”
The irony, in Dayen’s view, is that one of the main architects of the fast, lean, and now broken supply chain is taking credit for predicting the inflation he helped cause. “Larry Summers shares the blame for inflation,” he writes. “Mr. Summers shouldn’t be an obstacle to this effort or even an interested bystander, watching it unfold; he should be an active enthusiast for cleaning up the mess he made.”
