Just about everywhere you look in the Biden White House, you can see former treasury secretary Larry Summers’s influence. Everywhere, that is, except for the policies.
Summers, 66, who drafted economic blueprints for the past two Democratic presidents and was a top candidate to lead the Federal Reserve Board under President Barack Obama, has emerged in recent weeks as the loudest critic of President Biden’s approach to reviving the pandemic-era U.S. economy. The Harvard University professor — who advised Biden for a time last summer — warns that the president’s stimulus plan may trigger the highest inflation in more than half a century and could cost Democrats the chance to make lasting investments in the economy.
Summers’s Cassandra-like critique has ignited a firestorm among some of the most liberal members of his party, who blame him for financial industry deregulation in the 1990s that contributed to the financial crisis and for the anemic recovery that followed. But his arguments also have been swatted aside by his erstwhile allies in the White House, the Treasury Department and the Federal Reserve, who argue that the economy is in desperate need of help.
“This might not have struck as much a nerve if it didn’t reflect concerns that were widely felt,” Summers said in a 45-minute telephone interview last week.
The extraordinary clash between a globally recognized Democratic economist and a Democratic president hoping to enact the most transformative liberal agenda since the Great Society involves both the central issues of the day and the lessons of history.
If he at times uses dramatic language, Summers nonetheless has given voice to an unpopular opinion that many in the Democratic camp say deserves consideration. Few other Democratic economists have aired such concerns; some say doing so might harm Biden’s ability to translate his fragile congressional majority into decisive action.
Summers’s complaint about an oversized stimulus “was what a lot of people were saying privately, what was being whispered by people without his voice or without his platform who were nervous about going public,” said Jason Furman, who was Obama’s Council of Economic Advisers chair and disagrees with Summers’s inflation assessment.
At issue are the risks and opportunities involved in restarting a $20 trillion economy and the unresolved debate over the mistakes made in responding to the 2008 financial crisis.
Summers says the Biden administration’s spending plan was drafted to satisfy political realities rather than economic requirements, and it is courting disaster. The Biden brain trust and other economists, including Paul Krugman, a winner of the Nobel Prize in economics, say he’s misreading the moment and overstating the downside risks.
“The discussion he’s trying to push is one we should have,” said Claudia Sahm, a longtime Summers critic and a former Federal Reserve staff economist who is now at the Jain Family Institute. “But it’s so out of proportion. And since [the bill] passed, he’s gotten more and more vicious.”
Summers began warning of economic overheating late last year, criticizing the proposed $2,000 stimulus checks for individual Americans as “bad economics.” When he made that argument, in a piece for Bloomberg Opinion, the idea had already been endorsed by House Speaker Nancy Pelosi (D-Calif.) and soon-to-be Senate Majority Leader Charles E. Schumer (D-N.Y.). Biden joined them days later.
Last month, as Congress was considering Biden’s $1.9 trillion American Rescue Plan, Summers criticized it in a Washington Post opinion piece as excessive and poorly designed. Too much would be spent sending checks to people who didn’t need the money, while almost nothing would be used to increase the economy’s long-run potential, he said.
Summers acknowledged that the Obama administration hadn’t spent enough to bolster the economy after the 2008 financial crisis. But Biden’s rescue plan would learn that lesson too well, adding too much fuel to an economic fire that would already be raging by the time the money arrived.
The pandemic had punched a roughly $20 billion hole in Americans’ monthly wage income, he said. Biden proposed filling it with more than $100 billion. Coupled with the Federal Reserve’s ultralow interest rates, Washington’s spendthrift ways could send prices soaring.
“I know the bathtub has been too empty,” Summers said. “But one has to think about what the capacity of the bathtub is and how much water we’re trying to flow into it.”
Summers worries that a reopened economy could rev out of control. Either a surge of demand overwhelms producers and sends prices soaring or the Fed will try to prevent that inflationary spike by abruptly hiking interest rates, plunging the economy into a new recession.
There’s only a 1-in-3 chance that the administration enjoys a boom that settles into years of sustainable growth, he said.
“We’re taking substantial risks,” Summers said.
The United States could suffer the sort of price spiral that hasn’t been seen since the late 1960s, when President Lyndon B. Johnson refused to raise taxes to cover the combined costs of his domestic agenda and the Vietnam War, he says. From 1.6 percent in 1965, inflation ticked up to nearly 6 percent five years later.
The architects of Biden’s plan say any inflationary risks pale alongside the damage that could be done to millions of Americans if the administration doesn’t restore a vibrant economy. Spending on roads, bridges and rural broadband networks, which could lift economic growth in the long run, was always envisioned as the second part of a two-step maneuver.
Plus, much of the $1.9 trillion in spending will fill economic holes without adding to demand, such as with government payments to forestall evictions.
“A relief plan is different from a stimulus,” said Austan Goolsbee, a University of Chicago economist who served with Summers in the Obama White House.
The economy is likely to run a little hot for about a year, but not as hot or as long as in the late 1990s, he added. Fed Chair Jerome H. Powell and Treasury Secretary Janet Yellen both anticipate only a temporary burst of rising prices. Investors likewise anticipate average annual inflation of 2.1 percent starting five years from now, according to one standard market gauge.
“The risk of generalized overheating in the goods market appears low for the time being,” economists at Goldman Sachs told clients this week. A second Goldman study found “no evidence” that pandemics inevitably lead to an increase in inflation.
Others say Summers’s inflation concerns conflict with his calls over the past several years for large-scale government spending to ward off “secular stagnation,” or a permanent shortfall of demand. He denies changing his views, saying instead that by spending $1.9 trillion on short-term needs, the administration may miss the chance to obtain funding for the long-term investment plan that Biden plans to unveil this week.
If they had “been arguing for a $4 trillion stimulus over 10 years to build back America, that would have been fine. I would have been a huge enthusiast for that,” he said.
For Summers, the current dust-up is just the latest chapter in a high-octane career marked by more than its share of personality clashes and contention.
Awarded the prestigious Bates Clark medal, which recognizes economists under the age of 40 who have made the most significant contribution to economic thought, Summers taught at Harvard before becoming chief economist at the World Bank. He served as President Bill Clinton’s treasury secretary during the Asian financial crisis of the late 1990s and was by Obama’s side during the global financial crisis a decade later.
Alongside his acknowledged genius rides a reputation for disregarding social niceties. Some in Washington still recall his public evisceration of economist Emmanuel Saez during a 2019 panel discussion on the wealth tax.
Sarcastic and merciless, Summers criticized Saez’s arguments as “absurd” and called his data “substantially inaccurate and substantially misleading.” The audience at the normally sedate Peterson Institute for International Economics at one point audibly groaned as Summers pounded Saez for flabby thinking.
“Most of Larry’s difficulties in playing well with others had less to do with malice and more to do with obliviousness. For Larry, qualities like tact and restraint just cluttered the mind,” Obama recalled in his memoirs.
Summers’s current position on the sidelines of a Democratic administration is more unusual than uncomfortable. He can still command an audience, and his criticism of the administration, while pointed, does not appear to have burned any bridges.
“They take his substance seriously,” said one prominent Democratic economist who spoke on the condition of anonymity to describe internal White House thinking. “Their attitude is not, ‘He’s dead to us.’ They care about his views.”
The White House declined a request to interview a member of the president’s economic team for this story.
Others predict that those views will cost him a seat at the table.
“Nobody can call attention to a topic quite like Larry can,” said Goolsbee. “Sometimes that helps them define an agenda, but sometimes that help comes by defining it in the negative. Given the hostile nature of this argument, I would be surprised if Summers were at the top of the administration’s ‘seeking advice’ list for infrastructure policy ideas or whatever comes next.”
Some liberals say his criticism is the outgrowth of frustrated personal ambition, citing Summers’ failure in 2013 to secure the Fed chairmanship he had long coveted. But his inflation concerns, aired in newspaper columns, are shared by others, including Olivier Blanchard, the former chief economist of the International Monetary Fund.
Furman, a Summers ally, says the former treasury chief has gone overboard with his rhetoric. Earlier this month, Summers said the United States now has “the least responsible macroeconomic policies we’ve had in the last 40 years.” And he irked some administration officials when he wrote that the administration was dismissing “even the possibility of inflation.”
Speaking from the White House podium last month, Jared Bernstein, a member of the Council of Economic Advisers, called that assertion “just wrong.”
Summers publicly took himself out of the running for an administration job last summer. But he’s hardly idle. He still teaches at Harvard and sits on the boards of Square, a mobile payments company, and Doma, a San Francisco-based provider of technology designed to simplify real estate closings. He also writes newspaper opinion columns and gives paid speeches.
He says he’s focused on making the most of his multiple outside roles, rather than finding his way back into government.
“All of my plans and expectations are around doing economic analysis and contributing to both the academic and public debate on economic policy,” he said. “And if I’m raising issues that people are feeling a need to think about and grapple with, then I think I’m making a significant contribution.”
With his high-profile inflation forecast, Summers has staked out the “I told you so” terrain if Biden’s plan misfires. But for now, despite his repeated warnings of disaster, policymakers — his friends, mentees and former colleagues — remain unconvinced.
“He still has some sway. But he doesn’t have as much sway as he used to,” said Sahm. “He’s used to having the ear of the president. And now he doesn’t.”