From January 21, 2021 in The Economist:
Under the rubric of ‘Fire without fury’
Headline: Will Joe Biden’s fiscal stimulus overheat the American economy?
Sub-headline: If it does, higher inflation could be the consequence
On january 20th Joe Biden entered the White House during an economic crisis for the second time. On January 14th he unveiled his plan for dealing with the downturn wrought by the pandemic. Viewed from the bottom up, it combines vital spending on vaccines and health care, needed economic relief and other, more debatable handouts. Seen from the top down, it is a huge debt-funded stimulus. Mr Biden’s plan is worth about 9% of pre-crisis gdp, nearly twice the size of President Barack Obama’s spending package in 2009. And it is big, too, relative to the shortfall in demand that America might suffer once it puts the winter wave of covid-19 behind it, given the stimulus already in place.
Vintage Economist’s Austerity grumbling about the undeserving lesser beings, that inhabit the once Republic: ‘and other, more debatable handouts.’ and this declaration, ‘nearly twice the size of President Barack Obama’s spending package in 2009’ which proved to be not enough. Adam Tooze offers this in the April 22, 2021 issue of the London Review of Books:
Once the crisis was properly recognised it was clear what had to be done – and Obama appeared to have the people in place to do it. His economic policy team were as thoroughbred a group of New Keynesians as you could wish for. What was needed was a huge fiscal stimulus to ensure that the US didn’t slide from a crippling financial crisis into a Japan-style, low-growth liquidity trap. It was the very obviousness of that diagnosis that made what happened next all the more upsetting to Krugman. In 2009 Obama and the Democratic Congress passed a stimulus, but it was hopelessly undersized – half what was required. And 2010 began with the president announcing not that more was necessary, but that it was time for belt-tightening.
In so far as Obama was involved, Krugman wasn’t surprised – he had never been a fan. Obama’s insistence on bipartisanship ran squarely against Krugman’s darker vision of the roots of America’s political divisions in racialised class inequality. The dogged opposition of the GOP, for its part, was only to be expected. What shocked Krugman was the failure of his own kind, the economists, to rally in a time of national emergency. Predictably, the Chicago School joined the GOP opposition, but what horrified Krugman was the undeniable evidence that Obama’s own economic experts were self-sabotaging, and that Larry Summers – once the teenage star of MIT and Harvard – was in the thick of it. It was he who led the push to cap the stimulus at well below a trillion dollars. ‘The overall narrative,’ Krugman wrote, was ‘tragic. A policy initiative that was good but not good enough ended up being seen as a failure, and set the stage for an immensely destructive wrong turn.’ ‘We used to pity our grandfathers, who lacked both the knowledge and the compassion to fight the Great Depression effectively; now we see ourselves repeating all the old mistakes.’
The Economist writer present the arguments, recognizing the role of Larry Summers as self-appointed watchdog on the possibility of this ‘overheating’. Let me refresh your memory : Gramm-Leach-Bliley and Simpson-Bowles !
There are three main reasons to suspect overheating might be on the cards: emerging evidence that the downturn may prove temporary; generous stimulus; and the Federal Reserve’s monetary-policy strategy. Take first the evidence that today’s downturn might be more temporary hiatus than prolonged slump. The number of non-farm jobs remains around 10m, or 6.3%, below its pre-pandemic peak—similar to the shortfall seen in 2010. Yet after the first wave of infections last year, unemployment fell much more rapidly than forecasters expected. If job creation were to return to the average pace achieved between June and November 2020, the pre-pandemic peak in employment would be reconquered in less than a year. It was not until midway through Mr Biden’s second vice-presidential term that such a milestone was reached last time.
Next for consideration is the ‘cash pile’ comprised of ‘excess savings’ that Americans have accumulated since the lockdown. Such is the myopia of this person, with the lives of we ordinary Americans!
According to Fannie Mae, a government-backed housing-finance firm, by mid-December Americans had accumulated about $1.6trn in excess savings. It is hard to know what might happen to this cash pile; economists typically assume that households are much less likely to spend wealth windfalls (such as the gains from a rise in the stockmarket) than income. But if people instead regard these excess savings as delayed income, then the cash hoard represents stimulus that has not yet gone to work, to be unleashed when the economy fully reopens.
The writer ends the essay here, with the fact that the Economy is not like a watch that can be repaired byTechnocrats.
Those who are zealously committed to breaking the world economy out of the low-rate, low-inflation trap of the 2010s might welcome the even larger burst of inflation that the current fiscal and monetary policy mix could enable. The Fed, however, is not in that camp. Were overheating to provoke it into earlier rate rises than markets expect, the assumption of cheap money that underpins today’s sky-high asset prices and the sustainability of rocketing public debt might begin to unravel.
Such a scenario remains a tail risk. The most likely outcome is that Congress agrees on a smaller stimulus than Mr Biden has proposed, and that overheating, if it occurs, proves temporary. Beyond that, nobody really knows how fast the economy can grow without setting off inflation. Should economic policy stay in uncharted territory, though, its speed limits may be tested more frequently.
From The Financial Times of April 11, 2021. Larry Summers is interviewed by Martin Wolf
Headline: Larry Summers: ‘I’m concerned that what is being done is substantially excessive’
Sub-headline: Former treasury secretary criticises the scale of Biden’s fiscal policy and warns it could lead to overheating and wasted resources
Now, however, Summers — a Democrat with his party back in power — is criticising both the scale and direction of the administration’s fiscal policies. Instead of applauding its boldness, he fears they will lead to significant overheating and waste of resources.
In discussion with Martin Wolf, the FT’s chief economics commentator, Summers explains why the new approach might go disastrously wrong. He agrees there is a strong case for a more aggressive approach to fiscal policy. But policy still needs to be grounded in economic realities and priorities — and these ones, he insists, are not.
If Summers is wrong, it will matter little. If he is right, the hopes for a transformative presidency are likely to end in catastrophic economic and political disappointment. It is an immensely important argument.
Martin Wolf: Let’s start with the current macroeconomic situation and, particularly, the legacy of Covid-19 and the arrival of Biden. His administration has already passed an enormous new fiscal stimulus of $1.9tn and is talking about a longer-term investment package of $3tn. Together, this is close to a quarter of gross domestic product.
You have been critical of these policies. Could you explain your criticisms? And how does this fit with your views on secular stagnation?
Larry Summers: I’m going to focus on the American policy path and not talk about where responsibility lies for that path. I think, in important respects, it lies with the Republicans and with those on the more extreme left of the Democratic party.
If you look at the economy at the beginning of this year, prevailing forecasts were that Covid would reduce wages and salaries to American households by $20bn-$30bn a month, with that figure declining over the year.
So, that would be a $250bn-$300bn hole in wages and salaries over the course of the year. So, I look at this hole and then I see $900bn of stimulus in the December package, $1.9tn of stimulus in the recently passed package and $2tn in the savings overhang, which is also likely to be spent. I see the Fed with its foot on the accelerator as hard as any Fed has ever done.
I see serious discussion of trillions of dollars more in fiscal stimulus, along with the explanation that this latest package is not temporary Covid relief, but a harbinger of a major transformation in social policy, which suggests that at least some of it will be continued indefinitely.
So, I look at that dwindling hole. Then I look at expenditures that aren’t hard to add into the multiple trillions, and I see substantial risk that the amount of water being poured in vastly exceeds the size of the bathtub.
The Technocrat, who was the an advocate for the ill fated Gramm-Leach-Bliley,that was the end of Glass-Steagall, that ended in a World Historical Crisis! Who can claim that kind of power? But note that Mr. Summers strategically hedges his bets with Biden: I’m going to focus on the American policy path and not talk about where responsibility lies for that path. Just in case the Biden economic overreach goes wrong, Mr. Summers will be there to assist with an Austerity made to measure.
Here is Robert Kuttner’s revelatory essay on Summers of July 13 , 2020
Headline: Falling Upward: The Surprising Survival of Larry Summers
Sub-headline: The surprising survival of a rebranded Larry Summers, who once again is counseling a Democratic presidential candidate
Larry Summers’s public career has been marked by a carnival of policy debacles, punctuated by his brief, accident-prone tenure as president of Harvard. Yet, at 65, he is once again a senior economic adviser to another prospective Democratic president—one who has gingerly embraced transformative policies that Summers has long opposed.
Joe Biden and his handlers are aware that Summers is radioactive to much of the Democratic coalition. His campaign has downplayed Summers’s role. In fact, Summers is not only part of Biden’s senior economics policy team, but he is able to end-run other advisers and have one-on-one conversations directly with the former vice president.
Though much has been written about Summers, it’s worth reviewing the dynamics of his influence, serial repositioning, and uncanny survival. The more mistakes Summers makes, the more he is treated as a seer. This is a complex man, with a brilliant mind and nimble political skills. He has powerful patrons and protégés. Perhaps most importantly, his views are very congenial to powerful financial elites, who have a great deal to lose should Joe Biden turn out to be another Franklin Roosevelt.
In American History there have been many harbingers (perhaps not a strong enough term?) of catastrophe: Johnson, McNamara Nixon, Kissenger, Bush The Younger, Cheney,Rumsfeld, Obama, Hillary Clinton, John Kerry, Samantha Power, Victoria Nuland, and The Economic Sage Greenspan! The political/economic niche that Mr. Summers has created for himself, places him comfortably with the aforementioned.