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Guest Essay
Larry Summers Shares the Blame for Inflation
Mr. Dayen is the author of two books about Wall Street and the economy. He is also the executive editor of The American Prospect, whose latest issue focuses on the supply chain disruptions of the past two years, and the policies that led to them.
“Any honest Democrat will admit that we are now all Friedmanites,” Larry Summers wrote in The Times in 2006. Mr. Summers comes from a family of left-leaning economists who saw Milton Friedman as a “devil figure.” But as he moved into the upper echelons of the family profession, Mr. Summers came to have “great admiration” for the conservative thinker and his work.
The transformation reflects how elite economists in both parties reached a rough accord on the importance of free markets, free trade, and restrained regulation. Each side believed they could harness these forces for liberal or conservative ends. And there was little disagreement about the means.
Virtually every American feels the consequences of this today, whenever we visit a grocery store with empty shelves, or do a double-take at the price of an appliance. For decades, economists like Mr. Summers advanced policies like globalization, deregulation, and markets that valued efficiency over competition. They promised that these trends would deliver lower prices. And they did, for a time. But they also left the system vulnerable. During the pandemic, when demand burst beyond what the system could handle, prices for shipping soared, ports clogged, trucks and railroads lacked manpower, and underinvested companies scrambled for logistics workarounds and warehouse space. Increased shipping and distribution costs have undeniably raised prices.
Mr. Summers has been focused on a different story, warning that government spending could increase inflation. With prices rising at the fastest rate in 40 years, he has been lauded for making the right call. “Does the WH owe Larry Summers an apology?” Politico asked last November.
The problem with this reading is that the economy hasn’t really overheated. Real gross domestic product and employment are still lower than prepandemic projections, according to government statistics. Yes, consumer spending patterns have shifted from services to goods, but that began two years ago; the fact that our supply chains still cannot adjust reflects a bigger problem with how they were designed.
Mr. Summers’s claims don’t express an economic truth. They seem designed to deflect blame. A leading economic adviser in the Clinton and Obama presidencies, Mr. Summers is prominent among the fraternity of mainstream economists who are deeply implicated in building the system at the heart of our current predicament, and setting up our economy for failure. If engineers constructed a bridge this prone to collapse, they’d be fired. But with our accountability-free elites, being an economist means never having to say you’re sorry.
Mr. Summers built an early reputation as an economic wunderkind, earning tenure at Harvard at age 28. Stagflation in the late 1970s had sent New Deal-style Keynesianism into retreat, and thrust into prominence Friedman’s vision of a marketized economics that catered to the whims of large corporations. As Friedman asserted, also in The Times, the sole social responsibility of business is to increase profits. Cut regulations, cut taxes, and allow companies to structure markets, people like Friedman maintained, and watch the economy take off.
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- Ezra Klein speaks to David Shor, who discusses his fear that Democrats face electoral catastrophe unless they shift their messaging.
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During Mr. Summers’s formative years, this logic became the dominant current of economic thought. Mr. Summers spent a year under conservative economist Martin Feldstein in the Reagan administration; his generation “re-emphasized the importance of markets and the failures of government,” according to Mr. Summers’s mother, also an economist.
As under secretary for international affairs in Bill Clinton’s Treasury Department, Mr. Summers was at the forefront of encouraging developing nations to open their markets, a kind of enforcer of globalization. Later, as Treasury secretary, he helped facilitate China’s entry into the World Trade Organization and argued that the United States should give China “permanent normal trade relations” (or P.N.T.R.) status. Mr. Summers told the Senate Banking Committee in 2000, “It is difficult to discern any disadvantage to the United States” from the policy.
During the Carter era moves were made toward deregulation in transportation services like trucking and rail. In the Clinton years, a little-remembered law called the Ocean Shipping Reform Act of 1998 helped carry that over to ocean ships. Mr. Clinton also continued a trend toward economic concentration that began in the Reagan administration. If Mr. Summers opposed the deregulation and consolidation that occurred during his tenures with Mr. Clinton and Barack Obama, I have found no evidence that he said anything about it. In fact in 2001, he stated that “the goal is efficiency, not competition.”
U.S. financial services, which under P.N.T.R. pried open the Chinese market, grew enormously powerful in this period, too. Mr. Summers fought the regulation of derivatives and pushed Congress to eliminate the separation of investment and commercial banks. Where finance accounted for 15 percent of corporate profits in the U.S. economy before the 1970s, it grew to 43 percent by 2002, after this economic restructuring. Later, when runaway financial innovations (including the derivatives Mr. Summers did not want to regulate) collapsed the world economy, Mr. Summers, as Mr. Obama’s chief economic adviser, pushed for banks to be protected with bailouts, maintaining the status quo.
Mr. Summers was not especially novel in his preferences. He fit within an economist consensus that has largely governed the country since the late 1970s. The free trade consensus enabled corporate executives to chase cheap labor and centralize production. The just-in-time consensus pushed companies to only order what’s needed to pass on to customers, with inventories seen as unnecessary costs. The bigger-is-better consensus encouraged mergers and market dominance. The deregulatory consensus breaks worker power and greases the whole system. The Wall Street consensus lets investors dictate adherence to everything else, demanding ever-higher profits and returns that flow not into reinvestment but to them, in the forms of stock buybacks and dividends.
The gamble of such a system paid off, for a while. In 2005, Mr. Summers’s longtime collaborator Jason Furman best explained the philosophy when he pronounced retail behemoth Walmart a “progressive success story,” in part because of its ability to deliver low prices. “There is little dispute that Wal-Mart’s price reductions have benefited the 120 million American workers employed outside of the retail sector,” Mr. Furman wrote. That seemed to override everything else: low wages, competitors driven out of business, manufacturing jobs shipped overseas, communities hollowed out across America.
The trade-off was clear: sacrifice resiliency, wage security, and community for the promise of a five-dollar pack of tube socks. And the Summers-Furman side initially delivered: Prices for consumer goods, at least, did fall. Assuring these low prices became an important goal; while some liberals wanted to bring back manufacturing jobs to the United States or maintain reserves of vital goods, the threat of higher costs was enough to keep the system in place.
But the adherents of hyper-efficiency do not seem to have emphasized what might happen if there was a breakdown anywhere in the system. Economists spat out their models and assured us that very little could stop the global production engine. But their models did not adequately contemplate the physical world. And that’s why the system Mr. Summers and Mr. Furman helped build was so primed for collapse, and why the low prices, intended to be the compensation for increased inequality and left-behind regions, vanished in a matter of months.
The policies many of these economists championed during the decades leading up to the pandemic are the policies responsible for the supply chain’s fragility. When disruptions hit the center of global production in China, they spread across the entire world. Specialized facilities producing most of a particular good or component can easily produce shocks with even a small loss of output.
Shipping deregulation passed during the Clinton administration helped lead to ever-larger container vessels that can only dock at certain U.S. ports, further narrowing bottlenecks. The twin ports of Los Angeles and Long Beach are responsible for about 40 percent of all seaborne imports in the United States; by early January, 105 ships were awaiting entry offshore, and import volume had fallen, despite the increased demand, for four straight months. Trucking deregulation has similarly contributed to bottlenecks, as long hours, poor working conditions and inadequate wages have made it next to impossible for port truckers to stay in the industry.
The financier-above-all approach Mr. Summers helped entrench made things worse. Preferences for lean inventories meant there were no reserves when things spun out of control as the pandemic hit. Precision scheduled railroading, a Wall Street tactic of cutting back on service and spare capacity to maximize profits, made it difficult for rail lines to handle rising demand.
Economists often seem to assume corporate self-interest will sort this out, that the prospect of more sales will create urgency to move supply. But concentration along key nodes of the supply chain (three ocean carrier alliances control most shipping, two railroads control eastern routes and two others control western ones) have brought skyrocketing profits to the companies at the center of the chaos. The shipping industry earned twice as much in the first three quarters 2021 as it did in the entire period between 2010 and 2020.
Similarly, big businesses are announcing in earnings calls that they are using this opportunity to lock in higher prices, well above rising input costs. Estimated profits for S&P 500 firms rose nearly 50 percent in 2021. Bigger businesses also circumvented supply chain issues by demanding that suppliers fulfill their orders first, raising costs for smaller rivals. The supply chain mess, in other words, has also been a consolidation event, harming workers and communities.
The bottom line is that a system without redundancy and flexibility, which assumes that the corporate executives who control it are doing everything in their power to prevent it from breaking, is simply unsustainable.
The shocks will only continue until we reverse course on this prevailing consensus. 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. They failed to recognize how things could crumble because of the vulnerability they engineered.
No country can be perfectly self-sufficient; imports and shipping will still exist. But we can ensure some stability through bringing back manufacturing of critical goods to our shores, while maintaining productive capacity and strategic reserves. Public utility regulation can ensure smoother flow of goods, and competition policy can eliminate price gouging. And infrastructure investments like we’re currently embarking on can force open bottlenecks.
Economists will howl that losing efficiency will raise costs. Those words ring hollow in the face of the highest inflation in 40 years. Broken systems raise costs far faster than resilient ones.
Mr. Summers seems to acknowledge, at least partially, the extent to which his economic school of thought was responsible for the fragility of the supply chain. In a 2020 interview with The American Interest, he acknowledged the need to develop industrial capacity in the U.S. “In general, economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency,” Mr. Summers said. “Going forward we will need more emphasis on ‘just in case’ even at some cost in terms of ‘just in time.’ ”
But it’s not enough for him to simply acknowledge the downsides of efficiency. There is a live debate over how to solve the problem going on right now, as the Biden administration takes the first steps toward prioritizing resilience by attempting to re-regulate shipping companies, encourage competition to weaken corporate pricing power, and support domestic manufacturing. 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.
David Dayen (@ddayen) is the executive editor of The American Prospect and the author, most recently, of “Monopolized: Life in the Age of Corporate Power.”
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