Larry Summers was Biden’s biggest inflation critic. Was he wrong?
The former Democratic treasury secretary, hailed for predicting inflation, now faces scrutiny over projections of spiking unemployment
The bonhomie has not always lasted. For two years, White House officials and Summers have often been on opposite sides in one of the most important debates in economics: what caused inflation, and how to rein it in. The dispute matters not just for the reputations of squabbling economists, but for the future of Democratic policymaking. As inflation has plummeted while unemployment remains low, the president’s allies see not just a strong run of economic data but a new model for policymakers — proof of what is possible if the government is willing to be aggressive in fighting downturns.
Summers is the most prominent expert who disagrees. He blasted the administration’s $1.9 trillion 2021 stimulus law, the American Rescue Plan, for exacerbating inflation, arguing through 2022 that the U.S. economy would probably need a spike in unemployment for price hikes to fully abate and accusing President Biden’s team of the “least responsible” macroeconomic policy in 40 years. Biden’s economic policies had overstimulated the economy, Summers said on cable TV, in op-eds and in interviews, as well as in private talks. And he maintained it would almost certainly take a major slowdown — and millions of lost jobs — for inflation to return to the Federal Reserve’s 2 percent target. (Summers said he did not want to see a rise in unemployment, just that it was likely.)
Increasingly, that prediction looks unlikely to be right. Inflation has dropped from 9 percent to 3.2 percent with no discernible jump in unemployment, fueling optimism inside the White House that a “soft landing” is possible for the economy.
Biden last year instinctively rejected the notion pushed by Summers that taming inflation would require policies that would throw millions of people out of work, according to five people familiar with the president’s private remarks, who spoke on the condition of anonymity to reflect the conversations. The president’s allies are newly optimistic the brightening economic mood will further discredit the notion that a recession is necessary to tame inflation.
Despite the disagreement between Biden and Summers, senior White House aides still talk to Summers frequently and routinely seek his input. Summers has been to the White House several times this year alone, even as he continues to publicly hammer Biden’s industrial policy, student loan forgiveness and other economic programs.
“Sometimes we agree, sometimes we disagree, but there’s strong mutual respect, and we always welcome Larry’s insights,” said Jared Bernstein, chair of the White House Council of Economic Advisers.
Along with other centrist economists, Summers says inflation remains dangerously high, warning it could reaccelerate. The latest inflation report shows prices rising by 3.2 percent in July relative to one year ago, but a less volatile measure of price increases is still at 4.7 percent. The labor market remains strong not because Biden has defied the laws of economic reality, according to Summers, but because the battle against inflation is still far from won. Summers maintains the rescue plan sparked inflation that is at risk of becoming “entrenched” — a long-term problem for consumers and businesses.
“I don’t think anybody should reach any definitive judgments until we see how things play out,” Summers said in an interview. Summers said his predictions were based on standard macroeconomic models, and not meant to be interpreted as precise estimates. “The idea that bringing down inflation has nothing to do with increasing unemployment runs different from all conventional macroeconomic assessments.”
Publicly, the party’s officials continue to defend the rescue plan as necessary to grow the economy after the recession caused by covid. Privately, many Democratic lawmakers are ambivalent about the legacy of the bill, after punishing price hikes and the GOP attacks that followed. If inflation keeps easing while job growth remains robust — in defiance of Summers’s predictions — that would bolster the rescue plan’s defenders, as would a successful Biden 2024 reelection campaign.
“The Democratic Party is currently split between people who thought the American Rescue Plan was appropriately sized and absolutely necessary — and those who think it was too big and had collateral effects that were quite damaging,” said Bill Galston, a policy analyst at the D.C.-based Brookings Institution who served in the Clinton administration. “This is a moral question, but it’s also a political question. If Joe Biden loses the election principally because of economic discontent over inflation and high prices, then a lot of Democrats will conclude it was not worth it.”
A top aide to Presidents Bill Clinton and Barack Obama, Summers had a large platform to criticize the law, warning as it was passing that it was too big and could spark runaway inflation.
White House aides downplayed that possibility, and once the inflation Summers predicted did emerge, they insisted that it would only be “transitory.” When that proved untrue, the president lashed out at his staff and repeatedly reached out to Summers, who was also central to the White House’s efforts to persuade Sen. Joe Manchin III (D-W.Va.) to back the Inflation Reduction Act, which Summers supported despite his qualms with the 2021 law.
But Summers has also made predictions that still do not appear to have been borne out. In a June 2022 speech at the London School of Economics, when inflation was at its 9.1 percent peak, Summers said the nation would “need” substantially higher levels of unemployment for inflation to come down.
“We need five years of unemployment above 5 percent to contain inflation — in other words, we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment,” Summers said, later clarifying to Slate he was not “advocating increases in unemployment as a strategy.”
That same month, Summers and a co-author wrote that reducing job vacancies by 20 percent “requires, on average” a three percentage point increase in the unemployment rate. The number of job openings has fallen about 16 percent with no discernible jump in unemployment.
In September 2022, Summers reiterated the point to Fortune: “I’m not sure you’re restraining inflation until you get the unemployment rate close to 5 percent, and to significantly restrain inflation you’re likely to need unemployment for some period at 6 percent.” The unemployment rate was 3.5 percent then and is the same level now.
In more recent interviews, Summers has defended his estimates by pointing out that inflation remains above the Fed’s 2 percent target. In particular, Summers emphasizes that it was always the case that transitory factors — such as soaring gas prices — pushed inflation up higher, to closer to 8 percent, but that the more stable “underlying” inflation was closer to 4.5 percent.
Even with lower overall inflation, Summers argues, underlying inflation remains largely unchanged — though the decline in transitory prices makes the problem appear to be going away.
“I think it’s fair to say — given how hot the economy is — the inflation performance at this point is better than I think many standard models would have predicted,” Summers said. “But I don’t think that all establishes we’re on a confident glide path to 2 percent with current rates of unemployment.”
Olivier Blanchard, who served as chief economist of the International Monetary Fund, agreed that the unemployment rate needs to be higher to “eliminate overheating” in the labor market that is pushing prices up. “With very high probability, we need an increase in unemployment to get inflation fully under control,” Blanchard said in an email. Jason Furman, a former Obama administration economist and a Harvard colleague of Summers who predicted unemployment would reach 6.5 percent to get to 2 percent inflation, said that “literally nothing in the data would cause you to reject” that view.
More liberal economists argued that Summers misdiagnosed the cause of higher inflation, and therefore missed the cure. These economists contend that price spikes were overwhelmingly caused by supply chain disruptions, including lingering shocks from the pandemic and Russia’s invasion of Ukraine, not by too much government stimulus. As supply chains have normalized, so too has inflation.
One White House official, speaking on the condition of anonymity to describe Biden aides’ thinking, said some economic forecasters gave too much weight to excessive stimulus as the cause of inflation, missing other factors, such as a temporary covid-driven shift in consumer purchasing behavior. These forecasters also incorrectly anticipated that the decline in the number of workers would be permanent, which hasn’t been true either, the White House official said.
Skanda Amarnath, executive director of the left-leaning think tank Employ America, emphasized that inflation is “now broadly decelerating,” not just in some idiosyncratic or transitory factors such as energy and used cars but across a large range of categories — household furnishings, technological equipment, wages, legal and professional services, and more.
“Larry was very blunt: He said the only way to get it down was a very high period of unemployment. We are clearly not seeing that,” said Dean Baker, an economist at the Center for Economic and Policy Research, another left-leaning think tank. Lindsay Owens, executive director of the left-leaning Groundwork Collaborative, was even more direct: “It’s time for Democrats to turn the page on Summers for good.”
Having been wrong about inflation’s rise, White House officials are now wary of too aggressively celebrating its fall. Biden is quick to emphasize in his speeches that the job is not yet done. And despite their diverging predictions, Summers remains in close contact with numerous senior White House officials, who contacted him during this year’s regional banking crisis and the debt ceiling standoff with congressional Republicans, the White House official said.
But that doesn’t mean Biden and his aides are pulling their punches entirely.
“Remember when the experts said that to get inflation under control we needed to lower wages, and drive up unemployment? I never bought that,” Biden tweeted on July 20. “Instead, I focused on getting more Americans into the workforce, fixing our broken supply chains, and lowering costs.”
Summers remains unconvinced about the rescue plan, pointing to substantial “unhappiness in the middle class about the state of the economy” over the last two years, mostly driven by inflation.
But, he added: “If a soft landing is achieved — with inflation coming down to normal levels where it’s not a major concern, without an increase in unemployment — this is all going to look much better than it does … Nobody can know with confidence what the answer is going to be.”
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