If Larry Summers was right about inflation, then what does he see happening next? That’s what I wondered as I prepared to speak with the famous public-facing economist last Thursday.
As you may know, early last year Summers sounded the alarm about President Biden’s $1.9 trillion. US rescue plan, saying it was the “least responsible” economic policy in 40 years and could lead to significant and persistent inflation. Turns out Summers, a self-proclaimed progressive, was right.
More on what Summers saw that others missed in a second, but I want to focus on that last political point first, because Summers was basically calling his own party, which perhaps isn’t surprising .
Summers, as you surely know, is not only the former Secretary of the Treasury and former President of Harvard, he is also known for being outspoken, sometimes to the detriment of people’s feelings (and for not having a complex of inferiority).
Fair trade, I say. You want a sycophant, buy a dog. You want an economist who doesn’t hesitate, call Summers.
It’s probably the case that there is a place for people who are loyalists and who will defend their team. But there’s perhaps more value in having advisers who call them what they see them. If you hired an economist who says things no one disagrees with, what is their real value?
I have spoken with Larry many times over the years, and I must tell you that I know few individuals on planet Earth who have a greater wealth of knowledge at their disposal that they can share in more convincing and often funny than him. Is.
And Larry was in top form this week — perhaps in part because he’s getting his due — when I caught up with him to do a keynote chat at the Bruin Capital/Sportico conference in Kiawah, South Carolina, a new event that aims to be the Davos or Sun Valley for the sports business.
Summers regaled the select audience – stewards, moguls, team leaders and others – with a few stories; his own prowess as an athlete and his vision for sport from his former position as president of the Ivy League University. Finally, we turned to the economy.
Before I get to what he had to say, let me go back to Larry’s inflation warning, which he featured in a Washington Post grandstand in February 2021.
Besides Democrats, others, like Fed Governors Richard Clarida and Charles Evansalso criticized Summers’ assessment.
So much so that Summers felt compelled to defend himself in an upcoming To post piece titled “My inflation warnings raised questions. Here are my answers.”(Clarida, who resigned from the Fed earlier this year after “came under scrutiny for trades he made in 2020 as the central bank was poised to bail out financial markets,” for a, now says he saw the danger of inflation as early as last summer and is currently calling for steep interest rate hikes.)
So today, 15 months after that To post piece, Summers isn’t just perfect (although there are those who, while acknowledging that Summers was rightsay he was right for the wrong reasons, for example), what he predicted seems so obvious that one is tempted to ask Fed governors and the rest of the gloomy scientists: how did you miss it?
So what did Summers see?
On the one hand, he compared the 2009 bailout – which the feds were later told had done too little bailout, resulting in the Great Recession – to what he had seen then- there last year. This, of February 2021 Washington Post opinion piecelays out the essentials of Summers’ mathematics:
“…a comparison between the 2009 stimulus package and what is now on offer is instructive. In 2009, the gap between actual and estimated potential output was around $80 billion per month and growing. The 2009 stimulus measures provided an additional $30 billion to $40 billion per month in 2009, an amount equal to about half of the output shortfall.
In contrast, recent estimates from the Congressional Budget Office suggest that with the already adopted a 900 billion dollar package – but without further stimulus – the gap between actual and potential output will narrow from about $50 billion a month at the start of the year to $20 billion a month at the end. The proposed stimulus package will total around $150 billion a month, even before considering any follow-up action. That’s at least three times the size of the production gap.
Bottom line, says Summers, we should have done more in 2008, but we did too much in 2021.
Summers acknowledges that supply constraints, those related to COVID in particular, as well as Ukraine and globalism, have also pushed prices up.
But the real culprit is demand. It’s about tons of money in people’s pockets being spent on everything from sports betting to meme and crypto stocks to new homes. I understand it’s not easy to get the right amount out of a national bailout, but I think you can argue convincingly that we’ve done too much.
And so, to cut to the chase, here’s Summers moving forward:
“I like to try to keep my facts relatively similar,” Summers said this week.
“There’s never been a time when we’ve had inflation above 4% and unemployment below 4%, where we haven’t had a recession in the next two years. Inflation is now well above 4%. Unemployment is now well below 4%, especially if vacancies are taken into account. So I think it’s quite likely that we will have a recession in the next couple of years. I’m more confident about that than I am about what’s going to happen to interest rates.
Ok, so that’s bad. But hey, we see it coming, right? It’s time to hedge your bets.
This article was featured in a Saturday edition of the Morning Brief on May 14, 2022. Get the Morning Brief delivered straight to your inbox Monday through Friday by 6:30 a.m. ET. Subscribe
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