Just last year, economists and policy-makers were still debating whether inflation was worth worrying about. Some argued that it would be a transitory phenomenon with little real impact on working Americans. Others suggested that things could get worse before they got better.
Today, with inflation clearly a major factor both in our domestic politics and in many other nations, the discussion has moved on to how best to solve the inflation problem.
Former treasury secretary Lawrence Summers recently suggested that the solution—at least here in the United States—is to reverse the present rare moment of job and wage gains (the latter still well behind inflation) and increase the joblessness rate.
“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,” Bloomberg reported Summers as saying in a June speech in London.
Summers’s view—which, alas, is very much in keeping with contemporary orthodoxy—is rooted in the curious notion that if you make enough people poor by taking away their jobs, they won’t be able to buy goods or services, which will result in lower demand and, eventually, lower prices.
But a policy of killing demand by taking jobs from 18 million Americans will leave an awful lot of collateral damage. Before even considering such “kill the patient” remedies, we ought to ask whether better-targeted, non-carpet-bombing-style tactics are available.
One such tactic comes quickly to mind: operating from the supply side of the supply-and-demand divide, rather than from the demand side—which Summers apparently assumes is the only side. Right-wing Friedmanite quotes to the contrary notwithstanding, inflation is, after all, not “always and everywhere a [merely] monetary phenomenon.” It is a money-to-goods phenomenon—“too much money chasing too few goods.” We can act from either side or both sides of that binary.
That Summers would ignore the supply side of the demand/supply equation is not entirely surprising. He was responsible for policies pursued by the Clinton administration that gutted American productive capacity—impoverishing American labor in the process—by offshoring our industry and deregulating anti-productive Wall Street speculation. It was on his watch—and that of his indistinguishable Bush administration counterparts—that we moved from being a republic of producers to an oligarchy of offshorers and financiers.
Our current woes are ultimately rooted in those fateful decisions and their industrial consequences. An America whose domestic supply-making capacity had remained vibrant would have been an America whose supply chains would still be at home—rather than vulnerable to global pandemics, Chinese Covid lockdowns, and capricious Russian invasions as now.
But what Summers and his Clinton- and Bush-era colleagues did, we can now undo. We can eliminate inflation not by killing demand, hair shirt or Stoic style, but by supplying demand—both ours and the world’s, as we used to do.
American doesn’t just need jobs; the whole country needs work. We have to rebuild our crumbling infrastructure along sustainable lines. We have to restore multiple lost industries, and start new ones, in eco-friendly form. We have to reshore our production and supply chains, expand our housing and health care and advanced education availability, and transition our economy from the mid-20th century’s to the 21st century’s “state of the art”—and there’s no time to waste.
Policy-makers and politicians of Summers’s persuasion can’t even see that challenge; hence, they will always miss the opportunity that such challenges raise. Indeed, the ultimate problem with the “solutions” suggested by Summers and his ilk is that they aren’t based on anything like a national vision.
They aren’t guided or buoyed by the ambition to build a strong and growing America. The tools they propose assume that the best we can hope for is a return to the torpid status quo of the mid-2000s. Indeed Summers himself has just admitted desiring a return to—his words—“secular stagnation.”
America needs a new favorite economist. We suggest Bob Dylan, whose admonition that “he not busy being born is busy dying” should be carved into the desk of everyone tempted to listen—yet again—to Larry Summers.
We can do better than “secular stagnation.” We can America-the-hell out of the present challenge. How do we know? Because we’ve done it time and again. If you doubt this, consider just one example: America’s position in mid-1940, after the Nazis stunned the world by overrunning France in six weeks rather than bogging down in trenches as in the First World War. President Roosevelt understood what this new timetable meant. The threat to America and other free countries was far more imminent than had been appreciated; the US would have to reclaim its industrial capacity—wiped out by the Great Depression—virtually overnight.
Roosevelt thus famously called for the manufacture of 50,000 warplanes per year—this in a country that had produced barely 3,000 the year before. This call was equally famously mocked by the Larry Summerses of the time as “unrealistic.”
Yet the United States was soon manufacturing tens, then scores of thousands of warplanes a year. And not just planes. Also tanks, trucks, warships, cargo ships, artillery, small arms, ammunition, housing for war production workers, schools for their children… We even started new industries from scratch—synthetic rubber, for instance, once the Japanese invasion inconveniently ended our access to natural rubber in the South Pacific.
How did we do all of this? We did it by combining the strengths of the public and private sectors. FDR’s War Production Board (WPB), Reconstruction Finance Corporation (RFC), and other bodies coordinated efforts and supplied both financing and plant, not to mention housing and health clinics and roadways and power grids for a mobile labor force. Private-sector firms and their workers then used the provided facilities to do what they knew how to do best—to produce.
World War II was won in America’s planning bureaus and factories at least as much as on oceans and battlefields. And the capacity we built up to win it powered the most productive and prosperous peacetime economy in history for decades after.
Our challenge today is much the same as it was in the summer of 1940. The industries of tomorrow are already emerging: semiconductors, high-capacity batteries, electric vehicles and their charging infrastructure, rare earth metals, wind power, solar power, heat pumps, advanced pharmaceuticals, etc. The United States invented most of these new technologies and the uses to which they are applied, but does virtually no manufacturing in them now.
At New Consensus, we have urged President Biden since 2020 to impanel a 21st-century counterpart to FDR’s WPB—what we call a National Reconstruction and Development Council—to coordinate a return of the US to global productive preeminence in all of the industries of tomorrow. This council, like its predecessors, would include all relevant White House cabinet officials and all American leaders of relevant industries. Its purpose would be nothing short of coordinating the comprehensive reindustrialization of America—in all of the environmentally friendly industries of tomorrow.
Our plan also upgrades the Treasury’s Federal Financing Bank (FFB) to enable it to do just as much financing of redevelopment as FDR’s RFC did of the WWII mobilization. The object must be, in a slogan, to “Make America Make Again.” The object must be to make America the world’s preeminent manufacturer and exporter again. If we could be the world’s “Arsenal of Democracy” in the 1940s, we can certainly be the world’s “Arsenal of Planetary Preservation and Progress” now.
It’s said that if all you have is a hammer, everything looks like a nail. Well, if you think all you have is the Federal Reserve, everything might likewise look like a Friedmanite “monetary phenomenon.” We have much more in our toolbox than the Fed, though, and it’s high time that we used what we have to turn Summers-style “fate” into FDR-style choice again.
Summers and his ilk might be content with taking the easy way out for policy-makers and letting millions of Americans do the hard work of trying to survive without a job. After all, he’s at the end of his career—and a multimillionaire to boot.
What America needs now are leaders who are willing to do the hard work of learning from our own past and opening a new path for America, jump-starting the industries and jobs of the future, and meeting our citizens’ and the world’s demands for the products of then and now. As we follow that lead, the inflation of today will shrink quickly in the rearview mirror of tomorrow.