One heartening fact about Joe Biden is that he’s the first Democratic president in nearly 40 years who is not employing the services of Larry Summers, one of the most influential neoliberal economists of the last few decades. Summers has been a perennial power player ever since he served on the Council of Economic Advisers under Ronald Reagan from 1982–83. His Reaganite roots didn’t stop him from being repeatedly elevated to commanding positions of authority under the administrations of Bill Clinton and Barack Obama. He was secretary of the treasury from 1999–2001 and director of the National Economic Council from 2009–10.
The usual line of defense Summers’s political patrons give is that although he’s notoriously abrasive, he is also brilliant. In 2009, Naomi Klein challenged the high marks Summers gets for braininess by observing in The Washington Post, “For all his appeals to absolute truths, [Summers] has been spectacularly wrong again and again. He was wrong about not regulating derivatives. Wrong when he helped kill Depression-era banking laws, turning banks into too-big-to-fail welfare monsters. And as he helps devise ever more complex tricks and spends ever more taxpayer dollars to keep the financial casino running, he remains wrong today.”
Klein’s criticism is an expert distillation of the left-wing critique of Summers. There’s reason to think that even some of his former patrons have come around to seeing the truth of this indictment. In 2010, Bill Clinton said that the advice he received from Larry Summers and former Treasury Secretary Robert Rubin not to regulate derivatives was “wrong” and he regretted following it.
The growing consensus that Summers was mistaken about big issues explains why he has been shut out of the Biden administration. Summers did briefly advise candidate Biden in the summer of 2020, but the outcry from progressives ended the Biden campaign’s relationship with the controversial economist.
Losing access to the president’s ear hasn’t dampened Summers’s desire to shape policy. In a much-read Washington Post op-ed on Tuesday, Summers argued that the $1.9 trillion stimulus pushed by Democrats could be too large and risk overheating the economy. He warned that “there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.” Summers’s dire prediction relies heavily on Congressional Budget Office (CBO) projections that the American economy is already heading for a swift and robust recovery.
The danger is that there are still enough Democrats in power who respect Summers that his alarmism could be contagious. On Tuesday, Politico reported, “Everyone in the West Wing is reading a Larry Summers op-ed being circulated among liberal policy wonks. Why? Summers put down on paper what many liberal wonks have been whispering about for weeks: That President Biden’s stimulus bill may be too big.”
Significantly, a number of high officials, including Biden himself, went on the record challenging Summers’s position either directly or indirectly. Biden told reporters, “The one thing we learned is we can’t do too much here. We can do too little. We can do too little and sputter.” Treasury Secretary Janet Yellen addressed the idea that Biden could be doing too much stimulus by saying, “I have to worry about all the risks to the economy … and the most important risk is that we leave workers and communities scarred by the pandemic … that we don’t do enough.”
Biden and Yellen are wise to disregard Summers’s unwanted advice. As it turns out, Summers as an editorial-page Cassandra is as wrongheaded as he was as policy-making panjandrum.
Other economists have been scornful of Summers’s claims. In a phone call, James Galbraith of the University of Texas mocked Summers’s reliance on the CBO’s projections. “These silly calculations of excess capacity are the absolutely dumbest thing in the mainstream economist toolkit,” Galbraith insisted.
There is no reason to believe that the CBO can know what the economy will be like in the coming year, since the primary engine driving events is not economy activity but a pandemic. There are all sorts of unknown factors, including the emergence of Covid-19 variants, that make predicting the future a mug’s game.
Indeed, the latest economic news doesn’t suggest a quick rebound but renewed stalling and a long-lasting recession. As The New York Times reported on Wednesday, “Over all, the economy in January had 9.1 million fewer jobs than a year earlier, a 6.1 percent shortfall. That is consistent with a severe recession.”
Amanda Phalin, economist at the UF Warrington College of Business, is puzzled by Summers’s fears of inflation. “Scolds have predicted inflation for well more than a decade, and it has not appeared, even with the historically low unemployment before the pandemic,” Phalin informed me in an e-mail. “There are no indications that we’re going anywhere above the usual 2% that signals steady aggregate demand. And if we did, so what? The downside risk to not doing enough is far greater, in my opinion. Moreover, if inflation appears, it’s relatively easy to control—not pretty, not fun, but we do not run the risk of hyperinflation.”
Much of Summers’s argument isn’t economic at all but political. He worries that if Biden expends political capital on a big stimulus now, there won’t be either the capacity or will to do more spending on needed public investment in the future. But this political calculus makes little sense. Biden has a short window of opportunity to get the economy back on track before the 2022 midterms. If he stints stimulus now, as Obama did in 2009, that will insure a Democratic wipeout in 2022 that could rival the legendary shellacking of 2010. The quickest way to lose political capital is to refrain from stimulus spending now.
Dean Baker, senior economist the Center for Economic and Policy Research, disputes Summers’s claim that the stimulus will hamper public investment. “Money that goes to state and local governments will allow them to do investment, even if it is not designated as such,” Baker told me in an e-mail. Writing in The American Prospect, Robert Kuttner makes a similar argument, noting that “most of the Democrats’ proposal is not about a macroeconomic gap. It’s directed toward vaccine supply and distribution, and relief for struggling schools and flattened state and local budgets and public services. Only about $420 billion goes for direct payments to individuals, and some of that will replenish savings or pay down debt (as opponents of the Biden plan have argued in other contexts).”
Summers’s reasoning makes little sense as either economics or politics. Kuttner describes Summers as a “vindictive SOB” whose arguments are just the sour grapes of a rebuffed office-seeker. Normally, one would avoid such personal speculations, but given how unmoored the Summers article is from reality, it is hard to resist that conclusion.
Realizing that it is always best to ignore Larry Summers has been a hard-won lesson for Democrats. In the difficult months ahead, they’ll need to hold fast to this crucial truth.