Brian Deese, the current head of the National Economic Council, was one of his closest aides during the financial crisis. The chair of the Council of Economic Advisers, Cecilia Rouse, had him as an adviser in graduate school. And Gene Sperling, who will oversee the president’s $1.9 trillion economic rescue plan, used to make annual trips with him to a Florida tennis camp.
Just about everywhere you look in the Biden White House, you can see former treasury secretary Larry Summers’s influence. Everywhere, that is, except for the policies.
Summers, 66, who drafted economic blueprints for the past two Democratic presidents and was a top candidate to lead the Federal Reserve Board under President Barack Obama, has emerged in recent weeks as the loudest critic of President Biden’s approach to reviving the pandemic-era US economy. The Harvard University professor — who advised Biden for a time last summer — warns that the president’s stimulus plan may trigger the highest inflation in more than half a century and could cost Democrats the chance to make lasting investments in the economy.
Summers’s Cassandra-like critique has ignited a firestorm among liberals, his traditional adversaries, who blame him for financial industry deregulation in the 1990s that contributed to the financial crisis and for the anemic recovery that followed. But his arguments also have been swatted aside by his erstwhile allies in the White House, the Treasury Department, and the Federal Reserve, who argue that the economy is in desperate need of help.
’'This might not have struck as much a nerve if it didn’t reflect concerns that were widely felt,’' Summers said in a 45-minute telephone interview last week.
The extraordinary clash between a globally recognized Democratic economist and a Democratic president hoping to enact the most transformative liberal agenda since the Great Society involves both the central issues of the day and the lessons of history.
If he at times has veered into hyperbole, Summers nonetheless has given voice to an unpopular opinion that many in the Democratic camp say deserves consideration. Few other Democratic economists seem willing to air such concerns, perhaps for fear of imperiling Biden’s ability to translate his fragile congressional majority into decisive action.
Summers’s complaint about an oversized stimulus ’'was what a lot of people were saying privately, what was being whispered by people without his voice or without his platform who were nervous about going public,’' said Jason Furman, who was Obama’s Council of Economic Advisers chair and disagrees with Summers’s inflation assessment.
At issue are the risks and opportunities involved in restarting a $20 trillion economy and the unresolved debate over the mistakes made in responding to the 2008 financial crisis.
Summers says the Biden administration’s spending plan was drafted to satisfy political realities rather than economic requirements, and it is courting disaster. The Biden brain trust and other economists, including Paul Krugman, a winner of the Nobel Prize in economics, say he’s misreading the moment and overstating the downside risks.
’'The discussion he’s trying to push is one we should have,’' said Claudia Sahm, a longtime Summers critic and a former Federal Reserve staff economist who is now at the Jain Family Institute. ’'But it’s so out of proportion. And since [the bill] passed, he’s gotten more and more vicious.’'
Summers began warning of economic overheating late last year, criticizing the proposed $2,000 stimulus checks for individual Americans as ’'bad economics.’' When he made that argument, in a piece for Bloomberg Opinion, the idea had already been endorsed by House Speaker Nancy Pelosi, Democrat of California, and soon-to-be Senate majority leader Charles Schumer, Democrat of New York. Biden joined them days later.
Last month, as Congress was considering Biden’s $1.9 trillion American Rescue Plan, Summers criticized it in a Washington Post opinion piece as excessive and poorly designed. Too much would be spent sending checks to people who didn’t need the money, while almost nothing would be used to increase the economy’s long-run potential, he said.
Summers acknowledged that the Obama administration hadn’t spent enough to bolster the economy after the 2008 financial crisis. But Biden’s rescue plan would learn that lesson too well, adding too much fuel to an economic fire that would already be raging by the time the money arrived.
The pandemic had punched a roughly $20 billion hole in Americans’ monthly wage income, he said. Biden proposed filling it with more than $100 billion. Coupled with the Federal Reserve’s ultralow interest rates, Washington’s spendthrift ways could send prices soaring.
’'I know the bathtub has been too empty,’' Summers said. ’'But one has to think about what the capacity of the bathtub is and how much water we’re trying to flow into it.’'
Summers worries that a reopened economy could rev out of control. Either a surge of demand overwhelms producers and sends prices soaring or the Fed will try to prevent that inflationary spike by abruptly hiking interest rates, plunging the economy into a new recession.
There’s only a 1-in-3 chance that the administration enjoys a boom that settles into years of sustainable growth, he said.
’'We’re taking substantial risks,’' Summers said.
The United States could suffer the sort of price spiral that hasn’t been seen since the late 1960s, when President Lyndon B. Johnson refused to raise taxes to cover the combined costs of his domestic agenda and the Vietnam War, he says. From 1.6 percent in 1965, inflation ticked up to nearly 6 percent five years later.
The architects of Biden’s plan say any inflationary risks pale alongside the damage that could be done to millions of Americans if the administration doesn’t restore a vibrant economy. Spending on roads, bridges, and rural broadband networks, which could lift economic growth in the long run, was always envisioned as the second part of a two-step maneuver.