If Larry Summers was right about inflation, then what does he see happening next? That’s what I asked myself as I prepared to speak with the noted, public-facing economist this past Thursday.
As you may know, early last year Summers sounded the alarm about President Biden’s $1.9 trillion American Rescue Plan, saying it was the ‘least responsible’ economic policy in 40 years and that it could engender significant and persistent inflation. Turns out Summers, a self-described progressive, was right.
More on what Summers saw that others missed in a second, but first I want to focus on that last political point, because Summers was essentially calling out his own party—which maybe isn’t surprising.
Summers, as I’m sure you know, is not only the whip-smart former Treasury Secretary and former president of Harvard, he’s also known to be candid, sometimes at the expense of people’s feelings, (and for not having an inferiority complex).
A fair trade, I say. You want a sycophant, buy a dog. You want an economist who bars no holds, call Summers.
It’s probably the case that there’s a place for people who are loyalists, and who will advocate for their team. But there’s maybe more value in having advisors who call them like they see them. If you’ve engaged an economist who says things nobody disagrees with, how valuable are they really?
I’ve spoken with Larry many times over the years, and I have to tell you, I know of few individuals on planet earth who possess a greater wealth of knowledge at their disposal which they can share by more cogent and often droll means than he does.
And Larry was in fine form this week — perhaps in part because he’s being given his due — when I caught up with him to do a keynote conversation at the Bruin Capital/Sportico conference at Kiawah, South Carolina, a new event which aims to be the Davos or Sun Valley for the business of sports.
Summers regaled the select assembled audience — commissioners, moguls, team managers and such — with a few tales; his own prowess as an athlete and his take on sports from his former perch as an Ivy League university president. Eventually though we did pivot to economics.
Before I get to what he had to say, let me return to Larry’s inflation warning, which he laid out in a Washington Post opinion piece in February 2021.
Besides Democrats, others, like Fed Governors Richard Clarida and Charles Evans, also criticized Summers’ assessment.
So much so that Summers felt compelled to defend himself in a subsequent Post piece titled, “My inflation warnings have spurred questions. Here are my answers.”(Clarida, who resigned from the Fed earlier this year after he “faced scrutiny about trades he made in 2020 as the central bank was poised to rescue financial markets,” for one, now says he saw the danger of inflation as of last summer and is currently calling for strong interest rate hikes.)
So today, 15 months after that Post piece, Summers is not just looking spot on (though there are those who, while acknowledging Summers was right, say for instance he was right for the wrong reasons), what he predicted seems so obvious that one is tempted to ask Fed governors and rest of the dismal scientists: how did you miss it?
So, what did Summers see?
For one thing, he compared the bailout of 2009 — of which it was later said that the federal government did too little bailing, resulting in the Great Recession — to what he saw at that point last year. This, from the February 2021 Washington Post opinion piece, spells out the gist of Summers’ math:
“…a comparison of the 2009 stimulus and what is now being proposed is instructive. In 2009, the gap between actual and estimated potential output was about $80 billion a month and increasing. The 2009 stimulus measures provided an incremental $30 billion to $40 billion a month during 2009 — an amount equal to about half the output shortfall.
In contrast, recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.”
Bottom line, Summers says: We should have done more in 2008, but we did too much in 2021.
Summers acknowledges supply constraints, those related to COVID especially, as well as Ukraine, and anti-globalism, have also pushed prices higher.
But the real culprit is the demand side. It’s about oodles of money in people’s pockets being spent on everything from sports betting, to meme stocks and crypto, to new houses. I understand that getting the amount of a national bailout right ain’t easy, but I think you can argue convincingly that we overdid it.
And so, cutting to the chase, here’s Summers see going forward:
“I like to try to keep my facts relatively similar,” Summers said this week.
“There’s never been a moment when we had inflation over 4% and unemployment below 4%, when we didn’t have a recession within the next two years. Inflation is now well above 4%. Unemployment is now well below 4%, especially if you adjust for vacancies. So I think it’s pretty likely that we’re going to have a recession sometime within the next two 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? 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 sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
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