In 2009, when the Obama White House was busy charting a course for an economy that had just suffered the biggest hit since the Great Depression, Larry Summers famously joked that fretting about spending too much on the recovery was akin to worrying that he might lose too much weight.
Regardless of the measures taken, “there’s not much danger I’ll become anorexic,” Summers said.
As it turned out, the fiscal stimulus package — which sported a price tag of roughly $800 billion — wasn’t enough. The recovery from the financial crisis was notoriously anemic.
In March and April of 2020, when it became apparent that the lockdowns associated with the global effort to contain COVID-19 were likely to plunge the world into an actual depression (with a “d”), analysts, economists, and even the media seemed hellbent on emphasizing that policymakers mustn’t repeat the mistakes made over the past decade.
Monetary policy would do what it could, but fiscal policy would need to step up, not just to stabilize things in the near-term, but to provide ongoing, sustained, demand-side stimulus. Otherwise, the pandemic would do structural damage, likely worsening existing inequities and exacerbating deleterious societal trends.
And yet, you needn’t have been a fortune teller to predict that even a modest rebound in economic activity would bring out the fiscal hawks and associated calls for austerity. Fast forward nine months and talk of purportedly unsustainable government debt loads is back, along with deficit fearmongering.
Not helping matters is Larry Summers himself, who on Thursday told Bloomberg TV that “I don’t think the $2,000 checks make much sense.”
Summers was, of course, referring to Donald Trump’s “suggestion” that Congress more than triple the size of the direct payments to households included in the latest virus relief package. “We have stimulus already much more than filling out the hole,” Summers said, after running through some ad hoc math.
Then, he suggested the problem isn’t people’s economic capacity to spend, but rather their physical inability to do so given mandatory business closures and travel restrictions.
“They can’t spend — they can’t take a flight or go to a restaurant,” he mused. “I don’t necessarily think that the priority should be on promoting consumer spending beyond where we are now.”
It’s true that spending has rebounded, and that retail sales staged a true “V-shaped” recovery, recouping pre-pandemic levels relatively quickly. But, as Summers surely knows, that was in no small part attributable to transfer payments. Once the effect of social benefits began to wane, so did spending. Just ask November’s personal income and outlays figures or the latest retail sales data.
“I’m not even sure that I’m enthusiastic about the $600 checks,” Summers went on to chide.
He then attempted to justify his position not by reference to the economy, but by way of a strange bedfellows argument. “I have to say that when you see the two extremes agreeing you can almost be certain that something crazy is in the air,” Summers mused. “So when I see a coalition of Bernie Sanders and Donald Trump getting behind an idea, I think that’s time to run for cover.”
Ultimately, Summers said “$2,000 checks would be a serious mistake that would risk a temporary overheat.” Nobody tell that to the millions of people in the world’s richest nation who are currently experiencing some level of food insecurity.
The figures used for the visual (above) are from data on households with children. For those families, the risk of becoming anorexic is real. And not because they’re voluntarily on a diet.
The US budget deficit tripled in 2020 to a record $3.2 trillion, or around 16% of GDP (figure below). That isn’t anything to be concerned about. Labor market slack and output gaps are likely to persist due to the “scarring effect” of the pandemic. So, the idea that more stimulus risks “overheating” the US economy on the way to stoking hyperinflation is dubious in the extreme.
Of course, anything is possible. It was possible, for example, that Summers would “become anorexic” in 2009.
But the world’s largest economy is still 10 million jobs short of pre-pandemic levels. And the virus is still killing more than 2,600 people each day. And lower-income Americans are rapidly running down cash buffers built with the help of federal assistance.
New data from the Chase Institute shows that by October, households that earned between $12,000 and $30,267 last year had lost 64% of the gains in their checking accounts seen in and around the initial stimulus push.
“If these trends continue, we would expect low-income families to deplete their account balance gains sooner than their high-earning counterparts,” JPMorgan’s policy think tank said earlier this month.
Commenting on Summers’s Thursday remarks, Stephanie Kelton had three words: “Fallacious. Grotesque. Voodoo.”
It was a big disappointment when I heard he was going to have a role in the Obama administration. More recently, it was a big relief when I heard he was not going to join the Biden administration.
He is an embodiment of what some in the media might call an out-of-touch elitist. Super intelligent person. The policy ideas and recommendations he advocates for are are stale. Less soap box for Larry.
That goes for a few more of the old white guys who are wedded to old disproven ideas. Stephanie Kelton should be part of the new administration, not ‘old Larry’. He had his chance to be wrong and succeed, now’s the time for Biden to not act his age, race and gender and confine these old farts to the proverbial dustbin of history.
Unfortunately, the economic thinking enunciated by Larry Summers will be amply represented in the Biden administration, Janet Yellen as Treasury Secretary notwithstanding.
Well I did not see the whole “Larry” comment so I will reserve judgement. However, a case could be made to make the aid more focused. In other words, more generousity to the unemployed – longer coverage/larger checks- maybe instead of 300 extra make it $500- I saw a study saying on average the $600 extra replaced 108% of average income, so 500 might be the right number but for much longer (9-12 more months). And if you want to cut checks to many make the income cut off a lot lower- like a phase out at 35k for singles and 75k for families. Maybe you want to also focus on non-eviction as well and providing money for this purpose. I think NYS has this program now. Maybe roll out something nationally. And of course either subsidize/backstop heavily a bonding authority for the Fed to buy 50 year 0% coupon bonds from each state/ state bond bank based on some formula- it could even be forgiven 50 years from now. Or even better, appropriate something like 250 billion for states and localities. Perhaps also think about providing direct aid to food banks too. I could buy Larry Summers’s argument if other more targeted measures were taken.
Ria: All great observations and ideas. Why don’t you apply for a job with the Biden administration?
Forgive student debt. I don’t think we appreciate how far down we’ve pushed the generation who are going to have to live with the mess the wealthy power brokers have made. Our problems, even much of the Covid beat down, are self-inflicted.
A lot of people still touch their normal salary, those do not need 600 dollars, but those who have lost their jobs and thus their income need a lot more, as do the states.
I studied economics at an ivy league university. Towards the end, I was asked How do you feel about economics? Disgusted was my answer…
“Fiscal-monetary partnership ensures that a matching total of the relief money will wind up in the hands of the 1%”
That’s not correct.
The whole point of overt fiscal-monetary partnerships (where that means cutting out the primary dealer middlemen), is to break that chain.
And for God’s sake stop quoting Jurassic Park. It’s a children’s movie.
Oh, ok. I get it. You ask a question, and then when I answer it, you claim you weren’t really asking the question.
“Has anyone other than me even considered cherry-flavored Coke?!”
“Yes, you can buy it at the store. It’s been around for decades. It’s called ‘Cherry Coke’.”
“I wasn’t serious. I knew there was Cherry Coke.”