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.”