“Look, we need to help people,” Larry Summers said, in a kind of deliberate drawl on Monday, during another chat with Bloomberg Television.
Taylor Riggs stared back at him, her trademark smile bent into a slight smirk.
“There are millions of people who desperately need help, especially right now, but at all times, as inequality has risen and our economy has stagnated,” Summers continued.
Normally, I’d fault Bloomberg for having this conversation with Summers again, given the somewhat insulting character of his remarks around stimulus checks last week, and the equally insulting Op-Ed he published on Sunday.
In his piece, called “Trump’s $2,000 Stimulus Checks Are a Big Mistake,” Summers trots out a lot of economics and some numbers, none of which are any semblance of sophisticated, and all of which are subject to this standard criticism: Economics is a soft science. It’s no closer to being a hard (i.e., a real) science than political science or sociology or, say, public administration.
I have great respect for academia, academics, and for anyone who holds advanced degrees. I spent a good part of my life in academia and a good sum of money pursuing advanced degrees for myself. But no amount of respect for the social sciences and the civic arts is going to change the fact that economics is just a fancy name for consumer psychology. Business school does a little better, but it doesn’t get you to hard science either, because ultimately, the balance sheet is just a reflection of what you’re selling to consumers.
Below are some excerpts from Summers’s Op-Ed to give you an idea of what I mean:
The issue is whether spending about $600 billion on a one-time tax credit that would be worth $8,000 to a family of four and reach more than 85% of taxpayers makes good economic sense.
Total employee compensation is now running only about $30 billion per month behind the pre-COVID baseline. Measures in the congressional stimulus bill to strengthen unemployment insurance and to support business will add about $150 billion a month to household income in order to replace all this loss.
The question is whether there is a rationale for further tax rebate of more than $200 billion a month over the next quarter. This would represent additional support equal to an additional seven times the loss of household wage and salary income over the next quarter.
Because of the legislation passed in 2020, total household income has exceeded normal levels relative to the economy’s potential more or less since the pandemic began. Without new stimulus, things would have normalized in 2021.
But the existing stimulus bill is sufficient to elevate household income relative to the economy’s potential to abnormally high levels – unheard of during an economic downturn. With President Donald Trump’s add-on, we are in completely uncharted territory, with household incomes more than 15% above their normal level relative to economic potential.
Summers presented the same numbers on Bloomberg Television Monday.
Are you convinced by any of his math? Do the excerpts above settle the debate for you about whether larger direct checks risk overheating the economy? Of course you’re not convinced, and of course the debate isn’t settled. Because unlike the hard sciences, this ostensible analysis is really just some basic addition coupled with guesses about human behavior.
Summers admits as much on the other side of the argument. “We frankly have no confident basis for judging how much and how fast this excess, and the pre-existing backlog of saving from the Cares Act, will be spent,” he wrote.
No, we don’t. We also have “no confident basis” for saying much of anything about the economy because it’s comprised of people whose behavior is entirely unpredictable and not always rational.
What’s particularly unfortunate is that while he cited standard economic models and presented subjective conclusions drawn from them as though they’re infallible, Summers ignored the hard, objective data we do have. We know, for example, that cash buffers built during March and April have been depleted, and the rate of depletion is more rapid for lower-income families. That’s based on data collected by JPMorgan Chase Institute covering some 1.8 million American families over the course of the last two years.
Naturally, Summers’s Op-Ed is replete with obligatory references to the necessity of helping the poor and allusions to the desirability of adopting a more expansive approach to fiscal policy.
And that’s great. Good for Larry.
But let’s take a step back and look at what’s staring us in the face right now, today. There are nearly 10 million Americans who had jobs in February of 2020 but who are now unemployed, and according to the Census Bureau’s “Pulse Survey,” more than 14 million households with children are experiencing some level of food scarcity.
Suffice to say nobody who’s currently unemployed and/or having a difficult time feeding their families wants to hear Summers explain a textbook model, which to him suggests that sending $2,000 checks is too risky because it might “overheat” the economy.
On Monday, as Summers spoke, the House was poised to vote on increasing the amount of the checks included in the virus relief bill and Trump, who finally signed the bill on Sunday evening, continued to insist that $600 direct payments are an insult to the poor.
It goes without saying that to the extent Trump is worried about the plight of struggling Americans, it’s mostly because he wants to bolster his populist bonafides in preparation for a presumed 2024 run, or else for some manner of dramatic last stand next month before Joe Biden is inaugurated.
“The focus on $2,000 checks is a kind of political opportunism,” Summers told Bloomberg, in the on-air segment.
As a series of lawmakers, both Republican and Democrat, pointed out last week, if Trump actually cared so much about the $2,000 checks that he was willing to imperil not just the relief package, but the entire government spending bill over the issue, he would have made as much clear to Steve Mnuchin, who participated in the negotiations. It’s possible he did, and Mnuchin simply didn’t covey the president’s position, but if that were the case, one imagines Trump would have figured it out and intervened personally to ensure the message got where it needed to go (namely, into Mitch McConnell’s ears). And that would have happened long before the bill cleared both chambers of Congress.
But that’s not really the point. Observing that politicians don’t mind handing out free money to people when they think it might replenish their own depleted political capital is hardly an observation that’s going to win any awards. So the question isn’t why Trump wants bigger checks, it’s whether the risks associated with sending more than two-thirds of taxpayers $2,000 outweigh the rewards.
Forgive me, but the answer to that question is quite obviously “no.” That is: Of course the risks don’t outweigh the rewards.
If you want to cite economics, fine. There’s slack in the labor market, there are output gaps everywhere, and even if you want to argue that unemployment will aggressively fall once the vaccine rollout is complete, the Phillips curve is apparently dead and as far as inflation goes, the places where it’s actually a problem (e.g., education and healthcare) are also sectors plagued by perverse incentives and well-documented industry-specific issues.
In short: The idea that giving middle- and lower-income Americans (so, most Americans) $2,000 is going to “overheat” anything is patently absurd. Summers is stuck in a textbook. And I’ve read those textbooks. They’re like cheap, manual can openers: Useful, necessary, but prone to failure and occasionally conducive to injury.
“Our problem is not an across-the-board lack of purchasing power,” Summers went on to say. “Our problem is people in need should be helped in targeted ways and our problem is investing in the future of our country.”
Forgive me, but that sounds quite a bit like McConnell’s talking points, which lean heavily on the word “targeted.” That works great for soundbites because by definition, a “targeted” approach is a narrow one that hits the mark with little to no waste. But that idealized stimulus bill doesn’t exist in the real world. I’m not sure anyone, when pressed, could tell you precisely what mark it is we’re trying to hit. We know restaurants are hurting, for example. We can give them grants and hope they rehire staff. But if they can’t open or if people aren’t comfortable eating indoors or if people simply don’t have the money to eat away from home, then encouraging these businesses to tap forgivable loans is an exercise in futility. That’s the “dead tree” concern I’ve discussed in these pages previously.
Kevin Cirilli took a stab at explaining this to Summers. “Ok, Larry… the economy is on pace to contract 5% year over year with 1.2% inflation,” Cirilli said. “When I talk to small business leaders and employees of these small businesses, in restaurants for example, where people are unable to get back to work, how would providing immediate economic relief not provide assistance? They literally are not able to go back to work.”
“I’m for compensating anybody who’s been shutdown by their local government. That’s what the targeted PPP program is about,” Summers responded.
Do you see the circularity there? Cirilli asked Summers why giving people who are unable to work at their restaurant jobs $2,000 is a bad idea. Summers responded by advocating for PPP loans to the same restaurants.
At a certain point, common sense has to prevail — it just has to. Summers is almost surely correct that sending $2,000 to everyone isn’t the perfect solution, but it’s a blunt-force, demand-side measure, which is perhaps what’s needed. Even if it doesn’t do anything other than boost spending, allow households to add to a cash buffer, or facilitate the paying down of debt, how is that bad?
As long as the argument against this is framed by reference to concepts from chapters five and six of a basic economics text, that argument is going to fall on deaf ears at a time when people don’t have enough food to put in their mouths.
Summers concluded his Op-Ed by saying “there’s no good economic argument for the $2,000 checks.”
Ironically, that may be the best argument for the $2,000 checks.