Former Treasury Secretary Lawrence Summers warned that the US is suffering from the “least responsible” macroeconomic policies in four decades, pointing the finger at Democrats and Republicans alike for creating “huge” risks.
In his latest attack on the recent stimulus boost, Summers told David Westin on Bloomberg Television’s “Wall Street Week” that “what created is now igniting,” given Covid’s recovery, will stir demand pressure at the same time as tax policy. aggressively eased and the Federal Reserve has “held on to its weapons” by committing to an accommodative monetary policy.
“This is the least responsible macroeconomic fiscal policy we have pursued for the past 40 years,” Summers said. “It is fundamentally driven by the intransigence of the democratic left and intransigence and the completely irresponsible behavior throughout the Republican Party.”
Summers, a top official in the past two Democratic governments, has emerged as one of the leading critics among Democrat-leaning economists of President Joe Biden’s $ 1.9 trillion pandemic plan. Summers warned in the interview that the US was facing a “pretty dramatic fiscal-monetary clash.”
He said there is a one in three chance that inflation will accelerate in the coming years and that the US could face stagflation. He also saw the same likelihood of no inflation as the Fed would hit the brakes and push the economy into recession. The last possibility is that the Fed and Treasury will grow quickly without inflation.
“But at the moment there are more risks that macroeconomic policy carries major risks than I can remember,” said Summers, who is a paid contributor to Bloomberg.
Read more: YellenSummers Spar on the risk of overheating in the stimulation plan
Government officials have pushed back against the criticism, saying the Biden bill is intended to provide assistance to those in need and will not overheat an economy still suffering from high unemployment. Fed officials have broadly echoed that view – they point to the risk of insufficient fiscal support and indicate that they have no plans to tighten monetary policy any time soon.
Nobel laureate Paul Krugman also rejected the theory that the US will witness a 1970s-style inflation spike as a result of the stimulus.
“It really took more than a decade to screw things up – year after year – to get that trick, and I don’t think we’ll do that again,” Krugman said, adding that the Fed has the tools. to address pricing pressures, if necessary.
Read more: Krugman Rejects 1970s-style inflation with confidence in the Fed
The worst-case scenario of the fiscal stimulus package would be a temporary spike in consumer prices, as seen early in the Korean War, he said. The bill is “certainly a significant stimulus, but not an overly inflationary stimulus,” he said.
Adds Krugman comments in the last two paragraphs.