Former Treasury Secretary Lawrence Summers warned that the U.S. was suffering from the “least responsible” macroeconomic policies in four decades, and pointed the finger at Democrats and Republicans for creating “enormous” risks.
In his latest attack on the recent stimulus rush, Summers told David Westin on Bloomberg Television’s “Wall Street Week” that “what was on fire is now igniting”, given Covid’s recovery, will put pressure on the demand flared at the same time as fiscal policy aggressively eased the and the Federal Reserve “stuck” when it committed itself to a loose monetary policy.
“This is the least responsible fiscal macroeconomic policy we have had in the last forty years,” Summers said. “It is fundamentally driven by intransigence on the Democratic left and intransigence and the utterly irresponsible behavior of the entire Republican Party.”
Summers, a top official in the past two Democratic governments, has emerged as one of the leading critics among Democratic economies of President Biden’s $ 1.9 billion pandemic plan. Summers warned in the interview that the US was facing a ‘fairly dramatic fiscal-monetary clash’.
He said there was a one-in-three chance that inflation would accelerate in the coming years and that the US could experience stagflation. He also saw the same chance for no inflation, because the Fed would brake hard and push the economy into a recession. The final possibility is that the Fed and the Treasury will grow rapidly without inflation.
“But there are more risks at the moment that macroeconomic policies will pose serious risks than I can remember,” said Summers, who is a paid contributor to Bloomberg.
Read more: Yellen, Summers Spar About Overheating Risk in Stimulus Plan
Government officials pushed back against the criticism, saying the Biden bill aims to help the needy and that the economy, which is still suffering from high unemployment, will not be too hot. Fed officials generally accommodated the view – highlighting the risk of providing too little fiscal support and signaling that they do not intend to tighten monetary policy any time soon.
Nobel laureate Paul Krugman, who also spoke at Wall Street Week, rejected the theory that the US would witness an inflation surge in the 1970s because of the stimulus.
“It’s really taken more than a decade to refurbish things year after year to reach that pace, and I don’t think we’re going to do that again,” Krugman said, adding that the Fed has the tools. to address price pressure if necessary.
Read more: Krugman Rejects inflation from the 1970s, with faith in the Fed
The worst case scenario from the fiscal stimulus package would be a short-lived rise in consumer prices, as seen early in the Korean War. The relief bill is “definitely a significant stimulus, but not a huge inflation stimulus,” he said.
(Add Krugman comments in the last two paragraphs.)