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Former Obama adviser warns that inflation and overheating economy now 'primary risk'

Lawrence Summers
National Economic Council Director Lawrence Summers, right, talks with Treasury Secretary Timothy Geithner, left, before the start of an event with President Barack Obama announcing that White Hose Chief of Staff Rahm Emanuel is stepping down to run for Mayor of Chicago, Friday, Oct. 1, 2010, in the East Room of the White House in Washington. (Susan Walsh/ASSOCIATED PRESS)

Former Obama adviser warns that inflation and overheating economy now ‘primary risk’

May 25, 12:39 PM May 25, 12:39 PM

Former Treasury Secretary Larry Summers is sounding the alarm about inflation and economic overheating amid an explosion of spending by the Biden administration.

Summers, a Democrat who served as treasury secretary under President Bill Clinton and director of the National Economic Council under President Barack Obama, warned in an op-ed that while slow growth, unemployment, and deflationary pressures posed the most imminent risks to the economy during the pandemic, that paradigm has shifted.

“Our economy has outperformed those of other industrial countries. U.S. policymakers can take satisfaction from that,” he said in the Washington Post. “But new conditions require new approaches. Now, the primary risk to the U.S. economy is overheating — and inflation.”

Summers said the inflationary concerns come from increased demand from the more than $2.5 trillion in savings accumulated by consumers during the pandemic, the trillions of dollars in fiscal stimulus pumped out by the federal government, and large-scale Federal Reserve debt purchases. He also pointed out that the Fed has said it doesn’t intend to raise interest rates from their near-zero levels anytime soon.

SOME WORRIED BIDEN SPENDING SPREE OVERKILL AS ECONOMY BEATS EXPECTATIONS

“This is not just conjecture,” Summers said. “The consumer price index rose at a 7.5 percent annual rate in the first quarter, and inflation expectations jumped at the fastest rate since inflation indexed bonds were introduced a generation ago. Already, consumer prices have risen almost as much as the Fed predicted for the whole year.”

The Fed’s position on interest rates is controversial. It is targeting sustained 2% inflation and full employment. And while the central bank predicts that inflation will breach the 2% mark this year, it claims the spike will only be transitory and will sink back down in 2022.

Summers also warned, as he has in the past, that if the Fed decided to tighten its monetary policies suddenly, that jolt could cause economic pain. While Summers said it might be possible to contain inflationary pressures without damaging the economy by increasing interest rates, he noted that, in the current environment, it would be “very difficult, especially given the Fed’s new commitment to wait until sustained inflation is apparent before acting.

“The history here is not encouraging. Every time the Fed has hit the brakes hard enough to slow growth meaningfully, the economy has gone into recession,” Summers said.

Talking about solutions, Summers said that policymakers need to realize that overheating and not excessive slack is the main short-term risk for the economy and that tightening will likely be necessary. He also said that it is the “current reality” that there is a labor shortage and said that expanded federal unemployment insurance benefits in some parts of the United States should end before they are planned to sunset in September.

Currently, the supplemental pandemic unemployment program gives $300 per week in federal payments to the unemployed in addition to their state unemployment funding. The national average of statewide unemployment insurance prior to the pandemic was $387 per week, meaning that unemployed people in America are now netting $687 a week on average, which equates to a $17.17 hourly wage. Some Republicans have announced plans to opt out of the federal program in the coming weeks in an effort to reinvigorate the jobs market.

“Re-employment bonuses should be considered, and a major focus should be on promoting mobility and training workers for occupations where labor is short,” Summers wrote. “Where ‘made-in-America’ requirements exacerbate labor shortages and raise prices, they should be reconsidered.”

He also said that it is “essential to make long-term public investments to increase productivity and enable more people to work” and said it would be a “grave error” to cut back too much on public investment out of inflationary concerns. “That is not because of the immediate jobs they create, but because of the long-term increases they generate in productive potential, sustainability and inclusivity.”

The former treasury chief said that, where possible, infrastructure spending should be financed by reprogramming funds from Biden’s COVID-19 relief plan.

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“Additionally, current spending financed by future taxes might further stimulate an already overheated economy. The opposite — revenue increases ahead of spending, or at least parallel to spending — can ensure more sustainable growth,” he said.

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