Former Treasury Secretary Lawrence Summers warned that the United States has been suffering from “less responsible” macroeconomic policy for four decades, pointing fingers at Democrats and Republicans for creating “huge” risks.
In his latest attack on the recent wave of stimuli, Summers told David Westin at Bloomberg Television’s “Wall Street Week” that “what was being lit, is now being lit” it will provoke pressure from demand at the same time that fiscal policy has been aggressively eased and the Federal Reserve has “stuck to guns” in pledging to lose monetary policy.
“This is the least responsible macroeconomic fiscal policy we’ve had in the last 40 years,” Summers said. “It is fundamentally driven by the intransigence of the democratic left and the intransigence and completely irresponsible behavior of the entire Republican party.”
Former U.S. Treasury Secretary Lawrence H. Summers expects the Fed to raise rates next year.
Summers, a senior official in the last two Democratic administrations, has become a major critic among Democratic-leaning economists of President Joe Biden’s $ 1.9 trillion pandemic plan. Summers warned in the interview that the U.S. was facing a “quite dramatic fiscal-monetary collision.”
He said there is a one in three chance that inflation will accelerate in the coming years and that the US can cope with stagflation. He also saw the same chances of no inflation because the Fed would put a strong brake on it and push the economy toward recession. The bottom line is that the Fed and Treasury will achieve rapid growth without inflation.
“But there are more risks right now that macroeconomic policy poses serious risks than I remember,” said Summers, who is a paid contributor to Bloomberg.
Read more: Yellen, Summers low on the risk of overheating in the stimulus plan
Administration officials have rejected criticism, saying Biden’s bill aims to provide relief to people in need and will not overheat an economy that still suffers from high unemployment. Fed officials have echoed this view, marking the risk of offering too little tax support, and have indicated that they have no intention of tightening monetary policy anytime soon.
Also speaking at Wall Street Week, Nobel laureate Paul Krugman rejected the theory that the United States will witness a rise in inflation in the style of the 1970s because of the stimulus.
“It took us more than a decade to ruin things (year after year) to get to this step, and I don’t think we’ll do it again,” Krugman said, adding that the Fed has the tools to deal with the pressures. of prices if necessary.
Read more: Krugman rejects 1970s-style inflation, with faith in the Fed
The worst case scenario outside the fiscal stimulus package would be a temporary rise in consumer prices, as seen in the early Korean War, he said. The relief bill is “a definitely significant stimulus, but not an inflationary stimulus,” he said.
(Add Krugman’s comments to the last two paragraphs.)