US suffering from 'least responsible' fiscal policy in 40 years, says ex-treasury chief Lawrence Summers
Former treasury secretary Lawrence Summers has cautioned that the US is paying the price of the “least responsible” macroeconomic policy in 40 years and slammed both Democrats and Republicans saying they both created “enormous” risks. Summers, who has attacked the recent rush of stimulus, told David Westin on Bloomberg Television’s “Wall Street Week” that “what was kindling, is now igniting”, given the recovery from the Covid-19 pandemic will stoke demand pressure at the same time since the fiscal policy has been aggressively eased.
“These are the least responsible fiscal macroeconomic policy we’ve have had for the last 40 years,” Summers, who served as the treasury secretary in the Bill Clinton presidency in 1999-2001, said, adding: “It’s fundamentally driven by intransigence on the Democratic left and intransigence and the completely irresponsible behavior in the whole of the Republican Party.”
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The economist, who also served as the director of the National Economic Council for two years (2009-11) in the Barack Obama presidency, is one of the leading critics among Democrat-leaning economists of Biden’s $1.9 trillion pandemic plan. In his interview, Summers said America was facing a “pretty dramatic fiscal-monetary collision”. According to him, there is a one-in-three chance that inflation will accelerate in the upcoming years and the country could witness a stagflation, the Bloomberg report said. He also predicted the same chance of no inflation since the Fed would hit the brakes hard and push the economy towards recession. The final scenario is that the Fed and Treasury will see rapid growth sans inflation.
“But there are more risks at this moment that macroeconomic policy will cause grave risks than I can remember,” Summers, who is a paid contributor to Bloomberg, said.
Biden stimulus would overheat economy, Summers said in Jan
However, Summers said in January that Biden’s proposed stimulus package would cause the economy to overheat and that could be a good thing. In an interview with Westin, he said the package is one of the boldest economic plans the US has seen and while it would overheat the economy, the debate shouldn’t focus on that part but whether it would do more for those who have been hit during the pandemic-led recession. Current Treasury Secretary Janet Yellen, however, refused to agree with Summers’s words.
Biden’s administrative officials have taken on the critics, saying the president’s bill tries to give relief to those who desperately need help and will not overheat the economy which is still seeing high unemployment. Fed officials, according to the Bloomberg report, have flagged the risk of delivering too little fiscal support, besides signaling that they have no plan to tighten monetary policy anytime soon.
Nobel-winning economist Paul Krugman, meanwhile, said on “Wall Street Week” that the US will not witness a 1970s-type inflation surge as a result of the stimulus. “It took really more than a decade of screwing things up -- year after year -- to get to that pass, and I don’t think we’re going to do that again,” he said, adding the Fed possesses the tools to tackle price pressures if required. According to Krugman, the worst thing the fiscal stimulus package could see would be a transitory spike in consumer prices as was witnessed early in the Korean War of the 1950s. Biden’s relief bill is “definitely significant stimulus but not wildly inflationary stimulus,” Krugman said.