The record will show that I took Larry Summers’ side on stimulus payments when it wasn’t cool. I was ultimately reconciled to those payments when it became clear that they were inevitable; I hoped their political value would outweigh their potentially negative impacts on the economy. In the long run, that didn’t work.
That said, I think Summers is wrong when he calls for sharp increases in interest rates to stop inflation, for the following reasons:
- HE DOESN’T PAY ENOUGH ATTENTION TO CONDITIONS IN THE UK AND THE EU: As I’ve noted before, it is clear that the largest component in our current inflation rate involves skewed consumer priorities and supply chain problems, not excessive government spending, based on what is happening elsewhere.
- HE DOESN’T ANALYZE THE ACTUAL EFFECTS OF INTEREST RATE INCREASES ON INFLATIONARY SECTORS: Making it harder to borrow money isn’t going to decrease food consumption, stop the impacts of the Ukraine war on gas prices, or reduce the demand for housing. It can only “help” by shattering consumer confidence by driving down asset values, which isn’t worth it.
- HE DOESN’T SEEM TO UNDERSTAND THAT RAISING RATES HAS LESS IMPACT WHEN CONSUMERS ARE SPENDING THEIR EXCESS SAVINGS: The stimulus payments are only a small component of the vastly increased pandemic savings.
I will reiterate: the Fed needs to talk ferociously about inflation to keep expectations under control, but creating a stagflation recession by driving down the markets won’t do much to stop inflation–it will only add more misery to the equation.