Larry Summers is concerned that President Joe Biden’s $1.9 trillion Covid relief package is too big. What makes his point especially noteworthy — besides the fact that he is Larry Summers — is that he also readily admits that former President Barack Obama’s 2009 stimulus, of which he was one of the main architects, was too small.
This time he says, is different. He has crunched the numbers and concluded that the 2021 economy needs far less help than the 2009 economy did — yet Biden’s plan would provide about triple the boost of Obama’s. That’s overkill by any reasonable assessment, and Summers says it raises serious risks.
It’s worth taking a moment, however, to articulate just what kinds of risks it creates.
If the government provides “too much” stimulus, then the demand for goods and services could exceed what the US economy (even once it is recovered from the pandemic) is capable of supplying. The limiting factor is labor: not just workers, but the hours they are willing and able to work.
So what then? Maybe, as in 2018 and 2019, unemployment will be driven lower than thought possible. Those who have previously given up hope will be drawn back into the work force. Employers will be willing to take a chance on applicants they would have otherwise turned away.
Yet, if Summers is right, businesses still won’t be able to meet consumer demand. As problems go, this one starts off better than most.
The downside is that if both a labor shortage and excess consumer demand persist, they could set off a wage-price spiral. Some employers would be forced to raise wages in order attract more workers, then have to raise prices to cover the higher costs. And because there aren’t enough workers to go around, other employers would have to raise wages and prices as well. This dynamic would eventually lead to ever-higher prices and an increase in inflation.
As Summers well knows, however, sustained inflation would only come if the economy were continuously overstimulated. Otherwise, the most likely outcome is a short-term bump in the inflation rate — one that the Federal Reserve would almost certainly welcome.
Summers’s more substantive objection is that spending on stimulus now might crowd out spending on infrastructure later. To his credit, over the last several years he has been consistent on the need for more and better spending on public infrastructure.
He was early in pointing out that the US economy had slipped into secular stagnation, a sort of bizarro world in which the private sector’s willingness to invest is so low that savers can’t find anyone who wants to borrow their money. Interest rates drop to zero, the Fed has a hard time combating any shocks to financial system and the economy is persistently vulnerable to recession. Businesses become even more trepidatious about major investments, reinforcing the cycle.
Huge investments in public infrastructure, as Summers is fond of suggesting, is one way out of this trap. Another is to encourage greater private-sector investment, which was one of the purposes of the 2017 Tax Cuts and Jobs Act, which Summers opposed.
Yet another way out is to do precisely what Biden is suggesting now: Stimulate consumer demand so intensely that businesses will not only be clamoring to expand, but also increasing investment in labor-saving technology. Yet Summers is concerned that there has not been “careful consideration of risks and how they can be mitigated.”
Summers’s concern appears to be that if secular stagnation is cured by private-sector spending and investment, support for public-sector spending and investment will decline. That’s a logical fear, but it’s not clear it is correct. A rapidly growing economy is likely to dampen voter concerns about the deficit.
More important, the type of long-term investments that Summers favors are precisely the ones that could use a more holistic cost-benefit analysis. It’s entirely appropriate to ask if major infrastructure projects — or universal preschool, for that matter — will provide a return on investment that society is willing to finance for decades if not longer.
The point is this: It doesn’t make sense to avoid solving near-term problems because doing so may make solving long-term problems more expensive. Instead, Congress should pass the stimulus, get the economy on the road to recovery and then begin a robust and necessary debate on how to address the economy’s deeper structural flaws.
Bloomberg
