Former Treasury Secretary Lawrence Summers said that the White House is getting it wrong on the causes of high inflation and that attempts to blame it on “corporate greed” only increase the risk that a recession will be needed to tame surging prices.
“Misdiagnosis of the problem around greed or around particular sectors raises the risk that ultimate recession will be necessary,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “We need to recognize that we’ve got an overheated economy that we are going to need to cool off.”
The Biden administration has focused on, in National Economic Council Director Brian Deese’s words this week, “unsticking supply chains, protecting consumers and promoting competition,” along with reducing costs like childcare for families through the proposed Build Back Better social-spending bill. The White House has also taken aim at major meatpackers, with Deese highlighting concerns about “pandemic profiteering.”
Summers said Deese is “wrong” in his focus on supply-side issues behind inflation.
“Every time a Washington policy maker suggests that this is caused by corporate greed or some such, they are delaying the date at which we will achieve the credibility necessary to bring down inflation with stable employment,” said Summers, now a Harvard University professor and paid contributor to Bloomberg.
Addressing bottlenecks at ports, taking steps to improve the availability of semiconductors and providing better child-care options would all be helpful with regard to rising prices, but Summers said the key is addressing the “overheating” economy through steps including Federal Reserve tightening.
Summers, who held Deese’s job during the Obama administration, said it’s still possible for the economy to avoid “the kind of drastic contraction” necessary to quell inflation after Paul Volcker became Fed chair in the late 1970s.
But he repeated his consistent warnings of past months that “We are basically moving towards higher entrenched inflation.” He cited increased expectations for the inflation rate, wage gains and labor shortages, along with “the pervasive pattern across many different prices.”
Meantime, Summers stopped short of endorsing President Joe Biden’s picks for three openings on the Fed’s Board of Governors. Asked about the nominees -- Sarah Bloom Raskin, Lisa Cook and Philip Jefferson -- Summers began by saying, “I strongly support” Biden’s nominations for Jerome Powell to get a second term as Fed chair and Lael Brainard to become vice chair.
“I think that the three new nominees -- who don’t have a track record on the Fed -- will have an opportunity to present their views on inflation and on the challenges they will face in dealing with an overheating economy,” Summers said.
Raskin served on the Fed board from 2010 to 2014, and was chosen by Biden to become vice chair of financial supervision. Jefferson has worked at the Fed twice before, serving as an economist in the board’s monetary affairs division from 1996 to 1997, and as a research assistant in the fiscal analysis section from 1983 to 1985.
Jefferson authored and edited books and articles on poverty, and inequality has been one of the focus areas of his teaching. Cook, an economics professor at Michigan State University, has dedicated a large part of her career to researching the ways in which economic inequality hampers growth.
Summers said, “If a sense develops that there’s a desire to politicize the Fed by focusing it towards other issues -- beyond the crucial issues of financial stability -- I think that could be problematic for the Fed’s credibility. And so it will be very important for the nominees, who have distinguished track records in different areas in the past, to present their views to Congress and for Congress to very seriously consider those views.”
©2022 Bloomberg L.P.
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