Fiscal austerity has dominated economic policy in America, led by Republicans, for decades. It has suppressed economic growth and wages more than necessary to control inflation. Higher interest rates and less useful federal social spending than warranted were the means.
But now an influential Democratic economist, Lawrence Summers, has resurrected the argument. He is already attracting journalistic middle-of-the-roaders to cast doubt on the need for President Biden’s $1.9 trillion relief package. If he is successful, his view will suppress economic growth more than necessary once again due to unfounded fear of inflation.
The problem is that austerity is appealing to a deep-seated frugality among Americans. Don’t spend more than you have. When it comes to economies, however, it is dead wrong. Even Trump’s huge tax cuts did not produce an inflationary uptick.
There is a strong economic—not to mention humanitarian—argument that can be made in support of President Biden’s plan, and Janet Yellen has already begun to make it. Unemployed or under-employed are in pain. Poverty is rising. Millions need help right away. And the economy and employment growth is already slowing.
In truth, while the much-lauded economist Summers has said the package is too much, he really has no idea how much is too much. He says the hole in the economy—that gap between GDP and potential GDP—is only one third of the Biden spending proposal. If we spend more, he argues, it will generate pressure on business to raise prices.
How does he know? Because the Congressional Budget Office (CBO) says so. But here is my key point: the CBO makes only a hypothetical estimate of this gap, and has usually been wrong historically, often on the small side. Many economists think the hole is deeper than the CBO maintains.
Summers knows this, of course, but then why does he make such a public break from the Biden team based on this rather flexible piece of data? He also must know the Federal Reserve can tamp down inflation if it raises its ugly head. We are not in the 1970s, when soaring oil prices and powerful labor union demand for higher wages kept pushing wages up.
Moreover, stimulus now will help create stronger productive capacity in the near future. This will enable us to spend more government revenue on public infrastructure, not less, as Summers warns. “Going big now will enhance, not reduce, our ability to do more later,” writes Paul Krugman, correctly.
Summers is not being a hard-headed economist wringing sentimentality from Democratic proposals. He is dead wrong about his analysis. It’s actually hard to fathom what he is up to.