Key miscalculations that impacted inflation, and how Biden’s spending bill could affect it

Americans are increasingly feeling the sting of inflation. Up more than six percent compared to a year ago, inflation is taking a bite out of their paychecks — particularly for middle and lower-income Americans. Larry Summers was treasury secretary for President Clinton and director of the National Economic Council for President Obama. He joins Judy Woodruff with more on rising costs.

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  • Judy Woodruff:

    Americans are increasingly feeling the sting of inflation, whether it's at the gas station, where prices are at a seven-year high, or the grocery store, or paying the rent. Inflation is taking a bite out of people's paychecks, particularly for middle- and lower-income Americans.

    Inflation is up more than 6 percent compared with a year ago.

    We look at this and more now with Larry Summers. He was Treasury secretary for President Clinton and director of the National Economic Council for President Obama. And he joins me now.

    Larry Summers, welcome back to the "NewsHour."

    Yours was one of the few Democratic voices saying at the beginning of this year that inflation was going to get worse. What were the main miscalculations that policy-makers in Washington made back then?

  • Larry Summers, Former U.S. Treasury Secretary:

    People underestimated how much demand was going to be created by all the fiscal stimulus in the Recovery Act and all the expansionary monetary policy.

    And, at the same time, they overestimated the economy's supply potential, because they didn't recognize the damage that was going to be done over the medium term by COVID. So, when you had too much demand and not enough supply, it was predictable that that would produce a lot of upward pressure on prices.

    And that's what we're seeing. And now it's threatening to become a spiral, as higher wages lead to higher prices, and higher prices lead to higher wages. And so I think we have a situation that will be challenging to manage. The more we delay in managing it, the more challenging it will be.

  • Judy Woodruff:

    Well, after first denying inflation was going to be a long-term worry, you now have administration officials acknowledging that it will be.

    The treasury secretary, Janet Yellen, though, said a couple of weeks ago, in defense of the administration and its handling of inflation — I'm quoting her. She said: "It's obviously a concern. It's worrying, but we haven't lost control. As we make further progress on the pandemic, I expect these bottlenecks to subside."

    Is she right that this is connected to the pandemic?

  • Larry Summers:

    As I emphasized, the aftermath of COVID involved reduced supply. So, yes, it is.

    But I don't think it would be right to think that, on the current policy path, we're likely to bring inflation down to the 2 percent target. I think, on the current policy path, we're likely to have a substantially expanding economy colliding with limited capacity to produce.

    Already, we have a higher rate of vacancies than at any time in the country's history. We have a higher ratio of the number of vacant jobs to the number of unemployed people. We have a record number of people quitting their jobs. We have wage inflation accelerating very substantially, and price inflation even faster, leading to declining real wages. People's wages aren't keeping up with the cost of living.

    So that's an inflationary psychology. And you see it in the market. You see it in the surveys. So I think we need to be moving quickly to do something about this inflationary psychology. And I'm not sure that that's currently in trajectory without further actions, particularly by the Federal Reserve.

  • Judy Woodruff:

    Well, and I want to ask you about what should be done, because that's on the top of everybody's mind right now.

    But, first, we know President Biden, the Democrats are pushing this $1.75 trillion Build Back Better bill with more money for education, for child care, to combat climate change.

    But you have — Larry Summers, you have Republicans like Mitch McConnell, they're citing you as one reason to vote against it. They're saying you have spoken about inflation, this bill is going to make inflation worse.

    You even have a key Democrat like Joe Manchin of West Virginia worrying about inflation. And yet, as I understand it, you're saying Build Back Better should be voted into law?

  • Larry Summers:

    Judy, I'm for Build Back Better. I'm for it because of what it'll do for the environment. I'm for it because of what it'll do for the society.

    I don't think it's going to have a meaningful impact on inflation. It spends less money over 10 years than we spent just last year. Its spending is largely offset by tax increases. And it includes measures that will actually increase supply.

    So, I think any impact on inflation is likely to be negligible, precisely because, unlike last year's stimulus, which I opposed, it is small and paid for in the macroeconomic scheme of things. So, I support it, not because I think it's going to reduce inflation, but because I think it's the right thing to do for the country's long-term economy, and it's not going to have much impact on inflation one way or the other.

  • Judy Woodruff:

    Before I ask you about the Federal Reserve, I do want to ask you about that — another question about that Build Back Better bill.

    You said it's paid for. But if the Congressional Budget Office comes out in coming days with a so called-score, which is their view of whether it does pay for itself, and if they say it doesn't, should that matter?

  • Larry Summers:

    Judy, I don't think it's a light switch here.

    If the CBO credibly said that it was going to lead to massive deficits, then it shouldn't happen. Whether, in a economy that's over $20 trillion a year, figures of less than 1 percent of that, I'm not sure those should be decisive in anybody's judgment.

  • Judy Woodruff:

    And back on the Federal Reserve, as you know, President Biden has to make a decision in coming days about whether to reappoint Jay Powell as chair.

    Another name that's being mentioned is Lael Brainard. You know both of them. What do you think President Biden should do?

  • Larry Summers:

    I think they're both terrific people. And whatever choice he makes, I'm sure will be a wise one.

    What's most important is that the Fed reengage very seriously with the inflation risks, because, if the Fed allows inflation to accelerate from here, then it's going to be very expensive and very costly to put the inflation genie back in the bottle.

    So, I'm less worried about the personnel choice than the substantive choice. We need monetary policies that focus more on stopping inflation than the ones we have had so far.

  • Judy Woodruff:

    So, what's the next thing you're looking for the Fed to do?

  • Larry Summers:

    I'd like to see the Fed accelerate the so-called taper, that is, to stop buying up a large quantity of bonds. And then I'd like to see them move interest rates off the zero floor.

    And I'd like all of that to be completed some time late winter or early spring.

  • Judy Woodruff:

    So, quickly.

  • Larry Summers:

    Quickly, much more quickly than is now in the calendar, because I think, if we do less sooner, we won't have to do more painful contraction later.

  • Judy Woodruff:

    Larry Summers, former secretary of the Treasury, thank you very much.

  • Larry Summers:

    Thank you, Judy, for having me.

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