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![Larry Summers, former US Treasury secretary]()
‘Had Joe Biden listened to Larry Summers he would be in a far better position now’ © Bloomberg
There
was much wailing and gnashing of teeth among Democrats earlier this
year when Larry Summers, former US Treasury secretary and senior adviser
to Barack Obama, warned that America was at a high risk of returning to 1970s-style inflation.
Summers had sour grapes that Joe Biden had not asked him to take a
senior role in the new administration, officials whispered. He was a
neoliberal dinosaur who did not realise that the economic paradigm had
changed, was a common refrain among liberals I know.
Both
camps agreed that Summers was not a team player and was inadvertently —
or perhaps even deliberately — assisting the Republicans. I thought
then what I think now: that Summers was sticking his head above the
parapet to issue an authentic warning. He may turn out to be right, or
wrong, I wrote, but his arguments should be taken on merit.
It
turns out that Summers was much more right than he was wrong, and
considerably more right than his Democratic critics, who perished the
very thought that inflation would prove to be anything other than
transitory. At 6.2 per cent,
the latest reading is the highest in a generation and will probably
edge higher in the coming months as housing costs catch up with the
headlines. Eight months later, it is also hard to argue this inflation
problem is “temporary” unless your definition of that word is highly
elastic (the Federal Reserve keeps shifting its semantic goalposts and
is now saying inflation is “expected to be transitory”).
Swamp readers should fear not. This is not a note about the technical risks of higher inflation. Others, such as my colleagues Martin Wolf and Robert Armstrong, are far better equipped to do that. I want to pose a different question: why are Democrats so deaf to contrarian arguments?
The
two-word answer is Donald Trump. The prospect that the despot of
Mar-a-Lago could return to power in 2025 has instilled such terror that
liberals have closed ranks to any hint of criticism of Biden. This
instinct is entirely understandable — and I share their existential
dread of what could happen in the 2024 election. But it is also highly
counter-productive.
Take
Summers as an example. Far from being a hidebound neoliberal (Rana, I
think “neoliberal” is suffering from hyperinflationary overuse. I’m
still hazy about what it means!), Summers was arguing against the $1.9tn
stimulus package passed in March on the grounds that it was stimulative
overkill and would crowd out the political space to invest in
infrastructure and strengthen the US safety net. In addition, he has
been leading the charge on fully funding the Internal Revenue Service to
clamp down on plutocratic tax evasion, and has been a strong proponent
of the global minimum corporate tax to stop globalisation’s endless race
to the bottom (read his piece on “A triumph for Detroit over Davos”).
Had
Biden listened to Summers he would be in a far better position now. The
March stimulus was entirely unnecessary — it followed a $900bn one less
than three months earlier and a $2.2tn stimulus nine
months before that. Since the March 2021 package was several times
larger than America’s output gap, it would also create a level of demand
that supply could not meet. That is precisely what we have seen. The
boom in commodity prices, and the freight vessels circulating off the
ports of Los Angeles and Long Beach are chiefly about frothy consumer
demand, rather than a breakdown in global supply chains. Demand is
almost a fifth higher than it was two years ago, months before the
pandemic began.
Now
we have the vexing situation where West Virginia senator Joe Manchin is
citing higher inflation as a reason not to pass Biden’s 10-year $1.75tn Build Back Better bill
— which is a fraction of the size of the one-year $1.9tn bill Manchin
voted for in March, and probably disinflationary since it lifts future
productive capacity. This is the opposite of what Biden and Democrats
wanted to happen. But wishing is not a strategy. Thinking stuff through
is usually the better way to go.
Alas,
there are other examples of wishful thinking guiding today’s Democrats.
When Biden pulled the plug on America’s Afghanistan operation last
summer, liberal circles were awash in happy talk about the new moderate
Taliban. A cursory familiarity with the nature of the Islamists would
have shut down such Alice in Wonderland speculation about Taliban
2.0. Contrary to their expectations, Afghan girls are not going to
school and will never do so while the Talibs are in charge.
The
same applies to predictions that the Taliban would become an ally
against al-Qaeda and other terror groups. US intelligence is now
estimating that Afghanistan will become a centre for international
terrorist operations within six to 12 months. And so on.
My
larger point is that liberals should stop circling the wagons. The more
they listen to friendly critics, people who are just as keen to stop a
return of Trump as they are, the likelier they are to implement a
progressive agenda that can win elections.
I
should declare an interest with Summers — I was his speechwriter for a
year when he was Bill Clinton’s Treasury secretary. As he’d be the first
to tell you, I’ve criticised him in print many times, especially for
leading the Wall Street deregulation of the late 1990s. I agree that he
is not a natural team player (but would argue there’s way too much
groupthink among team players).
Rana,
I know you are not a Summers fan. Would you concede that he can
sometimes be right? Do you think inflation is a problem and, if so, what
should Biden do about it? |