Larry Summers says he is worried about the US economy. More than he was worried when he started ringing the alarm in February.Famous economist and former US Treasury Secretary Said Last week, “the focus of concern now should be overheating.”
He is not talking about climate, but about the rapid growth of the economy, facing sustained high inflation as in the 1970s, and other possible crises. On the same day he issued the warning above, the consumer price index (CPI) in June was 5.4% above the level a year ago. Reportedly, this was the biggest one-year jump since 2008.
But there are many reasons to question whether his fears are well-founded. See below for more information. But first, some background on why this debate is so important at this time in US history.
In the United States, monetary and fiscal policies are almost always the two most important policies that determine people’s living standards over time, such as employment and unemployment.
Monetary policy is determined by the Federal Reserve System, which sets short-term interest rates. It also has a direct impact on long-term interest rates, including those paid on mortgages. Over time, the Fed’s interest rate policy is the most important policy that determines the amount of our employment and unemployment. This is due to the impact of interest rates on economic activity. For example, note the recent rise in the housing market from low mortgage rates. But most importantly, the Fed usually raised interest rates when it determined that the unemployment rate was “too low,” thereby setting limits on how close to full employment could be.
Fiscal policy is the use of government taxation and spending, including some of the federal spending since the beginning of the pandemic / recession, and has served as both a bailout and a stimulus. It can also significantly increase employment, especially during recessions and economic recovery.
As my colleagues Dean Baker and Jared Bernstein (now a member of Joe Biden’s Council of Economic Advisers) explain in their book, Return to full employment: As the economy approaches full employment, not only will employment increase by millions, but income inequality will decrease significantly. Low-wage workers see higher wages and employment growth than workers climbing the income ladder. The same is true for black workers compared to white workers.
Historically, our government agencies, including the Fed, have been too conservative in allowing the economy to reach full employment. The Federal Reserve has, in fact, caused most of the recession the United States has experienced since World War II by raising interest rates.
When it comes to fiscal policy, for example, the federal stimulus during the Great Recession too small To make up for spending shortages caused by the bursting of the real estate bubble. That was only 2% of GDP, less than a quarter of what was needed. And about half of it was canceled by state and local government budget cuts.
So, as Summers complains, it was a historic achievement for the U.S. government to run the expected deficit. 13.4% Percentage of GDP this year (since 14.9% last year). And Jerome Powell, the current chairman of the Federal Reserve Board, has probably shown a greater commitment to full employment than any previous chairman of the Federal Reserve Board. The unemployment rate is currently 5.9%, millions more than the 3.5% unemployment rate achieved before the pandemic.
As we have seen since the 1990s, fiscal and monetary policy restrictions have proved to be significantly less restrictive than both economists and policy makers have maintained for decades. Even recently, the Fed did not have a current commitment to full employment. And Congress and the President would never have approved the kind of spending they recently made to ease suffering and accelerate economic recovery.
The implementation of these two most important and often misunderstood economic policies can very well determine which party will win the next two elections.
It brings us back to Larry Summers, where we met two of the president’s top economic advisers at the White House the same day last week. His discussions are directed at the scale of both expansive fiscal and monetary policy: the Fed’s zero short-term interest rates and funding (“quantitative easing”), and a very large federal budget deficit.Together he To tell, These push the economy beyond potential output, resulting in uncontrollable inflation.
Of course, economists recognize that there are limits to what fiscal and monetary policy can do, but most do not see the current surge in inflation as evidence of an imminent threat.As Dean Baker It pointed outMore than half of the 0.9% increase in CPI in June came from cars. This is a result of post-pandemic shortages (such as semiconductors) and stagnant demand, so there is no reason to expect this to continue.Some of the rise in annual inflation, including the last few months, is due to current prices Comparison The pandemic a year ago caused prices to fall.
The summer comparison with the 1970s is also unconvincing. In the 1960s and 1970s, it took years to change people’s inflation expectations. And there was a big oil crisis and stronger organized labor, and in many cases living expenses allowances continued to raise wages with inflation.
The latest survey of economists from The Wall Street Journal, report This week, US GDP growth is expected to peak at 9.1% annually in the second quarter and drop to 3.3% in the second quarter of next year.
And for now, as Powell OK This week, “measures of long-term inflation expectations have risen from pandemic lows and are in line with the FOMC’s long-term inflation target,” the bond market agrees: interest rates on 10-year bonds 1.2% this week. They don’t seem to be upset by the latest CPI report. Or the rally summers discussion.
If these changes at the boundaries of economic policy are not reversed, we can already get a glimpse of what this society will look like. cut back Child poverty is about 45%. The future of the country is at stake. The fate of our democracy, as our economic and social progress, as well as the economic consequences of the next few years, can be politically decisive.
What is at stake in the inflation debate?Biden’s Progressive Agenda | Mark Weiss Blot
Source link What is at stake in the inflation debate?Biden’s Progressive Agenda | Mark Weiss Blot