A top Democrat economist is warning that the size of President Biden’s economic stimulus is causing the economy to “overheat” and that it may melt down if Democrats do not start pumping the brakes quickly.
Larry Summers, who held top economic positions in the Clinton and Obama administrations, told PBS’s “Firing Line with Margaret Hoover” on Saturday that the Federal Reserve was, “in the face of a housing market on fire,” “intervening in the markets,” which was like “adding gasoline” to the fire.
“If you looked at how the economy was coming into this year, we had total wages and salaries coming to people were 20 or 30 billion dollars a month lower because many of them had to be home because of COVID and the economy was slowed,” Summers said. “But we put in a stimulus that was putting into the economy more than 200 billion dollars a month. And so when you take a hole and you overfill it, you’re likely to have problems. That started to manifest itself. It manifests itself in the fact that even though people say there’s high unemployment, the number of businesses with vacant jobs is higher than it’s ever been. Another indicator that economists use to kind of sort things out is how many people are quitting, because when times are really tight in the labor market, people feel like they can quit. So, on all these kinds of indicators, you’re seeing, it seems to me, some inflationary psychology take hold.”
“And I think we know that inflation’s like a lot of other things, it’s a lot easier to prevent than it is to cure,” he continued. “And I think the credibility of policymakers, including those at the Fed, is much easier to preserve than it is to restore.”
Summers said that he thinks that Biden is potentially setting up the country “for bigger” economic problems “in the future.”
Summers said a lot of the problem is that the Biden administration is still acting as if the economy were in the same shape that it was 6+ months ago, when, in reality, the economy is in a very different spot and potentially “overheat[ing].”
“The main risk is that our economy’s going to overheat,” he said. “And then once it overheats, it’s going to be hard to put out the fire without doing a lot of damage and causing a lot of problems. And so I’d like to see us shift towards a policy concern. I mean, let me give you another example.”
“Okay,” Hoover responded.
“We’ve got houses, a housing market in an incredible place,” Summers continued. “For the first time since they started having these statistics, the majority of houses are selling above their asking price. Why in the face of a housing market on fire should the Fed be intervening in the markets to buy up mortgage-backed securities and subsidized mortgages? Seems like that’s adding gasoline.”
Summers said that it was “completely inappropriate” to continue to be providing “unemployment insurance on excessively generous terms where we’re giving people more money for not working than they would have earned working.”
Republican governors have led the charge to stop those benefits in an effort to get people back into the workforce.
Summers said a few weeks ago that his concerns about the economy overheating “have grown substantially over the last several months.”