Larry Summers, who served as Treasury Secretary under former President Bill Clinton and director of the National Economic Council under former President Barack Obama, warned in an interview this week that the U.S. is moving toward “higher entrenched inflation.”
“I think the data flow is saying what I’ve thought for quite some time that, yes, there are transitory elements in inflation, and very likely they will recede, but we are basically moving towards higher entrenched inflation,” Summers said. “It’s there in expectations, it’s there in wages, it’s there in labor shortages, it’s there in the pervasive pattern across many different prices.”
“And people try to excuse it by picking this figure and that figure from month to month, but we’ve got an overheated economy, and the Fed’s gonna have a very real challenge of cooling that economy off and doing it in a controlled way,” he continued. “That has not been done very successfully in the past. So it’s going to be a very challenging year for macroeconomic policy.”
When asked if top White House officials were right in saying that the inflation problem was a result of “a supply side problem,” Summers responded, “No, he’s wrong.”
“We have a massive, overheated labor market,” Summers continued. “We have the highest ratio of vacancies to unemployment in the country’s history, by a large margin. We have shortages of labor, in everything from psychotherapy, to McDonalds, in everything from investment analysts to gardeners, that suggests a surfeit of purchasing power and demand relative to the capacity of the economy to produce and unless we bring those things into balance, we’re going to have not just higher inflation, but possibly even accelerating inflation. And we need to recognize that we have an overheated economy that we are going to need to cool off.”
Summers later added, “Every time a Washington policy maker suggests that this is caused by corporate greed or some such, they are delaying the date at which we will achieve the credibility necessary to bring down inflation with stable employment.”
Summers also said with respect to President Joe Biden’s picks for three openings on the Fed’s Board of Governors that what the Fed decides to focus on is going to make or break its credibility and that could cause further problems.
“If a sense develops that there’s a desire to politicize the Fed by focusing it towards other issues — beyond the crucial issues of financial stability — I think that could be problematic for the Fed’s credibility,” Summers said. “And so it will be very important for the nominees, who have distinguished track records in different areas in the past, to present their views to Congress and for Congress to very seriously consider those views.”