For approximately two months during the 2020 presidential campaign, Joe Biden’s advisors observed his fascination with Larry Summers. Biden frequently referred to the former Democratic treasury secretary and Harvard University president as “Lar,” conversed with him weekly, and treated him with a level of respect not afforded to many others. Summers even provided feedback on one of Biden’s speeches and expressed concerns about a proposal to protect consumers defrauded during the COVID-19 pandemic. However, the proposal was ultimately shelved due to Summers’ objections.
Although Biden and Summers have had their disagreements, their relationship remains amicable. The two have frequently found themselves on opposing sides of the ongoing debate about the causes of inflation and how to address it. This dispute holds significant implications for the future of Democratic policymaking. While the country experiences low unemployment and declining inflation rates, Biden’s allies see this as evidence that proactive government intervention can lead to such positive outcomes.
Summers, however, disagrees with this perspective. He strongly criticized Biden’s $1.9 trillion stimulus law, the American Rescue Plan, arguing that it exacerbated inflation. Summers maintained throughout 2022 that a spike in unemployment would be necessary for inflation to truly subside. He accused the Biden administration of pursuing the “least responsible” macroeconomic policy in four decades. Summers emphasized that he did not wish to see a rise in unemployment but believed it was likely.
Recent developments suggest that Summers’ predictions may be proven wrong. Inflation has decreased from 9% to 3.2% without a significant increase in unemployment, leading to increased optimism within the White House about the possibility of a “soft landing” for the economy.
Biden has always rejected Summers’ belief that taming inflation would require policies that lead to mass unemployment. The president and his allies are now hopeful that the improving economic conditions will discredit Summers’ view that a recession is necessary to control inflation.
Despite their differences, senior White House aides continue to seek Summers’ input and engage in frequent discussions with him. Summers has visited the White House multiple times this year, even as he publicly criticizes Biden’s economic policies. Jared Bernstein, chair of the White House Council of Economic Advisers, emphasizes the mutual respect between Summers and the administration, stating that they value his insights.
Summers, along with other centrist economists, maintains that inflation remains a significant concern, cautioning that it could accelerate once again. Although the latest inflation report shows a 3.2% increase in prices in July compared to the previous year, a more stable measure of price increases still stands at 4.7%. Summers argues that the battle against inflation is far from won and that the rescue plan has sparked inflation that could become long-term and detrimental to consumers and businesses.
Publicly, Democratic officials continue to defend the American Rescue Plan as a necessary measure to revive the economy after the COVID-induced recession. However, privately, many Democratic lawmakers express ambivalence about the bill’s legacy due to rising prices and GOP attacks. If inflation continues to ease while job growth remains strong, it would strengthen the defense of the rescue plan and potentially benefit President Biden’s reelection campaign in 2024.
Larry Summers, despite his disagreements with Biden, still holds influence within the White House. As a former aide to Presidents Clinton and Obama, Summers had a prominent platform to criticize the American Rescue Plan even before it became law. White House aides initially dismissed Summers’ concerns about inflation, claiming it would be transitory. When that did not prove true, Biden reached out to Summers, who was instrumental in persuading Senator Joe Manchin III to support the Inflation Reduction Act.
Summers has also made predictions that have yet to be substantiated. In a speech in June 2022, when inflation peaked at 9.1%, Summers suggested that substantially higher levels of unemployment would be necessary to bring inflation down. However, the unemployment rate at that time was 3.5%, the same as it is now. Summers argues that his estimates were based on standard macroeconomic models and should not be interpreted as precise predictions.
Summers defends his estimates by emphasizing that inflation remains above the Federal Reserve’s 2% target. He highlights that while transitory factors like rising gas prices pushed inflation higher, the underlying inflation rate has remained relatively stable at around 4.5%. Although overall inflation has decreased, Summers maintains that the underlying inflation rate has not changed significantly.
Olivier Blanchard, former chief economist of the International Monetary Fund, agrees with Summers that a higher unemployment rate is needed to control inflation. Blanchard states that it is highly likely that an increase in unemployment is necessary to address the labor market’s overheating and the subsequent price increases.
In conclusion, the ongoing debate between President Biden and Larry Summers regarding inflation and its causes continues to play a significant role in Democratic policymaking. While Biden and his allies view the improving economic conditions as evidence of the efficacy of proactive government intervention, Summers remains skeptical and warns that inflation could reaccelerate. As the economy evolves, the ramifications of this debate will become increasingly apparent.
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