Former Treasury Secretary Larry Summers said there is a risk of 1970s-style stagflation because of last year’s major fiscal stimulus and uncertainty surrounding the war in Ukraine.
Summers, a Democrat who served as treasury secretary under President Bill Clinton and director of the National Economic Council under President Barack Obama, has been sounding the alarm about inflation. On Friday, he told Bloomberg the country might be at risk of seeing history repeat itself.
“We’re now facing real risks of a 1970s-type scenario,” Summers said. “Not quite as high levels of inflation as we saw in the 1970s, but the same kind of broad phenomena of stagflation.”
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Stagflation, a portmanteau of stagnation and inflation, is when prices are rising while the economy and labor market are contracting. The United States simultaneously suffered rising prices and high unemployment in the “Great Inflation” of the 1960s and 1970s. Before then, many top economists had not thought such a situation was possible. Instead, it was commonly believed among academics that the central bank could trade off higher inflation for lower unemployment.
While Summers warned of the possibility of stagflation, that scenario has not yet played out.
Although inflation has been high — consumer prices rose 7.5% in the 12 months ending in January, the fastest pace of inflation in four decades and a big half percentage point increase from December’s number — the economy and employment have also been growing.
The job market has been consistently improving from the trough it found itself in after the onset of the COVID-19 pandemic. Summers’s comments come the same day that the economy crushed expectations and added 678,000 jobs in February, dropping the unemployment rate to 3.8%.
Summers’s warnings, though, were about the future, specifically referencing uncertainty about how Russia’s invasion of Ukraine will play out and the extent to which the Federal Reserve tightens monetary policy this year.
Summers said that among the concerns associated with the inflation side of the coin are rapidly rising commodity prices since the war began and the “excessive stimulation of the economy during 2021,” which he has repeatedly criticized.
This month, the Fed is set to raise interest rates for the first time in years. Summers said the central bank must “make difficult choices” to avoid a shock to the economy and opined that there is more risk in the Fed doing “too little” rather than too much when trying to tame inflation.
“Monetary policy is an effective tool, but it may not be an effective tool without engineering a slowdown,” Summers said.
He said a “soft landing” could occur if commodity prices go down and supply chain problems abate in the coming weeks and months. In that scenario, the Fed’s efforts to tighten money could be more modest, although the Harvard economist said he doesn’t expect the situation to play out like that.
He said it’s a possibility that “without a significant slowdown in the U.S. economy, we’re likely to have inflation be unanchored two years from now.”
While the Biden administration has pointed to supply-side problems, which are largely out of its control, as the key drivers behind inflation, Republicans, Summers, and other Democratic economists say government spending and loosened monetary policy have also played a central role.
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Steven Rattner, a Democratic counselor to the treasury secretary during the Obama administration, pushed back on the White House’s claims in a recent op-ed with the headline: “Biden keeps blaming the supply chain for inflation. That’s dishonest.”
“Blaming inflation on supply lines is like complaining about your sweater keeping you too warm after you’ve added several logs to the fireplace,” he wrote. “The bulk of our supply problems are the product of an overstimulated economy, not the cause of it.”
