It brings me no pleasure to report this, but Larry Summers may have been right.
Summers, the former Clinton and Obama administration Treasury secretary, was telling everybody who would listen at the beginning of the year that the economy faced a much higher risk of inflation than either the Federal Reserve or the Biden administration believed. Summers in particular warned that the American Rescue Plan, a $1.9 trillion emergency fiscal measure, would pump too much demand into the economy too fast and risk overheating.
Did I agree with this warning by Summers at the time? No, I didn’t. I thought there was a chance Summers was right, but I thought the risk of a too-slow recovery with too-high unemployment outweighed the risk of excessive inflation. That calculation may prove correct in the end if inflation peters out over the next year and the recovery chugs along.
But any honest person has to concede that the balance of risks between growth and inflation looks very different now than it did in January. Now is the winter of his discontent, made glorious Summers.
There are two conclusions to be drawn from this episode, one immediate and one broader. I’m fairly confident none of the relevant parties will draw the correct lessons, but I’m going to say what they are anyway.
First, even if we take as a certainty that the American Rescue Plan was too inflationary — and certainty is too strong a view — it does not follow that Build Back Better is inflationary.
The American Rescue Plan was a deliberate effort to stimulate demand by injecting $1.9 trillion that would be spent quickly. None of it was paid for. (That was by design: Offsetting the spending with tax increases would cancel out the stimulative effect.) Build Back Better spends slightly less money over a much longer period of time, and nearly all the spending would be offset by tax increases or other fiscal savings (like reduced spending on prescription drugs.)
Jason Furman, one of the few liberal economists who largely agreed with Summers on inflation, has been saying for months that Build Back Better will not worsen inflation:
Senator Joe Manchin has repeatedly cited inflation as his main concern about Build Back Better. Inflation is a good reason Manchin should have insisted on cutting back more deeply on the American Rescue Plan. It would be truly perverse if Manchin voted for an inflationary bill and then used inflation as a pretext to block a non-inflationary bill.
Summers himself supports the contours of Build Back Better. Most of his commentary on the issue has focused on the need to beef up taxes on the wealthy, but he has likewise endorsed the spending priorities. Here is what he said about Biden’s plan in June, when it was still priced at $6 trillion, or three times its current size:
There’s no question that we need substantial increases in public investment, substantially more attention to sustainability and preserving the planet, substantially more focus on the needs of children, particularly children from lower-income and middle-class families. And that we need to take better care of our seniors. And so I think President Biden’s judgment, that this is the moment for a large-scale increase in public investment, is correct. I would have a number of questions and issues in the details, but the policy impulse is very much the correct one.
Appearing on CNN Wednesday, Summers affirmed that Build Back Better is not inflationary. “The 10 years of the two spending bills together, A, are less than the one year of what they did last spring, and, B, unlike what they did last spring, are paid for by tax increases,” he said, “So I don’t think that’s an inflation problem. I think a lot of it is vitally needed investments in the future of the country.”
Republicans have been citing Summers’s inflation warnings all year, but applying it to a program that is offset by taxes and rolls out slowly over a long time is a non sequitur. It would be very easy to time the phase-in of the sundry portions of Biden’s plan so that it has a deflationary effect in the first year.
The second lesson from Summers’s apparent vindication is that liberals have created a bubble where groupthink is far too easy.
Summers is a peculiar figure who liberals are especially, and not irrationally, motivated to oppose. His long tenure in Washington, D.C., and as Harvard president, where he leaped into disputes both inside and outside his field of expertise, has created a trail of people who dislike him personally, ideologically, or both. He has been saddled with the blame for the Obama administration undershooting its 2009 fiscal stimulus, even though the story is a bit more complicated. (In internal discussions, Summers shot down proposals by fellow economists for a larger stimulus as politically unrealistic. It’s possible asking for more stimulus would have worked, but the fact is that fiscal conservatives in the Senate were the main barrier to spending more, and Summers’s instinct that they would have simply laughed off a bigger request may well have been correct.) In 2020, Robert Kuttner reported that Biden’s campaign, “yielding to serious pressure from progressive groups, asked Summers to take himself out of contention for a job in the administration”
So liberals were primed to disagree with Summers and certainly had reasonable grounds to do so. But his critics did not stop with mere disagreement. Progressives treated him as a clown who had been conclusively wrong and should never be listened to again. “Ever self-important and petulant, Summers tried to roll Biden by stalling the $1.9 trillion plan’s momentum. All he ended up doing instead was showing that he might finally be becoming irrelevant,” gloated The New Republic.
Indeed, Summers was not only wrong, he was so self-evidently wrong that only some hidden, petty motive could explain his irrational position. Kuttner called him a “vindictive SOB,” while Alex Pareene insisted “he’s trying to spook the markets and crash the economy to punish the administration for shutting him out.”
This kind of paranoia was hardly representative of mainstream Democratic thought. But it is indicative of a hothouse atmosphere in which prominent left-wing intellectuals earnestly believed that Summers was ginning up imaginary concerns he didn’t actually believe himself in order to tank the administration in revenge for failing to offer him a job.
More than a decade ago, Julian Sanchez coined the term “epistemic closure” to describe the conservative movement’s susceptibility to nonsense. The movement was so closed off to information from outside its ecosystem that its adherents rejected critique that came from outside sources — why listen to the lying liberals at the New York Times who are telling us “global warming” is real?
The left is nowhere near this point. But it is easy to see creeping signs of a similar ethos take hold as progressive institutions grow more ideologically monolithic and social media produces groupthink. The whole idea of testing beliefs by subjecting them to criticism is now itself controversial. As one professor told the New York Times, by way of justifying the exclusion of a scientist from a climate-science panel over his criticism of affirmative action, “This idea of intellectual debate and rigor as the pinnacle of intellectualism comes from a world in which white men dominated.”
Summers may or may not turn out to have been right about the American Rescue Plan. What we can see at this moment is that the impulse to dismiss his critique and revel in his isolation was the wrong one. The heart of the liberal ideal is openness to reason and critique. If you want to build a political movement that can govern successfully, you need to stop hunting heretics and open yourself to the possibility of error.
This column has been updated to include comments made by Summers Wednesday night.