the intelligencer profile

Was Larry Summers Right All Along?

How the ultimate Establishment figure became the preeminent critic of the Biden era’s economic consensus.

Illustration: Philip Burke
Illustration: Philip Burke

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There’s a story that progressives like to tell about Larry Summers. The doyen of Establishment economics is dining out with a populist politician. The two have made it through the meal with minimal awkwardness — their ideological tensions eased by booze and food — when Summers leans back in his chair and offers his left-wing foil a hard-won insight. There are two kinds of political actors in this world: insiders and outsiders.

Outsiders are free to speak their truth, Summers explains. But the price of such freedom is irrelevance in the halls of power. Insiders, by contrast, have a seat at the table where history is made. But to keep those seats, they must take care not to criticize other insiders. So, Summers asks his dining companion, which are you?

The anecdote has an apocryphal air. It makes Summers sound like the one-dimensional villain of a third-rate Sorkin script. Yet in their respective memoirs, Senator Elizabeth Warren and former Greek finance minister Yanis Varoufakis each claimed that Summers subjected them to such an after-dinner lecture and advised them to take the inside track.

If the story is true, then Summers has ceased taking his own advice. These days, the former treasury secretary is the outsideror at least he’s acting like one.

Back in March 2021, blue America was in high spirits. Thanks to their improbable sweep of Georgia’s special Senate elections, Democrats found themselves in full control of the federal government. They would waste little time in using it, with President Biden swiftly unveiling a $1.9 trillion COVID-relief bill known as the American Rescue Plan. The package won plaudits from all corners of his big-tent coalition. Everyone from the conservative columnist David Brooks to the socialist economist J.W. Mason hailed the bill as a landmark achievement. In polls, a similarly broad spectrum of voters evinced their approval.

But Larry Summers was not among them. In a series of op-eds and interviews, the Harvard economist warned that Biden’s bill was excessively large and could “set off inflationary pressures of a kind we have not seen in a generation.” The president’s first major legislative achievement was, therefore, “the least responsible fiscal macroeconomic policy we’ve had for the last 40 years.”

Summers’s warnings did not resonate in the West Wing. Once the consummate Democratic insider, he had suffered the fate of so many left-wing wonks of yesteryear: to see one’s dissent derided as economically illiterate and politically treacherous. Progressive commentators declared him a “vindictive SOB” whose caterwauling about inflation was really a bid to “spook the markets and crash the economy to punish the administration for shutting him out.” The New Republic entertained the hope that, after three decades at the center of Democratic politics, Summers was finally “becoming irrelevant.”

Ten months later, times have changed. Today, inflation is eroding workers’ wage gains and the president’s poll numbers, while headlines tout Summers’s prescience and the president solicits his counsel.

To some on the center-left, this sequence of events constitutes a parable about the perils of left-wing groupthink. By mistaking their caricature of Summers for the actual man, progressives dismissed his inconvenient truth-telling, undermining their own agenda in the process. From this vantage, Summers is a clear-eyed technocrat who shares progressives’ broad objectives but questions the efficacy of some of their means. “Larry is constantly seeking to challenge his own ideas and challenge the ideas of everyone around him,” said Jason Furman, a former Obama administration economist and one of Summers’s longtime collaborators. “There’s a narrative on the left that he’s on the party’s right, but that doesn’t map onto his research career or where he’s been on the issues.”

Summers’s left-wing critics see things differently. In their view, skepticism about the economist’s intellectual consistency is well-founded, while celebrations of his foresight are anything but. From their perspective, Summers is the embodiment of a discredited orthodoxy and a threat to long-belated paradigm shifts in Democratic economic thought. “Inflation is a legitimate problem. But Larry has blown it out of proportion,” said economist Claudia Sahm, head of the Macroeconomic Research Initiative of the Jain Family Institute. “At the end of the day, this whole argument is about the size of government.”

Which perspective you find more illuminating probably depends on your reading of Summers’s career and the past half-century of American macroeconomic policy. Thanks to his long tenure as an insider, the story of one is, to no small extent, the story of the other.

If the American technocracy has a royal family, then Larry Summers was born into it. Both of his parents were distinguished economists; two of his uncles were Nobel Prize-winning ones. His paternal uncle, Paul Samuelson, was arguably the most influential U.S economist of the 20th century, laying the foundations on which a generation of liberal economics was built.

In the aftermath of World War II, Samuelson’s profession found itself torn between the Keynesian implications of recent experience and the laissez-faire premises of established orthodoxy. Wartime mobilization had demonstrated that massive public spending could end a persistent depression, catalyze growth, and promote full employment. Yet neoclassical economics had long held that markets were self-correcting entities, and that state intervention in support of demand was pointless, at best.

It was Samuelson who reconciled neoclassical theory with New Deal practice. In his 1948 textbook, Economics: An Introductory Analysis, Summers’s uncle explained that stimulative fiscal and monetary policies were often necessary to promote full employment — but once that condition was met, markets tended toward an equilibrium between supply and demand, just as pre-war doctrine had promised. Government intervention was therefore legitimate. But its proper role was limited: The state’s job was to regulate levels of consumer demand and compensate for market failures, not plan economic development.

Summers’s own formal education in economics spanned the length of the 1970s, which proved to be a decade of crisis for his uncle’s paradigm.

Samuelson’s theory of demand management had posited an inverse relationship between unemployment and inflation: When jobs were abundant, workers could hold out for high wages, thereby forcing employers to raise prices to compensate for rising labor costs; when jobs were scarce, employers could drive a hard bargain on pay rates, and thus keep prices low. Government’s task was to maintain an optimal balance between the competing goods of full employment and price stability. Times of mass joblessness called for stimulative spending; periods of high inflation demanded fiscal austerity. Uncle Sam could keep the economy from running too hot or too cold by adjusting the federal budget like a thermostat.

But in the 1970s, the thermostat broke.

OPEC imposed an oil embargo on the U.S. in ‘73. Energy prices skyrocketed. And since energy is a key input in the production of virtually every good, high oil prices slowed growth and accelerated inflation simultaneously. Samuelson-ism had no ready prescription for a world in which prices and unemployment rose in tandem.

But the conservative movement did. To Milton Friedman and his allies, stagflation was not the consequence of a breakdown in oil supply chains or any other contingent shock. It was the inexorable byproduct of New Deal liberalism. In their account, the New Deal state had wrought stagnation by strangling free enterprise with high taxes and draconian regulations. And it had cultivated inflation by trying to stimulate its way to full employment. Contrary to Samuelson’s theory, increasing consumer demand through fiscal policy could never durably reduce joblessness, since every economy had a “natural rate of unemployment” that was determined by supply-side factors alone. Profligate public spending could temporarily push unemployment below this natural level, but accelerating inflation – followed by higher unemployment – would be the inevitable consequences.

Summers was no conservative. But the young scholar was not firmly wedded to his uncle’s intellectual tradition either. He was a self-styled pragmatist, more interested in empirical research than abstract theorizing, eager to revise his priors in light of new evidence. Larry was always very curious about the world,” said the economist David Cutler, Summers’s Harvard colleague and early collaborator. “He was always challenging his own assumptions. Always trying to bring data to bear on the problems of the world.”

The late ‘70s were a convenient time to be a seeker of inconvenient data. While stagflation was convulsing economics in the political realm, the computer was transforming it in the academy. When Summers entered Harvard’s graduate program in 1975, vast data-sets had become easily accessible to the university’s researchers. Summers exploited these to test various economic theories against real-world evidence. His research spanned myriad subfields; his conclusions defied tidy ideological categorization. In his first major paper, Summers demonstrated that economists had systematically underestimated the prevalence of long-term unemployment, and thus the social costs of slack labor markets. In another early study, he showed that stock market valuations could be stubbornly irrational. This finding led Summers to endorse a tax on financial transactions, for the sake of “curbing instability introduced by speculation” and “reducing the diversion of resources into the financial sector of the economy.”

As American politics grew more conservative, however, evidence-based economics seemed to do the same. The electoral ascent of Ronald Reagan’s GOP coincided with the academic triumph of Milton Friedman’s macroeconomics. Through it all, Summers’s research remained heterodox. But by the early 1990s, it was clear that his ideology lay to the right of his uncle’s. As his mother, Anita Arrow Summers, told the New York Times in 1991, “Larry’s generation re-emphasized the importance of markets and the failures of government.”

“It’s time to remember that We the People are the government,” President Biden said in his first address to Congress last April. “Not some powerful force that we have no control over — it’s us.” In Biden’s estimation, “We the People” had much to be proud of: Government-run schools and universities had “opened wide the doors of opportunity,” while government-funded research had brought us the moon landing, life-saving vaccines, and the internet. “These are investments we made together as one country, and investments that only the government was in a position to make. Time and again, they propel us into the future.”

Biden’s rhetoric was an implicit rebuke of Bill Clinton’s famous 1996 declaration that “the era of big government” was over. The president’s recently passed stimulus bill, meanwhile, encapsulated an explicit critique of his immediate Democratic predecessor.

In justifying the American Rescue Plan’s historic scale in March 2021, Senate Majority Leader Chuck Schumer told CNN, “We’re not going to make the mistake of 2008 and 2009, and do such a small, measly proposal that it won’t get us out of the mess that we are in right now.”

If the supposed failure of Barack Obama’s “small, measly” stimulus emboldened Democrats to “go big” last year, it also inclined them to write off Larry Summers’s complaints about their party’s newfound fiscal ambition. After all, many saw Summers as the leading author of “the mistake of 2009.”

In the 2008 primary, Obama had cast himself as the anti-Reagan — a figure who would change America’s ideological trajectory in an equal and opposite way. The financial crisis lent credence to Obama’s promises of transformation. The 2008 crash so thoroughly humiliated the gospel of free markets that some of the creed’s leading clerics had felt compelled to recant. In testimony before the House in October 2008, former Fed chair and Ayn Rand acolyte Alan Greenspan conceded that his view of the world “was not working.” As economic themes moved to the center of Obama’s stump speeches, the socialist author Naomi Klein suggested that he was turning his campaign “into a referendum on Friedmanism.”

If the crisis brought America’s macroeconomic orthodoxy into doubt, however, it also brought Summers into Obama’s inner circle. Two years in the Senate weren’t enough for the Democratic nominee to assemble his own brain trust. As global capitalism teetered, Obama became increasingly reliant on the Clintons’ stable of economic advisers. And Summers was its thoroughbred.

The 2008 crash wasn’t the first time that the world’s financial woes worked to Summers’s professional benefit. In the Clinton administration, he had initially been shunted into the modest post of Treasury Under-Secretary for International Affairs. When financial globalization birthed a domino rally of emerging market debt crises, however, this apparent career setback turned into a boon. Summers played a starring role in negotiating a series of bailouts for developing countries that had been economically destabilized by fickle foreign capital. In each case, the basic logic of the bailout agreements was the same: To achieve prosperity, governments needed to win the confidence of private investors — and to do that, they needed to commit to slashing public spending.

In the Clinton era, this theory of growth was not reserved for the global economy’s up-and-comers. At Treasury, Summers worked under the wing of Robert Rubin, a Goldman Sachs alum and evangelist for “expansionary austerity.” In Rubin’s analysis, public spending “crowded out” private investment by pushing up long-term interest rates. The idea being: the more interest that firms needed to pay on borrowed capital, the less likely they would be to finance new plants or enterprises. Therefore, to secure robust economic growth, Uncle Sam needed to win the confidence of the bond markets. To appease those market gods, Rubin and Summers advised Clinton to moderate his economic ambitions and pursue deficit reduction. “In 1993 and 1994, people like Alan Blinder and I were worried about insufficient aggregate demand,” recalled Columbia University economist Joseph Stiglitz, who chaired Clinton’s first Council of Economic Advisers. “Larry was more worried about budget deficits than demand or inequality.”

By decade’s end, Summers’s bet on austerity had appeared to pay off. In the late 1990s, as the federal budget went into surplus, the U.S. economy enjoyed its strongest expansion since the stagflation crisis. His analysis apparently vindicated, Summers inherited Rubin’s post atop the Treasury Department in 1999. In that role, Summers took his advocacy for budget restraint to new heights.

Summers’s enthusiasm for balanced budgets moderated after the dot-com bubble burst. But his faith in the beneficence of lightly regulated financial markets persevered. In the early aughts, Summers disavowed his past support for a tax on financial transactions. Over the same period, he collected millions in consulting and speaking fees from Wall Street firms. When Summers became Treasury Secretary in 1999, he had declared a net worth of roughly $400,000; when he returned to serve in the Obama administration less than a decade later, his estimated net worth lay somewhere between $7 million and $31 million.

Nevertheless, in late 2008, some on the left were willing to give Obama’s hand-picked National Economic Council director the benefit of the doubt. Noting Summers’s increasingly liberal commentary in the run-up to the election, publisher of The Nation Katrina vanden Heuvel told the New York Times, “The Larry Summers of 2008 is not the Larry Summers of 1993 or 1999.” Other progressives greeted the Clintonite’s appointment as the death knell for their dreams of economic transformation. After all, in a memoriam for Milton Friedman just two years earlier, Summers had declared that “any honest Democrat will admit that we are now all Friedmanites.”

Events would flatter the pessimists. As the financial system’s implosion decimated the middle class’s 401ks and choked off credit to businesses, private spending and investment collapsed. By December 2008, the crisis had ripped a $1.7 trillion hole in the economy. Textbook Keynesianism — which is to say, the centrist kind that Summers was raised on — had a clear prescription for this circumstance: Public spending must fill the hole in private demand.

But the Obama White House consciously chose not to do so.

In progressive lore, Summers single-handedly sabotaged the 2009 stimulus. The lone D.C. outsider on Obama’s team, the economic historian Christina Romer, had calculated that nothing short of $1.2 trillion in deficit spending could fill the gap in private demand. Yet Summers, the master briefer, had final authority over the team’s memorandum to the president in December 2008. He left Romer’s proposal on the cutting-room floor, opting to make a $890 billion stimulus the president’s most ambitious policy option. Thus, Summers personally ensured the inadequacy of the administration’s fiscal response.

This narrative is not entirely fair. Judging by subsequent accounts from both Summers and Romer, Obama’s NEC director favored $1.2 trillion of stimulus spending on the merits but believed that a trillion-dollar package would be dead on arrival in the Senate. Given that Summers ultimately recommended an $890 billion stimulus — only to see the White House propose just $775 billion and Congress authorize $787 billion — his presumption that politics placed a hard cap on the package’s size looks plausible, in retrospect.

And yet, congressional Democrats’ aversion to large deficits didn’t come from nowhere. To no small extent, their debt-phobia derived from the fiscal orthodoxies of the 1990s, which Summers had done as much as anyone to enshrine.

The costs of underspending on stimulus proved higher than Obama’s team had bargained for. Between 1947 and 2007, the U.S. economy had fallen into recession 10 times. In each case, the ensuing recovery had brought a period of unusually fast “catch up growth” that had fully restored the nation’s pre-crisis productive capacity.

But the post-2008 recovery brought no such boom. Instead of accelerated growth, Obama’s first term witnessed a rate of economic expansion far below the long-term average. Today, the American economy is still smaller than it would have been, had the crash never happened.

When voters went to the polls for the 2010 midterms, unemployment remained near 10 percent. Republicans won a landslide victory, and with it, dominance over the decennial redistricting process. As the party entrenched its newfound dominance of state legislatures and the House through gerrymandering, Obama’s avowed aspiration to serve as the anti-Reagan was lost. No new era of liberal hegemony was in the offing.

The recovery’s discontents may well have taken a toll on Summers’s own job prospects. Ben Bernanke’s tenure as chair of the Federal Reserve was set to expire in January 2014. Summers was more than interested in taking the reins of the world’s most powerful central bank, and Obama let it be known that he wished to affirm his advisor’s ambitions.

But Fed appointments require the Senate’s consent. And in 2013, the Democrats’ left flank was both embittered and emboldened. As the millennial generation graduated into a jobless recovery, the progressive movement had enjoyed a revival, one that had propelled Elizabeth Warren into office. Warren’s politics were centered on a critique of financial deregulation and the Wall Street Democrats who’d apologized for it. And she wasn’t the only senator with an antipathy for Summers.

Oregon Senator Jeff Merkley had won his seat in 2009, after campaigning on an anti-bailout platform. One of Summers’s first tasks as NEC head had been to neutralize Merkley’s opposition to a second round of bailouts for the beleaguered financial system. To do so, he led Merkley to believe that, if he voted as the administration wished, the White House would fight hard to pass bankruptcy reforms that would make it easier for embattled homeowners to avoid foreclosure. The administration never did so. Merkley never forgot.

During a banking committee hearing in September 2013, the Oregon senator turned to Warren and disclosed his intention to vote against Summers; Warren said she planned to do the same. “And then I turned to [Ohio Senator] Sherrod Brown. And I said, ‘Sherrod, do you know what your position…’ and he said, ‘Yeah, I’m going to vote against him,’” Merkeley recounted. “And I turned to [Montana Senator Jon] Tester. He said the same thing. I turned to [North Dakota Senator] Heidi Heitkamp; ‘Oh yeah, no, I’m not voting for that guy.’ And so, I realized we needed to let the president know before he made a nomination that would die in committee.”

Five days later, Summers announced that he was withdrawing his name from consideration, clearing the way for progressives’ preferred nominee, then-Fed vice chair Janet Yellen. In the post-Occupy Democratic Party, it was apparently possible to be too friendly with Wall Street to run the Federal Reserve.

His dreams of public power deferred if not abandoned, Summers concentrated his attention on academic research. And as the empirical economist scrutinized the tepid recovery, he came to espouse a Keynesianism more left-wing than his uncle’s.

Two months after his bid for Fed chair was quashed, Summers appeared before the IMF Research Conference and delivered what was, in the words of New York Times columnist Paul Krugman, “a very radical manifesto.

Summers set out to explain why the post-crash recovery had so badly disappointed expectations. Even as central banks had kept benchmark interest rates near zero, and governments had increased deficit spending, growth had remained tepid and inflation non-existent. This contradicted the doctrines that Summers had spent decades preaching. Central banks were supposed to be able to generate growth and inflation by making credit cheap. Markets were supposed to punish governments that ran persistent deficits by demanding higher interest rates. And economies were supposed to eventually return to their previous growth trajectories after recessions — even if fiscal stimulus was suboptimal — since, in the long run, an economy’s productive capacity was determined by supply-side factors alone.

Summers told the IMF that his profession’s verities were obsolete. They described a world that no longer existed. Or, put more precisely, Milton Friedman’s macroeconomics had created a world in which its tenets ceased to be true — a world defined by perpetually weak demand or “secular stagnation,” as Summers termed it.

Since the triumph of Friedmanism, central banks had assumed primary responsibility for managing economic demand. They’d done this by identifying and then pursuing the “neutral” interest rate — the rate necessary for achieving the highest level of employment consistent with price stability. The logic behind this mode of operation was straightforward. Capitalists always face a choice between storing their wealth in savings instruments, or investing them in enterprise. Investment mobilizes real resources and employs labor, thereby promoting growth, employment, and inflation. Savings effectively remove income from circulation, thereby reducing demand for real resources and therefore prices. If benchmark interest rates are excessively high, then capitalists will be content to collect risk-free returns on their savings, and unemployment will rise. If such rates are excessively low, then capitalists will invest too much and inflation will take off. At the “neutral” interest rate, savings and investment sit in optimal balance.

But in the 21st century, Summers explained, the neutral interest rate had fallen below zero. Which is to say: Capitalists’ preference for saving had grown so intense, even 0 percent interest rates could not deliver healthy growth.

In fact, the Friedmanite approach to economic management had not delivered such growth for more than a decade, according to Summers. Low interest rates had sparked a robust expansion in the late 1990s and early aughts, but only by inflating a stock market bubble in the first case, and a housing bubble in the latter one. Summers emphasized that this did not mean that interest rates had been too low in either period: In its modern form, achieving full employment through debt-fueled asset manias was the very best that American capitalism seemed capable of; in 2013, it could no longer even manage this.

Summers spent the ensuing years elaborating his “secular stagnation” thesis. His speeches and papers on the subject remained resolutely technocratic in their diction. But they grew increasingly incendiary in their implications. Summers came to argue that inequality and fiscal austerity were among the primary causes of capitalism’s present dysfunction. The collapse of the neutral interest rate was inextricable from the rise in the 1 percent’s share of income. This was because the rich are more inclined to save their gains, while working people are more inclined to spend them. Thus, as labor’s share of income declined, so did consumer demand. And when consumer demand is weak, investment opportunities are limited.

What had made the wealthy’s reluctance to invest especially problematic, however, was the government’s fear of running high deficits. With the neutral rate below zero, the Federal Reserve could do little to increase demand. But Uncle Sam could still do plenty. It just needed to forget everything that Summers had spent the 1990s teaching it. In the age of secular stagnation, high deficit spending would not crowd out private investment but crowd it in: By generating modest inflation, fiscal policy could make saving money at a 0 percent interest rate unattractive, thereby compelling wealth holders to invest. Meanwhile, governments didn’t need to fear the wrath of bond markets; in a world where savers are abundant and safe debt instruments few, the U.S. Treasury is king.

But Summers’s most important heresy may have been this: If inadequate demand could trigger a sustained, self-reinforcing decline in investment, then the costs of understimulating the economy were far higher than Friedman had realized. Allowing a demand gap to persist wouldn’t just delay the restoration of the economy’s long-term productive capacity, but permanently lower that capacity. As Summers put the point, “lack of demand creates its own lack of supply.”

Over the course of Obama’s second term, the evidence for secular stagnation grew more robust while Summers’s prescriptions for addressing it became more staunchly progressive. He began calling on policymakers to promote demand through public “investments in renewable technologies” and “support for unions and increased minimum wages.”

By 2015, Summers’s analysis put him to the left of the progressive movement’s chosen Fed chair. In December of that year, the Federal Reserve decided to start raising interest rates, even as inflation remained a full percentage point below the central bank’s official target. Yellen and her colleagues had determined that the U.S. economy could not sustain an unemployment rate far below 5 percent without risking accelerating inflation. In keeping with the gospel of Milton Friedman, they decided to deliberately slow the economy before workers secured too much leverage. Summers lambasted the decision in the Washington Post, protesting, “New conditions require new policies.”

The Trump era would vindicate his assessment.

President Trump did not pursue Larry Summers’s preferred fiscal policy. But Trump and his party did simultaneously slash taxes and increase domestic spending. As a consequence, the U.S. effectively passed a large stimulus in the winter of 2017, when many economists believed that America was already at full employment. The Federal Reserve’s new chair, Jerome Powell, facilitated this fiscal expansion anyway by keeping interest rates low. Contrary to the warnings of some liberal wonks, Trumponomics did not spark inflation or a surge in America’s borrowing costs. Rather, they revealed that there had been far more slack left in the U.S. economy than Yellen’s Fed had realized. As the exploding federal deficit swelled consumer demand, wage growth picked up. And as labor market conditions improved, better wages and opportunities brought millions of discouraged workers off of the economy’s sidelines. High labor demand created a larger labor supply.

The implications of this development were profound. If the size of the labor force was not fixed by factors external to monetary policy — if it could grow in response to sustained demand — then the Federal Reserve had plausibly been preempting full employment for decades.

In response, Powell’s Fed embraced a more dovish approach to monetary policy. Now, the central bank would wait until inflation ran above target for a sustained period before deciding that the economy had reached full employment. In a 2018 paper for the Brookings Institute, Summers had encouraged the Fed to revise its framework even more radically. Instead of targeting an average of 2 percent inflation over time, he counseled the central bank to target a nominal economic growth rate of above 5 percent.

Regardless, by 2019’s end, America had embraced a new macroeconomic orthodoxy, one that privileged maximizing growth over minimizing inflation. Summers had been one of the first mainstream economists to endorse this sea change. He would also be one of the first to disavow it.

When COVID capsized the global economy in March 2020, Congress did not repeat the mistakes of 2009. Its relief package was constrained by neither terror of the word trillion nor concern for distinguishing the deserving poor from the pathological. Despite the GOP’s grip on the White House and Senate, the federal government swiftly dispensed nearly $2 trillion in aid, including $1,200 relief checks and unemployment benefits so generous that they left many laid-off workers better off financially than they had been on the job.

The results were revelatory. The CARES Act demonstrated that the most detrimental aspects of downturns, which policymakers had long cast as tragic inevitabilities, were in fact optional. It was not a truism that recessions are always toughest on the poor; that was a choice. In April 2020, with entire sectors of the U.S. economy shut down and tens of millions unemployed, America’s poverty rate actually fell. Over the course of the year, the poorest 50 percent of U.S. households were less likely to suffer a large fall in income than they had been in the boom times of 2019.

Summers’s economic commentary remained sharply progressive throughout 2020. In the spring, he and MIT economist Anna Stansbury released a paper that attributed rising inequality in the United States to a “decline in worker power.” In contemporaneous interviews, Summers suggested that Congress’s relief efforts had not gone far enough, calling for “a substantial increase in the funding available to states and localities.” He voiced the hope that America was witnessing “the end of the Reagan-Thatcher libertarian wave” and a pro-social “change in public philosophy.”

In the view of progressive activists, however, bringing about that change required keeping Larry Summers out of power. When Biden locked up the Democratic nomination in early April, the first major demand that Justice Democrats and the Sunrise Movement made of their standard-bearer was that he remove Summers from his panel of economic advisers.

To the Democrats’ left flank, Summers’s evangelism for a progressive revolution in macro policy counted for little. As Robert Kuttner, co-founder of the liberal journal The American Prospect, argued in a July 2020 takedown of Summers’s career, the economist’s work on secular stagnation had been a mere “rebranding exercise” aimed at distancing himself from the policies “he espoused and carried out while he enjoyed actual power.”

Shortly after the publication of Kuttner’s article, Summers formally withdrew himself from cabinet consideration, telling the Aspen Security Forum, “My time in government is behind me and my time as a free speaker is ahead of me.”

The American Rescue Plan was a radical proposal in the guise of a modest one. On the surface, Biden’s first legislative priority looked like a mere extension of Trump-era relief policy. In macroeconomic terms, however, the two laws were dramatically different propositions. When the CARES Act was passed, U.S. households had just seen their net worths plummet, entire sectors of the economy were on hiatus, and the unemployment rolls were expanding at an unprecedented rate.

By contrast, Biden’s relief bill was drafted at a time when the total net worth of U.S. households was $12 trillion higher than it had been before the pandemic. Most American families were, in strictly financial terms, doing unusually well. Thanks to the trillions in relief spending that Congress had already authorized, American consumers had less debt and more disposable income in January 2021 than they’d had at the peak of the Trump era expansion. Meanwhile, unemployment was falling, shots were going into arms, and stocks were hovering near record highs.

As Summers noted in his first public criticism of the legislation, ARP didn’t aim to fill the hole in private demand so much as build a mountain atop it: While Congressional Budget Office estimates projected a monthly demand gap of about $50 billion, Biden’s bill would increase monthly demand by $150 billion. Summers argued that secular stagnation remained a “medium-term” worry. But in the immediate term, stimulus at this scale threatened to trigger price increases unseen in a generation. The costs of that development would extend beyond the checkout aisle, Summers warned. High inflation could torpedo the recovery by forcing the Federal Reserve to induce a recession through interest rate hikes. And it could also jeopardize Biden’s capacity to make more durable investments in everything from “infrastructure to preschool education to renewable energy.”

The American Rescue Plan’s most clear-eyed defenders didn’t deny the audacity of its spending levels. Where Summers saw recklessness and risk, however, progressive economists saw boldness and opportunity. Under the tenets of Friedmanism, no good can come from “overheating” the economy. If demand runs ahead of supply, inflationary crisis will be the inevitable result. But this was not necessarily the case under Summers’s own macro framework (or at least, under the one he’d spent the past decade articulating).

As Summers had long lamented, the U.S. never caught up to its pre-2008 growth trajectory. To realize that lost potential, policymakers would need to push the economy to exceed its existing capacities. That the American Rescue Plan would do precisely this was a feature not a bug. Further, by pushing labor demand to its breaking point, the bill would redress the decline in worker bargaining power that Summers had also bemoaned.

Ten months after the bill’s passage, both sides have cause for declaring vindication. In December, consumer prices rose on a 7 percent annual basis, the highest rate of inflation that America has seen in 40 years. Economists disagree about how much of this inflation can be attributed to fiscal policy, as opposed to supply-side bottlenecks, energy market dynamics, and a pandemic-induced shift in demand away from services and towards goods. The extraordinary size and global scale of inflation casts doubt on the notion that problematic price increases could have been averted, if Biden had only passed a $1 trillion relief bill instead of a $2 trillion one. Nevertheless, ARP surely contributed to rising prices at the margin, if only by averting a steep decline in the purchasing power of the unemployed.

Politically, there is no question that inflation has debased Biden’s political capital. The president’s approval rating has fallen underwater as prices have soared. In polls, voters cite inflation as a top concern, and say the GOP is better equipped to handle it by overwhelming margins. Meanwhile, in Congress, panic over inflation has derailed the president’s climate and social welfare agenda, with Senator Joe Manchin calling for the legislation to be tabled until prices stabilize.

Given these results, Summers’s recommendations in February 2021 may strike some liberals as retrospectively benign. After all, Summers did not argue that another relief bill was unnecessary, or that America could not afford to invest trillions of dollars into a broad-based recovery. Rather, he suggested shaving $900 billion off the relief bill — by withholding $1,400 checks from households that had grown wealthier since the pandemic’s onset, and aid from states that were running surpluses — so as to leave more fiscal space and political capital for long-term public investment.

To Jason Furman, the former Obama administration official, the left’s indictment of Summers fails on all counts. “There’s a difference between heating the economy one log at a time and throwing all of the logs on the fire at the same time,” Furman said. “Everyone agreed that the economy needed fiscal support. But when you take the spending in the legislation that passed in December 2020 together with the legislation that passed last March, that added up to $2.8 trillion. That was higher than any number that anyone was proposing before the law came out. I think it is notable — and a bit of tell — that no one has criticized it for being too small, in retrospect.”

Yet that $2.8 trillion has also brought about many of the economic changes that Summers had long sought.

Following the CARES Act’s passage in 2020, the Congressional Budget Office projected that America’s unemployment rate would remain near 8 percent at the end of 2021. In December, that rate fell to 3.9 percent. After the 2008 crash, it took a decade for America’s jobless rate to reach such a low level. This rapid recovery in demand has also given workers more bargaining power over employers than at any time in modern history. With job openings at record levels, low-wage workers have been quitting their jobs en masse to pursue better opportunities. October 2021 witnessed America’s biggest strike wave in a generation.

Perhaps most critically, elevated demand is growing the economy’s productive capacity, just as Summers’s theoretical work would suggest. Over the first nine months of 2021, companies in the S&P 500 increased their collective spending on capital projects by 11 percent, while U.S. investment in nondefense capital goods hit its highest point on record.

Summers has not ignored these developments. But he hasn’t lauded them either. Rather, his contemporary commentary casts soaring worker power and booming investment as symptoms of inflationary excess. Transitioning to a high-wage, high-investment economy remains desirable, in Summers’s account. If done at too rapid a pace, however, demand will outstrip supply, unemployment will fall below its natural rate, and accelerating inflation will undo all of the boom time’s gains. “If I thought we could sustainably run the economy in a red-hot way, that would be a wonderful thing,” Summers told Bloomberg in November. “But the consequence — and this is the excruciating lesson we learned in the 1970s — of an overheating economy is not merely elevated inflation, but constantly rising inflation.”

To Roosevelt Institute economist J.W. Mason, this reads like a disavowal of the secular stagnation hypothesis.

“The point of the secular stagnation literature is that, over time, potential output adjusts to the level of demand,” Mason said. “If that’s true, the way you get back onto a higher growth path is by having a period where demand is running ahead of potential. That is the point of those papers. So you can’t turn around and say, ‘Oh, but demand is running ahead of potential, so we have to throttle back [demand].’ I mean, you can’t do it. You can’t say that two and two is four, and also three. I really do not think the Larry Summers of 2021 can be squared with the Larry Summers of 2016 or 2020.”

In other recent remarks, the tensions between Summers’s current outlook and his past advocacy are more acute. In 2016, during the heyday of his evangelism for secular stagnation, Summers argued in a column for the Financial Times, “Tight labour markets are the best social programme, as they force employers to hire and mentor inexperienced people in order to be adequately staffed.” At a Wall Street Journal conference in December, meanwhile, Summers said that the idea of accepting somewhat higher inflation for the sake of “using lower unemployment as a tool of social policy — that that is a long-term sustainable strategy — is not a proper reading of what economics and long-term historical experience teach.”

Of course, the “proper reading” of historical experience is not self-evident. It is always contested and ever-shifting. If any weighty matter is at stake in the debate over Summers’s prescience and intellectual consistency, it is how the present chapter of economic history will be read. Will the lesson of Biden-era fiscal policy be that recessions need not immiserate the vulnerable, that a tight labor market lifts all boats, and that “we the people” can make investments that propel us into the future — or that governments must ration mercy during downturns lest they unleash constantly rising inflation? Or might the takeaway split the difference, holding that Milton Friedman underestimated the benefits of “heating” a low-demand economy while progressives misjudged the necessity of doing so “one log at a time”?

Ironically, if the left’s most cynical reading of Summers’s career is correct — if his ideological evolution traces shifts in Washington’s balance of power, not changes in available evidence — then his analysis would merit little more criticism than the reading of a weathervane. In a world where the views of “insider” economists bend with the political winds, tomorrow’s supply of progressive policies will be determined by the strength of demand.

Was Larry Summers Right All Along?