Summers says pandemic only partly to blame for record inflation

Former Treasury secretary lays out need for Fed intervention, political costs of higher prices

From The Harvard Gazette. Excerpts:

"It’s, obviously, the pandemic. And there’s both uncertainty as to what the future of the pandemic will be and uncertainty about what the impact of the pandemic is on various aspects of the economy. So, it’s a moment of more than usual uncertainty. But I think in a certain sense, our current economic situation is relatively familiar. We have an economy that is overheating, the clearest indicator of that is the ratio of vacancies to unemployment, which is in unprecedented territory. Workers are quitting their jobs at record rates because of high-quality job opportunities, and layoffs are at extraordinarily low levels. Wherever you look, there is a shortage of workers, whether it’s restaurants, psychotherapists, or gardeners, whether it’s investment-banking analysts or medical orderlies. Labor is in short supply, putting upward pressure on wages and the inflation process. The inflation challenge is magnified by a variety of supply-chain bottlenecks ranging from automobiles that are in short supply because of limitations on semiconductor production to some categories of diet soda that are in short supply because of limits on aspartame production. So, we have a classic strong demand, limited supply inflationary situation that has developed over the last year."

"It’s two blades of a scissors. I’m not sure that we would have the inflation if there had never been a pandemic and, even if there had been a pandemic, without the overwhelming stimulus that was applied well into recovery — during 2021. We had an economy where income was running short by $50 billion a month because of the pandemic, and we injected $150 billion to $200 billion a month into that economy. It’s perhaps not surprising that that’s led to an overflow of demand, which has generated inflation that on the CPI [Consumer Price Index] measure has risen to 7 percent."

"I was arguing through 2021 that the right analogy was the Vietnam War period, when we used very expansionary fiscal policy, did not apply monetary restraint, and pushed inflation up very, very substantially. I think that now looks to have been a reasonable description of what happened in 2021. I am nervous about the analogy between many things that are being said today and what was said during the early and mid-1970s. People resisted the idea that inflation was being caused by loose monetary policy in favor of pointing to specific factors. People talked about oil prices, they talked about changes in ocean currents that led to changes in anchovy prices that led to changes in grain prices. They talked about a variety of structural factors, much as many economists are today. In the end, it looks like we made a mistake in the 1970s, which was failing to appreciate that ultimately, higher demand translated primarily into increased inflation."