Debt And Summers II

Larry Summers has responded to his critics. My first thought is, yes he is still really smart.

Also Olivier Blanchard also thinks the Covid Relief bill is too generous, and, in particular objects to the $1400 for most Americans. Note that Blanchard is the author of the main citation in my critique of Summers (although I should also have cited Summers on secular stagnation, Delong and Summers on the Keynesian Laffer Curve and Blanchard and Summers on hysteresis).

Summers makes 4 arguments.

Don’t blame me for the fact that the ARRA was too small. Here I think it doesn’t really matter, and that he is mostly right. Certainly he argued frequently for higher deficits.

Fearing Secular stagnation does not imply that one prefers $1.9 Trillion in stimulus to $ 1 Trillion. Indeed, the debate over the right number is almost completely qualitative.

The Fed has trouble fighting inflation without causing recessions. ” Every past significant inflation acceleration has been quickly followed by recession. Tamping down inflation will require allowing unemployment to rise, and engineering a soft landing is difficult:Unemployment has never risen by half a percentage point without then rising by almost two points, or more.”

This argument seems to me to beg the question. Summers assumes that the Fed can’t prevent an increase in inflation or moderate an increase in unemployment. If the Fed has prevented an acceleration of inflation, the success would not show up in Summers’ survey of what happens after inflation accelerates. If the Fed keeps unemployment at the NAIRU then unemployment does not have to increase to fight inflation. I think his point is that, when the Fed loses control and misses its target, then the Fed loses control and misses its target. There is no argument that fiscal stimulus (of any amount ever) makes it more difficult for the Fed to avoid both accelerating inflation and recession. The only clearly demonstrated limit on the Fed’s ability to thread the needle is the zero lower bound. That problem can be avoided with fiscal stimulus.

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