Larry Summers has been a sharp critic of this administration's efforts to control inflation. He has been warning for over a year now that the White House--and the Federal Reserve--weren't taking the problem seriously enough. He has already cautioned that a recession within the next year or two is probably a guarantee. Last week, he even slammed the Democrats' new bill to bar "excessive" fuel prices as "dangerous nonsense" that could actually worsen the problem.
All this from a Democrat who served as Treasury Secretary in the Clinton White House! But this morning, Summers swerved sharply away from his recent criticism to actually defend the Biden administration against criticism coming from billionaire Jeff Bezos. Bezos was upset by President Biden's tweet last Friday saying, "You want to bring down inflation? Let's make sure the wealthiest corporations pay their fair share." In response, Bezos said "Raising corp taxes is fine to discuss. Taming inflation is critical to discuss. [But] Mushing them together is just misdirection."
Bezos doubled down two days later in another tweet, adding "[T]he administration tried hard to inject even more stimulus into an already over-heated, inflationary economy and only Manchin saved them from themselves." But this morning, Larry Summers declared, "I think Jeff Bezos is mostly wrong in his recent attack on the Biden administration. It is perfectly reasonable to believe, as I do and the President asserts, that we should raise taxes to reduce demand to contain inflation and that the increases should be as progressive as possible."
Whoa, whoa, whoa, whoa, whoa. Suddenly, this just got serious. Larry Summers actually thinks we should raise taxes right now to reduce demand--in other words, to intentionally slow the economy? And side note--he is admitting that raising taxes slows the economy, and suggesting that the Democratic leadership knows fully well that is what it will do? Some pretty glaring honesty there.
Let's unpack this for a second. Summers now appears to be talking about personal income taxes, in his suggestion that the increases should be "as progressive as possible." There is only one problem with raising taxes mostly on high earners--it won't impact inflation. Consider the following observation from Goldman Sachs head of commodities Jeff Currie--but with an eye towards wanting to bring inflation down:
"What do the world's rich control? Dollars. Can they create GDP? Yes. But can they create physical goods inflation? Numerically impossible. There's not enough of them. Only the world's low-income groups can create inflation and commodity bull markets and there is no exception to that. You cannot find me an exception."
In other words, if you want to unwind the inflation we're dealing with now, you have to reduce demand from middle- and lower-income households, not "the 1%." Do Summers or this administration really want to send the majority of Americans into recession in order to lower inflation, by raising their taxes? I wouldn't think so, but otherwise, their approach would only raise high-income taxes (and slow economic growth) without lowering inflation. Or, they might expect those narrow tax hikes to slow growth enough to cause a broad recession that would lower inflation--but again, that would still hurt low-income households.
Maybe they want to raise taxes for other reasons--like paying down the debt as interest rates rise, without sending Medicare or Social Security into a funding crisis. But as an inflation-fighting tool, it doesn't add up. In fact, raising taxes is a classic way of reducing the economy's "supply side" capacity at the very moment that measures to improve the supply side are one thing that would actually help fight inflation.
"Hitting the supply side right now is the dumbest thing we could do," said the economist Larry Lindsey this morning when I asked him if I was missing something about the tax-hike proposal. "If you're going to raise taxes now, you're certainly going to cause a recession. I wouldn't do it, but I'm a softie, and I don't like unemployment."
Measures that would actually help the supply side right now--possibly staving off recession--would include things like directly incentivizing more economic activity (usually done through tax cuts, deregulation, or other such measures), or using existing programs more wisely.
Lindsey thinks one such example of that could be eliminating the ethanol mandate that the Biden administration just raised, for instance. That would redeploy our existing cropland more effectively and make desperately needed crops available to global consumers, versus burning all that corn as fuel; thus, helping food inflation with a minimal impact on gasoline prices.
Or maybe no one's really going to raise taxes anyhow, because they can't risk slowing the economy--and policymakers may not really want to bring down inflation that much. Inflation, after all, can be a very useful way of eliminating debt--which we, post-pandemic, have a lot of right now (123% of GDP).
I remember back after the financial crisis, when the bailouts and stimulus packages first started swelling our public debt, economists warned there were only three possible solutions to the problem: either grow, inflate, or default your way out of it. I don't know about you, but I'd certainly rather Washington pursue option one than options two or three right now.
See you on Wednesday!
Kelly
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