Doubling Down on His Predictions

In an op-ed in the Washington Post Lawrence Summers doubles down on the baleful predictions he’s been making in a sort of Socratic dialogue format, more or less interviewing himself. Here, for example, is his observation of the Federal Reserve achieving a “soft landing” (bringing inflation within reasonable levels without the economy entering a recession):

There is a first time for everything, but over the past 75 years, every time inflation has exceeded 4 percent and unemployment has been below 5 percent, the U.S. economy has gone into recession within two years. Today, inflation is north of 6 percent and unemployment is south of 4 percent.

Second, the three examples that Powell points to all were moments when unemployment exceeded inflation, which is very different from today’s configuration.

Third, those soft-landing successes all followed actions to preempt future inflation pressures, something the Fed ruled out in its unfortunately still operative 2020 framework and operating procedures.

The condensed version of his observations is:

• The Fed’s actions to date have been inadequate.
• Delaying more serious steps is bad policy.

and here are his proposals for action:

First, as part of its new “humble and nimble” approach, the Fed should renounce its 2020 policy framework as not related to current challenges and instead emphasize setting interest rates relative to neutral rates, so as to achieve price stability and maximum employment.

Second, in the current context, this means a determination to achieve a meaningfully positive real short-term interest rate in the relatively near term, as long as no other major financial market dislocations occur.

Third, there is no advantage to delaying rate changes that are almost certain to happen. The Fed should signal openness to half-point increases, or possibly even more, at all meetings.

He also has a warning for progressives: inflation tends to impel voters to turn to conservatives.