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March 20, 2021

Former Treasury Secretary Lawrence Summers warned that the U.S. is suffering from the “least responsible” macroeconomic policy in four decades, pointing the finger at both Democrats and Republicans for creating “enormous” risks.

In his latest attack on the recent rush of stimulus, Summers told David Westin on Bloomberg Television’s “Wall Street Week” that “what was kindling, is now igniting” given the recovery from Covid will stoke demand pressure at the same time as fiscal policy has been aggressively eased and the Federal Reserve has “stuck to its guns” in committing to loose monetary policy.

“These are the least responsible fiscal macroeconomic policy we’ve have had for the last 40 years,” Summers said. “It’s fundamentally driven by intransigence on the Democratic left and intransigence and the completely irresponsible behavior in the whole of the Republican Party.”

Summers, a top official in the past two Democratic administrations, has emerged as one of the leading critics among Democrat-leaning economists of President Joe Biden’s $1.9 trillion pandemic plan. Summers warned in the interview the U.S. was facing a “pretty dramatic fiscal-monetary collision.”

He said there is a one-in-three chance that inflation will accelerate in the coming years and the U.S. could face stagflation. He also saw the same chance of no inflation because the Fed would hit the brakes hard and push the economy toward recession. The final possibility is that the Fed and Treasury will get rapid growth without inflation.

“But there are more risks at this moment that macroeconomic policy will cause grave risks than I can remember,” said Summers, who is a paid contributor to Bloomberg.

Administration officials have pushed back against the critique, saying the Biden bill aims to provide relief to those in need and won’t overheat an economy still suffering from high unemployment. Fed officials have broadly echoed that view -- flagging the risk of delivering too little fiscal support, and signaling they have no intention of tightening monetary policy anytime soon.

Also speaking on “Wall Street Week,” Nobel Laureate Paul Krugman rejected the theory that the U.S. will witness a 1970s-style inflation surge because of the stimulus.

“It took really more than a decade of screwing things up -- year after year -- to get to that pass, and I don’t think we’re going to do that again,” Krugman said, adding the Fed has the tools to tackle price pressures if needed.

The worst-case scenario out of the fiscal stimulus package would be a transitory spike in consumer prices as was seen early in the Korean War, he said. The relief bill is “definitely significant stimulus but not wildly inflationary stimulus,” he said.