Thread by @LHSummers

Opinion | On inflation, it’s past time for team ‘transitory’ to stand down

Read my column on inflation and four policy prescriptions we need to do now.
washingtonpost.com/opinions/2021/…

There is a wise apocryphal saying often attributed to Keynes: When the facts change, I change my mind. What do you do? After yrs of advocating more expansionary fiscal & monetary policy, I altered my view. I believe Admin & Fed. need to further adjust their thinking on inflation.

First, let’s not compound errors that have already been made with far too much fiscal stimulus and overly easy monetary policy by rejecting Build Back Better. The legislation would spend less over 10 yrs than was spent on stimulus in 2021.

Because spending is offset by revenue increases and because it includes measures such as child care that will increase the economy’s capacity. Build Back Better will have only a negligible impact on inflation.

Second, the Administration is making a series of Fed appointments in coming weeks. The president’s choices need to recognize, as Powell has started to do in recent remarks, that the major current challenge for the central bank is containing inflation.

Third, The Fed should signal that the primary risk is overheating and accelerate tapering of its asset purchases. Given the house-price boom, mortgage-related purchases should stop immediately.

Fourth, the administration should signal that a concern about inflation will inform its policies generally. Measures already taken to reduce port bottlenecks may have limited effect but are a clear positive step.

Buying inexpensively should take priority over buying American. Tariff reduction is the most important supply-side policy the administration could undertake to combat inflation.

Excessive inflation and a sense that it was not being controlled helped elect Richard Nixon and Ronald Reagan, and risks bringing Donald Trump back to power.

While an overheating economy is a relatively good problem to have compared to a pandemic or a financial crisis, it will metastasize and threaten prosperity and public trust unless clearly acknowledged and addressed.