In February 2021, Larry Summers was right and I was wrong. The former Treasury secretary warned that President Biden’s stimulus package was too big and would lead to too high inflation. I was less than worry and The Federal Reserve thinks willing to raise interest rates to solve any inflation problem. My trust was misplaced, and I had to lose until June to realize my mistake. The Fed waited another nine months to act.
Markets are finally focusing on whether the Fed’s nascent hawkishness is the beginning of a downturn—Professor Summers thinks it will. There is also an important long-term question: Once inflation is finally under control, do we go back to the post-2009 period? secular stagnation, or will there be a new model? Here again I find myself disagreeing with Professor Summers, who argues that the possibility is that we return to the status quo. I think there is more opportunity for a new economic regime, with more inflationary pressures and higher real interest rates.
