Former U.S. Treasury Secretary and National Economic Council Chairman Summers.
Is President Biden‘s proposed $1.9 trillion “U.S. bailout package” too large? Will it ignite Inflation? This is the subject of a debate between two of America’s leading economists, Lawrence Summers and Paul Krugman, on the 12th.
Summers has served as U.S. Treasury Secretary, Chairman of the National Economic Council and Harvard University Dean, and Krugman is the 2008 Nobel Prize winner in economics, New York Times columnist, both are highly visible, sharp-tongued center-left heavyweight economists, making the 12th by Princeton University economist Markus Brunnermeier hosted this video conference The debate was highly anticipated.
Earlier, Summers wrote a Washington Post article, “Biden’s stimulus ambitions are admirable, but they pose some big risks,” while Krugman defended the huge package in a Newseum column, “Biden’s spending spree is exactly what America needs.
The two men went on to present their respective views in a 12-day online video debate, the following highlights of which were compiled by Bloomberg.
● Summers made four points.
1) The $1.9 trillion package is “enormous,” with total spending far greater than the estimated “output gap,” i.e., the portion of actual output that falls short of potential output.
2) “Far more” than the relief spending needed to assist the victims of the Newcastle pneumonia outbreak.
3) the risk of triggering inflation – if the bailout does go off and cause inflation to spike, the Federal Reserve Board (Fed) may have to raise interest rates to curb inflation, inadvertently causing a recession.
4) The huge expenditure of the bailout program will be better used if it is put into long-term infrastructure changes.
The Biden package should be seen as a “bailout”, not a “stimulus”, as Krugman reiterated in his New Times column. From the perspective of “natural disaster relief” or “fighting epidemics like a war”, we should spend as much as needed for disaster relief and warfare, and we will not consider “how big the output gap is” before measuring how much should be invested. The Biden plan is not about spending.
Krugman goes on to break down the Biden plan into three major components, looking at each of them.
1) public service spending, such as federal assistance in vaccinating citizens and making schools safe to resume; this part of the spending is absolutely reasonable; 2) financial assistance to the unemployed and state and local governments, which is also justified; 3) including $1,400 cash handouts to many people, as many people are not affected by the Epidemic, this part of the spending has attracted “not spent on the knife This part of the expenditure has been questioned as “not being spent on the right things. Krugman agreed that this was not the most “essential” expenditure, but it was the item with the strongest public support, helping to get the package through Congress.
Krugman also pointed out that this package should not “over-stimulate” the economy and ignite inflation, because from the experience of the “New Coronavirus Assistance, Relief and Economic Security Act” (CARES Act) last spring, people received $1,400 After receiving the $1,400 bailout, people will save a large portion of it rather than spend it immediately. Once the epidemic subsides, state and local governments will also deposit excess aid into emergency funds.
In response to Summers’ argument that spending on infrastructure would be better, Krugman believes that the Biden Administration must do both, but there are priorities, and should focus on epidemic relief at this point, and then start long-term infrastructure investments in 2022.
The company has also mentioned that in case inflation resumes, the Federal Reserve Board (Fed) can tighten monetary policy.
After expressing their own views, Summers and Krugman presented the following rebuttals to each other’s arguments.
Summers questioned Krugman: he did not believe the Fed could “fine tune” interest rates to offset excessive fiscal stimulus, while also preventing the economy from falling into recession; he also did not think most of the bailout money would be spent slowly, GameStop speculative frenzy that shows some retail investors take bailout money to speculate in stocks, and the end of the epidemic will trigger consumer spending. The younger generation of economists mistakenly believe that inflation will not become a problem again, “may have made a mistake”, inflation risks must be carefully dealt with; it is appropriate to take small, cautious steps, unless there is a strong persuasive reason, before committing to something else, he estimated that Biden 1.9 trillion dollars plan, nearly 1 trillion dollars is insignificant “air” spending.
Krugman responded: events like GameStop, “bubbles happen all the Time“, but to prevent bubbles and adjust monetary policy, usually not wise; 1.9 trillion dollars plan can be successfully passed and play an immediate effect, will win the public support, which will reduce the Biden administration’s subsequent spending plan through the political resistance; although Although inflation may be a self-fulfilling prophecy, at this point in time, there is little risk of a significant increase in inflation expectations.
In short, the two heavyweight economists have a “partial consensus” on the Biden bailout package, with the main points of disagreement being the size of the package and the risk of inflationary trouble. Krugman believes that Summers is “overly worried” about inflation and may have made a “mistake”, but admits that he is “not sure” if this is the case, all will be verified in time.
Krugman, the 2008 Nobel Prize winner in economics.
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