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As debate raged among economists on Twitter over the weekend over Larry Summer’s argument that President Joe Biden’s $1.9 trillion Covid-relief package might cause runaway inflation, some analysts proposed that lawmakers add spending curbs to the legislation to be triggered if the economy recovered quickly
Many economists attacked Summer’s premise of a risk of overheating but others, including some Democrats, said it had merit.
“This would not be overheating, it would be starting a fire,” said Olivier Blanchard, a past president of the American Economic Association, who often has collaborated with Summers on research.
Other liberal economists said Summers’ concern with overheating might not be the most likely outcome, but said it shouldn’t be dismissed out-of-hand.
Jay C. Shambaugh, who served on President Barack Obama’s Council of Economic Advisors, tweeted the idea that triggers could be placed on the package to reduce spending if the economy recovered sooner than expected.
The idea is a novel twist on an argument from progressive economists for automatic triggers that would start spending if the economy faltered.
Many economists said they were not worried about higher inflation, noting that the Federal Reserve has been trying to get inflation back to its 2% target rate without success.
Fed Chairman Jerome Powell has unveiled a new framework trying to convince markets the Fed won’t tighten monetary policy at the first hint of higher inflation.
Fed officials have often responded to audience worries about high inflation with some variation of a confident “we got this” response.
Some economists are not convinced.
For instance, earlier Monday, Cleveland Fed President Loretta Mester told the Toledo Rotary Club “we know how to control inflation on the upside.”
New Treasury Secretary Janet Yellen, no stranger to Fed debates, expressed confidence that runaway inflation could be curtailed.
“I have spent many years studying inflation and worrying about inflation and I can tell you, we have the tools to deal with that risk if it materializes,” Yellen said during an interview on CNN on Sunday.
Joseph Gagnon, a former Fed staffer and now economist at the Peterson Institute for International Economics, said there could be “collateral damage” from U.S. central bank tightening.
Francios Gourio, a research economist at the Chicago Fed, said that the same low-interest-rate environment that has made it difficult for the Fed to push inflation up may make it difficult to bring inflation down.
Yields on the 10-year Treasury note TMUBMUSD10Y, 1.161% have moved higher since late January as more Americans receive vaccinations and are now close to 1.20%.
