AP Photo/Michel Euler
- Economist Larry Summers repeated his inflation fears, saying risks resemble those seen in the 1970s.
- The idea that inflation can't suddenly spike to worrying highs "is just plain wrong," he told Bloomberg TV.
- Lifting taxes on wealthy Americans and corporations could dull spending risks, Summers added.
- See more stories on Insider's business page.
Former Treasury Secretary Larry Summers reiterated his concerns about rampant inflation on Friday and questioned whether the Federal Reserve and the White House can control price growth as effectively as they claim.
The ink is barely dry on Democrats' $1.9 trillion stimulus plan, but President Joe Biden isn't slowing his roll. The White House is slated to roll out a new spending plan on Wednesday that includes trillions of dollars for infrastructure, climate, and family-care projects. The proposal signals Biden is willing to keep injecting cash into the economy until it's fully recovered.
The scale of pandemic-era spending, and the suggestion it will continue, is cause for concern, Summers said in a Friday interview on Bloomberg TV. Many economists and policy experts have dispelled fears of 1970s-like hyperinflation, but the former Treasury Secretary said he sees few contrasts between that era and today.
"If there are any differences, the differences are such as to make one more concerned now," Summers said.
The famed economist cited the sudden and volatile nature of inflation in the late 1960s in his argument. Price growth stood at around 1% for a few months in 1966, yet it stood as high as 6% for some of 1969.
The idea that inflation can't surge so unexpectedly "is just plain wrong," Summers said.
"It may be that a way will be found to bring it under control," the economist added. "But as I look at $3 trillion of stimulus, $2 trillion of savings overhang, a major acceleration coming from COVID in the rear-view mirror, rates expected by the Federal Reserve to be at zero for three years even in a booming economy, record growth this year, major expansion of the Fed balance sheet, and much new fiscal stimulus to come - I'm worried."
To be sure, the Fed is standing its ground until inflation steadily trends above 2% before raising rates. Central bank chair Jerome Powell has said the Fed will "be patient" in pursuing its inflation target, and told lawmakers last week that decades of disinflationary pressures aren't likely to be reversed in a matter of months.
Covering stimulus costs with higher taxes
The impact of such massive relief spending could be offset by near-term tax hikes. The Biden administration is reportedly considering raising taxes on the wealthy as well as lifting the corporate tax rate following President Trump's huge 2017 cuts.
There's "no rational economic case" for those cuts, and increasing tax revenue could help counter inflationary pressures moving forward, Summers said.
"I actually think the United States is now in a position where there are many ways we could raise tax revenue that would actually make the economy function better," he added.
So far, the president is considering lifting the corporate tax rate to 28% from 21%, increasing the income tax rate for people making more than $400,000, lifting the capital gains tax rate for individuals making more than $1 million each year, and expanding the estate tax. There isn't a detailed package yet, according to the White House press secretary, but details could emerge as Biden rolls out his latest spending addenda.
"His priority and focus has always been on people paying their fair share and also focusing on corporations that may not be paying their fair share either," White House Press Secretary Jan Psaki said earlier this month.