Lawrence Summers answers questions during an interview in Venice, Italy, July 9, 2021.
Photo:
Luca Bruno/Associated Press
Lawrence Summers,
who served as
Bill Clinton’s
Treasury secretary, rocked the Democratic establishment last year by predicting that his party’s excessive spending would cause inflation. He was right. But he’s wrong now. On June 20 he told Bloomberg that “we need five years of unemployment above 5% to contain inflation”—or perhaps one year of 10% unemployment. That would throw millions of Americans out of work.
Mr. Summers echoed the advice of his uncle, the Nobel economics laureate
Paul Samuelson,
who famously wrote in 1980, a time of double-digit inflation, that “five to ten years of austerity, in which the unemployment rate rises to an eight or nine percent average and real output inches upward at barely one or two percent per year, might accomplish a gradual taming of U.S. inflation.”
Walter Heller,
chairman of the Council of Economic Advisers under Presidents
John F. Kennedy
and
Lyndon B. Johnson,
similarly predicted that the 1981 Reagan tax cuts “would soon generate soaring deficits and roaring inflation.” He, too, was wrong. From Jan. 1, 1983, when the tax cuts took effect, to June 30, 1984, U.S. real gross domestic product grew at an average annual rate of 8%. Inflation collapsed.
Catalysts for inflation vary—excessive government spending, printing too much money, currency devaluations, specific and general shortages of goods and services. Once embedded in an economy they can create long-lasting inflation. The secret to curing inflation isn’t economic collapse and high unemployment but the opposite: pro-growth policies that create incentives for more goods, more employment, less government spending and sound money. As the economy produces more, prices go down.
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