Inflation levels are closer to the peaks of the Jimmy Carter era than the White House or media would have Americans believe, according to a report coauthored by Clinton administration Treasury secretary and Obama administration economic adviser Lawrence Summers.
At first glimpse, the inflation rate, which sits at roughly 8.3 percent, seems a far ways off from the March 1980 peak of 14.8 percent. Yet Summers and his colleagues argue that U.S. economic conditions are much bleaker than many policymakers assume and that inflation levels during these periods are actually similar.
Government data on inflation rates in years past are themselves inflated, Summers and his colleagues find. The 1951 inflation rating was 9.4 percent, for example, according to the consumer price index (CPI)—the index the federal government uses to measure the inflation rate. Summers and his colleagues found after calculating the rate using a formula that measures rising prices more accurately that the 1951 CPI was actually 3.3 percent.
The report paints a grim picture of the economic challenges facing President Joe Biden, who has been reluctant to call inflation an economic crisis and unwilling to curb domestic spending to help lower consumer costs. The only solution—if the inflationary environment is as dire as Summers and his coauthors allege—may be for the Federal Reserve to induce a recession by dramatically hiking interest rates and further harm consumers who have been spending an increased share of their income on household goods for nearly a year.
Summers's paper never uses the word "recession" but makes repeated references to actions taken by former Fed chairman and Carter appointee Paul Volcker, who along with the fiscal policies of former president Ronald Reagan gets credit for helping the United States escape the stagflation malaise that defined the 1970s. Summers's paper goes as far as to say "to return to 2 percent core CPI inflation [the Fed's target rate] today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker."
While most economists believe Volcker's policies were a success in the long term, the policies resulted in two harsh recessions in 1980 and 1981. Those policies included nearly doubling interest rates from 11.2 percent in 1979 to 20 percent in 1981. The interest rate today is set at around 1 percent, for comparison.
Summers and his colleagues believe that failures to adjust CPI measures have led to a misconception by policymakers that the United States can lower inflation without "large macroeconomic consequences." Because the government-provided inflation rate appears far lower than the 14.8 percent peak in March 1980, many policymakers wrongly assume such drastic rate hikes are not necessary.
Biden and other White House officials appear unaware that the Fed may be forced to institute harsh rate hikes that will temporarily harm economic growth. In a recent Wall Street Journal op-ed, the president proclaimed that his agenda of respecting the Fed's independence and domestic spending can help the United States "transition … to stable, steady growth, and bring down inflation without giving up all these historic [economic] gains." Treasury Secretary Janet Yellen last month echoed those remarks, saying all economic indicators suggest "that the Fed has a path to bring down inflation without causing a recession."
Policymakers who use faulty data to inform their response to high inflation could not only fail to lower prices but could also make the problem worse, Summers's paper alleges. Because such government services as Social Security benefits, federal retirement plans, and food stamps are tied to the CPI, "a slower than desired decline in the CPI could become self-reinforcing" and lead to inflation that takes "more time to exit the system," the paper states.
Summers has become one of the most prominent liberal critics of the Biden administration's handling of the economy. At the start of Biden's presidency, Summers warned that the $2 trillion American Rescue Plan was far too large and could cause inflation. A study from economists at the San Francisco Federal Reserve vindicated Summers, finding that COVID stimulus resulted in roughly 3 additional points of inflation during Biden's first year in office.
Rising costs remains the number-one most concerning issue for voters, with more than 80 percent of Americans telling an ABC News/Ipsos pollster that inflation is "an extremely or very important factor in how they will vote." That same poll found that only 37 percent approve of Biden's handling of the economic recovery and that only 28 percent approve of how he is tackling inflation.
Polling does perhaps present one bright spot for Biden if the Fed decides to implement a Volcker-type response to rising inflation: A Maru Public Opinion survey released earlier this month found that 62 percent of Americans already believe the U.S. economy is in a recession.