Washington Insider-- Wednesday

Krugman, Summers on Economic Policy

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

US Maintains Block On Resumption Of WTO Appellate Body

The U.S. this week held with its blocking of a plan to restart the WTO Appellate Body via a proposal from Mexico that has the backing of 140 countries.

In the Geneva meeting, the U.S. said the objections raised by the Trump administration that had prevented the naming of new Appellate Body members were valid, but the Biden administration is open to a dialogue to address those issues.

This runs counter to expectations that the Biden administration would seek to set aside the objections raised by the Trump administration on the dispute settlement process, some of which were heightened after the Biden administration ended the U.S. blockade on naming a new leader of the trade body.

Minnesota Lawmaker Urges Investigation On Price Gouging

Sen. Tina Smith, D-Minn., is calling for federal investigations into possible price gouging of natural gas in the Midwest, which also suffered extreme cold and outages last week.

Smith said natural gas spot prices spiked as high as 100 times normal levels, forcing high costs upon utilities and other natural gas users, many of which were passed on to customers.

In a letter sent Saturday to federal regulators, Smith said the price spikes harm consumers and also “threaten the financial stability of some utilities that do not have sufficient cash reserves to cover their short-term costs in this extraordinary event.”

The letter was obtained by the Associated Press and was sent to the Federal Energy Regulatory Commission (FERC) and other agencies.

Washington Insider: Krugman, Summers on Economic Policy

Bloomberg reported recently on a key economic policy issue by two of the “best-known and sharpest-elbowed center-left economists.” The report features something of a disagreement between the two on an economic topic that is being widely discussed in Washington.

The discussion focused on President Biden's $1.9 trillion coronavirus rescue plan, which was hosted by Princeton University economist Markus Brunnermeier and pitted Lawrence Summers, the former Treasury secretary, National Economic Council director, and Harvard president, against Paul Krugman, the Nobel laureate formerly of Princeton and now at City University of New York.

Summers defended his recent Washington Post op-ed that argued that, as the headline said, “The Biden stimulus is admirably ambitious. But it brings some big risks, too.” Krugman responded by talking the line of his own recent column in the New York Times, headlined, “Biden Is the Big Spender America Wants.”

Summers made four points, Bloomberg said: 1) The $1.9 trillion package is “extremely large” and the amount of spending is far bigger than the estimated “output gap,” that is, the amount by which the economy's output is falling short of potential; 2) it goes “way beyond what is necessary” to help victims of the COVID-19 crisis; 3) “We risk an inflationary collision of some kind” — and if the package does kick up inflation, the Federal Reserve could inadvertently cause a recession by trying to squelch the inflation with higher interest rates; 4) that sum of money, or even more, would be better spent on long-term public investment, what Biden calls “building back better.”

Krugman did not wholly disagree, but responded that Biden's plan should be regarded as a rescue, not a stimulus. “Think of it as disaster relief or like fighting a war. When Pearl Harbor gets attacked, you don't say, 'How big is the output gap?'”

Breaking the Biden plan into three parts, Krugman said the first part, which consists of “public goods” spending such as federal assistance in getting people vaccinated and making schools safe from COVID-19, is well-justified. The second part, support for job losers and state and local governments, is also defensible, he thinks.

He concedes that the third part, which includes $1,400 checks for many people who haven't been harmed by COVID, is not as essential but is the most popular aspect and will help get the whole package through Congress.

Krugman also argued that the package wouldn't overstimulate the economy or cause inflation, because a lot of the $1,400 given out in checks will be saved, rather than spent. And if the coronavirus crisis should ease, much of the aid to state and local governments will also be saved in rainy day funds. As for Summers's idea of focusing on infrastructure, Krugman said the government could do both: coronavirus relief now, and infrastructure — which takes time — starting in 2022 and continuing beyond.

Summers said he doesn't trust the Fed to fine-tune interest rates to offset excessive fiscal stimulus without tipping the economy into a recession. He mentioned that some speculators in GameStop Corp bragged about using “stimmies” — stimulus checks — to buy shares. He said there could be close to $1 trillion of “air” — non-essential spending — in the Biden plan. He also disagreed with Krugman's contention that most of the relief money would be spent slowly. He said that once the pandemic ends, there could be a burst of consumption.

Krugman, responding to the GameStop comment, said “bubbles happen” and it's rarely wise to calibrate monetary policy to prevent them. He thinks that Biden will win political support from successful passage of the $1.9 trillion package, which would make it easier for his administration to pass other big projects later because voters will decide that “these people seem to know what they're doing.”

Also, he sees little risk that people would begin to expect much higher inflation — which, in theory, could become a self-fulfilling prophecy. It took “years and years of bad policy judgment” for that to happen in the 1960s, he said.

Summers continues to worry that younger economists falsely assume that inflation will never again be a problem, and “that's probably a mistake.” Because of the risk of inflation or other problems, he said, “It's a good idea to take small, careful steps unless there's a compelling reason to do something else.”

Toward the end of the discussion, the two came to partial agreement although Krugman thinks Summers's views about inflation are wrong, and that he is excessively worried. “But I'm not sure about that.” What they think doesn't matter anyhow, he said, because the package is likely to pass intact — or nearly intact. “Then we'll find out.”

So, we will see. The debate and the topics it focused on remains crucially important and likely will intensify ahead of key Congressional votes in coming days — votes producers should watch closely as the fight for the next stimulus recovery package intensifies, Washington Insider believes.

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