He is not talking about climate but about an economy that is growing too fast and experiencing high and persistent inflation like the one we experienced in the 1970s, as well as others possible crises. On the same day he issued the above warning, the June Consumer Price Index (CPI) was 5.4% above its level a year earlier. News reports indicated that this was the biggest jump in a year since 2008.
But there are many reasons to question whether his fears are well founded. More on that below. But first, some information on why this debate is so important at this point in US history.
Most of the time in the United States, the two most important policies that determine people's standard of living over time - including the rate of employment and unemployment -are monetary and fiscal policy.
Monetary policy is decided by the Federal Reserve, which sets short-term interest rates; and currently also directly influences long-term rates (including those paid on real estate mortgages). Over time, the Fed's interest rate policy is the most important policy determining how many jobs and how many unemployment we have. This is due to the effect of interest rates on economic activity - for example, note the recent boost the real estate market has gotten from low mortgage rates. Most importantly, the Fed generally raised interest rates when it decided that unemployment had become "too low", thus setting a limit on how close we can get to full employment. .
Fiscal policy is the government's use of taxation and spending, includings some of the federal spending since the start of the pandemic / recession that has served as both relief and stimulus. It can also boost employment significantly, especially during a recession or when the economy recovers.
Like my colleague Dean Baker and Jared Bernstein (currently board member of Joe Biden economic advisers) explained in their book, Returning to full employment : As the economy approaches full employment, there are not only millions of additional jobs, but substantial reductions in income inequalities. Low-paid workers see their wages and employment increase more sharply than those at the top of the income scale; and the same goes for black workers versus white workers.
Historically, our government institutions, including the Fed, have been far too conservative to allow the economy to reach full employment. The Fed has in fact caused most of the recessions that the United States has. have known since World War II, by raising interest rates.
As regards fiscal policy, the federal stimulus during the Great Recession, for example example, was much too small to make up for the shortfall due to the bursting of the housing bubble. It was only 2% of GDP, less than a quarter of what was needed. And about half of it was canceled by state and local government budget cuts.
So it is a historic feat that, as Summers complains, the US government is running a projected deficit de 13.4% of GDP this year (after 14.9% last year). And current Federal Reserve Chairman Jerome Powell has shown more commitment to full employment than any other Fed chairman. The unemployment rate is currently 5.9% - with millions more unemployed than the 3.5% rate reached before the pandemic.
As we've seen since the 1990s, limits on fiscal and monetary policy have proven to be considerably less stringent than economists and policymakers had argued - for decades. Even in the recent past, the Fed did not have its current commitment to full employment; and Congress and the President would never have approved the kind of spending he recently implemented, in order to alleviate suffering and accelerate economic recovery.