The Treasury Secretary Is Right To Point Out Summers’ Record Of Failed Predictions, And Other Democrats Should Too.
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On Tuesday, Treasury Secretary Janet Yellen stood before the House Ways and Means Committee and said what we at Hackwatch have been trying to get across for almost two years: Larry Summers is often wrong. Specifically, Yellen said of Summers that “he’s a person who’s been wrong in the past.” She then proceeded to point out that Summers had once said only a massive recession could calm inflation but that has proved to be manifestly untrue. For this, the unobtrusive and moderate Yellen seems like a maverick.
The media typically likes to play the part of stenographer when it comes to the esteemed Charles W. Eliot University Professor, lauding Summers’ economic insight whenever he deigns to offer it to the public. And in the world of Democratic politics, the situation had been much the same until the pandemic, when Summers’ unyielding criticism of Biden’s Covid recovery plans pushed the party away. This has not stopped the White House from reaching out to him for his opinion, nor has it encouraged more centrist members of the party to ignore his advice, as Joe Manchin would only consider the Inflation Reduction Act after it had been blessed by Harvard’s patriarch of neoliberalism. Ergo, Yellen’s willingness to point out that Summers has often been wrong feels radically honest. More administration officials should follow suit. Perhaps then we can receive some pushback in the media to Summers’ near-constant predictions of a recession couched in the odds of one in three.
While Yellen’s willingness to criticize Summers’ prescription of lingering inflation (more rate hikes, who would’ve guessed?) was refreshing, she did not properly explain why Summers’ calls are so incorrect. Namely, it’s that more rate hikes would be counterproductive.
Summers’ continued calls for rate hikes – the source of the question that prompted Yellen to point out Summers’ lackluster history of economic soothsaying – are, by his own account, an attempt to deal with continued inflationary pressures largely stemming from increased housing costs. Specifically, Summers has said that he is concerned that “shelter inflation is not durably declining” as a reason why rate hikes must continue.
Yellen – whose job at Treasury in no way controls the Fed’s interest rates – tried to avoid talking about monetary policy despite prompting by a seemingly confused Republican Congressman but pointed out that “rental prices have stabilized and in some cases declined.” More importantly, however, rate hikes are not the solution to inflationary pressure on housing prices. As Senators Elizabeth Warren, John Hickenlooper, Jacky Rosen and Sheldon Whitehouse pointed out in a letter from January of this year, rate hikes are counterproductive in the fight for housing affordability. Not only do increased interest rates result in fewer units of new housing being built, but they also impact the sale of existing homes.
Higher interest rates have the immediate effect of lowering the number of homes for sale as those with lower, pre-interest rate hike mortgage rates opt to keep them when they might otherwise have considered moving. From 2021 to October 2023, mortgage rates have increased by as much as five percent, from 3 percent to 8 percent in some cases. As a result, those with 3 percent mortgages stand to face vastly increased monthly mortgage payments if they sell their house and take out a new mortgage at today’s higher rates. This is why wealthy homebuyers have been paying for homes in cash at a record rate in New York, and why far more Americans are avoiding selling the home on which they have a good mortgage rate. Baby boomers and empty nesters who would otherwise be considering downsizing are avoiding doing so because that would necessitate leaving behind their historically good mortgage rates and taking out a new loan with much higher monthly payments. This leaves fewer large homes on the market for young families who need the space. The lower-than-usual supply of homes on the market further increases prices, as the same demand chases reduced supply, and is a direct result of high interest rates. Further rate hikes would only reinforce the issue of Americans being locked into a mortgage and ensure even fewer homes will be built in the foreseeable future as a result of high interest rates. This is to say nothing of the issue of how, as the Warren letter points out, landlords tend to pass on the increased mortgage rates to renters in the form of higher rent.
Interestingly enough, Summers himself is actually listed as a co-author of a research paper just two months ago on the effects of higher interest rates. Specifically, Summers and his team sought to understand why consumer sentiment was so low despite seemingly falling inflation and the continuation of a historically strong job market. What they found was that housing costs for many Americans were going up as a result of interest rates in a way that is not captured by the standard measurement of inflation, the CPI. While Summers’ paper does not make policy recommendations — nor does it necessarily seem preoccupied with consumer sentiment (rather than just understanding it) — its implications should be understood by policymakers. Additional rate hikes hurt ordinary Americans, and they do so in the same manner as inflation, even if current definitions treat the phenomenon as distinct.
Summers seems intent on reaching the 2% inflation target by any means necessary, even if that means long-term harm to the fight for housing affordability (ostensibly his objective in fighting inflation) or other Democratic policies. Does it matter that his prescription may be incorrect? No. Because he’s been incorrect countless times and almost never gets called on it. So let’s all take a page from Secretary Yellen’s book and remind Summers and his fans that we all remember the many times he’s been wrong.