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Orphaned mall in West Nyack, New York
Photo: MIKE SEGAR / REUTERS
One is a Harvard professor, the other a Nobel laureate in economics.
They are roughly the same age, both are stars in the Democrats' economist orbit, and both longed for the end of the Trump era.
But now Larry Summers and Paul Krugman have become adversaries on a question that could determine the success of Joe Biden's presidency: How do you advance the US economy?
Biden is planning an economic stimulus program, next to which everything has gone before: 1.9 trillion dollars is to be distributed by the state to citizens, companies and government agencies.
Since taking office, the President and his Treasury Secretary Janet Yellen have tried to convince the public, parts of the Republicans that are considered accessible, and also skeptical fellow party members of the necessity of the "American rescue plan".
But Obama's former chief economic advisor, of all people, drove them into the parade: Larry Summers warned of the dangers of inflation "the likes of which we have not seen in a generation" and the consequences for the dollar and the stability of the financial system.
In addition, the exploding budget deficits would limit the future scope for necessary investments in infrastructure.
The anger among the Democrats over the intervention, which plays into the hands of the political opponent, was high.
"Larry Summers gives the skunk at the Covid rescue party," commented the capital postil "Politico".
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Paul Krugman
, Nobel Prize Winner and Columnist for the New York Times
Photo: Brendan McDermid / REUTERS
Krugman's tip
Krugman, who as a "New York Times" columnist has a wide audience, quickly and unequivocally took a stand against his fellow economist.
On Twitter, he recommended reading an article that impaled Summers' "strange fears" and suggested that he was simply offended.
In retrospect, many Democrats criticize that the economic stimulus package that Summers helped draft in 2009 was far too small to get out of the economic crisis.
And Yellen - whom Obama later preferred to candidate Summers when he was appointed to the top of the Fed - does not want to repeat this mistake under any circumstances.
The showdown of the two very self-confident economists took place this Friday: In a webinar, organized and moderated by German Princeton colleague Markus Brunnermeier.
They remained friendly, but very different.
Summers central argument: While Americans lost income due to the Corona crisis at 25 billion dollars a month, the government wants to distribute four times that amount: more than 100 billion dollars in the form of one-off payments for almost every citizen - the stimulus checks, too Called "Stimi" -, additional unemployment benefits and tax breaks for families.
Such an expansionary spending policy creates inflation risks, warned Summers.
That fear of rapid price hikes has disappeared from the radar of many economists after several decades of low inflation is "probably a mistake," he said.
And his confidence that the central bank will take countermeasures is not great: in the past, instead of a "soft landing", the Fed has often created a recession.
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Larry Summers
, Obama's former chief economic advisor and Harvard professor
Photo: Joshua Roberts / REUTERS
Summers counterattack
Summers, who was once Bill Clinton's Treasury Secretary, believes the massive economic stimulus is as risky as it is unnecessary.
The vaccination rate is increasing and the falling dollar increases competitiveness.
In the second half of the year, the US economy will "quite likely boom, even without an additional boost." In his view, only payments in the order of one trillion dollars for the Covid crisis victims would be justified.
"If Pearl Harbor is attacked, the question is not how big the output gap is," countered Krugman, who was in the sweater in front of the bookshelf. "We are waging a war." He admitted that the stimulus checks, the Even those with higher incomes would get "least justifiable" - but the helicopter money was very popular with the Americans.
He believes concerns about the economy overheating and inflation are exaggerated.
A significant part of the money will go to the savings accounts.
And anyway there is this "thesis of secular stagnation," said Krugman, alluding to a term coined by Summers: According to this, the underinvestment slows growth - and ensures low real interest rates and inflation.
Summers ignored this and in turn let loose a small tip against the politically arguing adversary.
In the "fundamental economic analysis" they actually agree, he claimed.
Even if politicians had to make compromises, it was "our job as economists to say that there is no really convincing economic argument for it and that it involves risks."
The conclusion of an hour-long exchange of blows was drawn by the Nobel Prize winners at the end: They probably had a rather "purely academic debate": Biden's package would be adopted, even if the economists did not like it: "This is real life."
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