On Summers, Manchin, and the Value of Dissent

Many people were taken by surprise yesterday when Senator Joe Manchin announced his support for an ambitious legislative package that addresses climate change, clean energy production, prescription drug prices, and health insurance costs:

Senator Joe Manchin III of West Virginia, a key centrist Democrat, announced on Wednesday that he had agreed to include hundreds of billions of dollars for climate and energy programs and tax increases in a package to subsidize health care and lower the cost of prescription drugs, less than two weeks after abruptly upending hopes for such an agreement this summer.

The package would set aside $369 billion for climate and energy proposals, the most ambitious climate action ever taken by Congress, and raise an estimated $451 billion in new tax revenue over a decade, while cutting federal spending on prescription drugs by $288 billion.

What caused Manchin to change his mind? It appears that Larry Summers played a significant role in persuading him that the package would not be inflationary:

To further win his support, some Democratic senators in recent days also sought an intervention from Larry Summers, the former treasury secretary who has been sharply critical of Biden’s earlier stimulus law... Summers was among the economists who first warned that inflation would rise.

The two men spoke this week, and Manchin listened as Summers talked in detail about why Democrats’ proposed economic package — including its energy provisions — would not lead to higher prices.

What made Summers so persuasive to Manchin was his early and insistent prediction that the American Rescue Plan involved significant inflation risk. These warnings were prescient, as some of his critics have been honest enough to admit.

In an interview with Ezra Klein a few months ago, Summers explained both the logic behind his predictions of inflation, and also why this logic did not apply to the kind of climate and energy policy that was announced yesterday. That is, Summers has been entirely consistent in his positions, as an opponent of the size of the earlier Covid-19 relief package, and a supporter (with some qualifications) of action on climate and energy:

EZRA KLEIN: So we talked a few minutes ago about how the federal government doesn’t have very good tools to work with supply on the one to two-year time frame. But this more they can do to expand it or also change the kind of supply the economy offers on the five-, 10-, 15-year time frame. A good example being investments in green energy. If you send the right signals and make the right investments, you can create a lot more green energy in 10 years than you would have had otherwise.

There are a number of these investments in the legislative package, maybe formerly known as Build Back Better. But inflation risk has become very much part of why folks like Joe Manchin and Kyrsten Sinema have shot it down. Do you think that’s the right way to think about Build Back Better? That it’s something we should not do because there is higher inflation now. Or do you think there are real ways we can increase the supply of the economy in 10 years and these should be seen as noncontradictory?

LARRY SUMMERS: Ezra, the record is clear. I endorsed Build Back Better. I re-endorsed Build Back Better. I was a strong supporter of Build Back Better for exactly the reason you say that I think there are a set of fundamental investments that we need to make in our economy that start from infrastructure and include a range of human investments.

There are ways in which I think the design could be better. I’d like to see emphasis on efficiency and building infrastructure as well as more money into infrastructure, for example. But I was a strong supporter of Build Back Better. I did think we should design it so that it didn’t represent a net contribution to demand in the first few years for the reasons that you were talking about earlier, that I didn’t want too much burden to fall on monetary policy.

But my view is that we should pay for fundamental public investments that are worth it, that there are a lot of fundamental public investments that are worth it, that have very high returns. That many of the ways of raising revenue probably would be good ideas even if we didn’t need the money, such as improving tax compliance. So I’m very much with the general orientation of the progressives on that in believing that there are a whole set of public investments that would be very, very valuable for us to make, and I think will over time increase the capacity of the economy.

One can agree or disagree with the positions adopted by Summers, but there is no doubt that these positions are logically consistent. The key difference between the legislation he previously thought was too ambitious and the one he now supports is the role of taxation. The American Rescue Plan was deficit financed, and led to an increase in aggregate demand that was large, persistent, and outstripped the capacity of the economy to quickly ramp up production. The legislation announced yesterday is tax financed, and will end up lowering the federal deficit. It will shift the composition of aggregate demand rather than its scale, and will also result in greater productive capacity over time.

There’s another important lesson here, and it has to do with the value of dissent. Summers was assailed by many in his own party for his dire forecasts. As Ezra Klein put it, he was a “relentless, loud, frustrating economic Cassandra.” Meanwhile, his public statements were celebrated and indeed exploited by political opponents. But his willingness to speak his mind, even as a relatively lonely voice on his side of the political divide, has ended up paying enormous dividends. It raised his credibility on an issue that turned out to be pivotal in advancing the most ambitious climate and energy legislation in our history.

Disagreement has social value, demonization does not. Sometimes public positions are disguised statements of private interest, and sometimes they are just good faith arguments. Summers was able to speak his mind and stick to his guns, but few people have his power, prestige, and public platform. More generally, vilification stifles debate and promotes self-censorship, undermining the very interests it seeks to serve.