Here’s why Larry Summers wants 10 million people to lose their jobs

Former U.S. Treasury Secretary Larry Summers has said higher unemployment is needed to rein in inflation, which Federal Reserve policymakers say isn’t necessary for price growth to continue. cool down.

According to Bloomberg News, Summers said in a speech in London on Monday that a sustained period of rising unemployment was needed to contain inflation – a one-year peak at 10%, two years of unemployment at 7.5 % or five years of 6% unemployment.

In other words, Summers is calling for the number of unemployed to rise to around 16 million from just under 6 million in May.

President Joe Biden said he spoke with Summers on Monday, although he said a US recession could be avoided.

The way Summers has framed the numbers suggests he’s talking about something called the buyout ratio, which is the link between unemployment and inflation. According to Jason Furman, the former chairman of President Obama’s Council of Economic Advisers, in the 25 years before the pandemic, the sacrifice ratio was six percentage points – which means a year of a jump of 6 points. percentage point in unemployment, or two years of a 3 percentage point increase in the unemployment rate would be needed to reduce inflation by a full percentage point.

In May, the unemployment rate was 3.6%. What Summers is essentially saying is that he wants the unemployment rate to rise to a level that would reduce inflation by one percentage point. The core PCE price index was 4.9% year-on-year in April.

Current Federal Reserve officials do not accept that there has to be such an abrupt trade-off. Fed forecasts call for the unemployment rate to rise to 4.1% next year, which would bring core inflation down to 2.3%. Christopher Waller, a Fed Governor, said the trade-off was less between inflation and unemployment, than between inflation and job creation.

Jerome Powell, the Fed Chairman, also said such a blunt compromise was unnecessary. “Take for example the labor market, so you basically have two job offers for every person actively looking for a job, and that has led to a real imbalance in wage negotiations. You could get to a level where that ratio was at a more normal level and you would expect to see those wage pressures come down to a level where people are still getting healthy pay raises, real pay raises, but at a compatible level with 2% inflation,” Powell said at the last press conference.

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