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But inflation proved the perfect issue to enable Summers to regain the spotlight. Intellectually, Summers had been deeply formed by the monetarist revolution instigated by Milton Friedman in the 1970s—which held that a key way to hold down inflation was to raise interest rates in order to increase unemployment (and thereby keep wages in check). In early 2021, Summers began sounding the alarm that the stimulus spending Biden and the Democrats had used to keep the economy afloat during Covid was going to lead to a sharp rise in inflation. When inflation did in fact rise, Summers basked in the role of the prophet vindicated.
But Summers’s rehabilitation rested on an illusion. As Eric Levitz notes in a recent New York magazine article, all evidence suggests that while Summers was right to predict inflation, he was completely wrong about both the causes of that inflation and the best means to fight it. Speaking at the London School of Economics in June 2022, Summers said that “we need five years of unemployment above 5 percent to contain inflation—in other words, we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment.” This is the standard Friedman prescription of a short, sharp shock of unemployment to defeat inflation—the same remedy followed by Paul Volcker in the late 1970s and early ’80s. Those policies, of course, led to the long-term defeat of American labor unions and the rise of Reaganite neoliberalism.
But that scenario was not repeated under Biden. As Levitz reports, Summers’s "call for austerity was premised on the notion that only a sharp increase in unemployment could prevent a ruinous wage-price spiral. In reality, both wage and price growth have been slowing for months, even as unemployment has remained near historic lows. Summers’s failure to anticipate this outcome should lead us to reconsider just how prescient his analysis of the post-Covid economy ever was."
The core problem, Levitz adds, is that from the beginning, [Summers’s] analysis was predicated on the idea that excessive stimulus would lead to unsustainably low unemployment and thus wage-driven inflation. There has never much reason to believe that the labor market was the primary driver of post-Covid price growth. And at this point, it’s abundantly clear that, in 2023 America, a tight labor market will not inevitably trigger a wage-price spiral.
If the Federal Reserve follows Summers’s advice and keeps raising interest rates until the economy hits “five years of unemployment above 5 percent,” then millions of people will suffer for absolutely no reason other than as human sacrifices to a discredited economic theory.
Far from vindicating Summers, inflation is yet another case where he got a big issue wrong. It joins a long list of such errors. As Binyamin Appelbaum documented in his fine book The Economists’ Hour (2015), while serving as deputy Treasury secretary in 1998, Summers took it upon himself to bully staffers who were pushing for the regulation of credit derivatives—the banking practice that led to the housing bubble and 2008 crash. Summers even called one staffer, Brooksley Born, the head of the Commodity Futures Trading Commission, into his office to scream, “I have 13 bankers in my office who tell me you’re going to cause the worst financial crisis since the end of World War II.” Ironically, it was Summers’s own failure to heed Born’s advice that caused that very crisis. In 2005, Summers derided critics of the deregulated credit default swap market as “slightly Luddites.”
© 2015 Mutual Fund Observer. All rights reserved.
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Comments
Yes. I’ve long felt that way (”Federal Reserve Wrecking Crew”). Somewhat surprisingly, the overly restrictive stance hasn’t yet thrown us into a deep recession. Summers? Uhh! / I have a lot of trouble stomaching both him and Er-Erian. Both sound like a wet rag (financially speaking) 90% the time.
I have a hunch that a part of the inflation issue is the bundle of savings amassed by the boomers over decades of economic growth and market outperformance. In a sense. inflation may “taking back” much of what has been given over those years. Would help explain why the economy stays hot despite the efforts of the Fed to cool it. As I said, just a hunch and haven’t found anyone who agrees with me on that point.
As Jack Benny used to say.
I think it has competition.
What a surprise, economists have been wrong for decades.
Hint: every time someone predicts markets based on the economy, unemployment, valuation, inverted yield and many others, there is a big chance they are wrong about what stocks will do in the next 1-3-6 months.
I do listen to El Erian, though.
That’s OK. Just don’t swallow it hook, line and sinker. I do enjoy his posts most of the time. Has some interesting (albeit conservative leaning) perspectives on the markets and investing.
@SFNative- And there, sir, is the ultimate truth.
1) Corporations have much better on time data and can raise prices quickly to protect and even increase profit margins
2) there are still something like 2 or 3 million "missing workers" who have not returned to work after Covid. Some maybe are still living on their stimulus checks, but the combination of aging demographics and demoralization of the blue collar worker are structural problems that have to be addressed.
I read today that the Navy cannot find enough workers to staff their four bases to construct new ships. This is certainly true in New London CT where the sub base is sponsoring high school students so they will stay for jobs. Of course non profits elsewhere in the state are demanding more money to support housing assistance and food kitchens. Why not subsidize housing in New London where there are jobs?
Surely, a way can be found. Capitalism is all about creating sweetheart deals. It could work for homebuilders as well as lumber mills or steel companies or behemoth computer monsters.
In the same part of the state, a practically non-existent tribe of Pequots opened a huge casino that became the biggest taxpayer to the State. Job creation for sure, but not in a line of business that sits well with my belief system.
DDoney:
On average, President Biden has the highest real (inflation-adjusted) wage and lowest unemployment rate of any president from LBJ to present (1964-2023).
Workers never had it better.
and (the whole thread)
https://twitter.com/paulkrugman/status/1673947313704783877
Thanks for sharing that article. While the investing take home points focus on inflation and a good description of what is at work, what will stick in my mind longer is how some people are more concerned with being in charge or on top in a big office with headlines than being right. It is also amazing how someone can be wrong so many times and still be thought to be worth listening to.
I do not think it is correct to call the head of the CFTC " a staffer"
Real wages under since the grifter has been in office have dropped every month, look at how few people are working as a total of population... tax receipts way down even though Biden raised corporate taxes ..so many working multiple low level jobs...are you serious d Moran?
God save the queen
https://fred.stlouisfed.org/series/LES1252881600Q
Meanwhile, the 3.7% unemployment rate is close to an all-time low:
https://fred.stlouisfed.org/series/UNRATE
Read here
After, link me to your proof that the raise has already happened because I can't find it.
Good luck to all
Baseball fan
The biggest wage increase since 1980 happened during Trump which reached the highest point. Covid brought it down and the current administration is far from the peak.
Here are the numbers based on the stlouisfed chart. During the Trump years: Q4/2016=349....Q2/2020=393 (that is 12.6% real wage increase in just 3.5 years). Trump finished in Q4/2020=377. There is nobody else that came close to a 12.6% real wage increase. Since 1980 the second biggest increase during any other presidency was about 5%.
The last number from Q1/2023=263 is still far from the top. This is after trillions of support and a waste of money for the next generation.
The easiest way to measure success is effordability. The 2 biggest items to purchase are homes and vehicles. I will check the numbers tomorrow, from memory, in 3 years houses went up over 40% and vehicles about 30%. Americans have to work many more years to achieve their dreams.
Again, you are silly and unserious and should stop w your wingnut posting until you have something substantial, more than 'I know a guy.'
https://factcheck.org/2021/10/trumps-final-numbers/