By Cristian Bustos. Originally published at ValueWalk.
Larry Summers, former Secretary of the Treasury during Bill Clinton’s second administration, says 10 million Americans should go unemployed to tame the price rally amid a tight labor market.
Larry Summers’ Views
According to Summers, it will be the Federal Reserve that will cause the economic contraction by wanting to suddenly combat high inflation after having “let it go.” This sudden aggressiveness will have a severe impact on employment.
Summers was quoted as saying on Fox Bussiness that this is the price to pay to contain inflation amid such a tight labor market —up to 10 million layoffs would be necessary to return to a certain normality of prices.
“Why do we have to ‘kill’ the labor market? Inflation in the U.S. —the general CPI is 8.6%— has a high demand component. Prices have been rising, in part, because the consumption of durable goods has soared well above pre-Covid levels, a situation that could worsen if job creation and wage growth continue apace.”
“It seems evident in the U.S. that domestic factors have a special relationship with the inflationary phenomenon,” he says.
San Francisco Fed economists have published a note in which they say that at least a third of U.S. inflation is caused by “excessive demand,” while the rest is caused by ambiguous factors including those that highlight supply problems.
Larry Summers says the solution is to cool down the economy and “sacrifice” the labor market —that is, full employment.
Summers himself acknowledged in a paper published in April that “The idea that inflation can fall sharply without a corresponding increase in labor market slack runs counter to standard economic theory and is inconsistent with historical evidence.”
“Empirical evidence supports the view that controlling accelerating inflation requires a substantial increase in economic slack since 1955, there has never been a quarter with inflation above 4% and unemployment below 5% that has not been followed by a recession in the next two years. Recession and unemployment is a temporary sacrifice to achieve future well-being.”
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