Larry Summers Isn’t Buying It

Generally speaking, market participants were pleased with the latest jobs report out of the world’s largest economy.

Data for August “checked the Goldilocks boxes,” as I put it, while editorializing around the numbers. The term “Goldilocks” was bandied about incessantly ahead of the long holiday weekend in the US. And for good reason, I think. A robust headline, cooler-than-anticipated wage growth and a welcome uptick in the participation rate, were all consistent with a “just right” interpretation. “A Goldilocks US jobs report,” ING declared. “Labor market data evokes Goldilocks memories,” Cameron Crise wrote. And so on. You get the idea.

On person who wasn’t impressed was Larry Summers, who effortlessly played the curmudgeonly economist while chatting with Bloomberg for this week’s installment of “Wall Street Week.”

“The increase in participation is good news, but I think there’s a tendency to exaggerate how much higher participation will reduce inflation,” Summers said, framed by a pristine beach. “People think of it as extra labor supply, but they forget that if the unemployment rate stays the same and participation goes up, more people are working, earning and therefore spending, and that in turn raises the demand for labor.”

Speaking of increased demand for labor, you’d be forgiven for suggesting a part of Summers hopes the distortions bedeviling Joe Biden’s economy last as long as possible. After all, the longer inflation stays elevated, the longer Summers’s “labor” will be in demand. He was right about inflation, accidentally or not, and you can scarcely go a day without hearing from him. Of course, Summers didn’t need a second act. He was already as famous as economists get. But fame is intoxicating, and Summers certainly seems to be enjoying the notoriety he garnered for predicting additional stimulus would lead to elevated inflation.

Bloomberg tossed Summers a ridiculous softball. “Doesn’t the Fed, Larry, have to push people out of jobs?” Matt Miller wondered. “I mean right now, everyone is earning money and able to pay up as much as they need to for goods and services,” Miller said, gesticulating and feigning frustration at how rich everyone apparently is in the imagination of TV anchors. “In order to bring inflation down, they’re gonna need unemployment at 4.5%, 5%, 5.5% — I don’t know what NAIRU is right now, but maybe you have a view.”

It was a laughable lead. Yes, of course Larry “has a view,” and everyone knows what that view is since he’s made no secret of it. Miller isn’t much for subtlety, but anchors are supposed to at least pretend to be interlocutors. Miller may as well have let Summers do a monologue. “Matt, my guess is, things are much less good than the Fed has supposed,” Summers said, suggesting NAIRU is 5%. He referenced the Beveridge Curve.

Last month, Summers brushed aside Chris Waller’s attempt to use a Beveridge Curve analysis to make the case for a soft landing. “We looked at [Waller’s] note with interest, in the hope of being educated on a more optimistic view of the American economy’s soft landing prospects,” Summers and Olivier Blanchard wrote, in a short post dripping with sarcasm. “Unfortunately, our judgment is that it contains misleading conclusions, errors and factual mistakes.” Waller’s (admittedly lackluster) effort was a response to a paper penned by Summers and Blanchard in July.

This week, while documenting the latest JOLTS data, I suggested critics of the soft landing narrative (which, at this point, revolves almost entirely around the controversial contention that the Fed can effectively render millions of vacancies superfluous, thereby reducing the disparity with available labor), would use the latest job openings figures as evidence to support their skepticism. Summers did just that. “Recent JOLTS data confirm the absence of evidence for a soft landing,” he said, in series of social media posts referencing a fresh Beveridge curve analysis with Alex Domash.

“Even if job vacancies had declined, the history is clear: Vacancies always fall first, and then over the next 12 months unemployment rises,” Summers went on, summarizing. Vacancies didn’t fall. They rose, insult to injury for the soft landing narrative. Even with an uptick in the number of Americans counted as unemployed, the ratio of openings to the “officially” jobless remained stuck near record highs (figure above).

Summers told Bloomberg’s Miller that the Fed needs to get the unemployment rate above NAIRU — so, above 5%. Ultimately, he said it’d be surprising if the Fed gets inflation back down to 2% without a jobless rate that “approaches or exceeds” 6%.

Needless to say, September’s updated SEP won’t include a 6% projection for the unemployment rate, and you surely won’t hear any Fed officials suggest such levels are necessary to achieve their inflation goal.

As a reminder, the most recent projections, from June, did come packaged with an upward revision to the forecast for the unemployment rate, which was seen exceeding 4% in 2024 (figure above). But the projection was widely lampooned for being naively optimistic.

Summers is hardly alone in his skepticism. Indeed, most observers doubt the Fed can execute on a plan that leans so heavily on “correcting” a single disparity. Certainly, engineering lower demand will prompt some businesses to reassess staffing needs and the financial pages are replete with headlines documenting layoffs and hiring freezes. Ultimately, though, closing the gap is a question of matching jobs and workers, something the Fed can’t help with.

Meanwhile, many still worry that fiscal policy is making the Fed’s job more difficult. “Nominal growth continues to be boosted by inflation, fiscal stimulus, the past era of wealth accumulation and a new era of ‘economic cancel culture’ [wherein] economic pain elicits immediate public sector bailouts,” BofA’s Michael Hartnett said.

Besides, Hartnett added, “war is always inflationary.”