The Rising Influence of Rising Affluence

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5 years at 6% unemployment or 1 year at 10%: That’s what Larry Summers says we’ll need to defeat inflation (yikes!)...

https://fortune.com/2022/06/21/larry-summers-calls-for-high-unemployment-to-curb-inflation/

Former Treasury Secretary Larry Summers said unemployment in the U.S. would need to rise significantly for an extended period of time if it has any chance of curbing the inflation that is wreaking havoc on global markets.

“We need five years of unemployment above 5% to contain inflation—in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” Summers said in a speech in London on Monday, Bloomberg reported.

“There are numbers that are remarkably discouraging relative to the Fed Reserve view,” he added.

Unemployment in the U.S. currently sits at 3.6% after U.S. employers added 390,000 jobs in May, according to the Bureau of Labor Statistics monthly jobs report released in early June.

Inflation historically has an inverse relationship with unemployment, meaning when inflation is high, unemployment is typically low. In basic macroeconomic principle and in the opinion of Larry Summers’, higher unemployment would translate to people having less discretionary income to purchase goods, lowering demand and reducing prices—i.e. inflation.

“The gap between 7.5% unemployment for two years and 4.1% unemployment for one year is immense,” said Summers, adding, “Is our central bank prepared to do what is necessary to stabilize inflation if something like what I’ve estimated is necessary?”