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[뉴욕=이데일리 김정남 특파원] Harvard University professor Larry Summers, along with City University of New York professor Paul Krugman and Columbia University professor Jeffrey Sachs, are called ‘three superstars’ in American economics. At the age of 28, he is the youngest tenure professor at Harvard University. He is particularly a ‘Democrat’, who served as Treasury Secretary under the Clinton administration and as chairman of the White House National Economic Council (NEC) under the Obama administration. He has been treated as the best economist in the Democratic camp.
For him, the past 1 year and 6 months have been more upsetting than ever. In February of last year, the Washington Post (WP) wrote that “inflation that has not been experienced in a generation will come” was the beginning. In January and February of last year, the US consumer price index (CPI) rose 1.4% and 1.7% compared to the same month of the previous year. It was still cheap. Nevertheless, Summers has been at the forefront of price warnings, openly criticizing the Biden administration’s loose money. In the process, he even had to hear ‘stupid’ and ‘politician’ ridicule from Democrats like Krugman.
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◇ A superstar in economics who was ridiculed as a ‘stupid’
“In the end, Summers was right.”
These days, it is the most talked about word on Wall Street and in academia in the United States. The speculation reached its climax when President Joe Biden spoke to Summers aside from Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell. Biden’s approval rating is at its worst ahead of the November midterm elections. In a hurry, he sought advice from Summers, who had been critical of him for a year and a half. A Wall Street bond adviser said, “Now I have no choice but to watch Summers’ comments.”
So, what is the core of the diagnosis and outlook that Summers is proposing? According to the paper ‘Comparing Past and Present Inflation’ published by Summers this month, the CPI growth rate of 14.8%, the highest during the second oil shock between April 1978 and July 1983, was restored in line with modern consumption patterns. As a result of calculation, it was found to be 11.4%. In the case of the first oil shock from June 1972 to December 1976, the highest was 12.3%, and if it is modernized, it becomes 9.1%. This is the result of recalculating housing prices that were not properly reflected in the past CPI. The most recent CPI increase of 8.5% last month is not much different from the worst oil shock in the past. “Inflation right now is much closer to a historic high than the officially published figures,” Summers said.
“Summers got hit” his heavy warning
Second, Summers draws attention to the relationship between low unemployment and inflation. The U.S. unemployment rate for May was 3.6%. full employment level. However, Summers thinks that this is an optical illusion created by many people who do not work even though they can work, in other words, who have left the labor market altogether. In fact, the labor market participation rate (labor force/the economically active population aged 16 and over) in May was 62.3%, lower than February 2020 (63.4%), just before the pandemic.
The long-term average of the job opening rate and the retirement rate from 2001 to 2019 is estimated to be 3.1% and 1.9%, respectively. However, now they are 7.0% and 2.9%, respectively. Demand for companies to hire people has skyrocketed, which means that many employees are leaving in pursuit of higher salaries.
In a recent ‘The Conversation’ column, Summers argued that “wage growth today is accelerating at a historic pace at 6.6%” and that “wages are the ultimate measure of inflation.” “In these circumstances, there is no basis for optimism that inflation could be lowered to the Fed’s 2% target,” he said.
His diagnosis ultimately leads to the conclusion that “recession is inevitable.” It is said that unprecedented inflation can be suppressed only when the unemployment rate rises because companies cannot sustain high wages and hire people. “We need an unemployment rate of 7.5% over the next two years, 6% over the next five years, and 10% over the next year,” Summers said. There is no basis for a ‘soft landing’ of lowering inflation to the Fed’s target of 2% without a recession.
Summers appeared again on Bloomberg TV on the 24th (local time) and warned of an early recession, saying, “There is a 75-80% chance of a recession within the next two years, but there is a risk that it will hit faster than this.”
A portfolio manager at a Wall Street financial company said, “Summers’ analysis that the unemployment rate just before the successful soft landing in 1984 was over 10% is impressive,” said a portfolio manager at a Wall Street financial company. Summers’ early recession is shaking the US more convincingly than last year’s high inflation warning.
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