Why Larry Summers believes mass layoffs will ease inflation

Yahoo Finance political columnist Rick Newman details economist Larry Summers' assessment on how lowered jobless rates may ease inflationary pressures, how President Biden's economic strategy could be influenced, and compares Biden and former President Jimmy Carter's economic conditions.

Video Transcript

DAVE BRIGGS: Solutions are scant to tame inflation. And now former Treasury secretary Larry Summers says millions of Americans will have to lose their jobs for prices to come back to Earth. Yahoo Finance senior columnist Rick Newman here with more on this. Rick, good to see you. He said at the speech in London-- ought to make him pretty popular at cocktail parties-- hey, I want 10 million people to lose their jobs. But is he right?

RICK NEWMAN: Larry Summers does not really care about offending people. And who knows? I mean, he put this out there. So I think what he did-- what he added that's new to the conversation, is he sort of created a rule of thumb for how much the Federal Reserve would have to actually slow the economy in order to get inflation under control. And I don't think he defined under control, but maybe he was saying back to around their 2% target. So right now, it's about 8.6%.

And he said the unemployment rate would have to rise to the equivalent of 5% for five years. And that could happen in different ways. It could be 7 and 1/2% for two years or 10% for one year or something like that. But that's how much unemployment and economic pain he says it would take to actually get inflation where the Fed needs to get it. I did some more informal math on that.

And if the unemployment rate, which is now 3.6%, if that went up to about 5%, that would be the loss of about 2.2 million jobs. And Larry Summers said we'd have to go through that for five years to get to the inflation target. So that would be some pain for-- clearly be some pain for some portion of Americans, and definitely not the soft landing that Wall Street hopes the Fed is able to engineer here. Now, I'm sure we're going to hear some other economists saying, ah, he's overstating it. The Federal Reserve itself will probably push back on that. But that's one man's view.

SEANA SMITH: Yeah, Rick, it's interesting because it sounds like we're hearing more and more people either saying that right now, we're already in a recession. Or the risk of recession odds, the probability that we're going to see a recession, seem to be rising.

Now his comments, Larry Summers coming just hours after we heard from President Biden last week in his interview with AP, saying that a recession isn't inevitable. When you're part of the Biden administration, looking at comments like this from Larry Summers, I guess, how do you think the Biden administration is digesting this? And how do you think it could potentially shape their policy here, going forward?

RICK NEWMAN: Even more interesting, Joe Biden said he was just on the phone with Larry Summers. I think he said that yesterday. And that is when he said Larry Summers himself said a recession is not inevitable. And by the way, if we have 5% unemployment, that does not mean we're automatically in a recession. I think you probably could still have a growing economy with higher unemployment. It'll get pretty tricky, though.

The answer to your question, though, Seana, is, Biden is clearly on the defensive. And he must be as frustrated as he can possibly be because we still have a super low unemployment rate of 3.6% in a very hot job market. But of course, in the view of the Fed, that's part of the problem. And it must be weird to some people hearing an economist say, the Fed needs to make people lose their jobs in order to address inflation. And it is a very weird predicament.

And let's keep in mind, the Fed does have two mandates. One is controlling inflation, but the other is, quote, "maximizing employment." And we're in a very odd situation where pursuing one of those goals, maximizing unemployment, seems to come at the expense of the other goal-- controlling inflation. So the Fed is in a difficult spot.

SEANA SMITH: Yeah, very, very difficult spot, and as is the Biden administration. Well, Rick, as we've seen inflation jump here, there's been a lot of comparisons between the Biden administration and what we saw in Jimmy Carter's administration back in the late '70s. What's the latest? And what do you make of that comparison?

RICK NEWMAN: Yeah, and I track some economic data going back to the Carter administration as part of my Bidenomics report card. And since I'm kind of an economic history geek, I like checking this out. So I went back and looked. How was the economy at the exact same point in Jimmy Carter's presidency, which we generally think of as a failed presidency. But at this point in his presidency, about, let's call it, 15 months in-- that would be June of 1978-- the US economy is actually doing very well. The job growth was strong.

So I tracked six metrics. And Biden and Carter are tied on these, three to three. So Biden, we've had more jobs created under Biden. Of course, we also have a larger population at this point. GDP per capita under Biden has been higher than under Carter. And the stock market has done a little bit better under Biden than it was under Carter. That was a bad decade for stocks. But under Jimmy Carter, the economy actually created more manufacturing jobs. Earnings growth was stronger. And inflation, at this point in Jimmy Carter's presidency, was only 7.4%, compared to the 8.6% we have right now.

Now, the economy really deteriorated in Jimmy Carter's last two years. And Biden hopes to avoid that. So just as one more comparison point, the inflation rate under Jimmy Carter was actually going up at this point in his presidency. It ultimately hit 14.6%. That is very painful. Biden, of course, hopes that we're at the peak right now, at 8.6%, and inflation is going to come down. But the Carter-- it's an interesting parallel, given that the Carter economy was doing pretty well. And then it kind of fell off a cliff. And of course, Carter lost in 1980. So Biden hopes to avoid that fate.

SEANA SMITH: Yeah, he certainly does. All right, Rick Newman, thanks so much for joining us.