The economist predicted that the Fed would need to push unemployment above 5 percent to contain price growth. Whoops.
, Summers declared that “we need five years of unemployment above 5 percent to contain inflation — in other words, we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment.” In the Harvard professor’s estimation, U.S. policymakers had no choice but to deliberately throw millions of Americans out of work or else accept a steadily deepening inflationary crisis.
And that number actually overstates the amount of inflation in the contemporary economy. Shelter costs are the biggest service-sector component in the government’s inflation index, comprising about a third of the CPI. And its official estimate for the price of housing in the U.S. today is outdated.
Of course, inflation remains well above the Fed’s 2 percent annual target. But given that core inflation has fallen by more than a percentage point since September, in the absence of any increase in the unemployment rate, it is no longer credible to claim that nothing less than five years of 6 percent unemployment could “contain inflation.
In June 2022, Summers believed that the natural unemployment rate was 5 percent, roughly 1.5 percentage points higher than its actual level at that time. And since the Fed did not wish to merely avert accelerating inflation but actuallyit by multiple percentage points, Summers reasoned that it would need to raise unemployment well above the natural rate for a sustained period of time.
But there are at least two problems with this reasoning. One is that there is no basis for believing that 3.6 percent was the lowest unemployment rate that the pre-COVID economy could have sustained without inflation. Throughout the 2010s, economists But it’s also possible that the entire idea of a “natural rate of unemployment” is misguided. That concept emerged out of the inflation crisis of the 1970s. And its model of the economy — in which low unemployment inevitably begets wage increases, which inevitably beget price increases, which inevitably beget further wage increases — might be an artifact of a very different political economy. Fifty years ago, more than a quarter of U.S. private sector workers were unionized.
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