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Top US economists argue millions of Americans must lose their jobs to stop inflation. They couldn't have it more wrong.

Paul Constant   

Top US economists argue millions of Americans must lose their jobs to stop inflation. They couldn't have it more wrong.
  • Paul Constant is a writer at Civic Ventures and the cohost of the "Pitchfork Economics" podcast.
  • Larry Summers and Fed Chair Jerome Powell argue high unemployment will help inflation.
  • Constant says the real solution isn't to take money out of ordinary Americans' pockets.

Last month, former Clinton administration Treasury Secretary Larry Summers gave a speech in London proclaiming that the US needed unemployment to be above 5% for five years 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," he said.

Summers' language is so boring and clinical it's easy to miss the cruelty behind those figures: In order to curb high prices, millions of Americans must lose their jobs and face at least one year of unemployment. If more Americans lose their jobs all at once, Summers claimed, inflation will shrink faster.

Federal Reserve Chair Jerome Powell recently seemed to concur with Summers' pronouncement. "There is a risk that unemployment will move up" if the Federal Reserve continues to raise interest rates and slow the economy down, Powell said. By making it more expensive for employers to borrow money, the Fed's interest-rate hikes are likely to stifle business expansion and creation, which will cool down the labor market and even inspire cash-starved employers to lay off workers. Still, Powell seemed to indicate that the Fed would continue with its steady increase of interest rates for the foreseeable future.

Despite these predictions, the American labor market has continued to beat economists' expectations, with 372,000 jobs added in June and hourly wages up more than 5% over this time last year. America's strong labor-force participation and growing paychecks have represented the one piece of good economic news throughout the past two years. And yet, for some reason, two of the most influential economic thinkers of the last 30 years want to kick out the one remaining solid beam holding the American economy aloft.

Neither Powell nor Summers seem to understand the fundamentals of how the economy really works. Their theory that slowing down the economy and putting millions out of work will stem the tide of inflationary increases may have worked in the early 1980s, but the truth is that the high prices Americans have been paying at grocery stores and gas stations for the past year bear no relation to the inflationary crisis of the 1970s. And it shouldn't be forgotten that the Fed's "successful" plan to cut inflation caused years of pain for millions of ordinary Americans because it pushed the unemployment rate to an unthinkable 11%.

This current wave of record inflation was caused by pandemic-inspired supply-chain issues and price-gouging corporations. Continuing to raise interest rates — and thus putting millions of Americans out of work — is unlikely to resolve either of those problems. In fact, slowing down the labor market and taking paychecks away from American families will likely turn out to be worse for the economy in the long run.

Consumer spending is responsible for some 70% of the American economy's annual production, accounting for around $13.28 trillion of the gross domestic product in 2019. That consumer demand creates jobs, circulates money through local economies, and shores up corporate profits. Taking money out of the pockets of millions of Americans will deprive the economy of trillions of dollars in consumer spending, throwing the economy into a negative feedback loop of lost jobs and ever-decreasing consumer demand.

The truth is that Summers' and Powell's "solution" is trickle-down economics in its purest form: They're prepared to sacrifice the income of millions of Americans in order to prioritize the wealthiest people in the economy. In the long run, recessions are great for the richest Americans. In the years following the Great Recession of 2008, the wealthiest 1% of all Americans absorbed 95% of the total wealth generated by the economic recovery.

All those windfall profits completely failed to trickle down from the super-rich to the rest of us — and now for the first time in recorded history, the richest 10% of all Americans own more than half of America's wealth.

If Summers and Powell wanted to create a solution that reflects how the American economy really works, they'd encourage policies that prioritized the spending of average Americans, not the accrual of wealth at the very top of the income pyramid. We can't end inflation by rewarding the same people who are enjoying record profits from higher prices.

Rather than actively trying to undercut our economy, leaders could do more to cap inflation by building a more robust supply chain, penalizing bad corporate actors for price-gouging and profiteering at a time of crisis, and following the lead of 14 states that are sending inflation stimulus checks in order to provide much-needed relief for ordinary Americans — the very people who power the economy in the first place.


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