Kuttner on TAP: Deflating Larry Summers

Larry Summers is at it again, misstating the connection between wage growth and price inflation. In an extended interview quoted in Tuesday’s Washington Post, Summers said, “I don’t think there’s a durable reduction in inflation without a meaningful reduction in wage growth.”

But Summers evidently failed to check the actual numbers. The estimable Josh Bivens of EPI did. As Bivens reported in a recent piece, wages have been lagging well behind inflation, not driving it. Bivens is worth quoting in detail:

To date, the rise of inflation has unambiguously not been driven by tight labor markets pushing up wages.

Nominal wage growth has … lagged far behind inflation, meaning that labor costs are dampening—not amplifying—price pressures. Last week’s jobs report showed that average hourly earnings growth over the last quarter was 4.4% (at an annualized rate), with wage growth actually slowing in the last three months to under 4%.

If the only change in the economy over the past year had been the acceleration of nominal wage growth relative to the recent past, then inflation would be roughly 2.5–4.5% today, instead of the 8.6% pace it ran through March. In short, nonwage factors are clearly the main drivers of inflation. (emphasis added)

Summers, in the same interview, flagrantly misstated the actual numbers. He said, “We now have wage inflation running at a close to 6 percent rate.” In fact, it was 3.7 percent in the last quarter, down substantially from 5.4 percent in 2021.

Just to rub it in, Summers added, “I don’t see how we can get inflation to substantially decelerate without wage inflation falling substantially, and I don’t see any reason to think wage inflation will fall substantially unless there’s a substantial loosening in labor markets, which would mean higher unemployment.”

In reality, labor markets are already looser than they were at the peak of the recovery. Other economists, notably those at the Fed and the Congressional Budget Office, expect inflation to start subsiding later in 2022 and to keep moderating in 2023.

In its May 25 update, CBO projected inflation to fall to just 3.1 percent next year, and then 2.3 percent in the year’s fourth quarter. Summers, having bashed CBO’s forecast, helpfully said in his Post interview, “I think the CBO has been a bastion of credibility over time.”

Summers keeps getting things wrong—not just the interpretation but the easily available data. Why is he taken seriously? Maybe because he tells corporate elites what they want to hear. Want to fix the economy? Cut workers’ wages!