Lawrence Summers Review – Why Didn’t We Listen?
December 18th, 2009 Filed under: Uncategorized — Economic Author
It was not a lesson Lawrence Summers mastered with great ease. But after nearly a decade working beside Alan Greenspan, and having watched his own tenure as President of Harvard cut short by a phrase that slipped from brain to mouth, Summers, director of the President’s National Economic Council, has become a restrained public man.
Gone are the days when he would compare financial markets to jet crashes, as he did back in 1999. But what he proceeded to offer was, in fact, an unusually strong insight that our present economic moment is in danger.
He set out to speak to a very attentive crowd while using a bit of physics to work out our economy situation. Using the economic rule called Okun’s law which says that when the economy grows, it produces jobs at a predictable rate, and when it shrinks, it sheds them at a similarly regular pace.
What made Summers’ comment so important is that it suggests that the American economy has been shedding jobs much faster than Okun’s law predicts. Okun’s law states that we should be at about 8.5% unemployment today, not slipping toward 10%.
The big question that comes from Summers is “will creating jobs be that much slower too? Will double-digit unemployment persist even after we emerge from this recession? Is there something fundamentally broken in the heart of our economy? And if so, how can we fix it?”
In summary, policymakers figured the most chilling scenario for unemployment in 2009 was 8.9%. A figure we breezed past in May. From December 2007 to August 2009 the economy deleted nearly 7 million jobs, according to the Bureau of Labor Statistics. It really makes you wonder, why did no one listen to Mr Summers back then when he talked about the economy is getting worse?
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