10% Unemployment? Larry Summers’ Dire Warning

Lawrence Summers
Reuters
By Michael Rainey

Welcome back to a short but busy week! President Joe Biden says he could announce within a few days his decision on a potential federal gas tax holiday, while Senate negotiators are trying to reach an agreement on legislation aimed at reducing gun violence before they head out of town for their two-week July 4 recess. Here’s what else is happening:

Larry Summers Says the US Needs Much Higher Unemployment to Break Inflation

President Biden downplayed the likelihood of a recession in an interview with the Associated Press last week, and he repeated the point over the holiday weekend, citing a notable former Treasury Secretary for support.

“I was talking to Larry Summers this morning, and there’s nothing inevitable about a recession,” Biden told reporters Monday, referring to the prominent Democratic economist who served in both the Clinton and Obama administrations.

Summers, however, struck a very different note in a speech in London Monday, telling his audience that unemployment needs to rise sharply if the U.S. wants to get inflation under control. “We need five years of unemployment above 5% 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.

Currently, the unemployment rate is 3.6%, but many economists expect that number to creep higher as the Federal Reserve continues to raise interest rates and withdraw liquidity from the economy. But Summers is mulling something far more intense than Fed officials currently appear to have in mind.

“The U.S. may need as severe monetary tightening as Paul Volcker pushed through in the late 1970s, early 1980s,” Summers said, citing the former Fed chief who famously raised rates sharply in his battle against stagflation, sparking a severe recession.

MarketWatch’s Jeffry Bartash made it clear that Summers is talking about real economic pain. “A lot of Americans would get hurt if Summers is right and high unemployment is needed to beat back inflation,” he wrote. “Put in starker terms, the U.S. would have to endure a second recession in three years and as many as 10 million people would have to lose their jobs.”

The Washington Post’s Jeff Stein made a similar point: “To state the obvious, a 5% unemployment rate would mean devastating joblessness for millions of poor American workers,” he wrote.

The bottom line: There is no agreement on just how likely a recession is over the next year or two, or how far the Fed will have to go to get inflation under control, but many think the odds of a downturn are rising. Goldman Sachs chief economist Jan Hatzius said over the weekend that the bank has updated its projections, doubling the probability of a recession to 30%.

“We now see recession risk as higher and more front-loaded,” Hatzius wrote. “The main reasons are that our baseline growth path is now lower and that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply.

Quote of the Day: A Gas Tax Holiday Skeptic

“Whatever you thought of the merits of a gas tax holiday in February it is a worse idea now. Refineries are even more constrained now so supply is nearly fully inelastic. Most of the 18.4 cent reduction would be pocketed by industry--with maybe a few cents passed on to consumers.”

— Jason Furman, who led the Council of Economic Advisers in the Obama administration, writing about a possible suspension of the federal gas tax. “This is standard price incidence theory in economics--the government cannot decide who gets the benefits of a tax cut, it gets split between the two parties based on the responsiveness of supply and demand,” Furman says. Given the current condition of the energy market, Furman thinks that split will go mostly in the producers’ favor.

Marc Cuban’s Drug Company Could Save Medicare Billions: Analysis

Medicare would save billions of dollars if it purchased generic drugs at prices similar to those offered by a pharmaceutical company founded by billionaire entrepreneur Marc Cuban, according to a new study published in the journal Annals of Internal Medicine.

Cuban launched the firm – the Mark Cuban Cost Plus Drug Company – at the beginning of the year to provide more than 100 generic drugs without the exorbitant profits and middlemen charges that are typically found in the market.

“Our approach at Cost Plus Drugs — which is we'll show you our actual cost, we'll mark it up 15%, we'll add $3 pharmacy handling fee and $5 shipping, and that's all you ever pay," Cuban told PBS earlier this month.

The study by researchers at Brigham and Women’s Hospital in Boston looked at how much money Medicare Part D would save if the program purchased all the generic drugs it could from Cuban’s company. Of the 89 drugs that could potentially be purchased, 77 were less expensive through Cost Plus Drugs (the remaining 12 were the same price). According to the analysis, Medicare would save $3.6 billion, or 37%, by paying those lower prices, reducing its bill from the $9.8 billion it spent in 2020 to $6.2 billion.

The researchers say that the study shows how inefficient – and costly – the current drug distribution system is in the U.S., even for generics. “Generic drug competition is a major source of prescription drug savings in the United States, but the lower prices from a direct-to-consumer model highlight inefficiencies in the existing pharmaceutical distribution and reimbursement system, which includes wholesalers, pharmacy benefit managers, pharmacies, and insurers,” the study says. “By one estimate, this supply chain retains 64% of every dollar spent on generic drugs, compared with 25% of every dollar spent on brand-name drugs before rebates.”

Obviously pleased with the results of the study, Cuban sent a tweet tagging political leaders, including President Biden, Speaker Nancy Pelosi (D-CA) and Sens. Mitch McConnel (R-KY) and Bernie Sanders (I-VT): “have your people call my people and let’s get this done.”

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