Summers on the Economy, Recovery, Productivity and Unemployment

Posted by: Jane Sasseen on July 17

With concern growing over whether the stimulus is doing enough to stem fast-rising unemployment and the business community and others increasingly up in arms about the potential costs of the Administration’s health care and energy proposals, both President Barack Obama and his top economic advisor, Larry Summers, have gone on the offensive.

In a series of recent speeches, the President has aggressively defended his economic policies and the need for an extensive health care reform bill. And in an exclusive interview earlier in the week with BusinessWeek, Summers was also quick to dismiss the criticism that the stimulus has been too slow to take effect. “You look at how frequently people are talking about depression. (Compare) six months ago vs. now, it’s not a term you hear anymore,” Summers told BusinessWeek. “I reject the view that the stimulus bill has not worked.”

Expect to hear that theme a lot more in coming weeks as the Administration seeks to regain the high ground on the economy. The core argument: its policies have pulled the country back from the abyss and generated stability far sooner than many thought possible just six short months ago, even if full recovery will be slow and painful in coming.

In a lengthy speech this morning intended to rebut the critics at the Peterson Institute for International Economics, a Washington think tank, Summers hammered that idea home. He reminded the overflow crowd in attendance of the situation the country faced as the Administration took office.

“The anxiety stretched well into the mainstream. Take one example as an indicator: Google searches for the term “economic depression” were up fourfold from their pre-crisis levels,” Summers said. “Now, he says, such hits have returned to normal levels.”

Much of the speech was devoted to reviewing the moves the adminstration has taken, and — no surprise here — Summers’ favorable take on the progress that has been made. To those worried about the deficit and the prospects of rising inflation, he also made clear that getting the economy back to health was by far the top priority.

If there was little surprise in much of the speech, however, Summers did offer up one new insight into why unemployment keeps going up so sharply despite the stimulus spending. He argued that productivity has remained stronger at this point in the recession than it has in similar downturns in the past, meaning employers can get by with even fewer workers than might otherwise have been expected. Summers added that the phenomenon is not well understood. Here's his take:

"The economic contraction has caused significant job loss. It is noteworthy, however, that the higher than forecasted job losses do not appear to be primarily the result of weaker-than- expected GDP. Rather, it appears that a given level of output is being produced with fewer people working than historical relationships would have led one to predict. In economists’ language, there is a significant residual in the Okun’s law relationship: the unemployment rate over the recession has risen about 1-to-1.5 percentage points more than would normally be attributable to the contraction in GDP.

To put the point a different way, normally in economic downturns, productivity decreases as firms keep workers employed even as the amount of work declines. This pattern of deteriorating productivity has not been a feature of the current recession. In fact, productivity has increased in this recession, as it did in the last.

One potential explanation for this phenomenon, though by no means a dispositive one, is that the greater financial pressure on firms in this recession has led them to shed cash flow commitments at an unusually rapid rate by laying off workers and leaving jobs vacant. Perhaps an expectation that the recession would be lengthy has also contributed to this behavior."

You'll find excerpts of the speech on the White House web site. To listen to an audio of the speech, the Peterson Institute has it up. Video will be posted over the weekend.