Larry Summers adds concerns about insufficient supply to those about inadequate demand…to which I ask, “why go there?”

September 8th, 2014 at 2:03 pm

In a WaPo oped today, Larry Summers takes a pretty gloomy view of the growth prospects of the US economy, and he throws Europe and Japan in there too for good measure. Larry’s always worth listening to on such matters, so let’s take a brief, closer look.

Larry’s been righteously worrying about the economy’s demand side for a while now, including as a participant in our full employment project, wherein he co-authored this important paper with Larry Ball and Brad DeLong advocating better–as in “more responsive to slack”–fiscal policy. And, of course, his “secular stagnation” hypothesis, as he noted today, “…has emphasized the difficulty in maintaining sufficient economic demand to permit normal levels of output.”

But in this piece he adds concerns about constraints on the supply side of the economy. It’s a serious concern and one which points toward potentially lower growth, weaker labor supply (Summers’ main focus), and slower productivity growth.

Basically, Larry figures that the job market is already tightening up, and given the underlying pace of monthly job growth–something north of 200K–and the stagnant-at-best trend in the labor force participation rate, we’re likely to hit labor supply constraints at some point.

A simple calculation reveals that the unemployment rate would fall to the 4 percent range by the end of 2016…While such a low unemployment rate is conceivable, it seems more likely that employment growth will slow at some point, either because of employers having difficulty finding workers, rising wages or government policy decisions. In any of these cases, the economy would be held back not by a lack of demand but a lack of supply potential.

Um…sure, I guess…but that seems like an awfully high class problem to have, and I don’t see what good it does worrying about it now. To the contrary, such a focus risks sharpening the talons of inflation hawks who would pre-empt the expansion from the demand side well before Larry would like, I’m sure.

Moreover, while I grant Larry and others the US demographics that are baked in the cake, we really don’t know the full extent of the labor supply constraints. It’s entirely possible, for example, that strong and persistent growth would relax that particular constraint, pulling more people back in to the job market.

And even if I’m wrong about that, we do know that much slack still exists both in terms of employment and the output gap. According to my CBPP colleagues: “In the second quarter of 2014, the demand for goods and services (actual GDP) was roughly $725 billion (about 4 percent) less than what the economy was capable of supplying (potential GDP).”

There’s great disagreement about how much more the labor force could grow, but summarizing a lot of what I’ve read on this, I think there’s at least one percentage point in the LFPR that’s up for cyclical grabs, equal to 1.5 million workers. And what you really want to ask in this part of the debate is “just how structural is structural?” meaning how unreachable are those who appear to be pretty solidly out of the job market, like prime-age, non-college educated men?

And while I get that boosting supply amidst weak demand generates its own problems, it is that case–as Larry mentions–that a welcoming version of immigration reform can provide a labor supply pressure valve.

That said, if we want to reduce inequality, rebalance “factor shares” (the skewing of the profit versus the wage share of national income), and bring a lot more households along in this recovery, we need more pressure from the demand side.

So even without digging into the maybe-inaccessible structural parts missing from the economy’s supply side, there 4% of GDP, another percentage point of the labor force, a few percentage points of shifting income from profits to wages, and another 1.5% of nominal wage growth before we hit any supply constraints.

Like this catchy, recent pop song says, let’s not make this harder than it has to be.

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26 comments in reply to "Larry Summers adds concerns about insufficient supply to those about inadequate demand…to which I ask, “why go there?”"

  1. Dausuul says:

    I think prime-age, non-college-educated men are a much more employable demographic than you’d think, for one reason: Construction. Manufacturing has become highly automated, but manufacturing takes place in factories where the environment can be tightly controlled–ideal for automation. Construction, with its immense variety of environments and scenarios, requires far more flexibility, and flexibility in real-world situations is the big advantage humans possess over machines.

    Now, construction is skilled labor, no doubt about that. You can’t just grab any schmuck out of the unemployment line and tell him to build a bridge or a skyscraper. But it also doesn’t require a PhD. We know how to train people to do it, and we can get them on the job in a reasonable amount of time… if there are jobs for them to do. Therein lies the rub. There is no shortage of things we *could* be building, and *should* be building, but if we’re not willing to pay for it, the jobs won’t happen.

  2. Dan says:

    The only supply-side labor problems that seems worth mentioning is those that are caused by offshoring. Offshoring has a way of reinforcing itself, such that it creates labor supply problems in the country engaged in it by undermining local market forces.

    I can see good reason to worry about this kind of structural supply problem because it could lead to or contribute heavily to secular stagnation in that it sends wages overseas, and a large part of our economy’s demand problem is insufficient wages. So in this way, a shortage of local labor supply corresponds directly to a shortage of consumer demand.

  3. smith says:

    Mr. Summers writes
    “employment growth will slow at some point, either because of employers having difficulty finding workers, rising wages or government policy decisions.”

    Does anyone know what “government policy decisions” means? One assumes the Fed raising interest rates, tightening the money supply, because of inflation. Why is this coded as such? Isn’t this exactly what Krugman rails against? What exactly is wrong with employers having difficulty finding workers. That’s the only way wages rise and more people are drawn back into the workforce. Rising wages allow people to arrange for child care. What’s wrong with rising wages even it causes inflation? The 1% and 10% already enjoy rising wages, why is that just their privilege? Suppose less people want to work, who cares about rising GDP? Investment does not always depend on growth (sorry, no study to cite, must be something out there).

    Also, so called immigration reform as currently constructed would literally flood the high skill job market (college educated) by adding about 10% to the workforce, and highly concentrated in one sector (tech) Numbers based on projections of BLS and stalled bill. How? Why? Ask google and Apple defending against the claims of 60,000 cheated workers where $300 million was already ruled too small a settlement.

    Actual reform that would free immigrants from employer control and allow them to bargain for wages (free labor) is not in anyone’s package or on anyone’s agenda.

    On money matters, I would tend to think the WaPo OpEd should be heavily discounted.

    • Tiree says:

      I have no respect for the way Democrats or Republicans have handled immigration by catering to the insane demands of huge tech monopolies. They’re all spineless.

    • Barry says:

      All WaPo op-eds should be read as Pravda was – not as truthful, but to read between the lines of their lies.

      Mr. Summers writes
      “employment growth will slow at some point, either because of employers having difficulty finding workers, rising wages or government policy decisions.”

      I’d like to find some of these rising wages which right-wing economists always see swooping down upon us.

  4. Kevin Rica says:

    Do we have more job seekers than jobs? Yes, we do (on Monday)! OR —

    Do we have more jobs than job seekers? Yes we do on Tuesday when we discuss immigration!

    How could an “immigration reform” intended only to bring more unskilled, low-wage labor (last hired and first fired) improve the supply side? When all other classes of labor are fully employed, those poor and penniless souls will still be trying to make $9/hr on a regular basis.

    We want the economy to grow so that it can absorb all available job seekers. Making the economy absorb even more job seekers defeats the purpose. It’s like throwing a bucket of water on a drowning man.

    Labor shortages are not an economic emergency in peacetime. In late 1944, Eisenhower was screaming for more infantry (specialized skill set) and the war plants wanted more workers. Since at least VJ-Day labor shortages have not been a real issue.

    Labor shortages (more jobs than workers) are the thing that spreads income and raises wages in a market economy. The economy grows by moving workers to more productive jobs from less productive jobs rather than off the unemployment line. If we take the attitude that increasing wages are bad for economic growth, then wages will never rise and everyone is a big-business Republican. The economy might grow, but wages won’t grow. Guess who keeps the rest?

    I’m a Truman Democrat and I believe that the purpose of economic growth is to create labor shortages and raise wages! The other three surfing Truman Dems approved this message.

    • smith says:

      You haven’t really looked at the proposed bill. The huge changes that immediately quadruple the number of high skills immigrants is the main feature. It’s the reason business backed Republicans in the Senate were willing to compromise and allow more low skills immigrants who might eventually vote Democratic. It’s a shift from family connections to job skills, low income to high income, Mexico to Asia. It also eliminates the diversity features (which admittedly some might consider quotas) of our present system.

      Again, the most pernicious aspect of current immigration and future proposals are employer sponsorship which translates into a form of indentured servitude. It creates a huge pool of un-free labor, unable to enjoy any notion of labor rights, to bargain, move to another job (notwithstanding a 3 month window to deportation), to strike (immediate deportation). They most certainly can not start new businesses (unless they happen to have an extra $100,000 or so lying around or wait 5 or 10 years).

      Run the numbers, from BLS, from the census, from the bill’s own text, but ignore the academic studies which neglect to account for downwardly nominal wage rigidities.

      • Tiree says:

        It is outrageous how the parties have handled this. Both of them. I’m not going to comment on Republicans because there’s no reasoning with them, but Democrats since BC have decided that making compromises in favor their big donor businesses to increase their voting base are ok. They do it to win elections and maintain favor after leaving government for the private sector. They’re exactly 1/2 of the problem in Washington. Too much attention to politics, not enough to policy. The results have been horrendous for all workers.

        It isn’t just this issue though. BC compromised on the GLB act that caused this great recession. We don’t need compromises like this. We don’t need Neo-Liberal / Neo Conservative compromises anymore. They’ve failed miserably. They can’t continue to make compromise based on political polls and the like. It is time for our policies to start making sense in results for the majority of people rather than just making sense in the minds of those people. Deadlock is better than the direction things have gone.

        Obama should just stop deporting people and call it a term.

        • Some guy says:

          You’re right. Both parties are screwing labor. Bring in H1B to compete at the high end of the labor market and bring/document millions to take over at the low end.

          Since the middle of the labor market has already hollowed out, what is left for the millions of short and long term unemployed, missing workers, and workers entering the job market. Nothing. Absolutely nothing. Super!

      • Kevin Rica says:


        It’s the numbers that count. Every new immigrant worker who comes simply displaces an American worker or drives wages down. It makes no difference whether or not they are employer sponsored.

        What we should do is make the employer responsible for all the social costs of bringing that person here, including medical care and English lessons if necessary + pay a decent middle-class wage at least 10% higher than the going rate. Furthermore, each employer should be required to post a large performance bond to ensure that they meet those commitments. It’s not the employee who should be beholden to the sponsor, it’s the sponsor who should be beholden to the immigrant employee and society.

        And, of course, the whole skill shortage, including STEM was a fake. The Chamber of Commerce would claim a “labor shortage” and the press would keep interviewing employers. they would never interview jobs seekers because the press didn’t want to know about that.!

        The Democratic Party needs to be taken back from the body snatchers. I’m sure that those bodies belong to real Democrats before the current Democratic Leadership moved in, but real Democrats would never help the Chamber of Commerce keep wages low. That used to be the job of the Republican Leadership.

        • smith says:

          It makes a world of difference whether workers are employee sponsored or not. Every year we add new workers to the job market. They replace retiring workers, and they also add to the growing labor force from new jobs. Immigration is an important source of new workers. In the long run, increasing the labor force helps the economy grow.

          The unwelcome effects for workers of a non-free segment of the labor force is the greater deterrent to wage growth, not increasing numbers.
          A) The most ridiculous part of current and proposed system is that employee sponsorship bars immigrants from starting new businesses and thereby increasing jobs. It is the employee sponsorship that causes the one for one displacement. There is a program for people with a lot of money (generally $100,000 to $200,000 or more) to apply for entry to start businesses, which is not at all conducive to job growth (let people enter, get their bearings, start whenever they feel opportunity is there).
          B) Being unable to bargain for wages (because entry and continued stay is conditional on accepting employer terms), change jobs (there are ways to do it but hardly matches freedom of ordinary worker), let alone organize or strike (unlike past waves of immigrants in 19th and early 20th century) is what drives down wages (or keeps current workers wages stagnant).

          Admittedly, numbers can play a role in driving down wages, which is obviously the goal of businesses, which is why the number of high skills immigrants is increased fourfold in the version passed by the Senate. The numbers in comparison to expected jobs created are very significant, approaching 10% per year. (It’s partly H1B increase, and partly new point system for high skills).

          Because the skills are usually STEM (obvious reason being top level English skills not needed) it creates a disincentive for U.S. workers to enter fields. The problem is that this leads to less innovation. The number of advanced degrees (masters) did not increase under the proposal (20,000), showing the true goal of bill (lower costs, and not more innovation).

          Allow programmers to start competitive firms immediately and see what happens to support for bill from Apple, Google, IBM and the like.

          Thanks for the link, here’s another:

          • Kevin Rica says:


            The alternative you don’t consider is what happens if they don’t come. That increase wages!

            Whatever terms that they come under, they displace other workers and that decreases wages. Giving immigrants the right to compete freely with other workers just makes it worse for the other workers.

            The employers want more visas or an open door policy.

            We already have plenty of immigrants to do any job, but the employers want even more. So do you. You are on the same side as the Chamber of Commerce. the differences are cosmetic.

          • Smith says:

            The alternative to immigration could be a stagnant economy like Japan. Germany is facing the prospect of a stagnant shrinking economy due to low birth rates absent sufficient immigration.

            Whatever terms they come under, it is those terms that determine displacement and decreasing wages.

            Anyone who claims giving workers the right to compete freely with other workers makes it worse for the other workers is wrong, uninformed, practically a dupe of big business. Business claims (the law is written as such) that they only hire immigrant workers
            a) temporarily
            b) when Americans are not available
            c) at prevailing wages

            These are all false. Measures proposed by Senators Grassley (R Iowa) and Durbin (D Illinois) to actually monitor these conditions have been repeatedly defeated.

            The only thing restrictions to compete does to immigrant labor is force them to take lower wages, submit to any conditions of employment without recourse to bargain, lodge complaints, switch jobs, organize or strike, and definitely not leave to start a new business, creating jobs and competing with their former employer.

            No one advocates zero immigration (though it’s unclear if you do), but the Chamber of Commerce and politicians catering to business interests unfairly target certain sectors of the economy (like the very important STEM) to cut wages which discourages entrance into that field and curtails innovation.

            For determining the number and source of immigrant workers, the triggers and allocation in the new bill are much worse than the present system, for low and high skills.

            I all cases though, labor needs to be free in order not to drive down wages. That was something that was supposed to have been settled 150 years ago.

          • Kevin Rica says:


            You keep making assertions, but offer no proof or support other than the assertion itself. You cannot prove something by asserting “No one advocates zero immigration (though it’s unclear if you do).” Note that your assertion is inconsistent. You can’t assert that I might advocate that, but that “no one advocates zero immigration.” Furthermore, there are many zero population growth (ZPG) advocates that do want exactly that. (Notice that when I said that you were wrong, I explained why — you are both inconsistent and wrong on the facts. That is how one rebuts and argument.)

            Another way to LOGICALLY rebut an argument is by a formal “proof by contradiction.”

            If we can show that p implies q, but q is known to be false then we show that p must be false. Conversely, we can prove that p is true if we can show that “not p” implies q, and we know q to be false.

            So we know that if your assertion that German economic growth is constrained by a shortage of labor is true, then Germany must have extremely and persistently low
            unemployment as well as rapidly rising wages. Since Germany has persistently high unemployment and stagnant wages, we therefore know that your assertion of a German labor shortage is false.

            Logic is important. It allows one to distinguish between “what is true” and “what one wishes were true.”

            Increasing a country’s population without increasing employment and output simply reduces per capital income and makes a country poorer. Canada and India have similar total GDP’s, but Canada is considered a richer country. Why? Because Canada produces it’s GDP with a smaller population.

            US wages were rising rapidly between the end of WWII and 1970, in step with productivity gains. That was a period of low immigration, when both the numbers and proportion of immigrants in the population was declining.

            When immigration suddenly shot up in the 1970s, wages started to stagnate and Jared’s “Jaws of the Snake” opened up. Immigration was too high then, is too high now, and the new No Immigrant Left Behind bill will make it worse.

  5. Robert Buttons says:

    How to stimulate demand? Easy: lower prices. That’s econ 101.

    Wealth effect is a myth—Japan is proof of that, GDP down 7%.
    Rising inflation creating rising wages (creating increased demand) – Myth – if inflation caused wages to rise, real wages would never decline.

    How do we lower prices? (1) make our companies more competitive – cut the corporate tax rate. (2) Cut all other taxes, too – when regular consumers can keep more of their incomes, they will spend it. (3) strengthen the dollar, which will instantly put more spending power in consumer’s pockets.

    • smith says:

      Corporations are raking in record profits. They are also sitting on record amounts of cash. If we cut corporate taxes, their profits will rise further, but it will just go for more stock buybacks, or acquisitions which promote growth for the acquiring company, higher profits due to economies of scale, monopolistic pricing power, but smaller overall industry, output, and employment. The only thing stopping companies from expanding and/or investing right now is lack of demand.

      With debt overhang (record student debt now exceeding consumer credit) and mortgage debt, (close to 20% underwater or just above), cutting taxes goes to pay down or service loans instead of increased spending. We didn’t get out of the Great Depression by cutting taxes. Just the opposite, taxes on the rich, who had no need for the money anyway (how much more food can a rich person eat?) increased to pay for government spending.

      Strengthening the dollar would instantly increase our trade deficit further curtailing incentives for businesses to expand domestically due to lower costs of offshoring, while at the same time demand for products produced here drops (lower exports).
      It’s a lose lose situation. Savings from low cost goods from Asia are offset by increased unemployment at home, a resulting depressed economy featuring stagnant of declining wages.

      • Robert buttons says:

        1. As I have previously posted(with links) the record corporate cash is largely the result of record corporate debt.

        2. Our manufacturers are so saddled with excessive taxes and regulations that a stronger dollar won’t hurt exports, because there aren’t any to hurt.

        3. We DID solve the depression by cutting taxes. The depression of 1920 was solved in 6mos. when Harding, over the objections of interventionist commerece secy Herbert Hoover, cut spending in HALF. BTW, we had tax hikes and deficit spending and we are still in the depression of 2098.

    • Larry Signor says:

      RB, lower prices=increased demand is not Econ 101, it is nonsense. Increasing income levels=increased demand. As for reducing taxes, that reduces government spending which is a key factor in the demand equation [AD=C+I+G+(X-M)], so that won’t work. A stronger dollar simply reduces demand for our exports. How does that help increase AD? “Wealth effect is a myth…”, sure didn’t feel very mythical when the economy broke. The median wage is simply too low to induce much of an increase in AD. That’s a shave with Occam’s Razor.

  6. jonny bakho says:

    Ever since the Great Depression, the Federal Government has intervened to create jobs when labor demand was slack. Labor requires active management in a modern economy. One reason there might be a future labor shortage is allowing unemployment to fester during the past decade. People who should have received job training (most training in the US is On the Job) did not and may be more difficult to train for the workforce going forward. This is a problem created by lack of stimulus and not appreciating the need to manage the labor market in the period from 2001 to present.

    If Government intervenes to utilize slack labor, government can also release that labor to the private sector when needed. This is called countercyclical policy. Summers seems to understand countercyclical fiscal policy but is not applying the lessons to labor policy.

    Labor in the US is managed such that there is always a pool of unemployed. If that pool is not turning over, workers are not being trained. There is low wage pressure because of this pool of unemployed. Business demands that an economy keep a supply of labor ready for employment. If the government policy is to keep unemployed at a set percent, the government also needs to to set minimum wage at a high level because they are interfering with the market and undercutting wages.

    There is always a large pool of immigrants that can supply some of our labor needs if the labor market gets too tight. Unfortunately in politics, the working class, which could benefit the most from more active labor management is resistant to the very interventions that could improve their lives.

    Everyone who wants to work should be able to find a job. That should be a policy goal. I’m surprised that politicians don’t go this populist route. Maybe it is Big$$ on the side of CheapLabor that dims our political will.

    • Some guy says:

      “Maybe it is Big$$ on the side of CheapLabor that dims our political will.”

      Of course it is.
      ‘Corporations are people’ and money (and not votes) is the voice and choice that makes things how they are. It’s unfortunate that the Supreme Court seems to think that money is more important than votes and Congress is always rigging things to keep it that way.

      I voted yesterday, but it really didn’t matter that I did so.

  7. Fred Donaldson says:

    Adding low wage service jobs is no way to increase the GDP. Instead it diminishes productivity, because it eliminates consumer demand, except for loans and the necessities they buy. While the Club for Growth and others might advocate that lower wages equal more progress, the gains are for club members only.