Larry Summers on Labor Participation Rate

Bruce Krasting's picture

Larry Summers Blows It on TV 

Courtesy of Bruce Krasting

The Labor Force Participation Rate (LFPR) is a key economic statistic today. Changes in the LFPR are shaping the direction of the capital markets, federal economic policy, monetary policy and, most importantly, politics.

The LFPR hit a new record low on Friday. The key question that must be answered is:

Is the current LFPR a temporary phenomenon, or is this the “New Normal?”

If the current LFPR is, in fact, the new normal (I think it is), it has profound implications on the macro economic outlook for the USA. Virtually all of the economic models used by CBO, OMB, SSA and private economists are assuming that the long-term LFPR will be in the mid-to upper 60s. The consensus is 2-3% higher than where it is today. 

If you plug in a rate of 63% versus 67% over the next ten-years, it makes a huge difference on the size of the deficit and the public debt. It would cause the deficits at Social Security and Medicare to explode. The percentage of GDP attributable to the government would inevitably rise. The economy, and society in general, would be socialized. 

I don’t think there is a macro economist or economic policy deep-thinker out there that does not recognize the significance of the LFPR, or that it’s hitting new lows.

Let me confirm the data. This from the BLS. Note that January's reading fell 0.3% to a multi-decade low:

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This chart is also from the BLS. The trend is obvious:
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I think most of the Biz press had the story right. The drop in the LFPR was highlighted (accurately) by many:
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Okay, I hope I’ve convinced you of two things. 1) The LFPR is a very important statistic, and 2) The BLS reported on Friday that the LFPR had fallen to a new record low in January.

Now listen to what Larry Summers had to say about the LFPR this morning on ABC’s This Week show. (This is a painless, no commercial, 90 second video.)

 

 

Larry Summers is a possible candidate as the next Treasury Secretary. He has all the credentials. He knows where the bathroom is; he’s had the job before. But he blew it on the issue of what happened to the LFPR this month. He gave the wrong answer, with 10mm people watching. 

Looking at the macro picture, anyone that is worth their salt should not have gotten this wrong. It’s too important. Possibly an explanation by Mr. Summers will be forthcoming.