Amid the public outcry over inflation hitting 40-year highs, Harvard economist Larry Summers — one of the earliest and most vocal figures to warn that inflation was more worrisome than many policymakers believed — has become something of an oracle on the topic, appearing frequently in print, on television, and even sharing a phone call with President Joe Biden.
Summers, a veteran of the Clinton and Obama administrations but considered something of a centrist, has taken to articulating a clear message. Summers says the current high inflation rate needs to be taken seriously, but he adds that trying to combat it necessarily risks another problem: tipping the economy into a recession.
On June 17, Summers told Barron’s that “when you have unemployment below 4% and inflation above 4%, recession always follows within two years.” (Summers used the same formula in an interview with NBC’s “Meet the Press” two days later.)
Currently, the unemployment rate is 3.6% and the inflation rate is 8.6%, so if Summers’ rule is correct, then the U.S. should be facing a recession some time in the next 24 months.
Economists told us that the theory behind Summer’s broader point is solid: To tackle inflation, the Federal Reserve needs to hike interest rates, and doing so will inevitably hamper business expansion, which increases the likelihood of layoffs and slower economic growth.
Still, even if Summers’ logic is sound based on economic theory, we found that Summers’ formula, at least as stated in media appearances, is at best oversimplified and under-nuanced.
Summers’ premise — that there are a decent number of time periods when unemployment was below 4% at the same time inflation was above 4% — has problems from the start. In reality, there haven’t been many such periods.
Let’s start by looking just at the periods when unemployment was below 4%. Since 1948, unemployment has been this low only on four general occasions.
• January 1951 to November 1953, or 35 months.
• February 1957 to April 1957, or three months.
• February 1966 to December 1969, or 47 months.
• April 2000, and September 2000 to December 2000, or five months.
So, before mid-2018, there were a grand total of five months since 1970 in which unemployment was under 4%. That’s less than 1% of the months over the past half century or so.
Unemployment has also been below 4% between mid-2018 and the onset of the pandemic in early 2020, and also from December 2021 to the present. But the pandemic recession was an oddity caused by an external factor, and it is this recent period of employment that Summers is using to predict the next recession, so it can’t also be used as historic precedent.
Meanwhile, this is before we factor in high inflation. We cross-checked the months of sub-4% unemployment with inflation rates and found that none of the five months in 2000 also had inflation above 4%.
In other words, during the nearly half-century from 1970 to 2018, there was not a single example of Summers’ stated condition — unemployment under 4% and inflation over 4% — ever existing.
There are some earlier examples, at least in a limited way.
For about a year in 1951, unemployment was under 4% while inflation was above 4%. But inflation then dropped to 1.1% or less for the six months immediately before a recession in 1953, so this is not unequivocal evidence for Summers’ larger point about high inflation being a precursor to a recession.
We found only one clear example of Summers’ rule holding — a two-year period in 1968 and 1969 when unemployment was under 4% and inflation was above 4%. That came in the immediate run-up to a recession.
Still, this means there’s just one example of Summers’ rule holding over nearly 75 years of economic data. That’s not exactly ironclad empirical evidence.
This is known in data analysis as the “small-n” problem, short for “small number of examples.” Social scientists and economists generally warn against drawing sweeping conclusions based on small numbers of examples.
So what’s going on with Summers’ rule?
We didn’t hear back from Summers, but we did hear back from a research collaborator of his, Alex Domash of the Harvard Kennedy School. When Domash walked us through the supporting data, it became clearer to us that the research upon which Summers was basing his formula had more nuances than his talking point to journalists indicated.
Domash pointed us to a blog post that is the source of Summers’ talking point. In it, he and Summers looked at data similar to what PolitiFact used, although they used quarterly figures rather than monthly figures.
A chart in the blog post breaks down the data in some detail. It covers every quarter from 1955 to 2019, or 256 separate quarters.
Using the thresholds cited by Summers in his media interviews — inflation above 4% and unemployment below 4% — they found that the likelihood of a recession was 100%. However, these conditions only existed in seven quarters out of 256, or less than 3% of the time.
Domash told PolitiFact that the “small-n” issue “is a valid critique,” and one that he has since sought to improve upon by enlarging the base of research. He said he recently used the same analysis to study 30 member nations in the Organization for Economic Cooperation and Development, a group of richer nations, and found that low unemployment and high inflation made the probability of an impending recession “around 90%.”
Still, Summers’ offering of a straightforward formula in the media obscures the reality that there’s barely any historical precedent, making it less than a robust method for extrapolating into the future.
Summers said, “When you have unemployment below 4% and inflation above 4%, recession always follows within two years.”
His prediction of a future recession is well-supported by economic theory and common sense, and it may come to fruition.
However, his statements in the media go beyond that: They seek to elevate a prediction based theory into an empirical certainty based on lived history. He’s saying that if the current unemployment and inflation rates meet an ironclad threshold, a recession is historically guaranteed.
A big reason why the likelihood of a recession is 100% under these conditions is that these conditions almost never occur. During the nearly half-century from 1970 to 2018 — the part of the data set which is most similar to today’s economy — there was not a single example of Summers’ stated conditions occurring. That’s not much of a basis for this sweeping formula.
We rate his statement Mostly False.