Summers: "People Forget Just How Close to the Edge the Economy Was''

Larry Summers, the president's leading economic adviser, can identify in retrospect the moment when the world financial crisis eased. It was in April, when the former Treasury secretary realized that he was no longer nervously awakening at 4 in the morning to check the Asian markets.

Now in mid-summer, as the Dow Jones industrial average crossed the 9000 mark for the first time since Barack Obama was inaugurated, it is easy for most voters to forget the white-knuckle fears of economic collapse. As Summers said in a Thursday afternoon interview, "The combination of complexity of the economy and the quality of human nature -- which for evolutionary reasons smoothes over excruciating memories to make us all happier -- has led to a situation where people forget just how close to the edge the economy was last fall and early this winter."

"When the Dow was around 6,000, we made clear that our goal was to develop economic policy based on the long-run fundamentals – trying to put in place productive capacity," he recalled. "And that you couldn't judge the policies based on day-to-day market moves. That was the right and responsible approach." Summers' implicit message is that the current jump in share prices should embarrass the administration's critics, who painted a dire portrait of the Obama economy based on a 6600 Dow in March.

In a speech last week at the Peterson Institute for International Economics, Summers pointed out that the current 9.5 percent unemployment rate was "about 1 to 1.5 percentage points more than would normally be attributable to the contraction in the [economy]." In other words, something is screwy with the standard forecasting models, since layoffs have been much more severe than would be expected with the decline in the economic output, or Gross National Product (GNP). This was a major reason why the administration's economic forecast in January had erroneously predicted that unemployment would not rise above about 8 percent this year.

In his Thursday phone interview with me, Summers amplified his remarks about the breakdown of the traditional relationship between GNP and the jobless rate. "What's noteworthy about this recession is that GNP over the last six months has been only marginally worse than people expected it would be in January, while we are experiencing higher than expected unemployment," he said. "Normally in economic downturns, productivity decreases as firms keep workers employed even as the amount of work declines. In this recession, as in the last one, productivity has actually increased."

Traditionally, as the economy gathers momentum after a recession, jobs are slow to bounce back, a lagging indicator in economic lingo. What is difficult to figure this time around – and Summers acknowledges that there is not yet enough data to make a determination – is how reluctant businesses will be to hire new workers. It can be argued that because the layoffs were so much faster and graver than the economic models would suggest, the recovery in jobs will be equally accelerated. But there is also the more alarming prospect that companies are growing adept at doing more with fewer workers (the equivalent of an old-fashioned speed-up on the assembly line) – and that this largely may be a jobless recovery.