Larry Summers misses another important point

He's clueless about the consequences of inequality

From time to time, Larry Summers gets things very wrong. He hypothesized that women were largely underrepresented in the sciences at least partially because of innate gender differences.

He championed bank deregulation during the Clinton years ("...it would take a Republican Congress and the Clinton administration’s Robert Rubin and Larry Summers at Treasury to repeal Glass-Steagall."), a deregulatory step that others, including Ron Suskind, author of Confidence Men: Wall Street, Washington and the Education of a President, suggest had much to do with the economic collapse of 2008.

And, following that collapse, from which he seemed to have learned the wrong lessons, Summers, along with Tim Geithner, was one of the leading actors pushing bank and corporate bailouts and downplaying stimulus spending and infrastructure investment within the Obama administration.

As Dean Baker put it in "How Larry Summers' memo hobbled Obama's stimulus plan," posted on common dreams.org, "In short, while the data was crying out for more stimulus, the Obama administration openly embraced the need for deficit reduction, effectively slamming the door on the prospect of further stimulus. The basis for this original sin can be found in [Summers'] December memo, which, unfortunately, provided the administration's game plan long after it should have been clear that it had been superseded by events."

Susskind makes it clear that Summers' policy recommendations suffer, in part, from his high opinion of himself. "Instead of looking at [Summers'] record pockmarked with bad decisions, people see his extemporaneous brilliance and let themselves be dazzled. Summers' career has come to look, more and more, like one long demonstration of the difference between wisdom and smarts," Suskind wrote in Confidence Men.

But no matter the various judgments of history, Summers isn't going to go away. He blogs on economic and political issues for Reuters, gives lots of interviews and writes a lot of op-ed pieces. His latest piece, "American inequality goes beyond dollars and cents," ran in today's (June 9) Washington Post.

Summers' op-ed begins with a nod to Thomas Piketty's new book, Capital in the Twenty-First Century, which examines the growing inequality in income and wealth in the United States and around the world. "This is indeed a critical issue," Summers writes.

Later he observes that increasing "tax productivity" would not do "any noticeable damage to the prospects for economic growth," but quickly moves on from serious consideration of policy changes that might reduce inequality. Instead, he considers unequal outcomes in life expectancy and educational achievement, two areas in which Summers has never previously demonstrated much interest.

Nevertheless, he's happy to point out that differences in life expectancy for older people "more likely have to do with lifestyle and variations in diet and stress..." Summers also cites figures that make it clear that children from affluent families are exposed to many more "enrichment" experiences than are children from poor families, but, he concludes, that to address unequal outcomes we should not merely focus on inequality. "...it is crucial to recognize that measures to support the rest of the population in other ways are at least equally important," Summers writes, though he does not specify what those other "measures" might be.

In any case, what seems mightily important here is a point missed by Summers, but noted elsewhere by others, notably Paul Krugman and Robin Wells in "The Widening Gyre: Inequality, Polarization and the Crisis," which they wrote for inclusion in The Occupy Handbook, edited and compiled by Janet Byrne. Citing the work of political scientists Keith Poole, Howard Rosenthal and Nolan McCarty, Krugman and Wells argue that there's no separating inequality from the political polarization and gridlock of our time.

"Soaring inequality is at the root of our polarized politics," they wrote. That polarization has "made us unable to act together in the face of crisis. And because rising incomes at the top have brought rising power to the wealthiest, our nation's intellectual life has been warped, with too many economists co-opted into defending economic doctrines that were convenient for the wealthy despite being indefensible on logical and empirical grounds."

Krugman and Wells may not have been including Summers in their list of "co-opted economists," but given his demonstrated preference for bank deregulation and bailouts over significant stimulus spending, we should be forgiven for assuming Summers belongs on the list. Krugman and Wells see many of Obama's policy compromises with his intractable opponents in Congress as a direct result of inequality-linked political polarization.

In 2009, they wrote, "we arrived at a Keynesian crisis demanding a Keynesian solution--but Keynesian ideas had been driven out of the national discourse, in large part because they were politically inconvenient for the increasingly empowered 1 percent."

Summers would probably prefer not to be reminded that the policies he has advocated in the past have done little to protect ordinary Americans from economic hardship. His Post op-ed actually includes a shout-out to progressive economist Dean Baker, suggesting that Summers would like us to forget his track record. But we ought not forget--if we want to reduce income inequality (and political polarization), and if Hillary Clinton follows Obama to the presidency, we want to do our best to make sure that Larry Summers finds employment somewhere other than the federal government.

GM and Chrysler

A Different Model?

I've criticized Washington Post columnist Steven Pearlstein in the past (check out "Letter to the Washington Post, #7" and "No Bailout"), so it's probably only fair to acknowledge when Pearlstein may have gotten it right. In particular, the federal investment in GM could turn out to be a very positive intervention in the long run.

In his Post column today (read it here), Pearlstein argues, as he has in the past, that GM and Chrysler and their suppliers are too big to fail. This could be just a rationale for a bad bailout. But I think Pearlstein is correct when he says that the government's investments in Chrysler and GM aren't bailouts, at all, but a massive intervention aimed at protecting jobs and pensions and manufacturing capacity.

Pearlstein points out that the intervention wasn't mandated, the Obama administration elected to intervene. In the process, original shareholders have been wiped out, or nearly so. The management teams that presided over the collapse of the two companies have been dismissed. "Bankers and bondholders who had the bad judgement, or the bad luck, to lend money to these companies" will get only pennies on the dollar.

But Pearlstein points out "any fair analysis would also show that the net present value of wage, benefit and job-security concessions agreed to by the United Auto Workers amounts to tens of billions of dollars." In exchange, some autoworkers will keep their jobs. Pensions will be cut, but will survive. And the union, its members and related organizations will own about one-eighth of GM and, I suppose, a similar share of Chrysler. The UAW will have to find a way to make this ownership share pay off, not a sure thing, but maybe a way to pressure the still giant auto companies to operate in the interests of all stakeholders in the future rather than in the interests of a privileged few.

And though I wish to give Pearlstein as strong an "attaboy" as possible for his column, his closing sentence opens up a whole new can of worms. "If President Obama can get most of our troops out of Iraq by the end of 2010, he ought to be able to get our money out of Detroit by then, as well," Pearlstein wrote.

I don't know about that analogy, Steven. First of all, I'm hoping that the U.S. investment in GM is not based on the same lies and deceptions that framed and covered the U.S. attack on Iraq. Second, we ought to be looking for some actual success story as a result of the GM investment, not a laying waste to the company. Finally, the troops in Iraq are, in significant numbers, moving to Afghanistan. Here's hoping that there are far better uses for the GM cash when we finally get it back.

Dean Baker and the Economic Right Stuff

If there is a more delightfully rational and straightforward economist around than Dean Baker of the Center for Economic and Policy Research, somebody needs to tell me. I don’t write much--I wish I could make myself do it more. But reading Baker’s stuff makes me want to package his ideas and analysis and get it out to a wider audience. My reliance on Dean for economic and political truth is so complete, I would be roadkill without him.

“Paulson and Bernanke spread the wealth around” is a recent and useful example of Dean’s thinking. He observes that when Barack told Joe the Plumber that he favored tax increases on incomes over $250,000 in order to spread wealth, the loudest responses were critical and adverse.

But, Dean writes, “fortunes will be made or lost depending on how this bailout money is used. For example, Secretary Paulson just agreed to lend another $20 billion of the Treasury's bailout money to Citigroup.

“In addition, the Federal Reserve Board agreed to guarantee up to $300 billion of presumably bad assets. This is an enormously valuable guarantee. If Citigroup had to arrange a comparable guarantee in the private market, it would almost certainly pay more than $30 billion a year.

“This decision sent Citigroup's stock soaring. In the week since the bailout was announced, Citigroup's stock more than doubled, adding more than $25 billion to the company's capitalization. (The government could have bought the bank outright with the money it lent to Citi.) This is great news for Citigroup's shareholders, who would be holding almost worthless stock if Mr. Paulson had not been so generous.

“Paulson's decision was also good news for Robert Rubin and other top executives at Citigroup. If the government had not stepped in, Citigroup would almost certainly be in bankruptcy and most of its highly paid executives would likely be out on the street.

“Creditors of Citigroup also benefited. If Citigroup went into bankruptcy, their loans would be frozen for a period of time while the court determined what percentage of Citi's debts could be paid. At the end of this process, many creditors would only receive back a fraction of what they are owed.

“The fact that money is being redistributed doesn't make it wrong to bail out Citigroup or any of the other companies now being aided by the various Fed and Treasury funds. We need to keep the financial system functioning. However, there is every reason in the world to be concerned about the extent to which these policies may be enriching the wealthy and well-connected at the expense of the rest of us.

“In the case of the Citi rescue, there was no obvious reason why the shareholders should not be wiped out. They understood (or should have) that when they bought shares of the company that they could lose their whole investment if the company was poorly managed and went bankrupt. Similarly, there is no obvious reason that the management that wrecked Citi should not be thrown out and replaced with a more competent and lower paid team.”

There is more of Dean, lots more at www.cepr.net. Be sure also to check out “Paper wealth and the economic crisis.”

Dean may not have a prime place in the rolodexes of power, but journalists and commentators need to rely on him more often. Ordinary folks already can and do.

Blaming the sub-prime mortgagees for the sins of bankers

I keep trying to explain the current financial crisis to myself for two reasons. One, I believe there must be simpler explanations than the ones that seem to prevail in media reports and on op-ed pages. And two, I'm discovering that far too many people believe that one of the major causes of our current problems lays with homeowners who took mortgages that they couldn't afford.

There is of course, still a class of pundits who believe that too much regulation is a significant cause of the collapse of the financial markets, the freezing of credit, and the abysmal performance of American auto companies. We are going to have to agree to leave such people out of the conversation--they are market fundamentalists whose cultish practices are no doubt constitutionally protected however much they might frighten children and the simple-minded.

But to apply, at least minimally, the notion that it is markets that decide (rationally or otherwise) who gets what, when, where and why, it seems both wrong-headed and unkind to blame individual homeowners who have fallen behind or defaulted on their mortgages for our current financial difficulties. These homeowners must live with the decisions of markets. They are not the deciders, as our soon to be ex-president might say.

After all, a good many people who received sub-prime mortgages actually qualified for conventional mortgages at more favorable rates. They were channelled into the sub-prime market, which created huge difficulties for them when affordable adjustable rate mortgages suddenly climbed to much higher rates after the housing bubble popped. It is shoeing the wrong horse to ask such people to predict the end of the bubble when bankers themselves believed (or pretended to believe) that we were all going to profit from an endlessly inflating housing market.

Mortgage applicants are consumers, not financial experts. They rely, mistakenly as it happens, on the expertise of others.

It is arguable, of course, that it is the buyer who ought to beware. But historically, it is banks and mortgage companies who have decided who is eligible for their services and who is not. If we are to take reasonable steps toward resurrecting the housing market, it makes far more sense to examine the practices of bankers, mortgage brokers and the buyers and sellers of bundled mortgages than it does to swing away at people who are losing their homes.

Bailout and regulate

Not that Charles Krauthammer needs to acknowledge my existence, but I feel like he's here to nullify mine. I only wish I could swing enough weight to nullify him back. I would regard the fact of his nullification, second only to the existence of my children, as my greatest contribution to life and culture to come.

In "A Lemon of A Bailout," Washington Post, Nov. 14, Krauthammer claims that some sort of rescue of the banking industry makes sense because "...finance is a utility," like "...the electric companies." This observation comes on the way to his larger point that extending the federal bailout to include the auto companies is arbitrary and inefficient. After all, Krauthammer might claim, capitalism can't exist without a financial sector, but we could all muddle through with a shrunken and bankrupt auto industry.

If that were actually true, then exactly what would be the point of having a capitalist system? I mean, if capitalism offers nothing to the many, if jobs and products aren't the principal parts of that commitment, then 90 percent of us (at least) have no use for it, at all. Who agreed to this deal?

And, if Krauthammer's assertion that finance is integral to capitalism, but auto as a dominant industrial presence (at this point in time) is not necessary to capitalism, is not true, then it follows that not only should we rescue, but we should regulate with an eye to maximizing employment and making autos and jobs as people-friendly and earth-friendly as possible.

jde