Monday, January 23, 2012

The Larry Summers Experience

Larry Summers has always been a frequent target here, mainly because I find it annoying that people ignore his extremely dodgy track record because he is a "brilliant mind", or something.

The size of the stimulus has always been a issue of debate. At the time, many of the economists whose judgement I trust (because they aren't constantly wrong about things) strongly criticized the stimulus as being not large enough, and being too focused on tax cuts rather than the more stimulative options at their disposal. In the months and years since it's become painfully obvious that they were right and Summers (and the administration) were wrong, there have been two main for why they screwed up. The 1st excuse that no one thought it was too small and fully understood how bad the economy is so wrong and easily disproved it's not worth discussing.

The second excuse is that political constrains forced a smaller sized stimulus than the administration would have otherwise wanted. This excuse was always hard to disprove since you can't know exactly how those meetings went, but it always seemed odd to me that Summers, Obama's lead economic adviser, would be including political considerations into his analysis.

In an interesting article in the New Yorker on Obama's first term, we get our answer:
Since 2009, some economists have insisted that the stimulus was too small. White House defenders have responded that a larger stimulus would not have moved through Congress. But the Summers memo barely mentioned Congress, noting only that his recommendation of a stimulus above six hundred billion dollars was “an economic judgment that would need to be combined with political judgments about what is feasible.”

He offered the President four illustrative stimulus plans: $550 billion, $665 billion, $810 billion, and $890 billion. Obama was never offered the option of a stimulus package commensurate with the size of the hole in the economy––known by economists as the “output gap”––which was estimated at two trillion dollars during 2009 and 2010. Summers advised the President that a larger stimulus could actually make things worse. “An excessive recovery package could spook markets or the public and be counterproductive,” he wrote, and added that none of his recommendations “returns the unemployment rate to its normal, pre-recession level. To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions—which would likely not accomplish the goal because of the impact it would have on markets.”

Paul Krugman, a Times columnist and a Nobel Prize-winning economist who persistently supported a larger stimulus, told me that Summers’s assertion about market fears was a “bang my head on the table” argument. “He’s invoking the invisible bond vigilantes, basically saying that investors would be scared and drive up interest rates. That’s a major economic misjudgment.” Since the beginning of the crisis, the U.S. has borrowed more than five trillion dollars, and the interest rate on the ten-year Treasury bills is under two per cent. The markets that Summers warned Obama about have been calm.
There are no excuses for Summers. He was tasked with proposing what the economy needed for a turnaround, and was spectacularly wrong. I'm sure the Summers defenders will find a way to make "major economic misjudgment" another example of his genius, but for those of us who prefer to look at his actual record of policy beliefs and actions, it isn't a pretty one.

For most people, a screw up of that magnitude would cost them their jobs. For Larry Summers, he gets recommended for a more prestigious one.

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