Scott Sumner  

Larry Summers is persuasive

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Tyler Cowen directed me to a long interview of Larry Summers. I have two general impressions after listening to the interview:

1. Larry Summers seems brilliant.
2. I disagree with him on just about everything.

That got me wondering why I disagree with someone whose opinions seem sensible. Let's see if we can find a pattern:

1. He says financial excesses led to the Great Depression. I say just the opposite--the Depression was caused by tight money, and the later financial crises were an effect.

2. Summers says the slow RGDP growth in Britain indicates that austerity failed. I don't think RGDP tells us much about the impact of austerity, as fiscal policy directly impacts NGDP, and the split between RGDP and prices reflects supply-side factors.

3. Summers thinks excess saving leads to low AD and secular stagnation. I think secular stagnation (for supply-side reasons) leads to low interest rates, and in some countries these low rates push monetary policy in an excessively contractionary direction.

4. He thinks JFK airport is a disgrace, and this shows we need more public investment. I think JFK airport is a disgrace, and this shows we need more private investment (after privatizing JFK, LaGuardia, and Newark airports).

5. He thinks low interest rates (from easy money) leads to financial bubbles, and thus favors fiscal stimulus. I see little evidence (theoretical or empirical) linking low rates with financial instability. I think our financial system has been better behaved in recent years (at zero rates) than back in 2005 and 2006 when rates were much higher.

6. He thinks capital income should be taxed more heavily. I oppose all taxes on capital income.

7. He thinks growing inequality is a major issue in the modern world. I see growing equality as the most important trend since 1980.

8. He worries about current account deficits and I don't.

That's just a small sample; I disagreed with almost everything he said for over an hour. And there are many other differences that were not in the talk:

9. He favors discretionary monetary policy; I favor rules.

10. He judges the stance of monetary policy by looking at interest rates, I look at NGDP.

This is clearly not the place to determine who's right. Obviously I think I'm right and just as obviously my opinion has zero value. Rather I'd like to figure out why we can't agree on anything.

Here's one hypothesis. I take all the counterintuitive aspects of economic theory very seriously, whereas Summers is more influenced by "framing effects." He has a more common sense view of the world. Back in the 1990s when it looked like the "Washington Consensus" was roughly correct, Summers seemed like a neoliberal. So did Paul Krugman. Now Krugman says reality has a liberal bias. I'd say left-leaning liberalism is the natural position of a utilitarian with a common sense view of the world. I'm a right wing liberal because I have a counterintuitive view of the world:

1. The Great Depression looks like it was caused by financial turmoil, but looks can be deceiving.

2. Since the ultimate goal of fiscal stimulus is faster growing RGDP, that variable seems a natural way to measure the impact of fiscal stimulus, but it isn't. NGDP measures aggregate demand.

3. It seems obvious that saving would reduce AD, but it doesn't. Monetary policy determines AD. It seems plausible that low spending could explain a low trend rate of growth, but it doesn't. Supply-side factors explain the low trend rate of growth.

4. It seems obvious to an American (not a European) that the government should own airports. Summers is an American.

5. It seems obvious that low rates would encourage speculation and financial excess, leading to bubbles. But the EMH says bubbles don't exist.

6. It seems obvious that all forms of income should be treated equal, but public finance theory says that taxing capital income is taxing the same labor income twice.

7. It seems obvious that inequality is increasing, but the data says that global inequality is decreasing.

8. It seems obvious that trade deficits would hurt an economy, but economic theory says they don't.

9. It seems obvious that central banks should make a decision in the year 2014 that is best for the economy in 2014 and in the near future--i.e. discretion. But theory says we need policy rules using a timeless perspective.

10. It seems obvious that low interest rates mean easy money, but theory and evidence suggest they more often reflect low inflation and/or a weak economy.

To be sure, there are good counterarguments for much of what I said. You can construct models that differ from the standard models on CA deficits or capital income taxation. That's not my point. The people that Larry Summers interacts with (like President Obama) know nothing of those models. Most idealistic people from outside the field of economics will think Summers is right and I'm wrong. Even President Bush supported a demand-side tax rebate (in 2008) to juice the economy. I'll have the support of selfish rich people who don't want to pay taxes on capital income because they are greedy. Yuck.

It really is a miracle that Milton Friedman was so persuasive. I don't know how he did it.


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CATEGORIES: Economic Philosophy



COMMENTS (25 to date)
Philip George writes:

There's something to be said for the way you have neatly summed up your differences with Summers.

I'm not defending Summers. But have you considered the following possibility?
1. The stock market crash of 1929 caused tight money which in turn caused the Great Depression.

2. Increased savings results in reduced aggregate demand. Increased savings also mean tight money. So in one sense, what Friedman said and what Keynes said amount to the same thing (if you correct the errors on both sides).

3. Do points 2 and 3 above sound like riddles?

The way Milton Friedman 'did it' was to be relentlessly logical. He also produced examples that could be understood by people outside the economics profession.

He persevered, and persevered, and then one day in the 1970s his opponents' arguments looked ridiculous; we had both high inflation and high unemployment, for one thing. He was the guy left standing.

Andrew_FL writes:

10 Seems like it could be resolved by talking about real rates rather than nominal rates.

The idea that saving leads to stagnation seems to me to be complete and total gibberish. Savings represents the supply of loanable funds. If savings increases voluntarily this implies investment becomes cheaper, and investment should fuel faster long term growth. Saying saving leads to secular stagnation is not common sense, it's actually the opposite of common sense.

EA FH writes:

Thanks of this Scott, even when I am a nobody, I surely will tell you this - this post shows you are a deep thinker - even when I had my initial doubts about you, if you continue this path of introspection, regardless of your substantive claims, we will expect great things from you.

Jon Murphy writes:

I agree with EA FH: this post shows that you are a deep and serious thinker, and so is Summers. You can learn a lot from people you disagree with.

Eric Falkenstein writes:

I think the key to Keynesians and their opposite is the degree to which one has more faith in markets or governments in providing useful services and investments. Keynesians emphasize the beauty contests, the fads, the self-interestedness of markets, and think these effects are much less pronounced among bureaucrats.

People like me think governments are just as self-interested but worse because they aren't disciplined by the market, and their fads (eg, corn-based ethanol) don't get fixed in a market cycle (note, only the government has doubled-down on 3.5% mortgages). Thus, JFK airport management can persist indefinitely because no one is 'losing money', except in an opportunity cost sense. Same for bad schools, courts, etc.

Anyway, given that set of biases, everything follows.

Mike W writes:

Excellent post, thanks for laying out the issues in this way...I plan to examine each point.

Milton Friedman was persuasive because the general public was ready, after a decade of stagflation, for what he had to say. Before that, the mid-50s until the late 70s, not so much.

Unfortunately, it appears we will be going the other way for quite some time yet.

MingoV writes:

There are people who are very intelligent, are great at presenting ideas, and are almost always wrong. Larry Summers is one. The current version of Paul Krugman is another.

Unfortunately, there are people who are very intelligent, are poor at presenting ideas, and are almost always correct. I've seen this among scientists. This is tragic because the great ideas are ignored.

ThomasH writes:

1. Agree about the Great Depression. About the Great Recession it’s not so clear. With less leverage the financial system would not have had to be bailed out and monetary policy could have focused on less politically damaging asset classes.
2. UK austerity was sold as a way of raising real incomes. By that standard it failed. Maybe it should not have been sold that way.
3. Governments in the US do not have good mechanisms for identifying and investing in high yielding projects and monetary authorities will not always be aggressive enough to clear the market, so "excess savings" (="not enough investment") are possible.
4. Summers would probably agree if he thought that was easier to privatize and intelligently regulate it than get more public investment in JFK.
5. I think the case for fiscal policy is that Central Banks have in practice been unwilling to maintain ngdp growth (but would not offset fiscal policy in that direction).
6. Depends on the alternatives. If the issue is capital income or progressive consumption taxes, I agree to no taxation of capital income. If any decrease in capital income has to be made up without out changing the personal income tax, no.
7. .??
8. Scott is right.
9. This may be a “what is feasible” rather than a “what is preferable” question. He may be assuming that “rules” as likely to be applied will prevent maintaining ngdp.
10. Scott is right.

I think Scott is right about Summers "common sense" view of the world, what I attribute to bounds on what he considers feasible to argue for publicly.

Steve J writes:

3. It seems obvious that saving would reduce AD, but it doesn't.

This reminds of a saying something like "everyone can't save money at the same time". That does seem obviously true. How is it that monetary policy allows everyone to save money simultaneously?

Steve J writes:

Replying to my own question I am guessing if we all have more money then we can both spend more and save more in nominal terms. Suddenly what is obvious has been reversed...

George Bailey writes:

More precisely, the Great Depression was caused by the Gold Standard! Interest rates were raised in the US to reduce gold outflows. Those higher rates led to the stock market crash. Later financial crisis followed as the Fed failed it's lender of last resort function.
The gold standard also played a key role in the transmission of the depression to many different countries.

Todd Kreider writes:

I'm sure Summers is a bright chap, and it would take a very long time to say where I agree and disagree with him, but can we move away from where every NY Times article calls him brilliant?

If Summers was brilliant, he'd be a theoretical physicist, not an economist who no one will remember in 20 years. (Of course, I think he's an excellent economist)

Scott Sumner writes:

Philip, I've spent a lot of time studying the Depression, and I've concluded that the tight money policy of 1929-30 contributed to the stock crash (although it wasn't the only factor.)

I don't believe that saving reduces AD.

Patrick, He also explained things in a way that was easy for people to understand.

Andrew, I agree on savings. Real interest rates are better than nominal rates, but are still not a reliable indicator of the stance of monetary policy.

EA and Jon, Thanks!

Eric, Good point, but I'd add that there's a bit more involved with Summers. He was much more market-oriented in the 1990s, when markets seemed to be doing better, based on casual empiricism. I don't believe the recent crisis was a market failure, but will admit it looks that way at first glance.

Thanks Mike.

Mingo. Good point.

Thomas, I partly agree.

Steve, QE gives us more money, but not more wealth, as money is exchanged for bonds. Thus no DIRECT impact on saving.

George, That's too simple. The global supply of monetary gold rose in 1929-30, while the global monetary base fell. Countries did not follow the rules of the game. But I agree the gold standard was a problem, and largely explains the international nature of the crisis.

Todd, There are different types of brilliance. He couldn't do what Einstein did, and vice versa.

Andrew_FL writes:

It would be more accurate to say "the Gold Exchange Standard was a problem."

Because it allowed countries to not play by the rules of the game.

Under the Standard that prevailed before 1913, things would have gone very differently.

Todd Kreider writes:

I was joking (to make a point) that Summers would have been a theoretical physicist if brilliant. While excellent, I think it's funny how "Brilliant" has become Summer's middle name where that description is rarely used with economists just as good.

Todd Kreider writes:

I was joking (to make a point) that Summers would have been a theoretical physicist if brilliant. While excellent, I think it's funny how "Brilliant" has become Summer's middle name where that description is rarely used with economists just as good.

emerich writes:

Friedman was so persuasive in public debate and conversation less because he was logical (which he was) than because he could explain an idea concretely and succinctly. Every time. And he was never condescending, never scored cheap debating points. As Scott says, economics is often counterintuitive, but Friedman made it sound like common sense.

Scott comes across well in conversation (listen to him on Econtalk), it's just that he doesn't normally venture far from monetary policy.

John Becker writes:

It doesn't seem that liking counterintuitive economic ideas should be a matter of taste. Saying that Summer's common sense views of the economy are a viable intellectual option is like saying that would be perfectly well and good for a modern physicist to believe in the "common sense" physics of Aristotle and rejecting the counter-intuitive conclusions of Einstein or Feynman.

Economic research has shown itself to be useful in so far as it has generated conclusions that are counterintuitive to the untrained. That is one of the hallmarks of a science. Summers is doing the equivalent of arguing that planes shouldn't be able to fly because they are obviously heavier than air.

It doesn't matter how smart you are if you buy into stupid ideas. Especially if you buy into stupid ideas in your profession where you have a great deal of influence. What makes this guy "smart" anyway? Couldn't you just as well argue that he is dumb? All he seems to be good at is gaining power and authority.

Philip George writes:

Did I say that the Depression was not caused by a contraction in money? I am saying that a contraction in money and a contraction in aggregate demand are the same thing, if money is taken as medium of exchange.

Chris mahoney writes:

I'm finally reading Hetzell's book, and he agrees with Scott's views.

Every depression in American history, and the vast majority of recessions, have come on the heels of reduced deficit growth.

The evidence is at: http://mythfighter.com/2009/09/07/introduction/

Rodger Malcolm Mitchell writes:

[Comment removed for irrelevance.--Econlib Ed.]

Floccina writes:

Still I bet that you and Larry agree on more than either of you agree with any Congressperson.

Floccina writes:

This is an interesting idea: "What Status RQ?", that might explain why very intelligent people can string disagree on subject like those listed above.

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