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The Evolution of Larry Summers

November 21, 2013
the Economy: Home and the World
4 Comments

November 14, 2011 – Munk Debate: “Be it resolved North America faces a Japan-style era of economic stagnation.”

Paul Krugman and David Rosenberg vs. Larry Summers and Ian Bremmer.

Larry Summers:

Paul, I would buy, not sell. You’re right that we will suffer needless unemployment and stagnation until more is done to address [our] demand deficiency […] My thesis is that as serious as [our] problem is, it is dimensionally much less than the problems that Japan faced in four respects. Japan’s problems were different in magnitude, different in the depth of their structural roots, different in the relative perspective they had […] and different in the degree of resilience their system had for adapting to them […]

Paul, you forecast in 1994 […] that Japanese potential GDP growth would be 3% or a bit more. By that standard, Japan is now producing half of the potential output that people were forecasting when its lost decade began. That’s a problem of a different magnitude than a U.S. gap, serious though it is, at 6 or 7%.

There is little wonder that Japan’s slow-down is so profound given the magnitude of the structural problems that hold Japan back: the most rapidly aging society in the industrialized world resulting in slow labour-force growth; epic insularity and inability to accept immigration; in the face of distress a massive retrenchment by its companies to their home markets; an utter lack of capacity for entrepreneurial innovation in the era of the social network. The United States remains, witness my colleague here, the only country in the world where you can raise your first 100 million dollars before you buy your first suit and tie.

Let’s look at relative perspective. When Japan went wrong in the 1990s, the world was working. The United States was flourishing and growing. […] The United States’ problems are the problems of every industrial democracy. And the U.S. share of the industrial world is steadily increasing.

[I]f you look at what passes for governance in Europe in recent years, I would suggest that our problems do not loom large relative to either the economics or to the politics in the rest of the world. We remain totally unlike Japan. We remain the place where everyone in the world wants to come and the place where everyone in the world wants to put their money.

Finally, we are a uniquely resilient society and we have seen this before. John Kennedy died believing that Russia would surpass the United States by the early 1980s. Every issue of the Harvard Business Review in 1991 proclaimed that the Cold War was over and that Japan and Germany had won, and that was before the best decade in U.S. economic history.

It will take time. There are steps that need to be taken but we are a society that works. We are a society whose principle problems — we all up here agree — can be addressed by a change in the printing of money and the creation of infrastructure. That is not the kind of fundamental problem Japan has. 

February 11, 2013 – World Economic Forum: “The Future of the American Public Sector”: 

Larry Summers in conversation with Chrystia Freeland:

Chrystia Freeland: [Tell us about the United States]

Larry Summers: Look I think people have counted the US out before. John Kennedy died believing that the Soviet Union would surpass the US by 1995. […] People make that mistake now with respect to our economy and with respect to our politics. I think if we seize the moment we have huge and unique opportunity in the world. This is a moment for broad renewal that corrects all the deficits we have […]

If we can in our public life, corporate life, and individual life turn our attention more to the future away from the present, this can be a profoundly important moment for the US.

CF: [Are you moving into the PK Camp?]

LS: I don’t know if I’m going to do camps. In 1993, here’s what the situation was. Capital costs were really high. The trade deficit was really big. And if you looked at a graph average wages and productivity of American workers, those two graphs laid on top of each other. Reducing capital costs and raising productivity growth was the right strategy. That was what Bob Rubin told Bill Clinton. That’s what Bill Clinton did. They were right. Today the long-term interest rate is negligible. The constraint is lack of demand. Productivity has vastly outstripped wage growth. And the syllogism reduce the deficit and you’ll get more wages does not work the same way. But, if you don’t get the deficit under control you will eventually get a macroeconomic catastrophe. […]

CF: Following on from your focus on growth, there is an argument that I hear more and more people taking seriously advanced maybe most boldly by Tyler Cowen that growth maybe innovation and productivity growth is over. The low hanging fruit has been picked and we’re in a stagnant period. Do you buy any of it?

LS. Not a bit of it. Everyone in this room here was required to turn off their device in this room a couple of minutes ago. The device you were required to turn off had more power than the Apollo project, it has better access to information than the Library of Congress and in terms of reaching people around the planet, you would trade JFK’s communication system for your iPhone. And in 5 years from now 5 billion people will have it. So I don’t know how anyone can say we are making fundamental progress.

The prophets of doom cannot have it both way. You cannot both say that the [robots are taking your jobs] and say nothing is happening that’s important for productivity growth. And in between those two if you want to have a dystopian idea, I think the must more fundamental idea is what technology is doing for the middle-skilled.

[Talk about inequality].

I think that is a much more serious problem than the idea that somehow there is nothing new. One other thing, I see my friend Francis Collins sitting here and he knows infinitely more about this than I do. But perhaps the wisest aphorisms I learned in grad school was [Rudi] who told us that things take longer to happen than you think they will, and then they happen faster than you think they could. It was famously observed that the computers were everywhere but the productivity statistics. And then you saw what happened. [I think the same thing will happen with genomics].

Larry Summers believes deficits pose an important problem and hence negative interest rates are not yet on his radar. Larry Summers refuses to accept Paul Krugman’s comparison of the United States to Japan. Also, an odd choice of boots.

November 8, 2013 – The International Monetary Fund:

Larry Summers:

There is I think another aspect of the situation that I think warrants our close attention that receives insufficient attention. The share of men, women, and adults that are working today is essentially the same as four years ago. Four years ago the financial panic had been arrested. TARP money had been paid back. Credit spreads had normalized. There was no panic in the air. That was a great achievement. But in those four years the share of adults who were working has not improved at all. GDP has fallen further behind potential as we would have defined it in the fall of 2009. The American experience in this regard and this experience is not unique as RR has documented in the wake of a financial crisis. Japan’s real GDP today is about half of what we [the Washington Consensus] believed it would be. It is a central pillar of both classical and Keynesian models that it is all about fluctuations and what you need is less volatility. I wonder if a set of older ideas (that I have to say were pretty firmly rejected in [Stan’s class]) that went under the phrase secular stagnation that are now profoundly important in understanding Japan and may be relevant to the United States today. […]

If you go back and you study the economy prior to the crisis. There’s something a little bit odd. Many people believe monetary policy was too easy. Everybody agrees there was a vast amount of imprudent lending going on. Almost everyone agrees wealth as it was experienced by households was in excess of its reality. Too easy money, too much borrowing, too much wealth. Was there a boom? Growth was not high, unemployment was not too low, and inflation was quiescent. Somehow even a great bubble was not enough to create an excess in aggregate demand. Now think about after the crisis.

[Insert Larry Summers analogy of choice]

You’d imagine that once things normalize you’d get more GDP than you would have had. Not that four years later you’d still be having substantially less. So there’s something odd about financial normalization if that was what the whole problem was and then continued slow growth. So what’s an explanation that would fit both of these observations? Suppose that the short term real interest rate that was consistent with full employment had fallen to negative 2 or negative 3 percent sometime in the middle of the last decade. Then what would happen? Even with artificial stimulus to demand coming from all this financial imprudence, you would not see any excess demand. And even with a relative resumption of normal credit conditions, you’d have a lot of difficulty getting back to full employment. Yes, it has been demonstrated that panics are terrible and that monetary policy can contain them when the interest rate is zero. It has been demonstrated less conclusively but presumptively that when short term interest rates are zero monetary policy can affect other asset prices to plausibly impact demand. But imagine a situation where natural and equilibrium interest rates have fallen significantly below zero. Then conventional macroeconomic thinking leaves us in a very serious problem because we all seem to agree that whereas you can keep the FFR in a low rate forever, it is very hard to do extraordinary measures for ever beyond that. […] This may all be madness and I may not have this right at all, but it does seem to me four years after the successful combating of crisis with no evidence of growth that is restoring equilibrium one has to be concerned about a policy agenda that is doing less with monetary policy than has been done before that is doing less with fiscal policy than has been done before and is taking steps whose basic purpose is for there to be less lending, borrowing than before. So my lesson from this crisis which the world has under internalized is that it is not over until it is over and that is not right now and cannot be judged relative to the extent of financial panic. And, we may well need in the years ahead to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back holding us back from our potential.

About face.

Note, I am not accusing Summers of hypocrisy in this case. Too few intellectuals – especially those of this prestige – change their mind. I’d be thrilled to hear Summers detail the revision of his priors. That is always an interesting process. I will add it does not seem to me – at least within the intellectual confines of a twenty minute video for Davos – that Summers really gets Tyler Cowen’s argument right. It is very easy to “have it both ways”, as Summers puts it. In fact, his latest at the IMF is provides precisely this reconciliation. Certainly Summers does not now believe that the iPhone will not reach the masses of Africa, that genomics will stop in its tracks, or that 3D printing will fail (any more than it would have in January of this year, at least). But suddenly that does not matter. In fact, that is precisely why this is interesting – everything Summers said in 2011 holds true and could still be argued today. It seems, given that the facts have not changed, that Summers is interpreting them through a different model.

There is also the possibility that Larry Summers judged that the audience at the Fourteenth Jacques Polak Annual Research Conference at the International Monetary Fund in honor of Stan Fischer is a lot, lot more sophisticated than jet setters at the Munk Debate or Davos.

Count me as eager to see whether Summers as successfully sheds his Keynesian-Classical (deficits matter in the long run) worldview as Paul Krugman. So long as the growth rate is above the interest rate, and he sure seems to think that will be the case, he cannot be saying something like:

But, if you don’t get the deficit under control you will eventually get a macroeconomic catastrophe.

It is not that his underlying model of the world is wrong. Just that the parameters that were always true, that no one really thought about, don’t matter anymore.

This deserves a post on its own, but there seem to be a few schools of thought on stagnation:

  • Cyclical demand shortfall (Larry Summers, Munk + Davos).
  • Secular demand shortfall (Larry Summers today, Paul Krugman).
  • Innovative constraints (Michael Mandel).
  • Other structural factors. Or an amalgam of the above. Or something else. (Tyler Cowen).

First of all, talking about “low demand” without reference to a given level of supply is stupid. Aggregate demand in Eurozone is really low right now. But if South India + Maharashtra (approximately the same population) had the same level of demand relative to their supply India would be, well, indescribable. I make this explicit because it is very important to distinguish between “demand” in Summers’ first two videos to that in his last. In the former two he is extolling America’s supply-side potentials. It is unclear to me the way he models supply with his new interpretation of the world. I am looking forward to reading many more posts on this hypothesis.

By the way, this is something I’ve been saying for a few months now, but most clearly detail in a post a few days before the conference:

I am glad others are thinking along the same lines. Hopefully central bankers consider a higher inflation target seriously.

Mutatis Mutandis – Anatomy of an Atypical Financial Crisis

August 1, 2013
the Economy: Home and the World
18 Comments

It is difficult to begin a post about Larry Summers – and his suitability for Chairman of the Federal Reserve – due to the sheer volume of current commentary. I’ve refrained from writing too much about Summers because I don’t know much more than the average pundit and therefore cannot add much.

However, I recently read Larry Summers’ decades-old, prescient analysis of the emergent possibility of a financial crisis in the modern monetary system, and the role of central bankers therein. It would not be an overstatement to claim that every ounce of thought and analysis in this paper flies in the face of Summers’ contemporary detractors vis-a-vis his position on both financial deregulation and monetary imperatives. Larry Summers likes regulation mutatis mutandis – he supports it at the core with necessary alterations on the side.

Before I continue, I anticipate a common response from detractors will suggest Summers’ revealed preference for deregulation contradict views expressed in 1991 and must clearly have evolved since. Two points:

  • It is well within the realm of reason that Summers’ views towards regulation did evolve due to the illusory stability of American finance between 1995 and 2006. However, as a rational Bayesian agent, we can be certain that he has the intellectual and analytical foundation to revise his priors as a result of the 2007 crash, whose course he presciently anticipated in 1991. His support of Obama’s regulatory regimen in recent years lends support to this argument.
  • Summers’ aversion to the harsh – even crude – style of derivatives regulation proposed by Brooksley Born does not confirm the argument that Larry Summers opposes any and all financial regulation. It confirms the argument that Larry Summers opposes Brooksley Born. But that’s just not as sexy.

Larry Summers’ unfortunate response to Raghuram Rajan’s warning – in which regulators are accused of Ludditery – are at the heart of a liberal backlash against Summers. Also unfortunately, this does not capture his opinion on regulation. From “Planning for the Next Financial Crisis” (1991, linked above), Summers argues:

Kindleberger’s preconditions for crisis are as likely to be satisfied today as they ever have been in the past. It is probably now easier to lever assets than ever before and the combination of reduced transactions costs and new markets in derivative securities make it easier than it has been in the past for the illusion of universal liquidity to take hold. Asset price bubbles are now as likely as they have ever been. Bubbles eventually burst. The increased speed with which information diffuses and the increased use of quantitative-rule- based trading strategies make it likely that they will burst more quickly today than they have in the past.

The thrust of Summers’ discourse is that the risk of financial crisis had not decreased over the decades leading into the 1990s and may well have increased. While he accepted the contemporary establishment opinion that the risk of panic to the real economy had subsided, he rejects the notion that this emerges from any fundamental efficiency of markets, rather the emergence of Keynesian-style economic stabilizers:

If financial crisis is less likely now than it used to be, the reason is the firewalls now in place that insulate the real economy from the effects of financial disruptions. Most important in this regard is the federal government’s acceptance of the responsibility for stabilizing the economy. Automatic stabilizers that are now in place cushion the response of the economy to changes in demand conditions.

Indeed, Summers goes further to suggest that the risk of financial panic per se has increased with the dominance of the new, derivative-driven financial system:

I conclude that technological and financial innovation have probably operated to make speculative bubbles which ultimately burst more likely today than has been the case historically.

Therefore, critics like Dean Baker – and, yes, Paul Krugman – should be cautious when accusing Summers of not foreseeing the housing bubble and crash in the 2000s. As Krugman himself has argued, we must judge the analytical value of a position not by specific predictions or bets – on which count Larry Summers summarily fails – but by the analytical model behind a prediction. I am now more confident that Summers, like Krugman and others on the left, had the foresight and firepower to incorporate the events of 2007 into their intellectual framework. (I’m personally more impressed by someone using an analytical model to suggest that something big is possible than someone saying something will happen for donkey’s years only to be proved right by the Law of Large Numbers).

Before I go on, let me provide the context in which Summers’ paper was written. The early ’90s were in many ways a time of free banking revival on the right and monetarist conceptions of business cycle moderation in the mainstream. It was not vogue to militate the idea of an activist central bank whose role extends beyond blanket provision of liquidity and ensuring a steady growth in monetary base.

In 1991, conceiving a 2007-esque crisis would have been unimaginable. Yet Summers carefully builds a fictional scenario of financial panic – from its animal spirit antecedent to its dystopian consequent – militating the following:

The result was the worst recession since the Depression. Unemployment rose to 11 percent and real GNP declined by 7 percent. For the first time since the war, there was a decline from year to year in the consumption of nondurable goods.

I don’t cite this paragraph to describe something so mundane as a recession, but the infinitesimally-close resemblance it holds to our own reality. Again, Summers never predicted that this crisis will occur, but notes that within his intellectual framework it could occur. Something, again, that sets him apart from his contemporaries in the early noughties, let alone nineties.

Summers discusses four possible paradigms in which we may respond to a financial crisis that so dearly affected the real economy:

  • Free banking.
  • Monetarist lender-of-last-resort.
  • Classical (Bagehot, 1873) lender-of-last-resort.
  • Modern Pragmatic View.

It’s a detailed discussion, and I want to keep my remarks concise. (Needless to say, Summers politely declines the train-wreck of an idea that is free banking.) Ultimately, he supports what he coins a “modern pragmatic view” which includes broadly:

  • Keynesian stabilizers.
  • Targeted (TBTF) bailouts in the case of financial crisis.
  • Regulation. (Read this one again, if you must).
  • Absolute provision of liquidity.

While a lot of this is mainstream stuff that shouldn’t surprise anyone, I want to highlight a few nuggets that are certainly relevant today:

A minimalist view of the function of the central bank would hold that, in the face of a major disturbance, it should use open market operations to make sure that the money stock, somehow de- fined, is not allowed to decline precipitously; a more activist view would seek to insure that it rises rapidly enough to offset any decline in velocity associated with financial panic. On this monetarist view, there is no need for the Fed to make use of the discount window or moral suasion in the face of crisis. It suffices to make enough liquidity available.

In the emphasized, Larry Summers effectively endorses the benefits of nominal income targeting – were we to stipulate that he is an “activist”. (His recent columns, editorials, and speeches on the importance of employment, and danger of hysteresis convinces me that he is). At the time, a standard monetarist argument held that targeting money supply growth would sufficiently stabilize the business cycle and insulate the real economy from financial panic. The equation of exchange states that:

mv = pq

where m is the money supply, v is the velocity of money, p is the price level and q is the real output. This simplifies to:

y_nominal = mv

Monetarists therefore argue that the central bank should target m. However, Larry Summers correctly argues that during financial panic there is a shortage of safe assets and hence money demand increases, diminishing the velocity v. Hence, to maintain output while accounting for velocity is now simply called targeting nominal income.

I have many times said I don’t know what Summers’ views on monetary policy are. While this doesn’t increase my confidence too much, I’ll note it is incumbent to accept Summers has considered, acknowledged, and supported the benefits of a nominal income target.

We also know little about Summers’ current attitude toward the central bank asset purchases known as quantitative easing (QE). Japan first engaged in this “exotic” policy in the early 2000s having hit the zero lower bound. Most economists would not support this policy, and certainly did not one decade ago. Here is Summers two decades ago:

Yet another [possible treatment to financial panic] is direct intervention to prop up asset prices. If this is possible, it will serve to increase confidence in the financial system and reduce the need for reductions in interest rates that would otherwise lead to a currency collapse. Journalistic accounts such as Stewart and Hertzberg ( 1987) suggest that manipulation of a minor but crucial futures market played an important role in preventing a further meltdown on Tuesday, 20 October 1987. They also assign a prominent role to orchestrated equity repurchases by major companies. Hale (1988) argues that the primary thrust of Japanese securities regulation in general, and especially in the aftermath of the crash, is raising the value of stocks rather than maintaining a “fair” marketplace.

In this capacity, it’s not too hard to believe that Larry Summers anticipated something proximal to the new “market monetarist” position. Indeed:

Quite apart from whatever it does or does not do to back up financial institutions that get in trouble, the Federal Reserve has the ability to alter the money stock through open market operations. In the face of a defla- tionary crisis like the one described above, it is hard to see why it would not be appropriate to pursue an expansionary monetary policy that would prevent the expectation of deflation from pushing real interest rates way up. The use of such a policy would at least limit the spillover consequences of financial institution failures. Whether it would be enough to fully contain the damage is the issue of whether a lender of last resort is necessary, the subject of the next section.

In fact, the “market monetarist” movement has two wings. Those occupying the sturdy, monetarist-activist position like Scott Sumner who argue that fiscal policy is entirely irrelevant and those like Paul Krugman and Brad DeLong who occupy a nexus of Keynesian-Monetarist beliefs militating for both monetary and fiscal easing along with regulation.

It is very clear that at least in the above paper, Larry Summers falls solidly with Krugman and DeLong noting the dangers of budget balancing during a financial crisis:

[Emerging stability] is largely the result of the expansion of government’s role in the economy. When the economy slumps, government tax collections decline and government transfer pay- ments increase, both of which cushion the decline in disposable income. The mirror image of stability in disposable income is instability in the government deficit. Hence, automatic stabilizers cannot work if the government seeks to maintain a constant budget deficit in the face of changing economic conditions.

Perhaps the most vicious criticism of Larry Summers comes from an ultra-Left wing of commenters and economists that allege a conspiratorial tie between Summers and Wall Street embodied by his support for big bailouts (which I do not support) and supposed deregulation. In fact, this is just not the case:

Lender-of-last-resort policy is probably an area where James Tobin’s in- sight that “it take a heap of Harberger triangles to fill an Okun gap” is relevant. It may well be that the moral hazard associated with lender-of-last-resort in- surance is better controlled by prudential regulation than by scaling the insur- ance back. This at least is the modern pragmatic view that has worked so far.

The reference to Harberger triangles and Okun gap is an old quip in favor of Keynesian stimulus: suggesting the gains from employment (a closing Okun gap) are orders of magnitude more important than deadweight losses emergent from taxation (Harberger triangles).

Summers only suggests that during a crisis it is dangerous to let big banks fail and it is better to take a vaccination than unscientifically reject a cure for fear of its side effects. While this position certainly creates a moral hazard and excessive risk taking among big banks, Summers is clear this is handled better with regulation (!!!) than failure, phrasing the argument in terms many on the mainstream left must accept:

 It is difficult to gauge the price of this success. Almost certainly, the subsidy provided by the presence of a lender of last resort has led to some wasteful investments and to excessive risk taking. I am not aware of serious estimates of the magnitude of these costs. Estimates of the cost of bailouts, which represent transfers, surely greatly overestimate the ex ante costs of inappropriate investments. If the presence of an active lender of last resort has avoided even one percentage point in unemployment sustained for one year, it has raised U.S. income by more than $100 billion. It would be surprising if any resulting misallocation of investment were to prove nearly this large.

I fall to the left of many fellow mainstream critics of Summers and hence for many other reasons reject the purported pro-bailout stance. Regardless, with the sort of sane regulatory policies that Summers above clearly supports, I would be more at rest.

Summers carefully notes why the former three policy paradigms (free banking, classical,  and monetarist) fail. In this, he anticipates many of the too-optimistic arguments made by those like Scott Sumner or David Beckworth in favor of a rules-only nominal income target. Indeed, in another paper, he questions the value of a rules-based policy entirely:

[I]nstitutions do the work of rules, and monetary rules should be avoided…Unless it can be demonstrated that the political institutional route to low inflation — to commitment that preserves the discretion to deal with unexpected contingencies and multiple equilibria — is undesirable or cannot work, I don’t see any case at all for monetary rules.

But in this paper itself, he notes that the biggest reason for contemporary economic stability comes not from more efficient markets, monetary rules, or even activist lenders-of-last-resort but deep, automatic stabilizers. He notes:

A major difference between the pre-and post- World War I1 economies is the presence of automatic stabilizers in the postwar economy. Before World War 11, a $1-drop in GNP translated into a $.95 de- cline in disposable income. Since the war, less each $1 change in GNP has translated into a drop of only $.39 in GNP. This change is largely the result of the expansion of government’s role in the economy.

He furthers a powerful case against crude monetarism by noting many reputational externalities from bank failures:

 But the analysis of the potential difficulties with a free banking system suggests that support of specific institutions, rather than just the money stock, may be desirable. De- clines in the money stock are just one of the potential adverse impacts of bank failures. Bank failures, or the failure of financial institutions more generally imposes external costs on firms with whom they do business and through the damage they do to the reputations of other banks. Private lenders have no incentive to take account of these external benefits, and so there is a presump- tion that they will lend too little.

The point here may be put in a different way. Because of the relationship- specific capital each has accumulated, reserves at one bank are an imperfect substitute for reserves at another. Maintaining a given aggregate level of lend- ing is not sufficient to avoid the losses associated with a financial disturbance. 

I thought that last point was especially powerful.

I would sum Larry Summers’ opinion on relevant regulatory institutions as the victory of regulation and moral hazard in a tension between the goal of discouraging risky behavior and resolving the crisis. I would sum Larry Summers’ opinion on monetary policy as erring on the side of expansion and liquidity in a tension between the goal of discouraging inflation while promoting employment.

Miles Kimball argues that any potential candidate to head the Fed must note their position on the following three items:

  • Eliminating the “Zero Lower Bound” on Interest Rates.
  • Nominal GDP Targeting.
  • High Equity Requirements for Banks and Other Financial Firms.

I cannot know Summers’ position on the first – though I will note the e-money argument is still very heterodox, and hence I find it impossible that Janet Yellen will support it and only highly improbable that Larry Summers will.

I noted earlier that Summers accepts any activist monetary policy must increase money supply adjusting for a fall in velocity, which is an effective nominal GDP target. It is for the reader to interpret his position on activist monetary policy as an item, and the extent to which he has revised his views today.

Finally, we can read Kimball’s last item specifically as support for higher equity requirements but more broadly as a belief that regulation is important. While equity requirements are distinct from capital requirements, they share some similarity and Summers wrote here “Raising bank capital requirements would seem to be an obvious approach”, signaling support. Raising equity requirements (that is, forcing banks to finance themselves with stock instead of debt) are in every which way better and hence should receive even more support.

On the topic of regulation – the irony that Larry Summers is the bête noire of the Left vis-a-vis regulation is becoming very clear. If anything, Larry Summers supported a form of deregulation in the ’90s but had the correct intellectual framework and has hence updated his priors correctly since 2007. There is no evidence that Graham-Leach-Bliley (the repeal of Glass-Steagall) was the cause of the recent crisis, and even less evidence that Summers critique of Brooksley Born’s harsh opposition towards derivatives trading can be translated into his opposition of smart derivatives regulation overall.

This paper convinces me that Larry Summers was well-ahead of the curve in a way more respectable than just guessing a random crisis (like Steve Keen – in retrospect, as John Aziz points out, this was a poorly chosen jab. Keen, like Summers, had a model. Others did not.). Rather, he teases out the very specific method in which such a panic might occur and analytically understands exactly what we would need to insulate the real economy and employment.

In 1991, few others could have so presciently described the reasons why the economy is more stable today, how the financial system is becoming riskier, and what role the central bank can or should play to fix that.

What more do you want from your Chairman of the Federal Reserve.

(Oh by the way,  for the record and for the little my two cents are worth, I’m officially noting Larry Summers as my top choice for the job).

Money Printer General: Larry Summers or Janet Yellen?

July 18, 2013
the Economy: Home and the World
4 Comments

That’s the debate of the moment, folks. Evan Soltas tells us Brad DeLong and Miles Kimball – both accomplished Summers’ colleagues and collaborators – think he’s the way to go. Matt Klein, also for Bloomberg, thinks Larry Summers’ bet on interest rates in 2004 disqualifies both his competence and humility. Barry Ritholtz thinks Summers’ pro-dergulation politics were a train-wreck and would prefer “anyone but Larry Summers”. Whatever the case, I’m sad this debate doesn’t include Christina Romer, but I’ll bitch and moan somewhere else. (Edit: Actually, that’s a lie, I want Paul Krugman. And a billion dollars, too).

The debate (as stated by others) can be captured almost totally by this matrix:

Larry Summer Janet Yellen
Pros Dominating, cutting brilliance, superstar Monetary credentials, dovishness, brilliance
Cons Dominating, unflinching, arrogant, deregulator Not dominating, not an alpha male

A few months ago, I wrote that Janet Yellen has the edge. I wrote that Larry Summers had what Walter Isaacson said of Steve Jobs: a “reality distortion field” – an uncanny ability to use his rhetoric and excellent debating skills to bend those around him to his view. Much of this view is informed by Ron Suskind’s Confidence Men, what everyone epithetically says of Summers – he is beyond human brilliant – and a personal experience.

I was once (not all too long ago) in a very small room, with a very small number of people and Larry Summers was at the center. I think it was off the record, or something to that effect, but it was basically Larry Summers vs. 2007. I entered that room with Inside Men fresh in my mind. But I left with an unmistakably altered view, both on the man and the matter.

Suskind tells us he had a similar effect on Obama. But when I wrote that Summers’ dominating presence was overrated, I thought that Ashok Rao and Barack Obama were very different from the Open Market Committee. We were educated lay people without PhDs in economics. I’m also sure I can convince someone sufficiently dumber than myself that austerity is a good thing. That doesn’t mean shit. I firmly believed that Larry Summers would face far stronger competition – from Yellen included – in the hallowed halls of Harvard the Federal Reserve. I wrote:

So clearly I think Summers is a gifted scholar. For one, it’s kind of funny Yellen’s experience in the central banking system is taken as a bygone conclusion, with far more emphasis on Summers’ “intellectual leadership”. The question is “to whom”. You take a few smart and relatively well-educated people. You put Larry Summers and Janet Yellen in a room with them. There’s probably a very good chance Summers would come out as the “more impressive” character.

But you take two, highly-competent economists, and I’m willing to bet they’re equally confident in Yellen’s intellectual leadership. Now let’s actually talk policy, for a second. I won’t dwell on this because Yellen’s monetary credentials have been discussed in great depth for a while. She’s the rare Fed Official who actually seems to realize that inflation targeting is a disaster, and has endorsed a nominal spending target in all but name. (Christina Romer, my preferred option, has explicitly supported the same).

Miles Kimball tweeted me that I underestimated how much Larry Summers can dominate a room of economists. Based on what I know, I can’t help but doubt this. But Kimball and I agreed that I probably face a severe selection bias exposed mostly to the econ bloggers who are decidedly firmer in their beliefs than the median economist. And Summers’ ability to sway the FOMC is something both Kimball and DeLong cite as Summers’ relative strength to Yellen, and I’ll cede to that judgement.

But I can’t help but worry about the trajectory of this conversation. There’s basically no talk of Larry Summers’ monetary policy beliefs (and he even mentioned in passing something funny in the Financial Times about low interest rates and bubbles. Ugh.) That’s because the pro Larry Summers crowd writing op-eds are insiders. Brad DeLong is a frequent collaborator, Miles Kimball a colleague, and Ed Luce was his former speechwriter. Miles Kimball tweets me “I would expect Larry Summers to have similar views on monetary policy to those expressed by @delong on his blog”.

But I have no basis on which to understand that expectation. Perhaps I’m not privy to privileged information among elite economists. Maybe I just don’t know Larry Summers’ beliefs well enough. Whatever the case, I have no way of forming an opinion on what Larry Summers will do as a Fed chair. Sure we know that he’s expressed discontent with certain aspects of financial regulation, but it’s unlikely his private beliefs are unrevised. And what about his position on the zero interest rate policy? Quantitative easing? Nominal income targets?

On the other hand, while Larry Summers might be a academe-political superstar, Janet Yellen is a monetary genius. I think I sum it up well here:

It almost goes without saying that Yellen is far more established as a academic and policymaker insofar as monetary policy. All we need is a quick Google search to see the extent to which this is (perceived to be) the case. As former Treasury chief and NEC chairman – and in general a brilliant academic – Summers is the more eminent personality: yielding 6,310,000 search hits to Yellen’s 467,000.

But change the query to “[Larry Summers/Janet Yellen] monetary policy”, Yellen comes ahead at 206,000 to Summers’ 131,000. Now I’m not suggesting this is a particularly smart way to judge scholarship on a subject, but it gives a very visceral sense of Yellen’s online footprint insofar as monetary policy is concerned. Moreover, Yellen’s hits are almost entirely pages that are really concerned with relevant policy.

Deriving from his comparative fame, even Larry Summers’ “monetary policy” search hits are of no relevance. At the top are links to his Wikipedia entry, a brilliant profile comparing Larry Summers and Glen Hubbard, something about healthcare, and firelarrysummers.blogspot.com. Now please don’t get me wrong. Summers’ is probably one of the smartest economic policymakers alive today and would make great choice for central banker. But Yellen’s history and deep erudition in this subject – as well as a functioning understanding that “full employment” is 50% of the Fed’s mandate, not just scribbles on a paper – are unquestionably in her favor.

Larry Summers has without doubt engaged in private deliberations to which Barack Obama is privy. That means, ultimately, I have to resign my opinion to Obama’s judgement on monetary policy. History tells me this is not good. To the contrary, I know with excellent confidence that Janet Yellen knows her monetary policy, and rightly believes that dovish expectations will lead to higher employment. I even think she secretly supports a nominal income target.

Google “Larry Summers monetary policy” – tell me what you can get.

The asymmetry of this debate has shifted the conversation entirely from concrete monetary positions – on which I can inveigh my unsolicited opinions – to a sidebar about personality. I’m sorry but that’s just not the most important thing for a Fed chair. We’re not talking about a Treasury Secretary embroiled in politics, here.

And that’s why this conversation still gives Larry Summers the edge. When it comes to personality, academics tend to like the cutting alpha male. Genius associates itself subconsciously with everything Larry Summers represents. But the discussion on policy is vacuous. It’s taken as a foregone conclusion that his good analytical command implies that Larry Summers will follow the right monetary policy. In 2005 I would have said the same thing about Ben Bernanke – the analytical god of unconventional monetary policy. Come 2013, I don’t think Bernanke has lived up to his mandate, and many of us have updated our priors.

That said, I think Ritholtz, Klein, and friends levy an unfair criticism of Summers. It’s always something about his choice of deregulation, or a bet he made at Harvard. Unfortunately one micromotive (an interest rate swap) correlates nothing to his macrobeliefs. That he’s “pro Wall Street” says little of his command of monetary mechanics. That he’s arrogant says nothing of his private maturity in leading the world’s most important institution.

Here’s a heuristic. Larry Summers has – for many people – been a hated man for a long time. But the criticism this time is just a carbon copy of everything that’s been said before. You would expect that there would be specific concerns for a specific job. But there aren’t.

That’s a two way street. The pro-Summers commenters also offer little in his support that couldn’t have been said in service of his appointment to the National Economic Council in 2009. That says a lot about the ambiguities of the rhetoric in his favor, and we need more recognition to this effect.

Larry Summers is an arrogant, Bob Rubin acolyte? What is new? Larry Summers is a brilliant man and an even better debater. What is new?

I would rest easy that we can’t go wrong either way, but I do not trust Barack Obama’s monetary acumen.

Wall Street is right: Janet Yellen has the edge

May 26, 2013
the Economy: Home and the World
1 Comment

Ed Luce is bullish that his old boss Larry Summers is the slight favorite in the race to head the Federal Reserve. This is a perplexing proposition, not only because it’s counterintuitive to everything we’d expect, but also because suggested criticisms against Summers (in short, arrogance) are really of no issue and obscure more legitimate concerns.

It almost goes without saying that Yellen is far more established as a academic and policymaker insofar as monetary policy. All we need is a quick Google search to see the extent to which this is (perceived to be) the case. As former Treasury chief and NEC chairman – and in general a brilliant academic – Summers is the more eminent personality: yielding 6,310,000 search hits to Yellen’s 467,000.

But change the query to “[Larry Summers/Janet Yellen] monetary policy”, Yellen comes ahead at 206,000 to Summers’ 131,000. Now I’m not suggesting this is a particularly smart way to judge scholarship on a subject, but it gives a very visceral sense of Yellen’s online footprint insofar as monetary policy is concerned. Moreover, Yellen’s hits are almost entirely pages that are really concerned with relevant policy.

Deriving from his comparative fame, even Larry Summers’ “monetary policy” search hits are of no relevance. At the top are links to his Wikipedia entry, a brilliant profile comparing Larry Summers and Glen Hubbard, something about healthcare, and firelarrysummers.blogspot.com. Now please don’t get me wrong. Summers’ is probably one of the smartest economic policymakers alive today and would make great choice for central banker. But Yellen’s history and deep erudition in this subject – as well as a functioning understanding that “full employment” is 50% of the Fed’s mandate, not just scribbles on a paper – are unquestionably in her favor.

But, his straw men considerations against Summers’ are more curious still:

Which leaves Mr Summers. I should disclose that I once worked for him (and that he writes regularly for the Financial Times) but I have not spoken to him for this column. People’s chief concern is rightly about his emotional quotient rather than his IQ. No one has any doubt on the latter. Since the Fed chairman’s job is to build consensus among sometimes fragile egos, Mr Summers’ abrasiveness would count fatally against him, critics argue. Such worries are exaggerated. Even if he has greatly mellowed in recent years, as his friends insist, charm is overrated. He would make a bad choice as a mediator in Syria. Fortunately, a Fed chairman faces lesser diplomatic challenges. The most important quality is intellectual leadership – something Mr Summers would offer in greater abundance than the others.

The only time the Fed Chair really has to deal with irrational babies is Congressional testimony. Indeed if Michelle Bachmann wins in 2014 said Chair will have to deal with some “fragile egos”. However, I can’t help but think Luce floats the “emotional” counterpoint only as a way to make light of other, real, worries (which I will get to later). I cannot imagine any FOMC member actually balking against Summers’ stature. Surely these are the most preeminent monetary economists of our age. To think that Summers’ emotions will get in the way of governance is remarkably absurd. (And seriously, as far as arrogance is concerned, does anyone think Larry Summers actually believes he’s that much smarter than, say, Narayana Kocherlakota?)

Which is why this op-ed is a highly biased argument. Luce is arguing against a straw man. Larry Summers’ felicity with debate is well-known. Indeed Ron Suskind in his Confidence Men speaks of Summers’ influence in the Obama administration in much a similar tone as Walter Isaacson does Steve Jobs. Persuasive men, the both of them, seem to be gifted with what Isaacson dubbed a “reality distortion field”. And, by the way, he doesn’t have much of a problem admitting when he was wrong. (Indonesia).

So clearly I think Summers is a gifted scholar. For one, it’s kind of funny Yellen’s experience in the central banking system is taken as a bygone conclusion, with far more emphasis on Summers’ “intellectual leadership”. The question is “to whom”. You take a few smart and relatively well-educated people. You put Larry Summers and Janet Yellen in a room with them. There’s probably a very good chance Summers would come out as the “more impressive” character.

But you take two, highly-competent economists, and I’m willing to bet they’re equally confident in Yellen’s intellectual leadership. Now let’s actually talk policy, for a second. I won’t dwell on this because Yellen’s monetary credentials have been discussed in great depth for a while. She’s the rare Fed Official who actually seems to realize that inflation targeting is a disaster, and has endorsed a nominal spending target in all but name. (Christina Romer, my preferred option, has explicitly supported the same).

I don’t even know Larry Summers’ opinion on NGDP targeting  – the hottest thing in monetary policy. It’s understandable for a standing Fed official to be muted on revolutionary policy changes. Indeed a single utterance can rock the markets. But it is curious that Summers has not in his astute punditry post-NEC discussed the option much, especially for a leading contender.

No doubt, Larry Summers strikes me as the guy that can read all the new literature on the topic in a night, and have a clearer opinion than anyone else over coffee next morning. But, just like the Google search hits, it betrays a curious hush on monetary affairs. In what capacity will Barack Obama choose Summers over Yellen?

And here, I submit, Ron Suskind gives us an answer. It is clear that over all the politics and drama in Obama’s first two years, the two men shared a special relationship, with deep mutual respect. Luce knows better than I whether Obama’s respect for Summers will play a more important role than past scholarship.

But I must disagree with Tyler Cowen. This is not a particularly insightful expose on Larry Summers’ chances at the Federal Reserve, unless I’m missing something big. Luce can tell us that Larry Summers’ emotions are fine, or that “worries about Mr Summers’ Senate hearings are also overblown”. Indeed. I like Luce a lot (his work on India is brilliant) but to generate an op-ed solely from the weakest presentation of criticism and ignore the repository of Yellen’s work, quipping “when Wall Street predicts something will happen in Washington, it is often wise to bet on the opposite” does not seem like the debating strategy his old boss would encourage.