The Wrong Narrative on Larry Summers

February 23rd, 2012 at 5:48 pm

So, a friend reasonably asks me how do I square this with this?

In the first doc, I recall that during my tenure with Larry Summers at the White House, he was an aggressive supporter of Keynesian stimulus, and I point out a few ways in which I thought Ryan Lizza’s otherwise fine New Yorker piece got that wrong.

The second link finds Noam Scheiber revisiting this theme of Larry as unwilling to up the Keynesian ante in early memos to the President-elect.  Again, the slant here doesn’t capture Larry’s views or his actions.  Numerous people who edited the memo judged the $1.8 trillion stimulus number on which Scheiber focuses to be implausible, and not just in optical and political terms, but in implementation and market terms.

The final memo that went to the President-elect makes this point: “To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion–which would likely not accomplish the goal because of the impact it would have on markets.”

For the record, I was not one of those who worried about markets in this context and neither was Larry—and from everything I’ve seen, we were right.  But this is teamwork, and knowledgeable members of the team wanted the President-elect to be aware of this caveat.

One final substantive point.  Keynesian economics is not as simple as measuring a hole and filling it up.  The implementation constraints I noted above were real, especially if you’re concerned with the capacity of the economy to absorb the stimulus in a useful manner, not to mention the requisite accountability in tracking the bucks.  And remember, there was a lot of other stimulus going on at the time, including monetary policy and in credit markets (TARP).  I’m not arguing that $800 billion was the “right” number, nor that $1.8 trillion was “wrong.”  But there’s more to this than measuring a hole.

I don’t mean to be in the business of defending colleagues every time someone takes a swipe, and btw, Larry and I found a lot to disagree about, including stuff like this and this (actually, what’s your take on the minimum wage these days, Dr. Summers—on board for an increase?).  But this narrative of Larry as anti-Keynesian is just flat out wrong.  His view, as he consistently expressed to the President-elect and later to the President, was this (from a December 2008 memo):

“The rule that it is better to err on the side of doing too much rather than too little should apply forcefully to the overall set of economic proposals.”

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12 comments in reply to "The Wrong Narrative on Larry Summers"

  1. foosion says:

    Implementation? Aid to state and local governments is easy to implement

    Market terms? The market has been a lot more rational than politicians. Also, if rates went up, we’d no longer be at the zero bound and conventional Fed policy would be available.


  2. The Raven says:

    I am beginning to think that Dr. Summers tells one story to his colleagues and another to his boss. :-(


  3. pjr says:

    My problem with Summers is captured by the words “To accomplish a more significant reduction in the output gap would require that a stimulus well over $1 trillion–which would likely not accomplish the goal because of the impact it would have on markets.” Most importantly, where is the economic analysis to support this claim regarding the impact that it would have on markets? An important claim like this is presented to the President based on what? Is the claim so likely to be true that the President shouldn’t be bothered with estimates well over $1 trillion? (And where is the magical cutoff point–why isn’t it at one-half trillion, or one and one-half trillion?) Is the claim so certain that Summers should tell the President that it’s impossible–not possible–to achieve a “more significant reduction in the output gap” so we shouldn’t think about trying?

    I don’t know that Summers was substituting his political judgment, or his political values or biases, for the President’s, but it sort of looks that way to me. Maybe he verbally explained Romer’s analysis to Obama and we don’t know this. Otherwise, my alternative is that he doesn’t quite grasp what it means to “speak truth to power.” It’s the whole truth, not just the parts that you like.


  4. Ken M says:

    “knowledgeable members of the team wanted the President-elect to be aware of this caveat.”

    But it’s not presented as a caveat — it doesn’t say “some economists think that this would likely not accomplish the goal because of the impact it would have on markets, although several of us (L.S., J.B.,C.R.) believe otherwise” — it makes a simple declarative statement of what appears to be generally shared economic wisdom, “which would likely not accomplish the goal because of the impact it would have on markets.”

    You say the $1.8 billion figure was suppressed not just for the optics or the politics, but because “Numerous people who edited the memo judged the $1.8 trillion stimulus number on which Scheiber focuses to be implausible, and not just in optical and political terms, but in implementation and market terms.” But you’ve just told us that you and Summers, and presumably Romer, didn’t buy the market argument. I assume at least Romer didn’t buy the implementation argument? What about you and Summers?

    You seem on your blog like very much a straight shooter, but your arguments here aren’t exactly making sense to me. The highest figure shown to Obama was $800-$900 billion. $1.8 trillion was needed to close the output gap. Some but not all of you had doubts about the ability to implement that. Fewer had doubts about market reactions. Yet not only was $1.8 trillion not presented, but nothing over 1/2 of that was presented, and it was flat out stated that anything well over $1 trillion would likely be shot down by the markets.

    You seem to genuinely believe that Summers was pushing the Keynesian stimulus as hard as he could, but your arguments really don’t get me there. I think either you need to reexamine your beliefs or come up with some more carefully considered arguments. I’d love to see the result, either way.

    Thank you.


  5. Chris says:

    My issue is that every time it’s leaked that someone from the administration was against larger stimulus, the response seems to be “No, I really supported larger stimulus.”

    If everyone was in favor of larger stimulus, why wasn’t the stimulus larger?


  6. Michael says:

    “For the record, I was not one of those who worried about markets in this context and neither was Larry”

    Then why was this idea presented as settled fact which constrains action?

    Part of what we know about Obama is that he pre-negotiates; he seems to be unable to take any stance as a negotiating position. The sentence in the memo above absolutely precludes a man like Obama from seeking the larger stimulus, because it implies that it would be physically impossible to implement.

    Talk about burying the lede here. If neither you nor Prof. Summers was advising on policy, then . . . who was?


  7. Tyler says:

    I would have liked to have seen a full suspension of the payroll tax, but that’s just me being perfectionistic.

    I think you all did a great job. We’re not in a depression – full stop.

    If President Obama can keep us out a recession until 2017, he’ll probably be the first president to have caused zero recessions during his entire presidency. That should be the goal.


    • Tyler says:

      Correction: If President Obama can keep us out of a recession until 2017, he’ll be the first president to cause zero recessions during his presidency since Reagan.


  8. Ron E. says:

    “The implementation constraints I noted above were real, especially if you’re concerned with the capacity of the economy to absorb the stimulus in a useful manner, not to mention the requisite accountability in tracking the bucks. ”

    There were no implementation constraints only political constraints. You figure out how many shovel ready projects you have. Add to that the amount of state and local government aid needed. Subtract the sum from the total output gap and that’s the amount of tax cuts you include in the package. The only reason you get less than that amount is because Ben Nelson and Olympia Snowe balk at voting for anything over $1 trillion because… well just because.


  9. MP Jones says:

    This all does seem to suggest Rahm said no. Not so much a debate, as the economists got whacked.


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