Larry Summers In Demand For His Economic Insights? That's a Laugh
"Larry Summers believes that less fiscal austerity is the low-hanging fruit on stabilization and full-employment policy right now." - Brad DeLong, Wall Street Journal, July 31, 2013
The late William F. Buckley famously observed that he would take being ruled by the first 100 names in the Boston phone book over the faculties at Harvard and MIT. Full of book smart people with nosebleed IQs, the simple truth is that professors are the people who can't.
The above is particularly true when it comes to something as basic as economics. Economics is ultimately about growth, and growth is as simple as removing the tax, trade, regulatory, and monetary barriers to production. Put more simply, tax and regulate as a little as possible (taxes penalize work, regulations simply don't work), allow individuals to trade and invest their surplus with others irrespective of country, and provide them with a stable currency to measure and maximize the former. If you do that, you have stupendous growth. No numbers are needed.
All of which brings us to one of the most comical lines ever written on the front page of the Wall Street Journal. Though the newspaper is an increasingly lively source of information on all manner of subjects from business, to sports, to arts & entertainment, the front page has remained somewhat sober in its reportage. Sure enough, what was comical to this reader was presumably not meant to be funny despite it surely eliciting laughter from a high number of the Journal's sentient readers.
Specifically, last Saturday's edition, in an article about Harvard professor Lawrence Summers, noted that the Fed Chairman hopeful "has seen his views on the global economy, policy, and markets come into strong demand" since returning to the private sector (from the Obama administration) in 2011. When the laughing subsided after reading the latter I was reminded of the always wrong economists at Goldman Sachs in the ‘90s. Clients of Wall Street's foremost investment bank were known to keenly follow their research in order to profit from betting against it.
One might at first assume something similar is at work with Summers. That's the case because at least his modern economic analysis is rather devoid of insight.
Readers could doubtless point to so many examples supporting the above contention, but in the interest of time and space, it's best to touch on a few examples from the last several years. In January of 2008 Summers wrote in the Financial Times that renewed economic growth was as simple as "a $50bn-$75bn package implemented over two to three quarters [that] would provide about 1 per cent of gross domestic product in stimulus over the period of its implementation." More specifically, Summers was calling for Washington to distribute rebate checks to the citizenry in order to allegedly stimulate demand.
What's comical is that a simple analysis of the professor's musings reveals that rebates would logically restrain growth. That's the case because economic growth is about production of something desired by the marketplace, yet Summers was calling for no such thing. Instead, he was seeking a redistribution of wealth from one set of hands to another. There's no new production to speak of and surely no new demand, just a shift of demand by government force.
Importantly, the story gets worse. Empirical evidence is pretty clear that the rich account for the majority of federal tax revenues, so any rebates paid are going to logically result from society's most productive being fleeced so that its least productive receive checks. The incentives of Summers' plea for growth were more than backwards; raise the cost of work for the wealth creators while cushioning indolence among those who are least economically productive.
Keynesians reading this are doubtless seething, screaming that the poor and middle class are more likely to spend rebate checks, thus the purpose of forced wealth redistribution, but even the latter doesn't stand up to the most youthful of scrutiny. To put it plainly, no act of saving subtracts from demand. Banks don't accept deposits (liabilities) so that they can sit on the money; instead they offer interest on deposits so that they can take the funds deposited and turn them into loans (assets). Money saved never sits idle as much as it serves as capital for market-disciplined banks to lend out to entrepreneurs and those with immediate demands.
Thinking about the above, if we ignore how very much banks have become coddled supplicants of the political class, including Summers, they're far more likely to lend out monies saved in an economically stimulative way than governments are. Wasn't it Summers himself who once wisely uttered something along the lines of "government is a bad venture capitalist"?
Moving to Barack Obama's presidency, despite persistently weak economic growth amid massive government spending ‘stimulus,' Summers remained a cheerleader for same. This first revealed itself when he served Obama as director of the National Economic Council. Spending advocate Christina Romer confirmed this to Confidence Men author Ron Suskind. Romer recounted to Suskin that once Summers fully came on board with her failed notions about government spending ‘stimulus,' "[Larry and I] really started to have a decent working relationship."
Once back in the private sector, Summers' support for government spending became, if anything, even more strident. As he put it in the Financial Times last fall:
"Barack Obama has recognised the inadequacy of demand as the main barrier to growth and sought to bolster both public and private sector demand since becoming president. Recent work by the International Monetary Fund has confirmed the premise of his policies, namely that at a time when short-term interest rates are at zero, fiscal policies are especially potent as multipliers are larger than normal. "
Summers then added, falsely (Romney believed in the spending stimulus lie almost as much as Obama did), that:
"Mitt Romney, in contrast, supports immediate efforts to sharply reduce government spending even as economic slack remains..."
Ok, so this supposedly wise economist believes that economic growth is enhanced when money is taxed and borrowed away from Apple, Intel, and Google, and John Malone, Fred Smith and Jeff Bezos, so that government can dole it out. To be explicit, Summers believes that penalizing the most productive individuals and businesses all the while reducing the amount of investable capital (no entrepreneurs without capital, to quote Schumpeter) is the path to economic growth. Sorry, but that's what government ‘stimulus' is.
And it once again doesn't increase demand. It merely shifts it from the productive to the indolent; government serving as the venture capitalist backed by guns if the productive prove reluctant to hand over their hard-earned funds. Taking the absurdity of Summers' views even further, governments don't even create jobs.
The latter is surely difficult for romantic Keynesians to swallow, but it's really very simple. Governments don't have any resources. What they have to spend is a function of what they extract from the private sector first. Keynesians like Summers believe that government spending creates economic growth, but they get it exactly backwards. Government spending doesn't make us a prosperous and growing country, rather our federal government can spend nosebleed sums precisely because we're a prosperous and growing country. Big difference.
Looking at government spending, yes it ‘creates' jobs, but only insofar as the private sector hands it the revenues to do so. The private sector creates ALL jobs, yet the naïve lie that is Keynesianism is rooted in the belief that wealth springs from the very government whose wealth is solely a function of how productive is the private sector.
Notable about Summers is that while he has many detractors, some at least give him a pass for apparently not being as sympathetic as is Janet Yellen to the perversion of money that is "quantitative easing." Not so fast.
Summers has said that "there is less efficacy from quantitative easing than is supposed," but the latter is rooted in Keynesian worship of "aggregate demand." Summers believes that inflation results from too much demand, and since he thinks QE won't stimulate demand, that it's not inflationary. Where does one begin?
The main thing to point out is that demand is not inflationary despite what you read and hear. Demand is matched by production, or better yet we can only demand insofar as we produce first. If readers don't believe this, as in if they doubt the tautology that their supply is their demand, they need only cease working and see what they get for doing so. Unless the feds redistribute demand from others in the form of welfare checks, or charities do the same, or if they have productive friends who will hand to them the fruits of their labor for nothing, they will starve.
Inflation is not a function of too much demand simply because the latter is logically a function of commensurate supply. These things match. If demand were inflationary, then it would certainly be true that the ‘80s and ‘90s, when the U.S. economy boomed, were inflationary. In truth, the dollar was strong, a strong dollar feeds productivity gains, and a surge in demand (remember the ‘Decade of Greed') was naturally matched with a surge in supply.
Inflation is always and everywhere a function of currency devaluation. That's why QE hasn't boosted the economy, and it's also why the stock market (a forward looking indicator of growth) has rallied amid growing rumblings from the Fed that it will eventually wind down its QE program. Summers wasn't so much against QE as the deluded Keynesian in him labors under the absurd belief that demand doesn't result from supply.
All of which brings us back to the comical report from the Wall Street Journal about how the views of Summers have been very much in demand. Oh please. No reasonable investor would want to be ministered to by someone whose views are so impressively divorced from reality. Of course it's not due to Summers' ‘insights' that he's so popular on Wall Street.
Instead, it has to do with something far more basic, and touched on in Suskind's Confidence Men. In it, the author wrote of the $16 million paid to Rahm Emanuel during his brief stay at investment bank Wasserstein Perella; this despite Emanuel having no business experience. Of course, as a finance type explained to Suskind, Emanuel wasn't being paid for his business acumen. As he put it to the author, "Paying someone who will be a future government official a lot of money for doing very little? On Wall Street we call that an investment."
And there you have it. Larry Summers is surely very book smart, probably is great at crossword puzzles, and would likely be a wonderful Trivial Pursuit partner, but as evidenced by his views on what drives economic growth, his thoughts on the economy and markets are only useful insofar as a wise investor would bet against the forecasts of the Fed hopeful.
But that's not the point. Per Emanuel, Summers is an investment. Skillful at the government game, investors have long assumed he would eventually return to government; his name on the short list for Fed Chairman evidence that their investment may pay off. The latter is tragic to say the least, but it at least explains why someone so devoid of insight could have such a large bank account.