Last Monday I had lunch with Larry Summers. Well, to be precise I and 249 politicians and business people attended a luncheon sponsored by Jack Mintz of the U of C School of Public Policy. Larry Summers was the keynote speaker. The event was both informative and weird.
Starting with the informative part (we’ll get to the weird part in a minute), Larry Summers is a titan in the world of economics (hard to believe a discipline Deborah Yedlin* characterizes as a “dismal science” could grow its own superstars but apparently anything is possible if you narrow the field sufficiently). Summers’ many achievements include stints as the president of Harvard, US Treasury Secretary under Bill Clinton and President Obama’s key economic advisor.
Summers is in high demand as a keynote speaker–not only does he know a lot about economics, he can explain it clearly. Always a plus when the audience includes formulaically challenged individuals such as myself. Give it to me in words or don’t bother.
Summers’ key message was this—the US economy is in big trouble. While he didn’t put it quite so bluntly, his comments lead to that inescapable conclusion, viz** the US economy is not out of the woods yet and needs another 4 to 5 years to recover. Furthermore, even if the economy pulls up out of its nosedive its existing financial structure is not sustainable. If the US is to survive it must adopt a new financial strategy and Summers was prepared to share it with us. Ahh, this is what we’ve all been waiting for.
And this is where it got weird.
Summers said:
The economy won’t grow unless people and corporations stop hording cash and start to spend. Okay, I understand that corporations are not doing the economy any favours by refusing to reinvest their $2 trillion stash of cash in manufacturing jobs and research and development, but I’m not clear why encouraging consumers to spend on useless gadgets and houses they can’t afford gets us anywhere other than deeper in debt.
Cap government spending. Summers urges government to focus on the services it performs well and privatize the services it performs poorly. This sounds good on paper but is a veritable hornet’s nest of conflicting priorities and political agendas. It’s success depends on a clear non-partisan approach to the problem…in the US? Good luck with that.
Reduce healthcare costs, on the public and private side. A spending reduction plan for healthcare, in the absence of a plan to clean up healthcare fraud and abuse is worse than useless. Last year the US Department of Justice collected $2.4 billion in fraudulent health claims from healthcare providers and suppliers against Medicare and Medicaid.***But Summers is right about one thing—you can’t cut spending in the public sector without also cutting spending in the private sector or the public sector doctors will simply move over to the private sector. I can’t wait to see how the private healthcare sector and their political supporters react to this one!
Older people must keep working. No surprise there. Social security benefits aren’t enough to sustain the elderly through their golden years—but realize this, Summers said, the job that an old person retires from (when he finally retires) may not be his “career” job. This is economics-speak for: old guys will be pushed out of their corporate jobs when they’re “too old” to function profitably and they’d better be prepared to become Wal-Mart greeters because their social security benefits won’t tide them over.
Summers didn’t address the other side of the coin which is just as pernicious. If the old folks stay in their jobs, they’ll block the career paths of the youngsters who are trying to get a grip on the first rung of the corporate ladder. The young have 2 choices: stay in school (and run up even more debt) in the hope that things will improve in 2 years or settle for a lesser job and become part of the discontented generation.
Deal with the 99%. Summers pointed out that the wage disparity between the 99% and the 1% is growing exponentially. The fact that he recognized this at all signals a blossoming awareness on the part of the ”establishment” for the growing unrest in the nation. Unfortunately Summers’ solution—a low broad tax applied to everyone—leaves a lot to be desired. What happened to Warren Buffett’s progressive tax idea with higher tax rates for those with higher incomes?
“It’s weird.”
Larry Summers strategy is weird because, for all of his education and experience the one thing Summers failed to consider was whether the underlying structure of the US economy was still sound. Common sense would have you ask: What makes an economy grow? Are these growth mechanisms still functioning as expected? What happens if they fail? Think about it—how can economists ever hope to fix the economy if all they can tell us is what happened, but not why it happened.
This was the conundrum faced by Fischer Black, a colleague of Summers and another giant in the world of finance (he co-authored the Black-Scholes option pricing model).
The Wall Street Journal asked Black to comment on why the stock market crashed so spectactularly on October 19, 1987. He responded with the conventional wisdom—the investors had decided that the market was riskier. Yes, but why did the investors decide the market was riskier on that particular date? Black’s response was delightful: “It’s conceivable that a change in the well-informed forecast of future economic events moved the market as it did…on the other hand, it’s pretty weird”.
His mother was appalled. “Fifteen years of education, three advanced degrees, and all you can say is ‘it’s weird’?.”****When it comes to Larry Summer and the quality of his economic strategy, I’m with Fischer Black’s mother. That’s it? That’s all you’ve got?
I fear that the academic world of economics (formulas and rules) has squelched creativity and initiative and that Larry Summers and his colleagues are caught in the trap of conventional wisdom. This will surely lead us astray unless we find a way to encourage fresh perspectives from bright young minds who are prepared to look at the world as it really is and not as the economists would like it to be.
*Calgary Herald, Feb 14, 2012, D12
**from the Latin “videlicet” meaning “that is to say” or “namely”. I’ve been dying to use it in a sentence, what better place than in a post about the titan of economics, Larry Summers!
***Association of Corporate Counsel Newstand, Poyner Spruill LLP, Feb 1, 2012
****The Myth of the Rational Market, A History of Risk, Reward, and Delusion on Wall Street by Justin Fox, p 231. See also p 328.
Susan on the Soapbox 
I am sure many people consider Lawrence Summers a Titan in economics. In a country where Newt Gingritch is considered a serious presidential candidate and people like Rush Limbaugh, Glen Beck and Ann Coultier are considered serious journalists, anything is possible.
Lawrence Summers, beggining in the Clinton administration, was the architect of the Futures Modernization Act which ended the Glass-Steagall act of 1933 that had been implemented to end speculation and abuses by banks and financial institutions. Summers’ Act deregulated the industry and caused the 2008 debacle. He was brought back by Barack Obama maybe because after all only a crook can understand the rest of them in Wall Street and the banking industry. I believe that in the not too distant future some of these people will be forced to face reality and maybe even the law. I certainly hope so.
That these people are received in Calgary as Titans of anything does not surpise me, afterall these people exist in environments where being a crook is the price of doing business. He plays the elite game very well and it seems that he has also received kickbacks from his friends in the Financial world.
I will not make any comments about some of the details of his message because frankly it feels like making comments about the peacefull ideology of Geoge Bush. People like Lawrence Summers do not deserve our time spent even in blogs.
http://www.democracynow.org/2010/9/22/could_summers_departure_herald_a_new
http://www.truthdig.com/report/item/20090407_robert_scheer_april_8_column/
Carlos, you raise an excellent point in your reference to the Glass Steagall Act. It was put in place after the Great Depression to prevent banks from taking on too much risk by getting into the brokerage business. The repeal of the Act effectively removed the barrier between commercial and investment banks and created real opportunities for conflict of interest.
Larry Summers was asked in the Q&A session whether the repeal of the Act was partially responsible for the financial crisis of 2008. He said no, the Act had been repealed in 1999 well before the financial markets crashed. This was a very coy answer. Another perspective (mine actually) is that it took the financial institutions that long to figure out how to take full advantage of this lack of protection before they wreaked mayhem on the rest of us.
Thanks for the links Carlos…they’re well worth reading.
Links to Larry Summers gimmicks are everywhere. One just have to like reading them. Of course one has to be careful with what one finds but the sources are good and reputable.
You are absolutely right about the time gap between the implementation of the Modernization Act and when trouble actually started, but that is the name of the beast. In today’s world if not ever, people that live on finding loopholes and ways to circunvent the law need time and expertise to do it and of course find those who are willing to get money under the table and join the bandwagon. The idea that we are higher consciousness animals is just that, a nice idea. We are the highest level predators on this planet and the examples abound.
Here is a link that came on today and that maybe some of you may have already found it. It is interesting reading.
http://www.tnr.com/article/politics/100961/memo-Larry-Summers-Obama
Thank you
Carlos Beca
What’s really wierd is that these gurus with The Answers never tell us what the question was. What problem will this answer solve? If Summers’ answers were to the question about the survival of the US – is that all there is to hope for? Or is it worth hoping for, without some conditions?
(The “$2.4 billion in fraudulent health claims” against publicly funded health care is the unsuccessful-because-caught fraud so tempting to private-market US-style-entrepreneurial health care providers; those who were more sophisticated didn’t get caught. This is what we want to survive?)
Rephrasing Oscar Wilde, this economist apparently knows the price of everything and the value of nothing.
I agree, Susan; and would add as well as bright young minds who are prepared to look at the world as it really is, we need young and old minds to look for the world we really want.
Carol, what intriguing questions and surely the root of the problem. Justin Fox, the author of The Myth of the Rational Market, says that the academic approach to finance adopted by people like Summers (and incidentally Jack Mintz whom Summers speaks highly of) created rules for everyone to follow. His point is that rules are OK to supplement individual judgment but should never replace it because the result will be “mindless conformism”. He ends his book by saying that fostering mindless conformism is the gravest sin of modern finance. I like your approach, instead of wasting our time answering the wrong questions, let’s get the bright young and old minds to ask the right questions and create the world we really want. There’s an election coming in the spring…that would be a good start! Thanks.
Being one of the little people I never even consider solving the “world’s financial problems” I, like the Egyptians, look at the world’s financial problems much like the construction of a pyramid. Take it one block at a time.
My husband and I have recently been planning a trip to Europe and putting all the costs on our credit card to accumulate the air miles for the next trip we take. In receiving our credit card statement, there as a footnote to promote better personal financial management were the words “If you make only the Minimum Payment each month, we estimate it will take 96 year(s) and 11 month(s) to fully repay the outstading balance.” Lets see, that would make me roughtly 154 years old, works for me.
If this was not so sad, it would be funny. There are millions of people who actually can only afford to pay the minimum payment and it is all the bank’s fault. We have lef our population get into this mess and it is time to help them find a way out and I suggest it be by actually centralizing all banks, finance companies and money lenders so everyone know that a potential customer is up to his eyeballs in debt before they lend them more money.
When you buy something with a credit card, you very rarely look at the price because you do not actually hand over any money. The time has come to put a face on each and every dollar bill that leaves your wallet. Accountability for our actions is a start but it needs to be shored up by the financial institutes.
Rose Marie, you’ve put your finger on one of the reasons we’re in this mess…the consumer doesn’t seem to understand that buying something on credit is not the same as paying cash and that one day he might have to actually pay for this item. The banks don’t really care if they don’t get paid in full. All they want is a little guy who is a good credit risk who will continue to pay the minimum amount toward the balance. That gives the bank an asset which in your case is good for 96 years and 11 months (wow!). That’s why centralizing the process won’t get us all the way there–the financial institutions don’t look out for the foolish borrower, they’re happy to load him up with debt if they can characterize it as an asset on their books. Don’t you love the strange world of economics and finance.
Carlos: I checked out the other Larry Summer’s link you sent along. The most telling statement in the article was this: “…Romer was reluctant to second-guess Summers on political questions in light of his imposing government résumé. She protested, but dropped the matter when Summers held firm.” What a clear indication of how these so-called experts get us into these jams. It’s really time for the rest of us to say this makes absolutely no sense and it’s time to come up with a new model. We desperately need those bright young and old minds Carol was talking about earlier.
Thanks everyone.
I just finished watching ‘Margin Call’ last night with my wife Eryn (excellent movie by the way). What a thought-provoking, brilliant bit of movie-making (as well as depressing and infuriating).
One thing always comes to mind whenever I see or read piece on the debacle that was and continues to be our most recent ‘economic melt-down’: the fable of ‘The Emperor’s New Clothes’.
In the real world the little boy has cried out; now, what are we all prepared to do about it?
You nailed it Norm, these experts (and I don’t doubt they have lots of education and experience) are trapped in their own world view. It’s what they know and it has created a very comfortable life for them so there’s very little incentive to change. The important thing is how we answer the question you posed: what are we all going to do about it?
Let’s start right here and right now. So let me introduce you to the others. Norm, meet the people. People meet Norm Kelly. NORM KELLY IS THE ALBERTA PARTY CANDIDATE FOR CALGARY CURRIE. He’s taken a stand and is working for change. OK people over to you…what are you going to do about it?