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.
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?
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.
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.