Lawrence Summers: Mostly Optimistic (FT)

The Financial Times has an interesting interview with Larry Summers. Like many of these things it contains way too much color from the writer and way too little in the way of hard commentary from the interviewee. Nevertheless, the author does manage to pry some interesting thoughts from Summers.

On how Obama views the crisis and its place in the larger scheme of things:

"The president made two things clear to us early on,” recalls Summers, who answers my questions in full, idea-packed paragraphs, rocking gently back and forth in his seat as he gets into the flow of an argument. “He would do what he had to to fix the banking system, to get the economy out of the rut in which he was inheriting it. But he had run for president to do long-run, fundamental things, like fixing healthcare, like having real energy policy, like reforming education. And we weren’t going to be distracted from those things.”

Obama’s most important political calculation has been this decision to press ahead on all these fronts at once – and the success or failure of his administration will rest largely on whether that was the right call.

That’s an interesting view of the scope of the recession. It implies a view that the recession is just that and not a singular turning point. That there is life after what we are now experiencing and that life won’t be much different, save for the fundamental changes the President wants to make.

Certainly, it’s at odds with a lot of other observers views of the impacts of the current economic dislocations. It would have been interesting to get more detail on why they discount the game changing nature of the recession.

Maybe he’s right. Politicians are if nothing else pragmatists and most people of that bent tend not to see events not so much as revolutionary but more as abberations that jiggle societies temporarily off of a long-term trend line. There’s probably no reason to expect that Obama would react any differently.

On the disimilarities between this crisis and the economic crises in Russian and Asia of the late ’90s.

"I don’t think I would quite accept the characterisation that we’re in the position that the Russians were in in 1998,” Summers says when I draw the comparison. “The crises that we addressed during the 1990s internationally, in almost every case, took the form of a foreign lack of confidence in a country that led to a mass withdrawal of funds and made reassuring foreigners the central priority. That’s why interest rates often had to be increased. The American problem this time has more in common, at least qualitatively, with the Japanese post-bubble problem, where the issue was not reassuring foreigners but maintaining sufficient domestic demand to push the economy forward.”

He does, however, concede that fire-fighting feels different when it is your own home that is alight: “There have been moments, certainly, when I understood better some of the reactions of officials in crisis countries now than one was able to from the outside at the time. It is easier to be for more radical solutions when one lives thousands of miles away than when it is one’s own country.

I agree with Summers on the differences among the events. I did find the admission of a bit of humility refreshing.

Finally, Summers admits that the worst might not be over for the economy — more jobs may be lost and GDP may not yet have reached its nadir — but the panic phase has passed and he isn’t in the camp that believes the American economy will enter a phase of perpetual low growth:

This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-oriented”; “more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented”; and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift.

Summers admits that this rosy scenario depends on a lot more than the White House. Foreign policy watchers have tended to focus on the security issues this administration faces – the wars in Iraq and Afghanistan, the challenges of Iran and North Korea’s nuclear ambitions. But Obama’s most important international assignment may turn out to be coaxing the rest of the world into accommodating this reshaping of the US economy.

As Summers puts it, “The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.” On this possibility, Summers is bullish. “The very great enthusiasm for accumulating reserves that one saw globally is likely to be a smaller factor over the next decade than it has been in recent years,” he predicts.

That’s a big helping of change particularly in an environment in which the existing economic base you would be building upon is less than stable. It reinforces the point that I made after the first excerpt that Obama and company regard the current recession as transitory.

The change they envision would be difficult in the best of worlds and inevitably lead to less than trivial economic dislocations in a strong environment. To attempt to accomplish their goals in a period of economic distress risks could easily make it more difficult to get back to some semblance of normal. It sounds like a prescription for an extended period of economic flux at best.

It may well be that the current recession is not all that bad of a thing from their perspective. Change as they perceive it might be more welcome in a stressed population rather than one in which the majority enjoys relative comfort and confidence. No one is more open to new ideas than a man or woman whose life is crumbling.

It will be interesting to see if Obama can play this situation to his advantage of if once the country gets a whiff of solid recovery its openness to a radical economic makeover wanes.

Comments

[CautiousInv...:]

"This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-orie... “more bio- and software- and civil-engineering-orie... and less financial-engineering-... and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift."
______________________...
Other than hope and wishful thinking, there is little to suggest this will be the outcome and market economists such as Rosenberg, Mauldin, Gross and El-Erian present a much more compelling case for a new normal which is very much at odds with the economic picture painted by Summers.

From a policy perspective, it's truly puzzling that the stimlus package does not contain more to foster the economic future that Summers envisions. Recognizing a paradigm shift, more should have been done help with expanding trade and investing in real infrastructure.

Unfortunately, though, "haphazardly inconsistent" best defines most of the policy responses beginning TARP.

Jul 12 11:20 AM

[whidbey:]

"...he isn’t in the camp that believes the American economy will enter a phase of perpetual low growth:"

Summers is the hand maid of hell. He has an ego that prevents him form seeing the weakness in what has been done, or the possibility of a major failure in Global economies this fall. His concessions are part of his egomania, but they are not evidence of sanity. The Obama economics team is living a fantasy in which they change health care and save small business, change energy policy and lead the world, change tax policy and cure the deficit. All clumsy dreams that delight the left in major universities. Such people have never run anything. Yet, we treat them as if they are rational, well informed ad visors. WE only have a few months to sort this out and nothing has changed since the man's election except time has passed.

Jul 12 09:09 PM

[Old Trader:]

"Finally, Summers admits that the worst might not be over for the economy — more jobs may be lost and GDP may not yet have reached its nadir —"

Interesting that first Biden, and now Summers allow as how the administration gravely misjudged the gravity of the situation.

Jul 13 08:49 PM

[W.E. Heasley:]

Summer's ego is way to big for the Recall of the Stimulus Package. Its all about damage control at this point.

However, the Stimulus Plan needs recalled. Design of the Stimulus Plan is dismal.

Milton Friedman would have a field day.

Jul 14 12:38 AM