Friday, January 9, 2009

Raison d'etre

This blog is written by Ph.D. students in economics at top 40 Ph.D. institutions and is devoted to seeing to it that President-elect Obama fire Larry Summers and cease using him as an economic adviser. We bear no special ill will toward Larry Summers, but American Economic Policy is too important to be left to someone who has been consistently wrong on fundamental policy issues in the past 20 years. His errors in both policy and in his academic writings are correlated with his ideological bent toward market fundamentalism. Given the special opportunity that this crisis presents to realize a better America, it is vital that the new administration not include Larry Summers.

Among his historic policy transgressions are:

--Espousing market fundamentalist solutions to the Asian financial crisis in 1997, and prescribing raising interest rates and balanced budgets in the face of a crisis, and taking on loans to defend over-valued currencies (something the IMF is incredibly doing once again in Estonia...). This includes helping to force a balanced budget amendment on South Korea.

--Pushing capital market liberalization in developing countries without recognizing the danger of opening up to hot money. Proving this policy is now discredited, Larry has backtracked and said he "never" pushed capital market lib while at Treasury, although his underlings "may have" -- this is an outrageous lie, he *did* push capital market lib and so did those under him, but it proves he now realizes he was wrong and wants to cover this fact up. (See Paul Blustein's excellent book The Chastening.)

--Pushing financial deregulation for the US while at Treasury.

--His research in the 1970s which showed (and presumably he believed) that business taxes are what caused the stock market's dismal performance in that decade. In the model he liked to use, reducing the capital gains tax increases the steady-state capital stock greatly (and, in that model, should also increase the value of equities). Given this, he pushed for reductions in cap gains in the late 1990s, despite the regressive nature of such cuts and that they helped fuel the speculation in equities in the late 1990s. Bush has continued to cut cap gains, but the market just didn't react the way Larry's model suggested.

--Lecturing Gray Davis on how California's regulatory framework caused the California energy crisis. In fact it was Enron traders, a point which was obvious to other economists (hat tip to Paul Krugman -- see his recent blog entry and column during the crisis).

--Telling the Chinese how stupid they are for holding all those US T-Bills, undervaluing their currency, and for imposing capital controls. As it turns out, of course, in the face of a large-scale financial crisis, a mountain of T-Bills tend to come in handy... And having the yuan undervalued hasn't seemed to hurt China's growth much. (See Dani Rodrik's latest: ).

On the other hand, we do NOT! think that Larry Summers is necessarily sexist. In his comments at Harvard, he did not say he thought men were smarter than women on average, he just said that it should be studied whether there are fewer women in the sciences because the tail distributions of the abilities of men and women are different, an empirical point. However, it is clear from his comments that he thinks genetics are more important than culture, and here, too, we think that while he is not necessarily sexist, he is dead wrong. The decision of what profession to choose is deeply cultural...Also, we do not think that Larry Summers deserves blame for the tawdry Shleifer affair (although all economists should read this:; nevertheless, his colleagues did give terrible advice during the Soviet transition to capitalism. The policy brief he signed which suggested that Africa is "deeply under-polluted" for its level of development was also blown out of proportion, as it is at least possible that letting rich countries send their pollution to Africa for money could be a good idea, however heinous it may sound. And Summers will always retain a special place in our hearts for his infamous smackdown of the worthless RBC model, a paradigm which amazingly dominated the field of Macro for a generation despite its inability to say anything about recessions -- in other words, nobody really thinks that the current crisis was a rational response to a technology shock.

Hence, it is only his record on policy matters which led us to become concerned about Summers' key role in the incoming Obama administration -- he was always on a very short leash. This concern came to a head when details about Obama's stimulus package were announced, revealing key problems in both the size and the nature of the package. The size of the package is the same as that proposed by Martin Feldstein, or roughly $400 billion/year for the next two years, when the output gap requires something in the neighborhood of twice that. The other problem is that the stimulus is laced with regressive corporate tax cuts, which have historically been a favorite of Summers. We once thought that *we* were all Keynesians now... Perhaps not.

In addition, since we are untenured, the blog will remain anonymous. If you are a tenured faculty member, then let us know if you would like to join the ranks of those who support the statement: "President-elect Obama, it is my professional opinion that you would do better without the advice of Larry Summers."

Update: Commenters have taken issue with the pollution in Africa comment. While I see the point, what if the US were to give Africa 6 trillion USD to take all of our trash? Polluting africa is bad, of course, but if it could alleviate starvation and pay for medical supplies and schools, then it would at least be something worth looking into... On the other hand, if rich countries are giving poor countries peanuts in order to pollute, then it's despicable. The morality lies in the details...

Later Update: OK, I'll confess I don't know that much about the background/intent of the Summers Africa comment, but I hereby commit to researching it since that's what's drawn the discussion!


  1. I'm down with this all, except the under polluted Africa comment. Why societies become prosperous, strong, and stable within the current context is definitively not because they produce pollution. That is what we call a 'by-product.' I find the suggestion that polluting Africa for money to be quite despicable. However, I (as an analyst in a think tank) am generally on board with all of this. Can't wait for the next post.

  2. The polluting africa memo was clearly a joke, and an interesting one at that, in that it showed how silly a purely economic analysis can be. His policy preferences regarding regulation, taxation and capital liberalization are real and serious issues, though, and enough to give him the boot.

  3. On the African issue ... it wouldn't help an African nation any more than having oil to sell has been a tremendous boon to Nigerian development or a wealth of a variety of minerals including easily exploited diamonds has been a tremendous boon to the DRC ... confer the Dutch disease, or at the European Tribune the Anglo Disease, for part of the problem, but another major part is in the political economy of dependency on export earnings to such a great extent that access to a share of external earnings is sufficient for a national political elite, and ongoing domestic economic crisis is not a pressing concern.

  4. Hey Thorstein. I just read about you here. Anyone who pisses off Greg Mankiw for receiving attention deserves more attention. You're on my reading list.

  5. The point about California's regulatory framework (not) causing the energy crisis is only partially right, and I'm not convinced that the abilities of the respective sexes hew to the undergraduate course catalog, but otherwise, keep on keepin' on.

  6. Here is another Summer's disastrous policy role you may want to add to your list. While this post from Yves Smith's blog "Naked Capitalism" focuses on Geithner, Summers was his boss in this debacle. The full post, well worth reading, can be found at:

    The part tying Summers to Geithner and the policy disaster:
    "After all, a previous “public service” role, Geithner was the lead negotiator for the WTO’s General Agreement on Tarrifs and Trade for financial services. In this role, Geithner reported to Larry Summers, who in turn reported to Secretary of Treasury Robert Rubin. In 1998, this team won the banks EVERYTHING they requested from that treaty. From open access to new markets to unrestricted growth in equity and credit derivatives, they opened the door to rapid and deregulated growth of the large multinational banks, allowing them to become “too big to fail”. Moreover, the terms of the agreement has made it almost impossible to put the “too big to fail” genie back in the bottle without running afoul of rules of this international agreement. That was the work of Geithner as “public servant”."

  7. This is God's work. We're living in the storm surge caused by his arrogance. We'd all be better off had Rubin, Greenspan and this guy had never been allowed near the treasury. He lost nearly a billion dollars for Harvard alone and probably many many times that indirectly through his 'advice' to Clinton.

    At least show some contrition, realize you do more damage than good, and stay away from anything important.

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