The Consummate Courtier

The lengthy profile of economist Lawrence Summers by Eric Levitz in New York Magazine’s “Intelligencer” feature concludes with this passage:

Ironically, if the left’s most cynical reading of Summers’s career is correct — if his ideological evolution traces shifts in Washington’s balance of power, not changes in available evidence — then his analysis would merit little more criticism than the reading of a weathervane. In a world where the views of “insider” economists bend with the political winds, tomorrow’s supply of progressive policies will be determined by the strength of demand.

I’m not entirely sure whether the profile is intended to be a defense of Dr. Summers, an indictment of him, or an objective analysis. I have three observations about the piece. First, the Biden Administration would be much better off with Dr. Summers pissing out than with him outside pissing in.

My second observation is that it supports a point I’ve made here from time to time:

The lone D.C. outsider on Obama’s team, the economic historian Christina Romer, had calculated that nothing short of $1.2 trillion in deficit spending could fill the gap in private demand. Yet Summers, the master briefer, had final authority over the team’s memorandum to the president in December 2008. He left Romer’s proposal on the cutting-room floor, opting to make a $890 billion stimulus the president’s most ambitious policy option. Thus, Summers personally ensured the inadequacy of the administration’s fiscal response.

This narrative is not entirely fair. Judging by subsequent accounts from both Summers and Romer, Obama’s NEC director favored $1.2 trillion of stimulus spending on the merits but believed that a trillion-dollar package would be dead on arrival in the Senate. Given that Summers ultimately recommended an $890 billion stimulus — only to see the White House propose just $775 billion and Congress authorize $787 billion — his presumption that politics placed a hard cap on the package’s size looks plausible, in retrospect.

while my third observation is related to it. I would suggest that we consider the possibility that the reason for the failure of the ARRA to provide stimulus for the U. S. economy sufficient to pull it out of the doldrums in which it found itself after the end of the 2008-2009 recession was not that it was too small but that while Dr. Summers and other economists weren’t looking the U. S. economy had changed to the point where convention “pump-priming” stimulus was no longer effective.

Imagine a completely closed system. Everything within it including heat, air, and so on stays within it. Now imagine that system is exposed to the exterior. You apply heat and it may get a little hotter for a while but ultimately the heat radiates away. Air leaks out. And so on. That’s a simple model of the difference between an economy which exists almost entirely within our shores and a globalized one. Stimulus stimulates the economy all right—it stimulates the U. S. economy, the German economy, the Chinese economy, the Indian economy, and on and on. There is little or no Keynesian multiplier because increased consumption (and rising prices) does not incentivize increased production in the United States.

Now the secret to stimulating the economy resides in increasing production more directly, with fewer regulations or incentives or outright trade barriers to goods produced outside. It’s not your grandfather’s pump-priming any more.