Jim Glass on Larry Summers

My commenters are much tougher on Larry Summers than I am.  Here’s Jim Glass discussing a quotation from the recent DeLong and Summers paper:

We presume … the central bank is unable or unwilling to provide additional stimulus

Shame on Larry Summers. He was the #1 econ person in the Administration through the critical time — with the levers of power in his hands — and by all accounts seen so far, his own and others, he did nothing whatsoever to make the Fed willing to provide more stimulus.

There were two empty seats to fill on the BoG and the Dems had a 60-seat filibuster-proof majority. He could have told Obama, “Fill those seats with appointees who will vote for additional stimulus, students of everything Bernanke said about Japan.” He could have made the Fed willing to provide more stimulus, it was his job to do that — but he did **nothing**. [1]

To me this is impossible to fathom. He didn’t want those seats filled? How does one avoid thinking he advised Obama to *not* fill those empty seats? Why?? (I don’t want to indulge my cynical imagination here). I don’t see how this is so different from if Truman had left two seats of the Joint Chiefs empty during the Korean war. How is this not dereliction of duty?

If the Fed was and is unwilling to provide enough stimulus during this recession, the #1 largest identifiable reason is: Larry Summers.

Now he writes: “We presume the central bank is unwilling to provide additional stimulus”. Please. Shame on Larry Summers.
~~~

FN: [1] Except write a planning memo to Obama saying there was only $300 billion of quality fiscal stimulus available “we do not believe it is feasible to design sensible proposals along these lines that go much beyond this total size”, with necessary amounts beyond that amount “not as effective as stimulus”. Now he is writing that deficits as large as one may desire are self-financing?

I’ve made the same argument in previous post, but nowhere near as effectively.

And here’s the commenter “Steve”:

DeSummers wrote: “We presume for the moment that monetary policy is constrained by the zero lower bound, and that the central bank is unable or unwilling to provide additional stimulus through quantitative easing or other means”

I feel like we are currently learning that Bernanke saying “we care about the dual mandate” and singing Kumbaya with the doves is even more powerful than QE.

Yes, we are to believe the Fed is out of ammo, yet somehow just the tiniest hint from Bernanke is enough to ignite a global equities rally.  Here’s another great Steve comment:

Also, I think the DeSummers argument might be worse than you suggest. When they say “the central bank is unable or unwilling to provide additional stimulus through quantitative easing or OTHER MEANS” they affirmatively argue that the Fed *WILL* sabotage their stimulus. After all, one of the “OTHER MEANS” is a commitment to keep rates at or near zero even after the economy begins to recover and the Wicksellian rate goes positive.

They are assuming that the Fed will sabotage their stimulus, and ignoring the contradiction in the result!

Touche!

Update: Tyler Cowen has a good post on the hysteresis issue, which is central to the DeLong and Summers model.


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17 Responses to “Jim Glass on Larry Summers”

  1. Gravatar of D R D R
    27. March 2012 at 14:22

    So, if the Fed raises rates, it sabotages fiscal stimulus, and if the Fed doesn’t raise rates, it sabotages fiscal stimulus.

    Well, that’s clear as mud.

  2. Gravatar of Left Outside Left Outside
    27. March 2012 at 14:58

    But if the fed sabotages fiscal stimulus by (say) signally an earlier exit from low rates, doesn’t that still imply that the date the wicksellian interest rate turns positive is brought forward?

    Given a large enough “hysteresis shadow” would that not still count as a win for DeLong/Summer?

  3. Gravatar of dwb dwb
    27. March 2012 at 15:21

    on Summers: Krugman makes all the same points too. when it comes to fiscal and monetary stimulus, he was against it before he was for it.

  4. Gravatar of ssumner ssumner
    27. March 2012 at 16:03

    DR, I think it’s just the former.

    Left Outside, Yes, I thought of that too. But most of these models “hold monetary policy constant.” And by that they mean constant interest rates. So I found it an amusing contradiction, even if in the end it would still be possible for fiscal stimulus to have SOME effect. In my view, however, the effect would be exceedingly small, unless it involved supply-side fiscal stimulus, such as a employer-side payroll tax cut.

    dwb, Yes, I’ve seen him mention that.

  5. Gravatar of D R D R
    27. March 2012 at 16:13

    If it’s just the former, what then is the contradiction? I don’t get it.

  6. Gravatar of Benjamin Cole Benjamin Cole
    27. March 2012 at 16:30

    You would think a Summers or DeLong would get smart—”Okay, the GOP is not going to allow the amount of stimulus we want. So what can we do? We can cut taxes, and we can tell Bernanke to get aggressive.”

    Or, “We can pompously posture that more stimulus was necessary, and go home and sulk safely in academia (the Summers approach).”

    Additionally, Summers should have been able to bridge to GOP’ers, by citing the work in Japan of Friedman, Meltzer, Bernanke, Taylor and Mishkin. All five said go to QE hard and heavy, especially Friedman. Call them the “QE 5.”

    Ergo, there can be no principle involved in monetizing the debt through QE, from a conservative viewpoint. If there is some moral against monetizing the debt, it was lost on the “QE Five.” None had moral concerns in advising Japan to go to QE big time.

    Japan had a real estate bust-recession, fall in AD.
    The USA had a real estate bust-recession, fall in AD.

    But maybe Summers found it more rewarding to sulk that the bad guys won’t let him rescue the economy through stupid federal spending programs.

  7. Gravatar of DonG DonG
    27. March 2012 at 16:41

    I think Larry did a good job of understanding, even before the inauguration, that there was a small limit to what the Govt could spend effectively (~$250B) and that there was an upper limit on what Congress would spend (~$700B). Maybe he should have known better, but definitely Geitner should have known better. Timmy “moral hazard” Geitner probably deserves more blame.

  8. Gravatar of Jim Glass Jim Glass
    27. March 2012 at 19:32

    Hey, seeing this post title was a surprise! Now the whole world knows. :-)

    The *blatant* thing to me is that if Summers and DeLong were serious about pushing a policy to actually help the economy using their “assume the authorities are unable or unwilling to…” logic, then they’d say:

    “Obviously, the politicians in Washington are no-way, no-how, going to enact any major new fiscal stimulus running up the deficit still further, the political system is unable *and* unwilling to do that.

    “However, to get new monetary stimulus merely requires convincing a couple of the voters on the Feds BoG, a far simpler and entirely credible possibility, so we are dedicating our lobbying and analytical abilities to *that* task…”

    But no! They use the “unable or unwilling” argument to justify spending their efforts lobbying for the utterly impossible by analyzing the implausible. They are not serious. QED.

    “We can pompously posture that more stimulus was necessary, and go home and sulk safely in academia (the Summers approach).”

    I imagine Captain Smith surviving, becoming a tenured professor, and writing a paper: “Assume the captain of a large passenger ship is unable or unwilling avoid running it through an ice field at high speed, nor is he willing or able to steer out of it once in. The following 77 pages detail options to follow, in that case, to maximize passenger safety as the bergs shoot past the portholes and in the event of any unfortunate sudden stop…”

  9. Gravatar of Steve Steve
    27. March 2012 at 20:31

    I like Jim Glass’ devastating commentary better; mine was more snarky but still well founded.

    A major problem with the DeLong/Summers criticism is that they didn’t enumerate what they meant by no “OTHER MEANS.” Did they mean no conditional commitments (i.e., zero rates until NGDP target hit) or no calendar commitments (i.e., zero rates until 2014). Or do they simply not believe that the future path of policy matters at all, but only the short-term rate?

    Criticizing the DeLong/Summers paper becomes a choose your own adventure mystery depending on what you think they meant, although they are wrong in every case except possibly one where the future doesn’t matter.

  10. Gravatar of ssumner ssumner
    28. March 2012 at 04:36

    DR, D&S are saying the Fed can’t commit to low rates for long periods (unconventional stimulus). But if that’s true, they will raise rates at signs of recovery and sabotage fiscal stimulus.

    Ben, Yes, the obvious two choices are monetary stimulus or supply-side tax cuts.

    Jim Glass, I like the iceberg analogy.

    Steve, I think you are right in assuming they meant the low interest rate commitment wouldn’t work.

  11. Gravatar of Johannes Johannes
    28. March 2012 at 05:04

    @ssumner, Jim Glass
    Are you sure that DeLong/Summers really believe that “unconventional” monetary policy works better than fiscal stimulus? To me it reads more as if they wanted to stall you by adding “or unwilling” to the assumption. For them it is of low practical matter whether the FED is unable (what they believe) or unwilling (what you believe). But I could be wrong

  12. Gravatar of Gregor Bush Gregor Bush
    28. March 2012 at 05:08

    Scott,
    Whenever I hear or read Summers, I get the strong impression that he doesn’t think that unconventional monetary stimulus can work. I also get the impression that he hasn’t thought through the implications of it not working (ie. then why not monetize the entire national debt?).

    Remember his article in the FT at the end of 2007 (the onset of the recession) calling for “Temporary, Targeted and Timely” fiscal stimulus? (which by the why the Bush administration delivered in May of 2008 and all it did was bolster the case of the hawks at the Fed). If you had in your mind a NK model with rational expectations with a central bank targeting 2% inflation two years out, would you ever come to such a policy recommendation?

    I think it’s pretty clear that when he thinks about the macro economy, he has an old-fashion shed Keynesian model in the head with both he the central bank and agents in the economy completely backward-looking. There’s no place in such a model for unconventional monetary stimulus (except perhaps a minor impact on the term premium) so therefore in Summers mind it cannot work.

    Remember Obama’s quip in early 2009 that the Fed had “shot its wad”? Where do you think he got that idea from? Romer? I’m starting to think we should rename the Great Recession the Fisher*/Summers Recession.

    *that’s Richard, not Irving

  13. Gravatar of dwb dwb
    28. March 2012 at 05:20

    @Johannes:


    How well would (1) and (2) work? We don’t know. Are they worth trying? I certainly think so, and I believe that any of the alternative candidates for Fed Chair I heard back in 2009–Blinder, Dudley, Summers, Yellen–would at the least be thinking much harder than Bernanke appears to be about whether (1) or (2) or ideally both at once are worth trying on a large scale.

    Me? If I were in the hot seat, I would follow the Jan Hatzius plan: (a) take the Fed’s balance sheet up to $5T over the next two months, and (b) say that if that turned out not to be enough to get nominal GDP growth to a path that will return it to its pre-2007 trend within three years, that I would then keep interest rates low and take the Fed’s balance sheet even higher until it did.

    http://delong.typepad.com/sdj/2011/11/what-could-bernanke-do-monetary-policy-reponse-to-tweeting-doug-henwood-deapartment.html

  14. Gravatar of Jim Glass Jim Glass
    29. March 2012 at 15:34

    Whenever I hear or read Summers, I get the strong impression that he doesn’t think that unconventional monetary stimulus can work … Remember Obama’s quip in early 2009 that the Fed had “shot its wad”? Where do you think he got that idea from? Romer?

    Yes, this is the only thing that makes sense to me — yet even if so their actions are still hard for me to fathom.

    It implies that Summers’ thinking was…

    “Bernanke is wrong, the Fed can’t do anything. But if we fill those seats on the BoG amid such a recession we’ll have to appoint people who promise to do something, and then Ben and those fools might actually try. I have to stop that by keeping those seats empty … and to do that I have to convince Obama that Bernanke is wrong, the Fed can’t do anything but make things worse … and to do that I have to keep Romer away from him, get him to not listen to her…”

    I mean, I’ve heard stories about Summers’ operating style, but is it really this?

    And even if so, it is no excuse for Obama to keep those seats empty during the worst crisis in 70 years. *He* was the boss. In the worst case he should have said, “Larry, don’t tell me anyone we appoint to the Fed will only make things worse. I am going to fill those seats. Tell me the best people to put in them.”

    Then they would have been meeting their responsibility to set policy, with subsequent accountability for the results of the policy they set.

    I’m starting to think we should rename the Great Recession the Fisher*/Summers Recession.

    I’m with you as to Summers, though I can think of a number of candidates for his Fed-side partner.

  15. Gravatar of ssumner ssumner
    2. April 2012 at 05:38

    Johannes, I’m not sure what they “really believe”, nor do I care. The key point is that monetary policy is always effective, so the only issue worth considering is whether the Fed is willing to do the right thing. Also, see my response to Gregor.

    Gregor Bush, Interesting point, but your reference to 2007 supports my argument, not yours. Recall that the alternative then was conventional monetary policy, not unconventional. So he must favor fiscal stimulus for other reasons. I presume that is the “unwillingness” of the Fed to do more.

    I love the “Fisher/Summers” designation for the recession.

    Jim Glass, Yes, but see my reply to Gregor.

  16. Gravatar of marcus nunes marcus nunes
    2. April 2012 at 06:39

    Scott
    Beware! By saying you “love the Fisher/Summer designation for the recession” you risk being accused of saying Summer is a “bullshit artist” and asked to apologize to him!

  17. Gravatar of ssumner ssumner
    4. April 2012 at 05:19

    Marcus, I’m quaking in my boots.

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