Is Larry Summers the Dick Cheney of the Obama administration?

Seventeen months ago I did a post entitled “President Obama: You need to talk to Christy.”  According to Hotline On Call, he didn’t take my advice.

Christina Romer, chairwoman of Pres. Obama‘s Council of Economic Advisers, has decided to resign . . . 

“She has been frustrated,” a source with insight into the WH economics team said. “She doesn’t feel that she has a direct line to the president. She would be giving different advice than Larry Summers [director of the National Economic Council], who does have a direct line to the president.”

“She is ostensibly the chief economic adviser, but she doesn’t seem to be playing that role,” the source said. The WH has been pounded for its faulty forecast that unemployment would not top 8% after its economic stimulus proposal passed.

Instead, the jobless rate is 9.5%, after exceeding 10% last year. It was “a horribly inaccurate forecast,” said Bert Ely, a banking consultant. “You have to wonder why Summers isn’t the one that should be taking the fall. But Larry is a pretty good bureaucratic infighter.”

Christy Romer did a lot of research showing that monetary stimulus was the main factor boosting the economy during the 1930s, not fiscal stimulus.  She also found that tax cuts are a particularly effective form of fiscal stimulus.  I wonder if this means Obama will not go along with attempts to extend the Bush tax cuts?


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34 Responses to “Is Larry Summers the Dick Cheney of the Obama administration?”

  1. Gravatar of Dilip Dilip
    6. August 2010 at 05:41

    You are quite wrong. On the contrary, Ms. Romer argued for a much bigger fiscal stimulus, to the tune of $1.2 trillion which was whittled all the way to $800 billion by Summers, Emmanuel et al. See this: http://www.newyorker.com/reporting/2009/10/12/091012fa_fact_lizza

  2. Gravatar of ssumner ssumner
    6. August 2010 at 06:00

    Dilip, That doesn’t conflict with what I said. By the time I wrote the March 2009 post, Romer had lost that battle. Since she knew that monetary stimulus was highly effective in the Depression, I assume she would have tried to tell Obama that since the fiscal stimulus was inadequate, they needed to do more monetary stimulus. It’s a pity that Obama never heard that advice.

  3. Gravatar of Wimivo Wimivo
    6. August 2010 at 06:05

    Since she knew that monetary stimulus was highly effective in the Depression, I assume she would have tried to tell Obama that since the fiscal stimulus was inadequate, they needed to do more monetary stimulus.

    I sort of got the same impression Dilip did but when you put it this way it’s pretty hard to argue against.

  4. Gravatar of Ted Ted
    6. August 2010 at 07:12

    It’s plausible that’s why she’s leaving, but I’m never certain about these inside stories with anonymous sources. Assuming it’s true though, she might have also been frustrated by Larry Summers distaste for monetary policy in a “liquidity trap” (remember this post: http://www.themoneyillusion.com/?p=5826). Since she’s most well know I think for her work on monetary policy during the Great Depression, if Summers was undermining her on that front I suspect it would be quite frustrating for her.

    I also feel a bit bad for Romer. She’s been tarred and feathered by the press for that silly stimulus chart she made, but that’s not her fault at all. Forecasting is really hard, particularly in uncertain times. There is real uncertainty about fiscal multipliers, particularly at the zero lower bound when they are theoretically suppose to be large (and this also assumes they are stable, which isn’t true). She was also asked to forecast the number of jobs it would create and the employment rate, which is basically impossible even if you have a good estimate of the multiplier. Not to mention accounting for the Fed’s reaction and all that good stuff. The Obama administration basically asked her to do an impossible task and it’s unfortunate she got heat for that. My guess is given a choice she’d probable say how uncertain the estimates were and they depended on a lot of factors. Also, she probably couldn’t account for the fact that in the end there would be a 0% increase in the baseline for aggregate government spending due to federal fiscal expansion being almost completely counter-acted by state fiscal contractions (http://www.nber.org/papers/w15784), which also unfortunately means we’ll never know if a large fiscal expansion could have helped in the way she projected since aggregate government expenditure didn’t increase at all.

    As a side note, I’m not at all convinced by the Romer & Romer paper you are referencing. Their econometric specification more or less assumes that their exogenous tax shock is orthogonal to any possible macro shock – be it another tax shock, monetary policy, productivity growth or what have you. I think that’s a widely implausible assumption. If you plausibly relax that assumption, you get much, much smaller estimates for the effects of tax changes. Of course, I believe tax cuts still have positive effects, but I think Romer & Romer’s VAR is incorrectly specified.

  5. Gravatar of Liberal Roman Liberal Roman
    6. August 2010 at 07:52

    Scott, why do you find new ways to depress me every morning?

  6. Gravatar of scott sumner scott sumner
    6. August 2010 at 07:58

    Wimivo, Thanks.

    Ted, Thanks for finding that old post, I usually have trouble finding them, unless they were very early in my blog.

    I agree with everything you say. Forecasting is really hard (which is why I rely on market forecasts.) Although I agree with her conclusions (I favor monetary stimulus and tax cuts) the reasons are very different. I also have doubts about her methods for establishing causality.

    In my view the supply-side impact of tax cuts is stronger than the demand-side impact. (And only for certain types of tax cuts.)

  7. Gravatar of scott sumner scott sumner
    6. August 2010 at 08:00

    Sorry Liberal Roman. Fortunately, I am going on another trip tomorrow, and will probably do just one more post for a while.

  8. Gravatar of Morgan Warstler Morgan Warstler
    6. August 2010 at 09:08

    Scott, since you only have one post for a while – I’d suggest: Make it about Denninger ruining Krugman. God bless Karl.

    http://market-ticker.org/archives/2560-Reducing-Krugman-And-All-Like-Him-To-Size.html

  9. Gravatar of Mike Sandifer Mike Sandifer
    6. August 2010 at 09:10

    Scott,

    One thing I’ve found interesting is what poor spokespeople Obama’s economic team is filled with. Geithner, Summers, Romer,… Does anyone think they do much for Obama politically when they speak in the media?

    Perhaps worse, Geithner and Summers are seen as failures in previous positions held in Washington, and not in small ways. I read that Bob Rubin helped Obama select his economic team, who is obviously another guy with a soiled reputation.

    What was Obama thinking?

  10. Gravatar of Mike Sandifer Mike Sandifer
    6. August 2010 at 09:13

    Warstler,

    I hope you were being sarcastic with that post link.

  11. Gravatar of Benjamin Cole Benjamin Cole
    6. August 2010 at 09:15

    All the more reason why people outside of government should express their views about monetary policy. There is interest right now…I encourage people to talk up QE and NGDP targeting on the blogs, letters to the editor, letters to Fed officials etc. Or you can wring your hands.

    From a PR perspective, this is do-able. The policy-making community is tiny and visible. You are not trying to get everyone in the country to buy a new brand of corn flakes, or entering age-old ground about whether welfare is good or not.

    You can propose the issue to the table..ultimately, I suppose, Bernanke will dispose. But, if no one proposes…..

  12. Gravatar of Morgan Warstler Morgan Warstler
    6. August 2010 at 09:33

    @Mike,

    Nope on everything but trade, and some out there ideas on Treasury default, Denninger is the man. He and ZeroHedge are the standards… the theory guys are Tyler and Scott.

  13. Gravatar of Liberal Roman Liberal Roman
    6. August 2010 at 09:59

    Morgan,

    If deflation is a sign of a good economy, then 1929-1933 was the best period in US economic history according to you.

    Like many Austrian school rants, it sounds good and passes the “common sense” test, except when you look beneath the surface. For example, deflation does not just mean falling prices. It means falling wages. And even more so, it means falling employment. But Morgan, if you think deflation is great, I would go all-in on the US economy right now if I were you. We are about to get a lot of deflation. Should be great.

  14. Gravatar of Liberal Roman Liberal Roman
    6. August 2010 at 10:05

    Benjamin,

    I think the problem is that our current policy makers just don’t care about the issues we discuss on this blog. They are not even on the radar screen. Republicans are a lost cause and just read the posts of Morgan here to get an understanding of their thinking.

    The Democrats are just apathetic to monetary policy. As proof of that, look at how Obama has left Fed undermanned. He has three spots to fill right now and his attitude to this task has been, “Ehh, whatever”. Of course, the Republicans are blocking his nominations as usual

    http://www.bloomberg.com/news/2010-08-06/obama-fed-board-pick-diamond-gets-referred-back-to-white-house-by-senate.html

    But, if he understood the importance of getting some people who understand the urgency of the situation on the board, he could throw his political capital behind getting them approved or just recess appoint them. But he basically doesn’t think this matters. And that’s our problem.

  15. Gravatar of Morgan Warstler Morgan Warstler
    6. August 2010 at 10:24

    @Roman,

    More noise.

    The perfect example of this is that while I’ve been advocating the sale of foreclosed homes in dollar auctions, to improve the balance sheets of dry capital, get the people upside down OUT of their home once and for all… so they rent cheap.

    Instead we now hear murmurs of trying to write down the debts of the people in over their heads – which is just dumb in so many ways, besides the horrible moral side of it.

    Keep the debts, foreclose, liquidate, rent back to them cheap.

    Who eats it? The banks.

    NONE of those people is going to ever pull money out their home, the homes values are not going up any time soon – this government payoff to the people who took all the risks, is 180 backwards from the basic thinking we need.

    And besides, look at the 2010 CPI data, minus rents (which need to go down) we’re at 1.9% inflation… and if energy prices keep going up, the only thing deflating will be electronics (which is always good), government, and housing.

    I’ll say it again, hypothetically, we could just start to pay all government employees half as much as contracts expire, hire twice as many, and there would be no unemployment.

    Most of them couldn’t find work int he private sector paying more than half of what they make now.

  16. Gravatar of marcus nunes marcus nunes
    6. August 2010 at 10:33

    Changes in MP will likely be hard for another month or two for “lack of decision makers”.
    http://www.bloomberg.com/news/2010-08-06/obama-fed-board-pick-diamond-gets-referred-back-to-white-house-by-senate.html

  17. Gravatar of marcus nunes marcus nunes
    6. August 2010 at 10:34

    Sorry
    Didn´t see Liberal Roman had already got that

  18. Gravatar of Mike Sandifer Mike Sandifer
    6. August 2010 at 11:19

    Well, Sumner, Krugman, and what seems like most economists see the problem as aggregate demand, which my unprofessional mind agrees with completely. I find it hard to believe that such an a view can be held about deflation with capacity under-utilization.

    What makes you think that any distortions caused by artificially increasing comsumption will be more costly than the loss in real GDP? It seems to me that the consequences of government inaction lead to losses far greater than any original “malinvestment” can justify.

  19. Gravatar of Mike Sandifer Mike Sandifer
    6. August 2010 at 11:23

    “I’ll say it again, hypothetically, we could just start to pay all government employees half as much as contracts expire, hire twice as many, and there would be no unemployment.

    Most of them couldn’t find work int he private sector paying more than half of what they make now.”

    Are you talking about only cutting the salaries of federal employees? Because, with about 2,000,000 federal employees, doubling that number won’t come close to eliminating of the of the present unemployment,

    http://www.bls.gov/oco/cg/cgs041.htm

  20. Gravatar of Morgan Warstler Morgan Warstler
    6. August 2010 at 13:53

    @Mike,

    We have 20M public employees at Local, State, and Federal level – wildly overpaid.

    Consider the vast majority “make work” jobs.. not because their task is worthless, or even that some are paid in line with private sector, but because the functioning of government is not done with first focus of Productivity…. outsource, automation, headcount reductions, whole policies should be written entirely based on the least expensive way to accomplish a task. Unless it is war, it should be cheap.

    Example: only 17% of SS recipients still get checks, but they make up almost all the calls to tens of thousands of grossly overpaid telemarketers askin,g “where’s my check?” Pound sand old people, if they can’t be bothered to get a bank account for direct deposit, no money for them. OK, let’s be nice, we’ll mail them a bank card.

    —-

    To be even clearer, if government made the annual productivity gains of private industries (maybe minus mining) since 1994 – we wouldn’t even have a budget deficit today. Our debt would be paltry.

    The whole world would be a vastly different place. The tech crash – wouldn’t have happened. Relieving pressure for the housing boom.

    Next year, those employees will walk with $1.2T (and that’s not all the pensions either) – I’m talking it being $900B.

    Just think of it as $400B annually in savings. With $100B of that going to private sector players, web / tech companies to provide the productivity gains… that’s what double ad revenues online?

    The burden of pensions would be non-existent. States wouldn’t be paying higher rates on bonds.

    It’s ALL squarely laid to rest on the back of the disease called Public Unions.

    If you can’t start there, you can’t even begin to “think macro.”

  21. Gravatar of Mike Sandifer Mike Sandifer
    6. August 2010 at 14:06

    Warstler,

    Even if what you’re suggesting were politically feasible, we might have a hard time finding decent public employees in the future.

    This is pie in the sky at best, and a vast oversimplified response to sticky wages.

  22. Gravatar of scott sumner scott sumner
    6. August 2010 at 16:18

    Morgan, I don’t think so.

    Mike, I don’t think economics is Obama’s strength.

    Benjamin, Yes, we need more people to speak out.

    Liberal Roman, Thanks for the link, I did a post.

    Morgan, You said;

    “Instead we now hear murmurs of trying to write down the debts of the people in over their heads – which is just dumb in so many ways, besides the horrible moral side of it.”

    Finally, something you and I strongly agree on. (I saw that rumor too.)

    Thanks marcus.

    Morgan, There are some problems with public employee pensions, I’ll grant you that.

    Mike, Yes, we need to get NGDP higher. Liquidationist approaches are never the best way out.

  23. Gravatar of Morgan Warstler Morgan Warstler
    6. August 2010 at 18:36

    It isn’t just pensions. There is no government program, not even Obamacare, that has to be cut, IF the method of delivery is run with the efficiency of the private market decade, or decade.

    There’s very few services that cannot be bid out, and run by private companies but under public mission, judged openly and transparently by metered standards online.

    The sad thing is real Rawlsian liberals, don’t get that the best way to make people like government is to run it cheap.

    Even in the toughest case – police. We should never hear we’re getting less cops, we should be told the cops are getting paid less money, and decide if we think thats acceptable. The whole mindset is dealt from doom.

    In the nastiest case, we don’t show capital costs on per-students expenditures at public schools (as if land and buildings are free)… and in virtually every case it means that prestigious prep school costs less than the hovel your kid goes too. Its disgusting.

    “Even if what you’re suggesting were politically feasible, we might have a hard time finding decent public employees in the future.”

    Mike, I’m expecting private companies to come in a run parking, food services, customer service, accounting, you name it. All done under open bids, online, running online services, everything open, everything verifiable, with competitors itching to prove they can do it cheaper, when contracts come up.

    We’re smart people, we can run government like Wal-Mart.

  24. Gravatar of Morgan Warstler Morgan Warstler
    6. August 2010 at 18:38

    Scott, but notice they consider it Treasury led QE.

    That’s what I’ve been trying to say, liquidation – but only to the right kind of private buyers gets us real QE, with none of the moral issues.

  25. Gravatar of Lorenzo from Oz Lorenzo from Oz
    6. August 2010 at 19:03

    As far as I can see, the biggest problem with public employment in the US is the way it (or, more precisely, the power of public sector unions) feeds into the “insider/outsider” divide that is growing in US politics. If anything, its depressing effect on management of assets and services, and upward effect on public debt, is a by-product of that. (See also here [pdf].)

  26. Gravatar of Edwin A Edwin A
    6. August 2010 at 19:58

    The thing that bothers me about this recent rage against state and local pensions is that all these news articles I’ve seen only talk about the average salary and/or pension of the entire public sector compared to the entire private sector. They never break it down and compare similar jobs with similar education/experience levels. The only study I’ve seen that does this concludes that the public sector (state and local) actually gets paid less despite having better benefits/pension.

    http://www.slge.org/vertical/Sites/%7BA260E1DF-5AEE-459D-84C4-876EFE1E4032%7D/uploads/%7B03E820E8-F0F9-472F-98E2-F0AE1166D116%7D.PDF

    I mean every once in a while you hear about these ridiculous salaries and pensions (and I would agree that it’s ridiculous), but they tend to be the exception rather than the rule.

  27. Gravatar of Lorenzo from Oz Lorenzo from Oz
    6. August 2010 at 23:55

    Edwin A: The results of the study you cite are unsurprising. The difficulty with the study is that it does not seem to value/consider security of tenure or examine effort/productivity requirements, which would seem to account for the differentials in compensation (and so undermine its implication that public sector pay rises would be appropriate).

  28. Gravatar of Morgan Warstler Morgan Warstler
    7. August 2010 at 06:55

    @Edwin,

    That’s just 100% wrong. In so many ways. It is a TOTALLY false argument.

    1. It’s about productivity. Technically, it isn’t what X gets paid, I care how many X there are, and are there structural incentives to increase productivity of X, so we can have less X over time.

    The whole feeling of government work must be, “soon there will be less of my job,” because that’s normal.

    Any given rote task, gets automated. Telling the citizens to use the web is REQUIRED. Our attitude needs to become over the next 10 years – “Don’t have the Internet, pay fees, because we do things online.”

    2. Regulations must be written with an 100% focus on cost of compliance. We need to legislate away the ability to create complication. A simple rule collects 10% less or more taxes than a loophole? Winner! From the beginning complexity = we don’t do it.

    3. Privatization ANYWHERE conceivably appropriate. That doesn’t mean free market, no regulation. It means government services are rendered as often as possible by private firms, open bidding, totally exposed, metered, and measured.

    4. NONE of the “studies” factor in pensions and healthcare. There can be no pensions anymore. They have to be phased out. 401K’s for everyone – no more generous than the average private contribution. Government healthcare? no more generous than the average contribution plan.

    5. Government NEVER gets to pay $1 more for a single apples to apples hire.

    6. Ultimately a core admittance that government sector employees live off the work and sweat of private sector that funds them. Savings over job security 110% of the time.

    So now you understand, nothing bothers you anymore right?

  29. Gravatar of Edwin A Edwin A
    7. August 2010 at 11:01

    I’m never going to change your view over on how much government we should have and their usefulness. And perhaps to a certain extent you might be right. But the premise that the public sector gets paid more than the private sector due to their job benefits (pension/healthcare) would still be wrong. The study is’t meant to be a cost-benefit analysis of government jobs. That’s a different argument.

    “NONE of the “studies” factor in pensions and healthcare.”
    This one does. That was the whole point.

  30. Gravatar of Morgan Warstler Morgan Warstler
    8. August 2010 at 10:34

    @Ewdwin, It is all crap. I can’t believe I went and read that whole thing, you obviously didn’t.

    “The costs of benefits paid by employers may represent only a portion of the full costs. A share of these costs can be moved to employees, as most employees contribute
    to their pension and health insurance costs. The required contributions of state and local employees are modestly lower than that of private employees, but the magnitude of these differences is small.”

    Modestly lower? HA!

    Page 16 gives up the goat. Read it. It doesn’t nothing for your claim. The private sector doesn’t not provide defined pension benefits – save for horrible unionized industries that must face cuts routinely or the company itself closes. See what UAW did to new employees salaries and benefits once they owned GM. Cut them to the bone.

    There is no such pension system in private sector. A report that doesn’t admit that and do the math right up front – is a white wash.

    The larger lie of this whole document is the JOKE, that government employees are more “educated” than private sector. My god man!

    What we’re really talking about is TEACHERS, who are the giant portion of state employees, and who unionization provides the backbone for unionization of local.

    And TEACHERS as a class are the dumbest (lowest performing) type of college graduates. Go do some reading. Teachers by are large are the ones who truly cannot perform in the world competing against private sector college graduates – a huge percent come from the bottom of the class. Teachers are dumber than private sector comparisons, they deserve to make LESS.

    Even more than that, teachers are encouraged – by summers off – and state funding to continue going to school. Which is I guess technically needed because they are indeed dumber than most regular college graduates, but mainly – it destroys the cost comparable AS IF someone with masters in education or writing deserves to earn anywhere near what real private sector business person deserves to earn with a MBA.

    I expect you to recant. There are not two rational sides to this argument.

    It is time to say that we need to save at least 25% on salaries an no pensions for government employees. That doesn’t mean pay them less salary, it means keep the good guys and make them productive with technology, and fire the waste.

  31. Gravatar of Edwin A Edwin A
    8. August 2010 at 14:04

    “Page 16 gives up the goat. Read it. It doesn’t nothing for your claim. The private sector doesn’t not provide defined pension benefits – save for horrible unionized industries that must face cuts routinely or the company itself closes. See what UAW did to new employees salaries and benefits once they owned GM. Cut them to the bone.

    There is no such pension system in private sector. A report that doesn’t admit that and do the math right up front – is a white wash.”

    You base this off what? Purely anecdotal evidence? Just your gut feeling? That’s what it looks like to me you’re doing. If you doubt any of their job benefits claims, go ahead and follow their cited sources and look at the data yourself.

    ftp://ftp.bls.gov/pub/special.requests/ocwc/ect/ececqrtn.pdf

    “they deserve to make LESS.”
    and technically they DO.

  32. Gravatar of JTapp JTapp
    9. August 2010 at 07:08

    Coincidentally, I just ran across a BusinessWeek profile of Christy Romer dated July 19, 1993 by Michael Mandel. It includes these gems to back up Dr. Sumner’s point about her departure:
    1. “Romer…is against using fiscal stimulus to pull the economy out of recessions. History, she says, shows that monetary policy is a more effective tool but that it hasn’t been used to stabilize the economy.
    2. “Most recent recessions have been deliberately caused by the Fed.”
    3. “Romer and her husband…will present a paper (at Jackson Hole) arguing that almost every credit crunch in the postwar era has been caused by the Federal Reserve.”

  33. Gravatar of Morgan Warstler Morgan Warstler
    9. August 2010 at 07:22

    @Edwin, oh no you don’t lazy guy.

    I want page and cite and data quote that says specifically incidence of defined lifetime benefit in private sector has incidence and size of public sector.

    You are full of air. Pop. Own up.

    I’ve given you plenty of carrying arguments… you’ve responded to none.

  34. Gravatar of Scott Sumner Scott Sumner
    22. August 2010 at 13:39

    Everyone, Since I am not an expert on the subject, I’ll just say that I’m a skeptic on public sector unions.

    Thanks JTapp, That confirms what I thought.

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