Larry Summers is persuasive
By Scott Sumner
Tyler Cowen directed me to a long interview of Larry Summers. I have two general impressions after listening to the interview:
1. Larry Summers seems brilliant.
2. I disagree with him on just about everything.
That got me wondering why I disagree with someone whose opinions seem sensible. Let’s see if we can find a pattern:
1. He says financial excesses led to the Great Depression. I say just the opposite–the Depression was caused by tight money, and the later financial crises were an effect.
2. Summers says the slow RGDP growth in Britain indicates that austerity failed. I don’t think RGDP tells us much about the impact of austerity, as fiscal policy directly impacts NGDP, and the split between RGDP and prices reflects supply-side factors.
3. Summers thinks excess saving leads to low AD and secular stagnation. I think secular stagnation (for supply-side reasons) leads to low interest rates, and in some countries these low rates push monetary policy in an excessively contractionary direction.
4. He thinks JFK airport is a disgrace, and this shows we need more public investment. I think JFK airport is a disgrace, and this shows we need more private investment (after privatizing JFK, LaGuardia, and Newark airports).
5. He thinks low interest rates (from easy money) leads to financial bubbles, and thus favors fiscal stimulus. I see little evidence (theoretical or empirical) linking low rates with financial instability. I think our financial system has been better behaved in recent years (at zero rates) than back in 2005 and 2006 when rates were much higher.
6. He thinks capital income should be taxed more heavily. I oppose all taxes on capital income.
7. He thinks growing inequality is a major issue in the modern world. I see growing equality as the most important trend since 1980.
8. He worries about current account deficits and I don’t.
That’s just a small sample; I disagreed with almost everything he said for over an hour. And there are many other differences that were not in the talk:
9. He favors discretionary monetary policy; I favor rules.
10. He judges the stance of monetary policy by looking at interest rates, I look at NGDP.
This is clearly not the place to determine who’s right. Obviously I think I’m right and just as obviously my opinion has zero value. Rather I’d like to figure out why we can’t agree on anything.
Here’s one hypothesis. I take all the counterintuitive aspects of economic theory very seriously, whereas Summers is more influenced by “framing effects.” He has a more common sense view of the world. Back in the 1990s when it looked like the “Washington Consensus” was roughly correct, Summers seemed like a neoliberal. So did Paul Krugman. Now Krugman says reality has a liberal bias. I’d say left-leaning liberalism is the natural position of a utilitarian with a common sense view of the world. I’m a right wing liberal because I have a counterintuitive view of the world:
1. The Great Depression looks like it was caused by financial turmoil, but looks can be deceiving.
2. Since the ultimate goal of fiscal stimulus is faster growing RGDP, that variable seems a natural way to measure the impact of fiscal stimulus, but it isn’t. NGDP measures aggregate demand.
3. It seems obvious that saving would reduce AD, but it doesn’t. Monetary policy determines AD. It seems plausible that low spending could explain a low trend rate of growth, but it doesn’t. Supply-side factors explain the low trend rate of growth.
4. It seems obvious to an American (not a European) that the government should own airports. Summers is an American.
5. It seems obvious that low rates would encourage speculation and financial excess, leading to bubbles. But the EMH says bubbles don’t exist.
6. It seems obvious that all forms of income should be treated equal, but public finance theory says that taxing capital income is taxing the same labor income twice.
7. It seems obvious that inequality is increasing, but the data says that global inequality is decreasing.
8. It seems obvious that trade deficits would hurt an economy, but economic theory says they don’t.
9. It seems obvious that central banks should make a decision in the year 2014 that is best for the economy in 2014 and in the near future–i.e. discretion. But theory says we need policy rules using a timeless perspective.
10. It seems obvious that low interest rates mean easy money, but theory and evidence suggest they more often reflect low inflation and/or a weak economy.
To be sure, there are good counterarguments for much of what I said. You can construct models that differ from the standard models on CA deficits or capital income taxation. That’s not my point. The people that Larry Summers interacts with (like President Obama) know nothing of those models. Most idealistic people from outside the field of economics will think Summers is right and I’m wrong. Even President Bush supported a demand-side tax rebate (in 2008) to juice the economy. I’ll have the support of selfish rich people who don’t want to pay taxes on capital income because they are greedy. Yuck.
It really is a miracle that Milton Friedman was so persuasive. I don’t know how he did it.