Monday, August 20, 2012

Larry Summers and the tragedy of too much education

By all accounts, Lawrence (Larry) Summers is a smart guy. He carries degrees from Harvard and MIT, he served as Treasury Secretary under Clinton, headed the Economic Council for Obama until the end of 2010, and was President of Harvard, as well. A helluva pedigree. Noted Nobel Prize-winning economist Paul Krugman said this about Summers:
Larry’s extremely smart—ask him and he’ll tell you.
High praise from a man known for the consistency of his own opinions. Interestingly enough, Summers--while President of Harvard--helped push the University into investing in various derivatives and swaps, those "financial weapons of mass destruction" that were a consequence of the artificial housing bubble Krugman was pushing for back in 2001. As Krugman said then:
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Summers, taking over at Harvard on 2001, basically went "all in" with some $3.5 billion of the school's money, most of it bet--through swaps--on the supposition that interest rates would rise, not fall. Ultimately, Harvard lost over $1 billion on these investments after the housing bubble popped and--conveniently--after Summers had stepped down.

It's an interesting pattern: Summers takes over at Harvard, pushes for a course of action, then leaves before the foolhardiness of his recommendations become apparent. And then, Summers heads up the Obama Stimulus program, sees it forced down the nation's throat, then steps down before the abysmal consequences are fully realized. If one's goal is destroy a company, school, or nation via bankruptcy, it would seem that Summers is the man for the job.

Now, Summers has a new op-ed out at WaPo. Entitled "The reality of trying to shrink government," in it Summers attempts to demonstrate why it's basically impossible to keep the Federal government close to the same size it has historically been as a percentage of GDP, much less reduce its size. He has four principle points, which I will summarize:
  1. Demographic changes will increase Medicare, Medicaid, and Social Security expenditures into the future, as the population ages.
  2. The increased Federal debt will mean increased interest payments as a matter of course, made worse when interest rates eventually rise.
  3. Government expenditures in the market are for goods/services whose prices are rising much faster than inflation (i.e. medical care, education, and research).
  4. Financial tools previously available to control deficits are no longer available.
With regard to 1., we've known this reality for quite some time, hence the attempts--by people like Ryan--to reconfigure programs like Medicare so they are sustainable without huge increases in funding, attempts routinely ignored by the people Summers has worked for and sided with.

With regard to 2., whose stinking fault is that? Hello Larry, its people like you and Krugman that pushed for massive government expenditures that led to a ballooning debt. Now, after the fact, you're saying this has created a permanent new level of indebtedness that will cost even more in the long run? Great. Good thing you were in charge, eh? Still, the debt can be paid down, provided we stop adding to it.

With regard to 3., this is true. Right now. But it doesn't have to be. Medical costs are rising faster than inflation because of specific government policies. Change the policies. Ditto for education. Research? Well, that part isn't actually true at all. Research costs can be--and have been at various moments--borne by the private sector. Now is such a moment.

With regard to 4., like the previous point this is true only in the moment. Supposing that it will be true indefinitely is logically inconsistent with Summers' first point: rising interest rates will make these tools available once again.

Thus in total, Summers' argument amounts to nothing. He doesn't come close to demonstrating the inevitability of government growth with respect to GDP, only the inevitability of government growth with respect to his own ideology. And he makes this clear immediately after he lays out his argument:
And on almost any reasonable view of the state’s responsibility, large increases in inequality such as those observed in recent years should call forth increased government activity.
Got that? Apparent increases in income inequality require more government activity, more government spending. And in Summers' warped view of reality, no reasonable person could disagree. That begs the question, who qualifies as "reasonable"? Summers thinks he does, no doubt. But do reasonable people gamble with huge sums of other people's money, then run away after they lose big? Do reasonable people gamble with money they don't have and pass the losses off to their children and grandchildren?

Larry Summers has a made his career from his expertise in the fields of finance and economics. Yet, whenever that expertise has been put to the test, it has been found wanting to say they least. It seems to me that what truly reasonable people would do is not listen to anything Larry Summers has to say.

Cheers, all.

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