Roubini on the Recovery (such as it is...)

By John Ballard

Watch for a smile at 2:15. Don't blink.

They don't call it the dismal science for nothing.

While my mind was clear this morning I read an insightful piece about Larry Summers by Ryan Lizza in The New Yorker. Too long to read from the monitor, it prints out to about fifteen pages. This unremarkable-looking and talking guy is more complicated than he comes across. And very smart.

Summers was born in 1954 in New Haven, Connecticut, where he lived until he was five. His parents were both economists, and his father taught at Yale, but the family moved to the suburbs of Philadelphia so that he could take a teaching job at the University of Pennsylvania. Two of Summers�s uncles, Paul Samuelson and Kenneth Arrow, were also economists. Summers�s childhood was not quite like that of the other kids in postwar suburbia; he and two younger brothers�one is now a psychiatrist and the other is a lawyer�were taught from grade school to approach life with an economist�s view of the world. His father once set up a bidding system to distribute TV-watching times. When his parents went out in the evening, they often gave Larry a math problem to work on. If they forgot, his mother has recalled, he would rush out the door after them and demand one. According to Arrow, Summers�s father taught him statistical methods from an early age, and in the sixth grade Larry created an analysis of baseball games that attempted to predict the probability of a team�s performance at the end of the season based on its position in the standings on the Fourth of July.

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Summers�s first important academic paper, published in 1979, with Kim B. Clark, who is now the president of Brigham Young University, used Feldstein�s empirical approach to disprove one of his own papers. Feldstein had argued that most unemployment was short-term, and that workers quickly re�ered the labor force. By mining newly available records, Summers discovered that, as he recounts, �somebody was unemployed for three months, they dropped out of the labor force for two months, and then they were unemployed for three more months, and then they got a job. The right way to think about that was that somebody was out of work for eight months. But in the employment data it showed up as two three-month spells of unemployment, which caused people to conclude that most unemployment is due to people who are out of work only for a short time.� The paper changed the way that many economists thought about the nature of unemployment.

M.I.T. hired him as a professor in 1979, then Harvard offered him tenure in 1982, when he was just twenty-seven. He was one of the youngest people to receive tenure in the university�s history. According to a friend of Summers�s, Harvard had wanted him earlier that year, but the university�s rules required him to have a Ph.D., and although he had finished his graduate work in 1979, he hadn�t yet turned in his doctorate, something that mystified his colleagues. �They had to get him to turn the thing in pronto, and have his committee pass him, so that they could move forward on the process,� the friend said. �This is a guy who published like a fiend, especially in those days. So why three years to get his Ph.D.? Well, his uncle Paul�s dissertation got Paul the Nobel Prize. And his uncle Kenneth�s dissertation got Kenneth the Nobel Prize. If you�re Larry, it�s pretty hard to turn in that dissertation.�

A flurry of breakthroughs similar to his unemployment work followed at Harvard, although Summers subsequently hit �home runs� rather than �grand slams,� according to Brad DeLong, an economics professor at the University of California at Berkeley, and a former student of Summers�s. �There wasn�t one thing that made people say, �This guy is going to be remembered in economics for the next hundred years because of contribution X.� Instead, there are forty brilliant insights scattered around whole bunches of literatures��especially finance, labor, and macroeconomics. Summers published prolifically and had an army of research assistants who now populate the upper ranks of the profession. �Larry�s reach as an intellect is much greater than his work,� Lawrence Katz, a Harvard economist, said. �Almost every applied economist out of Cambridge, which is a pretty big chunk of the profession, from 1978 to the early nineties was greatly influenced by Larry.�

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The urtext of economic policymaking in the Obama White House is a fifty-seven-page memo to the President, prepared in late November and early December of last year, by Summers and his deputy, Jason Furman. It has a five-page executive summary, and forty pages of comprehensive discussion about nearly every economic and budgetary issue that the new President would face in his first months in office�the stimulus, TARP, housing policy, the state of the automobile industry, the deficit, potential budget savings, regulatory reform. An eleven-page appendix details recommendations for items to be included in the stimulus bill that Obama proposed in his first weeks in office.

On Tuesday, December 16, 2008, as five inches of snow fell on Chicago, Obama�s top advisers gathered in his transition headquarters to discuss the memo. Obama sat on one side of a large square table, and crowded around the three others were members of his incoming team: Biden; Summers; Rahm Emanuel, the chief of staff; David Axelrod, Obama�s senior adviser; Timothy Geithner, the Treasury Secretary; Christina Romer, the chair of the Council of Economic Advisers; Peter Orszag, the budget director; Jared Bernstein, Biden�s top economic adviser; and several more. Others, like Lee Sachs, a former Bear Stearns executive and Clinton Treasury official, who was an expert on the financial crisis and who later joined Geithner at Treasury, were brought in via teleconference. Summers led the meeting like an orchestra conductor, directing the other economic advisers, each of whom made a presentation.

Perhaps nobody�s task was more important than Romer�s. She had drafted a crucial section of the memo which included an economic forecast and projections about the impact of a fiscal stimulus. Romer was well suited for the job; an economic historian, she was a close student of Washington policymaking during downturns. One of her key papers as an economist at the University of California at Berkeley, where she had spent the previous twenty years, showed that, contrary to popular belief, Franklin D. Roosevelt�s spending programs hadn�t pulled America out of the Depression. (She found that monetary policy was the key factor.) Conservatives had seized on the paper to disprove the efficacy of fiscal stimulus, but Romer�s point wasn�t that Roosevelt had spent too much to no purpose; it was that he hadn�t spent enough. When faced with a severe recession, she believed in overwhelming force.

Summers has been working in Presidential politics for two decades, but Romer was entering government for the first time. �I�m the quintessential outsider here,� she told me. But she was a �giant supporter of the President, probably since 2004.� She said, �On a bad day, my husband would find me at home clicking on the Democratic Convention speech, saying, �I want this man to be President.� � At the December meeting, it was Romer�s job to explain just how bad the economy was likely to get. �David Axelrod said we have to have a �holy-shit moment,� � she began. �Well, Mr. President, this is your �holy-shit moment.� It�s worse than we thought.� She gave a short tutorial about what happens to an economy during a depression, what happened during previous severe recessions, and what could happen if the Administration didn�t act. She showed PowerPoint slides emphasizing that the situation would require a bold government response. The purpose of a stimulus is to fill the hole left during a recession by the difference between the economy�s potential and what it�s actually producing�what economists call the �output gap.� She explained the impact of different types of stimulus, giving a lesson on �fiscal multipliers��the term economists use to describe the economic impact of every dollar of stimulus. For instance, she explained, a dollar of government spending raised the G.D.P. by about a dollar fifty, while every dollar of tax cuts, which are partially saved, generally returned about a dollar or less.

Axelrod told me, �The basic message was that, if we didn�t act quickly to replace the output we were losing, unemployment could skyrocket.� Romer mentioned that employers had dropped more than half a million workers from the payrolls in November, the biggest cut in more than three decades. �The conditions are grim, and deteriorating rapidly,� she told the President.

Go to the link to find the denouement. This is not tough reading and it gave me a better appreciation for Larry Summers than I had. He didn't have me at Hello, but this was the part that made me feel good:

Summers told me that, as a graduate student, he first studied claims, made famous by economists at the University of Chicago, that financial markets are always rational and self-correcting. He said, �I encountered a sentence that was much quoted: �The efficient-market hypothesis is the best established fact in social sciences.� Any sentence like that is a red flag to an ambitious academic.� Summers produced a body of work that undermined the efficient-market hypothesis, or E.M.H. A memorable paper on the subject, which he wrote in the early eighties but never published, began, �THERE ARE IDIOTS. Look around.� According to Justin Fox�s recent book, �The Myth of the Rational Market,� that paper persuaded Fischer Black, one of the leading theorists of E.M.H., to essentially abandon his belief in the hypothesis.

In 1982, Feldstein was named the chairman of Ronald Reagan�s Council of Economic Advisers, and Summers followed him to Washington. Feldstein had been hired to add intellectual heft to the Reagan White House, and he had no qualms about publicly challenging Reagan�s more extreme supply-side advisers. His concerns about rising deficits and his calls for raising taxes made him a hero to congressional Democrats. Reagan�s Treasury Secretary, Donald Regan, told Congress that Feldstein had learned everything from libraries rather than from the real world and that the members could just throw away his annual economic report. Feldstein was marginalized, and returned to Harvard in 1984. (After the experience, Reagan threatened to abolish the C.E.A.) Feldstein�s truthtelling greatly affected Summers, and his own research became more focussed on battling economists, like Reagan�s supply-siders, whose work, as he saw it, was grounded in abstractions and wishful thinking. He wrote, �No small part of our current economic difficulties can be traced to ignorant zealots who gained influence by providing answers to questions that others labeled as meaningless or difficult. Sound theory based on evidence is surely our best protection against such quackery.�

He saw the main false assumption of Reagan era economics, the fiction of the self-correcting unregulated market.

And once again I'm impressed with the president's gift at good management. It must have been very tempting politically to toss this baby out with the bath water.

UPDATE

Noam Scheiber comments...

There's been some teeth-gnashing in the liberal blogosphere over Ryan Lizza's New Yorker profile of Larry Summers, the general thrust of which is that he supposedly went too easy on Summers, particularly on the issue of bank nationalization.

More at the link but I doubt anyone reads this now.