Cal Berkeley Democrats

A Look at the White House Economic Team

Perhaps it’s just the econ major in me, but I find this article in New Yorker fascinating. Titled, “Inside the Crisis: Larry Summers and the White House economic team,” it profiles Larry Summers, the director of the White House’s National Economic Council.

Summers is one important fellow. As NEC Director, he coordinates economic policy for the Obama administration. In this article (and a few others I’ve read), a couple things struck me. First, like him or not, Summers is brilliant. When both your parents are economists and two of your uncles have Nobel Prizes in the field, you know you’re destined for greatness. Second, he’s abrasive but honest. Again, I can appreciate that. As long as he can tame himself when appropriate (and by all indications he has), he seems like a great fit for the job.

A couple quotes in this article really jumped out at me:

“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.”

Note to Republicans: the economy is bad. You can’t give Obama the worst boondoggle since the 1930s and expect him to solve it in 8 months. Speaking of which…

The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.”

Yes, unemployment is rising, but that doesn’t mean the stimulus is a failure. It wasn’t designed to stop job loss altogether. Rather, it was designed as a backstop. Don’t ask what unemployment is now, ask what it would have been without the stimulus (FYI, most economists estimate it’s boosted GDP ~3%)

Summers had had a healthy academic understanding that markets under severe stress could be thrown so out of whack that their self-correcting mechanisms broke down and required outside intervention.

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Summers explained that although the relationship between supply and demand is the cornerstone of a self-correcting market, in some financial crises that relationship breaks down.

This is important: markets are man-made institutions; they aren’t inherently perfect. Like all other constructs, they can fall apart. If you want an example, read the article’s explanation of margin calls.

By the time Clinton left office, the Rubin-Summers Treasury Department was venerated for its management of the economy. Two facts seemed to tell the story: the unemployment rate was 3.9 per cent, the lowest in thirty years, and the deficit, which was two hundred and ninety billion dollars in 1992, had been turned into a two-hundred-and-thirty-billion-dollar surplus in 2000.

Clinton and crew did a fairly bang up job, eh?

Summers told me, “If we had known that derivatives markets would mushroom the way they did and that regulators would remain spectators, we would have acted. With hindsight, all of us with involvement in financial policy wish we had done more to forestall problems.”

We should keep this is mind when judging financial regulation. Derivatives certainly serve a valid economic purpose, but they need some restrictions. They shouldn’t be so convoluted as to obscure their underlying risks.

his pre-Obama years were defined by an interest in the consequences of globalization and warnings about bubbles and the next financial crisis. In his first column, he asked why there was such widespread disillusionment with global free trade. The most troubling reason, he wrote, was “the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth.”

This is a very intelligent, mature view of globalization. On balance it’s great, but it benefits need to be more widely spread. This isn’t an argument for “redistributing the wealth”, it’s an argument for giving more of our citizens the education and skills they need to compete.

Summers played the role of “the ultimate murder board,” according to Sperling, making the Treasury officials defend their ideas the way a Ph.D. student must defend a dissertation. He challenged and provoked Geithner to make sure that he had thought through every aspect of the plan. They argued back and forth, as they had done in the Clinton Administration, and their intensity was often jarring to the other Obama advisers.

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there was enough internal dissension to make sure that the President’s options weren’t constrained. Goolsbee told me, “History has not been kind to Administrations where everybody agreed with each other and all they ever had to say was, Good idea, boss.”

It’s good to know the administration isn’t filled with yes-men. Healthy debate never hurt anybody.

Finally, a closing thought:

So far, none of the worst fears of those who believed that the stimulus was too small or that nationalization was the only option or that taking over car companies would destroy the fabric of capitalism have materialized

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Obama and his team have pulled the economy back from the abyss, but they will get credit only when it has been rebuilt.