Friday, July 26, 2013

Not the Smartest Guy in the Room

If we are to believe Ezra Klein, Larry Summers is the front-runner in President Obama's mind to take over the job of Chairman of the Federal Reserve as Ben Bernanke's replacement.  Bernanke hasn't been an ideal Fed Chair, but he's been far better than his predecessor, the absurdly overrated Alan Greenspan, whose monumental contribution to American economics was "lower interest rates and the economy will grow."
Now Benranke is retiring and Obama has to pick a new Chair.  In this space, we express our hope that Summers is not the choice.

(No, that's not the royal 'we' : Ginger has a very strong opinion on this issue, just as I do.)

Now it's been standard thinking since the 70s, in the school of monetarism founded by Milton Friedman, to think that monetary policy (i.e., controlling the economy by tweaking the Fed's lending rate) is a superior way to manage economic growth than fiscal policy (i.e., using taxing and spending by the government to stimulate growth in various sectors).  And monetary policy really showed its strength in the late 70s, when Paul Volcker raised the lending rate through the roof to stop the double-digit inflation that had been triggered by the various contrived oil shortages (and associated price increases) created by OPEC.

But the basic thinking of responsible monetary policy is this: when the economy is flagging, lower interest rates to stimulate economic growth.  When it's overheating, raise interest rates to slow down inflation.  But the problem during the Bush years was that, in spite of a healthy economy, Greenspan kept lowering interest rates and never raised them again.  So when the market crashed because of the financial crisis of 2008, the Fed couldn't ameliorate the problem by dropping the central lending rate.

As Paul Krugman argued many times, macroeconomics works differently near the zero lower bound.  Monetary policy is useless, and fiscal policy is necessary to get things running again.  But thanks to the utter obstructionism by Republicans and unrelenting "centrism" by the ruling elite of the Democratic party, we've been mired in an economic slump for nearly five years.  While technically not a "recession," our great success is to get the unemployment rate down to 7.5% (and that's probably an under-estimate, given how many people are not actively job hunting).

So how is this Larry Summers' fault, you may ask?  [Aside: and a completely irrelevant one at that.  I've seen people break up Summers' name with an apostrophe, as in "Larry Summer's fault."  Stop doing that!  Who ever told you that was a good idea!  Stop!  STOP!]  Anyway, back to Summers.  Summers is one of the key architects of the Clinton-era deregulation of the 1990s.  This is the de-regulation that led to absurd banking practices of the current century.  I won't go into great detail here, but the basic idea is that the bankers gambled in more and more elaborate ways, screwed the pooch, and nearly destroyed the economy.  In punishment for their excessive (and sometimes illegal) behavior, bankers were held responsible by....?

Lots of prosecutions, better and new regulation, and keen oversight of the industry?  Of course not!  Summers and all his "centrist" buddies wouldn't ever think of imposing any kinds of constraints (or, heaven forbid, punishments!) on Wall Street financiers.

The real problem is the tie between Summers and Obama.  Obama seems to think that Larry Summers is the smartest guy in the room.  That's often an opinion shared by Mr. Summers himself, who has a colossal ego.  The incident at Harvard illustrates his ego neatly.  In a room filled with actual researchers, Summers opines off-the-cuff about what gender roles really are, implying that the professional research done by all these people on his faculty is extraneous, since biology is destiny, boys play with trucks and girls with dolls, etc., etc.  That kind of blithe arrogance is a problem with the rich, who incorrectly think that their ability to make money in finance implies a superior intelligence which is itself applicable to all walks of life, as if any notion that wanders through their brain is highly likely to be superior to any thoughts or beliefs of anybody who isn't already a millionaire.

I have encountered this issue a lot with econ-people, and in particular with math-econ people.  They are essentially making an error of category.  By this I mean that they are thinking that because their thinking is superior in one area of life, that it represents a complete and full understanding of all areas of life.  It's even worse when their thinking in their specialty is not, itself, all that it purports to be.

Robert Rubin, Larry Summers, Tim Geithner, and all these guys think that the free market rocks and that government should just let the finance sector do what it wants to do, and that eventually everything will turn out all right.  This is close to a religious belief in their crowd, to the extent that if somebody like Paul Krugman criticizes their logic, the response will be little more than a diatribe.  [The fact that Krugman links to this post in today's post regarding Summers leads me to the conclusion that the "Senior Administration Official" is Summers himself.]

Anything short of evidence-based thinking is unacceptable, especially for the Chairman of the Fed, who is arguably the second-most powerful man in the country.  Summers is not "the smartest guy in the room."  He's smarter than a lot of people (including the President, apparently, when it comes to economics), but he's not half as smart as he thinks he is.  And this isn't a job for an egotist.

Edit: I really should have given a hat tip to Ezra Klein here.  And as reported by Ezra in a follow-up post: apparently in a CNBC poll of economists, traders, and strategists, Janet Yellen was the frontrunner choice at 50%.  Summers?  He got 2.5%.  There are some caveats here: this poll was taken long before Summers was considered a likely candidate.   But it does indicate a significant amount of support - enough so that any claim of insufficient gravitas should be viewed as unsupportable.  She's the current Vice Chair of the Fed and people seem to trust her.

Second edit:

Oh and (h/t to Sasha): a discussion of how the good ol' boys are trying to sabotage Yellen with a good ol' fashioned whispering campaign.


Purplestate said...

Always nice to read a post that points to BtaF. And you make a great point about the dangers of thinking you have the right about everything when you have superior knowledge / skill at one thing!

Who is your ideal choice for chairman?

Whispers said...

I don't have a preferred candidate, I just strongly disapprove of Summers. Apparently the other leading candidate is Janet Yellen, the current Vice-Chair.

Sasha said...

You might be interested in Ezra's take on the Janet Yellen prospects.

Sasha said...

Oh yeah. The link.

Landru said...

Imagine my disappointment that this post is not about me.