Between 1990 and 1998, Russia’s economy suffered perhaps the worst downturn of any major country that was not the victim of either war or natural disaster. The proximate cause of course was the collapse of the Soviet Union and the replacement of its system of central planning with a market economy. Larry Summers played a large role in shaping this transition, first as chief economist for the World Bank, then as the undersecretary for international affairs at the Treasury Department and later as the Deputy Treasury Secretary.
Since Russia’s economy had been guided largely by central planning for close to 70 years, this transition would have been difficult even under the best of circumstances. However the actual transition was hardly the best of circumstances. Corruption infested every aspect of the privatization. Those with connections in the government were able to become billionaires almost overnight, as they were allowed to buy Russia’s businesses and resources at a small fraction of their market value.
According to the World Bank, Russia’s government was paid just $8.3 billion from privatizing assets over the years 1990-1998, a period when most of its economy was turned over to private control. By comparison, Lukoil, Russia’s largest private oil company, had a market value of $268.8 billion on August 2, more than 30 times as much as the payments that Russia’s government received for all the assets it sold over this 8-year period.
The data clearly show the devastation that this failed transition imposed on the Russian people. According to the United Nation’s Human Development Report, Russia’s per capita income fell by one-third between 1990 and 2000, a decline that dwarfs the falloff in the Great Depression in the United States. This had enormous consequences in the daily lives of the Russian people as the system of social supports that provided basic services collapsed with nothing to replace it. The Development Report shows a drop in life expectancy fell from 68 in 1990 to 65 in 2000, a drop implying that millions of people would be dying at a younger age than would have been the case a decade earlier.
The Development Report has no shortage of grim statistics about the plight of the Russian people in the 1990s. (Those getting depressed by this story should know that Russia made rapid progress in most measures of economic and social well-being after breaking with the Summers agenda in 1998. By 2012, the losses of the 1990s had been more than completely reversed.) However, the question remains whether we can blame Larry Summers for this disaster?
At the American Economic Association convention in January of 1994, Larry Summers gave a talk about the successes of the first year of the Clinton administration. He boasted how “this administration” (a phrase repeated many times) had created more than 1.8 million jobs. He also boasted about the 2.0 percent growth the economy had seen to date. [Note: These were weak numbers. The economy was coming out of the 1990-1991 recession. We might have reasonably expected 3-4 percent growth and 3 million jobs.]
This was peculiar for two reasons. First, the economy almost always creates jobs and grows; the relevant question is the rate of job creation and the pace of economic growth. Boasting that jobs are being created and the economy is growing is a bit like taking credit for the sun rising. The other reason that Summers’ talk was peculiar was that he was making these boasts to economists, all of whom know that the economy typically creates jobs and grows.
Alan Blinder, who was also on the panel and one of Summers’ colleagues in the administration as a member of the Council of Economic Advisers, provided an interesting contrast in his own presentation. Blinder managed to talk forthrightly about the fact that the economy was not growing as fast as the administration wanted, nor was it creating as many jobs as was hoped. He did this in a way that provided useful insights to the audience while not providing any of the reporters in the room with fodder for embarrassing headlines in the next day’s paper.
But the point of this digression is Summers, not Blinder. Summers apparently felt that the Clinton administration deserved credit for the meager number of jobs and slow growth that the economy had generated up to that point. If that’s the case, then by the Summers standard, surely we can hold Mr. Summers accountable for the devastation that Russia’s transition inflicted on its people in the 1990s.
Call it item # 412 in the case for Larry Summers for Federal Reserve Board chair.
Between 1990 and 1998, Russia’s economy suffered perhaps the worst downturn of any major country that was not the victim of either war or natural disaster. The proximate cause of course was the collapse of the Soviet Union and the replacement of its system of central planning with a market economy. Larry Summers played a large role in shaping this transition, first as chief economist for the World Bank, then as the undersecretary for international affairs at the Treasury Department and later as the Deputy Treasury Secretary.
Since Russia’s economy had been guided largely by central planning for close to 70 years, this transition would have been difficult even under the best of circumstances. However the actual transition was hardly the best of circumstances. Corruption infested every aspect of the privatization. Those with connections in the government were able to become billionaires almost overnight, as they were allowed to buy Russia’s businesses and resources at a small fraction of their market value.
According to the World Bank, Russia’s government was paid just $8.3 billion from privatizing assets over the years 1990-1998, a period when most of its economy was turned over to private control. By comparison, Lukoil, Russia’s largest private oil company, had a market value of $268.8 billion on August 2, more than 30 times as much as the payments that Russia’s government received for all the assets it sold over this 8-year period.
The data clearly show the devastation that this failed transition imposed on the Russian people. According to the United Nation’s Human Development Report, Russia’s per capita income fell by one-third between 1990 and 2000, a decline that dwarfs the falloff in the Great Depression in the United States. This had enormous consequences in the daily lives of the Russian people as the system of social supports that provided basic services collapsed with nothing to replace it. The Development Report shows a drop in life expectancy fell from 68 in 1990 to 65 in 2000, a drop implying that millions of people would be dying at a younger age than would have been the case a decade earlier.
The Development Report has no shortage of grim statistics about the plight of the Russian people in the 1990s. (Those getting depressed by this story should know that Russia made rapid progress in most measures of economic and social well-being after breaking with the Summers agenda in 1998. By 2012, the losses of the 1990s had been more than completely reversed.) However, the question remains whether we can blame Larry Summers for this disaster?
At the American Economic Association convention in January of 1994, Larry Summers gave a talk about the successes of the first year of the Clinton administration. He boasted how “this administration” (a phrase repeated many times) had created more than 1.8 million jobs. He also boasted about the 2.0 percent growth the economy had seen to date. [Note: These were weak numbers. The economy was coming out of the 1990-1991 recession. We might have reasonably expected 3-4 percent growth and 3 million jobs.]
This was peculiar for two reasons. First, the economy almost always creates jobs and grows; the relevant question is the rate of job creation and the pace of economic growth. Boasting that jobs are being created and the economy is growing is a bit like taking credit for the sun rising. The other reason that Summers’ talk was peculiar was that he was making these boasts to economists, all of whom know that the economy typically creates jobs and grows.
Alan Blinder, who was also on the panel and one of Summers’ colleagues in the administration as a member of the Council of Economic Advisers, provided an interesting contrast in his own presentation. Blinder managed to talk forthrightly about the fact that the economy was not growing as fast as the administration wanted, nor was it creating as many jobs as was hoped. He did this in a way that provided useful insights to the audience while not providing any of the reporters in the room with fodder for embarrassing headlines in the next day’s paper.
But the point of this digression is Summers, not Blinder. Summers apparently felt that the Clinton administration deserved credit for the meager number of jobs and slow growth that the economy had generated up to that point. If that’s the case, then by the Summers standard, surely we can hold Mr. Summers accountable for the devastation that Russia’s transition inflicted on its people in the 1990s.
Call it item # 412 in the case for Larry Summers for Federal Reserve Board chair.
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This exchange (here, here, and here) between my friend Jared Bernstein and Casey Mulligan is worth a brief comment. As I’ve told several people who followed it, Mulligan is absolutely presenting the mainstream position in the profession, but Jared is right.
The question, if we ignore silly semantics, is whether the economy typically faces a problem of insufficient demand. In other words, if companies, families, or the government went out and spent $500 billion tomorrow would this boost growth or just cause inflation. (Yes, I used all three interchangeably because if the problem is a lack of demand it doesn’t matter who spends the money, the short-term effect on the economy is the same.)
Mulligan presents the orthodoxy, periods where lack of demand is a problem are the exception. As a general rule the economy is at or near full employment. In that context the primary result of more spending is higher inflation as we lack the ability to actually produce more goods and services. In this view, the way we get the economy to grow is by increasing supply side factors, like giving workers more incentive to work, training them better, getting more and better capital, and improving technology. By contrast, Jared is making the argument that if workers had higher wages they would be spending more money, which would lead to more output and possibly more investment as well (yes, a supply side effect).
Mulligan acknowledges that we could be in such a situation now, but that this is an exception. This sort of demand shortfall would not generally be an issue. (There was a similar sort of exchange between Paul Krugman and Joe Stiglitz earlier this year with Krugman taking the Mulligan position. [It is the mainstream position.])
In agreeing with Jared and Stiglitz I would like to introduce the widely discussed “savings glut” from the last decade as a major piece of evidence. While many of the people who knowingly talked about this glut may not know it, a savings glut means a shortfall of demand. In a world with a savings glut the problem is that people are not spending enough money to buy up all the goods and services that the economy is capable of producing.
This means that anyone who believed there was a savings glut in the last decade agrees with Jared and Stiglitz, the economy had a serious problem of inadequate aggregate demand. In this world, if workers get higher pay, this translates into more jobs and higher GDP. (We won’t call it “growth” in deference to Mulligan.)
There are some other propositions that would follow from the savings glut as well. In this world government deficits are helpful to the economy. They boost demand. That’s bad news for the folks who want to say the Bush tax cuts wreck the economy. (No, I have not become a fan of giving money to rich people, but no one pays me to shill for the Democrats.)
The basic economic problem becomes how to find ways to either increase demand on a sustained basis or adjust to a situation in which we will maintain a lower level of output without hurting people with inadequate incomes. (Can anyone say reduced workweeks and longer vacations?)
Anyhow, this is about the most fundamental point that we can have in economics. It is amazing how much confusion exists on the topic.
Addendum:
I see from the comments that this note has prompted confusion. Let me clarify a couple of points. My comment about the Bush tax cuts was not an endorsement of the tax cuts, I was just making the point that the deficits they created did not hurt the economy. We needed the demand and if we didn’t get them from the tax cuts, then we would have seen slower growth and higher unemployment. It would have been better both from the standpoint of boosting demand and reducing inequality if the tax cuts were focused on low and middle income people. It would have been even better if the money was used to support education and infrastructure, but the deficits themselves were good news, not bad news.
As far the existence of a savings glut, this is usually discussed in a worldwide context. The argument is that the world has more savings than it knows what to do with. The U.S. has run large balance of trade deficits over the last 15 years, which means that we have been taking some of savings generated elsewhere in the world. This would leave people unemployed in the United States, since incomes generated in production are being spent overseas. The counter to this has been the stock bubble in the 1990s and the housing bubble in the 2000s, both of which prompted large amounts of consumption, and therefore low household savings.
So this picture is totally consistent with a story of savings glut. What would be inconsistent is if we saw low savings rates even when trade was near balanced or in surplus. That has not happened.
In any case, the immediate issue here is simply the concept of a savings glut. It means that our problem is inadequate demand. Many people who talk of a savings glut do not seem to realize this fact.
This exchange (here, here, and here) between my friend Jared Bernstein and Casey Mulligan is worth a brief comment. As I’ve told several people who followed it, Mulligan is absolutely presenting the mainstream position in the profession, but Jared is right.
The question, if we ignore silly semantics, is whether the economy typically faces a problem of insufficient demand. In other words, if companies, families, or the government went out and spent $500 billion tomorrow would this boost growth or just cause inflation. (Yes, I used all three interchangeably because if the problem is a lack of demand it doesn’t matter who spends the money, the short-term effect on the economy is the same.)
Mulligan presents the orthodoxy, periods where lack of demand is a problem are the exception. As a general rule the economy is at or near full employment. In that context the primary result of more spending is higher inflation as we lack the ability to actually produce more goods and services. In this view, the way we get the economy to grow is by increasing supply side factors, like giving workers more incentive to work, training them better, getting more and better capital, and improving technology. By contrast, Jared is making the argument that if workers had higher wages they would be spending more money, which would lead to more output and possibly more investment as well (yes, a supply side effect).
Mulligan acknowledges that we could be in such a situation now, but that this is an exception. This sort of demand shortfall would not generally be an issue. (There was a similar sort of exchange between Paul Krugman and Joe Stiglitz earlier this year with Krugman taking the Mulligan position. [It is the mainstream position.])
In agreeing with Jared and Stiglitz I would like to introduce the widely discussed “savings glut” from the last decade as a major piece of evidence. While many of the people who knowingly talked about this glut may not know it, a savings glut means a shortfall of demand. In a world with a savings glut the problem is that people are not spending enough money to buy up all the goods and services that the economy is capable of producing.
This means that anyone who believed there was a savings glut in the last decade agrees with Jared and Stiglitz, the economy had a serious problem of inadequate aggregate demand. In this world, if workers get higher pay, this translates into more jobs and higher GDP. (We won’t call it “growth” in deference to Mulligan.)
There are some other propositions that would follow from the savings glut as well. In this world government deficits are helpful to the economy. They boost demand. That’s bad news for the folks who want to say the Bush tax cuts wreck the economy. (No, I have not become a fan of giving money to rich people, but no one pays me to shill for the Democrats.)
The basic economic problem becomes how to find ways to either increase demand on a sustained basis or adjust to a situation in which we will maintain a lower level of output without hurting people with inadequate incomes. (Can anyone say reduced workweeks and longer vacations?)
Anyhow, this is about the most fundamental point that we can have in economics. It is amazing how much confusion exists on the topic.
Addendum:
I see from the comments that this note has prompted confusion. Let me clarify a couple of points. My comment about the Bush tax cuts was not an endorsement of the tax cuts, I was just making the point that the deficits they created did not hurt the economy. We needed the demand and if we didn’t get them from the tax cuts, then we would have seen slower growth and higher unemployment. It would have been better both from the standpoint of boosting demand and reducing inequality if the tax cuts were focused on low and middle income people. It would have been even better if the money was used to support education and infrastructure, but the deficits themselves were good news, not bad news.
As far the existence of a savings glut, this is usually discussed in a worldwide context. The argument is that the world has more savings than it knows what to do with. The U.S. has run large balance of trade deficits over the last 15 years, which means that we have been taking some of savings generated elsewhere in the world. This would leave people unemployed in the United States, since incomes generated in production are being spent overseas. The counter to this has been the stock bubble in the 1990s and the housing bubble in the 2000s, both of which prompted large amounts of consumption, and therefore low household savings.
So this picture is totally consistent with a story of savings glut. What would be inconsistent is if we saw low savings rates even when trade was near balanced or in surplus. That has not happened.
In any case, the immediate issue here is simply the concept of a savings glut. It means that our problem is inadequate demand. Many people who talk of a savings glut do not seem to realize this fact.
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Sometimes it can be painful to read the newspaper. The NYT had a fascinating piece yesterday that implied S&P is lowering its standards for investment grade ratings in order to attract business.
According to the article, S&P had tightened its standards considerably following the financial crisis. This was causing it to lose market share. In order to regain market share it has recently lowered its standards so that banks can count on much better ratings from their new issues from S&P than the other two major rating agencies.
While this story is striking, the piece neglected an important little bit of recent history. There actually was an effort to crack down on this problem in the recent past.
Senator Al Franken proposed an amendment to Dodd-Frank that would have required the banks to call the Securities and Exchange Commission (SEC) when they wanted to have a new mortgage backed security rated. The SEC would then pick the agency. This takes the hiring decision out of the hands of the bank and removes this obvious conflict of interest. Franken’s amendment passed overwhelmingly, getting bi-partisan support. (Note: I had been writing about this idea since 2008 and had consulted with Franken’s staff.)
In the House-Senate conference over the bill, Barney Frank replaced the original wording with a two-year study by the SEC (which took almost 3 years). In the course of this study, the SEC was bombarded by comments from the industry all of which said that picking a bond-rating agency was too complicated for the SEC. As a result, the Franken amendment was killed and we now have the NYT telling us that a major bond-rating agency appears to be lowering its standards to attract business.
Sometimes it can be painful to read the newspaper. The NYT had a fascinating piece yesterday that implied S&P is lowering its standards for investment grade ratings in order to attract business.
According to the article, S&P had tightened its standards considerably following the financial crisis. This was causing it to lose market share. In order to regain market share it has recently lowered its standards so that banks can count on much better ratings from their new issues from S&P than the other two major rating agencies.
While this story is striking, the piece neglected an important little bit of recent history. There actually was an effort to crack down on this problem in the recent past.
Senator Al Franken proposed an amendment to Dodd-Frank that would have required the banks to call the Securities and Exchange Commission (SEC) when they wanted to have a new mortgage backed security rated. The SEC would then pick the agency. This takes the hiring decision out of the hands of the bank and removes this obvious conflict of interest. Franken’s amendment passed overwhelmingly, getting bi-partisan support. (Note: I had been writing about this idea since 2008 and had consulted with Franken’s staff.)
In the House-Senate conference over the bill, Barney Frank replaced the original wording with a two-year study by the SEC (which took almost 3 years). In the course of this study, the SEC was bombarded by comments from the industry all of which said that picking a bond-rating agency was too complicated for the SEC. As a result, the Franken amendment was killed and we now have the NYT telling us that a major bond-rating agency appears to be lowering its standards to attract business.
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I somehow missed this Post article touting the 1.7 percent growth rate reported for the second quarter as better than expected. First it is incredible that the piece would leave readers with the impression that this strong growth, at one point telling readers:
“Some economists anticipated that the better-than-expected GDP report, if coupled with encouraging data in the job market, could encourage the Fed to pull back its support for the economy sooner.”
The economy’s rate of potential growth is generally estimated as being between 2.2-2.5 percent. This means that rather than making up some of the 6 percentage point gap between potential output and actual output, the gap increased in the second quarter. Is the Post trying to tell us that a growing output gap will move up the date at which the Fed withdraws support for the economy?
But wait, it gets worse. The GDP data released on Wednesday also included revisions to prior quarters’ data. The revision to the prior three quarters’ growth rate (Table 1A) were sharply downward lowering growth over this period by 1.3 percentage points or an average of 0.4 percent per quarter. With the revised data, growth over the last year has been just 1.4 percent. This is supposed to be a justification for withdrawing stimulus?
I somehow missed this Post article touting the 1.7 percent growth rate reported for the second quarter as better than expected. First it is incredible that the piece would leave readers with the impression that this strong growth, at one point telling readers:
“Some economists anticipated that the better-than-expected GDP report, if coupled with encouraging data in the job market, could encourage the Fed to pull back its support for the economy sooner.”
The economy’s rate of potential growth is generally estimated as being between 2.2-2.5 percent. This means that rather than making up some of the 6 percentage point gap between potential output and actual output, the gap increased in the second quarter. Is the Post trying to tell us that a growing output gap will move up the date at which the Fed withdraws support for the economy?
But wait, it gets worse. The GDP data released on Wednesday also included revisions to prior quarters’ data. The revision to the prior three quarters’ growth rate (Table 1A) were sharply downward lowering growth over this period by 1.3 percentage points or an average of 0.4 percent per quarter. With the revised data, growth over the last year has been just 1.4 percent. This is supposed to be a justification for withdrawing stimulus?
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Amazingly, it seems that the media managed to completely ignore the sharp upward revision to profit shares reported on Wednesday. This one is pretty simple. By redefining many corporate expenses for research and creative work as investment, which depreciates through time rather than being a one-time cost, profits will be increased. As a result of this change the profit share in recent years was revised sharply upward. The after-tax share of profits in net corporate income for each of the last three years was higher than at any previous point in the post-war era.
Is there some reason that this fact was not mentioned in any of the reporting on the GDP?
Amazingly, it seems that the media managed to completely ignore the sharp upward revision to profit shares reported on Wednesday. This one is pretty simple. By redefining many corporate expenses for research and creative work as investment, which depreciates through time rather than being a one-time cost, profits will be increased. As a result of this change the profit share in recent years was revised sharply upward. The after-tax share of profits in net corporate income for each of the last three years was higher than at any previous point in the post-war era.
Is there some reason that this fact was not mentioned in any of the reporting on the GDP?
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Many political figures opposed to the ACA have made a big point of complaining that the delay of employer sanctions and the lack of enforcement mechanisms will make it easy for individuals to cheat the system and take advantage of the subsidies in the health care exchanges. This was a big complaint previously made by speaker Boehner and repeated today by Michael Gerson. It’s worth noting what this cheating would mean and the incentives provided to workers.
The deal is supposed to be that workers are eligible to join the exchanges and get income based subsidies, if their employer does not offer them an affordable (based on their income) insurance policy at work. Because the government is not prepared to enforce the employer sanctions for not insuring workers and does not have data on the nature of the insurance offered to workers entering the exchanges, there could be some workers who enter the exchanges and get subsidies who actually are offered affordable insurance from their employer.
The issue here is how many people do we think will fall into this boat. To take an extreme example, suppose a worker has an employer that pays the full premium for their insurance. What incentive would this worker have to lie their way into the exchange so that they could get a plan that is subsidized by the government?
If the worker is in a low-income household then the subsidy could be close to 100 percent. In this case, if the insurance offered through the exchange is better than what the employer offers (do opponents of the ACA think this will often be true?) then the worker would have an incentive to lie their way into the exchange, but otherwise they would be better off taking the deal from their employer.
Of course most employers do not pay 100 percent of the premium, but the cases where workers are likely to get a better deal through the exchanges than what they would get from an employer who offers a plan that fits the ACA definition of affordable are likely to be relatively limited. Therefore the idea that there will be massive cheating by this measure seems unlikely.
By contrast, if ACA opponents are actually worried about the government being ripped off, there are many small business owners who list personal expenses, such as a car purchased primarily for personal use, as business expenses. They list these items as business expenses, thereby having taxpayers pick up the tab.
The money lost to the government through this tax dodge is almost certainly at least an order of magnitude greater than the money that could potentially be lost through improper subsidies. (For the math here, if a business owner is in the 39.6 percent tax bracket and buys a $30,000 car, this will cost taxpayers almost $12,000.) Anyhow, if opponents of the ACA are generally concerned about the government being ripped off, they might focus their attention on improper reporting by small business owners. There is a lot more money here than in improper ACA subsidies.
Many political figures opposed to the ACA have made a big point of complaining that the delay of employer sanctions and the lack of enforcement mechanisms will make it easy for individuals to cheat the system and take advantage of the subsidies in the health care exchanges. This was a big complaint previously made by speaker Boehner and repeated today by Michael Gerson. It’s worth noting what this cheating would mean and the incentives provided to workers.
The deal is supposed to be that workers are eligible to join the exchanges and get income based subsidies, if their employer does not offer them an affordable (based on their income) insurance policy at work. Because the government is not prepared to enforce the employer sanctions for not insuring workers and does not have data on the nature of the insurance offered to workers entering the exchanges, there could be some workers who enter the exchanges and get subsidies who actually are offered affordable insurance from their employer.
The issue here is how many people do we think will fall into this boat. To take an extreme example, suppose a worker has an employer that pays the full premium for their insurance. What incentive would this worker have to lie their way into the exchange so that they could get a plan that is subsidized by the government?
If the worker is in a low-income household then the subsidy could be close to 100 percent. In this case, if the insurance offered through the exchange is better than what the employer offers (do opponents of the ACA think this will often be true?) then the worker would have an incentive to lie their way into the exchange, but otherwise they would be better off taking the deal from their employer.
Of course most employers do not pay 100 percent of the premium, but the cases where workers are likely to get a better deal through the exchanges than what they would get from an employer who offers a plan that fits the ACA definition of affordable are likely to be relatively limited. Therefore the idea that there will be massive cheating by this measure seems unlikely.
By contrast, if ACA opponents are actually worried about the government being ripped off, there are many small business owners who list personal expenses, such as a car purchased primarily for personal use, as business expenses. They list these items as business expenses, thereby having taxpayers pick up the tab.
The money lost to the government through this tax dodge is almost certainly at least an order of magnitude greater than the money that could potentially be lost through improper subsidies. (For the math here, if a business owner is in the 39.6 percent tax bracket and buys a $30,000 car, this will cost taxpayers almost $12,000.) Anyhow, if opponents of the ACA are generally concerned about the government being ripped off, they might focus their attention on improper reporting by small business owners. There is a lot more money here than in improper ACA subsidies.
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NYT had a good piece highlighting the wave of strikes taking place in fast-food restaurants across the country. One item could use some clarification.
At one point the piece notes that some labor leaders scoff at the idea that these workers could be unionized based on the fact that their turnover rate is 75 percent. If fast-food workers were paid a minimum of $15 an hour, the central demand of the strikes, then it is likely their turnover would be considerably lower.
NYT had a good piece highlighting the wave of strikes taking place in fast-food restaurants across the country. One item could use some clarification.
At one point the piece notes that some labor leaders scoff at the idea that these workers could be unionized based on the fact that their turnover rate is 75 percent. If fast-food workers were paid a minimum of $15 an hour, the central demand of the strikes, then it is likely their turnover would be considerably lower.
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George Will had the obligatory union bashing piece, titled “Detroit’s death by democracy,” in the Post today. Will’s story is that unions used their political power to get unaffordable contracts from the city government, thereby pushing it into bankruptcy.
For some reason he neglects to show the evidence of the union workers’ bloated pay: wages that average $42,000 a year for non-uniform personnel and pensions of $18,500 a year. I suppose you might be able to get workers for less, but this probably is not most people’s vision of the good life.
The main reason that Detroit died were structural factors that were determined largely outside of Detroit’s city government. Certainly a high dollar policy that made U.S. cars less competitive, contributed a great deal to Detroit’s decline. The growth of a parasitic financial sector that drew talented people away from productive industries like autos also played a role. And the economic collapse in 2008 that resulted from these folks’ greed and incompetence was also a really important factor.
Race also played a major role, with whites fleeing in large numbers to the suburbs beginning in the 1950s. This cost the city much of its tax base and left it with sections of the city that were large depopulated but still required city services (look at Detroit on Google maps).
However Will has a point about democracy doing in Detroit. Detroit’s representatives in Congress and their allies will push their case for federal aid in saving the city. But they are speaking with the wrong currency in Washington. This will be a question of the voting power of Detroit residents and the people who sympathize with them.
By contrast, when Goldman Sachs, Citigroup, and other Wall Street behemoths were facing death in 2008 they had strong advocates at the very top levels in the White House and Congress in both parties (e.g. Larry Summers and Henry Paulson). They did not need votes, they had the money to buy power. And of course they got the government to cough up the cash and guarantees that they needed to get through the crises they had created.
So Will is absolutely right in blaming Detroit’s death on democracy. The city simply doesn’t have the right currency to survive in the political system today.
George Will had the obligatory union bashing piece, titled “Detroit’s death by democracy,” in the Post today. Will’s story is that unions used their political power to get unaffordable contracts from the city government, thereby pushing it into bankruptcy.
For some reason he neglects to show the evidence of the union workers’ bloated pay: wages that average $42,000 a year for non-uniform personnel and pensions of $18,500 a year. I suppose you might be able to get workers for less, but this probably is not most people’s vision of the good life.
The main reason that Detroit died were structural factors that were determined largely outside of Detroit’s city government. Certainly a high dollar policy that made U.S. cars less competitive, contributed a great deal to Detroit’s decline. The growth of a parasitic financial sector that drew talented people away from productive industries like autos also played a role. And the economic collapse in 2008 that resulted from these folks’ greed and incompetence was also a really important factor.
Race also played a major role, with whites fleeing in large numbers to the suburbs beginning in the 1950s. This cost the city much of its tax base and left it with sections of the city that were large depopulated but still required city services (look at Detroit on Google maps).
However Will has a point about democracy doing in Detroit. Detroit’s representatives in Congress and their allies will push their case for federal aid in saving the city. But they are speaking with the wrong currency in Washington. This will be a question of the voting power of Detroit residents and the people who sympathize with them.
By contrast, when Goldman Sachs, Citigroup, and other Wall Street behemoths were facing death in 2008 they had strong advocates at the very top levels in the White House and Congress in both parties (e.g. Larry Summers and Henry Paulson). They did not need votes, they had the money to buy power. And of course they got the government to cough up the cash and guarantees that they needed to get through the crises they had created.
So Will is absolutely right in blaming Detroit’s death on democracy. The city simply doesn’t have the right currency to survive in the political system today.
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According to Ezra Klein, a major plus in the case for Larry Summers as Fed chair is his experience dealing with financial crises. While it is true that he took a leadership role in dealing with far more crises than Janet Yellen, the other leading contender for the job, it is hard to believe that his record in this area would be a plus if he was being graded by the outcomes.
Starting with the Mexican peso crisis in 1994, Summers helped to negotiate a deal that protected big investors in Mexico’s debt, like Goldman Sachs. Mexico suffered a severe downturn in the immediate aftermath of the crisis and has had the slowest per capita GDP growth of any country in Latin America in the two decades since the crisis. That one doesn’t look like much of a success story.
Then we can go to the East Asian financial crisis in 1997. As even the IMF now admits, Summers and the rest of the Committee to Save the World (CSW) largely misdiagnosed the crisis. They saw it as a problem of economies that were badly misbalanced as opposed to being largely an issue of liquidity and confidence. Malaysia broke with the IMF and applied capital controls, which were roundly rejected by Larry Summers, and managed to escape some of the worst effects of the adjustment.
The deal for the East Asian countries was that they had to repay their debts in full. In order to do so, the currencies of the countries in the region plummeted against the dollar and their exports to the U.S. soared.
It was not only East Asian countries that hugely increased their exports to the United States. Because of the harsh terms imposed by the Summers-IMF gang, developing countries throughout the world began to accumulate foreign exchange (i.e. dollars) like crazy as insurance, so that they would not be put in the same situation as the East Asian countries in dealing with the IMF.
This led to a huge run-up in the dollar. That in turn caused the trade deficit to explode, reaching a peak of almost 6.0 percent of GDP (@$960 billion in today’s economy) in 2006. The trade deficit has been the fundamental imbalance in the U.S. economy. It means that a huge amount of the income generated in the United States is being spent overseas rather than creating demand domestically.
In the 1990s this hole in demand was filled by the demand generated by the stock bubble. In the last decade it was filled by the demand generated by the housing bubble. Currently the demand gap is being partially filled by the budget deficit and partially going unfilled, leaving millions unemployed. This outcome hardly seems like an item to put on Summers’ boast sheet.
Finally we have Summers’ role in the 2008-2009 financial crisis. Summers was one of the people who pushed the Democrats in Congress to accept the no (real) conditions TARP bailout given to them by Henry Paulson. Once in the White House he was the staunch defender of the bankrupt banks belligerently challenging anyone who proposed letting the market work its magic and put these behemoths out of our misery. As a result of Summers’ work the too big to fail banks are bigger and more profitable than ever.
In fact, if we want a serious assessment of Larry Summers performance as a crisis manager we might ask what happens when countries don’t take his advice. Probably the best example in this category would be Russia in 1998. The CSW had been struggling with the Yeltsin government for years to keep them paying their bills and maintain the ruble’s link to the dollar. In the summer of 1998, Yeltsin gave up the effort. He abandoned the link to the dollar and temporarily defaulted on Russia’s debt.
The word from the Summer’s crew, which was dutifully repeated in the business press, was that Russia’s economy would go down the tubes. While it did fall sharply in 1998, it made up all the lost ground in 1999 and then grew by more than 10 percent in 2000. In fact, Russia enjoyed a decade of exceptionally strong growth before the economic crisis in 2009 finally sent it into recession. The Russians probably do not miss the wisdom of Larry Summers.
In short, if we look at Larry Summers track record in dealing with crises it is pretty abysmal. But on attendance, he gets an “A.”
According to Ezra Klein, a major plus in the case for Larry Summers as Fed chair is his experience dealing with financial crises. While it is true that he took a leadership role in dealing with far more crises than Janet Yellen, the other leading contender for the job, it is hard to believe that his record in this area would be a plus if he was being graded by the outcomes.
Starting with the Mexican peso crisis in 1994, Summers helped to negotiate a deal that protected big investors in Mexico’s debt, like Goldman Sachs. Mexico suffered a severe downturn in the immediate aftermath of the crisis and has had the slowest per capita GDP growth of any country in Latin America in the two decades since the crisis. That one doesn’t look like much of a success story.
Then we can go to the East Asian financial crisis in 1997. As even the IMF now admits, Summers and the rest of the Committee to Save the World (CSW) largely misdiagnosed the crisis. They saw it as a problem of economies that were badly misbalanced as opposed to being largely an issue of liquidity and confidence. Malaysia broke with the IMF and applied capital controls, which were roundly rejected by Larry Summers, and managed to escape some of the worst effects of the adjustment.
The deal for the East Asian countries was that they had to repay their debts in full. In order to do so, the currencies of the countries in the region plummeted against the dollar and their exports to the U.S. soared.
It was not only East Asian countries that hugely increased their exports to the United States. Because of the harsh terms imposed by the Summers-IMF gang, developing countries throughout the world began to accumulate foreign exchange (i.e. dollars) like crazy as insurance, so that they would not be put in the same situation as the East Asian countries in dealing with the IMF.
This led to a huge run-up in the dollar. That in turn caused the trade deficit to explode, reaching a peak of almost 6.0 percent of GDP (@$960 billion in today’s economy) in 2006. The trade deficit has been the fundamental imbalance in the U.S. economy. It means that a huge amount of the income generated in the United States is being spent overseas rather than creating demand domestically.
In the 1990s this hole in demand was filled by the demand generated by the stock bubble. In the last decade it was filled by the demand generated by the housing bubble. Currently the demand gap is being partially filled by the budget deficit and partially going unfilled, leaving millions unemployed. This outcome hardly seems like an item to put on Summers’ boast sheet.
Finally we have Summers’ role in the 2008-2009 financial crisis. Summers was one of the people who pushed the Democrats in Congress to accept the no (real) conditions TARP bailout given to them by Henry Paulson. Once in the White House he was the staunch defender of the bankrupt banks belligerently challenging anyone who proposed letting the market work its magic and put these behemoths out of our misery. As a result of Summers’ work the too big to fail banks are bigger and more profitable than ever.
In fact, if we want a serious assessment of Larry Summers performance as a crisis manager we might ask what happens when countries don’t take his advice. Probably the best example in this category would be Russia in 1998. The CSW had been struggling with the Yeltsin government for years to keep them paying their bills and maintain the ruble’s link to the dollar. In the summer of 1998, Yeltsin gave up the effort. He abandoned the link to the dollar and temporarily defaulted on Russia’s debt.
The word from the Summer’s crew, which was dutifully repeated in the business press, was that Russia’s economy would go down the tubes. While it did fall sharply in 1998, it made up all the lost ground in 1999 and then grew by more than 10 percent in 2000. In fact, Russia enjoyed a decade of exceptionally strong growth before the economic crisis in 2009 finally sent it into recession. The Russians probably do not miss the wisdom of Larry Summers.
In short, if we look at Larry Summers track record in dealing with crises it is pretty abysmal. But on attendance, he gets an “A.”
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