Tags: Larry Summers | Barack Obama | Donald Trump | Federal Reserve

Larry Summers Was Wrong About Obama's Stimulus, So Why Listen to Him?

Larry Summers Was Wrong About Obama's Stimulus, So Why Listen to Him?

By    |   Friday, 26 May 2017 03:42 PM EDT

According to Larry Summers, the Trump administration’s recently released budget contains a most heinous elementary error that disqualifies the whole thing and every single person involved in it. Apart from being hugely convenient for his side of the political debate, the error smells a little too familiar, or at least it should coming from Dr. Summers.

Here is what he contends, published widely all over the world in every major newspaper and internet outlet:

Then the administration asserts that it will propose revenue neutral tax cuts with the revenue neutrality coming in part because the tax cuts stimulate growth! This is an elementary double count. You can’t use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue. At least you cannot do so in a world of logic.

Just to be clear how bad this is in the estimation of elementary logic, Summers later adds:

This is a mistake no serious business person would make. It appears to be the most egregious accounting error in a presidential budget in the nearly 40 years I have been tracking them.

But weren’t economists like Summers (and Krugman) using largely the same formulation in 2009 if in reverse? Many critics of the “stimulus” contended that exploding budget deficits would create similar havoc down the road, to which “stimulus” proponents argued wouldn’t happen because it would restore growth, which would among other things reduce the deficit. We would, it was claimed, similarly “grow our way out” of any trouble. Summers today says that Trump’s estimates for a 3% baseline amount to, “if you believe in tooth fairies and ludicrous supply side economics.”

Yet, the Obama administration through its Council of Economic Advisors, chaired by orthodox economist Christina Romer, modeled growth of 3.2 percent in the second fiscal year of the Obama’s term, followed by 4 percent and then 4.6 percent; all due to deficit spending (and monetary policy). There were no mainstream charges of Easter Bunny-type hysterics. In fact, those estimates along with those of the Federal Reserve under QE1 were largely swallowed as if already written on the economy’s ledger, in ink.

As late as October 2013, amidst the nth iteration of the debt ceiling drama, Summers was still writing as if nothing had changed. In the Financial Times he claimed:

Beyond the fact that spurring growth has a multiplicity of benefits, of which reduced federal debt is only one, there is the further aspect that growth-enhancing policies have more widely felt benefits than measures that raise taxes or cut spending. Spurring growth is also an area where neither side of the political spectrum has a monopoly on good ideas.

That last point is where he and the rest of them have ended up. Economists all failed after the crisis, and rather than admit that might have been the case they have wandered over to the other extreme. Going from all ideas are good ideas, they in this era of “secular stagnation,” a 1930’s speculation (and a wrong one, it somehow needs to be pointed out) re-introduced by Dr. Summers, now demand that there are no good ideas. To put it another way, economists didn’t actually fail they couldn’t possibly have succeeded since it is the economy that is, for reasons they don’t and can’t specify, broken.

This is the danger of ideology when it falls on its face. A scientific pursuit is one that meets failure as a useful identification for at least what not to do, perhaps telling researchers as much as where next to search and inquire. Not Economics. ARRA, deficits, QE’s, ZIRP; now it’s abandon all hope ye who enter.

I do not write to defend Trump’s proposals or estimates, or even the so-called egregious error. Summers demands that the budget proposal is an assault on logic, and yet he commits himself a logical fallacy far worse. One thing in error does not necessarily propose all things in error (or all the people involved in it). There are legitimate reasons to believe that gutting regulations could lead to significant positive effects having nothing whatsoever to do with supply-side fairies.

But they are not likely to deliver 3% growth, either, apart from all-too-brief interludes. In other words, it would be the same condition that we experience now. This does not propose Dr. Summers is right in anything apart from his diagnosis of the condition of “secular stagnation.” His orthodox ideology has closed off his mind, just as it did for Alvin Hansen, the original sponsor for the topic, to explore all the possible reasons for it and therefore an actual, authentic remedy.

It speaks directly to the idea of “efficient markets”; how can money markets, the very basis of the wholesale financial system, continue to be so wrong? The answer is that QE and the view of bank reserves as money for use in the real economy is and has always been mistaken. Therefore, the upward sloping OIS curve (the one that finds normalization “always” 6 to 9 months into the future) is a bet on bank reserves as money; the eventual shriveling of it is the same as we find everywhere else, from German bunds to US treasuries to eurodollar futures – monetary contraction…

Since these economists believe down to their very core that they did everything they were supposed to, and it was all expertly designed and carried out, the fault must then lay with the economy itself. It cannot be the slow strangulation of monetary contraction because Friedman, Bernanke, Summers, etc., have all studied the Great Depression ad nauseam and would never make, as they see it, the same mistake.

They have led us into a trap, a liquidity trap wholly unlike what is talked about and proposed in the mainstream. It is one where there is no liquidity, but everyone thinks there is. Because of that last part, there is no genuine official interest anymore in liquidity (meaning money); the trap. That has left the world where its elite (in name and reputation only) thinkers are now almost certain there is no hope at all.

This is, in fact, the most dangerous of all courses. Criticize Trump if you must, and much of it deserved, but reserve in capacity the possibility for hope. Above all, don’t let economists’ collective bruised ego play such a decisive role. They got it wrong, so they think no one can possibly get it right. It is the most scandalous mistake in logic anywhere.

Jeff Snider is head of global investment research for Alhambra Investment Partners, a registered investment advisory based in Palmetto Bay, Florida. Click HERE to read more of his commentary.

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According to Larry Summers, the Trump administration's recently released budget contains a most heinous elementary error that disqualifies the whole thing and every single person involved in it. Apart from being hugely convenient for his side of the political debate, the...
Larry Summers, Barack Obama, Donald Trump, Federal Reserve
Friday, 26 May 2017 03:42 PM
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