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Economic policy does not occur in a political vacuum

Even if a policymaker is sure of the ideal economic policy, he or she can only implement it with the help of some of the other political players.

But I’m saying something different, echoing what I wrote a couple days ago. I thought of this the other day after seeing this recent quote from Paul Krugman (extracted by Brad DeLong) about Larry “Starbucks” Summers:

Summers is . . . indistinguishable from me [Krugman] on macro-policy. And he may be a bit to the left, because he’s even more certain than I am . . . that some extra spending now will actually help us more in fiscal terms. So he published a piece in the Financial Times that was meant to be a big statement about this. But before he got to that, he spend three paragraphs about the importance of dealing with the deficit in the medium term . . . to establish that ‘I am a respectable person; I am not like that rabble-rouser, Krugman.’ . . .

Maybe. But, going back to 2009, I still suspect that Summers, or some part of Summers, feared that a big stimulus at the beginning of Obama’s first term would work all too well, leading to a 1978-style economic expansion followed by a 1980-style dive. I’m sure that Summers’s preferred outcome was steady economic growth, but given all the uncertainty involved, I wouldn’t be surprised if he preferred to err on the side of a lower stimulus to avoid overheating the economy.

My story does not contradict Krugman’s.

In both cases, Summers believes that productive deficit spending will stimulate the economy and help in fiscal terms (by the usual mechanism that more employment will lead to more goods and services, a higher tax base, etc.) My story just adds a political component: Summers in 2013 is some combination of public intellectual and business investor and is quite naturally in favor of economic growth right now. Summers in 2009 was working for and closely identified with the incoming administration, and I think his #1 priority was to make it a success, which in particular meant doing his best to assure economic growth, not over all four years, but in particular during 2012.

I’m not saying that Krugman is wrong in his attribution of a desire to respectability on Summers’s part. Indeed, I suspect Krugman had similar motivations several years ago when he disparaged John Kenneth Galbraith. But I think this all makes more sense when considering the political context.

9 Comments

  1. Ashok Rao says:

    You can both be right. I think Larry Summers is well to the left of where he was today; than 2009. Of course I do not know him personally, and I can only make a guess based on external evidence. I suspect that in 2009 politics were important, but I don’t buy the “trillion” threshold (and, anyway, 831 != 999) – and I honestly think Summers had more confidence in “the market” then than now.

    Now that means, retrospectively, he either updated his priors on Keynesian theory itself, or the depth of our output gap. I think it’s much more the latter than the former, but who knows (Brad DeLong, for example, is far more Keynesian today than he was 6 years ago – http://delong.typepad.com/sdj/2013/06/john-cochrane-what-chicago-does-know-is-scholarship-we-take-a-little-time-to-research-what-people-actually-have-to-say.html)

    But I think by the time the Financial Times op-ed was written (after he wrote one of the fiercest anti-austerity papers with DeLong) the preface with “long term debt” etc etc. was more a nod to seriousness than anything else. And let’s be honest, it’s not even about the “I’m not Krugman”. That we need to “solve” our debt problem in the “long run” is one of the broadest, and most tautologically true statements in the world. Three ‘graphs?

    P.S. I don’t think the comparison with Krugman and Galbraith is right. Maybe I’m wrong, but Larry Summers isn’t really a celebrity economist much, is he?

    • Andrew says:

      Ashok:

      What you say above is reasonable.

      Regarding the P.S., I’m not equating Summers to Galbraith. What I’m saying is that Summers:Krugman = Krugman:Galbraith. That is: In the 90s, I think Krugman dissed Galbraith in part to establish his (Krugman’s) status as a Very Serious Person (as Krugman would now say). I have no doubt that Krugman was sincere in his disdain for Galbraith, but I think this disdain fit into Krugman’s position at the time as a non-ideological pragmatist.

      • Ashok Rao says:

        That’s fair enough, I missed the nuance in the comparison. Though Krugman distanced himself from certain people (Tyson, Reich, Galbraith – “policy entrepreneurs”) and Larry Summers from an idea. While Krugman is obviously the face and life of “deficits” today, I think Summers writing that goes well beyond any immediate comparison with Krugman. (Only Krugman inserted himself as the irresponsible character in a later comment).

        I think there was more content (whether right or not) in Krugman’s assault of certain leftist characters back in the ’90s than prefacing op-eds with points about “structural” change and “long term” which are usually empty copouts about the future. Again, all this might have more to do with FT editorial policy or something about which I don’t know.

        LS would be a lot more candid in blog form than editorials.

  2. […] Economic policy does not occur in a political vacuum […]

  3. numeric says:

    Maybe. But, going back to 2009, I still suspect that Summers, or some part of Summers, feared that a big stimulus at the beginning of Obama’s first term would work all too well, leading to a 1978-style economic expansion followed by a 1980-style dive.

    You’re a political scientist but surely you are aware that the collapse of Iran and the tripling of oil prices was the primary cause of economic difficulties in the US in 1979-80. This was not reflected in diminished growth but rather higher inflation–multiple reasons–oil was more important, a larger percent of the workforce had cost-of-living clauses, and oil did, after all, triple. This can be seen by looking at the GNP (http://research.stlouisfed.org/fred2/data/GNP.txt)

    Quarter GNP
    1979-01-01 2489.0
    1979-04-01 2555.9
    1979-07-01 2635.8
    1979-10-01 2695.9
    1980-01-01 2762.1
    1980-04-01 2763.8
    1980-07-01 2819.6
    1980-10-01 2943.8
    1981-01-01 3082.8
    1981-04-01 3114.3
    1981-07-01 3209.7
    1981-10-01 3232.3
    1982-01-01 3220.9

    the recession didn’t happen until after Reagan became president (Volcker raised interest rates–Reagan’s Keynesian defense spending and tax cuts goosed the economy starting in 1983). The larger point is Summers would have known the history of this and would not have worried about a “dive” in two years, particularly starting from a collapsed economy. What Summers apparently did worry about was the politics of a large stimulus, even refusing (by some accounts) Romer the authority to bring up the actual Keynesian estimate necessary to get the economy back to full employment (1.6 trillion, as opposed to .8 trillion, and .15 of that .8 trillion was the alternate minimum tax) adjustment. The events of 2008 were unprecedented in any policy makers personal experience–Krugman was lucky on several accounts, the greatest piece of luck being that he had studied the Japanese economy that had undergone something similar to the US (not as sharp, but an actual decline) a decade before. Krugman makes mistakes (look at his claim that Bush deficit spending would goose inflation in the early part of the 00’s), but this was a pretty simple application of standard economic theory. The reason it wasn’t applied is clearly political and not because Summers was afraid of a “dive” in two years. I don’t know what historical period you are even thinking of (1937? 1972?–and I would argue that those both were different)–but even then the stimulus (particularly aid to the states) could have been designed to avoid the “dive” effect (which I don’t think exists in the form you are arguing–I think you must be referring to some type of austerity, but see my comments on design of stimulus).

  4. HCG says:

    Without going back to examine all the discussion then, if memory serves, the Republicans were spooked by the huge increase in federal debt at the end of Bush’s term, and they were aided by several ideological conservative economists saying that the proposed increased stimulus would not work. These economists were wrong, but as ideologues they still have not admitted that they were wrong. Nonetheless no one really fully understood the problem at that point.

    Politics of course infused everything, but my surmise is that more influential were the psychological proclivities of Summer’s boss, in particular, his now very evident willingness to compromise with himself. He was not going to be aggressive about it.

    See http://www.nytimes.com/2011/08/07/opinion/sunday/what-happened-to-obamas-passion.html?scp=1&sq=westen%20emory%20obama&st=cse&_r=0

  5. kharris says:

    In order for you suspicion about Summers to have much chance of being correct, Summers would had to have had good reason to worried that stimulus would lead to a strong recovery that would lead to a quick stall. That is an unlikely chain of reasoning. Summers was as aware as anyone else that a credit crunch is typically followed by a lengthy period of sub-par growth. Summers was as aware as anyone that the recession had created economic slack of a magnitude unseen in decades, and that economic slack allows for growth without the Fed having to stomp on the break.

    I don’t think the economic argument behind your story about Summers holds up. The risk of a second recessionary dip that Bernanke was telling at the time was the 1937 story, and Summers very likely had that in mind as well. Nobody I know of was talking about 1980 back in 2009.

    • Andrew says:

      Kharris:

      They might not have been talking about 1980 from an economic perspective, but I bet that from a political perspective the Obama team was thinking hard about how to replicate Reagan’s reelection success and avoid the fate of Carter. And, remember, there was a lot of discussion about Larry Bartels’s book at that time. Bartels’s idea was that Democratic presidents tended, on average, to juice the economy in years 1-2 and have declines in years 3-4, leading to worse reelection chances, whereas Republican presidents were more successful, on average, by juicing the economy in years 3-4. I’m guessing that Summers was aware of this argument.

      • kharris says:

        I don’t see how the existence of Bartel’s book addresses anything that I wrote, so I’m a little puzzled at your reply. The point I made was that Summers had no reason to believe that over-stimulus could cause a problem. Bartel’s book addressed over-stimulus as it intersects with political timing. Take over-stimulus out, and Bartel’s argument evaporates. Given who Summers is – a very good economist with a very high opinion of his own abilities – I can’t imagine the Bartel’s book changing his assessment of the economy. Only if Summers had come independently to the view that over-stimulus could lead to a stall ahead of the election would he have given Bartel’s argument credence.

        Look at Summers debates with Christina Romer. She wanted more stimulus than he did, but neither of them have ever said the debate was over the risk of over-stimulating. Back then, 1937 was in the air. Economists in the middle and in the Obama camp, as far as I can see, took the 1937 risk more seriously than Bartel. Most, I think, would have dismissed Bartel out of hand. Summers was worried about the optics of a trillion dollar stimulus package, not the economic of such a package, not about stalling because of too much stimulus. That concern over the optics of a big stimulus was pretty widely reported, not something I’m making up.

        In fact, the whole notion of stalling because of too much stimulus buys into the Republican line at the time. The Republican line was pretty clearly aimed at making sure Obama did not benefit politically from his economic policies. Everybody at the White House knew that. Why would they believe the economics of an argument designed at forcing them to adopt sub-optimal economic policy?

        You are arguing that Summers used his economic judgement to drive his political recommendations. I think the evidence shows Summers allowed his political judgement to drive his economic recommendations. When an economic advisor does that, he does his boss a disservice. Summer did his boss and all of us a big disservice, but it didn’t keep Obama from being re-elected.