Evidence of intelligent life in the economics profession
March 3, 2015
from Dean Baker
Last month, former Clinton Treasury Secretary and top Obama adviser Larry Summers ripped into those arguing that more education is the answer to the country’s inequality problems:
“The core problem is that there aren’t enough jobs. If you help some people, you could help them get the jobs, but then someone else won’t get the jobs. Unless you’re doing things that have things that are affecting the demand for jobs, you’re helping people win a race to get a finite number of jobs.”
He made these comments at a conference put on by the Robert Rubin funded Hamilton Project held at the Brookings Institution.
If the significance of these comments is not clear, the most important economic figure of the mainstream of the Democratic Party was demolishing one of the party’s central themes over the last two decades. He was arguing that the problems of the labor force — weak employment opportunities, stagnant wages, and rising inequality — were not going to be addressed by increasing the education and skills of the workforce. Rather, the problem was the overall state of the economy.
The standard education story puts the blame for stagnant wages on workers. The key to getting ahead is getting a good education. The story Summers was telling at Brookings is that the blame is on the people who design economic policy. It is their fault that workers aren’t able to secure decent paying jobs.
Summers is responding to evidence that can’t be reconciled with the education story. As my friends and colleagues Larry Mishel, John Schmitt, and Heidi Shierholz have shown, inequality has continued to grow since 2000 in spite of the fact that there has been no increase in demand for workers in highly skilled occupations. Similarly, there has been little change in the wage premium that college educated workers enjoy relative to less educated workers, as pay for the typical college grad has barely risen since the turn of the century.
For this reason, anyone who blames stagnating wages on a lack of education is ignoring the data. With the data no longer supporting the theory, at least some mainstream economists have chosen to adjust their views.
This is not the only issue on which mainstream economists have changed their tune. It is now common to hear Summers and other prominent economists talk about the problem of “secular stagnation,” the idea that the economy could suffer from a shortage of demand over a sustained period of time.
This view was routinely ridiculed in the economics profession less than a decade ago. The standard view was that the economy could only suffer from a lack of demand for short periods of time when it was in a recession, but recessions were self-correcting. This meant that the economy would quickly bounce back to full employment levels of output, so a shortage of demand need not be a concern. The key to producing more was to fix the supply side of the economy. Even the research department of the International Monetary Fund (I.M.F.) now recognizes the problem of inadequate demand, although the I.M.F. economists designing country programs seem to have not yet gotten the message.
Economists are also now much more critical of trade. It is now widely accepted that the patterns of trade over the last three decades have lowered the wages of a large segment of the workforce. And prominent economists like Joe Stiglitz and Jeffrey Sachs have openly warned about the negative effects of trade agreements like the Trans-Pacific Partnership.
And the luster of an ever bigger financial sector with increasingly complicated financial instruments has also faded. A recent paper from the Bank of International Settlements showed that a bloated financial sector was a drag on growth. And Simon Johnson, the former chief economist at the I.M.F. has been a tireless critic of too big to fail banks and the policies that support them.
Each of these changes involves an enormous shift in the economic profession from views that were the absolute orthodoxy less than two decades ago. Back in the 1990s, the policy types and political figures who held the views now espoused by Summers, Krugman, Stiglitz, and Sachs were not just wrong, they were not serious people. They were know-nothings who didn’t understand modern economics.
This new thinking in the economics profession is a remarkable break with the past. It should be viewed in the same way as Pope Francis’ effort to reconcile the Catholic Church with the modern world. But just as Francis must do battle with hardliners, the orthodoxy remains well entrenched in the economics profession.
Many elite economists still insist that unemployment due to inadequate demand is not a problem. They continue to press concerns over budget deficits, as though the economy would somehow be better off if we cut annual spending by $500 billion (@ 2.7 percent of GDP) to balance the budget. And the Federal Reserve Board stands ready to start raising interest rates, as if higher inflation is a problem that need concern us any time in the foreseeable future. And most economists still argue that any trade deal is a good thing, if politicians label it a “free-trade” deal.
But those of us who want to advance a progressive economic agenda must recognize the opening that has taken within the profession. There is no longer a mainstream consensus for bad economic policy that redistributes upward. That is real progress.
STTPML: LARRY SUMMERS, “INTELLIGENCE” AND “ECONOMICS” LIKE VEGETARIANISM AND CANNIBALISM
Furor on Memo At World Bank
Published: February 7, 1992
WASHINGTON, Feb. 6— A memo by Lawrence H. Summers, the World Bank’s chief economist, has angered environmentalists by arguing that many developing countries are underpolluted and that dirty industries should be encouraged to move to them. Mr. Summers has said the memo was meant to be sarcastic.
“A given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages,” said the memo, which was obtained from a critic of the World Bank’s environmental record. “I think the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that.”
Mr. Summers said in a recent interview that the seven-page memo was a strongly worded and sarcastic response to a vague draft text on environmental issues by another World Bank division.
The World Bank said in a statement today that the memo did not represent the institution’s position and that Mr. Summers had apologized “for any misconceptions it may have generated.”
By Jim Vallette
1999 Back on December 12, 1991, then the chief economist for the World Bank, Lawrence Summers, wrote an internal memo that was leaked to the environmental community, and we, in turn, publicized it. This memo remains relevant.
Mr. Summers, currently the Deputy Secretary of the Treasury Dept., is President Clinton’s nominee to replace Mr. Wall Street, Robert Rubin, as U.S. Treasury Secretary. As the country’s chief economist, Mr. Summers will be the driving force behind its global economic policy. We can thus look forward, with trepidation, to further exertion of the U.S.’ free trade – at any cost to people and the environment – policies.
In 1994, by the way, virtually every other country in the world broke with Mr. Summers’ Harvard-trained “economic logic” ruminations about dumping rich countries’ poisons on their poorer neighbors, and agreed to ban the export of hazardous wastes from OECD to non-OECD countries under the Basel Convention. Five years later, the United States is one of the few countries that has yet to ratify the Basel Convention or the Basel Convention’s Ban Amendment on the export of hazardous wastes from OECD to non-OECD countries.
DATE: December 12, 1991
FR: Lawrence H. Summers
“‘Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I’ve always though that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable.”
“The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.”
After the memo became public in February 1992, Brazil’s then-Secretary of the Environment Jose Lutzenburger wrote back to Summers: “Your reasoning is perfectly logical but totally insane… Your thoughts [provide] a concrete example of the unbelievable alienation, reductionist thinking, social ruthlessness and the arrogant ignorance of many conventional ‘economists’ concerning the nature of the world we live in… If the World Bank keeps you as vice president it will lose all credibility. To me it would confirm what I often said… the best thing that could happen would be for the Bank to disappear.”
Sadly, Mr. Lutzenburger was fired shortly after writing this letter. Mr. Summers remained in the World Bank before joining the Clinton administration and continuing his incredible rise toward the Cabinet. Meanwhile, world trade has burgeoned with imbalanced cargoes: banned pesticides, leaded gasoline, CFCs, asbestos, and other products restricted in the North are sold to the South; tropical timber, oil, coal, and other natural resources flow from South to North with little or no benefit to the host communities; and while regulations tighten around dirty coal and dangerous nuclear power plants in the North, they are proliferating in Asia, Africa, Eastern Europe and Latin America, where they are owned and operated by Northern corporations.
This trade has been facilitated through tens of billions of dollars of financing by the World Bank, the U.S. Overseas Private Investment Corporation, and the U.S. Export-Import Bank, government institutions in which Mr. Summers has wielded his economic logic. His 1991 memo can be considered a working thesis behind this decade’s dominant global economic policies.
|NGO Working Group on the Security Council|
Summers’ Comments on Women and Science Draw Ire
Remarks at private conference stir criticism, media frenzy
“For him to say that ‘aptitude’ is the second most important reason that women don’t get to the top when he leads an institution that is 50 percent women students – that’s profoundly disturbing to me,” Hopkins said. “He shouldn’t admit women to Harvard if he’s going to announce when they come that, hey, we don’t feel that you can make it to the top.”
But Lee Professor of Economics Claudia Goldin, whose own research has examined the progress of women in academia and professional life, said she “was pretty flummoxed” by the negative response to Summers’ speech, which—in her view—displayed “utter brilliance.”
Why Larry Summers lost the presidency of Harvard
Some people still think Larry Summers got fired from being the president of Harvard because of the ridiculous comments he made about women in math (see my post about this here) or because of the comments he made about Cornel West. Actually, the truth is something worse, and for which he should actually be in jail. It’s also something that makes Harvard look bad, so maybe that’s why it’s less known.
The subtitle of this post is: Why Larry Summers shouldn’t be made head of the World Bank.
I was inspired to write this by being disgusted at continued rumors that he could get yet another prestigious job. It’s like this guy can’t fail spectacularly enough! Let’s give him another chance!
Let’s set the record straight: Summers was directly involved with defrauding the U.S. Government (see below) and Russia. He admitted to not understand conflict of interest issues (see below). It is particularly appalling, knowing these things, that he would be considered for the World Bank head, which presumably requires nuanced understanding of such issues.
I’m using this article, entitled “How Harvard Lost Russia,” and written in 2006 in Institutional Insider (II), as a reference. More on that article and how it led to getting Summers fired below. And by the way, I’m not claiming this story is completely unkown: see this wikipedia article for a quick overview, for example, in addition to the II article. I just think it needs reviving at this crucial moment, before Summers gets more toys to play with.
So why did Summers lose his job at Harvard? It was because of his protecting a buddy, a fellow economist at Harvard named Andrei Shleifer.
Andrei Shleifer managed to get put in charge of helping Russia privatize stuff in the mid 1990’s. His mission was to make things more useful and transparent to the infant capitalist system. Through his wife and friends, Shleifer instead orchestrated a boondoggle on Russia. He invested money through his wife and helped his friend Jonathan Hay and his lover and friends invest theirs, and set up the very first mutual fund as well as thwarting the efforts of other people to set up their own funds. All of these things were strictly against the conflict of interest policy they were working under.
Shleifer got in trouble, and the U.S Government sued and won against Harvard and Shleifer. From the article:
The judge determined that Shleifer and Hay were subject to the conflict-of-interest rules and had tried to circumvent them; that Shleifer engaged in apparent self-dealing; that Hay attempted to “launder” $400,000 through his father and girlfriend; that Hay knew the claims he caused to be submitted to AID were false; and that Shleifer and Hay conspired to defraud the U.S. government by submitting false claims.
On August 3, 2005, the parties announced a settlement under which Harvard was required to pay $26.5 million to the U.S. government, Shleifer $2 million and Hay between $1 million and $2 million, depending on his earnings over the next decade. Shleifer was barred from participating in any AID project for two years and Hay for five years. Shleifer and Zimmerman were required by terms of the settlement to take out a $2 million mortgage on their Newton house. None of the defendants acknowledged any liability under the settlement. (Forum Financial also settled its lawsuit against Harvard, Shleifer and Hay under undisclosed terms.
Summers and Shleifer
Summers was good friends with this criminal, and used his position to protect him. From the article:
Shleifer remained close to his friend and mentor Summers; they talked to and saw each other frequently and continued vacationing together in the summer on the Cape. Then it became known in early 2001 that Summers was on the short list of candidates to succeed Neil Rudenstine as the president of Harvard University. Shleifer and Zimmerman began campaigning for Summers to get the Harvard post, giving meet-and-greet parties for him at their home. Summers stayed with them when he visited Harvard.
In March 2001, Summers was named president of Harvard. Shleifer, who had been courted by New York University’s Stern School of Business, decided to stay put.
Having his close friend as his boss would turn out to be quite helpful to Shleifer. Summers asserted in his deposition that he recused himself from any involvement in the university’s handling of the Shleifer matter, but the new president stayed involved anyway. Early in his presidency he told the dean of the faculty of arts and sciences, Jeremy Knowles, to keep Shleifer at Harvard.
“I expressed to Dean Knowles,” Summers testified in a deposition in 2002, “. . . that I was concerned to make sure that Professor Shleifer remained at Harvard because I felt that he made a great contribution to the economics department . . . and expressed the hope that Dean Knowles would be attentive to that. . . . I think he recognized and shared the concern.”
“Conflict of interest issues should be left to the lawyers” says Summers
This is the testimony that says to me, in no uncertain terms, that Summers cannot be put in charge of something politically sensitive:
Summers said conflict-of-interest “issues,” in his Washington experience, were “left to the lawyers.” He said he was sensitive to “ethics rules,” but testified that “in Washington I wasn’t ever smart enough to predict them . . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”
More intervention on behalf of Shleifer
Maybe you’d think that getting sued by the US Government and losing $40 million might lose your job as a Harvard Professor. But you’d be wrong:
Knowles tells Institutional Investor that he does not remember Summers’ approaching him about Shleifer. “I don’t recall this particular conversation, but the president and I shared the goal of recruiting and retaining the best faculty, so it would have been perfectly natural for us to mention to each other the names of people that we certainly wouldn’t want to lose.” However, not long after Summers says he intervened on the professor’s behalf, Knowles promoted Shleifer from professor of economics to a named chair, the Whipple V.N. Jones professorship.
Shleifer’s legal position changed on June 28, 2004, when Judge Woodlock ruled that he and Hay had conspired to defraud the U.S. government and had violated conflict-of-interest regulations. Still, there was no indication that the Summers administration had initiated disciplinary proceedings. To the contrary, efforts were seemingly made to divert attention from the growing scandal. The message from the top at Harvard was, “No problem — Andrei Shleifer is a star,” says one senior Harvard figure.
The Summers-Shleifer friendship flourished. They spoke on the phone more than once a day, on average. Two months after the court ruling against Shleifer, he hosted Summers at a break-the-fast dinner on Yom Kippur.
One instance was a meeting early in the academic year that began in September 2004, less than two months after the federal court formally adjudicated Shleifer’s liability for conspiring to defraud the U.S. government. A faculty member asked Kirby why Harvard should defend a professor who had been found liable for conspiring to commit fraud. The second confrontation came early in the current academic year when another professor asked Kirby why Harvard should pay a settlement of $26.5 million and legal fees estimated at between $10 million and $15 million for legal violations by a single professor and his employee, about which it was unaware. On both occasions Kirby is said to have turned red in the face and angrily cut off discussion.
On at least one other occasion, Summers himself told members of the faculty of arts and sciences that the millions of dollars that Harvard paid in damages did not come from the budget of the faculty of arts and sciences, but didn’t say where the money came from. Those listening inferred he meant that the matter shouldn’t be of concern to the faculty and that they shouldn’t raise it, a curious notion, given that Shleifer was one of their own.
A spokesman for Summers said he was “unable to schedule” an interview with Summers for II in December, when this article was being prepared. As the lawsuit was against the university, not just the faculty of arts and sciences, the settlement came from “university funds available for these purposes,” the spokesman added.
Shleifer has never acknowledged doing anything wrong. Summers has said nothing. And so far as is known, there has been no internal investigation or sanction. “An observer trying to make sense of the University’s position on Shleifer, Ogletree and Tribe is driven to an unhappy conclusion. Defiance seems to be a better way to escape institutional opprobrium than confession and apology. . . . And most of all being a close personal friend of the president probably does one no harm.”
The article gets Summers fired
An anonymous person got a bunch of copies of the II article and stuck one in every Harvard faculty’s mailbox the morning of the no-confidence vote that got Summers ousted.
And just in case you’re wondering, here’s the website of Sheifer, still on faculty of Harvard.