Larry Summers lays it out for the next President

August 26, 2008 8:29 PM

"There are half a dozen [economic] issues today, each one of which is as important as the most important issue at the beginning of most presidential terms."Larry Summers became so well-known during his brief and contentious tenure as President of Harvard that it's easy to forget about his real job, as a much-lauded academic economist with a history of real-world service at the World Bank and in the Clinton Administration. In this month's Harvard Magazine, he summarizes his view of the economy (grim) and what the next president is going to have to do about it (a lot.)
posted by escabeche (41 comments total)

Indeed, the gap between the most fortunate and the least fortunate Americans in life expectancy has risen by almost two years over the last generation. To put this in some perspective, complete elimination of cancer would only add a little bit more than two years to Americans’ life expectancy.

That's good to know.
posted by delmoi at 8:57 PM on August 26, 2008

President McCain's nurse will probably wipe his ass with this paper
posted by matteo at 9:08 PM on August 26, 2008 [4 favorites has favorites]

Interesting read, thanks.
posted by ThePinkSuperhero at 9:13 PM on August 26, 2008 [1 favorite has favorites]

Fiasco's summary of Summers' summary:
1. Regulate banking activity,
2. Ensure a more equitable distribution of income,
3. Collectivise health insurance, and
4. Reduce carbon emissions.

What a commie.
posted by Fiasco da Gama at 9:21 PM on August 26, 2008 [1 favorite has favorites]

You know, although I'm thrilled that someone I don't despise is running for president in America for the first time in decades, particularly at such a critical juncture (or so I believe it to be), and I do think that when it comes to the wire, polls aside, Barack Obama will easily win the election, not matter what he does over the next 4 or 8 years, the US domestic economy is going to continue crashing down around the ears of average folks, and I regret that the nation's first hemi-African-American president will be remembered as the one who presided over the beginning of The Bad Times.

But perhaps I underestimate THE POWER OF TEH HOPE.
posted by stavrosthewonderchicken at 10:17 PM on August 26, 2008

As a wage slave, I'm looking forward to getting screwed by Obama!
posted by Mr. President Dr. Steve Elvis America at 10:23 PM on August 26, 2008

I'm looking forward to getting screwed by Obama!

Well, he is very handsome.
posted by stavrosthewonderchicken at 10:32 PM on August 26, 2008 [10 favorites has favorites]

While there are reasonable arguments to be made about how far along we are with respect to the current financial crisis, there is every reason to believe that the distress in the real economy is only very partially advanced.

As the distress advances, it will hopefully be harder and harder for working class Republicans to be distracted by abortion, guns, gay marriage, and foreign wars. Obama's support will only broaden as empty stomachs cause people to awaken from their evangelical stupor.
posted by three blind mice at 10:37 PM on August 26, 2008

Obama's support will only broaden as empty stomachs cause people to awaken from their evangelical stupor.

It's been my experience that hard times usually drive people even further into mindless religiosity. But perhaps I'm being unduly cynical here.
posted by Rangeboy at 10:52 PM on August 26, 2008

As a wage slave, I'm looking forward to getting screwed by Obama!

Presumably lowering your tax burden, increasing your wages, giving you more time off, and making more affordable housing available is your personal version of getting screwed, assuming you're not lying about being a wage slave.
posted by Blazecock Pileon at 11:12 PM on August 26, 2008 [1 favorite has favorites]

Obama said in a 2002 speech to the Chicago terrorist mafia that he will raise your taxes using Muslim accounting practices, kill and devour your unborn children, and dance on their graves with Paris Hilton. His wife is also an alien infiltrator (and not the good kind).
posted by palidor at 12:32 AM on August 27, 2008 [2 favorites has favorites]

Obama said in a 2002 speech to the Chicago terrorist mafia that he will raise your taxes using Muslim accounting practices, kill and devour your unborn children, and dance on their graves with Paris Hilton.

And still this would be an improvement over the last 7 1/2 years.

Presumably lowering your tax burden, increasing your wages, giving you more time off, and making more affordable housing available is your personal version of getting screwed, assuming you're not lying about being a wage slave.

Heh. Obama might as well promise to legalize pot because that's what you have to be smoking to believe that he can do any of this.

Still it will be nice for "real change I can believe in" to have a White House that accomplishes nothing at all.
posted by three blind mice at 12:53 AM on August 27, 2008 [2 favorites has favorites]

In terms of banking / economics not much substance in that article; I guess Summers saves his most insightful views for his employer, D. E. Shaw.

The banking regulatory stuff was very superficial, and almost deceptive due to overall gloss.

American banks have consistently resisted adopting Basel II, unlike their European counterparts. Last July US Regulators issued yet another guidance note on the implementation of Basel II, long after most European banks have completed their implementations (just to clarify - that's finished a baseline implementation, there still is lots of work and refinement to do).

Another note that I'm disappointed he didn't bring up was a key driver of the credit crunch - Liquidity Risk.

We're now seeing lots of regulatory attention being focused on this previously almost overlooked risk factor. Presently the Basel accord mandates that regulated entities set aside capital to protect against Market, Credit and Operational risk, but nothing for Liquidity Risk.

We expect lots of resistance from the banks so he could have turned this speech into a rallying cry of sorts.

Still always interesting to read something by someone of his caliber - thanks for posting.
posted by Mutant at 12:56 AM on August 27, 2008 [2 favorites has favorites]

Oh yeah, Summers was the guy who said in 1991, while Chief Economist at the World Bank:

"...developed countries ought to export more pollution to developing countries because these countries would incur the lowest cost from the pollution in terms of lost wages of people made ill or killed by the pollution due to the fact that wages are so low in developing countries... the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that."

Real world service at the World Bank... don't make me laugh.
posted by ronin21 at 4:18 AM on August 27, 2008

It's been my experience that hard times usually drive people even further into mindless religiosity.

9/11. What does Biden have to say?
posted by SeizeTheDay at 4:59 AM on August 27, 2008

American banks have consistently resisted adopting Basel II,

I don't know about that. Seems that the major Brokers use Basel II when it's convenient, like right now when they calculate Tier 1 and Total Capital ratios. Every major broker in this country is SERIOUSLY underfunded, and yet they report the highest capital ratios of any broker or bank.
posted by SeizeTheDay at 5:02 AM on August 27, 2008

It's been my experience that hard times usually drive people even further into mindless religiosity.

Same here. Late 80s early 90s were not exactly peaceful times on the abortion (doctors getting shot), gay rights (AIDS epidemic denial), free speech (Mapplethorpe exhibit) or religiosity (Falwell et al very popular) fronts.
posted by spicynuts at 5:58 AM on August 27, 2008

SeizeTheDay -- "I don't know about that. Seems that the major Brokers use Basel II when it's convenient, like right now when they calculate Tier 1 and Total Capital ratios. Every major broker in this country is SERIOUSLY underfunded, and yet they report the highest capital ratios of any broker or bank."

Yeh, good point about being underfunded but also reporting very high capital ratios. Currently regulators in the United States apply full Basel II to only the top 20 (or so) of most internationally active banks - e.g., firms of Citi's size or scope. Not like Europe, where Basel II applies to pretty much all banks and regulated financial institutions.

No, in the United States most banks have been allowed to "dodge the bullet", deploying what's called Basel 1.5 although many do in fact call it "Basel II".

But in reality it's the original Basel I just rebranded. We were hearing lots of complaints from US banks about the cost of and timeframes for a Basel II implementation, so they successfully lobbied this regulatory requirement away.

As recently as February 2007 they apparently were still discussing the finer points regarding full Basel II deployment in The United States.

I'm not really familiar with the Basel 1.5 requirements, as it's a uniquely American bastardisation of what otherwise exists as a wider (if not global) standard, but it seems like the US changes would shake out this way: they're specifying regulatory capital requirements on Market Risk (ala Basel I), perhaps some on Credit (not sure of what calculations - Foundation, Advanced, etc., - they'd allow / disallow), and perhaps none on Operational Risk - Op Risk being an addition that Basel II put on the table.

The Fed does seem concerned about Operational Risk post-credit crisis, hosting a conference on the topic last May.

It would be interesting to hear from someone who knows precisely how The US banks are calculating economic and regulatory capital (i.e., NOT reserve requirements which are completely different but often confused here on MetaFilter). I'd especially be interested in hearing timelines for a full Basel II adoption. Given the current state of banking, I'm not sure this would have a high priority but still it would be interesting.

One thing about the Credit Crunch is for sure: the Regulators are going to really start to clamp down.
posted by Mutant at 6:15 AM on August 27, 2008

it's also worth noting that...

Three years ago at the Kansas City Fed’s annual symposium in Jackson Hole, Wyo., Mr. Rajan — then the International Monetary Fund’s chief economist — delivered a presentation titled “Has financial development made the world riskier?” Among his opening lines: “People can borrow greater amounts at cheaper rates than ever before, invest in a multitude of instruments catering to every possible profile of risk and return, and share risks with strangers from across the globe. Have these undoubted benefits come at a cost?”

In his presentation (read it here), Mr. Rajan addressed many of the concerns that ultimately emerged over the past year’s financial crisis: incentives in the financial sector to take high risks that were concealed from investors, the “tail risk” of a bad economic outcome and doubts about whether banks can provide enough liquidity in a crisis.

What may seem clear today was not three years ago. At the time, the audience reaction was fierce. Lawrence Summers, the former Treasury Secretary, was the first out of the gates calling the paper’s premise “largely misguided” and called the suggested restrictions on markets “quite problematic.”

cf :P cheers!
posted by kliuless at 6:28 AM on August 27, 2008

Someone should email that presentation to Larry Summers. Perhaps every mefite should.
posted by spicynuts at 6:43 AM on August 27, 2008

btw, if you didn't click thru: "Fed Governor Frederic Mishkin said Buiter's paper fired `a lot of unguided missiles,' and former Vice Chairman Alan Blinder `respectfully disagreed' with his analysis of the central bank's crisis management." um, so that was this year at jackson hole...
posted by kliuless at 6:46 AM on August 27, 2008

kliuless -- "...if you didn't click thru..."

Oh I clicked through all right - took a while to read it and I had to reread it again - great stuff!

This -- "[T]hree factors contribute to Fed’s underachievement as regards macroeconomic stability. The first is institutional: the Fed is the least independent of the three central banks and, unlike the ECB and the BoE, has a regulatory and supervisory role ..." -- is very perceptive on Buiter's part; I've represented Tier 1 Investment banks to both The Fed and BOE, and my (highly subjective but shared in our team) view is that The Fed was far, far more accommodative. This was especially true when we didn't have key data they'd asked for during model calibration, or after the fact, when reviewing actual losses against VAR modeled estimates. The Fed was far more willing to take things presented at face value than BOE, who we viewed as hard asses. Out of five Central Banks we were working with at the time, BOE gave us the most hassle and took the most face time. They were always asking for additional details, alway drilling down and delaying signoff from their end.

I do think some of his complaints about ECB seem out of touch. After all, The Euro is, for all intents and purposes, The Deutschemark rebranded. It's a very, very stable and solid currency and ECB bankers aren't just doing things by the seat of the pants. They're model driven all the way, and can pretty much defend any decision (or lack of decision) by presenting the data and models. A very quantitative organisation.

By contrast The Fed historically has operated in a less quantitative, less model driven manner. Greenspan was famous for doing things by intuition and feeling. Canterbery's bio 'Alan Greenspan: The Oracle Behind the Curtain' touched upon Greenspan's reliance on intuition.

One of the problems with intuion is sometimes it works and sometimes it doesn't. When is does - grand. But when it doesn't, securing objective feedback to close the loop and improve decision making next time is all but impossible. As is transparency - always lacking in an intuitive decision making process.

Bernanke is a quant by education, far more comfortable with models and data and there's a lot of hope he migrate decision making at The Fed to a more rigorous, a much more transparent basis. They've got all the tools and processes, it's just now matter of actually using them.


On the other hand things like this -- '[Bank of Isreal's Stanley] Fischer, drawing laughter from the audience, held up a red fire extinguisher saying, ``I asked the organizers for some technical assistance in dealing with this discussion.''' -- I'm sure turned an otherwise boring conference into a good time.

But - wow, great find - thanks for posting the link.
posted by Mutant at 7:35 AM on August 27, 2008

Presumably lowering your tax burden, increasing your wages, giving you more time off, and making more affordable housing available is your personal version of getting screwed, assuming you're not lying about being a wage slave.

I'm pretty sure he wants to increase my tax burden and lower my wages, actually. And yes, I am a wage slave.
posted by Mr. President Dr. Steve Elvis America at 7:42 AM on August 27, 2008

A very quantitative organisation.

By contrast The Fed historically has operated in a less quantitative, less model driven manner.

Quite possibly a culturally rooted phenomenon as well: Cowboy vs. Engineer (American Git Er Done vs. German Precision)
posted by spicynuts at 8:20 AM on August 27, 2008

here's more from jackson hole if you're interested :P

and btw, macroblog is back!
posted by kliuless at 8:58 AM on August 27, 2008

I'm pretty sure he wants to increase my tax burden and lower my wages, actually. And yes, I am a wage slave.

Well, if you make over $200,000 a year, which would qualify you for higher tax obligations under what I know of Obama's plans, then salaried or not you're not a slave. If you feel enslaved, get an accountant. You can afford it at those wages and the better money management will help you realize how much you actually have.
posted by effwerd at 9:03 AM on August 27, 2008 [1 favorite has favorites]

Obama and McCain Tax Proposals:

According to a new analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, Democrat Barack Obama and Republican John McCain are both proposing tax plans that would result in cuts for most American families. Obama's plan gives the biggest cuts to those who make the least, while McCain would give the largest cuts to the very wealthy. For the approximately 147,000 families that make up the top 0.1 percent of the income scale, the difference between the two plans is stark. While McCain offers a $269,364 tax cut, Obama would raise their taxes, on average, by $701,885 - a difference of nearly $1 million.

What they'll do to your tax bill

CNN Crunches Obama and McCain Tax Plans

Who's rich? McCain and Obama have very different definitions
posted by kirkaracha at 9:41 AM on August 27, 2008

It's been my experience that hard times usually drive people even further into mindless religiosity. But perhaps I'm being unduly cynical here.

You're spot on.
posted by gyc at 9:56 AM on August 27, 2008

I'm pretty sure he wants to increase my tax burden and lower my wages, actually. And yes, I am a wage slave.

If you make enough for Obama to want to raise your taxes, you would be no kind of wage slave.
posted by Blazecock Pileon at 10:14 AM on August 27, 2008

Obama's support will only broaden as empty stomachs cause people to awaken from their evangelical stupor.

Or falter as people fondly recall the good years back when there was a Republican in the Oval Office and food on the table.
posted by -harlequin- at 11:12 AM on August 27, 2008

Of course, the Republican version of food on the table defines ketchup as one vegetable serving.
posted by troybob at 11:21 AM on August 27, 2008

"Today, in China and India and some other developing economies, the living standards of 40 percent of mankind are increasing 7 percent per year—that’s 100-fold or more over their 70-year lifespans. "

Just think, one can get a John Bates Clark medal, be Secretary of the Treasury and president of Harvard University and either a) not know what a mean is or b) think that China and India gather all their national product into a big pile and divide it equally amongst their citizens.
posted by bonecrusher at 12:06 PM on August 27, 2008

I'll read the other articles and hopefully find the answer myself, but one quick question: the "What they'll do to your tax bill" CNN article suggests an average tax increase of +$12 for the $227K-$603K group under the Obama plan. I thought he was proposing to uncap FICA for people making over $250k. How can these two things both be true?
posted by Perplexity at 2:00 PM on August 27, 2008

Well, I guess here's an answer, from the campaign web site:

"Obama does not support uncapping the full payroll tax of 12.4 percent rate. Instead, he is considering plans that would ask those making over $250,000 to pay in the range of 2 to 4 percent more in total (combined employer and employee). This change to Social Security would start a decade or more from now..."
posted by Perplexity at 2:11 PM on August 27, 2008

$227K-$603K is a broad (and weirdly arbitrary) range, and $250k is close to the low end of the range.
posted by kirkaracha at 2:38 PM on August 27, 2008

I actually went back and read the full document that the news story was based on. Pretty interesting.

It addresses my original question, noting that candidates' speeches etc have differed from the proposals given by staff (p39). They specifically address Obama increasing payroll tax to fund Social Security and produce alternate tables with that assumption (e.g. Table 12); in that case, the average tax increase for the $227K-$603K range is $942. Which makes more sense.

$227K-$603K isn't weirdly arbitrary; it's the 95th-99th percentile range.
posted by Perplexity at 3:15 PM on August 27, 2008

Hmm, the Tax Policy Center (which produced the report) claims to be non-partisan, but they use the phrase "more regressive" three times to describe what the tax system would be like under McCain. Using that rather than "less progressive" screams of bias; claiming the US tax system is regressive is just totally nuts. And they never use a parallel "less regressive" to describe anything.

So maybe the whole thing should be read a little skeptically.
posted by Perplexity at 3:22 PM on August 27, 2008

If you make enough for Obama to want to raise your taxes, you would be no kind of wage slave.

Well, this definiton seems pretty common:


"Wage slave: A wage earner whose livelihood is completely dependent on the wages earned."

And that probably applies to most people in the 200-300k range, for example. Especially for younger workers, it's unlikely they have accumulated enough capital to live without their wages.

Wage slave as I've always heard it basically differentiates between those who make money off their capital (investments, land, etc) and those who make money off their labor. The amount of money you make off your labor only matters insofar as it lets you accumulate capital and hopefully eventually not need to labor to have money (retirement, essentially).
posted by wildcrdj at 3:34 PM on August 27, 2008

And that probably applies to most people in the 200-300k range, for example. Especially for younger workers, it's unlikely they have accumulated enough capital to live without their wages.


And this is based on extensive research I'm sure. Certainly you didn't pull this out of your ass or anything.

Of course 200-300k is barely a living wage where you live. Try looking around at the rest of the country.
posted by Eekacat at 6:25 PM on August 27, 2008

"Wage slave: A wage earner whose livelihood is completely dependent on the wages earned."

If you cannot save, let alone subsist on the income earned from a $250K+/yr salary, then you are not a slave, you are not a serf: you are a fool. And you deserve to be called out as one.

Talk to someone making minimum wage with a family to feed. Then you'll find out what economic slavery means.
posted by Blazecock Pileon at 7:58 PM on August 27, 2008 [2 favorites has favorites]

Wage slave as I've always heard it basically differentiates between those who make money off their capital (investments, land, etc) and those who make money off their labor.

And what you have heard is a perversion of the term. A wage slave is literally someone who can literally not afford to stop working or look for a job because if they stop they will be utterly crushed. What you are describing is an employee. A wage slave literally can't take the time to job hunt because the time spent means time not working and so not having food on the table. And I don't mean stop working period. I mean stop working for their current employer.

I don't know whether the people who misinformed you were plain ignorant or had an agenda to push. And for what it's worth, I live in one of the most expensive cities in the world. A $200k salary will go a long way.

For a real illustration of wage slavery, try the song Sixteen Tons

You load sixteen tons
and what do you get?
Another day older
and deeper in debt.
St. Peter dont you call me
Cause I cant go.
I owe my soul to the company store.

When people use the definition of wage slave you used it pinpoints them as entitlement brats who haven't got a clue about the world. And have a romantic attachment to victimisation. And who are pissing in the discourse.
posted by Francis at 5:31 AM on August 28, 2008