Consistently wrong: Larry Summers’ record should rule him out of the Fed chairmanship
As a general rule in life – and certainly, in applying for a job – your record counts. If you’ve had a history of alienating people, being consistently wrong on the biggest issues in your field and screwing up – say, by helping set the stage (pdf) for the worst recession since the Great Depression – it’s time to look for a new career.
But that’s not, apparently, how life works out for Larry Summers, the fervent champion of deregulation and paid Wall Street consultant confirmed in last week’s presidential press conference to be a leading contender as Obama’s pick for the next chairman of the Federal Reserve.
That’s really too bad, because if Larry Summers replaces Ben Bernanke in what is the top economic post in the largest economy in the world when Bernanke steps down in January, we – meaning the overwhelming majority of American workers and taxpayers – will all likely suffer the consequences.
Doubts about Summers’ fitness for the job abound. A paid consultant to Citigroup, hedge fund DE Shaw and other companies, he is immersed in Wall Street both personally and professionally, posing the question of how he can possibly be trusted to regulate banks. He was also famously among the pushers of the deregulatory obsession that gripped Washington in the 1990s and early 2000s, which sowed the seeds of the financial crisis that cost our economy at least $14tn.
Let’s also not forget the massive risks he took with Harvard University’s endowment while serving as president, which cost the university more than $1bn, and his astonishing comments on women’s lack of “intrinsic aptitude” in math and science.
Then, there’s his defense of Enron during the California energy crisis. And not forgetting the weird, offensive memo he signed while chief economist at the World Bank that suggested dumping toxic wasted in third world countries.
So far, so familiar, perhaps. But what comes up less often is Summers’ approach to workers and the labor market. It’s not widely known, but in addition to containing inflation and regulating banks, one of the Fed’s mandates is to ensure maximum employment and maintain a robust job market. Bernanke has enraged critics on the right, in fact, by keeping Fed policy since the recession focused on this aspect of its role.
But how well would Summers fare on meeting this responsibility?
Although he’s recently been talking a good game, claiming he cares about the ongoing unemployment crisis, Summers’ past remarks and his record tell a different story: that he lacks understanding about how the labor market works, and has no empathy for people who have been unceremoniously ejected from the job market – thanks to the financial crisis Summers had a hand in creating.
Check out this entry by Summers in the 2007 “Encyclopedia of Economics”, created by the free-market foundation, Liberty Fund Inc. In it, Summers effectively blames jobless workers – and wacky programs like unemployment insurance – for long-term unemployment.
Under the header, “What Causes Long-Term Unemployment?” Summers writes:
Unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits … Government assistance programs contribute to long-term unemployment … by providing an incentive, and the means, not to work.
Nowhere does Summers mention that macroeconomic conditions – like, say, a deep recession that follows decades of deregulation, downsizing and outsourcing – could explain why workers are sitting on the sidelines. No, it’s those pesky workers, who are taking advantage of government largesse to remain idle.
Is this the person we want presiding over the Fed’s mandate of maximum employment?
Summers’ apparent suspicion of workers stands in stark contrast to his faith in Wall Street and big financial institutions (pdf). After pushing for the repeal of key provisions of the 1933 Glass-Steagall Act – which had separated commercial and investment banking and prevented proprietary trading – and battling regulation of the derivatives that helped cause the financial crisis, Summers now opposes efforts to break up megabanks to save taxpayers from the too-big-to-fail problem. (Is it a coincidence that his friends at too-big-to-fail Citigroup secured $45bn in taxpayer funds in the 2008 bailout?)
Clearly, Summers – who has amassed a fortune of between $17m and $39m consulting for financial firms and other companies – is Wall Street’s man, not Main Street’s. Yet, his spokesperson talks about how Summers’ “broad exposure to different parts of the economy gives him a unique perspective on what makes America work.” Note that these “different parts of the economy” do not include much interaction outside the financial district with the 155m-plus workers and would-be workers in the US.
Such isolation from working people does not bode well for a Summers Fed chairmanship. There are times when a Fed chairman has to choose between expansionary policies that support job growth and benefit workers and policies aimed at containing inflation that tend to benefit Wall Street. That choice is likely to sharpen as the US economy continues its uneven, halting recovery. I think it’s clear which way Summers would lean.
The Federal Reserve has already come to accept a so-called natural rate of unemployment of 6.5% – a supposed post-recession new normal. This rate of unemployment ought to be wholly unacceptable for the way it wastes human potential, holds down wages, and slows economic growth. I haven’t yet seen Summers weigh in on the “natural unemployment rate”, but I fear he will be just fine with 6.5%. After all, the plague of long-term joblessness is apparently the fault of those would-be workers sitting at home, watching reruns of “Here Comes Honey Boo Boo” as they collect their government checks.
Critics often take Obama to task because his soaring rhetoric doesn’t translate into policy achievements that help working people and the middle class. Although it’s true that Obama doesn’t control the architecture of our economy, he very clearly does control the choice of who will lead the Fed. Appointing Summers would mean embracing a leading representative of the Wall Street players who brought our economy to the brink, gutting retirement accounts and kicking workers out of homes and jobs en masse.
These days, scrutiny of job applicants is especially intense, as employers subject them to drug tests, credit checks and endless interviews. One slip-up, and you’re out of the running. But as Larry Summers emerges as a prime contender for Fed chairmanship, it’s clear that for him, the same rules don’t apply.
[Image via the World Economic Forum, Creative Commons licensed]