Larry Summers Is Not the Main Problem

I'm as pleased as anyone that Larry Summers has withdrawn from consideration as the next Chair of the Fed. I thought he would do a terrible job. But Summers himself was never the real problem. His candidacy was only a symptom. The real problem is that we have a President who wanted to nominate Summers in the first place. Obama does not understand what's wrong with the American economy, and five years into his term, he persists in some basic misunderstandings.

There are two basic Democratic narratives to explain the 2008 financial meltdown, and they contradict each other. When Obama took office, he had to choose which story to believe. The first story is that the economy thrived under Clinton, and Bush's people screwed it up. I'll call that the Democrat vs. Republican story. It's partisan, but not ideological.

The other story is that Clinton's economic policies led to a short-term boom, but set us up for the long-term bust that started in 2008. The toxic securities that crashed the system in 2008 were deregulated under Clinton. Deregulation of banks started under Clinton. Clinton thought Alan Greenspan was a genius. The list goes on. The Bush people, at worst, only exaggerated what Clinton's people had already been doing. Their basic emphases (favoring investors over workers, worrying more about inflation than unemployment, etc.) were the same. Call this the Left-vs.-Right story. It's ideological, but not partisan.

You can't believe both of these stories if you're going to actually come up with a plan to improve the economy. You have to pick one. If the Democrat-vs.-Republican story is the right one, the best thing to do is to put Clinton's old academic advisers back in charge. But if the Left-vs.-Right story is true, then putting the old Clinton guys back in charge is the LAST thing you should do. Clinton's economic policies, devised by Robert Rubin and the so-called "Rubinites" associated with him, are either the way out of our country's economic mess or a way further into that mess. It can't be both.

Obama clearly chose the "Clinton knew how to run the economy" story at the outset of his first term. That makes sense. Obama had never had a strong personal vision for economic policy. (Read the economy chapter in The Audacity of Hope and you'll see what I mean.) He was immediately forced to take responsibility for a national economic crisis that had hit late in his election campaign, giving him almost no time to think our economic problems through or develop new policy ideas. And he had to stop the bleeding somehow. Going with the Democrat-vs.-Republican story gave Obama a ready-made team to put in charge and a set of basic policies to follow. (Larry Summers, Clinton's old Treasury Secretary, is one of the main Rubinites.) Going with the Left-vs.-Right narrative would have meant coming up with a completely new team and a completely new set of ideas. But who would he have picked? How would he distinguish good policy advice from bad? Accepting the Left-vs.-Right narrative meant moving into uncharted territory during a national emergency. Throwing out the old playbook and starting over is a much riskier move, and Obama hates unnecessary risks. Electing Hillary Clinton instead of Obama would not have avoided this problem. Hillary would have relied on Bill's old economic advisers, too.

While Obama's original choice might have been reasonable at the time, it has also turned out to be wrong. Five years later, growth is still sluggish, unemployment still high, and income inequality more rampant than ever. We've had five years of the Rich Man's Recovery, where the tiny fraction at the top have started growing even richer than they were in the Bush II years, but the rest of the country is still nowhere close to getting back to economic health. Not only is that not success, it's potentially a recipe for much bigger failure. The high levels of inequality make the whole system less stable and more prone to catastrophe.

Sure, we are almost certainly better off than we would have been if McCain, rather than Obama, had been calling the shots, and better off than we would be under President Romney. A move to the kind of Austrian economics that people like Rand Paul favor would have been a disaster. Obama understandably wants credit for keeping the economy from going off the rails completely and for whatever recovery has taken place over the last five years. He's committed on some level to defending his earlier decisions, and doesn't feel he has any room to maneuver on his left. He's right as far as that goes: his centrist policies are surely healthier than hard-right economic ideology would be. But "better than crazy" is not good enough. And while Obama's policies fit reality better than the right wing's do, the actual economic reality is still far to Obama's left.

Centrism is almost never the long-range solution to a fundamental crisis. A major crisis is usually a sign that a set of policies have major underlying problems. Sticking to the middle of the road makes sense in the good times, but disasters as big as 2008 are reality's way of telling you that you are on the wrong road. Proceeding cautiously down the wrong road and obeying a reasonable speed limit only changes how fast you get lost. To actually get out of trouble, you have to turn around and go in a different direction. That Obama wanted to put Larry Summers, the chief advocate of deregulating the exotic securities that caused the 2008 crisis, in charge of the Federal Reserve, shows that Obama still thinks that he can keep going down the Clinton/Bush economic road and it will all be okay if he just drives carefully enough. That he wanted to have Larry Summers riding shotgun with him is bad. But even if Summers isn't officially navigating, Obama is still following the wrong directions.

cross-posted from Dagblog