The Evolution of Larry Summers

David Leonhardt of the New York Times looks at how Larry Summers economic philosophy has changed over time:

Larry Summers’s Evolution, by David Leonhardt, NY Times: Back in the 1980s, two young Harvard professors trying to reinvigorate the Democratic Party would meet ... in Cambridge, Mass., to have lunch and argue with each other. ...Robert Reich, a future secretary of labor — argued for something that he called “industrial policy.” Since the government couldn’t avoid having a big influence on the economy, he said, it should at least do so in a way that promoted fast-growing industries and invested in worthy public projects. ...

Lawrence H. Summers ... of Harvard ... loved to tackle big, broad questions, and, by his lights, industrial policy amounted to another version of the governmental meddling that had helped consign the Democratic Party to opposition status. How could bureaucrats know which industries and projects to support with tax credits? The better solution, Summers responded, was to get the economy growing fast enough that the problems of the middle class would begin to solve themselves. And the way to do this was to slow government spending and raise taxes on the wealthy, which would bring down the Reagan-era budget deficits and, eventually, interest rates. Once that happened, the American economy would be unleashed.

The debate ... would come to dominate the struggle over domestic policy within the Democratic Party for more than a decade. Bill Clinton ended up embracing the centrist, business-friendly ideas of Summers and his mentor, Robert Rubin, and the situation played out just as they had predicted: interest rates fell, and along came a boom that helped almost everyone. In the late ’90s, the wages of rank-and-file workers rose faster than they had in a generation. A frustrated Reich left the Labor Department after Clinton’s first term, while Summers eventually ascended to the top job at the Treasury Department.

All of which makes it rather fascinating to listen to Summers talk these days. ... He sounds, strangely enough, a little like Bob Reich.

On Oct. 30 of last year, Summers made his debut as a monthly columnist for The Financial Times. The column was titled “The Global Middle Cries Out for Reassurance.” He began by noting that the world’s economy had grown faster over the previous five years than at any other point in recorded history. “Yet in many corners of the globe there is growing disillusionment,” he continued. The main reason seems to be that the benefits of growth are flowing largely to only two groups: previously impoverished residents of Asia and an international elite. ...

Dealing with this anxiety — making globalization work for the masses — has become the central economic issue of the day in Summers’s mind. ... To liberal Democrats, it seems long overdue. “I breathe a great sigh of wistfulness and relief and say, ‘Finally, they’ve come around,’ ” Reich says. “It was, I think, a fundamental failure on the part of the Democrats in the late ’90s not to face the structural changes that needed to be faced.” ...

“I think the defining issue of our time is: Does the economic, social and political system work for the middle class?” he told me. “Because the system’s viability, its staying power and its health depend on how well it works for the middle class.” ...

The son of two economists at the University of Pennsylvania and the nephew of two Nobel-winning economists, he enrolled at M.I.T. when he was 16. Then came the swift rise to tenure at Harvard, a flurry of research papers on seemingly every major topic in economics and an award called the John Bates Clark Medal, given every other year to the best economist under 40. “I’ve been around some pretty smart people,” said Jonathan Gruber, an M.I.T. economist and a former student of Summers’s. “But it’s a different level with Larry.”

The rap on him — in academia and later in Washington... — was always that he knew he was the smartest guy in the room and acted like it. At faculty seminars, he would sometimes interrupt another professor a few minutes into a presentation, succinctly summarize the undelivered portion, poke holes in the argument and offer suggestions about how to make the same points in more compelling fashion. To the great amusement of his colleagues at Treasury, he occasionally did the same thing to officials from foreign governments who had come to call on him.

But the notion that Summers can be a bully misses one thing: he likes it when people fight back. As Treasury secretary, he encouraged his own staff to disagree with him when they thought he was wrong. ... As a result of this intellectual playfulness, many people find it thrilling to talk with him. He loves to examine an idea from every possible angle, searching out the weaknesses in order to arrive at a better conclusion. ... Of course, Summers’s style, or lack of it, is also at the root of his well-publicized missteps. ...

In many ways, the political path that he has followed over his career is also the path of his party. The decades after World War II were dominated by the Keynesian notion — shaped in part by one of his Nobel-winning uncles, Paul Samuelson — that government was good. But the stagflation of the 1970s caused a whole of generation of economists to look instead toward the market, which seemed far more efficient at allocating resources. Today Summers says he believes in markets as much as ever, and he begins almost any discussion of globalization by pointing out its benefits. Food, clothing, furniture and dozens of everyday items are more affordable than they once were. Interest rates are low, as is inflation, and recessions come less often. Bringing down the deficit in the ’90s, he argues, helped make this possible.

But Summers says he now has to reckon with a new reality. Despite good growth over the last four years, the pay of most American workers has barely kept pace with inflation. ... The middle-class income gains of the Clinton years now look like an aberration, caused by a combination of low oil prices ... and a financial bubble that made the job market unusually tight. “I don’t think my general orientation to the world has changed,” Summers says, noting that he favored interventions like tax credits for the poor during the ’90s and continues to worry about the deficit today. “But I think if you look at how the economy is working for average families, the sensible priority has shifted.”...

What’s striking today is how much Democrats on either side of the 1990s debate agree with one another. Most say that globalization itself cannot be held back, because it stems more from the inexorable march of technology than from any change in trade laws. ... Trying to prevent jobs from leaving will create the problems that protectionism always had... But leaving the market to work its magic also won’t do. Even the centrists within the party agree that the government needs to meddle in the economy more than it once did.

The model that most appeals to Summers is, in fact, the United States — in the decades after World War II. At the time, this country was opening itself to more global competition, by rebuilding Europe and signing financial agreements like Bretton Woods. But it was also taking concrete steps to build the modern middle class. In addition to the G.I. Bill, there were the Federal Housing Administration, the Interstate Highway System and a very different tax code. The history of progressivism “has been one of the market being protected from its own excesses,” Summers says. “And I think now the challenge is, again, to protect a basic market system based on open trade and globalization, to make it one that works for everyone or for almost everyone, at a time when market forces are often producing outcomes that seem increasingly problematic to middle-class families.”

A new social contract would look different, of course. The tax code of the 1950s, with a top marginal rate of 91 percent, stifled innovation. Today’s system goes too far in the other direction, Summers says, exacerbating inequality with loopholes and deductions that let a lot of affluent families avoid taxes, and the Bush tax cuts haven’t helped. Health care reform is another obvious priority. In Summers’s view, the current employer-based system ... may need to be replaced by one in which the government pays for insurance but individuals choose what plan they want. It would be single payer, but not as England or Canada does it.

Summers becomes really excited by what he sees as the potential for a life-sciences revolution. It will happen only if government again does its part, though, and in the last few years federal support for medical research has failed to keep pace with inflation. A more sensible policy, he argues, has the potential not only to keep people healthy and alive for longer but also to create well-paying jobs. He likes to talk about “clusters” like Silicon Valley — in the life sciences and other areas — where groups of companies can feed off one another to become more productive. Moving jobs to a low-wage country then becomes less attractive. And the government can help create clusters, just as it built the highway system and the Internet. If you didn’t know any better, you might even refer to this idea as industrial policy. ...