Summers's View on Monetary Policy Not So Hidden

Jul 31, 2013Jeff Madrick

Though some have claimed Larry Summers's views on monetary policy are unclear, his time in public service reveals a history of accomodating Wall Street over Main Street.

The reason Larry Summers has become a leading candidate for Federal Reserve chairman is because President Obama is now leaning his way. No, I don’t have direct proof of that, but some journalists claim they have heard this from insiders. And the reason this is credible is that Obama is a centrist on economic issues.

Though some have claimed Larry Summers's views on monetary policy are unclear, his time in public service reveals a history of accomodating Wall Street over Main Street.

The reason Larry Summers has become a leading candidate for Federal Reserve chairman is because President Obama is now leaning his way. No, I don’t have direct proof of that, but some journalists claim they have heard this from insiders. And the reason this is credible is that Obama is a centrist on economic issues.

Contrary to some claims, there are no mysteries about Summers’s view on monetary economics. Inflation is his big concern, as was Alan Greenspan’s. If Summers is appointed, we will return to the era of bond trader dictatorship. Obama simply wants protection from ‘inflationary expectations,’ the bugaboo of the Clinton 1990s. Any sign that the bond traders will push up rates for fear a strengthening economy will generate inflation will provoke a quick reaction from Summers. He is far more likely to crack down on the economy than his competitor, the estimable Janet Yellen.

Indeed, Yellen is the one who recently made the much-needed case for resurrecting employment as a Fed goal, on equal footing with others. Wall Street regards her with danger. Greenspan practiced the opposite. He was worried workers would regain confidence and, heaven forbid, ask for a raise.

Is Summers as profound an ideologue as Greenspan? Of course not. He will be more flexible. But jobs will remain hostage to Wall Street needs if he is chairman. The 1990s record is pretty clear. The Clinton administration had a virtual romance with Greenspan. When he unexpectedly pushed up rates in 1994, Clinton was furious. He had gotten his landmark tax increase passed the year before, a highlight of his administration. The Fed chairman raised rates anyway, but Secretary of the Treasury Robert Rubin urged him not to say a word publicly. Give Greenspan his independence. It’s likely Summers, then Assistant Secretary of the Treasury, reinforced his boss’ view.  

Basically, Clinton, Rubin and Summers had a pact with Greenspan. Any increase in tax revenues would be used to pay down debt, not to build up social programs. Some spending on public investment occurred, but only in the late 1990s, leaving federal public investment at historically low levels.

I was at a closed meeting of the Democratic leadership while Bush was president when one Congresswoman pleaded for more infrastructure spending.  Let me remind everyone, said Summers, infrastructure spending is still government spending.

Of course, Summers favors more fiscal stimulus now. It’s a no-brainer. Even Bernanke is talking about stimulus, and he was mostly a right-of-center monetarist, solely concerned about inflation targeting, until he had to face the real world of the 2008 crash as Fed chairman.

So, if Summers is Fed chairman, expect slower growth and higher unemployment than necessary in the future. Nothing would better serve the nation’s economy than raising the inflation target right now, and Yellen would more vigorously pursue that than Summers. But under Summers, the stock market might rise because interest rates are more likely to remain low. He is a Wall Street man, not a Main Street man.

As for financial regulation, Summers has an implicit record there, too. It is a miserable one. He was one of the ringleaders who kept Brooksley Born from regulating derivatives, the only serious mistake President Clinton admitted to in his recent book, Back To Work. He persists in saying that ending Glass-Steagall did not cause the financial crisis eight years later. This is a naïve and narrow interpretation. Undoing it enabled banks to grow much larger through diversification and acquisition, and to take on far more risk. In some ways, this forced investment banks to take more risk in order to compete. Citigroup, while Rubin was there, bought trailers full of risky mortgage securities, becoming one of the Street’s leading investors in them.

Of course, Glass-Steagall had already been watered down since the late 1980s by Alan Greenspan. Commercial banks were doing lots of investment banking already. Citigroup and JP Morgan lent money to the fraudulent Enron, then raised equity money for them from their investment banks, and also advised on some pretty nasty risk-disguising partnership.  

The big problem in the 1990s was that research analysts were really promoters of the equity issues of their employers. There should have been a Chinese Wall keeping analysts and researchers apart. Eventually, the Securities and Exchange Commission tried to enforce one, but it took Eliot Spitzer to stop the conflicts of interest. Where was the Clinton Administration or Summers? All this happened under their watch — the analysts’ lies, the Enron and WorldComm frauds, the absurd high-technology bubble built in part on deceptive sales practices.

There were also massive stock options issued to corporate executives. The Clinton administration did not fight very hard to force companies to expense them. But they became popular because the Clinton administration limited executive compensation to $1 million in actual salary, with no limit on stock options. Stock options encouraged job cuts, I’d ague, because it raised the short-term profits that seemed to drive stock prices and make CEOs rich, helping to drive inequality to their well-know outrageous levels.

Summers was also there when AIG executives were allowed to keep their outsize bonuses. This did great damage to the reputation of the Obama Administration. They were in league with bankers, it seemed. Summers claimed you couldn’t break these contracts. Really? Watch municipalities break the contracts they have with their retirees on pensions and healthcare almost every day of the week.

Obama, sadly, is comfortable with heavy-handed Summersomics, which is light-handed when it comes to Wall Street. Or perhaps he thinks Summers will give him cover for more liberal social spending.

After the glow of the Clinton boom, so dependent on the stock market bubble, Summers says he was converted in the 1990s to thinking more like Milton Friedman. He leaves his students with the view that “the invisible hand is more powerful than the hidden hand,” he told Daniel Yergin and Joseph Stanislaw for their book The Commanding Heights, a paean to free-market economics. “As for Milton Friedman,“ Summers went on, “he was the devil figure in my youth. Only with time have I come to have large amounts of grudging respect. And with time, increasingly ungrudging respect.”

Need I say more? 

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Share This

Daily Digest - July 31: Fixing Detroit from Inside

Jul 31, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Young Detroiters Double Down (TAP)

Roosevelt Institute | Pipeline Fellow Nona Willis Aronowitz visits Detroit, where she finds that Millennial natives are taking the lead in revitalizing the city. Many programs focus on bringing in outsiders for short terms of service, but these Detroiters are here to stay.

Click here to receive the Daily Digest via email.

Young Detroiters Double Down (TAP)

Roosevelt Institute | Pipeline Fellow Nona Willis Aronowitz visits Detroit, where she finds that Millennial natives are taking the lead in revitalizing the city. Many programs focus on bringing in outsiders for short terms of service, but these Detroiters are here to stay.

Can Fast Food Workers Get a Higher Minimum Wage? (MSNBC)

Ned Resnikoff speaks to Roosevelt Institute Fellow Dorian Warren about whether the current fast food strikes could actually achieve change. Dorian doesn't see federal legislation as the goal right now; progressive changes on a state or local level are the first step.

Fast Food Strikes: Unable to Unionize, Workers Borrow Tactics From ‘Occupy’ (Time)

Josh Sanburn explains how Occupy Wall Street has inspired fast food organizers. By targeting the entire industry and working to raise public awareness, the fast food workers make their organizing more powerful in a difficult-to-unionize industry.

Obama Offers to Cut Corporate Tax Rate as Part of Jobs Deal (NYT)

Mark Landler and Jackie Calmes report on President Obama's grand bargain for job creation. By putting a tax cut for corporations on the table, President Obama is calling out the GOP on whether they will ever work with the Democrats to help the middle class.

This Weird Little Policy is the Key to Obama’s Grand Bargain on Jobs (WaPo)

Ezra Klein points out how foreign earnings that are sitting overseas fit into the President's proposal. With a one-time fee instead of a repatriation holiday, we could have the funds for a jobs program, but it doesn't solve the long-term corporate tax problems.

In an Economic Democracy, Stiglitz & Reich Would Be Contenders for Fed Head (The Nation)

John Nichols thinks that if the process of choosing a Federal Reserve chair is a campaign, then we should put forward progressive candidates who emphasize income inequality and the middle class. Even if they aren't chosen, it swings the discussion in new directions.

New on Next New Deal

Telecom Industry’s Imaginary Book Critics Try to Discredit Susan Crawford

I consider the wide-ranging smear campaign against Roosevelt Institute Fellow Susan Crawford's work on telecommunications equality. With tactics ranging from prominently placed op-eds to fake one-star Amazon reviews, Big Telco is only strengthening her position.

Share This

Daily Digest - July 30: Goldilocks and the Next Fed Chair

Jul 30, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Bernanke Did Well, but the Fed Must do Better (FT)

Click here to receive the Daily Digest via email.

Bernanke Did Well, but the Fed Must do Better (FT)

Roosevelt Institute Fellow Mike Konczal looks at the Goldilocks question facing the next Fed Chair: is current policy in response to the Great Recession too hot, too cold, or just right? He says that the Fed wasn't doing enough, and a dramatic policy shift is needed. (Registration is required to read this article)

Fear of a Female Fed Chief (NY Mag)

Jonathan Chait examines the right-wing claims that Janet Yellen is only being considered for Fed Chair because of her gender. No one is denying her qualifications, so it appears those opposed to Yellen have been influenced by Larry Summers's view of women.

Strikes, Alliances, and Survival (TAP)

Harold Meyerson writes on unions' work to build a bigger and broader labor movement. Experiments like partnerships with the NAACP or helping fast food workers win minimum wage increases are about remaining relevant and surviving in an anti-union economy.

Fast Food Strikes Catch Fire (In These Times)

David Moberg reports on the expanding fast food strikes yesterday, which are many workers' first experience with collective organizing. Apparently, even managers recognize that it's hard to argue with the statement that fast food wages are too low to live on.

Beauty School Students Left With Broken Promises and Large Debts (NYT)

Emily S. Rueb explains the plight of women who took out federal student loans for scam beauty schools. A nonprofit group is attempting to help them discharge this debt, because the schools distributed fraudulent information to prospective students.

80 Percent Of U.S. Adults Face Near-Poverty, Unemployment: Survey (HuffPo)

Hope Yen questions what it means for the American Dream if four out of five adults face economic insecurity at some point in their lives. If poverty is an issue that almost all Americans must deal with, then why are poverty programs the first on the chopping block?

The GOP Wants to Slash Food Stamps: Here's Exactly How Many of Their Constituents Would Suffer (The Atlantic)

Jordan Weissmann and Kyle Thetford analyze census data to look at how many people receive food stamps in different House districts. For Republicans, the answer is consistent: cuts to food stamps would leave 8-12% of households in their districts with less money for food.

New on Next New Deal

What Mia Macy's Victory Means for Transgender Workers' Rights

Roosevelt Institute | Campus Network alumnus Tyler S. Bugg follows up on a major transgender employment discrimination case that he wrote about last year. This ruling is a win, but there is still more to be done for the transgender community and workers in general.

Share This

Daily Digest - July 29: Prisons in a Recession

Jul 29, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Prisons are Shrinking. That Won’t Necessarily Last. (WaPo)

Click here to receive the Daily Digest via email.

Prisons are Shrinking. That Won’t Necessarily Last. (WaPo)

Roosevelt Institute Fellow Mike Konczal questions whether the Great Recession has had an effect on our incarceration system. It seems that the slow decline in incarceration rates started before the recession, but we could use this moment to continue that trend.

Why Progressives Hate the Idea of Larry Summers for Fed Chair (MSNBC)

Ned Resnikoff speaks to Mike Konczal about all the reasons Larry Summers isn't the right choice for the next Federal Reserve Chair. Mike points out that Summers has never shown any great interest in monetary policy to begin with.

The Cost of Austerity: 3 Million Jobs (MoJo)

Kevin Drum reports that Republican austerity policies since 2011 have reduced employment by nearly 3 million. The unemployed aren't any better off with this obstructionist, anti-growth behavior, but with a Democrat in the White House, he says Republicans don't care.

Helping America’s Renters (Reuters)

David Abromowitz questions how much profit Fannie Mae and Freddie Mac need to make before we can fund the National Housing Trust Fund. The fund was created to support low-income housing just before the crash, but has never had actual funds to work with.

Fighting Back Against Wretched Wages (NYT)

Steven Greenhouse looks at the low-wage workers nationwide who have decided they are tired of corporations who refuse to pay a living wage. But as one CEO quoted says, there is no such thing as too-high profits, and apparenty there's no need to pass that on to the workers.

Fast Food Strikes Intensify in Seven Cities (Salon)

Josh Eidelson looks at the expansion of fast food worker strikes that is coming today. The short-term strikes in seven cities are aimed to decrease risk for strikers, because fast food corporations haven't taken well to employees who dare to mention unions.

How to Ease Inequality on the Cheap (Pacific Standard)

Michael Fitzgerald appreciates the sentiment behind President Obama's call for universal Pre-K, but there may be a cheaper option in the short run. A World Bank working paper finds that weekly hour-long sessions with a childcare aid can have a massive effect on the child's adult income.

Share This

Daily Digest - July 26: The Trouble with Summers's Silence

Jul 26, 2013Tim Price

Click here to receive the Daily Digest via e-mail.

Should Obama pick Larry Summers to head the Fed? (Politico)

Click here to receive the Daily Digest via e-mail.

Should Obama pick Larry Summers to head the Fed? (Politico)

Roosevelt Institute Fellow Mike Konczal writes that while Ben Bernanke led the Fed through a crisis, his successor will need to build consensus and establish the central bank's new normal. That's a problem given that Summers hasn't said a word about the biggest debates he'll have to settle.

Even as economy rebounds, income inequality festers (MoneyWatch)

Charles Wilbanks notes that most American remain deeply dissatisfied with an economy in which workers at the bottom see their wages fall while those at the top are making money hand over fist. And to add insult to injury, taxpayers are forced to subsidize their bosses' raises.

The day the right lost the economic argument (Salon)

Michael Lind argues that President Obama's Knox College speech offered a strong and broadly appealing summary of progressive economic theory focused on manufacturing, innovation, infrastructure, and education, while the House Republicans' alternative plan offered nothing in particular.

Some Democrats Look to Push Party Away from Center (NYT)

Jonathan Martin writes that as Democrats contemplate their future post-Obama, many are advocating for a populist approach to economic policy, financial reform, and rising inequality rather than the murky middle ground that the party's leaders have settled for since the '90s.

White House hardens stance on budget cuts ahead of showdown with Republicans (WaPo)

Zachary Goldfarb and Paul Kane report that the Obama administration may force a government shutdown come September if Republicans in Congress refuse to undo sequestration and continue to demand deeper cuts to a budget they've already carved to the bone.

Congress to Fed: End Too-Big-to-Fail Already! (MoJo)

Erika Eichelberger notes that Dodd-Frank requires the Fed to implement rules to scale back its emergency lending powers, but three years since the law was passed, the central bank still just says it's working on it. Things like this don't happen overnight. Or even over 1,095 nights.

Why 17 liberal senators voted against the student loan "deal" (MSNBC)

Suzy Khimm writes that while the Senate finally passed legislation to address the doubling of federal student loan interest rates, progressives weren't willing to swallow a compromise that lowered students' rates now while guaranteeing they'll have to pay even more in the future.

Share This

Where's the Beef?: The First Thing Obama Can Do By Himself to Create Good Jobs

Jul 25, 2013Richard Kirsch

The president's big economic address had some good lines, but he should back them up with real action through executive orders.

The president's big economic address had some good lines, but he should back them up with real action through executive orders.

I am of course glad to see President Obama focus the country on what he correctly identifies as the most pressing national problem, the crushing of the middle class. The solution he laid out in his address at Knox College, a middle-out economics which sees the middle class as the engine of the economy, is both good economics and a powerful political message. It is what progressives and Democrats need to keep emphasizing over and over again, both rhetorically and in their legislative agendas.

When it came to the broad foundations of policy, the president's outline of the pillars of a strong middle class was on point: good jobs, quality education and job training, affordable health care, good housing, retirement security, and strong neighborhoods.

Still, I found the speech disappointing. The president only nibbled at the biggest change in our economy, the relentless decline in good jobs. 

Not that the president didn't correctly identify the issue. Early in his address he explained, "The link between higher productivity and people’s wages and salaries was severed – the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged." He went on to acknowledge that even as the economy recovers, the earnings of the average worker are down.

But when it came to further analysis or solutions, the speech was thin. He did repeat his call for an increase in the minimum wage and remind the public that the Affordable Care Act will provide coverage for people who don't get health insurance at work. However, his solutions made assumptions that ignore the profound changes in the economy that have undermined job quality.

A good lens for this is his discussion – really lack of discussion – about the role of unions, which he only mentioned by commenting, "It became harder for unions to fight for the middle class." A great example of using the passive voice to avoid explaining that unions were not decimated by an act of nature, but by a concerted attack by corporations and the right, backed by government policy.

The president pointed out that "The days when the wages for a worker with a high school degree could keep pace with the earnings of someone who got some higher education are over." But why did workers with just high school educations used to get paid well? Because they organized unions through which they fought together for better wages. 

Today, most of the new jobs being created are low-wage jobs with no benefits, which also don't require more than a high school education. If these workers were enabled – with the help of modernized labor laws and aggressive enforcement of the labor laws now on the books – to organize, they too could win decent wages and benefits. The president talked about global competition as an explanation for job loss, but that’s not an issue for the service industries that employ most low-wage workers.

It is also no longer true that another of the president's pillars, education, will mean more good jobs. The fact that a higher proportion of Americans have a college education than ever before has not stopped the deterioration of job quality. In the new economy, college grads have maintained low unemployment by taking jobs that they are overqualified for, upping joblessness among Americans who aren't college grads.

Even the president's assumption that creating more manufacturing and infrastructure jobs will mean more good jobs is not as solid as it has been in the past. While most of these jobs are decent, they pay less than before. For example, newly hired auto workers make a fraction of what the industry historically paid; it would take two new auto worker jobs to support a family at the same middle-class level as the workers paid at traditional rates. More broadly, the drop in unionization in manufacturing and construction, one cause among many of the overall downward pressure on wages, means job quality in traditional good job sectors is declining.

A middle-out economy must be anchored by good jobs. There are clearly huge legislative challenges to winning a good jobs agenda, which would include robust labor law strengthening, updated labor standards that guarantee paid sick leave and family leave, and enforcement of the labor laws already on the books. But the president doesn't have to wait for Congress to provide better jobs for millions of workers and set a new example for the country.

In his speech, Obama promised, "Whatever executive authority I have to help the middle class, I’ll use it." That’s great. He can start with an executive order to boost job quality for at least 2 million workers whose pay is financed by the federal government. 

The federal government has a history, by legislation and executive order, of protecting wages for workers paid for with federal funds. However, the prevailing wage protections put in place over the three decades from the 1930s to the 1960s now cover only 20 percent of federally funded private-sector work. Even for those workers still covered, wage rates can be little higher than the federal minimum. According to a recent study by Demos, the federal government now funds over 2 million jobs paying under $12 per hour – more than Wal-Mart and McDonald’s combined – in such industries as food, apparel, trucking, and auxiliary health care.

In another report on the federal contract workforce, the National Employment Law Project (NELP) interviewed over 500 contract workers and found that 74 percent are paid less than $10 per hour and 58 percent receive no benefits from their employer. The NELP report includes one gripping story after another of workers like Lucila Ramirez, who, after 21 years as a janitor at the federally owned Union Station, earns $8.75 an hour.

A presidential executive order could directly help Lucila and the millions like her who manufacture uniforms for our military, care for our elders under Medicare, work as security guards at federally leased buildings, or are laborers on federally funded construction projects. The order would require that jobs financed by federal funds require living wages (not just minimum wage or prevailing wage in a low-wage sector), paid sick days, and prohibitions against employers fighting unionization.

I am looking forward to the president spending "every minute of the 1,276 days remaining in [his] term to make this country work for working Americans again." He can start by backing up great lines like that with an executive order for the millions of hardworking Americans whose pay comes from the government he leads. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

 

Barack Obama banner image via Shutterstock.com

Share This

Daily Digest - July 25: Minimum Wage Doesn't Pay the Bills

Jul 25, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Barely Making Ends Meet (All In With Chris Hayes)

Roosevelt Institute Fellow Dorian Warren corrects commonly held misconceptions of the minimum wage. Half of minimum wage workers are over 25, and studies show that increasing the minimum wage will not affect employment.

Click here to receive the Daily Digest via email.

Barely Making Ends Meet (All In With Chris Hayes)

Roosevelt Institute Fellow Dorian Warren corrects commonly held misconceptions of the minimum wage. Half of minimum wage workers are over 25, and studies show that increasing the minimum wage will not affect employment.

The ‘Obamacare Is a Job Killer’ Myth (U.S. News & World Report)

Pat Garofalo argues that the employer mandate isn't harming employment, no matter how often the GOP makes that claim. Changes in employment practices would have been noticeable this year, but there has been no increase in part-time employment.

The Depressing Reality of ‘The Recovery’: Americans Aren’t Getting Jobs. They’re Retiring. (WaPo)

Dylan Matthews agrees with the Century Foundation's argument that the decrease in unemployment in the recovery is almost all due to retirement, not job creation. The employment-population ratio, which shows the proportion of working adults, hasn't changed.

Are the Suburbs Where the American Dream Goes to Die? (The Atlantic)

Matthew O'Brien looks at the ties between sprawl, race, and income mobility. He argues that when suburbs sprawl, wealthy, mostly-white suburbanites have little desire to support public goods that help everyone succeed, like mass transit, due to racist fears of blacks in their neighborhoods.

More Americans Living in Others' Homes (WSJ)

Josh Mitchell looks at the increase in so-called missing households, which occur when adults do not own or rent their own homes. A large proportion of this phenomenon can be tied to Millennials who are living with parents, because it's just more affordable.

New on Next New Deal

Where's the Beef?: The First Thing Obama Can Do By Himself to Create Good Jobs

Roosevelt Institute Senior Fellow Richard Kirsch thinks that the President's speech ignored the structural changes that have caused a decline in good jobs. He suggests that Obama could starting by ensuring all federally subcontracted employees get a living wage, via executive order.

Yellen, Summers and Rebuilding After the Fire

Roosevelt Institute Fellow Mike Konczal looks at the important questions to consider in choosing a new Federal Reserve chair, and makes his own recommendation.

Why the Right Doesn’t Really Want Euro-Style Reproductive Health Care

Roosevelt Institute Fellow Andrea Flynn points out that when right-wing pundits call for European-style abortion laws, they're forgetting that those come along with a full range of progressive reproductive health care policies.

Share This

Yellen, Summers and Rebuilding After the Fire

Jul 24, 2013Mike Konczal

There is no Bernanke Consensus. This is important to remember about our moment, and about how to evaluate what comes next for the Federal Reserve. What we have instead is the Bernanke Improvisation, a series of emergency procedures to try to keep the economy from falling apart, and perhaps even guide it back to full employment, after normal monetary policy hit a wall.

With the rumor mill circulating that Larry Summers could be the next Federal Reserve chair instead of Janet Yellen, it’s worth understanding where the Fed is. Bernanke has been like a fireman trying to put out a fire since 2008. What comes next is the rebuilding. What building codes will we have? What precautions will we take to prevent the next fire, and what are the tradeoffs?

This makes the next FOMC chair extremely important. While you are inside a burning building, what the fireman is doing is everything. But deciding how to rebuild will ultimately make the big difference for the next 30 years.

The next FOMC chair will have three major issues to deal with during his or her tenure. The first is to determine when to start pushing on the brakes, and thus where we’ll hit “full employment.” The second is to decide how aggressively to enforce financial reform rules [1]. Those are pretty important things!

But the new FOMC chair has an even bigger responsibility. He or she will also have to figure out a way to rebuild monetary policy and the Federal Reserve so that we won’t have a repeat of our current crisis. And in case you’ve missed the half-a-lost-decade we’ve already gone through, this couldn’t be more important.

Monetary policy itself could be rebuilt in a number of directions. It could give up on unemployment, perhaps keeping the economy permanently in a quasi-recession to somehow boost a notion of “financial stability” instead. Or it could evolve in a direction designed to avoid the prolonged recession we just had, which could involve a higher inflation target or targeting something like nominal GDP.

But the default, like many things in life, is that inertia will win out, and some form of muddling forward will continue on indefinitely. The Federal Reserve will maintain a low inflation target that it always falls short of, and the economy will never run at its peak capacity. Attempts at better communications and priorities will be abandoned. And even minor recessions will run the risk of hitting the liquidity trap, making them far worse than they need to be.

The inertia problem is why having a consensus builder and convincer in charge is key, and it is a terrible development that these traits are being coded as feminine and thus weak. As a new governor in 1996, Janet Yellen argued the evidence to convince Alan Greenspan that targeting zero percent inflation was a bad idea. (Could you imagine this recession if inflation was already hovering at a little above zero in 2007?) The next governor will be asked to gather much more complicated evidence to make even harder decisions about the future of the economy - and Yellen has a proven track record here.

Yellen has been at the forefront of all these debates. As Cardiff Garcia writes, she runs the subcommittee on communications and has spent a great deal of time trying to figure out how these unorthodox policies impact the economy. The debate about what constitutes full employment has become muted among liberal economists because unemployment has been so high, but it will come back to the fore after the taper hits. Yellen has been thinking about this all along. Crucially, she has come the closest of any high-ranking Fed official to endorsing a major shift of current policy - in this case, to something like a nominal spending target. This will become important to however we rebuild after this crisis.

As a quick history lesson, there were two major points where a large battle broke out on monetary stimulus. The first was the spring and summer of 2010, when there were serious worries about a double-dip recession. This ended when Bernanke announced QE2, which immediately collapsed market expectations of deflation. The second was in the first half of 2012, when an intellectual consensus was built around tying monetary policy to future conditions, ending with the adoption of the Evans Rule.

I can’t find Larry Summers commenting on either of these situations, either in high-end academic debates or in the wide variety of op-eds he’s written. The commenters at The Money Illusion couldn’t find a single instance of Summers suggesting that monetary policy was too tight in the past five years. Summers was simply missing in action for the most important monetary policy debates of the past 30 years, while Yellen was leading them. And trying to shift from those debates into a new status quo will be the responsibility of the next FOMC chair.

 

 

[1] Given what this blog normally covers, I’d be remiss to not mention housing and financial reform. During the Obama transition, Larry Summers promised “substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis” as well as “reforming our bankruptcy laws.” This letter was crucial in securing votes from Democrats like Jeff Merkley for the second round of TARP bailouts. A recent check showed that the administration ended up using only $4.4 billion on foreclosure mitigation through the awful HAMP program, while Summers reportedly was not supportive of bankruptcy reform.

And as Bill McBride notes, Yellen was making the correct calls on the housing bubble and its potential damage while Summers was attacking those who thought financial innovation could increase the risks of a panic and crash.

It’s difficult to overstate how important the Federal Reserve is to financial regulation. Did you catch how the Federal Reserve needs to decide about the future of finance and physical commodities soon, with virtually no oversight or accountability? Even if you think Summers gets a bum rap for deregulation in the 1990s, you must believe that his suspicion of skepticism about finance - for instance, the reporting on his opposition on the Volcker Rule - is not what our real economy needs while Dodd-Frank is being implemented.

Follow or contact the Rortybomb blog:

  

 

There is no Bernanke Consensus. This is important to remember about our moment, and about how to evaluate what comes next for the Federal Reserve. What we have instead is the Bernanke Improvisation, a series of emergency procedures to try to keep the economy from falling apart, and perhaps even guide it back to full employment, after normal monetary policy hit a wall.

With the rumor mill circulating that Larry Summers could be the next Federal Reserve chair instead of Janet Yellen, it’s worth understanding where the Fed is. Bernanke has been like a fireman trying to put out a fire since 2008. What comes next is the rebuilding. What building codes will we have? What precautions will we take to prevent the next fire, and what are the tradeoffs?

This makes the next FOMC chair extremely important. While you are inside a burning building, what the fireman is doing is everything. But deciding how to rebuild will ultimately make the big difference for the next 30 years.

The next FOMC chair will have three major issues to deal with during his or her tenure. The first is to determine when to start pushing on the brakes, and thus where we’ll hit “full employment.” The second is to decide how aggressively to enforce financial reform rules [1]. Those are pretty important things!

But the new FOMC chair has an even bigger responsibility. He or she will also have to figure out a way to rebuild monetary policy and the Federal Reserve so that we won’t have a repeat of our current crisis. And in case you’ve missed the half-a-lost-decade we’ve already gone through, this couldn’t be more important.

Monetary policy itself could be rebuilt in a number of directions. It could give up on unemployment, perhaps keeping the economy permanently in a quasi-recession to somehow boost a notion of “financial stability” instead. Or it could evolve in a direction designed to avoid the prolonged recession we just had, which could involve a higher inflation target or targeting something like nominal GDP.

But the default, like many things in life, is that inertia will win out, and some form of muddling forward will continue on indefinitely. The Federal Reserve will maintain a low inflation target that it always falls short of, and the economy will never run at its peak capacity. Attempts at better communications and priorities will be abandoned. And even minor recessions will run the risk of hitting the liquidity trap, making them far worse than they need to be.

The inertia problem is why having a consensus builder and convincer in charge is key, and it is a terrible development that these traits are being coded as feminine and thus weak. As a new governor in 1996, Janet Yellen argued the evidence to convince Alan Greenspan that targeting zero percent inflation was a bad idea. (Could you imagine this recession if inflation was already hovering at a little above zero in 2007?) The next governor will be asked to gather much more complicated evidence to make even harder decisions about the future of the economy - and Yellen has a proven track record here.

Yellen has been at the forefront of all these debates. As Cardiff Garcia writes, she runs the subcommittee on communications and has spent a great deal of time trying to figure out how these unorthodox policies impact the economy. The debate about what constitutes full employment has become muted among liberal economists because unemployment has been so high, but it will come back to the fore after the taper hits. Yellen has been thinking about this all along. Crucially, she has come the closest of any high-ranking Fed official to endorsing a major shift of current policy - in this case, to something like a nominal spending target. This will become important to however we rebuild after this crisis.

As a quick history lesson, there were two major points where a large battle broke out on monetary stimulus. The first was the spring and summer of 2010, when there were serious worries about a double-dip recession. This ended when Bernanke announced QE2, which immediately collapsed market expectations of deflation. The second was in the first half of 2012, when an intellectual consensus was built around tying monetary policy to future conditions, ending with the adoption of the Evans Rule.

I can’t find Larry Summers commenting on either of these situations, either in high-end academic debates or in the wide variety of op-eds he’s written. The commenters at The Money Illusion couldn’t find a single instance of Summers suggesting that monetary policy was too tight in the past five years. Summers was simply missing in action for the most important monetary policy debates of the past 30 years, while Yellen was leading them. And trying to shift from those debates into a new status quo will be the responsibility of the next FOMC chair.

 

 

[1] Given what this blog normally covers, I’d be remiss to not mention housing and financial reform. During the Obama transition, Larry Summers promised “substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis” as well as “reforming our bankruptcy laws.” This letter was crucial in securing votes from Democrats like Jeff Merkley for the second round of TARP bailouts. A recent check showed that the administration ended up using only $4.4 billion on foreclosure mitigation through the awful HAMP program, while Summers reportedly was not supportive of bankruptcy reform.

And as Bill McBride notes, Yellen was making the correct calls on the housing bubble and its potential damage while Summers was attacking those who thought financial innovation could increase the risks of a panic and crash.

It’s difficult to overstate how important the Federal Reserve is to financial regulation. Did you catch how the Federal Reserve needs to decide about the future of finance and physical commodities soon, with virtually no oversight or accountability? Even if you think Summers gets a bum rap for deregulation in the 1990s, you must believe that his suspicion of skepticism about finance - for instance, the reporting on his opposition on the Volcker Rule - is not what our real economy needs while Dodd-Frank is being implemented.

Follow or contact the Rortybomb blog:

  

Federal Reserve banner image via Shutterstock.com

Share This

Daily Digest - July 24: Don't Copy the U.S. Telecoms Model

Jul 23, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Cable Companies Try to Take Over Europe, Too (Bloomberg)

Roosevelt Institute Fellow Susan Crawford thinks that the leaked European Commission proposal for data communications copies all the worst features of the U.S. model. Encouraging monopoly behavior doesn't increase high-speed access.

Click here to receive the Daily Digest via email.

Cable Companies Try to Take Over Europe, Too (Bloomberg)

Roosevelt Institute Fellow Susan Crawford thinks that the leaked European Commission proposal for data communications copies all the worst features of the U.S. model. Encouraging monopoly behavior doesn't increase high-speed access.

Why CEO Pay Exploded Over The Last 20 Years (HuffPo)

Caroline Fairchild looks at the Roosevelt Institute's latest white paper to discuss how the performance pay loophole has contributed to the explosive growth of CEO pay. Changes in the tax code under President Clinton encouraged a rise in options-based compensation.

  • Roosevelt Take: Read the white paper, "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Roosevelt Institute Director of Research Susan Holmberg and Roosevelt Institute | Campus Network Senior Fellow for Economic Development Lydia Austin here.

Part-Time Work On The Rise, But Is That A Good Thing? (NPR)

Michel Martin questions whether the rise in part-time work could be a positive change. His discussion with Amere Graham, a minimum-wage part-time McDonald's employee, makes it clear that these are in no way good jobs or careers.

The American Dream: Survival is Not an Aspiration (Al Jazeera)

Sarah Kendzior argues that the American dream of upward mobility is dying. In the low-wage service economy, there isn't money to spare for education, while higher-wage industries require unpaid or low-pay short-term positions, blocking out those without money.

Is the US Economy Good, Bad, or In-Between Right Now? (On The Economy)

Jared Bernstein compares the economy to a standard transmission car - we're currently in second gear, but we need policies that will help us to accelerate the economy by reconnecting growth and middle-class prosperity.

The Budget Crisis in Congress's Head (Bloomberg)

Evan Soltas asks why Congressional Republicans are still seeking spending cuts when according to Congressional Budget Office estimates, the crisis is past us. The cuts aren't needed anymore, but the GOP continues to hold fiscal measures hostage to these demands.

Economy: Without Congress, All Obama Can do is Talk (MSNBC)

Suzy Khimm suggests that President Obama is kicking off a series of speeches on the economy because he can't do anything else. Congress isn't taking action, so the President can only point to the issues and assure voters that someone is paying attention.

Share This

Daily Digest - July 23: Your Internet Access Isn't So Great

Jul 23, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

What Verizon's Op-Eds Won't Tell You About America's Slow, Costly Internet Access (Next New Deal)

Click here to receive the Daily Digest via email.

What Verizon's Op-Eds Won't Tell You About America's Slow, Costly Internet Access (Next New Deal)

Roosevelt Institute Fellow Susan Crawford responds to two recent New York Times op-eds that claimed the U.S. has great high-speed internet access - and criticized her work. She says the U.S. is paying more for lower speeds and lower quality access.

Rush Limbaugh on Slavery in America (The Last Word with Lawrence O'Donnell)

Roosevelt Institute Fellow Dorian Warren speaks about the right-wing response to President Obama's Friday speech on race. He argues that when the right complains about discussions of race, they ignore facts and history in a way that is dangerous for the black community.

Inequality, Mobility and the Policy Agenda They Imply (NYT)

Jared Bernstein argues that when Miles Corak pushes for accessible healthcare and high-quality early childhood education to improve income mobility, he doesn't go far enough. Education can't overcome the inequalities that require structural change.

Mr. President, Have Pity on the Working Man (Bill Moyers)

Bill Moyers and Michael Winship contend that President needs to do something about the millions of federally subcontracted jobs that have very low pay and no benefits. With an executive order, he could mandate a living wage for these government employees.

Subsidizing Poverty (TAP)

Harold Meyerson explains the problem with enterprise zones, which subsidize the wages of jobs that businesses might have created anyway. In San Bernadino, CA, the subsidized jobs were almost all low-wage, to the point where residents were subsidizing workers' poverty.

Why Won’t Obama Pay His Interns? (Buzzfeed)

Evan McMorris-Santoro reports on the work of Mikey Franklin, who is pushing back against the federal government's unpaid internship culture. Franklin can't accept a White House that pushes minimum wage increases without paying interns minimum wage.

Here’s how Goldman Sachs is making your beer more expensive (WaPo)

Lydia DePillis gives a step-by-step explanation of how Goldman Sachs's involvement in the aluminum market is raising prices. Goldman owns aluminum warehouses, and the cost of rent to store aluminum is eventually passed to buyers, inflating the price of the commodity.

New on Next New Deal

Delaware Welcomes Corporations That Put People Ahead of Profits

Roosevelt Institute Research Intern Suzanna Fritzberg explains how new legislation creating benefit corporations in Delaware could mean a major expansion of this form of social entrepreneurship, thanks to Delaware's corporation-friendly atmosphere.

Share This

Pages