How Larry Summers hobbled Obama’s economic policy

By Felix Salmon
January 19, 2011
Jason Linkins's evisceration of Peter Baker's big NYT Magazine story on Obama's economic policy is a classic of the genre.

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I love myself a brutal takedown, and Jason Linkins’s evisceration of Peter Baker’s big NYT Magazine story on Obama’s economic policy is a classic of the genre. Except, I have to admit to being Team Baker on this one. We’ve all read a lot of stories about the economy, and what bad shape it’s in, and how we got to this sorry place. This one’s different. It’s written by the NYT’s White House correspondent, and it raises an uncomfortable question: what if part of the problem is that Obama’s economic team just wasn’t a good team? What if, in fact, it turns out to have been a very bad team?

Baker points out that most of the original members of Obama’s economic team have left, and that the new guys are generally Clinton-era veterans. And given the reputation of the two presidents, you’d expect the Clinton bunch to be more fractious and chaotic than the No Drama Obama crew. But that turns out not to be the case:

The path from crisis to anemic recovery was marked by turmoil inside the White House. The economic team fractured repeatedly over philosophy (should jobs or deficits take priority?) and personality (who got to attend which meetings?), resulting in feuds that ultimately helped break it apart. The process felt like a treadmill, as one former official put it, with proposals sometimes debated for months before decisions were reached. The word commonly used by those involved is “dysfunctional,” and in recent months, most of the initial team has left or made plans to leave, including Larry Summers, Christina Romer, Peter Orszag, Rahm Emanuel and Paul Volcker.

Most of the blame here can and should be laid at the feet of Larry Summers — and, implictly, on Obama for hiring him in the first place. Summers is no manager, and seems to have been much better at getting into fights with people than at making sure everybody was doing their best to pull in the same direction. Baker rehearses the stories of Summers’s fights with Austan Goolsbee, with Christie Romer, and with Rahm Emanuel:

Summers and Emanuel also clashed over incentives for small business — the chief of staff kept demanding a proposal, but Summers opposed the idea of using TARP money for the initiative, arguing it would not be effective. It took months to develop a policy.

Baker even comes close to saying that Peter Orszag’s decision to take Citigroup’s millions was in part a function of his inability to get Summers to care about the budget — or, conversely, of Summers’s inability to credibly pretend to Orszag that he was being listened to:

One reason Orszag left, eventually winding up at Citigroup, was the sense that the administration was trapped in a dynamic that would make it hard to reduce the deficit adequately.

All this talk about being trapped in a dysfunctional team, of “picking through the wreckage of a messy divorce”, makes some sense, given the utter inability of Obama or anybody else to articulate a coherent vision of what the Obama administration’s economic policy actually is. Obama, writes Baker,

couldn’t seem to decide whether he was going to take Wall Street to task for its irresponsible behavior or cajole it into freeing up money to get the economy moving. One day he derided “fat-cat bankers” who caused the recession; another day, he soothed them by saying that he and the American people “don’t begrudge” multimillion-dollar bonuses.

Which is weird, given the clarity with which Obama was speaking before his economic team had the opportunity to fall apart.

Summers, of course, is being as slippery as ever:

As we talked for three hours that night, he struck me as thoughtful and analytical about what went right and what didn’t. He didn’t want to be quoted from that conversation, though, preferring to polish his thoughts with academic precision and e-mail them to me later. “We always believed that the greatest risk was doing too little, not to do too much,” he wrote. “We fought for the largest fiscal program we could get.”

Except, of course, that simply isn’t true:

Obama’s instinct was to take on everything at once. “I want to pull the band-aid off quickly, not delay the pain,” a senior Obama official remembers him saying. “He didn’t want to muddle through it, Japan-style,” recalled Larry Summers, tapped to be director of Obama’s National Economic Council. Romer calculated how much government spending would be needed to fill the gaping hole of consumer demand and came up with $1.2 trillion, the highest of three options. Summers told her to leave that number out of the memorandum to Obama.

At this point, the risk is that it’s too late to fix things. Obama no longer controls the House; neither can he count on 60 votes in the Senate for anything. And on top of that, he’s already two years into his administration. For Ken Rogoff, the course is set:

After two years, he said, the president has essentially done everything he can and must wait to see if it works. “What’s going to happen with unemployment and the economy is largely set at this point,” he said. “He’s taken his decisions, and now it will unfold and things will begin to improve.”

The problem is that the improvement will come fast for capital, and very slowly for labor; it’s unthinkable that Obama will run for re-election with a lower unemployment rate than when he ran for president.

The NYT is pairing Baker’s story with a group of photographs by Alec Soth entitled “Portraits From a Job-Starved City”. Linkins is right that these people don’t much care about technocratic squabbles inside the Beltway. But they elected a pro-labor, pro-union president — and got from him an economic policy which recapitalized banks and did wonders for the stock market, but which has massively underperformed on the job and foreclosure fronts. The buck stops with the president: he’s already taken his electoral lumps, and will face tough questions in 2012. But Baker makes an important case that a lot of the blame should be shouldered by Larry Summers, who should have cared much more about unemployment than he did, and who was in large part responsible for the incoherence of the most important arm of the Obama administration.

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Comments
9 comments so far

That’s twice today that you’ve pointed me to wonderful, quirky pieces, Felix. Thanks.

I loved the Rockford portraits. It’s like having Walker Evans’ photos speak. Do they care that Larry Summers screwed them over in favor of GS and Morgan Stanley? They would if they knew.

Posted by LadyGodiva | Report as abusive

Summers ‘should have cared much more about unemployment than he did.’ With a lot more caring, things would have turned out better? QED?

Posted by uprof | Report as abusive

I think it is becoming clear that the two key economic needs for the United States are increased energy independence (with less corn ethanol) and increased manufacturing. These would reduce for the foreign trade deficit dramatically and provide employment.

Unfortunately, Clinton, Bush, and Obama have all put in place economic teams dedicated to increasing the wealth of the financial sector, protecting vested interests in energy production and usage, and moving manufacturing offshore. These sectors have also effectively purchased Congress.

We need a massive reboot of economic thinking in government. Unfortunately, I think that the vested interests have bought so much influence that it will take a true crash and depression to break their lockhold on economic policy in this country. But I have faith that, at some point in time, conditions will get to the point where it will be possible to put something systemic in place on the order of the anti-trust legislations and Glass-Steagal Act that were put in place in the first half of the 20th century in the wake of massive collapses.

Folks like Summers, Geithner, Bernanke, Greenspan, Paulson, and Rubin are all just flag-wavers and cheerleaders for the currented vested interests. Nothing will change until they are thoroughly discredited publicly.

Posted by ErnieD | Report as abusive

You seem to be ignoring several salient facts, not the least of which being that Orszag was (and is) wrong with his “deficits take priority” view. Summers, who lived through the Peso Crisis (and had a strong leader then, unlike now), knows full well the value of Demand.

Obama has said–why does no one except me point this out every time the point is raised–that it was his mistake to, essentially, start with his BATNA and negotiate from there.

You can blame Larry Summers for a lot of things (and I do), but you can’t blame him for following the leadership he was (not) given.

And as for the “who got to attend which meetings?” shibboleth, the nicest thing we can say is that a writer who thinks that’s a question of “personality” is not a writer who understands the subject about which he is writing.

Baker is just not up to the task; that his conceits are wrong given the nature of the problem is lagniappe.

Posted by klhoughton | Report as abusive

It seems rather naive to think that the White House ‘caring more’ about unemployment would have significantly affected it.

Posted by inboulder | Report as abusive

I know that Barack Obama said that Lloyd Blankfein invented the internet, but the claim “he soothed them by saying that he and the American people “don’t begrudge” multimillion-dollar bonuses.” is false. Since it is a false claim about a published transcript, the false claim published in the New York Times demonstrates reckless disregard for the truth.

I quote the context of the two words TWO Words ! which Baker ripped out of context.

http://tinyurl.com/6jdgbfg

“Q Let’s talk bonuses for a minute: Lloyd Blankfein, $9 million; Jamie Dimon, $17 million. Now, granted, those were in stock and less than what some had expected. But are those numbers okay?

THE PRESIDENT: Well, look, first of all, I know both those guys. They’re very savvy businessmen. And I, like most of the American people, don’t begrudge people success or wealth. That’s part of the free market system. I do think that the compensation packages that we’ve seen over the last decade at least have not matched up always to performance. I think that shareholders oftentimes have not had any significant say in the pay structures for CEOs.”

So Obama said that the US people don’t begrudge success or wealth as such, however, wealth based on Wall Street compenstation packages have no justification.

Just to make it absolutely clear that Baker libeled Obama, I will also report the follow up question and answer

“Q Seventeen million dollars is a lot for Main Street to stomach.

THE PRESIDENT: Listen, $17 million is an extraordinary amount of money. Of course, there are some baseball players who are making more than that who don’t get to the World Series either. So I’m shocked by that as well. I guess the main principle we want to promote is a simple principle of “say on pay,” that shareholders have a chance to actually scrutinize what CEOs are getting paid. And I think that serves as a restraint and helps align performance with pay. The other thing we do think is the more that pay comes in the form of stock that requires proven performance over a certain period of time as opposed to quarterly earnings is a fairer way of measuring CEOs’ success and ultimately will make the performance of American businesses better.”

So in exactly the interview which Baker falsely asserts shows Obama soothing Wall Street executives, he advocated regulation of compensation which were not approved by Congress.

The claim about Obama is exactly as valid as the claim that “Al Gore claimed he invented the internet.”

You are, among other things, a journalist. You should be ashamed to repeat libels which have become conventional wisdom.

Posted by robertwaldmann | Report as abusive

I also find the criticism of Larry Summers unconvincing. I must note at the outset that Larry Summers was my PhD supervisor and I owe him a lot.

I don’t understand your criticism of Larry Summers. From the quoted bits of the article, he is blamed for not caring enough about the deficit and for not adding enough to the deficit with the stimulus bill. That is Baker criticizes him for disagreeing with Orszag who wanted to focus more on the deficit. Do you think that the Obama administration pivoted too late from trying to stimulate to trying to cut the deficit ? If so, your first criticism of Summers makes some sense. Otherwise it makes no sense at all.

He is also criticized for delaying the small business assistance bill which has done so much for the economy since it passed as is shown by … what exactly ? What evidence is there that Emanuel was right and Summers wrong on that one. I think that Emanuel liked the words “small business” and didn’t know or care about the effect of different policies on GDP or employment.

Importantly, the debate as described by Baker is over use of TARP money. You don’t mention if any alternative use was considered.

In the your quotes of Baker, I think we see the faults of US political journalism. The content of policy is ignored. The issue is whether people work together smoothly or there is conflict. This is the sort of idiocy that made many journalists assert that the Bush administration was highly competent. The meetings started and ended on time and everyone was on the same page. There were few (or no) unauthorised leaks. Everyone stayed on message. It’s a pity the policy choices were terrible, but it would be improper for reporters to consider that.

I am surprised that you agree with Baker. You too are a journalist, but you know a lot of economics. Surely you agree that the decision about which is the worse problem unemployment or the deficit is more important than whether Orszag’s feelings are hurt.

Posted by robertwaldmann | Report as abusive

Robert, I’ll first start by saying thanks for contributing, and thanks for contributing under your own name (which, in full disclosure, I don’t do because some of my clients are right wingers and I want my kids to have their choice of public or private college).

Baker’s article is lame, but the point remains that Larry Summers was in charge of giving Barack Obama economic advice, and with that advice Obama did a mediocre job of handling the economy. Regardless of the size of the stimulus, the way-too-lenient handling of the bankers, the cynical joke that was HAMP, and the composition of the stimulus (ineffective tax cuts vs. real stimulus) can all be laid at Obama’s feet.

Moreover, almost all of Obama’s errors (except small biz tax cuts) can not only be laid at Summers’ feet for his poor grasp of the politics of coddling Wall Street, his insensitivity to the needs of the mere laboring-and-mortgage-paying-classes, and his total misjudgment about the scale of the employment crisis, they also support two theses that have long followed Summers: 1) that he is bought and paid for by Wall Street and 2) he doesn’t care about the core demographic of the Democratic Party, the vast American middle.

Baker’s article is not great – but it resonates because it makes sense to people that poor policy and poor process go together. And ultimately, how unfair is the overall critique of Summers? If Summers didn’t support Obama’s series of economic policy mistakes, he could have left at any time.

Posted by Dollared | Report as abusive

Thanks for the update and information on Larry Summers Felix. There is not much news on him in the UK and until now all I had seen was a rather fawning and obsequious profile from the BBC’s economics editor Stephanie Flanders. That effort does not seem very accurate now. In fact it seems poor.

Posted by Sally32 | Report as abusive
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