Now that Larry Summers has announced he's leaving the Obama administration to return to Harvard, it's a good time to reflect on his tenure as head of the National Economic Council—not from the point of view of progressives or neoliberals, Wall Street, or the unemployed but from the point of view of Larry himself. I have two questions: Why did Summers take this job in the first place? And how is he feeling right now?
Of course, I have no idea. I've never met the guy. But I know people familiar with his thinking, as they say, and have followed the Obama administration's economic policy pretty closely. From 1999 to 2001, Summers held one of the most powerful positions in the world: Treasury secretary of the United States. After he went back to the private sector, he had a pretty cushy life, consulting for a high-end hedge fund and as an academic. (Yes, his time as Harvard's president was controversial, but it was also comfortable.) There are three potential motivations for Summers' return to public service in 2009:
Save the stimulus, save the world. It's rare that a macroeconomist gets the chance to prevent a second Great Depression. After the collapse of the financial sector in late 2008, the people advising President-Elect—and then President—Obama on the stimulus were going to have a huge effect on the future of the country. How could he turn that down?
In retrospect, Summers is probably disappointed with the way this turned out. He is infamously reported to have kept the $1.2 trillion-proposal of Christina Romer, then chair of the president's Council of Economic Advisers, off the table. Instead, he pushed for an insurance-policy approach in which all the government had to do was prevent a total collapse of the economy and growth would take off on its own. Now growth is sputtering, unemployment is still very high, and the very notion of Keynesian stimulus is toxic because it wasn't carried out seriously enough to begin with.
Summers Fact: Like Guns n' Roses, some people were cooler in the 1980s. In 1986, Summers wrote an influential paper about "hysteresis" in unemployment. He argued that unemployment, instead of returning to a mythical "natural" rate, could build on itself. Higher unemployment could generate more unemployment, which would push this natural rate upward. If he took his own advice to heart, he would be doing everything he could to get unemployment down right now.
Save the world, save his reputation. The modern era of financial deregulation started with Jimmy Carter's "Depository Institutions Deregulation and Monetary Control Act" in 1980. But it is Larry Summers and Robert Rubin's actions toward the derivative market in the late 1990s that most people remember as the height of financial-deregulatory fever. And with good reason: Their tarring and the subsequent dismissal of Brooksley Born let civil servants know who was in charge in the relationship between Wall Street and the regulators. (As chair of the Commodity Futures Trading Commission in the late 1990s, Born argued for greater regulation of financial derivatives.)
So it's possible Summers wanted to get involved with the process of reregulating Wall Street to help clear his name. But history is unlikely to grant him a rewrite. In his second go-round as a public servant, Summers didn't appear to be involved with any of the more structural reforms of Wall Street. He instead fell in line with the Treasury approach, which gave regulators more scope and powers to resolve problematic financial firms rather than to prevent financial crises.
Summers Fact: Like Sting, some people were more punk rock in the 1980s. In 1989, Summers wrote a paper arguing for a financial transaction tax titled "When Financial Markets Work too Well: A Cautious Case for a Securities Transaction Tax." Though this is a great solution for helping with the deficit and creating sensible brakes on the financial markets, it's a tough opinion to maintain once you start consulting for high-end hedge funds.
Save his reputation, get a better job. The most sensible explanation for his return to public service is that Summers wanted to be close to the administration in order to try out for the job of chairman of the Federal Reserve. But Obama decided to renominate Ben Bernanke, who was ultimately confirmed.
How would Summers have done? Bernanke's approach consists of acknowledging there is a problem, acknowledging that the Fed could be doing something about it, and then saying that the Fed will wait and see: Yes, this is my job, but maybe I'll do it later. Perhaps this excuse works at the highest level of our elite policymakers. But don't try it at home.
It's possible Summers would have been more aggressive than Bernanke in using monetary policy to fight unemployment. After all, he was clearly uncomfortable using fiscal policy—that is, spending more government money—to fight our way out of the crisis. Either way, he couldn't possibly do less than Bernanke is doing now.