New York Times
March 4, 2015
Larry Summers, who withdrew his candidacy for the chairmanship of the Federal Reserve under pressure from the liberal wing of the Democratic Party in 2013, has emerged as the party’s dominant economic policy strategist. The former Treasury secretary’s evolving message has won over many of his former critics.
Summers’s ascendance is a reflection of the abandonment by much of the party establishment of neo-liberal thinking, premised on the belief that unregulated markets and global trade would produce growth beneficial to worker and C.E.O. alike.
Summers’s analysis of current economic conditions suggests that free market capitalism, as now structured, is producing major distortions. These distortions, in his view, have resulted in gains of $1 trillion annually to those at the top of the pyramid, and losses of $1 trillion every year to those in the bottom 80 percent.
At a Feb. 19 panel discussion on the future of work organized by the Hamilton Project, a centrist Democratic think tank, Summers defied economic orthodoxy. He dismissed as “whistling past the graveyard” the widely accepted view that improving education and job training is the most effective way to reduce joblessness.
“The core problem,” according to Summers, is that there aren’t enough jobs, and if you help some people, you can help them get the jobs, but then someone else won’t get the jobs. And unless you’re doing things that are affecting the demand for jobs, you’re helping people win a race to get a finite number of jobs, and there are only so many of them.
He adds that he is “all for” more schooling and job training, but as an answer to the problems of the job marketplace, “it is fundamentally an evasion.”
This line of thought has strong appeal to liberal economists and policy makers who argue that government must intervene to create more demand for workers, primarily by spending more, especially spending that goes to private contractors who would then start hiring.
Summers dismissed as palliative such relatively modest proposals as supplementing the earnings of low-wage workers by increasing the earned-income tax credit and expanding eligibility for the refundable credit.
Even a 50 percent increase in the earned-income tax credit at a cost of $25 billion would barely address current income inequality, Summers said.According to Summers:
If we had the same income distribution in the United States that we did in 1979, the top 1 percent would have $1 trillion less today [in annual income], and the bottom 80 percent would have $1 trillion more. That works out to about $700,000 [a year for] for a family in the top 1 percent, and works out to about $11,000 a year for a family in the bottom 80 percent.
The lion’s share of the income of the top 1 percent is concentrated in the top 0.1 percent and 0.01 percent. The average income of the top 1 percent in 2013, according to data provided by Emmanuel Saez, a Berkeley economist, was $1.2 million, for the top 0.1 percent, $5.3 million, and for the top 0.01 percent, $24.9 million.
In other words, any attempt to correct the contemporary pattern in income distribution would require large and controversial changes in tax policy, regulation of the workplace, and intervention in the economy to expand employment and to raise wages.
To counter the weak employment market, Summers called for major growth in government expenditures to fill needs that the private sector is not addressing:
In our society, whether it is taking care of the young or taking care of the old, or repairing a lot that needs to be repaired, there is a huge amount of very valuable work that needs to be done. It’s much less clear, to use a modern phrase, that there’s a viable business model for getting it done. And I guess the reason why I think there is going to need to be a lot of reflection on the role of government going forward is that, if I’m right, that there’s vitally important work to be done for which there is no standard capital business model that will get it done. That suggests important roles for public policy.
Earlier this year, Summers co-wrote the Report of the Commission on Inclusive Prosperity, a forceful set of economic proposals released on Jan. 15 by the Center for American Progress.
In order to stem the disproportionate share of income flowing to corporate managers and owners of capital, and to address the declining share going to workers, the report calls for tax and regulatory policies to encourageemployee ownership, the strengthening of collective bargaining rights, regulations requiring corporations to provide fringe benefits to employees working for subcontractors, a substantial increase in the minimum wage, sharper overtime pay enforcement, and a huge increase in infrastructure appropriations – for roads, bridges, ports, schools – to spur job creation and tighten the labor market.
Summers also calls for significant increases in the progressivity of the United States tax system. He would eliminate or modify many of the tax breaks that now provide most of their benefits to the affluent, including the conversion of the mortgage interest deduction into a credit. “While deductions deliver a larger benefit to tax payers in higher tax brackets, credits deliver the same benefits to all tax payers, making the tax code more progressive,” the report notes. In addition, the report presses for much tougher rules governing the taxation of corporate overseas income.
I spoke with Summers on the phone last week to get more details about his thinking. One of his central goals, he said, is to make sure that “workers get a larger share of the pie.” He advocates aggressive steps to eliminate “rents” — profits that result from monopoly or other forms of government protection from competition. Summers favors attacking rents in the form of “exclusionary zoning practices” that bid up the price of housing, “excessively long copyright” protections, and financial regulations“providing implicit subsidies to a fortunate minority.”
Signaling that he now finds himself on common ground with stalwarts of the Democratic left like Elizabeth Warren and Joe Stiglitz, Summers adds, “Government needs to try to make sure everyone can get access to financial markets on an equal basis.”
Along with a growing number of Democratic policy advocates, Summers supports looking past income inequality to the distribution of wealth. During our conversation, he pointed out that “a large fraction of capital gains escapes taxation entirely” through “the stepped up basis at death.”Stepped up basis refers to an I.R.S. provision reducing the capital gains tax liability on inherited assets so that the beneficiary’s capital gains tax is minimized. Revenue losses from the stepped up basis amounted, in the 2014 fiscal year, to $36.4 billion according to the Office of Management and Budget.
Summers’s policy proposals have been praised by former critics.
Asked for his assessment of Summers’s views, Lawrence Mishel, president of the liberal, pro-labor Economic Policy Institute, emailed “I very much appreciate that Larry Summers has recently highlighted the need for a ‘high pressure economy’ and the need to ‘expand worker bargaining power.’ ”
Dean Baker, co-director of the Center for Economic and Policy Research, which sponsors the work of liberal economists, replied to my inquiry: “It’s funny you would ask this. I was just writing something praising Summers and others for changing their thinking.”
In his not-yet-published pro-Summers essay, Baker writes:
The idea that an economy could suffer from a persistent shortage of demand is an enormous switch for Summers or anyone who had been adhering to the economic orthodoxy in the three decades prior to the crisis in 2008. Baker goes on to argue that Summers “now recognizes that the financial system needs serious regulation.”
Some economists disagree with Summers. David Autor, a professor of economics at M.I.T., wrote in an email that Summers seems
to presuppose that we have entered an era of secular stagnation with perennially insufficient demand. I don’t share this pessimism, and I think many indicators point in the right direction: employment growth, wage trends, inflation, energy prices, even inequality.
In a follow-up email, Summers took note of Dean Baker’s assertion that Summers had changed his views, replying that John Maynard Keynes
is said to have responded to a similar question by saying ‘when the facts change, I change my mind. What do you do sir?’ Much has changed since the 1990s, including protracted shortfalls in demand, a dramatic decline in labor’s share of income, the pulling away of the top 1 percent, the possible emergence of secular stagnation, and the financial crisis. So of course my policy views have evolved.
Summers has advised Hillary Clinton on economic issues, and a key question looking toward 2016 is how much of the Summers agenda she is prepared to adopt, if she decides to run for president.
Many of the policies outlined by Summers — especially on trade, taxation, financial regulation and worker empowerment — are the very policies that divide the Wall-Street-corporate wing from the working-to-middle-class wing of the Democratic Party. Put another way, these policies divide the money wing from the voting wing.
Summers has forced out in the open a set of choices that Hillary Clinton has so far avoided, choices that even if she attempts to elide them will amount to a signal of where her loyalties lie.