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Larry Summers For World Bank: So Much Wrong, So Little Time

Posted: 02/29/2012 12:25 pm

What exactly does Larry Summers have to do to stop being offered important jobs? Hold up a liquor store? Kill a guy?

That is the question many are asking, or at least should be asking, about Summers' reported candidacy to be the next president of the World Bank.

There are lots of reasons to hope President Obama does not pick Summers for the job, but let's start with the latest, one that hasn't gotten a lot of widespread attention yet: The revelation from Noam Scheiber of The New Republic, in his new book about Obama's economic team called The Escape Artists, that in December 2008, Summers blocked from President Obama's view a suggestion by former economic adviser Christina Romer that his first economic stimulus package should ideally be $1.8 trillion.

The final stimulus package passed by Congress was less than half that size, at an estimated $787 billion.

Scheiber's smoking gun is an early draft of a 57-page memo that Larry Summers sent to Obama in December 2008 -- the same memo made famous in Ryan Lizza's recent New Yorker story -- about Obama's shift from idealism to pragmatism.

The early draft that Scheiber got his hands on includes a section written by Romer that suggests a stimulus package of $1.8 trillion would raise economic growth and bring down unemployment more quickly than a smaller one.

In the draft, Romer writes that a $1.8 trillion stimulus package would totally erase the economy's "output gap," or the gap between actual economic growth and potential economic growth, by the first quarter of 2011. A wide output gap helps keep unemployment high, and Romer said in the memo that a big-enough stimulus package would bring unemployment down to 5.1 percent by the first quarter of 2011.

When Summers sent his final memo to Obama, Romer's suggestion of a $1.8 trillion stimulus bill was gone. In fact, of the four possible package sizes Summers offered the president, the biggest was $890 billion.

Summers notes in the memo that "purely mechanical assumptions" suggest the stimulus package should be bigger than $1 trillion, but dismisses this as impractical because it would "spook markets or the public."

You could argue, as Larry Summers and Matt Yglesias have done, that any stimulus package of $1.8 trillion would have been a non-starter, not only with a hostile Congress, but also with those in the administration -- particularly Treasury Secretary Timothy Geithner and then-budget chief Peter Orszag -- who were worried that a bigger stimulus bill might spook financial markets.

Maybe Summers was concerned that Obama would think he and Romer were nuts if they had presented him with such a number.

And certainly Romer's analysis was not infallible. She thought a $900 billion stimulus package would bring unemployment down to 6.6 percent, an estimate off by a wide mark -- the jobless rate was about 9 percent during the first months of 2011.

And it was arguably better to get half a stimulus package rather than none at all. The stimulus ultimately helped avert a second Great Depression, and it is easier to forgive Summers with the economy now apparently on a painfully slow mend.

But the less-charitable interpretation of Summers' decision to strike Romer's bigger number from the record is that Summers played politics with the recovery and lost.

It was his job to present every conceivable alternative to the president, but in an effort to avoid losing face with his boss he ended up selling Obama a stimulus package that proved too small, creating a long-term political liability.

"Summers is an inside angler but an inept one, whom the smoother Geithner and more dispassionate Orszag outmaneuver," Rich Yeselson of The American Prospect wrote in a recent review of Scheiber's book.

Even if you give Summers a pass on his bad advice to the president, there are plenty of other reasons to oppose his nomination to the World Bank. His interpersonal skills fall somewhere on the scale between honey badger and Yosemite Sam with a urinary tract infection. He has a paleolithic attitude about women. As a World Bank economist, he once signed off on a memo that suggested, apparently in a Swiftian way, dumping toxic waste in poor countries.

And his aversion to floating a bigger stimulus package fits into a pattern of behavior that stretches back to his time in the Clinton administration, when he warned against going too far with financial regulation.

He supported the end of the Glass-Steagall act, which had kept commercial and investment banks successfully separated for decades after the Great Depression. In fact, he still supports the idea of super-size, do-everything banks, he recently told the BBC's Channel 4.

In that same Channel 4 interview, Summers also claims that credit default swaps were not a problem "on the horizon" when he was in President Clinton's Treasury Department.

Tell that to Brooksley Born, then running the Commodity Futures Trading Commission, who pleaded with Summers, Robert Rubin, Alan Greenspan and anybody else who would listen about the need to regulate the market for such financial derivatives.

Summers helped squelch Born in the Clinton White House, just as he squelched Romer in the Obama White House. Ultimately, Born's concerns proved prescient, given the role derivatives played in the financial crisis in 2008. Summers says he didn't see that coming.

So at several key moments in the years leading up to and after the financial crisis, you will find Larry Summers hanging around, like the Forrest Gump of Wall Street. He was there when banks got too big to fail. He was there when derivatives went unregulated. He was there when Obama decided to push for a stimulus that was a bit too small.

We shouldn't saddle Summers with too much blame for the financial crisis. There were bigger players who made bigger mistakes.

But by rewarding Summers with a plum posting at the World Bank, President Obama would be sending a signal that the Larry Summers Way -- of thinking small despite your apparent brilliance, of not trying to upset the powers that be, whether that be the banking industry or the bond market, or the president -- is a fine way to run an organization.

That would demonstrate either that President Obama has not learned much at all from the past decade -- or that he is fully on board with the Larry Summers Way. Neither message would be very encouraging.