Home > economics profession, Economy > Larry Summers and the Davos Scam

Larry Summers and the Davos Scam

from Dean Baker

Every January the public is treated to tales of the World Economic Forum, a gathering of the world’s rich and a select few who are invited there to educate and/or entertain them. Most of us will never have the honor of getting on the inside, so we must rely on media accounts to give us the picture. It turns out that these accounts might be more informative than intended.

Reuters reported on a talk given by Clinton Treasury Secretary and former Obama National Economic Adviser Larry Summers. According to the Reuters account, Summers said:

In 1993, here’s what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right.

This segment is so striking because it is completely wrong in a very big way.  Wages and productivity had started to diverge sharply in the early 1980s. By 1993 there was already a lively debate in the economic profession as to its causes. The existence of a large gap between productivity and the wage of a typical worker was not in dispute.

The trade deficit in 1993 was less than 1.0 percent of GDP. It had fallen from a peak of more than 3.0 percent of GDP in 1987. Clearly there was no trade deficit crisis at the time that needed to be addressed. By contrast, Clinton’s policy went the wrong way on this one. The trade deficit had expanded to more than 4.0 percent of GDP by the time President Clinton left office in 2000.

Nor was the cost of capital especially high. In January of 1993 the interest rate on 10-year Treasury bonds was 6.6 percent; with an inflation rate of 3.0-3.5 percent this implied a real interest rate of 3.1 percent to 3.6 percent. While this is perhaps somewhat higher than would be desired, it is not very different than real interest rates throughout the Clinton years.

In short, every part of what Summers said was not true, and he surely knew that what he was saying was not true. Summers is a very knowledgeable economist who has been in the middle of the major economic debates over the last two decades. It is inconceivable that he doesn’t know such basic facts about the U.S. economy.

This raises the question of why he would deliberately concoct a story that is 180 degrees at odds with reality. He obviously was telling his audience what he assumed they wanted to hear.

This puts the discussions in Davos in an interesting light. Here we have one of the most prominent economists in the world making up a fantasy story to pass along to the rich and powerful. The other economists present must have just implicitly consented to ignore the nonsense, since these are facts well-known to anyone who follows policy debates. The reporters who were present acted as stenographers, dutifully copying down Summers’ assertions as though they were pearls of wisdom.

Summers is presumably not the only “expert” who crafts a message to please the sponsors. When it comes to public education, there are surely many Michelle Rhee types who tout the virtues of charter schools and privatization in spite of two decades of failure. And there are probably an endless array of top experts who tout Bill Gates’ efforts to use patent-financed drug research to improve health care for the world’s poor in spite of the vast body of evidence that industry-funded research is a cesspool of corruption.

If we can take Summers’ tales as representative of the dialogue at Davos, we have elite academics fabricating stories that they think appeal to the interests of the elites of the business world. These elites can then walk away thinking that they are doing good in the world no matter how destructive the policies they are pursuing may actually be.

This outcome may not be entirely bad. If one has little hope that most of the elite-types at Davos would ever care about anything other than preserving and expanding their wealth and power then the fact that policy wonks like Summers are spinning them nonsense probably doesn’t matter much. In fact, getting these people racing down the wrong track may actually be a positive for those who would like to see major change. Of course anyone who has hopes that folks like Bill Gates may actually do something to advance humanity may be disappointed to find out that he is listening to people who are spewing nonsense.

Whatever the motives of the Davos rich, Summers’ spiel, and the fact that it did not arouse protests for its radical departure from reality, is informative. When it comes to their understanding of the world, the rich of the world are flying blind.

See article on original website

  1. originalsandwichman
    February 7, 2013 at 11:15 pm

    I love it when you’re cranky, Dean!

  2. Bruce E. Woych
    February 8, 2013 at 1:32 am

    A profile: excepts from
    The Chronicle Review

    October 3, 2010 By Charles Ferguson
    Larry Summers and the Subversion of Economics

    “Consider: As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws.”

    “Starting in the 1980s, and heavily influenced by laissez-faire economics, the United States began deregulating financial services. Shortly thereafter, America began to experience financial crises for the first time since the Great Depression. The first one arose from the savings-and-loan and junk-bond scandals of the 1980s; then came the dot-com bubble of the late 1990s, the Asian financial crisis; the collapse of Long Term Capital Management, in 1998; Enron; and then the housing bubble, which led to the global financial crisis”

    [and yet]

    “Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations—quite a feat. Never once has Summers publicly apologized or admitted any responsibility for causing the crisis. And now Harvard is welcoming him back.”

    “Over the past 30 years, the economics profession—in economics departments, and in business, public policy, and law schools—has become so compromised by conflicts of interest that it now functions almost as a support group for financial services and other industries whose profits depend heavily on government policy. The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And it’s due not just to ideology; it’s also about straightforward, old-fashioned money.”

    October 3, 2010 By Charles Ferguson
    Larry Summers and the Subversion of Economics

  3. Helene Clement-Pitiot
    February 8, 2013 at 7:17 am

    Thank Dean and Bruce for calling attention on L.Summers’ track record in the US economy and in global finance deregulation. One also have to stress on the economic damages made by L. Summers and his “dream team” at the advisory board of the Russian Transition in the 90s: Crony privatizations, collusion of interest, deindustrialisation and poverty were the major consequences. Their attempts have been legitimized in the West as a testimony of the Cold War victory. One have assumed that irreversible economic consequences and the establishment of a corrupt elite in power would secure a unipolar world with an infinite access to valued resources. However History was not at its end…despite Summer’s circle expectations. It seems now that L. Summers have pursued his “terrorist tasks” in the name of the victory of the world elite over the people, looking for congratulation in Davos among his pairs.

    See on the matter comments from Pr. J. Wedel

    “The U.S.-Russia experience is disturbing,” said Wedel, “because it exemplifies the growing trend towards the privatization of foreign policy and the thriving club of global elites who conduct policy with little accountability.”

    In COLLISION AND COLLUSION: The Strange Case Of Western Aid To Eastern Europe 1989-1998 (New York, St Martin’s Press, 1998). Winner of the 2001 Grawemeyer Award for Ideas Improving World Order

    and more recently, Janine R. Wedel’s book , SHADOW ELITE: How the World’s New Power Brokers Undermine Democracy, Government, and the Free Market (New York: Basic Books, 2009)

  4. sergio
    February 8, 2013 at 5:19 pm

    I wish I could analyze Larry Summers’s wage and productivity, how high is his wage above average worker’s, has he ever been unemployed or experienced skill mismatch? Anyone has a data? What is his occupation? Is he a worker or a farmer and produced something for economy? May be he is professional entertainer or may be is fantasy novel writer?

    In the Soviet Union, The Congresses of the Communist Party were held every five years. On those Congresses the delegates were reporting to the Party bosses how really good job they did in the previous five years and how much better they are going to do during the next five years. Although reports were dull and long, Party Bosses were very pleased to listen good reports and good reporters were given medals. And bosses did not know what was going on in reality or pretended that did not know.

    Davos Forum is absolutely no different from the Congresses of the Communist Party, world’s rich are absolutely no different from party bosses and larrysummerses are absolutely no different from delegates. Their reports were also not pearls of wisdom and were completely different from reality and both world’s rich and party bosses are/were flying blind.

    You know what happened to the Congresses of the Communist Party, Party itself, and socialism. Well, it is just the matter of time.

  5. February 18, 2013 at 12:03 pm

    Reblogged this on mmanonymous.

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