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Say It Ain't So, Larry

Did the president's top economic adviser really sign off on these policies?

Jun 8, 2009, Vol. 14, No. 36 • By IRWIN M. STELZER
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Ninety years ago the Chicago White Sox intentionally lost--dumped, to you sports fans--the World Series. Legend has it that a young fan implored the team's star, "Shoeless" Joe Jackson, as he emerged from the court house, "Say it ain't so, Joe." The Shoeless one allegedly responded, "Yes, I'm afraid it is, kid."

Let's hope that chief White House economic adviser Larry Summers wouldn't respond similarly if someone were to charge that he sat silently when the administration's political types decided it would be just fine to submit a budget that will take the ratio of debt-to-GDP from around 40 percent to 80 percent--most critics say 100 percent is where the debt-to-GDP ratio will in fact end up in ten years. Surely Summers knows that many economists use a rule-of-thumb that suggests that such an increase will force interest rates up between 1.25 and 1.5 percentage points, with unpleasant consequences for our economic growth rate. Or that, according to the highly regarded Stanford professor John Taylor, we could only inflate our way out of the problem by allowing a 100 percent rise in the price level over a ten-year period.

More important, it was only a few weeks ago that Summers told an audience at the Brookings Institution that it is "a criterion of fiscal sustainability that ensures that once the economy has recovered, the ratio of the nation's debt to its income stabilizes rather than continuing to grow. .  .  . Once your income has returned to normal .  .  . your debts can't be rising relative to your income." But just such an increase is built into the president's ten-year budget.

Summers is famous for his intellect and ability to shoot down nonsensical ideas, so if he was not asleep or absent, he must have gone along. Say it ain't so, Larry.

The administration, led by GM and Chrysler CEO Barack Obama, also decided to lay hands on the auto industry. First it shortchanged the companies' creditors--pension funds and investors who had lent the -companies money on terms that gave them preferential access to the companies' assets should there be a bankruptcy. What matter contractual obligations when the United Auto Workers is awaiting payback for its support of Obama in the primary and general election campaigns? Surely Summers knows that such a move will make investors more reluctant to lend in the future and inclined to charge higher interest rates to any companies they do finance. Some say Summers sat in on these meetings and either lost the argument--implausible, in the view of those who have jousted with him in the past--or remained silent. Say it ain't so, Larry.

The administration has also promised to lower health care costs by introducing new IT systems and expanding insurance coverage. Virtually every expert says that information technology might be a nice thing--automated records, easily accessible--but at best will have only a trivial effect on costs. And just how expanding coverage can lower costs remains a mystery to most economists. Unless, of course, the administration is planning to ration health care, a nightmarish system that until recently led the National Health Service in Britain to deny treatment to patients suffering from macular degeneration until they were blind in one eye. Summers knows all about these cost figures and the inefficiencies of rationing. Did he decide to go along to get along? Say it ain't so, Larry.

Then there is energy policy. The president says he can make us independent of foreign oil. Summers knows he can't. He knows too that many economists contend fuel efficiency standards are more likely to deny consumers the cars they want than to have any effect on global climate, given the developing countries' plans to build thousands of new coal-fired generating stations. Summers had the opportunity while at Harvard to sit at the feet of the wonderful energy economist Professor William Hogan (as did I, although the thought of Summers meekly sitting at the feet of a colleague does strain credulity). So he must have decided either to nod off during the energy policy meetings at the White House or to defer to climate and energy policy czar Carol Browner. Say it ain't so, Larry.