Three and a half years ago, in a nation far removed economically from the one we live in today, Lawrence Summers worried about income inequality. In a widely noted column in London's Financial Times, the then-Harvard economics professor lamented how the top 1 percent of U.S. households had seen their family income increase 43 percent over the past quarter century, while the lower 80 percent’s income had risen only 14 percent.
On Monday, in his final speech before stepping down as President Obama’s top economic adviser, Summers vigorously defended tax breaks for the rich as part of a controversial tax and spending package negotiated by the administration and Republican leaders.
“Compromises were necessary,” he said, echoing the president in defending the bill. “Without rapid recovery, all of our other goals will be compromised ... Not passing the tax bill will have serious consequences for the economy.”
Making Amends
Summers, the outgoing chair of the National Economic Council, has taken a lot of heat for everything that has gone wrong for Obama’s economic team over the past year, especially from the left. Yesterday’s farewell, offered, ironically, at a progressive think tank in Washington, sounded like he was trying to repair relations.
He called for beefed up investment in infrastructure, education and government institutions that spur innovation. “What better time to invest in our nation’s infrastructure,” he said. “A sustained effort to rebuild America should be at the top of Washington’s priority list next year.” But the economic and political realities in the nation’s capital will not be hospitable to those priorities with the Republicans running the House and calling for spending cuts.
Summers pronouncements in recent days that failure to pass the Obama-GOP tax agreement, including a new lower estate tax and an extension of tax cuts that benefit the wealthiest Americans as well as the middle class, are a far cry from the conscious rehabilitation campaign Summers undertook during 2007 as he angled to become part of the next Democratic administration. In the Financial Times column, he wrote that “If middle-income families had shared fully in the economy’s income growth over the past generation, their incomes would have risen twice as rapidly!” The next president must “develop a mandate for policy approaches that can ensure prosperity is more fully shared,” he added.
The transformation of an economist who as Treasury Secretary in the Clinton administration during the late 1990s had played a central role in crushing efforts to regulate derivatives, to liberal reformer startled labor-oriented economists. Summers championed the “enduring legacy of the New Deal (programs) that ... channel market forces and mitigate their consequences.”
The Great Recession's Role
But in his address Monday to the Economic Policy Institute – the institutional heart of left-liberal economics in Washington – Summers no longer had the luxury of worrying about income inequality. During his two years as the president’s chief economic adviser, the U.S. economy, while growing slowly, has remained mired in the most severe downturn since the Great Depression.
Nearly 17 million Americans are unemployed or underemployed, and wages for most middle-class Americans are stagnant. Households are still saving as fast as they can to repair tattered balance sheets. Meanwhile, the business community is sitting on $2 trillion in cash while factories, stores and offices are operating at their lowest capacity since World War II.
Given those realities, the critics were back. Questioners during Summers' speech asked why it was imperative that Congress shovel hundreds of billions of dollars in tax breaks to households in that top 20 percent of the income distribution, or give wealthy families an extra break on their estate taxes. “As tempting as it is to focus on the long run, it will be essential to focus on issues of demand,” he said.
Shortly after joining the administration from Harvard, where he plans to return, critics pointed to his previous extra-academic activities, such as the $5.2 million he earned from D.E. Shaw, a hedge fund, and the $2.8 million he earned from giving speeches, including a $135,000 talk to Goldman Sachs & Co.
A recent book by Richard Wolffe, a journalist and occasional campaign consultant with close administration ties, labeled Summers a disruptive force inside the White House. Wolffe claimed it was Summers, not Treasury Secretary Timothy Geithner as is haswidely believed, who had worked to protect Wall Street from stringent regulations after the financial collapse.
Yet now, with Wall Street and banking lobbyists working to undermine the legislation that was eventually signed by the president, Summers blasted their efforts. “Tough-minded implementation is essential,” he said. “It is essential for financial reform and for the future of democracy.”
Others have painted Summers as hostile to the large stimulus package sought in February 2009 by some in the new administration, including Christina Romer, the Council of Economic Advisers chairwoman. Romer, a University of California-Berkeley economist who had studied government responses to previous financial crises, argued that at least a $1.2 trillion package was needed to put a serious dent in unemployment. But as a subsequent New Yorker profile documented, it was the political brain trust – chief-of-staff Rahm Emanuel and David Axelrod, in particular – who argued against the trillion-dollar plan (the final price tag was $787 billion) for fear of criticism of excessive spending, which happened anyway. Others, like White House Budget Director Peter Orszag, who resigned last August and took a $2 million-a-year post with Citibank, argued the government simply didn’t have the capacity – enough “shovel ready projects” – to get that much money out the door in a timely fashion.
Looking Ahead
As he prepares to return to the Harvard economics department, Summers preferred yesterday to take the long view. And once again, as before the financial crisis hit, it was the fate of the middle class that seemed uppermost on his mind.
But he was no longer offering bromides that might please an audience at a labor-backed think tank. The government cannot restore middle-class prosperity by waxing nostalgic for a manufacturing base that will never return to the U.S. or by limiting foreign trade, he warned. He also said the nation had to pursue more free trade agreements like the pending one with South Korea, since increasing exports “have a far more potent effect” on creating jobs that almost any other policy objective.
He also criticized teacher unions as he called for improved public education. While no one would deny more resources are needed, he said, “No one can deny the need for more accountability.”
The one-time president of Harvard, who lost his job after an uproar over his comments about women in the sciences, also threw a jab at higher education, which he called ripe for reform, as U.S. students fail to keep pace with their highly educated counterparts in China, India and a dozen other developed and developing nations. Still, the professor-in-waiting celebrated the increase in student aid, an achievement of the Obama administration he said “that has not received the attention it deserves.”
In describing the economic accomplishments of his two years in the White House, Summers, like the president he served, pointed to the economic and budgetary mess they inherited and the fact that economy is slowly improving. “The president has been right to take pride in what has been averted,” he said.
Unfortunately for the Obama administration, that is not the kind of slogan like “morning in America” that a candidate can put on a bumper sticker.
Speculation on Summers’ replacement centers on Roger Altman, a Wall Street investment banker who once worked for the now-defunct Lehman Brothers. While he would increase Obama’s credibility with the business community, his appointment might face tough sledding since he resigned a Treasury post during President Clinton’s first term after being accused of misleading Congress during the Whitewater investigation.
