More on Summers and the Fed

I keep hearing (and reading) more and more that Obama will nominate Summers, rather than Yellen. David Warsh says in his last column (here):

"Evidence is accumulating that the president is on the verge of making a very big mistake. Last week John Harwood, of CNBC, reported that a 'Team Obama' source had told him that Lawrence Summers would likely be nominated in a few weeks."

Further, Warsh does point out an often forgotten problem when discussing Summers possible appointment. He says:

"there is an issue of serious corruption. ... Summers’s best friend and foremost protégé, Harvard professor Andrei Shleifer (and Shleifer’s hedge-fund operator wife) attempted in 1996 to steal from better-qualified competitors Russia’s first license to sell mutual funds – all the while leading Harvard’s State Department mission to teach Russians American-style market fair play. The mission was shut down amid much embarrassment after their actions were revealed; the US Justice Department sued Harvard and Shleifer and got its money back. Summers’s role in the affair and the subsequent investigation, heretofore almost completely ignored, presumably is about to get a good going over in the administration’s “vetting” of his candidacy, in the newspapers, and in whatever comes next."

Mind you, I'm not sure the appointment of Summers, if it really happens, is a watershed as Warsh suggests. Yellen would pursue similar policies (and both would probably be close to Bernanke's stance on the main issues), even if she would be better, and I would prefer her. They are all New Keynesians, and you should not expect a big difference.

PS: Yes Harvard had the spreadsheet mistake, and Keynes is gay and didn't care about the future scandals recently, but one should not forget the Russia consultancy scandal.

Reasonable liberals and conservatives, unreasonable economics

The ambiguously liberal/conservative duo, Joe Scarborough and Jeff Sachs, self-denominated reasonable (what Krugman refers to as 'serious' people), suggest that we need austerity in their WAPO op-ed. Forget for a second the inconsistencies of Scarborough, the conservative in the duo. What I find incredible is that Sachs continues to push the fiction that he is a liberal in the American sense of the word, meaning progressive or lefty, rather than a right wing neoliberal.

Let's not forget that Jeff Sachs is Dr. Shock Therapy,* a doctrine that suggested that budget deficits should be cut to control inflation, and that deregulated markets would promote growth and development, and that he applied in Bolivia, Poland and Russia, among other countries. The collapse and failure in these countries foreshadowed the failures of the so-called Washington Consensus. Forget also the institutional problems Sachs had regarding his advice in Russia [note that he did not have the same legal problems that led his collegue "Andrei Shleifer, whose misbehavior cost Harvard something like $25 million in damages, plus another $10 million or $15 million in legal fees," according to David Warsh].

The really incredible thing is that they try to argue, on the basis, of their reasonable principles, that we need austerity. They put Dick Cheney's and the right wing supply-siders that sometimes say that deficits do not matter, in their view because the supply side effects of higher productivity (entrepreneurship) brought by lower taxes would produce growth and higher revenue, together with Krugman and other Keynesians that suggest with full support of the evidence that spending does have positive effects on the level of activity. Note that in the second case Keynesians, and even further Functional Finance people (following Abba Lerner) would not suggest that deficits do not matter. What they suggest is that the way you spend and tax matters. So deficits could be bad or good, depending on what causes them. Higher deficits caused by tax cuts for the wealthy and to support wars of choice abroad, are not the same that deficits to reconstruct infrastructure and promote full employment.

But the incredible thing is that they (Scarborough and Sachs) try to claim that Keynes would have been against fiscal expansion now. Yes, Keynes was indeed for some fiscal restraint, but that was during the war, when deficits were above 20%, and not in the middle of the recovery.

For more on Sachs long and strange career read the following article by Doug Henwood at the Left Business Observer.

* He actually gave the Tanner Lecture at the University of Utah on Poland's shock therapy. I was not there in 1994, I should add. By the way, at that time he actually still thought that shock therapy was a success story. Oh well.