## Wednesday, September 22, 2010 ... /////

### Obama loses Larry Summers

In 2008, Lawrence Summers had left Harvard University for two years and he is coming back.

It's completely plausible that it's just a part of an old plan: he would lose tenure if he were away for more than two years. It's also plausible that someone has "recommended" him to leave Obama's economic team where he has been a top economic advisor. And Summers himself may have found that the White House job sucked. You will never know for sure and in my opinion, it makes no sense to speculate about these things.

Barack Obama's attitudes to various things may look extreme but I don't believe he will do a genuinely insane thing after Summers' departure. The president has praised Summers for his services and it's expected that he will choose a senior corporate executive as Summers' replacement.

However, what I find pretty remarkable are some of the negative reactions. The radical leftist blogosphere has used Summers' departure as a justification for another stream of irrational attacks. Of course, Summers' appreciation for the differences between men and women is the main genuine reason behind many of the attacks.

But look at some of these reactions.

Robert Scheer at Truthdig starts with the words "So Long, Summers" and "Finally!". Summers is being linked to the Wall Street which are clearly the ultimate bad guys who exploit the working class - an opinion that is unfortunately shared by many people in the Tea Party Movement, too.

Summers has defended the "color blindness" of all proposed stimuli and he's been clearly correct. It's just not a job for the government to selectively look for small businesses (or even individuals) that should be boosted when a crisis began in another sector of the economy. Any such ad hoc decision adds the noise to the system, reduces the motivation of these business to work, and reduces the effectiveness of the markets.

Because of some undesirable previous events, the money has been "lost" in the financial sector (in the U.S.) so it's clear that if the lack of liquidity were the problem, the financial sector was the place where they should have been "returned". The financial sector performs certain functions for everyone else - and the economy. Some of it is really important and by helping the financial institutions, one could possibly stop the problems at the beginning. Some of it may be unimportant or counterproductive.

Whether the money should have been pumped at all is a different question because at least some "cleaning" or changes that the recession would have naturally produced in the financial sector would actually be desirable - and Summers himself as vetoed Romer's proposal of a \$1.2 trillion stimulus - but pumping the money to random houses on the Main Street would clearly have been a bigger mistake than the aid to the financial institutions.

Cullen Roche of Seeking Alpha adds another layer of attacks. Larry Summers is the worst villain in a group of economists who are destroying the U.S. economy, we learn.

What attitudes would Roche offer as a replacement for Summers' ideas?

I think that the attitudes are just crazy. Roche reviews a discussion in which someone clearly wanted to defend budget deficits as a good thing - universally, as a matter of principle. Now, people with similar opinions are on par with "physicists" who are trying to construct a perpetuum mobile device.

But of course, such morons may be very annoying. So Summers was once asked a question that he was expected to treat seriously: What's wrong with the budget deficits? Summers took it seriously and replied: they take away savings that could be used for investment.

Of course that some incomprehensible administrative buzzwords followed and were meant to defend the ludicrous idea that the budget deficits were a good thing. Summers politely said that it was just babbling by saying that "he didn't understand reserve accounting so he couldn't discuss it at this level." You know, fake politeness may be costly. If he had just said that the statements of the other party were misguided, he wouldn't be criticized for apparently "not knowing basics of economics such as reserve accounting".

By the way, there's no "one" reserve accounting. There exists lagged and contemporaneous reserve accounting. Which one keeps the value of money more stable is debated by the economists; they should agree in the long run. But one thing is clear: if you increase your budget deficits so that the debt indefinitely grows as a percentage of the GDP, soon or later, you're going to run into problems. No "fancy" words about reserve accounting can change such matters.

The debater also tried to convince Summers of some Keynesian talking points. One of them is the "paradox of thrift". Keynes said that while the attempts to increase one's savings could be good for an individual, they're bad for the society if everyone does so because the consumption decreases. Needless to say, this superficial game is used as just another excuse for budget deficits.

However, one must be very careful about the analysis of this paradox. It has many subtleties and as the Austrian school economists would tell you, the canonical answer is that the increased desire to save the money won't impact the real economy at all. The key is to notice what happens with the prices which impacts how the "nominal GDP" is translated to a "real GDP".

Imagine that you start with a society where the people don't save any money. Suddenly, give them a lesson. The average people will begin to save 1/2 of their income. What will happen? They will only spend the remaining 1/2 of their income for goods and services. Clearly, the companies' nominal revenues will drop.

However, how will the companies behave after they converge to a new equilibrium? Well, they will reduce the prices to 1/2, too. So the people who save 1/2 of their income will actually buy the same amount of stuff; the economy will not drop. To show that the new arrangement also admits an equilibrium, I would also have to discuss what happens with the salaries of the producers' employees (which can't quite drop to 1/2), and so on. But at the end, the flow of goods and services may be unchanged as all the incomes and transactions are just redefined by a linear function. The Austrian economists would summarize it by saying that the investmentt-consumption ratio can be completely unchanged when people become more thrifty.

That doesn't mean that the long-term behavior won't be impacted by the rate of savings. Higher savings mean more safety - for the individual and those who depend on him - which may be a good thing. However, they may also imply a reduced motivation to work and earn money.

(Well, I actually think that if all the people suddenly became more thrifty, the nominal incomes would inevitably decrease a bit, too - because the companies' revenues will be nominally lower. However, the prices of things that don't depend on the human work will drop even more than by 1/2 in the example above so that a new equilibrium is found. Macroeconomically, it may be "equivalent" to the previous one when it comes to the real GDP; there won't be a discontinuity. However, I think that the new pressures in a newly thrifty society will punish the producers that depend on lots of the human work and give advantage to those that don't. The abrupt drop of commodity prices etc. will eventually convince the people that they don't have to be too thrifty. So I think that even the "thrift" is not quite an independent, arbitrary parameter - but the markets try to find its optimal value, too.)

These aspects have to be carefully considered when someone tries to stimulate the economy. Clearly, giving the money to the Main Street can never systematically lead to such a stimulation; such a transfer reduces the need for the recipient to work, and it reduces the payers' resources that could otherwise be used for investment.

Whether you like it or not, the economy is statistically motivated to work by the players' desire to achieve profit, to survive, or to have a luxurious life - depending on the context and wealth. Their eagerness to work and productivity depends on the pressures. However, if the people are freely paid - or forced to pay - amounts of money that have nothing to do with their work, it always reduces their motivation to do work and do it efficiently simply because a part of their income (whether it is positive or negative) is determined by something else - by the redistribution mechanisms that may look "random". Any "guarantees" inevitably reduce this motivation.

Have the economists managed to solve the crisis well? I don't know. It's plausible that it would have solved itself without any interventions and it could have been a better path, especially in the long run. And maybe, the previous conjecture isn't true. We will never know.

However, you shouldn't forget that a long new Very Great Depression was expected by many people and it has definitely not materialized. Chances are that it will not materialize in the near future. So I don't think that it would be fair to call their macroeconomic policies since 2008 catastrophic. Obviously, liquidity has mostly returned to the system and it was needed.

However, many other changes that are more "microeconomic" in character have gotten to the U.S. economy, too. Think about the healthcare, various types of regulation of the financial markets (which Summers has opposed), and other things. The system has converged much closer to the typical systems in the EU. When this happens, you shouldn't be surprised that the long-term U.S. growth rate will be lower than it used to be. It will also be closer to the EU rates which have been closer to 1% or so than to 3-4%. You won't be able to do anything with it. America has begun to become socialized and you will eventually see the consequences. America is not a special nation that is immune against the general laws of economics - or even physics. ;-)

I have certain doubts that the "new" long-term growth potential of the U.S. is much higher than the growth we have seen recently.

Environmentalists' new president

Glenn Hurowitz of Grist has noticed that Obama failed to install solar panels on the White House - and he also paid less money for them than he did pay for the stimulus package. So Obama will have to be replaced by a greener president in the 2012 Democratic primaries, we learn.

Pentti Linkola, a Finnish philosopher and fisherman, is a hot candidate. He's from Finland - but Finland or Kenyland, who cares about the difference? ;-)

Linkola wants to re-educate some skeptics in eco-gulags and kill the remaining 6.8 billion people on Earth. Linkola calls for forced abortions, while also adding that another world war would be “a happy occasion for the planet” because it would eradicate tens of millions of people. The environmentalist believes that only jackbooted tyranny can help to save mother earth from “the worst ideologies in the world” which he defines as “growth and freedom”.

He wants to mimic the best experience of Hitler, Stalin, Mao, and add much more. Read it - it's kilobytes of this stuff. I am sure that if he has fanboys in Finland and Slovakia (did you translate all the materials to Slovak, Alexander Ač?), he will get millions of fanboys in the U.S. Democrat Party, too.

Under Linkola’s proposal to save Earth from man-made climate change, “only a few million people would work as farmers and fishermen, without modern conveniences such as the automobile.” This system would be enforced by the creation of a “Green Police” who would abandon “the syrup of ethics” that governs human behavior to completely dominate the population.