Well, OK, I'm summarizing. I was startled to read at Agent Orange that Summers was a progressive thinker because Summers recognizes the massive increase in economic inequality that has taken place over the past three or four decades:
It would be, however, a serious mistake to suppose that our only problems are cyclical or amenable to macroeconomic solutions. Just as evolution from an agricultural to an industrial economy had far reaching implications for society, so too will the evolution from an industrial to a knowledge economy. Witness structural trends that predate the Great Recession and will be with us long after recovery is achieved: The most important of these is the strong shift in the market reward for a small minority of persons, relative to the rewards available to everyone else. In the United States, according to a recent CBO study, the incomes of the top 1 percent of the population have, after adjusting for inflation, risen by 275 percent from 1979 to 2007. At the same time, incomes for the middle class (in the study, the middle 60 percent of the income scale) grew by only 40 percent. Even this dismal figure overstates the fortunes of typical Americans; the number unable to find work or who have abandoned the job search has risen. In 1965, only 1 in 20 men between ages 25 and 54 was not working. By the end of this decade it will likely be 1 in 6—even if a full cyclical recovery is achieved.
There is no issue that will be more important to the politics of the industrialized world over the next generation than its response to a market system that distributes rewards increasingly inequitably and generates growing disaffection in the middle class. ...
The Analytical Dog That Does Not Bark
And then we get our first indication that this is not, after all, going to be an insightful analysis of the underlying causes of economic inequality but rather the lead-in to the same old, same old when Larry Summers starts talking about polarization. Oh, dear, a critical long term economic issues, why must opinions on what to do about it be sharply divided? Supposedly those on the left blame the lack of income growth of the middle class on the "success" of the wealthy, while on the right, anyone who points out that the economic inequality is a long term problem is labeled a class warrior.
And from this we get an inkling of where this is going: because what it is that the wealthy have been substantially more successful at in the past three decades has been in grabbing a larger share of the income. What they have been demonstrably unsuccessful at has been at maintaining either GDP or employment growth rates at the same rates enjoyed under the post-WWII Fordist system that prevailed from the late 40's through to the early 70's.
The wealthy include entrepreneurs ... but also includes large numbers of people living off of inherited wealth. And the entrepreneurs were successful in the first Gilded Age, a period of extreme economic inequality, and successful during the Great Compression and the three decades of substantially greater economic equality that followed it, and successful during the second Gilded Age, and the rapidly rising income inequality that followed it.
The question "successful at what" is straightforward once you look at the income flows that make up the income shifted from the middle to the top: successful at using the Finance Sector to suck a much larger "private finance tax" out of the Productive Sector. No analysis of "economic inequality" can be taken seriously unless it analyzes the role of the Finance Sector, since over half of the increase in economic inequality is composed of the growth in income share of the Finance Sector.
And so, what is Larry Summers insightful analysis of economic inequality? Its largely due to technological change and globalization.
The "technological change" argument falls apart as soon as it is examined in a historical context. During the post-WWII Fordist period, the US experienced waves of more rapid and less rapid productivity growth. During the Second Gilded Age starting in the mid-70's, the US experienced waves of more rapid and less rapid productivity growth.
However, during the Fordist period the US had a relatively even split of productivity gains between employer and employee incomes, relatively tightly regulated commercial banking, and a small share of imported value added in the high ticket items of consumption that feature prominently in debt-financed consumption. So during the Fordist period, ongoing productivity gains biased the economy toward ongoing income gains, while debt-finance of consumption tended to lead to employment growth, leading to both income growth and investment in domestic employment capacity.
In other words, during the Fordist period, we had an income-driven engine of economic growth, so that debt-fueled expansion after a recession really did tend to act like "priming the pump", restarting the income cycle of growth after it had been disrupted.
And during the Second Gilded Age, extending through to the present, we have had increasingly complete capture of productivity gains by employers, and, further, among employers capture of gains made in the competitive sector by large oligopolists, increasingly unregulated commercial banking and an increasing share of import value added to high ticket items of consumption. So, increasing, during the Second Gilded Age, ongoing productivity gains biases the economy toward decreasing labor demand, with debt-finance of consumption replacing rather than stimulating income-led growth. And an increasing share of any growth following a debt-fueled expansion is dissipated into increasing imports and a larger trade deficit.
The Fierce Urgency of Tired Third Way Pablum
What are the fixes? Larry Summers trots out three solutions:
- "First, government must be careful to insure that it does not facilitate increases in inequality by rewarding the wealthy with special concessions." How a thoroughly corrupted political system is to refrain from rewarding the wealthy with special concessions is not addressed, but more critically, the fact that so-called free trade agreements are more focused on offering special concessions to the wealthy than they are with trade is not brought up here, nor is the fact that the failure to regulate the Finance Sector is the biggest special concession to the wealthy that we make.
- "Second, there is scope for pro-fairness, pro-growth tax reform." All of the discussion here is that taxes not reinforce economic inequality. There is, however, an implied promise that it will not actually move to correct economic inequality, as it tended to starting in WWII and extending through the three decades following WWII, which is the "pro-growth" part of "tax reform". Its a neoliberal article of faith that any tax policy that would actually correct economic inequality would be "anti-growth" ~ despite the strong growth records of the US during the Great Compression.
- "Third, the public sector must insure that there is greater equity in areas of the most fundamental importance." This is the neoliberal nod to education, which pretends that the decline in economic opportunities are the fault of the education of those not moving up. In reality, in an economy where expanding economic opportunities are widely available, we develop educational systems that allow people to take advantage of those opportunities. And in economies like that of today where economic opportunities are increasingly foreclosed, its a historical commonplace that those already in an advantaged position see to it that their children are placed on an inside track to the opportunities that are available.
Why Larry Summers Shouldn't Be Fed Chair Is What He Didn't Say
What is really going on with this piece? What is Larry Summers really saying here?
If its entirely the fault of technology and globalization ... and if you pretend that globalization is some kind of force of nature rather than the result of policies that you yourself helped put into place ...
... then it follows that its not the fault of the Finance Sector.
And we could argue over to what extent it is the fault of the Finance Sector ... but it is inarguable that the role of the cancerous growth of the Finance Sector in fostering Economic Inequality that is something that the Chair of the Fed has influence over.
The Chair of the Fed cannot determine breaks given to the wealthy other than the breaks implied by the games commercial banks are allowed to play and the breaks built into the financial instruments the Fed uses to pump liquidity into or drain liquidity out of the national economy. The Chair of the Fed cannot determine whether the tax system rewards hard work or wise choice of parents to be born to. The Chair of the Fed cannot determine whether the educational system gives more equal access to the diminishing opportunities still available, or entrenches the current winners and losers into entrenched social classes.
Larry Summers only offered policies that the Fed Chairman has nothing to do with. Meanwhile, regarding the Finance Sector, which is the Sector that is getting the majority of the diverted income that makes up rising income inequality ...
... and which the Chair of the Fed could at least play some substantial role in both executive decisions and policy advice ...
... not one single policy to address what Larry Summers himself has identified as one of the most serious long term challenges faced by the national economy.
According to his own analysis, for the most important long-term challenge that runs right through the sector that is the Fed's immediate responsibility ...
... if he were Fed Chair, why, he wouldn't be responsible for any of that.
It would all be somebody else's job.
Which is part of why, in my view, the Chair of the Federal Reserve Board of Governors should be somebody else's job.