Politics

Every Synapse of Larry Summers' Every Neuron Contains Genius

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El Tiempo magazine's Michael Scherer believes outgoing director of the National Economic Council Lawrence Summers warned that "increased government involvement in the health care sector is a risky idea" in his farewell address. I am not so sure.

Scherer considers two paragraphs from Summers' speech at the Economic Policy Institute. But with the surrounding text it seems clear that Amazing Larry is calling for a broader and deeper public commitment to prevent decay in the functions of a growing government. And he uses this as justification of PPACA's involvement in health care. Underlined text is Time's citation. Italics mine: 

 
The third and final thing we must do is renew the public compact between the present and the future. Budget deficits are a tax on our future, unless used to finance productive investments. I am not one who sees financial collapse on the imminent horizon.  Indeed, I believe that at this point the risks of deflation or stagnation in the United States exceed the risks of uncontrolled growth or high inflation.  But unless we change our course, we are at risk of a profound demoralization of government.

At one level this means a decay of essential public functions and a loss of our national self-confidence. At a deeper level, we risk a vicious cycle in which an inadequately resourced government performs badly leading to further demands that it be cut back, exacerbating performance problems, deepening the backlash, and creating a vicious cycle. That is why while recovery is our first priority, it is essential that we establish long-run parity between revenues and expenditures.

Now this is a more complex matter than is often supposed.  One of the more important and less well-known ideas to come out of the economics profession over the last generation or so is the phenomenon known as Baumol's Disease. In certain areas, rapid productivity growth is possible.  In other areas it is much more difficult. It always has and always will take 8 teachers to teach 96 students for one hour in classes of twelve. Productivity improvement simply is not possible in the way that it is in other activities. Similar phenomena apply to almost anything that involves direct human interaction. Nursing care is another example.

Moynihan's Corollary to Baumol's Disease is the observation that there is a tendency in activities in which Baumol's disease is most pronounced to migrate to or be located in the public sector.  To take just one example, every five years the share of GDP devoted to government spending on health care goes up by 1 percentage point. As we contemplate our long-run fiscal future we must contemplate this reality rather than to suppose that there is some past static pattern of expenditures of revenues and expenditure that can be maintained indefinitely.

That is why Bowles-Simpson so important.

That is why President Obama committed to health care cost reduction in the context of the recently enacted health care legislation.

I wish I could have been there to start a chorus of boos at "not one who sees financial collapse on the imminent horizon." At least cut some adjectives Larry! What's the difference between an imminent horizon and a horizon?

The full text is worth a gander for its Commander McBragg self dramatizations ("Just as scholars continue to debate how close we came to nuclear conflict during the Cuban missile crisis, they will continue to debate just how close the American financial system and economy came to all-out collapse in the six months between September of 2008 and April of 2009") and boring stories of glory days ("The United States improved its structural deficit by nearly 4 percentage points of GDP between 1993 and 2000").

One thing I'll miss about Larry Summers: He was purely Larry Summers, perpetually in character in a way the Orzsags and Romers could only imagine being. In his farewell address, Summers summons a future of managed prosperity, finely honed inflation, trade-pact economics, an ivied welfare state and a government that, like Larry Summers himself, doesn't get bigger but just doubles in greatness every few years. Future generations can read it, and from every line the truth will ring out: This was Larry Summers.

I have been called a "Summersophile," and at some level I guess I did get some worried-toothache joy from watching him sleep through history. In that spirit, I recommend you make Mark Dery's study of the life-giving powers of love-hate your long read of the day.