Monday, 7 February 2011

Summers in Winter

I have a full plate of things I have to do, on top of which stands Vol. 4 of Speculative Capital whose completion is getting more pressing with each passing day. So, I ignore the uninterrupted stream of drivel that passes for economic discourse in the press and media. But when I read the (brilliant) Larry Summers’ last interview with the New York Times this past Wednesday, I decided it merited a brief comment for educational purposes. When it comes to highlighting the barrenness of thought and intellectual rot in the government and academia, old Larry can be counted on to deliver.

Here is the opening paragraph from the interview:
The peripatetic Larry Summers is once again back at Harvard, teaching a class on American economic policy with Martin Feldstein and Jeff Liebman – two other prominent former government economists – and reacquainting himself with the joys of free speech now that he is no longer President Obama’s director of National Economic Council, President’s Clinton’s treasury secretary or Harvard’s 27th president. What better time, then, than winter to check in with the lion?
Ok, now I get it. So in the past 30 or so years, loquacious Larry could not really talk and write because he was hampered by the constraints of high offices which he had sought. He had to hold his tongue, you see, (which he never did), in consideration of loyalty and higher good.

Now, though, here he is, free at last, having shaken off the shackles of higher calling. The time then for this lion to break the dams of manly silence has come. What mysterious workings of economic laws will he reveal?
The key to higher employment, he said, is increasing the demand for the goods and services produced by American companies. “You don’t hire more waiters unless the waiters you have in your restaurants have more work than they can handle,” he said. “There is a continuing shortage of demand, and that’s the root cause of unemployment. It’s the root cause of low capacity utilization … What you need to do is have more output with more people, and the way you have more output with more people is you need people who want to buy that output, and that’s why it comes back to demand”.
Let’s see now; how does one take this?

First, note his example of the waiter. If there were such a thing as an economic Freudian slip, this would be it! In discussing employment and job openings, the brilliant economist does not give – because it does not occur to him to give – the example of an assembly line worker or, say, a programmer. Those jobs are gone the way of the American Buffalo. There is nothing Walmart sells that is not produced in China, and Larry Summers knows that. What is more, he has seen the breakdown of the Labor Department’s employment statistics. Newly created jobs in the U.S. are mostly in the service areas: waiters, home care nurses, barmen and alike. Hence his clinical language on “increasing the demand for the goods and services produced by American companies”, because “shortage of demand is the root cause of unemployment,” he says.

But is it? Is shortage of demand the root cause of unemployment?

Only in the same way that gravity could be said to be the “root cause” of all plane crashes. You can see this abuse of the root cause in Larry’s circumlocution: You have unemployment because you have low capacity utilization because people cannot buy because they are unemployed. So you have to produce more with more people, so more people will buy more products and then they will be employed.

Got it?

The same day that Larry’s interview was published, the largest U.S. drug company, Pfizer, was in the news. Ian Read, the company’s new CEO, had announced the closing of a well-known research center in the UK with a loss of up to 2,400 jobs. Stock analysts loved the move. The company’s stock jumped 5 percent. "Just what the doctor ordered," wrote Jefferies in a research note. The “Lex” columnist of the Financial Times explained the meaning of all that, and, in doing so, knowingly or not, he also explained the real root cause of unemployment in the West as few economists could:

The more than 2,000 employees of Pfizer’s research facility in Sandwich, England, who helped develop Viagra and other blockbuster drugs, can be forgiven for feeling deflated. They and thousands more employees worldwide – along with patients awaiting breakthroughs in therapeutic areas that have been deemed commercially unpromising … – are losers in a reshuffling of priorities by the world’s largest drugmaker.

The move by incoming chief Ian Read is not so much a radical shift as an intensification of the past five year’s strategy. During that time Pfizer returned about $45bn in cash to shareholders while continuing headcount-shredding mergers … Now it will cut an additional $2bn from planned research and development spending to return the savings, and then some, to owners.

Already having one of the highest dividend yields in the S&P 500, Pfizer will add $5bn to an existing $4bn share buy-back plans. The move pleased Mr Read’s most important constituency – shares rallied after the announcement.
There you have it. The company lays off people, shuts down research centers and severely curtails research – research being a drug company's long term survival insurance policy – and returns the resulting savings to investors. Wall Street loves it. Finance capital triumphs yet again to the detriment of research and production.

And Pfizer is only one of the thousands of companies, all following the same script.

The brilliant economist looks at the economic landscape and sees none of that. What do you offer then, by way of advice and solution, if you do not see, much less understand, what is taking place before your eyes? Why, you deliver drivel:
Summers said there are numerous ways to stimulate this demand: by increasing exports; by encouraging companies to make new investments earlier than they otherwise would; by investing in the nation’s infrastructure; by encouraging people to consume more; and by substituting new technology for older technology. “I got three PC’s in my basement, but I still want an iPad,” he said by way of example.
He wants to increase exports – just like that. Which products, to which countries, he does not say.

And he wants Americans to consume more: more fat people eating more Big Macs; more maxed out, foreclosed consumers buying more electronics gadgets. It is advice for curing economic ills you would hear from a Miss America contestant.

The other day, Nick Clegg was explaining the UK coalition government’s economic plans. “We are determined,” he said, “to foster a new model of economic growth, and a new economy – one built on enterprise and investment.” To that end, he added, he would seek advice from business leaders and “economic experts.”

Larry Summers is one of the most sought-after economic experts. May the Lord deliver the British people from them.

A lion in winter? I say an ass for all seasons – and for good reasons.