Larry Summers hearts the busted Obama-Boehner deal

Progressives were having conniptions when details of Obama's never-consummated deal with Boehner emerged.  Three trillion in spending cuts, just $800 billion in new revenue -- no more than expiration of the Bush tax cuts for the wealthiest 2% of Americans would yield, and less than half the amount proposed by the right-leaning Bowles-Simpson plan. On the benefit side, social security benefits chained to the "chained CPI" (a less generous inflation calculation than the current CPI) -- and more jarringly, the Medicare eligibility age raised to 67.

A plan, it would seem, that Timothy Geithner could get behind (and probably was behind).  But I was surprised to read from Larry Summers today that he too apparently considers approximately the same level of revenue and presumably the same revenue-to-spending-cuts ratio sufficient:

Ah, soft power: a chorus of nations urges yuan appreciation

On several occasions I have flagged wise voices urging the U.S. to seek allies (Aryind Subramanian) and work through multilateral channels (Jeffrey Garten)  in its effort to convince China to let its currency appreciate. Recently, Larry Summers was singing from the same page:

...we think that countries with large surpluses need to be focused on shifting the pattern of demand towards reliance on domestic demand.

And clearly, exchange rates, which are the relative price of domestic and foreign goods, are one crucial aspect of that, and so I think that’s going to have to be an active area for international consideration going forward because I think all countries have a stake in more balanced growth, and I think where there are large reliance on external growth, that does raise questions about the sustainability of the expansion.

And so in our dialogue with China through the strategic economic dialogue, in our participation in the IMF with its enhanced mechanisms for global surveillance, as we move towards the G20 meetings in Canada and Korea this year, I think these are going to be very important issues (my emphasis).

Not to jump at shadows, but it looks like more pieces on Obama's international chess board may be moving into position on this front.  From today's FT:

China is facing growing pressure from developing countries to begin appreciating its currency, providing unexpected allies for the US in the diplomatic tussle over Beijing's exchange rate policy.

Speaking ahead of a meeting of finance ministers and central bank heads from the Group of 20 countries which starts today in Washington, Indian and -Brazilian central bank presidents have made the most forceful statements yet by their countries about the case for a stronger renminbi. [snip]

How not to attack the Administration

Andrew Leonard cites analyses of pending financial reform legislation by Paul Krugman and Noam Scheiber to suggest that the Administration will be happy to pass a weak bill and declare victory -- and that more generally, "the public's perception of how the administration is addressing the nation's problems may be more important to the White House than whether or not those problems will actually be solved." 

To my eye, Leonard's article is a cautionary example of how easy it is to misrepresent others' writings in support of one's own thesis. I made the case in a comment, here. The Summers interview to which Leonard refers is here (and is also the subject of my prior two posts, here and here).

A second White House Seder? Larry Summers sings Dayenu to Martin Wolf over health care reform

100-odd years ago, early in 2009, Obama and Peter Orzag were heavy on the mantra that "healthcare reform is entitlement reform"-- i.e. that "bending the cost curve"on healthcare would be the single most important step to erasing the country's structural deficit.  Here's how Peter Orzag put it in Obama's fiscal summit on Feb. 23, 2009:

Health care is the key to our fiscal future.

So to my fellow budget hawks in this room and in the rest of the country, let me be very clear: health care reform is entitlement reform.

The path of fiscal responsibility must run directly through health care.

We also must recognize that reforms to Medicare and Medicaid will only succeed in the context of slowing the spiraling growth of overall health care costs.

In an interview published in the online Financial Times today, Larry Summers, asked by Martin Wolf how other nations could have confidence that the U.S. will put its long-term fiscal house in order,  suggested that the Administration has already laid the most important cornerstone  -- again, that healthcare reform is entitlement reform, and that the cost controls in the Patient Protection Act have teeth.

Perhaps Summers was fresh from a Seder: his litany of the virtues of the Medicare Individual Payments Advisory Board (boldfaced below) swings with the repetitive glee of the Passover song  "Dayenu," which marvels at the extent of God's mercies in making the Exodus happen:

Larry Summers takes a long and multilateral view of China and trade rebalancing

As China signals that it is ready to start letting yuan appreciate again, Larry Summers, in an interview with the FT's Martin Wolf, gives some important hints as to the Administration's long-term approach  toward China.

With regard to exchange rates and a more general rebalancing of trade, both between the U.S. and China and more generally between high-export and high-consumption economies, two of Summers' emphases in particular are noteworthy: 1) a global rebalancing of supply and demand should be pursued through multilateral channels and institutions -- the U.S. should seek allies and so diffuse the expectation (and possibility) of gladiatorial combat between the U.S. and China over exchange rates; and  2) it's going to take time -- rebalancing the world economy is a project of years and probably decades, and yuan appreciation is only one piece in a complex (re)balancing act.

On the first point, Summers is very careful to build the multilateral context:

MW Okay, just tell me about where you are on the exchange rate question vis-a-vis China and the adjustment process vis-a-vis China.

LS The G20 made a common commitment last year in London, reiterated in Pittsburgh, to seeking more stable and balanced global growth. And I think we’ve made more progress in laying a foundation for restored global growth than has yet been made in assuring more balanced global growth - to be sure that growth, the pattern of growth over the last year, has been more balanced, with trade deficits and trade surpluses both coming down. But as the global economy recovers, it will be very important not to see a major resumption and a major widening of imbalances.

Summers channels Krugman chanelling Uncle Sam(uelson)

Compare Larry Summers' message at Davos (relayed by Gideon Rachman) to Paul Krugman's shot across China's bow back on New Year's Day.

Summers:

Larry Summers, the chief economic adviser in the White House, was rather more subtle in his flirtation with protectionism. He told the Davos audience that one in five American men aged between their mid-20s and their mid-50s is now out of work. In the 1960s, he pointed out, 95 per cent of this age cohort had been employed. Mr Summers was careful to say that the US remains committed to open trade and can gain from globalisation. But he also pointed out that Paul Samuelson, a famous economist (and uncle of Mr Summers), had argued that the case for free trade might not apply when countries were trading with nations that were pursuing mercantilist policies. The reference to China did not need to be spelled out.

Krugman:

I usually hear two reasons for not confronting China over its [mercantilist] policies. Neither holds water....

...there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.

Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full ... all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.

Getting used to change

In "It's a Wonderful Life," after a highly eventful day at the office, newlywed George Bailey gets a buzz from his altered life condition when he's told that "Mrs. Bailey is on the line" and realizes that it's his wife, not his mother, calling.

I got a similar frisson from the very ordinariness of this lede:

Jan. 25 (Bloomberg) -- White House officials warned Americans that economic prospects are darkening as they sought to ensure rapid Congressional approval of President Barack Obama’s $825 billion stimulus package.

Vice President Joe Biden told the CBS program “Face the Nation” that “it’s worse, quite frankly, than everyone thought it was.” Larry Summers, Obama’s top economic adviser, said the economy faces “very difficult” months, speaking today on NBC’s “Meet the Press.”

"White House officials" triggers a conditioned reflex: skepticism, wariness, brace for outrage. Don't want to entirely let go of that. All administrations spin, and screw up, and yield to the wrong pressures. But the distrust reached pathological proportions over the past eight years -- across the political spectrum, eventually. Now hope is fresh that most of the time at least we'll credit the rationality and good faith of what we hear from "Administration officials."

Obama: damn the debt, full speed ahead

In the third Obama-McCain debate, Bob Schieffer posed what came to be regarded as a baseline "responsible journalist" response to the financial system collapse:

Some experts say [the deficit] could go to $1 trillion next year....Aren't you both ignoring reality? Won't some of the programs you are proposing have to be trimmed, postponed, even eliminated?

But even as the chorus for Clintonian budget responsibility has swelled, a Keynsian counterpoint, led by Larry Summers and Paul Krugman, is drowning it out. The upshot: Clinton came in as a recovery was gathering steam, so deficit reduction was appropriate. But a mega-recession is no time to cut spending Krugman has argued that Roosevelt unwittingly spiked recovery in 1937 --after four years of massive stimulus -- by getting deficit religion too early.

Further, in Krugman's words, "the response to the economic crisis is, in itself, a chance to advance the progressive agenda." Major initiatives like alternative energy investment and health care reform should in fact be rolled into economic stimulus.

Obama has held steady with the "full steam ahead" school. During the campaign, he was regarded as evasive for refusing to name a major element of his agenda that would have to be scaled back in response to massive bailout outlays (though he did repeatedly rank priorities, beginning with alternative energy and ending with education).

In his first weekly address as President elect, Obama once again answered Schieffer -- and in fact, echoed Krugman, signaling in no uncertain terms that he's going for all-fronts-full-steam-federal-investment:

Even as we dig ourselves out of this recession, we must also recognize that out of this economic crisis comes an opportunity to create new jobs, strengthen our middle class, and keep our economy competitive in the 21st century.

That starts with the kinds of long-term investments that we've neglected for too long. That means putting two million Americans to work rebuilding our crumbling roads, bridges, and schools. It means investing $150 billion to build an American green energy economy that will create five million new jobs, while freeing our nation from the tyranny of foreign oil, and saving our planet for our children. It means making health care affordable for anyone who has it, accessible for anyone who wants it, and reducing costs for small businesses. And it also means giving every child the world-class education they need to compete with any worker, anywhere in the world.

Doing all this will require not just new policies, but a new spirit of service and sacrifice, where each of us resolves to pitch in and work harder and look after not only ourselves, but each other. If this financial crisis has taught us anything, it's that we cannot have a thriving Wall Street while Main Street suffers -- in this country, we rise or fall as one nation; as one people. And that is how we will meet the challenges of our time -- together. Thank you.

Who's afraid trillion dollar deficits? Not Obama...