Larry Summers and Celebrity Journalism

Larry Summers has a far deeper analysis of the wealth inequality crisis in America than many economists who are widely perceived of as to his left - such as Christy Romer and Paul Krugman. For more than a decade, Summers has challenged the orthodox economic model with observations such as this recent one:

The extent of the change in the income distribution is such that it is no longer true that the overall growth rate of the economy is the principal determinant of middle class income growth—how the growth pie is sliced is at least equally important. The observation that most of the increase in inequality reflects gains for those at the very top—at the expense of everyone else—further belies the idea that simply strengthening the economy will reduce inequality.

This may be obvious to most of us but it’s Galileo versus the Pope for the economics establishment - both liberal and conservative. 

Which brings us to the question of what it will take to end this depression we’re in.

Many pundits assert that the U.S. economy has big structural problems that will prevent any quick recovery. All the evidence, however, points to a simple lack of demand, which could and should be cured very quickly through a combination of fiscal and monetary stimulus.[Krugman]

In orthodox economics one can hide the role of government and political power in distribution of wealth by simply assuming that the economy has some sort of natural operation - like the movement of the planets.  This is why liberal economists have been so insistent about the aggregate size of the stimulus (let’s not speak of the totally reality denying Right wing economists). For New Keynsians like Krugman, increasing government spending increases aggregate demand and thus automatically generates economic growth which produces jobs and wage increases.  In this formulation “demand” is a kind of neutral force, like gravity, which produces produces jobs, irrespective of what it is a demand for:

So am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? Well, yes. You don’t have to like it, but economics is not a morality play, and I’ve yet to see a macroeconomic argument about why it isn’t possible. [Krugman]

But this is wrong and I very much doubt Keynes would have considered it even slightly plausible - even Adam Smith would have been appalled. Demand for positions in  hedge fund bets, or for gasoline trucked over the Khyber pass to  US military units in Afghanistan or for domestic servants is of a fundamentally different character than demand for solar power plants or electric vehicles or $150,000 homes or trains. This is why the massive increase in government spending under the Bush administration produced so few jobs and falling wages.  A skilled electrician working on a wind power plant is not just a consumer who spends more money because she is earning a wage, she is creating social wealth in the power plant. The power plant will produce electricity for other businesses and public organizations like schools, its development will increase the skills of workers and firms and make it cheaper to build the next plant, it will displace imported fossil fuel and reduce environmental costs/damages. That same electrician working on Mr. Koch’s yacht, not to mention one scrubbing Mr. Koch’s toilet, is turning social resources (manufactured goods, money, skill) into waste. The yacht and clean toilet will add nothing to the national wealth. Neither will Mr. Koch’s investment in buying Republican politicians who can remove environmental regulations or limit voting rights or the diversion of public spending to buying gasoline in Afghanistan.  Those investments, in fact, are increases in aggregate demand that produce poverty.

As Stiglitz has explained, and as Krugman has refused to understand, wealth imbalance redirects investment to non-productive uses which then increases wealth imbalance.  Orthodox economics, however, insists that investment decisions are driven by natural forces. Larry Summers, at least, has let the data persuade him that the planets do move.

http://blogs.reuters.com/lawrencesummers/2011/11/21/the-fierce-urgency-of-fixing-economic-inequality/

http://krugman.blogs.nytimes.com/2013/01/20/inequality-and-recovery/?smid=tw-NytimesKrugman&seid=auto&_r=0

http://www.nytimes.com/2012/05/04/opinion/krugman-plutocracy-paralysis-perplexity.html?ref=opinion