LAWRENCE SUMMERS | Butler Award

Lawrence Summers accepts the Butler
Award from the New York Association
 for Business Economics, November 29.

On Friday, November 29, 2018 the New York Association for Business Economics NYABE) presented The William F. Butler Award to former Treasury Secretary Dr. Lawrence H. Summers, the President Emeritus of, and the Charles W. Eliot University Professor at, Harvard University. 

Summers has been close to the center of the economics profession for his entire professional career. He was a strong candidate for the position of Chairman of the Fed under Obama before the President settled on Janet Yellen.

My notes on the lunch talk, which is on the record to the press, at the Cornell Club in New York City, follow. This is not a transcript; I did not use a tape recorder. The portions in quotes were more carefully written down, but may not be verbatim. The unnumbered questions in bold face were from Alan Goldman, the current President of the NYABE, of which I was President in 2002-2003.

I am glad to receive an award from business economists. The best opinions on the current economic outlook come from the business economics community. “I do not believe there is anywhere you can go on this planet than to business economists to get a better take on the business cycle.”

What were your best calls as Secretary of the Treasury?

“I was quite good around the [2007-2009] fiscal crisis. I said what we fear most is the lack of fear among banks.”  “I said that banks were dangerously undercapitalized and needed an infusion of funds and a stimulus was in order.”

“I said declaration of victory over green sprouts in 2009 was massively premature.”

What were your worst calls?

Five years ago my call on China was not so good. It was premature.

I recommended in the 1990s that we help the Russians with their economy, using as an analogy the Marshall Plan. The Russian economy did not develop the way it did in Europe after WW2. My idea did not prove out.

In the mid-1990s and 2000s, I was wrong on my productivity projections.

The jury is still out on the secular stagnation theory for the US economy that I proposed in 2013 based on Alvin Hansen’s work. Structural changes raised the saving rate, lowered the investment propensity. I said we needed more investment incentives. I was accused of recommending an “imprudent fiscal policy.” The problem is we had a bubble at the end of the 1990s, then a recession after 2001, and then the Internet bubble. I felt we had to encourage more investment,

Since 2013, fiscal policy has indeed been more expansionary and the Fed has been easier than the market had previously expected. Growth was harder to obtain. We had bigger bubbles, but less growth. I called it secular stagnation, a change that lowered the long-term rate of unemployment.

Real interest rates in Japan and Europe were even lower than in the United States. Growth continues to be low by historical standards. This supports the secular stagnation theory. I am more sure of it today than in 2013. What are the prospects for a recession? Over the next two years, I would say 50 percent, but I wouldn't argue with 35 percent. I would wonder at anyone projecting a probability of either as low as 15 percent or as high as 90 percent. The problem is that the Fed putting interest rates down to zero again is not going to help.

If I were Chairman of the Fed today, I wouldn't take a position much different from Jay Powell, so far, i.e., tending toward dovish. But I would differ in three ways:

• I would focus on the 2 percent inflation target and I would observe that in the last ten years the Fed has always erred on the downside of this target. With only 3.7 percent unemployment, when if not now should we err on the upside?
• I would be sceptical of balance sheet manipulation. QE works only in the early stages or when it has signaling consequences. The cumulative impact of duration from debt offsets the QE. I would put less emphasis on balance sheet size.
• I would deemphasize the fetish for information provision and transparency. Stick with the "a strong dollar is in our national interest" mantra and deliver a consistent message, with less emphasis on disagreements within the FOMC.

Q1 (from the floor). What about the labor force participation rate? Americans are aging into retirement. More workers are more credibly facing competition from overseas, from robots [the Internet], from the gig economy.

Q2. Should the Fed go to negative interest rates? A negative rate is not likely to produce stimulus. They are "unworldly".

Q3. Could secular stagnation be overcome by innovation? I'm looking at demand, not supply side. I am agnostic about [Northwestern Professor] Bob Gordon's argument, which is supply side. 

Q4. What will Trump tax reform accomplish? The reforms have helped the well off, but is financed by deficits and is therefore contractionary. Damages our ability to invest in infrastructure. Traffic congestion is terrible in NYC; took me 40 minutes to go 1.5 miles.

Q5. Should bankers have gone to jail after 2008? Stupidity is not a crime. By containing the crisis [bailing out the banks] we have had less populism that we would otherwise have had. "There must have been crimes" is not a credible claim. However, bankers were allowed to just resign rather than being  made accountable. That was an error.

Q6. Are the tariffs and trade tensions slowing the world economy? Not so much that as the traditional cycle of fear and greed.

Q7. What topics in economics are not being studied enough? "Relative to its social importance, business economics is overemphasized." I would like to see more study of regional economics. What could public policy do, for example, in West Virginia? Also, structural questions need more study – creation of local infrastructure, development economics. This is insufficiently studied in the United States, in favor of financial topics.

Comment

Professor Summers is a careful and clear speaker; I am a long-hand and therefore selective note-taker. If I have misquoted or misinterpreted anything he said, please send a note to me at john [at] cityeconomist.com and I will look at it again.

In identifying his worst calls, Summers did not go back 19 years to his support of the 1999 Gramm-Leach-Bliley Act. This lifted some of the restrictions on banks' involvement in insurance and investment services that were imposed in the 1933 Glass-Steagall Act. Glass-Steagall was a brilliant deal, part of the New Deal, that traded commercial bank deposit insurance for regulations of banks and other financial institutions to keep "shadow banks" from playing with government-insured deposits. Critics of Summers for his support of Gramm-Leach-Bliley include former Presidents Bill Clinton and Barack Obama.

CONGRESS IN TRANSITION | Financial Services Committee

The following email from Dana Chasin is posted here by permission. He called it "Update 315 — Rough Waters Ahead for Banks?"

The subject is the takeover of the  House Financial Services Committee by Rep. Maxine Waters (CA). The contrast between her and retiring Rep. Jeb Hensarling (R-TX) is one of the greatest in policy and style in the 116th Congress.

Clear Waters

Rep. Waters’ bedrock issues have long been housing, consumer protection, and big bank regulation. In the 115th Congress, Waters focused on protecting the Community Reinvestment Act, designed to prevent discriminatory credit practices, and guarantee fair housing protections.

Bills introduced by Waters during the Congress now ending (capping a six-year tenure as Ranking Member of HFSC) indicate her priorities:

• Public Housing Tenant Protection and Reinvestment Act of 2017 — H.R. 3160: The bill reforms the public housing demolition and disposition rules to require one-for-one replacement and tenant protections, and provides public housing agencies with additional resources and flexibility to preserve public housing.
• Comprehensive Consumer Credit Reporting Reform Act of 2017 — H.R. 3755: The bill enhances requirements on consumer reporting agencies, like Equifax, TransUnion, and Experian, to better ensure that the information on credit reports is accurate and complete.
• Megabank Accountability and Consequences Act — H.R.3937: The bill would give authority to federal banking regulators to break up banks that mistreat their customers.
• Consumers First Act —H.R.6972: The bill would reverse the harmful changes to the Consumer Financial Protection Bureau imposed by the Trump Administration and restore the agency’s supervisory and enforcement powers.
• Restoring Fair Housing Protections Eliminated by HUD Act of 2018 — H.R.6220: The bill would restore several fair housing protections that HUD Sec. Ben Carson eliminated.

Crossing the Party Bar

During her tenure as Ranking Member on the Committee, Rep. Waters supported bipartisan legislation, notably the third iteration of the JOBS and Investor Confidence Act. The bill includes provisions aimed at “decreasing the regulatory burden” for some financial institutions, as well as others that aim to increase protections for consumers.

In a similar vein, she partnered with Sen. Sherrod Brown on S. 1491, the Community Lender Regulatory Relief and Consumer Protection Act of 2015. The bill would give banks and credit unions with under $10 billion in assets relief from the Consumer Financial Protection Bureau’s (CFPB) “Qualified Mortgage” rule.

Appealing to Waters’ passion for housing reform, the measure would make permanent expired provisions that protect tenants from eviction when their landlord or property owner has entered foreclosure. When it comes to her bedrock issues, Waters may be more willing to compromise to ensure she reaches her legislative goals.

She has also reached across the aisle to work with Republicans to reauthorize the Export-Import Bank, and used her political savvy to get Republicans on board with a reauthorization of the National Flood Insurance Program. While she will look to make some strides in these areas as Financial Services Chair, she has expressed firm and progressive stances regarding systemic risk and oversight.

Mitigating Systemic Risk

Importantly, Rep. Waters at the helm of the HFSC means two things for systemic risk:

• the “tide” of deregulation of the financial sector is “at an end”
• regulators and agencies should be prepared to will have their feet held to the fire more often

Heading into the next Congress, a key item on Waters’ agenda will be monitoring systemic and other risks in big banks. The financial industry has enjoyed several months of continuous deregulatory activity under an HFSC headed by Rep. Hensarling and a Republican-controlled Congress. Under her leadership, the Committee will be limited in its ability to stall measures at the federal regulator level, but it will be able to increase oversight and change rhetoric to keep a check on agency overreach.

In the words of Waters, “as we saw in the last crisis, it is the average hard-working Americans that will suffer the consequences if Washington deregulates Wall Street megabanks again.”

Oversight

A robust oversight agenda will accompany the legislative priorities of the Committee under Waters. This agenda will likely focus on four distinct areas: firms, rulemaking, agencies, and the presidency.

On the firms, Waters has expressed indignation about the slap-on-the-wrist treatment of Wells Fargo in light of the improper and unfair foreclosures on its customers. Many were erroneously denied loan modifications to lower their mortgage payments.

A Democrat-controlled House cannot do much in the way of affirmative rulemaking, but it will no longer have to play defense against further attempts at deregulation. Much of Waters’ oversight in this area will be over agencies, ensuring that the Trump appointee-controlled CFPB, FSOC, and OFR are operating according to their original statutory purposes and with the resources they need. This will likely take the form of hearings, subpoenas, and investigations.

Waters has been steadfast in her position that investigation into the president’s alleged illegal financial dealings is on her agenda, but it’s not her top priority. In a Bloomberg interview earlier this month, Rep. Waters was clear that she would use her authority to get more information, using subpoenas if necessary, but was far more eager to discuss Wells Fargo and the CFPB.

Summing Up: An Able Veteran

Waters is a skilled and seasoned legislator. Her turn with the gavel at HFSC is very welcome news and signals the end of the tide of deregulation. It also signals an end to a period of free-reign for regulators (or should we say deregulators) dogmatically pursuing an agenda that puts Wall Street megabanks ahead of ordinary Americans. Her agenda will be limited by the Republican-controlled Senate, but it will set the tone and pave the way for future legislation that will curb the rollbacks of Dodd-Frank that have occurred in recent years.

AMAZON AND GM | Trumponomics Takes a Hit

From 20 final cities, Amazon chose to locate in two
states, NY and VA, that voted for Clinton in 2016.
Meanwhile, MI and OH, which voted for Trump,
 are taking the brunt of GM's layoffs.

The following is posted by permission of Dana Chasin, who sent this out as Update 314 to his list, under the title: "An Economy Shifting Gears: What do Amazon's new HQs and the GM Layoffs Portend?" GM's layoffs and Amazon's new headquarters expansions show that Trump's bets on revival of car manufacturing, as opposed to embrace of technology, are not paying off. States that voted for Clinton in 2016 are winning and two states that believed in Trump's promises for manufacturing are losing. Trump's beggar-my-neighbor tariff policies are not helping American manufacturing.

Major tidal shifts and cross-currents underlying the changing American industrial landscape have been on full display in recent weeks. Last month, Amazon announced it was going to base its second headquarters out of both New York and Virginia, promising to bring 25,000 jobs to each. [This is a significant economic victory for two states that voted for Hillary Clinton for President in 2016.]

In an equally important but opposite development yesterday, General Motors announced its plan to eliminate up to 14,000 jobs in five plants in three states and Canada. Three of the plants are in Michigan and Ohio, which voted for Trump after campaign promises to revive manufacturing.

GM's surprise decision has rattled the Trump Administration and Republican leadership, challenging the belief that the economy is running fine on high octane fuel and should continue unfettered.

GM’s announcement comes less than two years after it announced it would add or keep 7,000 jobs in the United States. It translates to an expected loss of 14,700 jobs. The decision comes only a month after GM offered buyouts to as many as 18,000 long-time employees, only 4,000 of whom accepted the offer by the November 19 deadline – 3,000 employees short of its 7,000 target. With the buyout program behind schedule, the decision to idle five facilities did not come as a surprise to many. The Lordstown assembly plant in Warren, Ohio, for example, had gone from three shifts per day in January 2017 to one shift this past April.

The United Auto Workers said it would challenge GM’s decision. If GM still hasn’t reached its 7,000 buyout goal by January, further involuntary cuts are likely.

While the Tax Cuts and Jobs Act (TCJA) of 2017 purported to create record tax windfall for corporations to reinvest, the picture with GM is more complicated. In GM’s case, the TCJA did not account for “deferred tax assets” which the company was able to accumulate due to poor performance predating the Great Recession. These assets allow companies to reduce taxable income, meaning GM had already been afforded a low tax bill for over a decade. The newly reduced corporate tax rate therefore rendered these assets less valuable, forcing GM to take a $7 billion charge against earnings during the fourth-quarter of FY 2017.

Executives expected to see an eventual benefit from the new tax law, but not for years to come. It’s hard to claim that in absence of sizable deferred tax assets, GM would have even used their $157 million in federal savings to support American plants and employees. An October survey published by the National Association for Business Economics reported 81 percent of 116 companies surveyed had not changed plans for investment or hiring as a result of the TCJA.

The tariffs put forward by the Trump administration are another possible contributing factor to GM’s financial troubles. The timeline of the trade war is highlighted below:

June 1, 2018: The Trump Administration ended the exemption of Mexico, Canada and the EU from aluminium and steel tariffs. GM representatives warned the White House that these tariffs would drastically hurt the firm, saying that “this could still lead to less investment, fewer jobs, and lower wages for our employees.”

July 25, 2018: GM was forced to reduce its profits forecast for 2018, tanking stock by 4.6 percent. GM’s CFO predicted the original tariffs in March and the ending of exemptions to the US’s most trusted partners in June could add “as much as 700 million to GM’s costs” for FY 2018.

September 24, 2018: The White House compounded the problem by unveiling a new, stringent set of tariffs on Chinese automotive exports, putting in place a 10 percent levy on brakes, car batteries, tires, etc. Analysts predict these new tariffs will lead to higher sticker prices for cars and lower car sales. GM, like all other US car manufacturers, relies on foreign-based subsidiary plants and goods to create finished products, making broad tariffs doubly damaging to an already wounded industry. With GM historically leading the way in moving jobs to Mexico and a less favorable domestic/international tax rate differential introduced in the TCJA, the Trump administration's tariffs have only produced escalated offshoring.

Starting on the campaign trail, President Trump made a series of promises to the American people about jobs, specifically jobs in manufacturing. During a speech in Michigan in October 2016, Trump promised to “bring back ... jobs” and said “the long nightmare of jobs leaving Michigan will be coming to an end.”

He blamed past factory closures on Democratic failures and promised not to let that happen again. The GM decision reflects the fecklessness of Trump’s approach. Many voted for him because of his pledge to save the manufacturing industry.

Instead, he has put forth policies that undermine that goal and expose fears that become self-fulfilling trade prophesies in the form of retaliation. Plants will be closing in two states that were key to Trump's victory – Michigan and Ohio.

The GM closures thwart his guarantees to protect manufacturing and undermine his portrayal of a healthy economy that is growing with no end in sight and equitable for minority groups.

Almost simultaneously, Amazon announced its locations for its new HQ2. After a country-wide tax benefit bidding war, it has pledged to bring 25,000 jobs to both New York and Virginia, as well as an estimated 67,000 and 22,000 indirect jobs to each respectively.

In return, Virginia agreed to give Amazon $819 million and New York agreed to $1.85 billion. Both states believe the benefits accrued from Amazon will far outweigh these costs. Gov. Ralph Northam of Virginia expects “Amazon to invest $2.5 billion in the commonwealth and create $3.2 billion in tax revenue.”

Will this model work? Amazon is encouraged to fulfill its jobs promise through "performance-based direct incentives," meaning that for each pledged job that comes to fruition, they get a certain amount of tax breaks. This kind of city and state tax break is by no means an uncommon way of driving business to invest in a given area, and has been utilized in the past by other tech company giants, such as Google.

Although the model has proven very effective at creating jobs, there are some accompanying flaws. In Seattle, Amazon’s first HQ brought an economic boom and more than 40,000 jobs to the city; it also cost taxpayers hundreds of millions of dollars in ongoing infrastructure and transportation upgrades around the site, while neglecting other areas of the city. Affordable housing underwent a serious crisis. However, Amazon has worked with Virginia and New York governments to try and get in front of some of these issues, pledging money for additional schools and low-income housing.

Moreover, Arlington and Long Island are not Seattle. Bringing 100,000 jobs to these areas is a boon even to these booming coastal metropolises.

Trump has criticized Amazon repeatedly in the past and again following the announcement of HQ2. The economic tide seems to be working against him – 44 cents of every dollar spent online goes to Amazon. As much as Trump wants new jobs in the manufacturing sector, the evidence shows that the tech sector is the one to watch. Tech jobs offer the same, if not better, benefits as traditional manufacturing jobs, such as 401ks for salaried workers. States are quite literally fighting over these Amazon jobs, whereas auto-manufacturing jobs in the rust belt have become more burdensome than beneficial.

Even GM will be using its hefty savings to further bulk up its electric and autonomous vehicle development through R&D programs that already see more than $1 billion a year in company investment. Trump can no longer keep up the facade of a booming economy fueled by the manufacturing industry, and his supporters, especially those in Michigan and Ohio, must adjust to these false hopes and broken promises.

TRUMP | Has Crossed the Line

PROTESTS CALLED FOR THURSDAY, NOVEMBER 8, 5 PM LOCAL TIME
Donald Trump has installed a crony to oversee the special counsel's Trump-Russia investigation, crossing a red line set to protect the investigation. By replacing Rod Rosenstein with just-named Acting Attorney General Matt Whitaker as special counsel Robert Mueller's boss on the investigation, Trump has undercut the independence of the investigation. Whitaker has publicly outlined strategies to stifle the investigation and cannot be allowed to remain in charge of it. The Nobody Is Above the Law network demands that Whitaker immediately commit not to assume supervision of the investigation. Our hundreds of response events are being launched to demonstrate the public demand for action to correct this injustice. We will update this page as the situation develops.

Enter your ZIP code here and find the closest rally to protest: Nobody Is Above the Law

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