Friday, November 22, 2013

OMG! Larry Summers Changed His Mind!

When the facts change, so do my opinions.  What do you do, sir?                                           -John Maynard Keynes

A number of blogs and media sources are noting that the "secular stagnation" economic views aired by former Treasury Secretary Larry Summers are different than the opinions he held just a few years ago.

Fairly typical is a lengthy post from an economic blog called "This is Ashok" that the Financial Times featured in a link posted on an email this morning.

The blog goes back to 2011 when Summer was apparently much less concerned than other prominent economists about the future growth potential of the United States.

At that time Summers dismissed any notion that the U.S. was facing any sort of stagnant economy that carried the serious threat of deflation similar to what Japan has experienced over the past two decades. Quoting from remarks in November 2011:

It will take time. There are steps that need to be taken but we are a society that works. We are a society whose principle problems — we all up here agree — can be addressed by a change in the printing of money and the creation of infrastructure. That is not the kind of fundamental problem Japan has.

Earlier this month, however, Summers appears to have changed his mind, and now questions whether we could indeed learn something from the Japan experience. Quoting from his IMF speech:
“Even a great bubble wasn’t enough to produce any excess of aggregate demand…Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess.”

“The underlying problem may be there forever”

“We may well need in the years ahead to think about how to manage an economy where the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.”

Now, I am not trying to defend Larry Summers, or anyone else for that matter.

But I would point out that this seems to be a natural tendency in the financial press.

If you express one particular view at a given point in time, you are held to that position regardless if circumstances have changed.

This was a problem that Keynes faced when he was an economist working for the British government during World War II and immediately thereafter.

Several officials had expressed frustration with Keynes for apparently wavering in his belief as to the next policy step that should be implemented.  Keynes's response to such criticism is captured in the quote above.

And I would rather have someone like a Summers evolve their views based on the evidence rather than simply holding onto to an opinion expressed years ago.