Regardless of what anyone thinks about the Federal Reserve and its policies, it had three mandates: control inflation (stabilize prices), maximize employment, and moderate long term interest rates. While I was working on some data from the World Bank on how the employment thing was going for the U.S. (it’s really bad), it was announced that Larry Summers may be tapped to be the new Chair of the Federal Reserve, to replace Ben Bernanke.
Economic policy has social consequences; something that stone age economists often forget. The internet has already done a great job of skewering Summers on being a possible Fed Chair, but here’s something the internet has not talked about: Summer’s position on employment.
Summers worked under Greenspan, who is notorious for “deregulation”. Economists like Noah Smith and Paul Krugman like to call Greenspan “Maestrodomus”, as he made this statement to Congress:
“Today’s competitive markets, whether we seek to recognize it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.”
With notably rare exceptions, death rays from Mars didn’t kill us all! And with notably rare exception, people who have done their best to completely screw the world economy while hiding behind their irritating self-righteousness while being wrong about most things most of the time, get yet another shot at ruining the economy at the expense of, well, everyone else in the world.
Enter Larry Summers. Other than his supreme amount of sexism that got him booted as the President of Harvard, he worked in Treasury while Greenspan was engaging his 12th Century policies, and mostly supported those policies. Summer’s was the one who came up with this great theory that if you eliminate unemployment insurance, then you’ll actually INCREASE employment. The idea goes something like this:
All of those moochers on unemployment have no incentive to go out and find a job when they are collecting (on average) $300 per week. What Summers forgets, is that the laws of supply and demand apply to labor markets as well. If there’s no demand for labor, then you have an increased labor reserve, which drives down wages. Instead of increasing demand for labor, which would increase wages, just make everyone’s life miserable to the point where they will work for slave wages.
In fact, Summers took this approach when he worked at the World Bank, decimating the living standards of developing nations.
The appointment of Larry Summers as chairman of the Fed will pretty much do the same thing that any other appointment of Larry Summers has done; force social consequences for bad economics. Like the markets, predictions of future results are based on past performance. It’s with notably rare exception that Larry Summers can perform with anything resembling Economic or Social theory.