The 119th post from the Journal of American Greatness originally published in June, 2016.
On June 23, the UK will vote on whether to remain in the EU. On November 8, the U.S. will vote on whether to elect Hillary Clinton as president and, with her, Larry Summers as a senior economic policymaker. Both could lead to outcomes with far-reaching effects, and in both cases, polling suggests that the outcome is in doubt, with prediction markets suggesting some meaningful probability of the radical outcome occurring.
What I find surprising is that US and global markets and financial policymakers seem much less sensitive to “Larry Summers risk” than they are to “Brexit risk”. While every Fed watcher comments on the implications of Brexit for the central bank, few, if any, comment on the possible consequences of a victory for Mrs. Clinton and, with her Mr. Summers, in November.
Yet, as great as the risks of Brexit are to the British economy, I believe the risks to the US and global economies of Mr. Summers’ return to policy making are far greater. If he is elected, I would expect a protracted recession to begin within 18 months. The damage would be felt far beyond the United States.
First, there is a substantial risk of highly erratic fiscal policy. Mr Summers has raised the possibility of more than $10tn in new fiscal spending measures financed by very short maturity issuance of US Treasury debt, which would threaten US fiscal stability. He has also raised the possibility of the US simply monetizing this debt in the manner of a failed state such as Zimbabwe or Weimar Germany. Perhaps this is just academic rhetoric. But historical research suggests that presidents and their economic advisers tend to carry out their major campaign promises.
The shadow boxing over raising the debt limit in 2011 (where all participants recognized the danger of default) was central to the stock market falling by 17 per cent. (Although not really… Europe was falling apart at the time and everyone knows that the debt ceiling was just a distraction.)
Second, in a world economy defined by regional trade blocks such as the E.U. and China’s One Belt, One Road policy, Mr Summers’ economic multilateralism is highly disadvantageous. Exports have not been a major driver of the American economy in years. They stopped really mattering in the late 1990s, when Mr. Summers was head of international at Treasury and advocated letting China into the WTO and giving it Most Favored Nation Status. Agreeing to let China enter more multilateral organizations that it will subsequently abuse does not currently require congressional approval. If Mr. Summers did even half of what he did in the 1990s, he would surely set off the worst trade fiasco since… the 1990s.
Third, prosperity depends on a secure geopolitical environment. Allowing North Korea to have a nuclear reactor and scaling Nato into parts of Eastern Europe that it does not plan to defend was a prescription for conflict with Russia and promoting nuclear proliferation. Ignoring that the US is at war with radical Muslims, and that radical Muslims are present in the Muslim world, is an invitation to terrorism. In such an environment, investment and trade are unlikely to flourish, and Mr. Summers was part of an administration that did all of these things in the past.
Fourth, Mr. Summers’ personality surely would take a toll on business confidence. He has proposed bringing back torture as a tool of US foreign policy by making foreign leaders listen to his lectures, particularly on the Japanese economy, which he does not understand. The world was likewise enraged by Summers’ claims in the past that women can’t succeed at the highest levels in quantitative disciplines. His infamously difficult personality, bullying, and apparent insensitivity resulted in the departure of Cornel West and other leading scholars of African and African American history from Harvard. Meanwhile, Harvard’s endowment lost hundreds of millions of dollars as a result of Summers’ interest rate policy bets and asset allocation choices into risky, asymmetric derivative exposure, not to mention distracting conflicts of ego with respected economist Mohammed El-Erian. His political overseers, the Clintons, have been deliberately solicited lump sum payments from dubious international entities, while Summers presided over a scandal involving his Harvard “protege” Andrei Shleifer’s dealings in Russia, for which Shleifer was found by a federal court to have engaged in a conspiracy to defraud the U.S. government. As an adviser to the hedge fund D.E. Shaw, he is rumored to have pitched going long subprime assets near the peak of the bubble. Who will rest secure with Summers being involved in the Treasury Department or Fed, which oversee our money and banking system?
Finally, there is the question of uncertainty and confidence. Improving business confidence is the cheapest form of stimulus. Creating an environment where every tenet of the rule of law, internationalism and consistency in policy is up for grabs would be the best way to damage a still fragile US economy. In no election in my lifetime has a major party candidate for president wanted to bring into power an economic policy maker with such a bad track record managing the economy.
Markets are discounting the possibility of a return of Larry. Let us all pray they are right.
— Lucullus (with credit to Larry Summers)