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Larry Summers for Treasury?

It is rumored that Larry Summers is at the top of Obama's list of possible appointees for Treasury. On the domestic front, I suspect he would be at least as good as the current Treasury secretary, Henry Paulson. On the international front, I am less certain.

Last spring, Summers wrote two interesting op-eds on global trade and regulation.

Here is his view on globalization:

A strategy to promote healthy globalisation

Last week, in this column, I argued that making the case that trade agreements improve economic welfare might no longer be sufficient to maintain political support for economic internationalism in the US and other countries. Instead, I suggested that opposition to trade agreements, and economic internationalism more generally, reflected a growing recognition by workers that what is good for the global economy and its business champions was not necessarily good for them, and that there were reasonable grounds for this belief.

The most important reason for doubting that an increasingly successful, integrated global economy will benefit US workers (and those in other industrial countries) is the weakening of the link between the success of a nation's workers and the success of both its trading partners and its companies. This phenomenon was first emphasised years ago by Robert Reich, the former US labour secretary. The normal argument is that a more rapidly growing global economy benefits workers and companies in an individual country by expanding the market for exports. This is a valid consideration. But it is also true that the success of other countries, and greater global integration, places more competitive pressure on an individual economy. Workers are likely disproportionately to bear the brunt of this pressure.

Part of the reason why US workers (or those in Europe and Japan) enjoy high wages is that they are more highly skilled than most workers in the developing world. Yet they also earn higher wages because they can be more productive - their effort is complemented by capital, broadly defined to include equipment, managerial expertise, corporate culture, infrastructure and the capacity for innovation. In a closed economy anything that promotes investment in productive capital necessarily raises workers' wages. In a closed economy, corporations have a huge stake in the quality of the national workforce and infrastructure.

The situation is very different in an open economy where investments in innovation, brands, a strong corporate culture or even in certain kinds of equipment can be combined with labour from anywhere in the world. Workers no longer have the same stake in productive investment by companies as it becomes easier for corporations to combine their capital with lower priced labour overseas. Companies, in turn, come to have less of a stake in the quality of the workforce and infrastructure in their home country when they can produce anywhere. Moreover businesses can use the threat of relocating as a lever to extract concessions regarding tax policy, regulations and specific subsidies. Inevitably the cost of these concessions is borne by labour.

The public policy response of withdrawing from the global economy, or reducing the pace of integration, is ultimately untenable. It would generate resentment abroad on a dangerous scale, hurt the economy as other countries retaliated, and make us less competitive as companies in rival countries continue to integrate their production lines with developing countries. As Bill Clinton said in his first major international economic speech as president, "the United States must compete not retreat". The domestic component of a strategy to promote healthy globalisation must rely on strengthening efforts to reduce inequality and insecurity. The international component must focus on the interests of working people in all countries, in addition to the current emphasis on the priorities of global -corporations.

First, the US should take the lead in promoting global co-operation in the international tax arena. . . .

Second, an increased focus of international economic diplomacy should be to prevent harmful regulatory competition. . . . There has not been enough serious consideration of the alternative - global co-operation to raise standards. While labour standards arguments have at times been invoked as a cover for protectionism, and this must be avoided, it is entirely appropriate that US policymakers seek to ensure that greater global integration does not become an excuse for eroding labour rights.

Summers opposes countries competing by lowering tax rates. I agree that, other things being equal, coordinated tax rates would be better for the world. But, since tax coordination would likely tend to lead to higher, rather than lower, rates, other things are not equal. It would seem to be a good thing for Ireland to lower tax rates and, in effect, put pressure on the rest of the EU to do the same. If you restrict tax competition by forming a cartel (of countries), you get higher (cartel) pricing.

On "labour rights," I would favor more international agreements to ensure the right to work without employer or union coercion. But, unfortunately, most proposed international labor agreements are attempts to spread, not only worthwhile worker safety protections, but also union power to the rest of the world. Unionization in the United States tends to destroy overall wealth, productivity, and jobs, as any glance at unionized airlines and auto companies illustrates. Unions are thriving in the US mainly in the one area where there is little competition and where low productivity is tolerated -- government workers.

Terrivus:
I would do my happy dance if Obama nominated Larry Summers -- not because of his policies or views, but because I would just LOVE to see the liberal left go crazy over such a nomination, given the hullabaloo over Summers's supposed "sexist" comments that contributed to his departure as the Harvard president.

For that reason, actually, I highly doubt Summers will get the nod, even though I would welcome it (there's no doubting the guy is sharp and is probably the best one could hope for in a liberal-left climate).
11.5.2008 12:25pm
Grobstein (mail) (www):
I'd be thrilled too, but as noted I think the base would explode.
11.5.2008 12:27pm
Big E:
Ah Lindgren back to the old bugaboos. Instead of "unionization in the United States tends to destroy overall wealth, productivity, and jobs," I sure you meant the more accurate statement that unionization increases wealth, productivity and jobs up to the point where unions become too greedy and management signs stupid contracts.
11.5.2008 12:29pm
wm13:
Summers's argument is a total non sequitur. It may be that reduced transport costs and increased capital and managerial mobility have decoupled the economic fortunes of the average worker from the fortunes of the business enterprises domiciled in his country. But Summers advances no evidence that tax or regulatory arbitrage is a major component of this phenomenon. The reason Indian lawyers can replace American paralegals in doing land title reviews is that they work for $25 per hour, not that they work in unsafe conditions or don't have unions.
11.5.2008 12:38pm
Gramarye:
A Summers pick, especially if announced early, would definitely set the tone for a more technocratic, pragmatic Obama presidency instead of one more given to ideological crusades. However, my guess is he'll go with someone more like Robert Reich was in the Clinton years, without a Robert Rubin to balance him.

I find it worth noting that commenters on several liberal blogs and online publications like The Nation are already trying to mobilize to prevent a Summers nomination--i.e., they see it as a possibility and they distinctly don't like it, preferring instead a more "transformational" figure. The same is perhaps even more true of the possibility that Bob Gates will be invited to stay on for a time in an interim capacity at Defense.
11.5.2008 12:41pm
A. Zarkov (mail):
That would be a good move for Obama, sending a clear signal that it intends to run an administration of adults and not some outgrowth of moveon.org. I don't know if Summers is the best man for the job. I'm not sure if Summer's was a fan of the NFA (New Financial Architecture), by now a utterly discredited model for domestic and international finance. If he was then, he's a very bad choice. But if he expressed serious reservations, then his appointment would be a excellent confidence building move. And we really need confidence building moves.
11.5.2008 12:50pm
A guy can dream, can't he?:
Ron Paul for Treasury Secretary!
11.5.2008 12:53pm
Hoosier:
Can't cut it running Harvard?

Have we got a job for you!
11.5.2008 12:54pm
The River Temoc (mail):
It is Bush administration trade policy that all future U.S. free trade agreements (FTA) contain enforceable provisions upholding core ILO labor standards, including the right to unionize. This is not new and is the right policy.

On Summers, I would heartily support him.
11.5.2008 12:55pm
holdfast (mail):
We could certainly do worse, and I suspect we will. Paul Krugman anyone ?
11.5.2008 1:00pm
byomtov (mail):


Yes. Those people running the auto companies were such geniuses - masters of reacting to market demand with high-quality products - that the only possible explanation for their troubles is unions.

Similarly, airlines are not affected by fuel costs, or by the plain fact that they operate in an extremely competitive market, or that they've managed to turn airline travel into an ordeal. It's all the unions' fault.
11.5.2008 1:13pm
Paul B:
The arguments made in favor by Lindgren in favor of Summers are reasons to make him the Chairman of Economic Advisers, not a Treasury Secretary during a period of dislocation in the financial markets.

Even those of us who were dismayed to see him fired as president of Harvard need to recognize that his time there showed he not have the skill set needed to hold a highly politicized job. Larry Summers may be the smartest guy in the room, but someone who can not resist letting you know that at any opportunity is not tempermentally suited to be Treasury Secretary in the current environment.
11.5.2008 1:13pm
akwhitacre (mail):
I'm hearing Sheila Blair (FDIC head) as a potential Treasury Sec. as well.
11.5.2008 1:14pm
Dilan Esper (mail) (www):
On "labour rights," I would favor more international agreements to ensure the right to work without employer or union coercion. But, unfortunately, most proposed international labor agreements are attempts to spread, not only worthwhile worker safety protections, but also union power to the rest of the world. Unionization in the United States tends to destroy overall wealth, productivity, and jobs, as any glance at unionized airlines and auto companies illustrates.

That may be true of unionization now, but how about unionization during the Industrial Revolution? And aren't unions in developing countries organizing sweatshop workers more closely analogous to say the Pullman Workers' Union a century ago than they are to the United Auto Workers today?
11.5.2008 1:27pm
JosephSlater (mail):
Unionization in the United States tends to destroy overall wealth, productivity, and jobs, as any glance at unionized airlines and auto companies illustrates.

This sort of polemical tripe is refuted by any numer of reputable studies on effects of unions on productivity (start with Freeman and Medoff, _What Do Unions Do?_)
11.5.2008 1:38pm
Pyrrhus (mail) (www):
While at Harvard, Summers co-taught a lecture course on globalism with Michael Sandel and Thomas Friedman. Summers was by far the outspoken advocate of increased globalization, and his caveats rarely seemed to reflect an actual desire to put up any barriers. He viewed globalized trade as an important moral policy to help lift the world's poor out of poverty. He also pushed pretty hard against Sandel's solicitousness to endorse protectionist rhetoric. Friedman was just a waste of time.

I would be more than comfortable with a Summers treasury position.
11.5.2008 1:42pm
Calderon:
Similarly, airlines are not affected by fuel costs, or by the plain fact that they operate in an extremely competitive market, or that they've managed to turn airline travel into an ordeal. It's all the unions' fault.

Certainly not "all the unions' fault" for the airlines, but before 2002 airline union workers were considerably overpaid compared to similar occupations, and workers at the "Big Six" airlines were overpaid compared to Southwest and smaller airlines. (As an aside, being a Big Six airline pilot was far and way the best job in America -- make 6 figures with generous health and pension benefits while working 10 days a month) During and after 2002 airlines brought their costs down to more manageable levels, often through Chapter 11, but I wouldn't be surprised if they're still elevated compared to other occupations.

As for the original post, look at it this way. If Europe and the US collaborate on these kinds of arrangements, business will have increased incentives to locate in third world countries and help increase living standards there. Thus, Summers' ideas if implemented would help to bring up global living standards, surely a moral good (well, unless the first world erects higher tariffs).
11.5.2008 1:44pm
byomtov (mail):
Calderon,

You have a point, but what about since 2002? I'm not up on the details, but it does seem to me that there have been an awful lot of union concessions in recent years.

And the fact is that the airline industry is by definition a difficult one. It's very competitive, it's hard to differentiate yourself, customers are price-sensitive, costs are volatile, etc. I'm no expert on airline economics. (Is Lindgren?) So I can't claim to be very confident I know the impact of unions. Still, in competitive industries an industry-wide increase in costs tends to get passed on to customers. That will reduce volume, of course, but to blame the industry's problems largely on that seems like a stretch.

Yes, Southwest and maybe some similar operations have been successful, but the Southwest model, clever as it is, does not generalize. They can make money flying into Providence and Manchester rather than Boston, but that strategy is broadly replicable.

I note you don't address the auto industry. Do you support Lindgren's position there?
11.5.2008 2:48pm
einhverfr (mail) (www):
My view on unions is that they are sometimes a necessary evil but I would not want to work in a unionized environment.

Let's face it-- worker protections really got traction in large part because of unions, and if your workplace unionizes, this is usually because something was already rotten before.....

Happy workers don't unionize...
11.5.2008 2:52pm
James Lindgren (mail):
I certainly support the RIGHT to unionize (ie, it shouldn't be an antitrust violation to join voluntary organizations to bargain with employers), but I don't think that owners should be compelled to bargain with unions or to hire only union members.

Studies I've seen suggest that unions achieve higher wages (about 30% in some studies).

That makes firms less profitable, increases technological substitutes, and reduces jobs.

If unionization works, why have they lost so many jobs in the private sector? As AFL-CIO President Lane Kirkland once said at a talk I moderated at Chicago-Kent, "The workers didn't leave the unions, the jobs left the workers."

The 1980s and 1990s US booms were stimulated in substantial part by the weakening of unions by foreign competition. The process of the next 100 years will be the attempt of US unions to do to the world economy what they did to the US economy by the 1970s.

For the good of workers everywhere, that process should be resisted, while providing basic workplace safety and the basic right to form unions or other voluntary organizations throughout the world.
11.5.2008 3:10pm
Chimaxx (mail):
Unions are a very inefficient way of accomplishing what needs to be done. The biggest impediment to employee negotiation is the power the employer has to require employees to keep their wage rates private as a condition of employment. All wage rates and other compensation should be public. That would empower the potential employee to negotiate with the same level of knowledge that the employer has.
11.5.2008 3:11pm
Dilan Esper (mail) (www):
Studies I've seen suggest that unions achieve higher wages (about 30% in some studies). That makes firms less profitable, increases technological substitutes, and reduces jobs.

That's an ipse dixit. I don't claim to be an economist, but even my limited recall of Micro 101 tells me that your hypothesis depends on the elasticity of demand in the relevant market. And, of course, there are studies that show (for instance, with the minimum wage) that modest wage increases do not lead to that effect.
11.5.2008 4:09pm
Calderon:
You have a point, but what about since 2002? I'm not up on the details, but it does seem to me that there have been an awful lot of union concessions in recent years.

A lot of the concessionary contracts negotiated post-9/11 are coming up for renegotiation in the next couple years, so we'll see sooner or later. (The Railway Labor Act that governs airlines tends to allow for a longer negotiation process before strikes than the NLRA governing other industries, so we may be waiting until 2011 or 2012).

As far as there being an "awful lot of concessions," overreaching by unions followed by concessions during economic downturns has been typical for the industry since deregulation. Airlines profits tend to be supercyclical with the economy, and one old airline maxim is that when the economy sneezes, airlines catch a cold. Airline unions try to get as much value from the business as they can, which mean trying to get rich contracts during boom times which may need to be cut back during leaner times. As one infamous pilot negotiator is reputed to have said "We don't want to strangle the golden goose, we just want to choke it until she gives us every egg she's got." Airlines have tried to propose variable pay (pay that automatically adjusts based on airline profitability) as an alternative, but unions have always balked at this idea.

And the fact is that the airline industry is by definition a difficult one. It's very competitive, it's hard to differentiate yourself, customers are price-sensitive, costs are volatile, etc. I'm no expert on airline economics. (Is Lindgren?) So I can't claim to be very confident I know the impact of unions. Still, in competitive industries an industry-wide increase in costs tends to get passed on to customers. That will reduce volume, of course, but to blame the industry's problems largely on that seems like a stretch.

I agree with some of what you list, but disagree on other items. The price sensitivity of airline customers varies quite a bit, from families planning a vacation (very price sensitive) to the executive who books a last minute trip (not price sensitive), and the notoriously confusing airline pricing is meant to capture those differences. It used to be the case that the significant majority of airline revenues came from the latter, price-insensitive passengers, though I have to admit I don't know if that's still the case. In any event, I'm not sure there's a basis to say the average consumer is more sensitive to airline prices than prices for other goods and services.

As far as competition and differention, sure this is difficult for airlines, but I doubt it's more difficult than in other industries. What really differentiates brands of toasters, televisions, computer, or even automobiles? Airlines do differentiate themselves by their schedules and the scope of their networks.

Airlines' cost aren't really that volatile, though their revenues definitely are. The only volatile cost is fuel, which depends largely on oil prices, and when airlines are able they hedge fuel prices using derivatives tied to oil prices so make their overall economics more stable. Other costs such as airline leases, airport fees, etc. tend to be stable and similar across airlines. Labor costs thus tends to be a big cost differentiator.

Finally, users of airline services have alternatives to flying. Families looking for a vacation can drive or take the train, or decide to vacation at home. Business executives can rely on teleconferencing or other interactive computer programs. So demand for airline travel is fairly elastic, as is demonstrated whenever there's a recession and airline travel drops steeply. In other words, increases in costs -- including labor costs -- can be difficult to pass on.


I note you don't address the auto industry. Do you support Lindgren's position there?


From prior legal work, I feel (rightly or wrongly) that I have more knowledge about airline economics than most other people. I simply don't feel like I have the knowledge about auto industry economics to add value to the discussion.
11.5.2008 4:42pm
Dick King:

Happy workers don't unionize...


They might, if card check passes and is signed into law and the Teamsters can find enough 250lb organizers.

-dk
11.5.2008 8:49pm
byomtov (mail):
Calderon,

Interesting response. Thanks. The cyclical nature of the industry is yet another non-union factor that makes it a tough business.

It's certainly true that the business traveller making a last-minute trip is going to pay up, because the "don't go" alternative is not available. Still, such a traveller may well compare fares among competing carriers. He will pay a high fare relative to the leisure traveller, but still look for the best deal available on short notice.
11.5.2008 9:56pm
Calderon:
Interesting response. Thanks. The cyclical nature of the industry is yet another non-union factor that makes it a tough business.

Thanks. While it's true the hypercyclical nature of airlines would make it difficult in any event, the unions make it more difficult by having contracts that either prohibit or add extra costs to laying off workers, and of course fix wages. Pilot contracts also tend to set a minimum number of miles the airline must fly each year. In the absence of unions, airlines would be much freer to lay off people or reduce wages during bad times (and hire people back and raise wages during good times) and so would have less economic difficulties than they do now.

On the business travellers, it varies a bit depending on the company policy and circumstances. Assuming the flier isn't the business owner and so isn't paying for the trip, s/he has an incentive to look at airlines more based on schedule than cost, so long as the cost will be reimbursed. Also, while it seems like this is less common that in previous years, companies may have preferred airlines they get special deals with that personnel are required to fly (with the company getting some discount on all fares). In the short-run though, business travellers are less price sensitive than consumers for other goods (in the longer run there tends to be more sensitivity since in tight economic times many business cut travel budgets).
11.5.2008 11:34pm