Larry Summers so very smart and Larry Summers not so very smart

Larry Summers, star-crossed former president of Harvard and, more recently, head of President Obama’s National Economic Council, has written an excellent review of Thomas Piketty’s endlessly reviewed (even by me) best seller, Capital in the Twenty-First Century, praising Piketty for both his timing (publishing a massively researched book on inequality when the topic is all the rage—at least on the left side of the spectrum) and his scholarship:

Piketty’s timing may be impeccable, and his easily understandable but slightly exotic accent perfectly suited to today’s media; but make no mistake, his work richly deserves all the attention it is receiving. This is not to say, however, that all of its conclusions will stand up to scholarly criticism from his fellow economists in the short run or to the test of history in the long run. Nor is it to suggest that his policy recommendations are either realistic or close to complete as a menu for addressing inequality.

***

Piketty provides an elegant framework for making sense of a complex reality. His theorizing is bold and simple and hugely important if correct. In every area of thought, progress comes from simple abstract paradigms that guide later thinking, such as Darwin’s idea of evolution, Ricardo’s notion of comparative advantage, or Keynes’s conception of aggregate demand. Whether or not his idea ultimately proves out, Piketty makes a major contribution by putting forth a theory of natural economic evolution under capitalism. His argument is that capital or wealth grows at the rate of return to capital, a rate that normally exceeds the economic growth rate. Thus, economies will tend to have ever-increasing ratios of wealth to income, barring huge disturbances like wars and depressions. Since wealth is highly concentrated, it follows that inequality will tend to increase without bound until a policy change is introduced or some kind of catastrophe interferes with wealth accumulation.

The only problem with Piketty’s theory, summarized as “r>g” (that is, return on capital exceeds growth), says Summers, is that it is all wrong. Larry does a nice job (I think) of demolishing Piketty’s argument that the rich will keep getting richer as “rentiers” (that is, passive investors, a classic insult in the rich vocabulary of leftist Gallic opprobrium). The “new” inequality is the product of the new fortunes, based largely on computerization and a global economy, that have enabled entrepreneurs as diverse as Sam Walton, Bill Gates, and Steve Jobs to storm the heavens and amass mega-fortunes that compete favorably with even the likes of Andrew Carnegie and John D. Rockefeller.

Where Larry stumbles—or, rather, where he first stumbles—is in lamenting the new fortunes:

Think about the contrast between George Eastman, who pioneered fundamental innovations in photography, and Steve Jobs. Jobs had an immediate global market, and the immediate capacity to implement his innovations at very low cost, so he was able to capture a far larger share of their value than Eastman. Correspondingly, while Eastman’s innovations and their dissemination through the Eastman Kodak Co. provided a foundation for a prosperous middle class in Rochester for generations, no comparable impact has been created by Jobs’s innovations.

Granted, Eastman did make things cozy in Rochester, but consider the entirety of the impact of Apple: an escape from poverty for thousands in Asia, middle-class jobs for the thousands who work in Apple stores, and varying degrees of “serious money” for those who design the software, including the multitudinous apps. Is the case for the good old days really the slam-dunk that Larry implies? I don’t think so.

Despite some pretty serious neo-liberal credentials, once he’s got the bit between his teeth, Summers sounds more than a little bit Luddite:

Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes. It will be the devastating consequences of robots, 3-D printing, artificial intelligence, and the like for those who perform routine tasks. Already there are more American men on disability insurance than doing production work in manufacturing. And the trends are all in the wrong direction, particularly for the less skilled, as the capacity of capital embodying artificial intelligence to replace white-collar as well as blue-collar work will increase rapidly in the years ahead.

I think a guy as smart as Summers should do better than this. What he’s describing is nothing more or less than the continuation of the Industrial Revolution, which is the only reason why we aren’t still living in the landlord/peasant class society that defined “civilization” all around the world for thousands of years, when 90 percent of the population lived a life defined by deprivation and toil—not only nasty, brutish, and short, but nastier, more brutish, and shorter than that endured by hunter/gatherer “savages.”

It’s particularly unimpressive that Summers, like so many liberals, continues to romanticize those wonderful “good” jobs in manufacturing. The only “good” thing about standing at a GM assembly line for eight hours a day is that you were paid “monopoly” wages extracted from the company by the UAW and passed on to the hapless consumer, who had no recourse. Making cappuccinos for a living may not be as “manly” as wielding a wrench, but if the pay is better, the job is better.

But this isn’t the worst of Larry’s sins. The worst is when he goes total Acela liberal on our asses and complains about Kennedy Airport:

Look at Kennedy airport. It is an embarrassment as an entry point to the leading city in the leading country in the world. The wealthiest, by flying privately, largely escape its depredations. Fixing it would employ substantial numbers of people who work with their hands and provide a significant stimulus to employment and growth. As I’ve written previously, if a moment when the United States can borrow at lower than 3 percent in a currency we print ourselves, and when the unemployment rate for construction workers hovers above 10 percent, is not the right moment to do it, when will that moment come?

Look at Kennedy, Larry? How about LaGuardia and Newark? They might like a piece of that cash that you want to pass out to JFK. And how about Dulles, Reagan National, and BWI, the three airports that service Washington, DC? And how about Logan Field in Boston, a city that might fancy itself to be the intellectual capital, not of the leading country in the world, but of the entire world? What about Miami, or Atlanta, or Dallas-Fort Worth, or Houston? Not to mention LAX and San Francisco?

The point is, the U.S. is not a European country, with a single capital city that is the seat of all power. We are not ruled by an elite that erects grand monuments to itself in the name of “the people.” Perhaps JFK is an embarrassment. But it’s not nearly embarrassing as that economic catastrophe called the “euro,” foisted upon the hapless masses by a self-aggrandizing elite blinded by the fantasy of a United States of Europe that could “stand up” to Uncle Sam and recover the intellectual and cultural leadership that Europe lost long ago. The U.S. is middle class, Larry. You and your la-di-da friends can’t sit around the faculty lounge at Harvard and tell the rest of us what to do. Get over it and get over yourself.

OK, so Larry sins. We all do. Read the article. You’ll learn a lot.