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Home Publications Blogs Beat the Press Larry Summers Says the Clinton Administration Didn't Have Access to Government Economic Data

Larry Summers Says the Clinton Administration Didn't Have Access to Government Economic Data

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Saturday, 26 January 2013 23:26

Okay, that is not exactly what he said, but if Chrystia Freeland's account of Summers' comments at Davos is to be believed Summers is badly misinformed about the state of the U.S. economy in 1993, when he was one of the top advisers in the Clinton administration. According to Freeland Summers said:

"In 1993, here’s what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right."

This is not what the data say. Here's the story on real wages and productivity.

real-wages-prod-2013-01

Source: Bureau of Labor Statistics.

There are some measurement issues that would reduce the gap somewhat, but anyone who could see these two as laying "on top of each other" needs some new glasses. The sharp divergence between productivity and wages began in the 1980s. It would be really scary if Larry Summers, Robert Rubin and the rest did not know this in 1993.

The other parts of Summers' story are also wrong. The trade deficit was less than 1.0 percent of GDP in 1993. By comparison it was almost 4.0 percent of GDP when Clinton left office in 2000. The interest rate on ten-year Treasury bonds was 6.6 percent in January of 1993. Coupled with an inflation rate of around 3.0-3.5 percent, this gave a real interest rate in the neighborhood of 3.1-3.6 percent. This is perhaps a bit higher than desirable, but actually not much different than what we saw through most of the Clinton years.

In short, Summers is describing a history that does not exist. He either has a very poor memory or is just making things up.

Comments (16)Add Comment
...
written by Union Member, January 26, 2013 11:56

But by seeing these two diverging lines in the year 2013 as on top of one another - before such an Austerity Chic crowd as Davos - could suggest to the Meritocracy that the only fair thing to do is to cut - I mean - change Social Security.
Be fair to Larry
written by wkj, January 27, 2013 5:38
That was 20 years ago with simpler graphics. What he must have meant was that the productivity curve was printed on a film overlay so you put it on top of the wage growth curve sheet to make your comparison.
...
written by Chris Engel, January 27, 2013 5:45
It would be really scary if Larry Summers, Robert Rubin and the rest did not know this in 1993.


Scary, yes. But would it really surprise you given their policy choices through the 90's?
...
written by Kat, January 27, 2013 7:59
Why would it be a bad thing for the average wages and productivity lines to lay on top of each other? Isn't that what Summers was implying?
the use of actual numbers
written by Jennifer, January 27, 2013 9:09
The trade deficit was less than 1.0 percent of GDP in 1993. By comparison it was almost 4.0 percent of GDP when Clinton left office in 2000.
I like to think I was following things closely then but that number is really striking. I would have thought at the time the gap was a lot higher and would have not appreciated the change--it really demonstrates the damage of NAFTA and other Clinton-era economic policies. Of course at the time I didn't have a strong grasp of what the trade deficit really was either. As Dean as pointed out Clinton gets a lot of love from everybody for the supposedly strong economy he presided over but it was really just froth.
...
written by skeptonomist, January 27, 2013 9:15
Summers is obviously delusional about both the points (if not lying), but the one about wages was shared in some contexts by many economists. As I have often pointed out, real wages started falling drastically before 1970 (not around 1980):

http://www.skeptometrics.org/Earnings_GDP_1860.png

and since then have not come anywhere near keeping up with either GDP or productivity (which also has increased steadily). Despite this, Dean Baker was maintaining that wages generally keep pace with inflation until very recently. I hope that this post indicates that he realizes that this is not at all true.

This is a very, very important point because of the way many economists still think of inflation as caused by wage demands. The reality is that nominal wages almost always fall behind inflation, except during major wars. The relationships among inflation, nominal wages and real wages were discussed at some length by Keynes (e.g. General Theory, Ch. 2) and his observations have generally been confirmed.
...
written by skeptonomist, January 27, 2013 9:23
Here is a plot of growth of real wages (production workers) and prices:

http://www.skeptometrics.org/Wages-Inflation.png

Summers may have been talking about Total Factor Productivity, a more derivative measure than the usual one, which did apparently grow slowly before 1993.
bend the knee to Greenspan and the bond markets
written by Peter K., January 27, 2013 9:50
Clinton bent the knee to Greenspan and the bond markets. Greenspan kept rates low at the end of the decade because he was fighting international financial crises.
...
written by liberal, January 27, 2013 8:06
skeptonomist wrote,
The relationships among inflation, nominal wages and real wages were discussed at some length by Keynes (e.g. General Theory, Ch. 2) and his observations have generally been confirmed.


What's the take home line about Keynes claims about the relationship between these quantities?
...
written by skeptonomist, January 28, 2013 8:30
liberal: Keynes had a lot to say about how wages are set, in Ch. 2 and elsewhere, but the main point in this context is that labor's demands are for nominal or "money" wages, not real wages; and that this tends to lead to reduction in real wages through inflation. And this is what happened during the period of high inflation in the 70's and 80's - real wages declined severely - this was absolutely not prevented by COLA's. This was the main reason that wages were declining even into the 80's, while GDP and productivity increased - as Dean showed and contrary to what Summers seemed to be claiming. This decline in real wages is totally incompatible with the idea that wage demands were responsible for inflation at that time, or in general.

Other factors are also involved in the stagnation of wages, but these came into play mostly after the 70's, which is when real wages actually declined.
...
written by watermelonpunch, January 28, 2013 8:41
@ Kat: I was about to ask the same question!

@ Jennifer:
it really demonstrates the damage of NAFTA and other Clinton-era economic policies. Of course at the time I didn't have a strong grasp of what the trade deficit really was either.

You're not alone, I understood just enough to be vaguely worried about those things, but never imagined how pertinent they might be.

@ skeptono
The relationships among inflation, nominal wages and real wages were discussed at some length by Keynes (e.g. General Theory, Ch. 2) and his observations have generally been confirmed.

If this is not a book I can get at my library (and it seems it is not)... Where else can I find an explanation of the referred to relationship? (preferably in English - the type of English non-economists speak)
...
written by Steve Hamlin, January 28, 2013 9:08
@Kat, @watermelonpunch: Kat wrote "Why would it be a bad thing for the average wages and productivity lines to lay on top of each other? Isn't that what Summers was implying"

It wouldn't be a bad thing, it would be a good thing: productivity increases would be reflected in increasing real wages earned by those productivity-increasing workers.

The problem is, as Dean points out, is that those graphs DIDN'T line up, and Summers claimed that they did.

Productivity increases were NOT being reflected in increased real wages, meaning that the benefit of productivity increase was being captured by capital, with little of those gains flowing to labor. Summers then crafted policies based on this error, which didn't try to reverse that sorry state of affairs, but rather (arguably) exacerbated them.

Exec_Summary: Summers misread as good news, the actual bad news about real wage growth, and created policies that increased that problem.
skepto nails it....
written by pete, January 28, 2013 10:22
The reason Krugman and I guess Romer want 4% inflation is exactly the same as Keynes, to increase employment by lowering real wages. Somehow in the 50s and 60s people began to equate Keynes with liberalism. I suspect that it is the reliance on irrational behavior, which the Chicago school generally assumes away. Since Chicago, generally considered "conservative," ranted on Keynes, then the liberals took the political opposite, defending Keynes. Amazingly, even unions adopted this stance. Marx of course warned against loose monetary policy, knowing as Austrians do that capital will suck up the short term rents from inflation.

...
written by watermelonpunch, January 28, 2013 8:58
@ pete & Steve Hamlin
In some kind of sensible thinking, I would've assumed any idea on how the economy works is not a political leaning in itself. I would've assumed that what one believes should be done, and for what effect, would be what defines their political stand.
But that doesn't seem to work that way. And that seems to lead to confusion, and suspicion.
...
written by MC, January 29, 2013 6:47
The Keynes text is in public domain -- if you want to read it, try:
http://ebooks.adelaide.edu.au/...ard/k44g/
Carefull with "normalized" charts
written by Attitude_Check, January 30, 2013 2:55
How does a similar chart look if the baseline data is 1970 or 1960? Does the divergence grow or shrink?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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