In July 1998, Larry Summers appeared before a Senate committee to argue that a financial product, called an over-the-counter (OTC) derivative, did not need to be regulated. He said that there were only two potential reasons for financial regulation—“to protect retail investors from unscrupulous traders” and “to guard against manipulation in markets”—neither of which, Summers concluded, were applicable to OTC derivatives. Summers, who served as Treasury secretary from 1999 to 2001, eventually won the battle over derivatives regulation.
Those derivatives, of course, were at the heart of the 2007/2008 financial crisis.
In a recent interview, Summers noted the context of his comments made in the 1990s is very different from present one. “I think the derivative instruments, like credit default swaps, that became the most important sources of systemic risk either didn't exist or existed only to a negligible extent at the time I gave that testimony,” Summers said after I read him back his past testimony on OTC derivatives. “But it certainly would have been much better to have foresight about the kinds of instruments that would evolve.” He argues that many regulatory policies he recommended in the 1990s went unheeded, on the dangers “of predatory lending and a variety of mortgage-lending practices”; of “the under-capitalized government sponsored-enterprises” like Freddie Mac and Fannie Mae; and the “illiquidity and excess leverage” of certain financial institutions. “Generally speaking, the set of measures put in place in Dodd-Frank,” he added, referring to the 2010 regulatory reform law, “it would have been better if the need for those measures had been anticipated before the crisis rather than after the crisis.”
That’s not quite a mea culpa. But comparing that language to his comments in the 1990s is instructive of how Summers’s thinking on financial regulation has evolved in the wake of the Great Recession.
Yet, that evolution is not limited to Summers nor to the issue of financial regulation. Skyrocketing inequality and the worst financial crisis since the Great Depression have led many economists, particularly those on the center-left, to rethink their positions. These days, they are sounding a lot like the progressive economists circa 1996. And this change has not gone unnoticed. In interviews with nearly two dozen left-leaning economists, many of whom were involved in the past two Democratic administrations, there is widespread agreement that the policy differences between center-left and progressive economists have narrowed.
“There definitely has been a pretty strong convergence,” New York Times columnist Paul Krugman said. “You can see that there really has been a coalescing among liberal economists.”
What has caused this convergence? The main answer among the economists I spoke with was that the financial crisis, stagnant wages and rising inequality have caused economists to reassess their beliefs. “Certainly,” Summers said, “I would hope any rational observer of the economy would have their views evolve over this 20 year period.” Others suggested that politics could be at play, although they were careful not to impugn the motives of any of their colleagues. “I don't want to talk to that,” said Alan Blinder, a Princeton economist who served on the Council of Economic Advisers (CEA) under Bill Clinton. “The answer is ‘Yes,’ but I don't want to talk to that.”
Moreover, many progressive economists noted that the differences between the center-left and left have not disappeared. That is evidenced by their policy positions and by reports issued by different think tanks.
And those differences have important implications for Hillary Clinton’s campaign and, potentially, her administration. Will she pursue trade deals like the Trans Pacific Partnership, which is loathed by unions and progressive economists? Is she satisfied that Dodd-Frank can prevent the financial system from imploding again? More importantly, what if the economic problems of today aren’t the problems of tomorrow? The battles between center-left and progressive economists that defined much of Bill Clinton’s White House—and have largely been absent from Barack Obama’s White House—might just be ready to make a comeback.
After the financial crisis, it was hard to find any economist, on the left or right, who still believed that the financial industry was capable of effectively regulating itself. Even former Federal Reserve Chair Alan Greenspan, one of the godfathers of that school of thought, admitted he was wrong. So it’s no surprise that center-left economists like Summers now support greater financial regulation.
Said Blinder: “The financial crisis that we all lived through in one way or another probably pushed almost everybody—certainly everybody that was left of center—in a more regulatory direction. The whole spectrum moved.”
But as Blinder pointed out, the spectrum is still wide. Some center-left economists believe that Dodd-Frank is nearly strong enough to protect the financial system from another crisis. For instance, Martin Baily, who was Council of Economic Advisers chair from 1999 to 2001 and currently is a senior fellow at the Brookings Institute, supported the repeal of a section of Dodd-Frank through a must-pass budget bill in December, a proposition that Massachusetts Democrat Elizabeth Warren railed against, unsuccessfully, on the Senate floor.
On this issue, Summers sides with the progressives. In January, he co-authored a report for the Center for American Progress on ensuring more Americans benefit from a stronger, 21st century economy. He criticized Congress for the backdoor way of chipping away at Dodd-Frank, saying it “must not become a precedent.” Elsewhere in the 166-page report, he calls for stronger regulation of the shadow-banking system, for regulators to demand admissions of guilt in settlements with the government, and a review of capital and liquidity requirements at major banks. But financial stability is not a focal point. For instance, Summers mentions too-big-to-fail banks just twice—on pages 91 and 92.
Compare that to a recently released report by the Roosevelt Institute’s Joseph Stiglitz, who was the CEA chair from 1995 through 1997. Stiglitz calls for some of the same policies as Summers: higher capital requirements, stronger regulation of the shadow banking system, and stricter penalties on those that break the law. But reforming the financial system is a clear focus of the report. “The Dodd-Frank Act was an excellent start, but the legislation did not change the structure of the dysfunctional system,” Stiglitz writes. He calls for enacting a financial transactions tax and breaking up any banks that cannot produce a “living will” that shows regulators how it can wind itself in bankruptcy.
When I asked Summers about those two proposals, he didn’t sound that much different than Stigltiz. “No institution should be permitted to continue to function if it's incapable of preparing a resolution procedure in case it fails,” he said, although he believed that was already the case under Dodd-Frank. As for a financial transactions tax, Summers worried about potential evasion and implementation difficulties citing Europe’s experience but was open to consideration of the idea.
Still, in reading the reports, you get the sense that financial stability and reforming Dodd-Frank is of higher importance to Stiglitz than Summers, who emphasizes his secular stagnation thesis.
“You look at the structure of the document and you look at what [CAP] emphasizes and you look at what Elizabeth Warren emphasizes when she talks about priorities,” Simon Johnson, an MIT economist, said. “For her, the financial crisis's causes and consequences are at the beginning of that, not on page 92. That tells you something about priorities.”
In the 1990s, Democratic economists, especially those in the Clinton administration, were largely not paying attention to income inequality. Wages were rising, after all. Even if inequality was widening, it didn’t seem like a big deal. But it’s impossible to deny the fact now that income inequality has increased dramatically and wages haven’t grown for the past 15 years, and economists have reacted accordingly.
“Most of the centrist economists wing of the Democratic Party are definitely espousing the view that income inequality has become a serious issue and that it’s worthy of discussion rather than [saying] let’s not talk about that,” said Austan Goolsbee, an economist at the University of Chicago who was the CEA chair from 2010 to 2011.
Yet, while the left and center-left now agree that inequality is both rising and something to worry about, they still disagree about its causes and what to do about it. “I think remarkably over the past year and half, there’s been a convergence that skill-biased technological change doesn’t do much to help explain the [increase in inequality during the] 2000s,” said Larry Mishel, the president of the Economic Policy Institute, a progressive economic think tank. “This really burst into the public sphere by Larry Summers calling educational upgrading essentially an evasion of the key issues.” But when I asked Jason Furman, the current CEA chair, about Mishel’s argument, he wasn’t convinced. “I personally think the rise in inequality has been large enough that there’s room for a lot of explanations without them having to compete with each other.”
Despite those differences, income inequality is a far larger part of the national discourse, on both the right and left, than it was in the ‘90s. “There’s a shared understanding that the central economic problem we face is raising wages for middle class families and expanding mobility for people to get into the middle class and to rise,” Furman said.
The question lurking behind this convergence is why it has happened. Just about everyone I spoke with pointed to the events of the past 15 years. The financial crisis and wage stagnation unquestionably caused nearly every economist to rethink the role of the financial system in the economy.
“If there had been much more inequality in the '90s, I think I would have had different views in the 1990s,” Summers said. “If there'd been an important financial accident on the same scale as what we saw, one would have had a different view in the 1990s.”
But some economists suggested a different reason: politics. “I think a lot is politics,” said Dean Baker, the co-founder of the Center for Economic and Policy Priorities. “I guess we’ll just have to see going forward.” Yet, they universally refused to name names. “God knows,” said Krugman. “Politics motivates people even when they themselves think it doesn't.”
When I suggested Summers might have moved leftward after progressive Democrats killed his bid to succeed Ben Bernanke as chair of the Federal Reserve (Janet Yellen got the job instead), many liberals were unconvinced. “I don't know that it's an evolution based on politics or trying to make an impression with any one type of person or another. It's generally not the way he rolls,” said Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities and the former chief economist to Vice President Joe Biden. “He pretty much calls things like he sees them.”
Summers denies that politics has ever influenced his positions. “I've said what I think all along,” he said. “I think if you look at things that I've said and wrote about inequality or you read the speeches I gave about financial regulation in the administration, my views have been pretty consistent through time, responding to events.” That’s true. Summers was one of the first to call for fiscal stimulus, was focused on inequality before the crisis and attacked financial regulators for not forcing capital raises during 2008. And throughout his time as head of the National Economic Council, he made numerous speeches in support of stronger financial regulation.
Still, multiple economists hinted to me off-the-record that they’ve wondered that themselves. Conservatives economists weren’t quite as hesitant. “Someone like Larry Summers is taking on more liberal positions than he did historically,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and now the president of the American-Action Forum. “He’s a living example of migration. You’d have to ask him why. I can’t speak for him but his positions have shifted.”
Is Summers interested in a position in a potential Hillary Clinton administration? People close to him insist he’s not. And he told me, “I've got no official role in her campaign.” At age 60, Summers is still relatively young and just a few years ago he was eager to lead the Federal Reserve. He may not want a White House position now. But I’m sure he isn’t interested in closing any doors.
What Hillary Clinton’s economic team looks like will say a lot about the economic policies she intends to pursue as president. (Her campaign didn’t respond to a request for comment.) To some extent, that matters less than it sounds. After all, Republicans are all but certain to control the House until at least 2020. Given that, Congress is unlikely to pass major pieces of economic legislation in her first term.
Still, the president is the leader of the party and shapes the national dialogue. If she becomes president, Hillary would also staff regulators and nominate members to the Federal Reserve. She’ll release a budget each year and negotiate deals with Republicans on must-pass spending bills. The president’s control over the economy may be vastly overrated but it’s not non-existent.
If the recent convergence between center-left and left economists is part of a long-term trend, then disagreements among liberal economists are likely to be small, at least compared with those in the 1990s. But the opposite may be more likely to occur. If growth picks up, the labor market tightens and wages rise, we could see a reversal of this convergence. Center-left economists may become increasingly concerned with the long-term debt and insist on raising interest rates to prevent inflation. Progressive may try to keep income inequality a topic in the national conversation and worry that the financial system is still unstable. After eight years of relative agreement during the Obama presidency, those disagreements could reemerge as another Clinton moves into the White House.
“As we are slowly coming out of our doldrums, yes, I sort of predict they’ll be fighting about that again,” Goolsbee said. “Once we're back to a fact pattern where low aggregate demand is almost certainly not the thing that's driving the sluggishness, then I think they'll go back to arguing.”