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Summers Was ... Surprisingly Good

Larry Summers, known mostly for his mastery of economics arcana, turns out to be a pretty effective public spokesman, too. On "Meet the Press" just now, he was not only crisp and persuasive on fiscal policy--David Gregory harped on the upper-income Bush tax cuts that are slated to expire next year (dwelling on the GOP concern about "raising taxes in a recession") and Summers calmly dispatched it with a discussion of how a.) we have to priotize given our crushing long-term deficits, and b.) unlike low and middle-income people, rich people don't tend to spend their tax cuts, so they don't actually help the economy much. But he also managed to emote. When asked about a Washington Post editorial criticizing the stimulus plan for its wasteful spending, Summers went on a riff about all the cops who'd be laid off without the spending and what a shame it would be if students couldn't go to school or parents had to sell their homes to pay for their kids' education. "I used to be a college president" he reminded Gregory, with a slight hitch in his voice. Who knew he had it in him?

Update: One of the more revealing exchanges revolved around the banks. Gregory asked if the $350 billion from the second installment of TARP would be enough to fix them. Summers implicitly conceded it wouldn't, saying it would be a down payment of sorts. But Gregory never raised the issue of nationalization, which is increasingly the mainstream solution of choice among economists. From the perspective of the White House, the problem is that really fixing the banks is going to cost some $3-4 trillion, which they obviously don't want to spend if possible. If you nationalize the banks, the shareholders have to fork over a chunk of that, which makes it a lot cheaper (though still expensive). On the other hand, you have to, you know, nationalize the banks, which is the kind of thing a lot of people would fulminate against. (Though maybe less than you think.)

This was a bit of a missed opportunity for Gregory. From what I understand, Summers isn't keen on nationalization. But if you're not keen on nationalization, you really are looking at a several-trillion dollar project. Gregory needed to press on this.

For what it's worth, Matt Yglesias very nicely distills the issue in this post:

[I]n the TARP I scheme, the “toxic assets” come “off the books” of privately-held banks because the government just agrees to overpay for the assets. This leaves the shareholders owning a good bank and the government owning a bad bank. The government then gets to sell off the bad bank’s assets eventually. In a nationalization scheme, the government takes ownership of the entire bank and then splits it into a “good” bank and a “bad” bank. The good bank is then re-privatized (getting the taxpayers some money) and the government then gets to sell off the bad bank’s assets eventually.

In terms of the broader economic logic—the diagnosis of what’s wrong with the economy and what’s needed to fix it—these are similar ideas. But in terms of the implications for the owners of equity in financial service firms, the implications are very different. And in terms of the implications for middle class taxpayers, the implications are very different. The joke part of it is that the “capitalist” way involves huge government subsidies to rich people, whereas the “socialist” way involves people who made bad business decisions suffering losses.

--Noam Scheiber