Every January, the public is treated to tales of the World Economic Forum, a gathering of the world's rich and a selected few who are invited there to educate and/or entertain them. Most of us will never have the honour of getting on the inside, so we must rely on media accounts to give us the picture. It turns out that these accounts might be more informative than intended.
Reuters reported on a talk given by Clinton Treasury Secretary and former Obama National Economic Adviser Larry Summers. According to the Reuters account, 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 segment is so striking because it is completely wrong in a very big way. Wages and productivity had started to diverge sharply in the early 1980s. By 1993, there was already a lively debate in the economic profession as to its causes. The existence of a large gap between productivity and the wage of a typical worker was not in dispute.
The trade deficit in 1993 was less than 1.0 percent of GDP. It had fallen from a peak of more than 3.0 percent of GDP in 1987. Clearly there was no trade deficit crisis at the time that needed to be addressed. By contrast, Clinton's policy went the wrong way on this one. The trade deficit had expanded to more than 4.0 percent of GDP by the time President Clinton left office in 2000.
Nor was the cost of capital especially high. In January 1993, the interest rate on 10-year Treasury bonds was 6.6 percent; with an inflation rate of 3.0-3.5 percent, this implied a real interest rate of 3.1- 3.6 percent. While this is perhaps somewhat higher than would be desired, it is not very different than real interest rates throughout the Clinton years.
In short, every part of what Summers said was not true, and he surely knew that what he was saying was not true. Summers is a very knowledgeable economist who has been in the middle of the major economic debates over the last two decades. It is inconceivable that he doesn't know such basic facts about the US economy.
This raises the question of why he would deliberately concoct a story that is 180 degrees at odds with reality. He obviously was telling his audience what he assumed they wanted to hear.
This puts the discussions in Davos in an interesting light. Here we have one of the most prominent economists in the world making up a fantasy story to pass along to the rich and powerful. The other economists present must have just implicitly consented to ignore the nonsense, since these are facts well-known to anyone who follows policy debates. The reporters who were present acted as stenographers, dutifully copying down Summers' assertions as though they were pearls of wisdom.
Summers is presumably not the only “expert” who crafts a message to please the sponsors. When it comes to public education, there are surely many Michelle Rhee types who tout the virtues of charter schools and privatisation in spite of two decades of failure. And there are probably an endless array of top experts who tout Bill Gates' efforts to use patent-financed drug research to improve healthcare for the world's poor in spite of the vast body of evidence that industry-funded research is a cesspool of corruption.
If we can take Summers' tales as representative of the dialogue at Davos, we have elite academics fabricating stories that they think appeal to the interests of the elites of the business world. These elites can then walk away thinking that they are doing good in the world no matter how destructive the policies they are pursuing may actually be.
This outcome may not be entirely bad. If one has little hope that most of the elite-types at Davos would ever care about anything other than preserving and expanding their wealth and power, then the fact that policy wonks like Summers are spinning them nonsense probably doesn't matter much. In fact, getting these people racing down the wrong track may actually be a positive for those who would like to see major change. Of course, anyone who has hopes that folks like Bill Gates may actually do something to advance humanity may be disappointed to find out that he is listening to people who are spewing nonsense.
Whatever the motives of the Davos rich, Summers' spiel, and the fact that it did not arouse protests for its radical departure from reality, is informative. When it comes to their understanding of the world, the rich of the world are flying blind.
Dean Baker is a US macroeconomist and co-founder of the Centre for Economic and Policy Research.