Larry Summers’ Fluffy Piece On Demonetisation Fails To Convince

Larry Summers’ Fluffy Piece On Demonetisation Fails To Convince (Photo: Monika Flueckiger)
  • Even though he presents no hard evidence for his assertions, Larry Summers doesn’t shy away from making them nonetheless, writes Rupa Subramanya

India, where slavish adherence to authority and credentials seems to be hardwired more than sifting arguments and evidence, it’s not surprising that a throw away blog post co-written by celebrity economist Larry Summers and Natasha Sarin has received so much play.

Normally, a 140 character tweet should be enough to respond to this fluff but in India anything said by a celebrity is taken seriously, like the pronouncement of an oracle.

Let’s take the first two paragraphs which are introductory and tell us nothing new except the authors were surprised like everyone else by Modi’s announcement to demonetise Rs. 500 and Rs 1000 notes on November 8. The next six paragraphs follow which contain their argument, if you can call it that.

So what are you telling us we didn’t know, Larry and Natasha?

First, you point out that high value notes are in common use in India. Yes thanks Larry and Natasha, we in India knew that already given that the old notes represented 86 per cent of the value of currency in circulation at the time of demonetisation. But perhaps your American readers will have learned something new when you tell them Rs 500 notes are used widely in India.

Second, you tell us this is not demonetisation but a currency swap of old notes for news notes. Again we already knew this but then  you add gratuitous “facts” that small and medium sized merchants have seen their shops deserted. While this was reported in the immediate aftermath after demonetisation, it’s no longer widely the case. Business is gradually getting back to normal, so your facts are out of date.

Third, you tell us that many people who hold large amounts of cash came by this in corrupt or illegal ways. This is a powerful insight from a former US Treasury Secretary and we in India would never have figured this out otherwise if not for this blog post.

Fourth, you make a dubious normative judgment when you assert a free society would rather let several criminals go free than convict an innocent man. As it happens “different societies” make different choices. So in the country in which you live, many states have capital punishment because they prefer the deterrent and punitive value of capital punishment over the prospect of a few innocent people being put to death. Meanwhile, other free societies such as Canada don’t have capital punishment for the reasons you hold. The basic point is, well meaning people will come to a different assessment of the trade off you imply.

You further confuse your argument by asserting that what is illegal or corrupt is open to debate.

I doubt very much you, Larry, would have made such an argument when you were Treasury Secretary. But abiding by the law applies in civilised countries like the US but should be ignored in poor countries like India, right?  Would you have said as Treasury Secretary that US tax laws are complex so illegality or tax evasion should be a matter of debate? I don’t think so.

Fifth, you tell us you strongly suspect a lot of black money has been laundered into property, foreign exchange, gold etc. Again we needed the penetrating insight of the nephew of two Nobel economists to tell us this since we had no idea.

Sixth, we also were clueless about the fact that a one time currency swap does not fix the long-term roots of corruption. Except for the fact that many including this author and others have repeatedly pointed that out in saying that the currency swap is not a magic bullet but a one time tax on black money. And further reforms need to follow in order to tackle the sources of black money.

But the most egregious is your conclusion where you let the cat out of the bag that you’ve already prejudged what you’re going to say by asserting you were never enthusiastic about demonetising high value notes. It’s not surprising therefore that you don’t favour India’s move.

But the truly most egregious is the last sentence where you assert without evidence there is “ongoing chaos” in India and this has resulted in a loss of “trust” in the government. Let’s parse both claims.

Given that life is gradually returning to normal, “ongoing chaos” is an exaggeration, at best. While the temporary liquidity crunch is affecting markets which have been historically cash-based, the introduction of the new 500 and 2000 rupee notes, and the switch away from cash toward electronic payments, suggests we are on the path toward a return to normalcy, even if the situation is not yet fully back to normal. This is a far cry from “ongoing chaos”.

However, given that this is still an unfolding event, and given how treacherous it is to generalize from a few anecdotal accounts in newspapers and from speaking to people on the ground, I would hesitate making a sweeping assertion. This seems to be no problem for you, however.

Even more problematic, you provide absolutely no evidence of a loss in trust in the government. This is a fact free judgment like your claim, Larry, that hate crimes have spiked since Donald Trump’s victory. Here are two blog posts (first, second) that debunk this fact free claim of a spike in hate crimes.

If you’ve seen opinion polls which suggest a drop in trust for Prime Minister Narendra Modi and his government, you should share them with us as I’ve just shared information debunking your view that hate crimes have spiked in the US. Now this truly would be new information to your Indian readers. Otherwise we only have your word on it from your perch in Harvard Square.

But of course I’m not a world famous economist, all I can do is sift facts and arguments to see if they make sense. By that score, your fluffy piece failed to convince.

Post-script: As it happens, shortly after this piece was published, C-Voter came out with a survey suggesting a large majority of Indians support Prime Minister’s Narendra Modi’s currency swap. As reported here, 1,212 were surveyed across 252 parliamentary constituencies. About 87 per cent of respondents felt that the currency swap was harming those with black money and 85 per cent felt that the temporary hardship was worth it. Furthermore, given much touted implementation glitches, more than 66 percent thought this was both a good step and well-implemented. So over to you Larry and Natasha.

Rupa Subramanya is an independent commentator and economist based in Mumbai. Follow her @rupasubramanya .


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