## Friday, July 22, 2011 ... //

### Larry Summers on two as*holes, growth, tech bubbles

I found this 35-minute debate with Larry Summers at Fortune's Brainstorm Tech conference entertaining and thought-provoking.

At the beginning, he has to clarify whether it's true that he treated the Winklevoss twins (who have claimed that they invented Facebook and the idea was stolen) in the way presented in the Social Network movie. So of course, it is true: the movie was accurate in these segments.

It was also accurate when it comes to Larry's complete inability to predict that Facebook as a company could actually become valuable.

He clarifies that as a college president, you learn that if two undergrads wear a suit and tie on Thursday 3 p.m., they're either coming from a job interview or they're assholes. The brothers are an example of the second option. ;-)

Incredibly enough, the two twins immediately wrote a complaint to the current Harvard president Drew Gilpin Faust. Their e-mail says:

Hi Faust,

we and our third black twin and ex-classmate, Divya Narendra, are so nice and ethical that we are writing to you to ask you to cause trouble to your employee Summers. We believe you could help us because you got to your job in a similar way as we got to our $64 million in settlements - and as we hope, the figure will keep on growing. During a recent meeting, he has offended not only us but also all other assholes among the Harvard undergraduates who try to get an advantage over their classmates (and to bring trouble to their classmates) by wearing a suit, a tie, and by trying to lick assholes of important officials during the office hours. We were born with the ties and the suits so it is a case of racism directed against all Tie Americans for Summers to judge our character based on our appearance and attire. So we ask you to sc**w Summers for his great betrayal just like we asked him to sc**w Zuckerberg a few years ago. Cordially Yours Two twin assholes and their friend I can't believe this self-parody. How big an asshole you have to be to act as a fucking whining feminist "discriminated against" bitch trying to secretly hurt others behind the scenes if you have received$64 million just for having met a top businessman in the current IT world a few times. Under those conditions, you must be a true victim, mustn't you?

Shouldn't they be satisfied with the money they have received? And if they want to earn more than $64 million, shouldn't they actually try to do something useful instead of asking multiple Harvard presidents to sc**w people whom these assholes incorrectly consider to be the obstacles from an even greater wealth? At most, these two guys were doing something remotely similar to a social network that thousands of other people in the world had (we've spent hundreds of hours on a Bulletin Board Service in the early 1990s, it wasn't that different). The unprecedented success of Facebook was partly due to the favorable Harvard environment but mostly due to the exceptional work discipline and management skills and programming skills of Mark Zuckerberg. I would still think that Facebook is overvalued, and its importance may even diminish rather soon because of Google+ etc. But it's a result of some genuine work that has nothing to do with the Winklevoss brothers. It just seems crazy to me that those people who haven't really done anything are not satisfied with a$64 million settlement. And their methods are pathetic. It's like the people during the Nazi era who were jealous about their neighbors so they teamed up with Gestapo to hurt the neighbors. The Winklevoss brothers are not Tie Americans deserving a protection: they are assholes deserving to be kicked into themselves in a recursive fashion.

Debt default

Summers also says that no responsible adult person would be ready to solve a disagreement by bringing the U.S. to the state of default. I mostly agree with that except that I don't think that a possible default would be mostly the Republicans' fault. It would be mostly Obama's fault.

The debt ceiling is simply a law and it is irresponsible for a president or any other manager to "assume" that the law will cease to apply at some moment. It doesn't have to. The existing laws are the default state of affairs. So if Obama is not capable to deal with the situation assuming the (unlikely) scenario that the ceiling is not raised, the default will mostly be his fault.

When asked about the key sources of new jobs in coming decades, Summers chooses healthcare and education. Well, I think it's a very problematic description of a "bulk of the economical growth". He says that even poor families possess a TV set these days but what they can't afford are the services like healthcare and education which is why the growth in those sectors may be significant.

It may sound convincing but he completely fails to address the other part of the story. The poor people are exactly those who won't be able to work in rather fancy sectors such as healthcare and education. The poorest people - who can't afford the healthcare themselves - are usually not university teachers or surgeons. The real question is what these people will be doing in the future.

Neither healthcare nor education are the primary generators of wealth. This sentence is not meant to say that education is irrelevant in the future production of wealth; but it does say that the actual mechanism how the wealth is ultimately generated can't be healthcare and education themselves. The people must be doing something else, something material at the very end.

Healthcare and education is something that people can pay for if they actually have the money to pay for it - but they must earn the money in different ways. In particular, America as a nation couldn't operate if all people were doctors or teachers because would be hungry and couldn't get to work, among many other, economically more important things. ;-)

Moreover, America's doctors and teachers are only overpaid relatively to their colleagues in many other countries because America is producing lots of wealth in other sectors of the industry, so the people have lots of money to spend for healthcare and for education. But there's no guarantee that the bulk of the U.S. teachers or doctors would actually be competitive relatively to their foreign colleagues. Most of them probably wouldn't be. From a purely economic perspective, having overpaid university teachers or doctors relatively to the incomes in other countries is a sure sign of a bubble.

So I think that by discussing these "secondary" sectors - sectors naturally paid from the public budgets and/or from "money for luxury" that all citizens may separate - Summers has de facto failed to describe what he thinks will be the "primary" generators of wealth in the future.

Technological bubble

Summers repeats the cliche that "it's different this time" is a dangerous proposition when it comes to the production of ever new bubbles. The current situation may always be analogous to the previous pre-bubble situations and those who deny the similarity may be treated as examples of deluded simpletons in the future. Still, he clearly believes that there's no bubble in the tech sector. The price/earning ratio is lowest in decades, especially if you express it as a double ratio
$\frac{(P/E)_{\rm tech}}{(P/E)_{\rm industry}}$ where industry is something like the General Electric. The double ratio above is minimal now relatively to recent decades which means something. Well, I agree it means something and it diminishes the notion that there is a bubble in the tech sector. However, there are other reasons that push the answer in the opposite direction. For example, the very fact that most of the people are already connected etc. - as Summers also pointed out - is a reason to predict that the future growth doesn't have to be significant.

And yes, I find it natural for Apple's $P/E$ to be lower - two thirds - than that of GE simply because there's a bigger probability that companies such as Apple, despite their remarkable profits and recent growth, will be just temporary fads that will be superseded by other fads in a few years. There are very similar companies for which it actually seems to be the case. On the other hand, companies such as GE are likely to be necessary for decades to come. It is this very risk that the huge profits of Apple could be temporary that justifies that Apple's $P/E$ is lower than GE's.

Comparing Clinton and Obama

Summers is asked to compare the collaboration with Bill Clinton and Barack Obama. Obama starts the meetings early, reads your memo in advance, focuses on the big picture, leaves the details to advisers. Clinton never starts early, usually doesn't read your memo, but tries to intervene into the microscopic issues of your job by mostly distracting detailed memories he has encountered years in the past. Funny examples follow.

Praising the Republicans

At the end, Summers is encouraged to praise the Republicans for something. After a joke suggesting there's nothing, not even their good behavior in their families, he praises them e.g. for the cost control of the health care, realization that the regulation has costs etc. There's an "enormous benefit" of having the views that the Republicans have brought, he says.