Larry Summers: Can he make the sums add up?
They don't come much cleverer than Barack Obama's main economic adviser. Now the world waits to see if his ideas are smart enough to save us
Saturday 14 March 2009
A remarkable rumour stalks Washington. Larry Summers has turned humble. Well, perhaps not humble as in "I grovel before your superior intellect". But Summers-watchers detect a new readiness to preface an assertion that once would have been iron-clad with a qualifier like "I may be wrong, but...". Even 18 months ago such willingness to acknowledge possible fallibility would have been unthinkable. But this most brutal global economic meltdown of the modern era has had some curious side effects.
If America manages to rescue itself – and, by extension, the world – from this crisis, it is likely that Summers will have been largely responsible. His imprint will be on the proposals that his one-time protégé Timothy Geithner brings to the hugely important G20 summit in London next month.
As treasury secretary (the job that Summers held for the last 18 months of Bill Clinton's presidency), Geithner may be the titular overlord of US economic policy. But as chairman of the National Economic Council at the White House, Summers may be even more influential. Each day he delivers an economic briefing to Barack Obama, to match the daily intelligence briefing prepared by the CIA. Not only is he thus physically close to the Oval Office, but by all accounts he and his boss are personally close as well.
Not since John Kennedy brought the "best and the brightest" to Washington almost half a century ago has a president gathered comparable intellectual wattage around him in his cabinet. To tackle the economic and financial crisis, Obama is fielding his own all-star team: not just Summers and Geithner, but the no less precocious and degree-festooned budget director Peter Orszag, as well as Paul Volcker, the austere eminence of American central banking, who as Federal Reserve chairman before Alan Greenspan led the country out of the stagflation crisis of the late 1970s and early 1980s.
Back in 1944, during the negotiations to set up the post war monetary system, British economic officials with too much spare time on their hands composed a condescending little ditty about their American counterparts:
"In Washington Lord Halifax
whispered to Maynard Keynes,
It's true they have all the money bags,
but we have all the brains."
How different now. Keynes, the most influential economist of the first half of the 20th century, has been dead for 63 years, and the money bags these days belong to China. But however strapped its national finances, the US side is overflowing with brains. Obama jokingly refers to his in-house economic think tank as "the propeller heads". And of these heads, none, by common consent, whirrs as fiercely and relentlessly as that of Summers.
If economists were racehorses you couldn't have a better bloodline than Larry Summers. His parents, Robert and Anita Summers, are both economists and professors at the University of Pennsylvania, while two of his uncles, Paul Samuelson and Kenneth Arrow, are Nobel laureates in economics.
Summers's own early academic record was to match. He was only 16 when he entered the prestigious Massachusetts Institute of Technology. After taking a PhD in economics at Harvard in 1982, he became the youngest tenured professor in the university's history the following year, at the age of 28 – posts he combined with a stint on President Reagan's council of economic advisers .
By 1991 he had left Harvard to become chief economist at the World Bank, before joining the Clinton treasury department as undersecretary for international affairs – a position that gave him a key role in the 1994/1995 Mexican bailout, a gentler, localised and far briefer forerunner of today's turmoil. Soon afterwards he was named deputy secretary to Robert Rubin, before becoming the country's 71st treasury secretary in July 1999.
It was than that Summers acquired his previous unsavoury reputation; brilliant to be sure, but not a man who suffered gladly either fools or sloppy thinking. No one demolished a bad idea more ruthlessly, and no one took less trouble to conceal his scorn. Physically, Summers is anything but a shrinking violet of academe. With his hooded eyes and slightly fleshy face, there is something of the bruiser about him. Nor was he inclined to treat Congess with the respect that sometimes pompous institution considers its due. Arrogance and high-handedness became his trademark.
The story was much the same at Harvard when Summers returned to his alma mater in 2001, this time as president of the university. Almost at once sparks flew, as he became embroiled in a public feud with Cornel West, the celebrated head of Harvard's department of African-American studies, after he basically told West to devote more time to his academic duties and less to outside ventures. The dispute ended with West decamping to Princeton, accusing Summers of acting like "an unprincipled power player".
Four years later, even greater controversy erupted as he wondered aloud at a conference whether inherent gender differences explained why there were far fewer leading women scientists and mathematicians. Woe betide the prominent American figure charged with sexism. Summers apologised, but in 2006 a faculty revolt finally forced him to resign – even though Harvard's students, unlike the teaching staff, were strongly supportive of him.
At about this point, Summers-watchers would have it, something changed. By summer 2008, he had re-emerged as a close economic adviser to then candidate Obama. This time, however, he kept out of the headlines. After Obama's victory in November, Summers was widely tipped for a second stint as treasury secretary, but the sexism rumpus probably doomed his hopes. But now he is back at the centre of the action, head of Obama's economic council and, if not all sweetness and light, then much better behaved than in his previous incarnation in government. So what happened?
Maybe the Harvard experience taught Summers that the role of eternal agent provocateur has drawbacks. More probably however, it was the unfolding economic drama.
When the definitive history of the calamity is written, Summers will not emerge without blemish. For the moment – to the good fortune of Messrs Obama, Geithner and himself – this is still seen as George Bush's crisis. But many seeds of the disaster were sown in the Clinton era. Along with his boss Rubin and Greenspan at the Fed, Summers championed deregulation and the unfettered markets that have brought about the debacle.
Though Rubin and Greenspan are now widely seen as prime villains of the piece, Summers has largely escaped opprobrium. Nonetheless, he was the treasury secretary under whom the Glass-Steagall Act, which had established walls between commercial and investment banking, was repealed. That decision, many say, only fuelled Wall Street's excesses. More important still, he was instrumental, along with Greenspan and Rubin, in blocking efforts to regulate derivatives, the "weapons of financial mass destruction" whose explosion brought the Western financial system to the brink of collapse. But a decade ago, no one greatly cared: history had ended; the markets were booming, and, mirabile dictu, the US even had a budget surplus.
Implicitly, Summers has acknowledged error. In columns for the Financial Times before he entered the Obama administration, he called for stronger regulation, admitting that things had got out of hand. The fiscal disciplinarian, meanwhile, had turned into an advocate of a massive stimulus to the economy, at the price of a budget deficit not seen since the Second World War. "When circumstances change, I change my opinion," Summers is fond of saying, quoting Keynes.
The key now is his relationship with Geithner, his erstwhile protégé at the treasury's international department. So well do they know each other, and so closely is their thinking aligned White House officials insist, that they are apt to finish each other's sentences on occasion. The harmony is as well: the snail's pace of confirmation proceedings for other senior posts at the treasury mean that the Geithner/Summers tandem is handling almost everything virtually alone, from domestic and G20 macro economic policy to the rescue of the US car industry. Such a workload coupled with personal antagonism would be a recipe for disaster. Happily, their only discernable rivalry is on the tennis court, where Geithner, at 47 and seven years Summers's junior, tends to prevail in their regular games.
Even more intriguing, however, is the question: has Larry Summers really changed? As an economist, his stance may have become more interventionist – less than surprising given that the government these days is lender and consumer not of last, but of first resort. When an interviewer asked him recently who had most influenced his approach to the crisis, the reply was instant and unhesitating. "Keynes," he said. "Given the crisis we inherited, there was no other possible choice." We are all Keynesians now, including Summers.
But he is far from an out-and-out liberal along the lines of Paul Krugman. He is adamant that the current federal spending binge must be accompanied by a strategy to shrink the deficit back towards zero in the not too distant future. He is resistant to bank nationalisation and, it would seem, to the draconian measures to eliminate insolvent "zombie" banks in the US that Washington urged in vain upon the Japanese during the latter's famous "lost decade" of the 1990s.
And there are signs that the abrasive Summers of yore is still alive. "He ignores arguments he doesn't like," says Joseph Stiglitz, the former World Bank economist and a long-standing opponent of unregulated globalisation in general and Summers in particular. And tales are already seeping out of the White House of friction with Paul Volcker. So maybe some things never change – like markets' propensity to create unsustainable bubbles, and the real Larry Summers.
A life in brief
Born: Lawrence Henry Summers, 30 November 1954, in New Haven, Connecticut, the son of two economists, Robert and Anita, and nephew of two Nobel laureates in economics.
Early life: Spent most of his childhood in Penn Valley, Pennsylvania, a suburb of Philadelphia. At age 16, he entered Massachusetts Institute of Technology, where he originally intended to study physics before switching to economics. He attended Harvard as a graduate student and, at 28, became one of the youngest tenured professors in Harvard's history.
Family: Was married to Harvard English professor Elisa New in 2005. Has three children (twin daughters Ruth and Pamela and son Harry) from previous marriage to Victoria Perry.
Career: Summers was on the staff of the Council of Economic Advisers under President Reagan in the early 1980s. He also served as an economic adviser to Michael Dukakis's Democratic presidential campaign in 1988. After Dukakis's defeat by George Bush Snr, he became chief economist for the World Bank 1991-1993. In 1993, he won the John Bates Clark medal before joining the Clinton administration, rising to become secretary of the treasury for the last year of Clinton's second term. After he left public office he served as president of Harvard 2001-2006. Barack Obama relied on Summers for guidance on how best to respond to the financial crisis during his presidential campaign, and after his election he appointed him as director of the White House National Economic Council.
He says: "This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times... there's a need for extraordinary public action at those times."
They say: "I find that five minutes of talking to Larry is often more valuable than an hour of talking to someone else." Timothy Geithner, US secretary of the treasury
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