Lunch with the FT

Last updated: July 11, 2009 2:42 am

Lunch with the FT: Larry Summers

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Illustration of Larry Summers

Larry Summers, director of the US president’s National Economic Council, usually eats at his White House desk or sitting around a nearby table with other members of the economic team. But today, for Lunch with the FT, Summers’ aides have persuaded him to walk down the stairs to the Ward Room, a windowless alcove near the White House mess. The dark-wood panelling and nautically themed paintings are meant to evoke a naval officer’s dining room but these grace notes are muted by the plastic cutlery, paper plates and drinks sipped straight from their plastic bottles.

As he flips open a plastic box of Caesar salad with grilled chicken and unscrews the cap of a bottle of Diet Coke, Summers makes small talk – his son’s killer swing on the golf course, his own weekend tennis plans. But Summers – whom I first met as an undergraduate 20 years ago when I dropped into his office at Harvard to ask about the economic advice he was giving to the leaders of what was then the Soviet Socialist Republic of Lithuania – is not known for his casual conversation.

Today, dressed in a navy suit, white shirt and blue and white tie, with dark circles under his blue eyes that are not entirely hidden by his tan, the 54-year-old seems particularly focused on work. President Barack Obama’s decision last year to appoint Summers to lead the NEC was a surprise. From 1999 to 2001, Summers had served as Bill Clinton’s Treasury secretary and he was thought to be up for that job – if he, as a former Clintonite, were to have any role at all in the new administration.

But, instead, the Treasury went to Tim Geithner, and ever since Wall Street and Washington have been abuzz about the relationship between Summers and his former protégé – and about the balance of power between the two men and other economic heavyweights in the administration. As the Obama team has coalesced, Summers, who leads a daily economic briefing for the president, has seemed to emerge as the strategic mastermind of the administration’s macroeconomic response to the biggest crisis since the Depression.

His post and his past give him a unique perspective on the similarities and differences between Obama and Clinton. Summers is (in)famous for his bluntness but even he knows better than to tackle that question head-on. Instead, he praises the current president for the no drama Obama temperament America first discovered in the heat of last year’s primary battle. One source of that “calm, measured” outlook, Summers says, is Obama’s determination to use his presidency to effect long-term change – no matter how pressing the immediate problems.


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Lunch with the FT

“The president made two things clear to us early on,” recalls Summers, who answers my questions in full, idea-packed paragraphs, rocking gently back and forth in his seat as he gets into the flow of an argument. “He would do what he had to to fix the banking system, to get the economy out of the rut in which he was inheriting it. But he had run for president to do long-run, fundamental things, like fixing healthcare, like having real energy policy, like reforming education. And we weren’t going to be distracted from those things.”

Obama’s most important political calculation has been this decision to press ahead on all these fronts at once – and the success or failure of his administration will rest largely on whether that was the right call.

This combination of long-term reforms and an immediate crisis reminds me of the last global financial meltdown I watched Summers, then deputy secretary of the Treasury, help navigate. It was 1998, the year of Asian contagion and Russia’s default and devaluation. Emerging market veterans of that crash have taken a certain bitter pleasure in pointing out that this time their former rescuer and scold – the United States – is at the centre of the world’s crisis, and in observing that Americans seem markedly less keen on their own unpalatable medicine now that they are the patient.

“I don’t think I would quite accept the characterisation that we’re in the position that the Russians were in in 1998,” Summers says when I draw the comparison. “The crises that we addressed during the 1990s internationally, in almost every case, took the form of a foreign lack of confidence in a country that led to a mass withdrawal of funds and made reassuring foreigners the central priority. That’s why interest rates often had to be increased. The American problem this time has more in common, at least qualitatively, with the Japanese post-bubble problem, where the issue was not reassuring foreigners but maintaining sufficient domestic demand to push the economy forward.”

He does, however, concede that fire-fighting feels different when it is your own home that is alight: “There have been moments, certainly, when I understood better some of the reactions of officials in crisis countries now than one was able to from the outside at the time. It is easier to be for more radical solutions when one lives thousands of miles away than when it is one’s own country.”

Between that financial meltdown and the current one, Summers lived through a crisis different in scale and substance but perhaps even more personally challenging – his tumultuous leadership of Harvard University. That experience, I suggest, may be the first time in a golden career when something went wrong for Summers. The son of two economists and nephew of two Nobel laureates in economics, he went on to become an award-winning, tenured Harvard professor of economics when he was just 28, then moved to top jobs at the World Bank and the Treasury. From there, following George W Bush’s election, he glided into the nation’s most prestigious academic post, becoming in 2001 president of Harvard. That role came to a rocky end in 2006, when he resigned under pressure from faculty critics. I ask what the episode taught him.

With a slight grimace – the question has been asked many times before – Summers offers his standard, Kissinger-esque line: “Harvard and Washington are both political environments and I’m not sure that Washington is the more political of the environments.” Beyond that, he allows that the “negative” lesson he learnt at Harvard was the need to “maintain focus on your top priorities and avoid diversionary controversies that were apart from the agenda”, a possible reference to comments about women and science that helped to scupper his already-troubled tenure.

Summers is more forthcoming on how his thinking has been influenced by his recent, part-time stint as an adviser at the hedge fund DE Shaw – a job that created a brief political flurry this spring when financial records released by the White House showed that Summers was paid about $5.2m (£3.2m) in salary and other compensation in the last of his two years at the firm.

The chief intellectual casualty of the current crisis has been the “efficient markets” school – the theory, associated with such erstwhile laisser faire gurus as Alan Greenspan, that market participants are governed by rational expectations and markets are self-correcting. As an academic economist, Summers has studied the shortcomings of that approach but, working on Wall Street gave him, he says, a more visceral understanding of the “self-referential” character of markets: “Markets are concerned with the ultimate health of economies and the like but they’re equally or more concerned with what the likely judgments of other market participants in the short run are.”

Might this “more textured understanding” have caused Summers to reconsider some of his views from the 1990s – a time when he and former Treasury secretary Robert Rubin led a pro-market faction in the Clinton administration that some critics believe is partly to blame for the current crisis? (They cite, for example, Summers’ support for the 1999 repeal of the Depression-era Glass-Steagall Act, which had separated commercial and investment banking.)

Summers’ reply amounts to a qualified yes: “I think I always had the sense that our regulatory system was about the protection of individual institutions, and the important problems are often about the protection of the system. I was very worried in the 1990s about predatory lending, about systemic risk, about the stability of Fannie and Freddie. But the political constellation at that time didn’t offer a chance really to do more than report and warn about it. It’s a different world today. As Keynes famously said, ‘When the facts change, I change my mind.’”

Onward, then, to the toughest economic challenge Summers faces today: the recession. Here, Summers turns sombre: “I don’t think the worst is over ... It’s very likely that more jobs will be lost. It would not be surprising if GDP has not yet reached its low. What does appear to be true is that the sense of panic in the markets and freefall in the economy has subsided and one does not have the sense of a situation as out of control as a few months ago.”

As the panic has subsided, the trendy new economic issue has become “exit strategy” – as in, when and how do governments shift from costly and aggressive intervention to levels of spending and taxation that are sustainable over the long term?

Summers rejects the premise of the question. “I actually think that the right measures for doing the right things about the long-run deficit will also increase confidence, hold down long-term interest rates and capital costs, make mortgages cheaper, make mortgage rates lower and so will contribute directly to recovery. So I don’t buy the notion that there is some conflict between the budget imperative for growth and some other budget imperatives.”

So far, so orthodox. What is different about the Obama team’s economic vision is their aspiration that once this crisis is over, the US economy will be in different, and better, shape than it was before the bust.

This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-oriented”; “more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented”; and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift.

Summers admits that this rosy scenario depends on a lot more than the White House. Foreign policy watchers have tended to focus on the security issues this administration faces – the wars in Iraq and Afghanistan, the challenges of Iran and North Korea’s nuclear ambitions. But Obama’s most important international assignment may turn out to be coaxing the rest of the world into accommodating this reshaping of the US economy.

As Summers puts it, “The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.” On this possibility, Summers is bullish. “The very great enthusiasm for accumulating reserves that one saw globally is likely to be a smaller factor over the next decade than it has been in recent years,” he predicts.

Summers has managed to eat about half of his salad and is now munching on one of the blueberry macadamia nut cookies an assistant brought in midway through our meal. It seems like a good moment to ask him the question that has bedevilled White House-watchers since he was appointed to head the NEC: what exactly is his job?

“My role is to make sure the president gets access to the best economic thinking he can on everything that touches the economy” he says loyally. “That means making sure that no arguments go unscrutinised ... and it means helping everyone on the president’s economic team make the best case for whatever policies they prefer.”

The notion of Summers as an intellectual handmaiden, “helping” others refine their arguments, is at odds with his reputation as a supremely self-confident intellectual bulldozer. Since he moved into the White House there have been a few, mostly anonymous, complaints about his unwillingness to brook dissent but the real story is that there hasn’t been any public falling out among the team of economic rivals Obama has assembled.

Summers is not easily seduced but he seems thrilled by the demands of his current job. “It is certainly incredible, as intellectually challenging as anything I’ve ever done ... What makes it so challenging and exciting, as well as exhausting, is the range of subjects.”

Even so, Washington rumour has it that the NEC isn’t big enough for Summers and that he regrets not leading the Treasury and yearns to run the Federal Reserve. Does he?

“I am totally engaged by the breadth of issues that I am asked to think about to support the president.”

I push one more time: “Even for you, that’s enough?”

“That’s more than enough.”

Chrystia Freeland is the FT’s US managing editor


Ward Room
White House
Washington DC

Turkey sandwich $7.15
Chicken Caesar salad $6.90
Bottle of water $0.55
Diet Coke, from Summers’ fridge
Blueberry cookies, complimentary

Total $14.60


What the columnist wrote

From 2006 to 2008, Larry Summers wrote a regular column for the FT from which the following quotations are taken:

June 25 2007: “The challenge for those running for president of the US in 2008 – a challenge very different from that faced by presidential candidates until very recently – will be to develop a mandate for policy approaches that can ensure prosperity is more fully shared without threatening its fundamental basis.”

November 26 2007: “Three months ago it was reasonable to expect that the subprime crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth. This is still a possible outcome but no longer the preponderant probability. Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.”

January 7 2008: “The odds of a 2008 US recession have surely increased after a very poor employment report, growing evidence of weak holiday spending, further increases in oil prices, more dismal housing data and further writedowns in the financial sector. Six weeks ago, my judgment in this newspaper that recession was likely seemed extreme; it is now conventional opinion and many fear that there will be a serious recession ... There is now a compelling case for the president and Congress to create a programme of fiscal stimulus to the US economy that could be signed into law in the next several months.”

January 28 2008: “Good policy is art as much as science, depending as it does on market psychology as well as the underlying realities.”

August 7 2008: “Today, the end of the current financial crisis looks further away than it did in August 2007. Policy has not yet gotten ahead of the curve. I used to remark in the context of the emerging market crises of the 1990s that I would date the moment of the recovery from the first time an official pronouncement proved to be too pessimistic. By this standard, recovery is not at hand.”

October 26 2008: “It is said in all presidential election years that the choices made by the next president are uniquely important. This time the cliché is true. The gravity of our situation is matched only by the opportunity it presents.”

Read more of Larry Summers’ FT columns

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