Lawrence Summers

Lawrence Summers
8th Director of the National Economic Council
Incumbent
Assumed office  20 January 2009
Deputy	Diana Farrell Jason Furman
Preceded by	Keith Hennessey
27th President of Harvard University
In office 1 July 2001 – 30 June 2006
Preceded by	Neil L. Rudenstine
Succeeded by	Drew Gilpin Faust Derek Bok (acting)
71st United States Secretary of the Treasury
In office 2 July 1999 – 20 January 2001
Preceded by	Robert Rubin
Succeeded by	Paul H. O'Neill
Born	November 30, 1954 (1954-11-30) (age 56) New Haven, Connecticut
Nationality	American
Political party	Democratic
Spouse(s)	Elisa New
Children	3
Alma mater	Massachusetts Institute of Technology Harvard University
Profession	Academic, economist
Religion	Judaism
Signature
"There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system" — Larry Summers, Oct. 16, 2009[1]

Lawrence Henry Summers (born November 30, 1954) is an American economist and currently Director of the White House National Economic Council for President Barack Obama.^[2] Summers is the Charles W. Eliot University Professor at Harvard University's Kennedy School of Government. He is the 1993 recipient of the John Bates Clark Medal for his work in several fields of economics and was Secretary of the Treasury for the last year and a half of the Clinton Administration.

Summers also served as the 27th President of Harvard University from 2001 to 2006. Summers resigned as Harvard's president in the wake of a no-confidence vote by Harvard faculty that resulted in large part from Summers' conflict with Cornel West, financial conflict of interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a "different availability of aptitude at the high end," and less to patterns of discrimination and socialization. Summers has also been criticized for the economic policies he advocated as Treasury Secretary and in later writings.^[3] Since returning to government in the Obama administration, he has come under fire for his numerous financial ties to Wall Street.

Family and education

Born in New Haven, Connecticut, on November 30, 1954, Summers was born into a Jewish family, the son of two economists, Robert Summers and Anita Summers of (Romanian-Jewish ancestry), who are both professors at the University of Pennsylvania, as well as the nephew of two Nobel laureates in economics: Paul Samuelson (sibling of Robert Summers, who, following an older brother's example, changed the family name from Samuelson to Summers) and Kenneth Arrow (Anita Summers's brother). He spent most of his childhood in Penn Valley, Pennsylvania, a suburb of Philadelphia, where he attended Harriton High School.

At age 16,^[4] he entered the Massachusetts Institute of Technology (MIT), where he originally intended to study physics but soon switched to economics (S.B., 1975). He was also an active member of the MIT debating team. He attended Harvard University as a graduate student (Ph.D., 1982). In 1983, at age 28, Summers became one of the youngest tenured professors in Harvard's history. Summers has three children (older twin daughters Ruth and Pamela and son Harry) with his first wife, Victoria Perry. In December 2005, Summers married English professor Elisa New, who had three daughters from a previous marriage. He currently owns two houses, one in Washington, D.C. and one in Brookline, Massachusetts.

Career

Academic economist

As a researcher, Summers has made important contributions in many areas of economics, primarily public finance, labor economics, financial economics, and macroeconomics. Some of Summers' early papers concluded that corporate and capital gains taxes are an inefficient form of taxation. Cutting the capital gains tax rate, Summers found, could help the economy grow. Later, while working in the Reagan and Clinton White Houses, Summers was able to lobby successfully for cuts in both corporate and capital gains taxes. One of Summers' prominent findings in labor economics is that unemployment insurance and welfare payments are a major contributor to unemployment, and therefore should be scaled back.^[5]

Summers has also worked in international economics, economic demography, economic history, and development economics. His work generally emphasizes the analysis of empirical economic data in order to answer well-defined questions (for example: Does saving respond to after-tax interest rates? Are the returns from stocks and stock portfolios predictable? Are most of those who receive unemployment benefits only transitorily unemployed? etc.) For his work he received the John Bates Clark Medal in 1993 from the American Economic Association. In 1987 he was the first social scientist to win the Alan T. Waterman Award from the National Science Foundation. Summers is also a member of the National Academy of Sciences.

Public official

Summers was on the staff of the Council of Economic Advisers under President Reagan from 1982-1983. He also served as an economic adviser to the Dukakis Presidential campaign in 1988.

Chief Economist at the World Bank

Summers left Harvard in 1991 and served as Chief Economist for the World Bank until 1993.

"Dirty Industries" controversy

In December 1991, while at the World Bank, Summers wrote a memo on trade liberalization that was leaked to the press. It included a section that promoted dumping toxic waste in third-world countries for economic reasons, which drew widespread criticism. Jose Lutzenberger wrote to Summers that his proposal was “perfectly logical but totally insane”, and showed how out-of-touch with reality economists could be.

When Summers became President at Harvard, Harvard Crimson later satirized it, saying that Summers would dump waste in the Kennedy School Courtyard as it had the lowest endowment. Afterwards, Lant Pritchett claimed that he was primary author of the memo, which he claimed was satire. By Summers' second year at Harvard, both authors claimed that the report was intended as sarcasm. There is no documentation that the report was meant as humorous until that time, and it remains the only claim Summers has ever made about satirical authorship. The memo stated that "the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that . . . I've always thought that under-populated countries in Africa are vastly underpolluted."^[6]

Service in the Clinton Administration

In 1993 Summers was appointed Undersecretary for International Affairs and later in the United States Department of the Treasury under the Clinton Administration. In 1995, he was promoted to Deputy Secretary of the Treasury under his long-time political mentor Robert Rubin. In 1999, he succeeded Rubin as Secretary of the Treasury.

Much of Summers's tenure at the Treasury Department was focused on international economic issues. He was deeply involved in Clinton administration's effort to bail out Mexico and Russia when those nations had currency crises.^[7] Summers encouraged then-Russian leader Boris Yeltsin to use the same "three-'ations'" of policy he advocated in the Clinton Administration-- "privatization, stabilization, and liberalization."^[8]

Summers pressured the Korean government to raise its interest rates and balance its budget in the midst of a recession, policies criticized by Paul Krugman and Joseph Stiglitz.^[9] According to the book The Chastening, by Paul Blustein, during this crisis, Summers, along with Paul Wolfowitz, pushed for regime change in Indonesia.^[10]

Summers was a leading voice within the Clinton Administration arguing against American leadership in greenhouse gas reductions and against US participation in the Kyoto Protocol, according to internal documents made public in 2009.^[11]

As Treasury Secretary, Summers led the Clinton Administration's opposition to tax cuts proposed by the Republican Congress in 1999.^[12] Also during his stint in the Clinton Administration, Summers was successful in pushing for capital gains tax cuts. During the California energy crisis of 2000, then-Treasury Secretary Summers teamed with Alan Greenspan and Enron executive Kenneth Lay to lecture California Governor Gray Davis on the causes of the crisis, explaining that the problem was excessive government regulation.^[13] Under the advice of Kenneth Lay, Summers urged Davis to relax California's environmental standards in order to reassure the markets.^[14]

Summers hailed the Gramm-Leach-Bliley Act in 1999, which lifted more than six decades of restrictions against banks offering commercial banking, insurance, and investment services (by repealing key provisions in the 1933 Glass-Steagall Act): "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," Summers said.^[15] "This historic legislation will better enable American companies to compete in the new economy."^[15] Many critics, including President Barack Obama, have suggested the 2007 subprime mortgage financial crisis was caused by the partial repeal of the 1933 Glass-Steagall Act.^[16] Indeed, as a member of President Clinton's Working Group on Financial Markets, Summers, along with U.S. Securities and Exchange Commission (SEC) Chairman Arthur Levitt, Fed Chairman Greenspan, and Secretary Rubin, torpedoed an effort to regulate the derivatives that many blame for bringing the financial market down in Fall 2008.^[17]

Summers' role in the deregulation of derivatives contracts

On May 7, 1998, the Commodity Futures Trading Commission (CFTC) issued a Concept Release soliciting input from regulators, academics, and practitioners to determine "how best to maintain adequate regulatory safeguards without impairing the ability of the OTC (Over-the-counter) derivatives market to grow and the ability of U.S. entities to remain competitive in the global financial marketplace." ^[18] On July 30, 1998, then-Deputy Secretary of the Treasury Summers testified before congress that "the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies." Summers, like Greenspan and Rubin who also opposed the concept release, offered no proof that the contracts would not be misused by financial institutions. Instead, Summers stated that "to date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need." ^[19] This argument suggests that the default position in the disagreement was that Summers, Greenspan, and Rubin were right, and that anyone (i.e., Brooksley Born) who disagreed with them bore the burden of proving their position. In fact, subsequent events have proven that Summers, Rubin, and Greenspan misjudged the dangers posed by derivatives contracts.

The lack of regulation that allowed A.I.G. to sell hundreds of billions of dollars in credit default swaps on mortgage-backed securities was a direct result of efforts by the Treasury (first under Rubin and then under Summers), the Federal Reserve (under Greenspan), and the Securities and Exchange Commission (under Arthur Levitt) to deregulate the derivatives markets. The first response to the CFTC Concept Release was issued as a joint statement from Rubin, Greenspan, and Levitt who stated that they "have grave concerns about this action and its possible consequences." ^[20] Levitt and Greenspan have admitted that their views on this issue were mistaken. Levitt told WGBH in Boston that "I could have done much better. I could have made a difference." Greenspan told a congressional hearing that "I found a flaw ... in the model that I perceived is the critical functioning structure that defines how the world works." ^{[21] [22]} When George Stephanopoulos asked Summers about the financial crisis in an ABC interview on March 15, 2009, Summers replied that "there are a lot of terrible things that have happened in the last eighteen months, but what’s happened at A.I.G. ... the way it was not regulated, the way no one was watching ... is outrageous."

At the 2005 Federal Reserve conference in Jackson Hole, Raghuram Rajan presented a paper called "Has Financial Development Made the World Riskier?" Rajan pointed to a number of potential problems with the financial developments of the past thirty years. ^[23] The problems that Rajan considers include skewed incentives of managers, herding behavior among traders, investment bankers, and hedge fund operators who suffer withdrawals if they under-perform the market. Rajan also discusses (on pp. 337–40) the problems associated with firms that "goose up returns" by taking risky positions that yield a "positive carry." This is how the infamous Joseph J. Cassano impressed his superiors at A.I.G. for a decade while sowing the destruction of the firm. ^[24] During the boom years of the housing market, the credit default swap contracts that A.I.G. Financial Products sold provided a stream of premium payments to the company with no expense stream. That's an example of what Rajan calls "goosing up returns" with latent risk. Rajan asks (on page 388) "If firms today implicitly are selling various kinds of default insurance to goose up returns, what happens if catastrophe strikes?" This is a fair question.

The flip side of the trade is equally problematic. Gregory Zuckerman in his book The Greatest Trade Ever about John Paulson's hedge fund recounts the difficulties that Paulson and others had holding on to their bets against the housing market. Even Paulson, whose timing couldn't have been better, spent a great deal of his time persuading investors to persist with the bet against the market. But month after month, millions of dollars were paid out on the credit default swap premia. The investors saw money spent and gone that could have been used to buy assets with rising prices, or at least held safely with a positive yield. As Rajan puts it (p. 338), "it takes a very brave investment manager with infinitely patient investors to fight the trend, even if the trend is a deviation from fundamental value."

Justin Lahart, writing in the Wall Street Journal in January 2009 about the response to Rajan's paper at the conference recounts that "former Treasury Secretary Lawrence Summers, famous among economists for his blistering attacks, told the audience he found 'the basic, slightly lead-eyed ^[25] premise of [Mr. Rajan's] paper to be largely misguided.'" This is strong criticism, especially given Summers' role in deregulation of the credit default swap market, and the collapse in 2008 of A.I.G. other firms with massive exposures to credit default swaps on mortgage-backed securities.

In a recent paper (on pages 285-87), Steven Gjerstad and Nobel laureate Vernon L. Smith describe more fully (1) the contribution of derivatives to the flow of mortgage funds that supported the housing bubble, (2) the concerns that Brooksley Born had raised about the dangers inherent in these contracts, (3) Summers' contribution to their deregulation, and (4) how these contracts precipitated the collapse of the financial system in 2007 and 2008. ^[26]

On April 18, 2010, in an interview on ABC’s “This Week” program, Clinton said Summers was wrong in the advice he gave him not to regulate derivatives.^[27]

President of Harvard

In 2001, when George W. Bush became President, Summers left the Treasury Department and returned to Harvard as its 27th President, serving from July 2001 until June 2006. He was Harvard's first Jewish president, and received praise from Harvard's Jewish community for his support.^[28] However, a number of his decisions at Harvard attracted public controversy.

Cornel West affair

In an October 2001 meeting, Summers criticized African American Studies department head Cornel West for allegedly missing three weeks of classes to work on the Bill Bradley presidential campaign, and complained that West was contributing to grade inflation. Summers also claimed that West's "rap" album (in fact a spoken word album) was an "embarrassment" to the university. West refuted the accusations^[29] "The hip-hop scared him. It's a stereotypical reaction," he said later. West, who later called Summers both "uninformed" and "an unprincipled power player" in describing this encounter in his book Democracy Matters (2004), subsequently returned to Princeton University, where he taught prior to Harvard University.

Differences between the sexes

In January 2005, at a Conference on Diversifying the Science & Engineering Workforce sponsored by the National Bureau of Economic Research, Summers sparked controversy with his discussion of why women may have been underrepresented "in tenured positions in science and engineering at top universities and research institutions".

Summers had prefaced his talk, saying he was adopting an "entirely positive, rather than normative approach" and that his remarks were intended to be an "attempt at provocation."^[30]

Summers then began by identifying three hypotheses for the higher proportion of men in high-end science and engineering positions:

1. The high-powered job hypothesis
2. Different availability of aptitude at the high end
3. Different socialization and patterns of discrimination in a search^[30]

The second hypothesis - different availability of aptitude at the high end - caused the most controversy. In his discussion of this hypothesis, Summers said that "even small differences in the standard deviation [between genders] will translate into very large differences in the available pool substantially out [from the mean]".^[30] Summers referenced research that implied differences between the standard deviations of males and females in the top 5% of twelfth graders under various tests. He then went on to argue that, if this research were to be accepted, then "whatever the set of attributes... that are precisely defined to correlate with being an aeronautical engineer at MIT or being a chemist at Berkeley... are probably different in their standard deviations as well".^[30]

Summers then concluded his discussion of the three hypotheses by saying:

So my best guess, to provoke you, of what's behind all of this is that the largest phenomenon, by far, is the general clash between people's legitimate family desires and employers' current desire for high power and high intensity, that in the special case of science and engineering, there are issues of intrinsic aptitude, and particularly of the variability of aptitude, and that those considerations are reinforced by what are in fact lesser factors involving socialization and continuing discrimination. I would like nothing better than to be proved wrong, because I would like nothing better than for these problems to be addressable simply by everybody understanding what they are, and working very hard to address them.^[30]

Summers then went on to discuss approaches to remedying the shortage of women in high-end science and engineering positions.

This lunch-time talk drew accusations of sexism and careless scholarship, and an intense negative response followed, both nationally and at Harvard.^[31] Summers apologized repeatedly.^[32] Nevertheless, the controversy is speculated to have contributed to his resigning his position as president of Harvard University the following year, as well as costing Summers the job of Treasury Secretary in Obama's administration.^[33]

Summers' opposition and support at Harvard

On March 15, 2005, members of the Harvard Faculty of Arts and Sciences, which instructs graduate students in GSAS and undergraduates in Harvard College, passed 218–185 a motion of "lack of confidence" in the leadership of Summers, with 18 abstentions. A second motion that offered a milder censure of the president passed 253 to 137, also with 18 abstentions.

The members of the Harvard Corporation, the University's highest governing body, are in charge of the selection of the president and issued statements strongly supporting Summers.

FAS faculty were not unanimous in their comments on Summers. Influential psychologist Steven Pinker defended the legitimacy of Summers' January lecture. When asked if Summers' talk was "within the pale of legitimate academic discourse," Pinker responded "Good grief, shouldn’t everything be within the pale of legitimate academic discourse, as long as it is presented with some degree of rigor? That’s the difference between a university and a madrassa. [...] There is certainly enough evidence for the hypothesis to be taken seriously."^[34]

Summers had stronger support among Harvard College students than among the college faculty. One poll by the Harvard Crimson indicated that students opposed his resignation by a three-to-one margin, with 57% of responding students opposing his resignation and 19% supporting it.^[35]

In July 2005, the only African-American board member of Harvard Corporation, Conrad K. Harper, resigned saying he was angered both by the university president's comments about women and by Summers being given a salary increase. The resignation letter to the president said, "I could not and cannot support a raise in your salary, ... I believe that Harvard's best interests require your resignation."^[36][37]

Support of economist Andrei Shleifer

Harvard and Andrei Shleifer, a close friend and protege of Summers, controversially paid $28.5 million to settle a lawsuit by the U.S. government over the conflict of interest Shleifer had while advising Russia's privatisation program. The US government had sued Shleifer under the False Claims Act, as he bought Russian stocks and while designing the country's privatisation. In 2004, a federal judge ruled that while Harvard had violated the contract, Shleifer and his associate alone were liable for treble damages.

In June 2005, Harvard and Shleifer announced that they had reached a tentative settlement with the US government. In August, Harvard, Shleifer and the Department of Justice reached an agreement under which the university paid $26.5 million to settle the five-year-old lawsuit. Shleifer was also responsible for paying $2 million dollars worth of damages.

Because Harvard paid almost all of the damages and allowed Shleifer to retain his faculty position, the settlement provoked allegations of favoritism on Summers. His continued support for Shleifer strengthened Summers' unpopularity with other professors:

"I’ve been a member of this Faculty for over 45 years, and I am no longer easily shocked," is how Frederick H. Abernathy, the McKay professor of mechanical engineering, began his biting comments about the Shleifer case at Tuesday’s fiery Faculty meeting. But, Abernathy continued, "I was deeply shocked and disappointed by the actions of this University" in the Shleifer affair.

In an 18,000-word article in Institutional Investor (magazine) (January, 2006), the magazine detailed Shleifer’s alleged efforts to use his inside knowledge of and sway over the Russian economy in order to make lucrative personal investments, all while leading a Harvard group, advising the Russian government, that was under contract with the U.S. The article suggests that Summers shielded his fellow economist from disciplinary action by the University.^[38] Summers' friendship with Shleifer was well known by the Corporation when it selected him to succeed Rudenstine and Summers recused himself from all proceedings with Shleifer, whose case was actually handled by an independent committee led by Derek Bok.

Losses on financial derivatives

During Summers' presidency at Harvard, the University entered into a series totalling US$3.52 billion of interest rate swaps, financial derivatives that can be used for either hedging or speculation.^[39] Summers approved the decision to enter into the swap contracts as president of the university and as a member of Harvard Corp., "the university’s seven-member ruling body" which bears "the school’s ultimate fiduciary responsibility."^[40] By late 2008, those positions had lost approximately $1 billion in value. This forced Harvard to borrow significant sums in distressed market conditions to meet margin calls on the swaps.^[41] In the end Harvard paid $497.6 million in termination fees to investment banks and has agreed to pay another $425 million over 30–40 years.^[40] The decision to enter into the swap positions has been attributed to Summers and has been termed a "massive interest-rate gamble" that ended badly.^[42]

Resignation as Harvard President

On February 21, 2006, Summers announced his intention to step down at the end of the school year effective June 30, 2006. Harvard agreed to provide Summers on his resignation with a one-year paid sabbatical leave, subsidized a $1 million outstanding loan to the university for his personal residence, and provided other payments.^[43]. Former University President Derek Bok acted as Interim President while the University conducted a search for a replacement which ended with the naming of Drew Gilpin Faust on February 11, 2007. After a one year sabbatical, Summers subsequently accepted the University's invitation to serve as the Charles W. Eliot University Professor, one of twenty select University-wide professorships, with offices in the Kennedy School of Government and the Harvard Business School.^[44] He also joined the D. E. Shaw Group in October 2006 as a part-time managing director.^[45] Summers also has been authoring a column for the Financial Times.^[46]

Post-Harvard career

President Barack Obama, on left, discusses with a group in the White House, including Larry Summers on far right (back to camera)

On October 19, 2006, he became a part-time managing director of the investment and technology development firm D. E. Shaw & Co. He drew a large salary from this job.

Upon the death of libertarian economist Milton Friedman, Summers wrote an Op-Ed in The New York Times entitled "The Great Liberator" arguing that "any honest Democrat will admit that we are now all Friedmanites." In it Summers wrote that even though Friedman's contributions to monetary policy have been highly lauded, his most important contribution may have been "in convincing people of the importance of allowing free markets to operate."^[47]

Henry Kissinger once said that Larry Summers should "be given a White House post in which he was charged with shooting down or fixing bad ideas." ^[48]

In 2006 he was a member of the Panel of Eminent Persons which reviewed the work of the United Nations Conference on Trade and Development.

In February 2009, he quoted John Maynard Keynes, saying "When circumstances change, I change my opinion", reflecting both on the failures of Wall Street deregulation and his new leadership role in the government bailout.^[49]

National Economic Council

In 2009, he was tapped by President Obama to be the director of the White House National Economic Council.^[2][50] He has emerged as a key economic decision-maker in the Obama administration, where he has attracted both praise and criticism. There has been friction between Summers and former Federal Reserve Chairman Paul Volcker, as Volcker has accused Summers of delaying the effort to organize a panel of outside economic advisers, and Summers has cut Volcker out of White House meetings and has not shown interest in collaborating on policy solutions to the current economic crisis.^[51] On the other hand, Obama himself was reportedly thrilled with the work Summers did in his first few weeks on the job. And Peter Orszag, another top economic advisor, calls Summers "one of the world’s most brilliant economists."^[52]

In January 2009, as the Obama Administration tried to pass an economic stimulus spending bill, Oregon Democratic Representative Peter DeFazio criticized Summers, saying that he thought that President Barack Obama is "ill-advised by Larry Summers. Larry Summers hates infrastructure."^[53] DeFazio, along with liberal economists including Paul Krugman and Joseph Stiglitz, has argued that more of the stimulus should be spent on infrastructure,^[54] while Summers has supported tax cuts.

Summers has recently come under fire for accepting perks from Citigroup, including free rides on its corporate jet in 2008.^[55] According to the Wall Street Journal, Larry Summers called Chris Dodd asking him to remove caps on executive pay at firms that have received stimulus money, including Citigroup.^[56]

On April 3, 2009 Summers came under renewed criticism after it was disclosed that he was paid millions of dollars the previous year by companies which he now has influence over as a public servant. He earned $5 million from the hedge fund D. E. Shaw, and collected $2.7 million in speaking fees from Wall Street companies that received government bailout money.^[57]

In early April 2010, Joshua Green reported that Summers is frustrated with his position at the NEC and upset that he was not chosen to replace Ben Bernanke as head of the Federal Reserve. It is seen as likely that Summers could leave the post soon.^[58]

Notes

References

External links

• Summers' Harvard Kennedy School page
• Summers bio from U.S. Treasury Dept.
• Voices on Antisemitism Interview with Lawrence Summers from the US Holocaust Memorial Museum
• Lawrence Summers on Big Think

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