Lawrence Summers

WASHINGTON — Ask anyone in Washington who is the Clinton administration’s key point-man on economic issues, and the answer is likely to be Lawrence H. Summers. With more than five years’ experience under his belt at the Treasury Department, the 43-year-old Harvard economist, now deputy secretary, has emerged as one of the most influential players in shaping and carrying out administration policies on everything from reforming the Internal Revenue Service to managing the Asian financial crisis.

In 1995, Summers was a leading architect of the administration’s successful bid to bail Mexico out of its peso crisis. Last January, he led a high-profile mission to Jakarta to persuade Indonesia’s President Suharto to go along with the economic reforms prescribed by the International Monetary Fund. He is on almost everyone’s short list as a candidate to become secretary of the Treasury if the incumbent, Robert E. Rubin, decides to return to private life.

A blunt-spoken, professorial-looking man, Summers spent the first 12 years of his career as an academic, teaching economics first at the Massachusetts Institute of Technology and later at Harvard. In 1991, he became chief economist at the World Bank, moving to the Clinton administration as undersecretary of the Treasury in 1993. He became deputy secretary in 1995.

Married, with twin daughters and a son, Summers seems almost to have been born to be an economist. His parents were economists, and two of his uncles, Paul A. Samuelson and Kenneth J. Arrow, won Nobel prizes in economics. His wife, Victoria, is a tax expert at the IMF. Summers himself was the youngest PhD--at age 28--to receive tenure as a Harvard professor. Last week, over his favorite drink, Diet Coke, in his spacious office in the Treasury building, Summers took time to talk about a wide range of economic issues: how long the current economic boom will last, what to do about the Asia financial crisis and how globalization will affect Americans.

Question: The economy is performing better than it has in a generation. Economic growth is booming. Unemployment is at its lowest level in 24 years. Inflation is nowhere to be seen. Fifteen years ago, the economy was in a mess. What has happened to make the economy so vibrant again?

Answer: I think there are two main factors: First, we have set the right kind of broad economic foundation. By eliminating the budget deficit, we’re allowing a trillion dollars that otherwise would have gone into the federal treasury to go into developing new capacities in American firms, and to reduce the need for borrowing from the private sector. The second, and longer-lasting, reason is that America has shown itself unique in adapting to the imperatives of the new global economy. There has been a virtual reinventing of American business over the past few years. From General Motors to IBM, our largest corporations are vastly more competitive than they were a decade ago. Almost four times as many Americans work with personal computers as is the case in any other country. We account for more than half the Internet traffic worldwide, although we constitute only about 25% of the world economy. In almost every area of postindustrial economic activity, whether it is Microsoft in software or AIG in insurance or McDonald’s in fast food or Wal-Mart in retailing or McKinsey in management consulting or Toys R Us in toy retailing, American firms are setting the world standards. And, of course, we are the leaders in the most potent capital of all, venture capital. Only in America can you make your first $100 million before you buy your first suit. Finally, the crucial feature of this recovery and expansion is that they have been led by investments in exports rather than consumption of the government. We’ve got 300,000 fewer people working for the federal government than five years ago, and we’ve got millions more working in jobs that produce exports which are often the highest-wage jobs.

Q: Even so, some analysts are afraid that the economy--or, more accurately, the stock market--is in a “bubble,” end that the bubble is likely to burst and throw the economy into a recession, or even a 1930s-style depression. Without making any predictions about the stock market, are you worried about that as well?

A: Inevitably, after an expansion has been going on for several years, as this one has, one of the most important things we have to fear is the lack of fear itself. There is always the concern that complacency proves to be a self-denying prophecy. That is, that optimism leads to excessive inventory, excessive accumulation of inventories, excessive lending, perhaps even excessive asset values [stock prices]. I think we always need to be vigilant, but I don’t think it’s appropriate yet to be alarmed. It’s very important to remember that, historically, expansions have not died of old age. They have died when specific policy errors were made, usually an overheating of the economy that led to a revival of inflation.

Q: Some economists contend that the fact that the economic boom has continued for so long suggests that the economy may have undergone some fundamental structural changes, resulting in a so-called “new paradigm” that promises to keep the current prosperity going for the next several decades. Are they too optimistic?

A: I think, in some ways, there’s truth to that. Look at the extent that high-technology accounts for what’s happening in our market today. The value of the high-tech firms in Silicon Valley has grown to the point where it exceeds the value of the financial firms on Wall Street. You have a kind of connectivity in the economy the likes of which would have been inconceivable five years ago. So it’s a very different economy. It’s an economy that’s more flexible. That means you can expand output more rapidly without setting off excessive inflation than may have been the case in the past.

At the same time, however, we need to remember that there have been many periods of remarkable technical change--the advent of electricity, the telephone, the introduction of mass-production techniques. These were revolutionary changes that had a major impact on the economy, too, but we’ve continued to have expansions and recessions, and I think it would be a mistake to declare the end of the business cycle, as some analysts have suggested.

Q: Here we are almost a year after the Asian financial crisis broke out, and, so far, the effects on the U.S. economy have been minimal. What’s your assessment?

A: I think it’s very hard to predict. I think you will see some effects that are still in the pipeline. On the other hand, with the strength of investment, consumer confidence, I don’t think the Asian crisis--assuming it remains contained-- should drive us off the path of economic expansion. But I do think that it is essential that we do everything we can to keep the crisis contained. That is why funding the IMF is so absolutely critical. It doesn’t cost America anything because we get interest on our contributions. The IMF’s loans are backed by the IMF’s gold. They are not gifts, because they come with strong conditions and are paid back at interest rates that exceed the IMF’s cost of borrowing. So I think if . . . there’s still a lot of uncertainty out there. It is important that we do provide support to the IMF and the other international financial institutions.

Q: Partly because of the slump in Asia, the United States is running a bigger foreign-trade deficit this year compared with last, and some economists believe that it will soar to $250 billion or more by 1999. How big will the trade deficit become, will it pose political problems for the administration--and does it really matter at all?

A: I think it will increase. But unlike the situation in the 1980s, the current widening is a reflection of our economic strength. The U.S. economy is growing more rapidly than those of our trading partners. So we are a magnet for capital, which also contributes to the trade deficit. Even so, I think it’s unfortunate when the world’s richest and most powerful country is borrowing excessively from abroad for too long a time, so I would like to see the trade deficit come down. But I think that opening markets and increasing our savings are the best ways to bring the trade deficit down. It’s also very important that we vigorously pursue our agenda of opening markets and bringing down trade barriers in other countries. We’ve already gotten new agreements in the services area, in communications, in information technology and, now, a new agreement with Japan on deregulation. But there’s a great deal that we have to do to continue opening markets, given that the trade deficit is a serious issue.

Q: Many Americans are uneasy about the recent move toward the globalization of the U.S. economy. But globalization has occurred before--hasn’t it?--and we’ve managed to survive. What’s different this time around? How is this affecting the political climate here at home?

A: I think what’s new and most unsettling--and at the same time what is most profoundly beneficial to humanity--is that this time the globalization involves not just the major industrial nations but countries whose economies and whose workers’ incomes are far different from those of Americans, sometimes by a factor of 10. It was only a generation ago, for example, that many South Koreans were living in poverty. With the kind of economic progress that globalization has generated, you see an economic event as rapid growth in the developing world, that I would argue is as important as any in this millennium. At the same time, however, because these income gaps are larger, the scale of the whole phenomenon is different, and it is more unsettling as well.

Q: How can Americans cope with this?

A: I think making the global economy work for all Americans--not just some Americans--is probably our most important economic challenge over the next decade or two. It’s not enough to have a larger pie unless everyone is getting a larger piece. It has always been true in the United States that our ability to lead internationally has depended on making it work for our people here. The GI bill was a crucial part of the context that made it possible for the United States to launch the Marshall Plan and to create the international framework--the United Nations, the IMF, the World Bank--that it did after World War II. I think we have to find ways today of making globalization work for more people. That goes both to questions of education and training, and to providing the right kinds of insurance and a safety net when there are dislocations. This is something that President Clinton and [British] Prime Minister [Tony] Blair and the other leaders were talking about this past week at the G-8 summit conference. It’s obviously something that has been very important to the discussion of trade policy.

Q: The United States has been pressuring Japan recently to do more to stimulate its economy. Two questions: First, what will happen if Tokyo does not do enough to spur its economic growth? Second, why should Japan’s leaders pay any attention to what other countries want them to do at home? The United States didn’t, when other countries were pushing Washington to reduce the federal budget deficit.

A: Japan is the largest economy in Asia and it has a very important effect as a trade recipient and as a provider of finance. A successful Japan will be much better for Asia and for the world. Continued weakness in Japan would make it substantially more difficult to engineer a resumption of growth in Asia and would increase the risks of another crisis--possibly one that would become more global in scope. Obviously it would affect the United States’ trade performance which in turn, would affect job-creation in the United States and perhaps also the level of U.S. markets. As for listening to other countries, I think an external view can often be helpful. International pressure was certainly one of the contributing factors that led to the decision to break the back of the deficit in 1993. It was appropriate for our major partners to highlight what was in the global interest, especially in a global economy where countries are interconnected by trade, by interbank deposits, by flows of capital.

Q: Some critics are blaming the International Monetary Fund for the current turmoil in Indonesia, contending that the economic policies that the IMF prescribed were so draconian that they inevitably brought on political unrest. Is there a point to that?

A: I think it’s a mistake to blame the doctor instead of the disease. The reality is that in the case of the Asian financial crisis, there was no other choice. The private sector was no longer prepared to finance these countries on the terms that had been in place, and that was a real problem. The IMF has tried to mitigate that by providing financial support based on appropriate policy positions which, to some extent, were successful. Without the IMF, you would have seen more capital flight, higher interest rates, slower growth, more unemployment, less confidence, more volatile and difficult problems. These are profound problems, profound economic and financial challenges that these [Asian] countries face, and there are no silver bullets.

Q: You’ve been a senior administration economic policymaker for more than five years now, having come from an academic career. When you look back over your time in public service, is there anything about this job that has really surprised you?

A: I’ve been struck by two things. The first is the complexity of so many problems that we deal. As an academic economist, I often looked at these issues through a single prism. Now, I realize that they need to be seen through many, many prisms. That often it’s important just to make it work. What’s important to get things done is to make the interests as mutual as possible. And that’s true both domestically and it’s true internationally.... The second is that for all the bad things people say about Washington, there are an enormous number of very capable, very dedicated people who, both here and in the career staff in the executive [branch] and up on the Hill, who come to work each day trying in their way to make this a better country.