Larry Summers is smart. Too smart to work as a temp. Which is what he would be if he had agreed to replace Bob Rubin as Treasury secretary for the waning months of the Clinton administration with no assurance — too strong a word in this administration; perhaps “indication” is more apt — that he will keep his job in a Gore administration. After all, as an economist with a brilliant academic career on hold, Summers knows that what he would call the “opportunity cost” of taking on the top Treasury job is very high indeed: It might well include giving up the Nobel Prize that would be in his grasp were he to return to Harvard, where at the age of 28 he became the university’s youngest-ever tenured professor.
But there are other reasons for believing that Summers, who came to some political prominence as a top adviser to Michael Dukakis’s 1988 presidential campaign, will keep the job should Tipper get an opportunity to redecorate the White House in 2001. For one thing, the administration is eager to keep the good times rolling. As the Financial Times put it, “If Mr. Gore is elected, Mr. Summers offers a prospect of further continuity on the economic front.” If Bill Clinton is steadfast in anything, it is in his belief that a Gore victory would be a vindication before history of Clinton’s policies and, perhaps, even of his behavior, since the vice president has loyally defended both. So the president is not likely to harm the Gore campaign by imposing on it an economic spokesman that it does not find congenial, especially one likely to appear on the talk shows to analyze the state of the economy during the months leading up to the elections.
Then there is the state of the economy, so robust as to pose a real danger to Summers’s reputation. It is difficult to succeed by succeeding a success. Bob Rubin knew when to go home. The stock market is booming, everyone who wants a job has one, inflation is more or less tame, the federal budget is in surplus as such things are (mis)measured here in Washington, and the so-called world financial crisis is easing. Exit Rubin, smiling (too cool a customer to gloat).
Never mind that he had little to do with these successes, which belong to Ronald Reagan’s tax reforms and his willingness to take a recession in order to sweat inflation out of the economy; to Alan Greenspan, whose fine “feel” for trends in the economy has kept it moving smartly along; and to a newly vibrant private sector, restructured by a combination of Mike Milken’s junk bond revolution and increased global competition. Or that Rubin was not the unalloyed success that the media would have us believe. There were, after all, some spectacular failures on his watch. It was Rubin who defied Congress and, with Summers as his point man before hostile congressional committees, used Treasury funds to bail out imprudent private investors in Mexico, sending a signal that the government would protect the reckless (creating what Summers would call “moral hazard,” were he still at Harvard). It was Rubin who misdiagnosed the crisis in Asia and sent Summers country-hopping to prescribe a lethal medicine of tight monetary and fiscal policies, thereby deepening recessions and causing massive social upheavals. And it was Rubin, relying on Summers’s economic analysis, according to the press, who decided to pour $ 4 billion down the Russian rathole before realizing that the funds merely passed through Moscow en route to private bank accounts in Switzerland.
But Rubin leaves, reputation intact — indeed, enhanced. Any chickens that come home to roost will find their homes in Larry Summers’s Treasury office. All of which Summers knows. He knows the economy is so good that it can’t get better, and might well get worse. He knows that the recovery in Asia is fragile, and might well prove a mere blip in a continued fall. He knows that he can’t count on Rubinesque charm to bail him out, should the domestic economy turn sour or the world economy plunge into crisis. Quite the contrary: His acerbic tongue and impatience with those dimmer than he — which includes just about everyone — have earned him enemies on the Hill and in the media, enemies that are waiting for this academic protege to slip up.
Even pro-Clinton newspapers are preparing to sink Summers at the first sign of trouble. The New York Times, after attributing to Rubin such massive credibility that “the power of his presence” helped to halt the October 1997 stock market slide, notes that Summers and Rubin “could not be more different.” Summers has “an inclination to be more interventionist. . . . Whether he can speak the language of the markets — whether he can walk down the Treasury’s steps and convey a sense of calm — is a test yet to come.” The Washington Post is also avoiding the praise it usually heaps on Clinton nominees. “Summers suffers in some important respects by comparison with Rubin, whose self-control and ease with himself are as evident as his deputy’s insecurities,” writes Paul Blustein, who then reports a poll of “elite global investors” showing that 37 percent believe financial upheaval would be at least “somewhat more likely” if Summers moves into Rubin’s office.
Only the promise of a long-term job could prompt this economist — who knows how to balance short-term risk against long-term gain — to sign on with Clinton-Gore. Which makes him the first important appointment of a Gore administration. Which is worrisome.
If nothing else, Rubin’s success as a trader at Goldman Sachs, and his deliberative demeanor, enabled him to act as a shield between Clinton and the woolier ideas emerging from the pizza-eating talkfests that were such a prominent feature of the White House in the early days of the Clinton administration. Rubin was able to shoot down then-Labor Secretary Robert Reich’s plans to redistribute income in good Old Democrat fashion. He was able to trump James Carville’s populist pandering by reminding Clinton that the bond market punishes profligate politicians by raising interest rates to slow down the economy and increase unemployment. That’s what prompted the Ragin’ Cajun to voice his famous wish to be reincarnated as the bond market, rather than as president, pope, or .400 hitter.
Gore will have Summers, not Rubin, at his elbow. A bad combination. For both are more inclined to intervene in the economy than are their predecessors. Both are beholden to the trade unions, although for different reasons. Gore quite simply wants their troops in the field during the primaries and the general election, and the money they extract from their members. Summers’s attachment to unions is more abstract. In a paper written with Jonathan Gruber and Rodrigo Vergara for the National Bureau of Economic Research, Summers flirts with the notion that “union bosses in corporatist nations” can more intelligently perceive the relationship between the taxes paid by workers and the benefits they receive, than can individual workers. Therefore, the widespread presence of trade unions makes the tax system more efficient, and higher taxes more palatable. Summers cites Sweden as an example of a country in which “the evolution of centralized bargaining” may have made possible higher taxes on labor, not a bad thing in Summers’s book, one suspects.
Gore and Summers are also as one in their disgust with entrepreneurs who seek short-term profits. Never mind that such profit-seeking is good for the economy. If you have any doubt that the invisible hand of the private sector trumps the heavy hand of government, just compare the productivity gains and increase in living standards resulting from the capital investments of greedy American profit-seekers, with the waste and poverty resulting from investments chosen in the national interest by Japanese and Indonesian finance ministers and politicians.
But neither experience nor theory can stay Gore and Summers from their interventionist rounds. Gore, in his astonishing environmentalist screed, Earth in the Balance, rails against the way markets distribute incomes and goods among the nations of the world; objects to “our transitory methods of calculating value,” preferring instead some system that would attach us more closely to nature; says that people who lease land “for short-term profits often don’t consider the future” (forgetting that the owner must do just that in setting the terms of the lease); and proposes “government purchasing programs” to stimulate technologies he favors but that private investors deem too costly and risky to finance — a bureaucratic picking of winners that brought the British economy to ruin in the pre-Thatcher years.
Summers is unlikely to play Bob Rubin to Al Gore’s Bill Clinton and to argue in the inner circles of a Gore administration that markets might, just might, direct capital more efficiently than the man he hopes will be his boss, come 2001. Again, let’s look at his writings. Economists generally agree that arbitrageurs and speculators perform a valuable function. Arbitrageurs pursue profits by buying a good in markets where it is cheap, and selling it in markets where it is dear, thereby moving resources to where they are most needed and bringing prices in all markets into line with one another. Speculators, writes Paul Samuelson, Summers’s Nobel laureate uncle and author of the world’s most famous economics textbook, “‘move’ goods from periods of abundance to periods of scarcity . . . , help[ing to] even out . . . price differences . . . among regions or over time.”
But Summers has no use for the arbitrageurs who make markets more efficient. To him, they are “economic parasites.” Indeed, the entire stock market consists of a game that “redistributes wealth between winners and losers, but . . . does not create wealth.” Really? Most economists believe that efficient stock markets reflect the latest information in the price of shares. That in turn permits firms with the best prospects to attract more capital cheaply. Recently, we have seen investors flee oil stocks and bid up the price of shares in high-tech companies. This diverts capital from an industry that is in decline and directs it to industries in which more capital is needed to develop new, productivity-enhancing products.
Which is one reason why, as Samuelson and co-author William Nordhaus explain in the latest edition of Economics, “When the countries of Eastern Europe decided to scrap their centrally planned systems and become market economies, one of their first acts was to introduce a stock market to buy and sell ownership rights in companies.” Unlike Summers, those who suffered for years without an efficient mechanism for allocating capital know a good thing when they see it. It will certainly come as news to those countries that envy the depth and efficiency of America’s capital markets to learn that the incoming secretary of the Treasury believes arbitrage and trading in shares are bad things. And that he favors a tax “on the purchase or sale of financial instruments” to discourage speculators and other “economic parasites” (presumably including Rubin, if he regresses to his old Goldman Sachs ways) from plying their trade, as Summers proposed in an unrepudiated article in the Boston Globe some years ago.
Nor is Summers likely to be curbed by dissenting colleagues. There won’t be any. Consider Gene Sperling, director of the National Economic Council, responsible for coordinating the administration’s economic policies. No one doubts that Sperling can have a job with the Gore administration if he wants one. Summers met Sperling when both worked on the Dukakis campaign, after Sperling had graduated from Yale Law School and dropped out of the Wharton School. Sperling went on to work for New York governor Mario Cuomo before joining the Clinton campaigns. George Stephanopoulos reminds us that both he and Sperling regard Mario Cuomo as their “hero.” Cuomo, recall, is the man who almost bankrupted New York state with tax-and-spend policies that drove businesses and taxpayers out and brought welfare claimants in.
No matter. After failing to persuade Cuomo to give up Albany for a seat on the Supreme Court, Sperling and Stephanopoulos led the charge to have Cuomo’s policies adopted on a national scale by Clinton. When the Clinton team broke into warring camps, with the deficit-reducers on one side and the “Putting People First” liberals on the other, it was Stephanopoulos and Sperling who held out for more spending, the deficit be damned. As one spending program after another gave way to the need to project fiscal prudence to voters who were nervous that, if elected, Clinton and the Democrats would spend and tax, Sperling and his partner-in-spending, as Stephanopoulos tells it, became more and more “dejected as we watched promise after promise disappear under the budget director’s blue pencil.”
Gore, who has a list of spending projects longer even than Clinton’s, quite naturally finds Sperling’s views congenial. Gore is, after all, more beholden to the trade unions and to other constituencies that will encourage him to loosen the purse strings. Public transportation, a higher minimum wage, spending on inner cities, research for exotic technologies to replace fossil fuels, sidewalks for the suburbs, higher pay for teachers, and more school buildings in which not to educate still another generation of children — these are only a few of the items on the Gore agenda.
Now picture the meeting in which Gore explores the budgetary implications of this wish list. No Rubin to suggest that Wall Street might react negatively. Only Summers, who has no use for the Wall Street “parasites,” and Sperling, who learned how to tax and spend at the feet of the master of those arts, Mario Cuomo. Both know that Gore’s deepest wish is to impose an energy tax, for which he argued strongly during the Clinton years, and which a Democratic House — a distinct possibility — might grant him in return for approval of some of the spending programs that they have deferred in the dry years since Newt Gingrich led the Republicans to victory in 1994.
If there are any doubts that such a tax would be a good thing, they will not be heard from Carol Browner, administrator of the Environmental Protection Agency and virtually certain to have a cabinet-level appointment in a Gore administration. Browner’s efforts to push environmental restrictions to the point where the costs clearly exceed the benefits, have been documented both in this magazine (“Gore’s Green Guys,” March 31, 1997) and by Resources for the Future, the respected and nonpartisan think tank. And her efforts to pile on still more regulations without congressional approval have recently come a cropper in the federal courts, which ruled that her proposed new clean air standards are based on shoddy science and anyhow represent a usurpation of Congress’s law-making authority.
Browner agrees with Gore that ours is a “dysfunctional civilization” and plans to help him put it right. Lest you think that this means only regulations affecting big business, consider that Gore’s acolytes at the Department of Energy are now considering a rule requiring all washing machines to be front-loading rather than top-loading because front-loaders use less hot water. Bad back doesn’t let you bend to empty a front-loader? Tell it to Secretary of Energy Bill Richardson, high on the list of possible Gore running mates.
So the Summers appointment tells us as much about Gore as it does about Clinton. Even those eager to push the appointment quietly through the Republican Senate concede that Summers is more liberal and more interventionist than Rubin, which suits Gore just fine. For the vice president has very strong views on just how each of us should be permitted by the government to live, and what portion of our incomes should go to pay to bring his vision of a better world into being, a world in which we all have “a kind of inner ecology that relies on the same principles of balance and holism that characterize a healthy environment.” Add to Summers and Sperling the team that Gore has in waiting at Energy, the EPA, and other agencies, and before we are very far into the next century, we might wish for the return of Bill Clinton, interns and all.
Contributing editor Irwin M. Stelzer is director of regulatory policy studies at the Hudson Institute. Bill Shew and Melinda Arons provided assistance for this article.
