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Summers recalls good old days as Clinton's Treasury secretary

Harvard University president Larry Summers (S.B. 1975), spoke to students in Wong Auditorium about a variety of economic topics, including his years in Washington.
Harvard University president Larry Summers (S.B. 1975), spoke to students in Wong Auditorium about a variety of economic topics, including his years in Washington.
Photo / Donna Coveney

Lawrence H. Summers (S.B. 1975), Secretary of the Treasury during the Clinton administration and a former professor of economics at MIT, returned to his alma mater to deliver a good-natured informal talk on the role economists play--and do not play--in forging public policy.

Summers, 48, now president of Harvard University, spoke without notes to students gathered in Wong Auditorium on Oct. 16. Strolling comfortably across the stage and sipping occasionally from a can of Diet Coke, he described moments both tense and instructive from his Washington years.

An instructive moment came to him and Jonathan Gruber (S.B. 1987), professor of economics at MIT, during a meeting on electricity deregulation that included former Vice President Al Gore and other high-ranking members of the administration.

Summers, who was Gruber's thesis advisor at Harvard, praised his former student for the economic analysis he had prepared. However, "political decisions aren't made entirely on an economic basis. Environmental concerns were important to Gore. For the sake of political harmony, I hung Jon out to dry," Summers said.

On the other hand, he noted, "ideas developed by economists can have a very substantial impact on public policy." He cited examples from the early 1990s of the power of economists' ideas.

"The profound change in national fiscal policy to focus on deficit reduction came from economists. The idea for index bonds, which have no natural constituency and have saved the U.S. several hundred billion dollars, came from the economics profession. And economic analysis has had a major role in world financial crises," he said.

Summers' own role as an economist had its "tensest moment" in averting just such a financial crisis. On Dec. 18, 1994, just after the election of President Zedillo in Mexico, "I got a call at midnight saying Mexico intended to devalue the peso. Within days, the peso was in free fall. Would Mexico, a former poster child for emerging markets, default?

"People rushed for the exits, trying to get dollars and get out. But what was the right policy for the U.S. and the international system? Treat this as a bank run and act to restore confidence? Or would a bailout create a moral hazard?" he asked.

The outcome was an economists' dream unfolding in political reality. Urged by economic advisors including Summers, President Clinton authorized $12 billion in "support" for Mexico without legislative approval by invoking the power to spend the funds in the name of exchange-rate stability. Since that time, the Mexican economy has been revitalized and a peaceful transition from one political party to another has occurred, Summers said. What's more, the United States made $450 million in profits from the loan, he added.

His general advice on being an economist: Always think like one.

"Whatever you're doing today, the ability to think like an economist permeates every aspect of life. If you doubt this, read the best book this year, 'Moneyball: The Art of Winning an Unfair Game,' about Billy Beane, the Oakland A's general manager. He uses econometrics to pick players and make decisions. His payroll is 40 percent of other teams.

"If it can happen in baseball, it can happen in every other walk of existence," Summers said.

Summers received the Ph.D. in economics from Harvard in 1982. He taught at MIT from 1979-82 and at Harvard from 1983-91. He was named vice president and chief economist for the World Bank in 1991. He became Undersecretary of the Treasury in 1993, Deputy Secretary in 1995 and Secretary of the Treasury in 1999. He has been president of Harvard since 2001.

Summers' talk at MIT was sponsored by the Undergraduate Economics Association and the Sloan Policy Forum.

A version of this article appeared in MIT Tech Talk on October 22, 2003.

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