In early August, Lawrence H. Summers, President Barack Obama’s top economic adviser, accompanied Vice-President Joseph Biden aboard Air Force Two on a trip to Detroit. Michigan has a fifteen-per-cent unemployment rate, the highest in America, and Detroit has become virtually a ward of the federal government: the United States now owns ten per cent of Chrysler and sixty-one per cent of General Motors. The purpose of Biden’s trip was to announce an additional $2.4 billion in federal grants, to help jump-start the electric-car industry; more than a billion will go to battery and auto manufacturers in Michigan.
Summers, who is the director of the National Economic Council, the White House office that coördinates all economic policy in the Obama Administration, has rarely travelled outside Washington this year, and was in Detroit on a fact-finding mission. After nearly a year of debate about how much federal intervention was needed to beat back the recession—a debate that started during the end of the Presidential campaign—he was somewhat optimistic. The principal measures that Obama had taken—implementing the stimulus package, rescuing the banks, restructuring the automakers—had begun to stabilize the economy. In a speech three weeks earlier, Summers had put it this way: “We were at the brink of catastrophe at the beginning of the year, but we have walked some substantial distance back from the abyss.” It seemed like a good moment to check in on the government’s investments in Michigan.
Michiganders were thankful for the largesse. At NextEnergy, a nonprofit incubator for alternative-energy technology, an audience of local officials and business leaders waited eagerly under a hot sun to hear Biden and Summers announce the grants. Governor Jennifer Granholm, a canny politician who has worked every angle to bring federal assistance to her state, introduced the Vice-President as “the man with the cash,” and the crowd cheered. Later that afternoon, at an auto plant, an assembly-line worker rushed over to shake Summers’s hand. “My family thanks you!” he exclaimed. Summers, wearing protective goggles and a yellow reflective vest over his suit, smiled and momentarily basked in the glow of gratitude that is familiar to a politician but rare for a White House economist.
Particularly this one. Larry Summers, one of the most brilliant economists of his generation, left Washington nine years ago as an outgoing Treasury Secretary celebrated for having helped to create the boom of the nineteen-nineties. Harvard quickly hired him as president of the university, in 2001, and he arrived with an ambitious agenda that included increasing financial aid, placing a bigger emphasis on science, pushing faculty to spend more time teaching undergraduates, and continuing the expansion of Harvard into the Allston area of Boston. But five years later he was gone, forced out by a faculty that had lost confidence in him after a series of controversies, beginning with a dispute with Cornel West, a professor of Afro-American studies, and ending with comments that Summers had made about women faculty in the sciences. The problems stemmed from the blunt, sometimes arrogant manner for which he had been known throughout his career. Then, as the economic crisis began, Summers’s policymaking in the Clinton era, with its legacy of deregulation, came under attack as a source of the current troubles. But, in Detroit, all that seemed to be in the distant past.
Later that afternoon, Summers found himself in the office of Detroit’s mayor, Dave Bing, meeting with executives from auto-parts suppliers. Everyone gathered around a large circular table. The faces of a mother and child smiled down on them from an oversized photograph on the wall. Governor Granholm, whose Midwestern sweetness can sometimes mask her shrewdness, chaired the meeting. Summers assumed that he was there simply to listen to the concerns of another group of hard-hit manufacturers, but Granholm was not interested in sympathy alone. Michigan had just created a loan program to help old-line firms make the transition to new-economy industries, like solar-panel production and microchips, and the meeting turned into a plea to the Obama Administration to adopt the program as a federal plan.
Summers knew that if he gave the slightest glimmer of assent he’d be reading about a “new White House initiative” the next day in the Detroit News. But Obama was preparing to give a major speech on manufacturing sometime in the next two months, and the White House was looking for policy ideas to ease the crisis. Summers opened with a tone of skepticism: The future of activist government was at stake, he warned. If Obama’s programs wasted money, they would discredit progressivism itself. “I would have guessed that bailing out big banks was going to be unpopular, and bailing out real companies where people work was going to be popular,” he said. “But I was wrong. They were both unpopular. There’s a lot of suspicion around. Why this business but not that business? Is this industrial policy? Is this socialism? Why is the government moving in?”
Summers looked exhausted. The previous day, he hadn’t left the White House until after midnight, and he was up at dawn to make the flight to Detroit. As Granholm talked about layoffs, he eyed a bottle of soda on the table in front of her. Summers drinks many Diet Cokes a day, and he was badly in need of one. He got up, his shirttails peeking out from underneath his jacket, and shuffled over to a counter at the side of the room in search of a caffeinated beverage. All he found was an empty glass, which he carried back to his seat. The manufacturers took turns explaining their plight. Wes Smith, of E. & E. Manufacturing, argued that although the public hates bailouts, “helping manufacturing is popular.” An executive from Atlas Technologies quoted Jeffrey Immelt, the head of G.E., who had recently said that manufacturing jobs should make up twenty per cent of total employment in the United States—twice what it is now. Several of the participants argued that the bank bailouts hadn’t revived lending in their industry, so the government needed to intervene. Ned Staebler, one of Granholm’s top economic advisers, explained excitedly that the new assistance program for struggling companies had already approved its first loan even though he hadn’t advertised the program.
As they spoke, Summers caught Granholm’s attention and mimed a request for some of her soda. She moved the bottle closer to him, smiling. He drank quickly, but it didn’t help. He shifted his weight in his chair. He made jerky, shaking motions with his head. He ran a hand through his hair. Still, by the time Mario Sciberras, of Saline Lectronics, was speaking about what he would do with one of the new loans, Summers was asleep.
This is something of a habit: he has fallen asleep in two public meetings—and, reportedly, one private meeting—with the President this year. Yet, when Summers came alive in the Mayor’s office, he didn’t appear to have missed a thing. He is so aware of the prickly caricature that has built up about him over the years that he now often speaks in a tone of exaggerated politeness, burying his barbs underneath a torrent of deferential phrases. Still, he does not let bad arguments slip by uncontested. According to White House colleagues, in economic meetings in the Oval Office Summers can rarely resist challenging or correcting others, even Obama. The meeting in Detroit was no different.
“It’s terribly important that we be very tough-minded about doing things that work, not things that don’t work, and about testing, challenging, claims,” he told the executives. And then, like a machine gun on a rotating turret, he went around the table one by one and questioned every claim he had just heard. “I was very much aware of Jeff Immelt’s statement about twenty per cent,” he said. “That was a very impressive claim, because if you look at every country the manufacturing share of employment has been going down, and I asked him if he had any data analysis to back up his statement. I’m still waiting for the answer.” (Immelt did eventually send him some information.)
Summers was equally doubtful of the idea that fairness required the government to bail out every struggling industry. He said, “The point that some of you made is one that, frankly, a number of the President’s more political advisers make with great frequency: how could you lend money to the big banks in New York and not lend money to regular folk who are employing a hundred people and are losing a hundred jobs?” But, he said, “just like occasionally in war there are unintended benefits, occasionally in bailouts there are unintended beneficiaries.” The bank bailouts, which, he noted several times, began under President Bush, “were directed at preventing a collapse that would have led millions of people to be out of work, not as support for those institutions.”
He also took exception to the idea, voiced by several people in the meeting, that intervening in manufacturing was as imperative as stabilizing the financial industry. “Manufacturing is very special,” he said, “but I promise you that the people involved in energy production think that it’s kind of special. I promise you that there are a lot of people involved in various kinds of retail activities who think they have a crucial role in the economy, and they’re right.”
Finally, he turned to Ned Staebler. Granholm seemed to hold her breath as Summers prepared to deliver his verdict on the new program. “You said you hadn’t really marketed your program at all, and you’ve been able to get a number of people who have been able to take advantage of it without marketing,” Summers told Staebler. “One reaction was ‘Isn’t that terrific? There’s this demand without marketing it.’ ” But, he added, another way to look at it was that Staebler had started a program of loans in which only “the people who are well connected and fortunate enough to know about them are able to take advantage of them.” He said that the Michigan program reminded him of a term used to criticize Asian countries during the financial crisis of the nineties: “crony capitalism.” He added, “I’m not saying this as a negative. I’m really saying this to help you understand what the issues are.”
It was Summers’s instinctive skepticism and ability to penetrate to the heart of an issue that had initially impressed Obama. Summers had remained neutral during the primaries last year. But he began briefing Obama during daily conference calls after the Lehman Brothers collapse, a moment when a subtle power shift took place in the campaign, away from the political advisers who were helping Obama get elected and toward the policy wonks he would need to help him navigate the recession. Summers became the hub of this new economic team, one that has made a series of crisis decisions that may prove more consequential than anything else that Obama does in his Presidency.
Summers was born in 1954 in New Haven, Connecticut, where he lived until he was five. His parents were both economists, and his father taught at Yale, but the family moved to the suburbs of Philadelphia so that he could take a teaching job at the University of Pennsylvania. Two of Summers’s uncles, Paul Samuelson and Kenneth Arrow, were also economists. Summers’s childhood was not quite like that of the other kids in postwar suburbia; he and two younger brothers—one is now a psychiatrist and the other is a lawyer—were taught from grade school to approach life with an economist’s view of the world. His father once set up a bidding system to distribute TV-watching times. When his parents went out in the evening, they often gave Larry a math problem to work on. If they forgot, his mother has recalled, he would rush out the door after them and demand one. According to Arrow, Summers’s father taught him statistical methods from an early age, and in the sixth grade Larry created an analysis of baseball games that attempted to predict the probability of a team’s performance at the end of the season based on its position in the standings on the Fourth of July.
Of all the social sciences, the economics profession prides itself on being the most relevant to real-world problems, and Summers was attracted to the links between academic work and public policy. During an interview in his White House office, overlooking the Rose Garden, as he sat in a wing chair with his feet propped up on a coffee table, he said, “I remember when I was twelve or thirteen being told with pride about how there had been a Department of Commerce publication called B.C.D., the Business Cycle Digest, and under the influence of my father’s close friend Art Okun it had been renamed Business Conditions Digest, because now, with modern economic policies, there was no inherent business cycle anymore, and what an achievement that was. In retrospect, it was a sort of hubristic moment in the economics profession. But what I absorbed was this sense that you could have these huge achievements, and you could do these things that were good for people, and be engaged in the world and in policy, and be doing it in the kind of mathematical and scientific way of thinking that I had always been hugely drawn to.”****
In high school, Summers found a book on his father’s shelf titled “Decision Analysis: Introductory Lectures on Choices Under Uncertainty,” by Howard Raiffa, an economics professor at Harvard. Raiffa explained how, when faced with a real-world decision, one could use probabilities to quantify even the most difficult choices. Summers told me, “That book was a very large influence on me, because it introduced me to the idea of probabilistic thinking.” (His penchant for speaking in terms of probabilities is now so pronounced that Obama regularly teases him about it. “Larry will give precise quantitative estimates of things that are difficult to quantify,” one of his colleagues told me. “So the President will say, ‘I think there’s a seventy-two-point-seven-per-cent chance that I’m going to wear black shoes in the morning.’ ”)
Summers graduated from high school a year early, and was accepted at the Massachusetts Institute of Technology. He thought of majoring in math but decided to stick with the family business of economics. He had a lot to live up to: the previous year, 1970, Paul Samuelson, a former Kennedy adviser, who revolutionized economics by making it a more rigorous and math-based discipline, won the Nobel Prize; in 1972, Kenneth Arrow won it, for his work on the general-economic-equilibrium theory. Summers told me that he wasn’t a top student, that he devoted too much time to the debating team. Paul Joskow, one of his professors, said, “Larry was an outstanding debater, and an outstanding debater is someone who thinks of a question from both sides.” He added, “Larry does sometimes interact with people in a debating format, and expects them to reciprocate and to be able to engage in an intellectual tennis match.”
At M.I.T., Summers focussed on working through real-world problems using rigorous methods, rather than following the drift of many of his peers, who, he believed, were building elegant and useless theories just for the sake of it. When he applied to the graduate program in economics at Harvard, where he studied from 1975 to 1979, the beginning of his essay read, “Many children are taught to believe in God. I came to believe in the power of systems analysis.”
At that time, economics was being transformed by the computer, which suddenly made enormous data sets readily accessible. “Larry was in the vanguard of the empirical revolution in applied economics,” James Poterba, a prominent M.I.T. economist, who once worked as a research assistant for Summers, told me. At Harvard, Summers’s most influential mentor was Martin Feldstein, a conservative who was known for his emphasis on data rather than on theory.
Summers’s first important academic paper, published in 1979, with Kim B. Clark, who is now the president of Brigham Young University—Idaho,* used Feldstein’s empirical approach to disprove one of his own papers. Feldstein had argued that most unemployment was short-term, and that workers quickly reëntered the labor force. By mining newly available records, Summers discovered that, as he recounts, “somebody was unemployed for three months, they dropped out of the labor force for two months, and then they were unemployed for three more months, and then they got a job. The right way to think about that was that somebody was out of work for eight months. But in the employment data it showed up as two three-month spells of unemployment, which caused people to conclude that most unemployment is due to people who are out of work only for a short time.” The paper changed the way that many economists thought about the nature of unemployment.
M.I.T. hired him as a professor in 1979, then Harvard offered him tenure in 1982, when he was just twenty-seven. He was one of the youngest people to receive tenure in the university’s history. According to a friend of Summers’s, Harvard had wanted him earlier that year, but the university’s rules required him to have a Ph.D., and although he had finished his graduate work in 1979, he hadn’t yet turned in his doctorate, something that mystified his colleagues. “They had to get him to turn the thing in pronto, and have his committee pass him, so that they could move forward on the process,” the friend said. “This is a guy who published like a fiend, especially in those days. So why three years to get his Ph.D.? Well, his uncle Paul’s dissertation got Paul the Nobel Prize. And his uncle Kenneth’s dissertation got Kenneth the Nobel Prize. If you’re Larry, it’s pretty hard to turn in that dissertation.”
A flurry of breakthroughs similar to his unemployment work followed at Harvard, although Summers subsequently hit “home runs” rather than “grand slams,” according to Brad DeLong, an economics professor at the University of California at Berkeley, and a former student of Summers’s. “There wasn’t one thing that made people say, ‘This guy is going to be remembered in economics for the next hundred years because of contribution X.’ Instead, there are forty brilliant insights scattered around whole bunches of literatures”—especially finance, labor, and macroeconomics. Summers published prolifically and had an army of research assistants who now populate the upper ranks of the profession. “Larry’s reach as an intellect is much greater than his work,” Lawrence Katz, a Harvard economist, said. “Almost every applied economist out of Cambridge, which is a pretty big chunk of the profession, from 1978 to the early nineties was greatly influenced by Larry.”
Even in the culture of ferocious debate that characterized the economics departments of M.I.T. and Harvard, Summers stood out for his confrontational approach. “Larry’s impressed by no one and never was,” James Hines, a former Harvard economist who now teaches at the University of Michigan, said. “There was an awful lot, especially at Harvard in those days, of being impressed by people for the titles that they held, and none of that would ever work on Larry. Graduate students like me gravitated to him specifically for that reason.” Hines added that debate in economics, unlike the humanities, is “a very rough back-and-forth. And, oh my God, Larry put everybody else to shame. He was vicious among economists.”
Summers told me that, as a graduate student, he first studied claims, made famous by economists at the University of Chicago, that financial markets are always rational and self-correcting. He said, “I encountered a sentence that was much quoted: ‘The efficient-market hypothesis is the best established fact in social sciences.’ Any sentence like that is a red flag to an ambitious academic.” Summers produced a body of work that undermined the efficient-market hypothesis, or E.M.H. A memorable paper on the subject, which he wrote in the early eighties but never published, began, “THERE ARE IDIOTS. Look around.” According to Justin Fox’s recent book, “The Myth of the Rational Market,” that paper persuaded Fischer Black, one of the leading theorists of E.M.H., to essentially abandon his belief in the hypothesis.
In 1982, Feldstein was named the chairman of Ronald Reagan’s Council of Economic Advisers, and Summers followed him to Washington. Feldstein had been hired to add intellectual heft to the Reagan White House, and he had no qualms about publicly challenging Reagan’s more extreme supply-side advisers. His concerns about rising deficits and his calls for raising taxes made him a hero to congressional Democrats. Reagan’s Treasury Secretary, Donald Regan, told Congress that Feldstein had learned everything from libraries rather than from the real world and that the members could just throw away his annual economic report. Feldstein was marginalized, and returned to Harvard in 1984. (After the experience, Reagan threatened to abolish the C.E.A.) Feldstein’s truthtelling greatly affected Summers, and his own research became more focussed on battling economists, like Reagan’s supply-siders, whose work, as he saw it, was grounded in abstractions and wishful thinking. He wrote, “No small part of our current economic difficulties can be traced to ignorant zealots who gained influence by providing answers to questions that others labeled as meaningless or difficult. Sound theory based on evidence is surely our best protection against such quackery.”
By the time Summers returned to Cambridge, he was becoming a star in his profession. The Boston Globe ran a fourteen-page profile of him in 1986. (The piece included this observation from Summers: “When I look out the window at my backyard, I can’t think of anything interesting to ask. I mean, it’s green, it’s growing—but nothing occurs to me that any concentrated effort of thought could possibly enlighten. Whereas in economic, statistical, or mathematical kinds of things, I can think of lots of questions.”) The next year, Jack Corrigan, a friend of Summers from Harvard who had gone on to work for Governor Michael Dukakis, invited him to meet with the Governor, who was then campaigning for the Presidency. Summers became one of his top economic advisers.
The campaign was a revelation to him. “It was a whole different world,” Summers told me. “It drew on some of the skills that one developed in college debate, and I think that, unlike some other economists, and probably contrary to my reputation, I was pretty quick to figure out that this was a political competition. It was played according to a set of political rules, and the more emphatic explanation of the neoclassical model was probably not the best way to be helpful.” He added, “It certainly increased my appetite to serve in government. But it also made me aware, in a way that had not totally been the case before, that there was a lot more to public policy than estimating a parameter.”
The urtext of economic policymaking in the Obama White House is a fifty-seven-page memo to the President, prepared in late November and early December of last year, by Summers and his deputy, Jason Furman. It has a five-page executive summary, and forty pages of comprehensive discussion about nearly every economic and budgetary issue that the new President would face in his first months in office—the stimulus, TARP, housing policy, the state of the automobile industry, the deficit, potential budget savings, regulatory reform. An eleven-page appendix details recommendations for items to be included in the stimulus bill that Obama proposed in his first weeks in office.
On Tuesday, December 16, 2008, as five inches of snow fell on Chicago, Obama’s top advisers gathered in his transition headquarters to discuss the memo. Obama sat on one side of a large square table, and crowded around the three others were members of his incoming team: Biden; Summers; Rahm Emanuel, the chief of staff; David Axelrod, Obama’s senior adviser; Timothy Geithner, the Treasury Secretary; Christina Romer, the chair of the Council of Economic Advisers; Peter Orszag, the budget director; Jared Bernstein, Biden’s top economic adviser; and several more. Others, like Lee Sachs, a former Bear Stearns executive and Clinton Treasury official, who was an expert on the financial crisis and who later joined Geithner at Treasury, were brought in via teleconference. Summers led the meeting like an orchestra conductor, directing the other economic advisers, each of whom made a presentation.
Perhaps nobody’s task was more important than Romer’s. She had drafted a crucial section of the memo which included an economic forecast and projections about the impact of a fiscal stimulus. Romer was well suited for the job; an economic historian, she was a close student of Washington policymaking during downturns. One of her key papers as an economist at the University of California at Berkeley, where she had spent the previous twenty years, showed that, contrary to popular belief, Franklin D. Roosevelt’s spending programs hadn’t pulled America out of the Depression. (She found that monetary policy was the key factor.) Conservatives had seized on the paper to disprove the efficacy of fiscal stimulus, but Romer’s point wasn’t that Roosevelt had spent too much to no purpose; it was that he hadn’t spent enough. When faced with a severe recession, she believed in overwhelming force.
Summers has been working in Presidential politics for two decades, but Romer was entering government for the first time. “I’m the quintessential outsider here,” she told me. But she was a “giant supporter of the President, probably since 2004.” She said, “On a bad day, my husband would find me at home clicking on the Democratic Convention speech, saying, ‘I want this man to be President.’ ” At the December meeting, it was Romer’s job to explain just how bad the economy was likely to get. “David Axelrod said we have to have a ‘holy-shit moment,’ ” she began. “Well, Mr. President, this is your ‘holy-shit moment.’ It’s worse than we thought.” She gave a short tutorial about what happens to an economy during a depression, what happened during previous severe recessions, and what could happen if the Administration didn’t act. She showed PowerPoint slides emphasizing that the situation would require a bold government response. The purpose of a stimulus is to fill the hole left during a recession by the difference between the economy’s potential and what it’s actually producing—what economists call the “output gap.” She explained the impact of different types of stimulus, giving a lesson on “fiscal multipliers”—the term economists use to describe the economic impact of every dollar of stimulus. For instance, she explained, a dollar of government spending raised the G.D.P. by about a dollar fifty, while every dollar of tax cuts, which are partially saved, generally returned about a dollar or less.
Axelrod told me, “The basic message was that, if we didn’t act quickly to replace the output we were losing, unemployment could skyrocket.” Romer mentioned that employers had dropped more than half a million workers from the payrolls in November, the biggest cut in more than three decades. “The conditions are grim, and deteriorating rapidly,” she told the President.
The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”
There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”
There was also a mechanical argument against a stimulus of that size. Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future.
Summers brought a third argument to the debate, one that echoed his advice to Bill Clinton sixteen years earlier, when his Administration was facing persistent budget deficits that Summers believed were suppressing economic growth. He, like Romer, was guided by an understanding that in financial crises the risk of doing too little is greater than doing too much. He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.
When the meeting broke up, after four hours of discussion, interrupted only briefly when the President brought out a cake and led the group in singing “Happy Birthday” to Orszag, there was still indecision about how big a stimulus Obama would recommend to Congress. Summers, Romer, Geithner, Orszag, Emanuel, and Jason Furman huddled in the corner to lock down the number. Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. The final legislation was for seven hundred and eighty-seven billion dollars.
“A lot of my research has been figuring out what policymakers did, why they did it,” Romer told me. “I have a whole new level of sympathy. Until you’ve experienced it, you don’t realize how hard it is. It’s humbling.”
At the start of 1993, things were looking good for Summers. At thirty-eight, he was ending a two-year stint as the chief economist of the World Bank, and was a leading candidate for the John Bates Clark Medal, which is awarded every other year to an economist under forty years old, and is the most prestigious prize in economics short of the Nobel. He was married to Victoria Perry, a lawyer; the couple had twin daughters, and a son on the way. Press reports, stoked by allies in the Clinton campaign, hinted that Summers was in line to run the Council of Economic Advisers.
But there was a problem. At the World Bank, in 1991, Summers’s penchant for provocation had led him to sign a memo written by a subordinate, which argued—in a tone that was meant to be outrageous, in the hope of stimulating debate—that developed countries should ship their pollution to the Third World. “The economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable,” the memo said, citing the mutual benefits of such an arrangement between developed and undeveloped countries (one group had lots of waste; the other needed ways to make money). It was the kind of argument that would thrill a college debater but which in the world of public policy can be a killer. The so-called “toxic memo” was leaked to the press in 1992, precipitating an avalanche of outrage from columnists and environmentalists. Al Gore, the incoming Vice-President, made it clear that Summers was not welcome in the new White House. Perhaps equally harmful to Summers’s prospects for the C.E.A. job was the fact that, of the four top slots on the economic team, three were already filled by white men (Lloyd Bentsen, at Treasury; Robert Rubin, at the N.E.C.; and Leon Panetta, at the Office of Management and Budget). Clinton was serious about gender and racial diversity, and he picked Laura Tyson to head the C.E.A., the first woman to have the job.
In turned out to be only a temporary setback. In the spring of 1993, Summers won the Clark Medal, and he was offered another Administration job, an unlikely one—he became a diplomat. Summers said, “The luckiest thing that ever happened to me was that Lloyd Bentsen chose to make me Under-Secretary for International Affairs, which was a lower-ranking but in many ways very powerful and operational position. You negotiated communiqués on currencies, you negotiated aid programs. While my dominant orientation as a researcher had been domestic, between the World Bank experience and the job I landed at Treasury my orientation became more international and financial.” In that job, and in subsequent higher positions at Treasury, he became one of the central participants in resolving the major financial crises of the nineteen-nineties in Russia, Brazil, Asia, and Mexico.
The Mexican-peso crisis came first. In 1994, the peso underwent a sudden devaluation, brought on by ill-conceived election-year policies of the incumbent government. Summers helped organize a fifty-billion-dollar rescue package to stabilize the situation and restore confidence. Since his days tearing apart the E.M.H., Summers had had a healthy academic understanding that markets under severe stress could be thrown so out of whack that their self-correcting mechanisms broke down and required outside intervention. He often compared the psychology that takes hold during a financial crisis to a run on a bank. “The peso crisis was the first thing I had dealt with in which the bank-run metaphor that I had written about earlier had really been a central kind of phenomenon,” Summers told me.
During the Clinton years, Summers also worked to tame his reputation as an intellectual bully. He developed a close relationship with Robert Rubin, Clinton’s second Treasury Secretary, who adopted Summers as a protégé. They were a curious pair: Rubin, the self-effacing Wall Street titan (he had helped run Goldman Sachs), and Summers, the confrontational academic. They bonded over a mutual devotion to probabilistic decision-making, and, like many of the people Summers has worked for over the years, Rubin believed that his mind was worth the price of his idiosyncrasies. “Once Rubin decides that somebody is outstanding, he’ll push him for lots of things,” a good friend of both men said. “So he pushed Larry.”
Summers self-consciously adopted many of Rubin’s managerial techniques. He gave subordinates more credit. He engaged in less intellectual combat. He started sentences by admitting that he might not know all the facts at hand. (He even became friendly with Al Gore, a photo of whom now hangs in his White House office.) “I became more effective as a public official by watching Bob, listening to his suggestions and thoughts,” Summers said. A few weeks after Clinton’s 1996 reëlection, Rubin negotiated a deal with the President. He would remain as Treasury Secretary for at least two more years, and then Summers, who by then was Rubin’s deputy, would replace him. In the meantime, Summers would be allowed to attend senior economic meetings at the White House—the only sub-Cabinet official with that privilege. Clinton agreed to the plan.
By the time Clinton left office, the Rubin-Summers Treasury Department was venerated for its management of the economy. Two facts seemed to tell the story: the unemployment rate was 3.9 per cent, the lowest in thirty years, and the deficit, which was two hundred and ninety billion dollars in 1992, had been turned into a two-hundred-and-thirty-billion-dollar surplus in 2000. But the current crisis has led to a reassessment of that era. Many critics have argued that Clinton’s 1999 repeal of the 1933 Glass-Steagall Act, which had separated commercial and investment banks, contributed to the meltdown last year. “It was a clear signal to the big banks to get much bigger and to become kind of financial supermarkets,” Robert Reich, Clinton’s first Labor Secretary, said. “It’s not the biggest factor, but it’s certainly a step along the way.” In an article on the causes of the current crisis, Joseph Stiglitz wrote, “When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top.”
But others note that the pure investment banks, like Lehman Brothers, have been the greatest source of instability, while the banks with combined commercial and investment arms have fared the best. “Banks did terrible things, investment banks did terrible things, a big insurance company named A.I.G. did terrible things, but basically none of that was enabled by the repeal of Glass-Steagall,” said Alan Blinder, an economist at Princeton, who had his share of confrontations with Summers when he was a member of the C.E.A., in the first two years of the Clinton Administration. Brad DeLong added, “To say that the breaking down of the Glass-Steagall wall between investment banks and commercial banks was the source of the current crisis is just wrong.”
However, the main criticism of a dozen economists, all of whom know Summers personally, is that during the late Clinton years, in two important cases, he seemed to forget his own warnings about financial markets. The first was a debate over opening up Asian markets to financial liberalization. Summers believed that several Asian countries, especially South Korea, were unfairly refusing to allow American financial-services firms to operate there. “The Asian countries kept pushing to regulate hedge funds, and these guys were dead set against it,” the friend of Rubin and Summers said. “They did have more belief in the ability of the financial markets and financial institutions to police themselves than now seems to be warranted, and that I think is a major issue.”
The second case cited against Summers is his hesitancy about regulating derivatives. In this instance, he was to the right of Rubin. Derivatives are contracts intended to perform the financially useful function of spreading risk. But in recent years they served mainly to concentrate it. In Rubin’s memoir, “In an Uncertain World: Tough Choices from Wall Street to Washington,” he describes the debate that he and Summers had over the issue. “Larry thought I was overly concerned with the risks of derivatives,” Rubin writes. “His argument was characteristic of many students of markets, who argue that derivatives serve an important purpose in allocating risk by letting each person take as much of whatever kind of risk he wants. Larry’s position held together under normal circumstances but seemed to me not to take into account what might happen under extraordinary circumstances.” Summers told me, “If we had known that derivatives markets would mushroom the way they did and that regulators would remain spectators, we would have acted. With hindsight, all of us with involvement in financial policy wish we had done more to forestall problems.”
But at the end of the Clinton era Summers’s achievements still seemed unassailable. He had gambled by leaving academia and trying to make his mark in government, and he had become not just a government economist but an economic statesman. Rubin was proud of his selection of Summers as his replacement. So, when members of the search committee for Harvard’s new president hesitated about whether to hire Summers, because of concerns over his temperament, they called Rubin, and he allayed their worries.
At the beginning of this year, Timothy Geithner seemed like the Administration official most likely to soon be spending more time with his family. He had been a young star in the Clinton Treasury Department. Assigned as a special assistant to Summers in 1993, he rose with him through the federal financial bureaucracy. They engaged in intense debates on the financial crises, and became friends. (“The way Tim came up through Treasury is that he was the only one who would tell Summers he was full of shit or that an idea was stupid,” a Treasury official told me.) In 2003, he was named president of the Federal Reserve Bank of New York. In that capacity, he helped Henry Paulson and Ben Bernanke stave off financial apocalypse in September of last year. Before the election, Obama interviewed Geithner in New York. “I think you’d like him,” Obama told Axelrod. “He seems like a really interesting and solid guy with the right sensibilities.”
But Geithner’s nomination as Treasury Secretary was marred by revelations that he hadn’t paid various personal taxes. Then, on February 10th, two weeks after he was confirmed by the Senate—where thirty-four members voted against him, more than against any other Obama Cabinet nominee—he gave a highly anticipated speech laying out the Treasury Department’s plan to nurse back to health the still fragile banking industry. It was immediately panned, and the following day the Dow dropped three hundred and eighty-two points, a reflection of Wall Street’s alarm that the plan lacked sufficient detail—or that perhaps there really was no plan. “Geithner, that poor son of a bitch,” Axelrod told me. “He was going to be the first human sacrifice of our Administration as far as Washington was concerned.”
The day after Geithner was confirmed, he had sat down in the Oval Office with Obama, Biden, and Summers. “We have to understand these five big things we’re stuck with that we inherited and that we’re going to have to solve and that are going to be very difficult,” he said. On his list were Fannie Mae and Freddie Mac, A.I.G., and—most important—the big banks that some feared were teetering on the edge of insolvency, specifically Bank of America and Citigroup. As Christina Romer had done in Chicago, Geithner warned that the problem was worse than the public understood, and would require more intervention than was popular.
Geithner proposed an alphabet soup of programs to entice the private sector to take bad loans off the balance sheets of struggling banks. The crux of his plan was the stress tests. The Federal Reserve and other regulators would examine the nineteen biggest banks to reveal how much capital they would require if the economy worsened, and the results would be publicly released in May. The idea was that the process would restore confidence in the banks and reassure investors. But throughout the spring the plan was attacked by a growing number of economists and members of Congress as a pale alternative to nationalizing the weakest banks. In February and March, Paul Krugman alone wrote seven columns in the Times deriding the plan and calling for nationalization.
What was more troubling for Geithner was that the White House seemed to be losing confidence. The political advisers dreaded the bailouts. Axelrod was frustrated by what he saw as undue deference toward the banks. “I ran a small business for twenty-three years,” he said, referring to his political-consulting firm. “If I went broke, nobody was going to come in and save me, and if I didn’t do well in a given year then I didn’t take a large bonus and neither did anybody else. And that’s the way most Americans operate.” Rahm Emanuel would blow up when various complicated Treasury ideas reached his desk without warning. “What the fuck are you guys doing?” he would demand. “That’s terrible politics.” Romer and Summers had their doubts. Romer believed it was unlikely that the most troubled banks would be able to raise capital privately, and thought that Obama should prepare for a major government intervention. Summers, too, wondered if they needed a more bold, confidence-restoring approach. Axelrod said, “Larry did voice an argument that there might be a need for a more dramatic event with some of these banks, akin to the bank holiday.” (During the Depression, F.D.R.’s bank holiday was used to reorganize weak banks and close insolvent ones.) Obama’s own confidence in Geithner was tested by the steady bombardment of criticism.
On Sunday, March 15th, Geithner was summoned to the White House for a meeting with the President and his senior aides about whether Obama should adjust Geithner’s plan—or scrap it and come up with something else. Geithner did not go unprepared: he brought with him his advisers Lee Sachs and Gene Sperling, who ran the N.E.C. during the Clinton Administration, and six other staffers. Geithner had a line he often used that summed up how he and his colleagues at Treasury would prevail: “Plan beats no plan.” The meeting lasted seven hours. Obama’s advisers were so divided that he left them in the Roosevelt Room after the first two hours, saying, “You guys work this out, and when I come back I want you to tell me what your agreed-upon approach is.”
Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, “The one thing that was absolutely clear was, we were not in a position to go back to Congress.”
Summers played the role of “the ultimate murder board,” according to Sperling, making the Treasury officials defend their ideas the way a Ph.D. student must defend a dissertation. He challenged and provoked Geithner to make sure that he had thought through every aspect of the plan. They argued back and forth, as they had done in the Clinton Administration, and their intensity was often jarring to the other Obama advisers. Summers didn’t trust the regulators, and was particularly worried about whether the stress tests designed by them were sufficiently tough on the banks. He pointed out that, in the days before Lehman, Bear Stearns, and Washington Mutual crashed, the same regulators had said that capital at those institutions was more than adequate.
In the end, though, Summers acknowledged that there were no better options, and Geithner’s plan survived intact. On March 31st, Summers sent the President a page-and-a-half memo outlining the reasoning behind the decision not to nationalize any banks. Obama was on his way to the G-20 meeting in London, and he wanted to be prepared with the best case against it.
The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)
Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe—interest rates had reached a hundred per cent—that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.
The results of the stress tests showed that the banks were not in as dire shape as commonly believed. Most of the nineteen banks were able to raise money privately. “It worked,” the Treasury official said. “People had money to put into banks. The nationalization crowd would have had the government putting all that money in.” On the day the results of the stress tests were released, Geithner met with the President. He smiled and handed Obama the first page of a report from Bridgewater Associates, a private investment firm that had consistently taken a dim view of Treasury’s plans. The report was headlined “We Agree!”
On October 24, 2001, Summers met with Cornel West. Summers has never publicly discussed their exchange, but West’s new memoir, “Brother West: Living and Loving Out Loud,” offers his version of events. He writes that Summers, after summoning him to his office, had criticized him for missing too many classes and handing out too many A’s, and told him that his recently released hip-hop CD was “an embarrassment.” He challenged West to write “an important book on a philosophical tradition to establish your authority and insure your place as a scholar.” Summers, according to West, also told him that he needed to meet with him regularly. “If you think that I’m going to trot in here every two weeks to be monitored like a miscreant graduate student, I’m afraid, my brother, that you’ve messed with the wrong brother,” West told him, and walked out of his office. By the end of the year, the Boston Globe was reporting that the Afro-American studies department was at war with Summers. He tried to repair the damage by repeatedly reaching out to West and others, but, in April, 2002, West announced that he was leaving Harvard for Princeton, his former academic home.
Summers had not settled easily into the presidency. In 2001, he went through a painful separation from his wife, which one of his friends told me may have contributed to his missteps. (They later divorced, and, in 2005, Summers married Elisa New, a professor of English at Harvard.) And he was accustomed to the kind of authority that he had wielded as Treasury Secretary. Even among professors who believe that he was right on the major changes he supported at Harvard, it is difficult to find anyone who thinks that he went about instituting those changes in a politic way; his many faculty critics thought that he was attempting to expand the power of the president’s office at their expense. It was as if all the lessons that Summers learned from Rubin about diplomacy and tact had been instantly forgotten when he stepped back onto the Cambridge campus. Recently, West told me, “I forgive the brother. He’s just got deep problems with his social skills.”
Steven Pinker, a professor in the department of psychology, who defended Summers during his presidency, said, “He alienated people who could have been his supporters, so, when he needed political capital to draw on, the accounts were overdrawn.” He added, “Because he was seen often as hostile to, or uncomprehending of, the humanities, he had a number of natural enemies there. And often it was people in the humanities who were most active in faculty meetings. Scientists tend to stay in their labs and let other people run the university.”
The next couple of years were relatively quiet, but then, on January 14, 2005, Summers gave a speech at the National Bureau of Economic Research’s Conference on Diversifying the Science and Engineering Workforce. His subject was the issue of women’s representation in tenured positions in the sciences, and he started out by noting that he would be making “some attempts at provocation.” He went on to say that although he could be wrong, he believed that the two best explanations for the dearth of women in the sciences were “the high-powered-job hypothesis”—that women’s familial responsibilities make them less likely to embark on extremely intense professions—and, fatefully, “different availability of aptitude at the high end.” Summers was trying to explain all the potential causes of a persistent social problem, but his remarks were widely interpreted as an argument that women had inherently less ability for math and science than men. It was an explosive argument for the head of a university to make, and it blew up in his face, just as the “toxic memo” had, a dozen years earlier. He might have been less vilified had he not ranked aptitude as the second most important factor, ahead of discrimination. As the economists Claudia Goldin and Lawrence Katz explained in an op-ed in the Boston Globe that attempted to defend Summers’s speech, “The ‘ability’ reason is of limited importance not because it is politically incorrect to talk of gender differences in ability, but because research shows that men and women of similar ability have different career outcomes, particularly in science and engineering.” Pinker said, “I think a dispassionate reading of his speech would find nothing particularly inflammatory. Although some people could argue that if you’re a university president you shouldn’t be so candid.”
In March, at a meeting of the Faculty of Arts and Sciences, J. Lorand Matory, a professor of African and African-American studies (he is now at Duke University), brought a motion of no confidence in Summers’s leadership. “I detested what he had done to Cornel West,” Matory told me, and he was infuriated by the women-in-science comments. But he was surprised by the response to his action. “Harvard hosts an enormous diversity of opinion, which is not nearly as left-wing as much of the world thinks,” Matory said, adding, “But it turned out that more than half of the people agreed with me. I was shocked.”
Summers stayed in the job for one more year, until another meeting was called, in February, 2006, at which the F.A.S. planned to take another no-confidence vote. Summers decided to announce his resignation before the meeting. He told me, “I believe the university made substantial progress in the areas I focussed on during my time as president. Where I made my mistakes was in failing to recognize the politics of the university and being insufficiently selective in taking on controversial issues.”
In one of his last major speeches at Harvard, the 2006 baccalaureate address, Summers delivered something of a cri de coeur. He started with a joke: “Class of 2006, I count myself as one of you: we all graduate from Harvard this week!” But he ended by warning the students to be ever mindful of those “threats that come from elevating the values of consensus, conformity, and comfort above the value of truth.”
Summers’s road from failure at Harvard back to the epicenter of policymaking in Washington began with a return to his strength: thinking about the economy. His new venue was a regular column in the Financial Times, which he wrote from 2006 to 2008. If his Clinton years were defined by a focus on deficit reduction and sympathy to deregulation, his pre-Obama years were defined by an interest in the consequences of globalization and warnings about bubbles and the next financial crisis. In his first column, he asked why there was such widespread disillusionment with global free trade. The most troubling reason, he wrote, was “the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth.” The columns were both a serious rethinking of issues like income inequality and a political olive branch to his critics on the left. It was part economics, part rehabilitation.
“You know the old story, the higher you are up on the ladder the farther you fall?” Stuart Eizenstat, who was Summers’s deputy at Treasury, said. “It could’ve been just a completely devastating career-ending type of experience, and, instead, he showed the courage and the fortitude to reinvent himself.” He added, “I do know that he started looking at the world in a different and broader and more comprehensive and more sensitive way.”
Jared Bernstein spent years in the think-tank world arguing the pro-labor, left side of debates with people like Rubin and Summers. (Bernstein, a former professional bass player, came to economics by a circuitous route: at about the same time that Summers was studying Raiffa and probabilistic decision-making, he was studying Ravi Shankar at Woodstock.) He told me, “I was reading Larry’s articles in the Financial Times over the past couple of years, and thought, Wow, it’s all too rare that you see the thinking of such a prominent economist move like that.”
Not everyone was convinced of the transformation: Robert Reich said, “It’s very hard for me to evaluate, because, in all honesty, I haven’t seen any evidence of it.” But Summers explained the shift this way: “You put me in the midst of an economy that is basically held back by government borrowing, and, except for that, is substantially succeeding, and I have the orientation that I had during the Clinton Administration. Stepping back and seeing where things were after the Bush years, what you saw was these large bubbles forming, pervasive inequality, everything having moved in the wrong direction on health care, on energy, on all the problems that we had tried to work on. And so when things were pretty screwed up, and the dominant thrust of the policy had been of doing nothing, the inclination was much more on the activist side. But I don’t think it’s because I changed, I think it’s because the world changed.”
In 2007, Summers started looking at the looming economic crisis. Back in 2003, he had attended a Federal Reserve conference in Jackson Hole, Wyoming, in which economists were celebrating the fact that central bankers seemed to have mastered the use of monetary policy to tame inflation without causing the economy to slip into a recession, as had happened in the past. Summers warned that perhaps the victory over inflation meant only that the next recession would be caused by some new phenomenon.
As the recent crisis started to come into focus, Summers moved closer to Rubin on the potential of complicated new financial products to be a source of systemic risk. Around that time, Summers started working with the hedge fund D. E. Shaw & Company. He told me, “I’d approached markets before as an academic and as a policymaker, but never from the perspective of someone trying to participate in them successfully.”
In the fall of 2007, his Financial Times columns took on a more urgent tone, starting with a piece on November 25th, titled “Wake Up to the Dangers of a Deepening Crisis.” There had been at least six major financial crises that affected the United States over the past twenty years: the 1987 stock-market crash, the 1990 savings-and-loan crisis, the Mexican-peso crisis, the East Asian economic crisis, the failure of Long Term Capital Management, and the tech-bubble crash. Summers had a theory that tied them together: whereas for many decades most recessions were caused by the Federal Reserve’s attempts to curb inflation, the Fed’s recent mastery of keeping inflation in check had given rise to the financial crisis. Summers explained that, just as the success in curing infectious disease will allow some people to live longer only to die of cancer, the success in battling inflation will prolong an economic expansion only to lead to overconfidence and a financial crisis.
Summers returned to his attacks on the efficient-market hypothesis. While it is true that the market is often self-correcting—for instance, the 1987 stock-market crash didn’t cause a recession—at other times, as in Asia or Mexico during the nineties, the shocks to the financial system are so pronounced that the market does not self-correct, and eventually tips the economy into recession. Summers explained that although the relationship between supply and demand is the cornerstone of a self-correcting market, in some financial crises that relationship breaks down. “If you think about a security that is bought on margin,” Summers explained during a speech early last year, “when its price goes down there are margin calls which force liquidations, and more of it is sold. So a falling price is not a stabilizing mechanism, but it is potentially a destabilizing mechanism.” He called this “the liquidation vicious cycle,” and the result can be that institutions are depleted of capital as the psychology of a bank run prevails and the value of their assets plummets.
This insight formed the basis of the Obama Administration’s understanding of the crisis, especially the debate over nationalization. The nationalizers thought that the banks were insolvent—that the toxic assets were worthless. But Summers and Geithner, though they disagreed on some aspects of the stress tests, agreed that the asset prices were simply under attack from the liquidation vicious cycle, and that recapitalizing the banks and restoring confidence would stem the panic and restore some value to the bad assets. The recession had saved Summers. It made him indispensable, especially to a young President facing an economic calamity of which very few people seemed to have any understanding.
But Obama faced a dilemma: how to exploit Summers’s intellectual energy while avoiding his managerial weaknesses. As several Obama advisers put it, Obama “wanted Larry’s brain.” Summers ended up in a contest with Geithner for the Treasury Secretary post. The two men bumped into each other at O’Hare Airport, on November 16, 2008. They sat together in an airport lounge for an hour before heading downtown for back-to-back interviews with the President-elect. “I know it’s not the conventional wisdom, but I am of the personal view that you would make a good Treasury Secretary,” Geithner joked to Summers. During his interview, Geithner, who had previously worked for Henry Kissinger’s consulting firm, Kissinger Associates, told Obama something that the former Secretary of State had once said about Summers: “They should just make Larry a permanent White House adviser to the President.”
Obama and Geithner had immediately liked each other. They have similarly serene personalities that sometimes make them seem a little detached. Obama devoted a third of the interview to asking about Geithner’s background. Like Obama, Geithner had spent part of his childhood outside the United States, and, in a quirk of history, Geithner’s father, who worked for the Ford Foundation, was responsible for funding some of Obama’s mother’s anthropological research. Afterward, Obama and Emanuel discussed the decision. “My head’s one place, my heart’s another,” Obama said. He decided that he wanted Geithner at Treasury.
Obama and Emanuel then devised a plan to bring Summers into the White House, as the head of the N.E.C. But, Emanuel told Obama, “The only way we’re going to do this is you’ve got to talk to Larry.” Obama called Summers and reminded him that the country was in the midst of an unprecedented economic crisis, and said that he needed him in the White House. He told him that he wouldn’t take no for an answer. Still, Summers said that he wanted to think about it. The next morning, he met with Emanuel for an hour in his office on Capitol Hill. By the end of the conversation, Summers had agreed to join the team. His decision surprised some. “How many former Secretaries of the Treasury would come in not as Secretary of the Treasury?” Vice-President Biden said to me. He added, “And he’s the smartest son of a bitch.”
The N.E.C. was created by President Clinton in 1993, and since then most of its directors have seen their role as that of an honest broker, whose job is to present to the President a full range of views on any given issue. That was not Summers’s obvious strong suit; he has always been interested in affecting policy with his own opinions, not acting as a passive conduit for every perspective. “It is not enough, if we are to make the world better, to sign on to processes that explore all positions but cede the hope of changing anyone’s mind,” he said in 2006. “Ultimately, for effective action, people do have to agree on some things and reject others to find dynamic ways forward.” To compensate, the White House added two innovations to its economic decision-making apparatus. The first, announced the previous November, was the President’s Economic Recovery Advisory Board, which is headed by the former Federal Reserve chairman Paul Volcker and is composed of outside economists, C.E.O.s, and labor officials. While almost all economic-policy traffic flows through the N.E.C., the PERAB reports directly to the President. In January, the White House added a half-hour meeting each morning, in which Obama is briefed by the top members of his economic team: Summers, Geithner, Romer, Orszag, and Bernstein. Obama officials said that the extra layers were intended to insure that no one person dominates the economic advice going to the President.
This system was sharply tested during the debate over the fate of G.M. and Chrysler. In mid-March, Summers and eight advisers dealing with the issue met around the conference table in his office. Summers called for a vote: who thought Obama should save Chrysler? The group was deadlocked. Four were in favor and four were against. Summers abstained, but he believed that Chrysler should get another chance at survival, especially since the Italian automaker Fiat had announced that it was willing to take over the company. Austan Goolsbee, who is both the staff director of the PERAB and one of Romer’s deputies at the C.E.A., cast the strongest of the no votes, arguing forcefully that saving Chrysler would damage the long-term prospects of G.M. and Ford, and for that reason Chrysler should be allowed to go bankrupt and be liquidated. Summers and Goolsbee had argued the issue for weeks, and the debate had become a source of friction between them.
At a morning meeting in the Oval Office on March 26th, Summers pressed Obama to make a decision. Romer told Obama of Goolsbee’s dissenting opinion, and he was brought into the meeting, which delayed the decision. “Half an hour to decide the fate of the auto industry?” Obama said, according to an account by Bloomberg News. “We need more time than this.” The group, plus several other advisers, reconvened at six o’clock in the evening. At one point, Robert Gibbs, the President’s press secretary and confidant, showed the group a map of Midwestern counties and their current levels of unemployment. He said, “We talk a lot about avoiding twenty-five-per-cent unemployment, like we had in the Great Depression, but in a lot of these places we’re already there.” When the debate was exhausted, Summers, perhaps recognizing that he had misbehaved at the morning meeting, faithfully summarized the views of everyone at the meeting, including Goolsbee. Obama asked Steven Rattner, the head of the auto task force, who had been one of the four to vote yes in Summers’s office, “What do you think the percentage likelihood is that, if we give this deal a chance, it will succeed?” Rattner didn’t make the decision any easier. “Fifty-one per cent,” he said. “But, Mr. President, in my experience, deals get worse, not better, over time.”
In the end, Obama sided with Summers over Goolsbee, but Goolsbee believes that his case against Chrysler did push Obama to impose the condition that, if the Fiat deal fell through, the government would offer no help. Over all, the episode suggests that there was enough internal dissension to make sure that the President’s options weren’t constrained. Goolsbee told me, “History has not been kind to Administrations where everybody agreed with each other and all they ever had to say was, Good idea, boss.”
So far, none of the worst fears of those who believed that the stimulus was too small or that nationalization was the only option or that taking over car companies would destroy the fabric of capitalism have materialized. Indeed, several private forecasters have credited the stimulus with blunting the impact of the recession—it probably added around three points to the G.D.P. last quarter—and the banking system has dramatically stabilized since the stress tests were completed. But competence has its limits as a source of inspiration. Paul Krugman said, “The stimulus helped, but the question is, ‘Is that enough?’ ” With unemployment at around ten per cent and still on an upward trajectory, the Administration is left arguing not that jobs are being created but that without Obama’s policies things would be worse. It’s not a very pithy slogan. And, undoubtedly, the huge government interventions laid the groundwork for the political backlash against Obama that was unleashed this past August and which has jeopardized his larger agenda on health care, global warming, and financial regulation. Obama and his team have pulled the economy back from the abyss, but they will get credit only when it has been rebuilt. ♦
*Correction, December 1, 2009: Kim B. Clark is now president of Brigham Young University—Idaho, not Brigham Young University, as originally stated.