Larry Summers: An Economist in Government

Larry Summers: An Economist in Government



hi I'm Bill Kristol welcome to conversations I'm very happy to be joined today by Larry Summers professor at Harvard former Harvard president Treasury secretary White House adviser to President Obama a top economic adviser I want to begin with a crisis I remember you heylia's for I had met you a little bit before that but I remember suddenly you were all of prominent had a prominence that maybe at the time you were not so eager to have seven but suddenly you were thrust into the middle of this major international economic crisis at the end of 1994 the Mexico peso crisis I didn't know anything much about it honestly and I is launching the magazine Weekly Standard and talking with someone who served in the Reagan or in push administration's and economic policy and that is after you guys resolved it and saying this was a they really did a good job it was something they won't get much credit for because it's very complicated and people once it solved that one forgets how dangerous it was before it got solved you know and there was a political sales job involved with it obviously with a Republican Congress I think at that point so I don't were you then already deputy secretary used I was under I was actually the undersecretary for international so I was at point I was the pointed right I was the point I think work I was on I was on people I was sort of on point on that one and I was extra on point as it turned out because secretary Benson left at the end of December towards the end of December of 1994 the Mexicans found themselves forced to devalue their currency and heading towards a kind of economic apocalypse the department had no permanent secretary for several weeks after secretary Benson left before secretary Rubin was confirmed White House so there was a stretch when I had the misfortune to be a bit home alone with the problem women took one Congress Republican clear that the Republican run Congress and they were not in every respect our for success and I worked through that Christmas holiday very very closely with chairman Greenspan diagnosing the problem and understanding it so you know the first part of it was understanding what was going on and you know Mexico had been substantially less than transparent with the markets and had been only a little more transparent with us despite NAFTA so it was not entirely clear what it was clear that bad things were happening but just what the financial forces involved were was not clear we came to the judgment and it was a analytical economic judgment that Mexico was experiencing something that had very much the character of a bank run on a country that as you know bill even the healthiest bank will become unhealthy if everybody tries to take their money out all at once and because Mexico had said it would never never never devalue and then been forced to devalue and because Mexico had done a number of other things that were living on the edge it found itself with this profound confidence crisis and Mexico was at that time you know at that time you have to think back the whole idea of an emerging market vocabulary was just shifting from developing country to emerging market and the poster child for a successful emerging market was Mexico and so if Mexico collapsed that wasn't just gonna be about Mexico people were gonna think that if the best emerging market really a submerging market then they couldn't really trust any of the rest of the emerging markets and this wasn't long after it seems like a long time ago now but this was only ten years after the whole wave of Latin American defaults in the 1980s and so it seemed a perilous moment and so it was a perilous moment and there was this bank run phenomenon going on with respect to Mexico and the question was what to do and the world has a sort of known answer to bank runs which is the provision of liquidity on a large scale if there's a bank if there's a bank run at summers Bank and really Summers Bank is okay and it's just a confidence crisis then if the Federal Reserve takes the assets of summers Bank and loans against that collateral then everybody can relax and they can stop running and so my colleagues and I made the diagnosis that this was a bank run type phenomenon we made the diagnosis that it was really importantly a problem of confidence that it wasn't that Mexico couldn't over time service all of its debts but it couldn't service all its debts in three weeks as they who are coming due and so the recommendation was that what Mexico needed was a very large amount of liquidity unfortunately the amount of liquidity that Mexico needed was far beyond the then present capacity of the IMF and so really the only alternative was that that liquidity come in some way from the United States was the conclusion that that I came to and the in discussion with chairman Greenspan that we came to and as Secretary Rubin moved to becoming secretary when we discussed it extensively with him that was the conclusion that he came to and you know we hoped that as Mexico tried to settle its affairs and explained its situation that confidence would return but as with a bank run once things are past a certain point it doesn't really matter what the bank does people aren't really thinking about the bank they're thinking about the other people who are trying to get their money out and that was the situate and that was the situation in Mexico and so in early January actually the night after sec night that secretary Rubin was sworn in a group of us were in the White House called into the Oval Office and discussed this presented this to President Clinton and secretary Rubin set the stage for it briefly and then as it as was his way he turned to someone else namely me to explain the situation in more detail and our proposal and I said that I felt that 25 billion dollars was required and one of the president's political advisors said Larry you mean 25 million and I said no I mean 25 Billy's right after his midterms there was a certain pall over the room and one of his other political advisors said mr. president if you send that money back and if you send that money to Mexico and it doesn't come back before 1996 you won't be coming back after 1996 and the president I mean he like any president like any of us he's person with strengths and weaknesses but on that occasion I thought his response was quite remarkable he let the conversation go on for a little while and then he said Alan Greenspan Bob Larry I really just have two questions do you think there's a substantial risk that if we don't do this there will be really grave consequences if Mexico fails that will have serious consequences for the United States and for other countries we said no certainties but yes then he said there there's nothing like a guarantee I realize that and there are no certainties but do you think there is a reasonable chance that if we act we can prevent that we said yes because we don't know just what that chance is but yes we do think there's a substantial chance that if we act quickly we could avert the bankrupt and then he said well then there's no choice no question what the right thing is it may have political consequences and but that's what we're here for we're here to make on really important questions the best decisions we can and this isn't and he names some other issues that he thought were chicken um this is really important and there's no question what we need what we need to do I'm gonna call the congressional leadership tonight and ask them to come to the White House and I'm gonna ask them to join me in supporting legislation that would give Congress off that would give authorization for us to guarantee loans on a large scale to Mexico and I stayed with him that night and he placed the calls I would say he got willing but substantially less than enthusiastic reactions from the congressional leadership you could I only heard his side and the conversations but you could see that these were experienced political figures who were calculating on the one hand I can't not go along with what the president the United States says is an important matter of national security on the other hand this is a substantial and risky step and if it fails let it not be on me and so they had a modulated responses that reflecting their situation they attempted to do it was a meeting in the White House the next day and then there was an announcement coming out of the White House what then happened was a quite disturbing stretch it appeared immediately that if the president United States was for this and the four congressional leaders were more or less for it that then the Congress would legislated but as happens people had all sorts of ideas your friends bill in the Republican Party didn't understand why if we were gonna lend twenty five billion dollars to bail out Q bailout Mexico in its period of Ede Mexico needed to continue to support Castro and wanted to impose conditions about Mexico's involvement with Cuba there were people on my side who had been dissatisfied for a long time with certain practices Mexico had towards unions and they thought this was a good time to change those rules the Mexicans were desperate for this support but they also had their pride as a country and the idea that they were a democracy and they didn't see how the support could become the occasion for the United States to redesign fundamental policies of their country and so what ensued was a roughly two-week period of negotiation between the Mexicans us the Democrats in Congress the Republicans in Congress with the market watching and evaluating likely outcome every day and the markets evaluation of the likely outcome was deteriorating almost every day and after two weeks or so became relatively clear that it was unlikely that this legislation would pass and so the question was and the markets were again at a point of panic with respect to Mexico and frankly I wouldn't have no I wouldn't have known before it started to collapse what the name of the currency of Thailand was but I learned in those two weeks that it was a Thai Baht and that it was very vulnerable to what was happy was happening in Mexico and then the suggestion was made and it was one we had thought about but rejected but by congressman Bennett from Senator Bennett from Utah a Republican and really a my view a great public servant he said look Congress isn't gonna get there you all have the authority through something called the president's exchange Stabilization Fund exchange Stabilization Fund was designed for when the dollar was fluctuating too much against the end to intervene to keep the dollar stable it was not designed for bailouts of developing countries but its language in a legal sense basically did give the authority quite broadly to the Treasury of the secretary with if it was a large loan as it was in this case the president's approval and so the question arose and we debated it whether this was some kind of usurpation of congressional authority or whether in some sense Congress was encouraging us to do it because it wanted this to be done but it wanted this to be done without its being without it being its responsibility ultimately President Clinton and secretary Rubin decided to use the exchange Stabilization Fund and so the exchange Stabilization Fund was announced as the vehicle at that point there were a lot of people saying you know this is on the president's hook and all of that it was then our task to negotiate an actual agreement because we weren't going to give this money to the max to Mexico without conditions there was going to be what was what's known as tranching stage stages of the money and of course there was a very difficult balance because from the point of view of the markets and the markets confidence wanted there to be as much money as quickly and as firmly and as clearly as possible from the point of view of motivating the Mexicans to stop making policy mistakes and to pursue sound policies you wanted the sense that the money was going to be delayed and was going to be contingent and you couldn't give one message to the Mexicans and a different message to the market since they were both paying attention to everything we said and so we we wrestled with that balance and over several weeks I was on the phone with Mexican finance minister four or five times a day one point when the negotiation looked very difficult a couple of colleagues and I took an Air Force plane to Mexico City arriving at six in the morning man ISM and in secret went to spend several hours with president Cedillo because it was important to us to see whether Mexico as a whole was completely behind this program and to evaluate the situation and but if there had been a sense that senior officials of the United States were coming to Mexico to negotiate this that would have been very problematic politically in Mexico so it was more cloak-and-dagger hush-hush than anything I had previously been been part of we completed an agreement bill and there was a rather odd ceremony because this wasn't exactly a happy event but it was a historically significant event secretary Rubin and the Mexican finance minister were on a podium together in the Treasury Department and we announced the completion of this loan agreement we're now in middly February and the markets the peso fell 6% the day we announced this agreement and was at a very low was at a very very low level and it didn't look like what we had done was going to be sufficient to restore confidence that night I went after everybody gone after everybody gone home 7 o'clock or so 7:30 8 o'clock I went into secretary Reubens office and I said you know Bob it doesn't look like this is working and somebody should take somebody should have to take responsibility and this had been my idea and I don't think it was a unreasonable or stupid idea but it is an idea that appears to have failed and so perhaps I should resign and I'm perfectly prepared to resign I recognize that there are larger interests here and he responded by saying that it was an admirable sentiment that I had expressed in his view but that many of us had been involved including him had been involved in taking the decision and that there was no desire to leave me holding the bag with respect to this decision and that more fundamentally things took time to play out and he didn't know what the consequences was going to be over time and that I would be much more useful to the team if I wasn't exhausted and a little bit overwrought and then I should go home and get a good night's sleep and come back and we'd see how things played out several weeks later for some variety of reasons some having to do with the market so I'm having to do with Mexico matters turned and the market turned and ultimately five six months later Mexico actually paid back a portion of the loan early at a profit to the United States the White House political operation did not allow that event to go unnoticed to put it mildly and it was regarded as an important success for the administration because a major problem had been for stalled because the President had acted with great political courage the loan he approved without congressional support was supported by about 9% of the American people with about eighty percent in opposition but ultimately something very important happened and it had an important effect that I think has carried forward to this day on us-mexican relations from my point of view it was a sort of experience in making decision made making decisions and contributing to decision making processes under great stress I remember saying to a friend at the time it feels to me like my human capital is now denominated almost entirely in pesos and that may not be a good currency to have one's human capital denominated in but that every store every story is is different at one level in its particulars but the elements that you had to understand the underlying substance of the policy that you had to understand the various cross-cutting political forces that at some point you had to make a decision and you had to stick with the decision you had to advocate the decision in as persuasive a way as you could and that you had to hope that things broke your way those elements I think are fairly common to the experience of trying to get involved in public policy in senior positions in Washington it's great sometimes they even have a happy ending so sometimes they do not always but sometimes they do it's such a great resume I've got to ask you what which was your favorite job or least your favorite public sector job I've loved every every one of them and I've been very glad to have all a variety that I've had because he had come to learn different things and see the world in different ways from having different jobs but probably the thing that was most satisfying was the time I had as secretary of the Treasury because I really felt that I had the privilege of leading a remarkable group of people and I had the ability to put and put into a fact what I'd spent most of my life to that point studying which was various aspects of economics and how economics can be used to make the world better so whether it was working on African debt relief or the future of the World Bank or how the United States could handle a budget surplus which we did have while I was a Treasury secretary or ways in which the tax code could be made more efficient or ways in which the customs could do a better job of facility in trade there were so many important questions where you could use or at least I felt you could use the things I knew and the kind of capacities I developed studying economics to make the world better that I found that probably the most satisfying of the various times that I was in government let's go backwards since I mean I myself I worked in Washington for a lot quite a while I was in government and I'm not sure I know what everything the Treasury secretary does and I'd love I think people be fascinated to know just what does it mean to my head you have how are you treasury secretary what is it what do you do what does it mean but let's go backwards for minute since you mentioned having been and economist so you were academic distinguished academic economist you'd worked in Washington some as a young economist tried as I recall and in the White House I think I studied I went to MIT thinking I was going to be a mathematician or a physicist because I'd been pretty good at math and physics in my high school and then I saw with some real mathematicians and physicists we're lazy like at MIT and so I just decided that was probably not the direction for me I also wanted to do something that contributed to making the world a better place in a more direct way and so I was drawn to public policy and the combination of being interested in public policy and being interested in scientific and analytical methods is what drew me to economics I've also got a lot of economists in my family so that may have contributed as well I worked one summer for Martin Feldstein and I saw that you really could figure out the answers to important policy questions by using statistical techniques and that the results of studies could really move the world and so I decided to become an academic economist studied economics at MIT and then I got like did my graduate work at Harvard taught at MIT and then came back to Harvard as a professor but always thinking that at some point I was going to want in some way to use what I knew as an economist as luck would have it when I was a graduate student I had worked with a young undergraduate who was a great guy but probably not one of Harvard's greatest students and I've been there at 3 in the morning before an economics exam or two because seems like the right thing to do for him and he ended up being Michael Dukakis deputy campaign manager and not being the most fantastic economics student there ever was he didn't know that many economists but he knew who'd gotten him through his final exams faculty member at this point and so I was at I by this point I'd become us I was pretty young but I had become in my early 30s but I'd been lucky enough to become a professor and he drew me into the campaign as an advisor and the whole thing was a new world done any real political campaign I've done nothing I worked a little bit with Marty Feldstein when he had been in Washington but doing technical economics and I thought for example that well what was a campaign a campaign was something where department where you figured out your policy positions and you announced your policy positions so I remember being shocked to discover that the campaign had 10 or 11 departments and only one of the departments was policy and policy was not one of the more important departments in the campaign and that came as a complete shock to me but I decided that when in the rut When in Rome do as the Romans do and that I would probably be more useful if I listened to the political people about what kinds of needs they had from the perspective of their imperative which was causing governor Dukakis to be nominated or causing governor Dukakis to be elected and tried to be responsive with such expertise as I had to their needs that was a different approach than some of my fellow economists who are perhaps a bit more oriented to telling the political people what they should think you know I don't think I quite imagined I remember one day that President Bush Vice President Bush who was the candidate you were probably working for him in some way in some way in some way at the in some way at the time bill he was doing something or other about the American flag and how governor Dukakis had the wrong attitude towards the American flag and the political geniuses in governor dukakis's campaign wish to point out that most of the flags being sold in the United States were in fact produced outside of the United States and so they were looking for data on the importation of flags well this was not quite what my image of being an economic adviser to a campaign was but several students and I endeavor to find data on flag production and it told you something about what the process was like the campaign did the campaign did not succeed but I learned a great deal and I met many people who I subsequently worked very closely with Lloyd Bentsen who is the vice an actual candidate who I worked with in the Treasury Department Bob Rubin who was involved in that campaign George Stephanopoulos who was involved in that campaign and many other many other people when the campaign ended average young people I mean I myself accidentally sort of like you got involved in a couple of campaigns and I really learned a lot I always encouraged young people especially more academic well I tell my I tell people ernit on doing and I tell people they will look they will see something that is not like what they imagined it will be that they will find it both very very exciting and very very frustrating and they will get a sense of whether this sphere in all of its importance all of its demographic Democratic grandeur and all of its chaos and messiness is attractive and appealing to them but I tell people to go to work on campaigns but I tell them the story about doing research on flag imports when I was a professor at Harvard to make the point that they need to not go with to ennoble the sense of self because the entry-level jobs and campaigns are not defined by being either hyper intellectual or extraordinarily glamorous and I thought I was much better in in government after I'd run a campaign than be then I before happened I was in government first I didn't really know how politics much and then I did a little campaign which lawston then I came back in as the vice president's chief of staff and in the first Bush White House and I really felt like had a much better understanding of the people I was working with and really the impaired the actual imperatives of governing it's not just something you have to can't pay it's not just something you have to hurdle you have to get over and then you get to govern I mean you have to keep consensus political I agree in a democracy is about leading people in a way that they approve of and like the idea that you should be doing the things that people want and you should be explaining what you do to people in a way that leads them to approve of it that's like a central part of the system and campaigns are that in a particularly crystallized crystallized form so I found that I learned learned a great deal in in that process I don't remember were you involved in the Clinton 92 campaign or we I had the World Bank I was that I will I return to where I've never left Harvard but I was at Harvard through the campaign and I stayed at Harvard a couple of years later I was lucky enough that barbarac honorable who was a who had been a distinguished moderate Republican Congressmen the kind of congressman we don't really have anymore in many ways Republican very supportive of business but very much establishment oriented and very oriented to making deals rather than making points had been named by President Bush as the president of the World Bank and the position of chief economist of the World Bank became open and he offered that position to me it was some ways I was I suppose an unlikely choice there were Republicans who didn't quite understand why Democrats economical economic campaign economic adviser was being given a position in an international institution and the world thanks primary concerns of course the to help developing countries develop that my primary work had been on American economic policy issues but barber Conable Desai decided that I was the right person and I thought that it was an extraordinary opportunity to make a contribution to the developing economic developing countries economics to learn a whole set of things that I didn't certainly didn't know and to have a kind of experience that I had never had before and then I wasn't sure that I would ever have had in my career which was being a leader and a manager as the chief economist of the World Bank I was the vice president I was also a vice president of the World Bank and in the training and research areas of the World Bank there were three or four hundred people who worked there and I was at one level a temporary visitor from academia but in another level I was their boss and so I had the experience of management and leadership which wasn't a type of experience that I thought in many ways I ever would have in my career I imagined that I would study economics and that perhaps at some point I would be called on to provide economic advice but I didn't really envision having leadership experience and having that kind of experience and many ways changed my changed my life and changed a set of options that were open to me and changed my views and values about what I wanted what I wanted to do so I went from so I served at the World Bank we I found myself from time to time as has been the case ever since getting involved in some controversies but we did a couple of things that I think we're very important with working with Sheryl Sandberg who now of course has gone on to great things at Facebook but then had just graduated from Harvard College I published a study making the case that universalizing education primary and secondary education for girls was the highest return investment available in the developing world went to Pakistan to present that study and I'll never forget someone the reaction to it when I presented it on the one hand and there was a woman who asked some question but began by explaining with tears in her eyes that finally there was somebody from the World Bank saying something relevant rather than talking about liberalizing banks on the other hand there was a guy who said literally this was the kind of thinking that explained why there were so many latchkey children and juvenile delinquency in the United States and that this was the in my method of doing quantitative analysis was the kind of reason why so many people had died in Vietnam and so it was a it was a sort of learning experience that social science can arise can arouse passions we also while I was there because I went back to what in some sense had drawn media economics in the first place which was this idea of quantitative analysis as a way of making the world better we did a report advocated various kinds of cost-benefit analysis and rigorous analysis in the area of global health and made the case that if you really followed analytic precepts there was tremendous low-hanging fruit in terms of the ability to influence public policy down the road and you know they the bank prints 120,000 copies of those reports and so they're fairly widely read but I think in a case of that report there was one work one reader who was probably more important than the other 120,000 that was Bill Gates who credits that report with having drawn him towards the interest he's had in global health and that's great as I but to just take up the the threat of your question there you are Washington bill so I'm in Washington there's a presidential campaign going it's very exciting as a international civil servant I'm not taking any active role in a u.s. political campaign the other hand I have a fair number of friends most of whom I met during the Dukakis campaign who were very involved in the Clinton campaign so I'm involved a bit behind the scenes and when President Clinton won then incoming Treasury secretary Benson asked me to serve as his undersecretary for international affairs which is the point person in the Treasury Department for all international economic questions and at that time Japan was and what was seen as the rise in Japanese stayed in its threat to the United States was a major international economic issue the question of in what way the United States was or was not going to mobilize substantial support for President Yeltsin was a large issue the whole question of emerging markets was just getting started and after NAFTA became a very big issue the trade the Uruguay Round was a big issue and it was a whole set of revelations for me you hadn't be in there to be and the Treasuries of our year to be in the middle of there you got a big to be in the middle of this to be in the middle of this bureaucracy I mean the way I have said it to people is as a professor the worst thing you could do was to sign her name to something you had not written yourself on the other hand as the undersecretary there was a measure of effectiveness to do so as frequently as possible and you weren't doing your job right if you were not doing it on an entirely routine basis I remember being terrified because I was going to go off and negotiate with other countries about the reduction in Poland's debt and I was going to represent the United States of America and how much was the United States gonna reduce its debt and how much were they going to reduce their debt and what was the position that I was supposed to take in the negotiation and I remember realizing at some stage that within some broad parameters that obviously had been set by the secretary and had been set by the president I wasn't really supposed to ask anybody I was supposed to decide how I supposed to decide was this a sufficient deal was this not supposed you know Mike my job was to negotiate a deal and then come back and tell the secretary what it was and not come back and ask him about it to come back and tell him what it was and I remember for somebody who'd spent his life writing articles and directing research and doing analysis having that experience of being supposed to be the decision-maker and having that responsibility was at first terrifying then daunting and over time it actually came to be quite satisfying to feel that I was being entrusted with that kind of responsibility the special tips you would have for people when I was in the lower level of servile position of having been a professor and suddenly being a government and do things and take responsibility for things anything you any advice anyone gave you this particular useful any book you read that you would tell some thirty five-year-old Harvard you know Harvard or anywhere else professor he was now going into the next administration to think about just your honor I'd say I'd say some lessons I some lessons I learned bill are people you should maintain a very strong presumption that people are acting reasonably by their lights and that if it seems to you that somebody's taking a position that's completely stupid or unreasonable it's probably not because you're smart and they're stupid and you should just explain it to them it's probably because given where they sit given where they sit as part of the governments of Japan or given where they sit as part of the Department of Commerce or given where they sit as part of General Electric yeah we're given where they sit as a person with responsibility for getting reelected and six in six months and that you will achieve your objectives much more effectively if you try to understand why other people are taking a position different than yours rather than just simply tell them they should take your position and take more arguments so that was probably the most important lesson that was uncongenial to me that in academics what you do is you persuade people with intellectual argument and what I realized was people probably were taking positions that correspond it to their interests and you sort of had to figure out how to make it work given their interests that's probably them that's probably the most important initial lesson learned second lesson I learned was you really can't do it yourself all yourself and that you have to do it with a lot of other people I watched later in the process Bob Rubin during his time as secretary and I realized that he more or less how to rule that he didn't do anything that somebody else could do he was the secretaries there were some settings and it wasn't that I was deputy second was some things that you know advising the president signing the dollar bill appearing and representing the department delivering a major declaration on behalf of the Treasury Department setting policy that only the secretary could do but whereas my instinct as an academic was you know you tried to publish as many articles as you could and to have as much influence as you could his instinct as a leader was to do the things that he was required to do and then try to empower other people to do all the other things and he realized that he would have a much more effective department if it was seen as a department with a variety of highly capable people each of whom were taking on a set of substantial responsibilities in a particular area so the principle of empowering people was a second principle that I sort of learned through osmosis through making mistakes and of course a corollary of the principle of empowering people is surrounding yourself with as many good people as you possibly can and surrounding yourself with people who have different strengths than you do and I I was very lucky in those days the young Tim Geithner was my special assistant when I first entered the Department of course he ultimately rose to be the secretary a little later the young sheryl sandberg was my was my chief of staff and there are many other people who were extremely talented and so the principle that you try to surround yourself with as much talent as you can was another principle that I sort of learned and then you try to empower people as much as you can as she's a high-class Department which has already finally a better considerably better than average you know senior solicitor fresher II has a very how do the other departments of Treasury had a terrific Senior Service but we also brought in a set of very talented people and you know I also learned and our moments when I've done this with more success in my life and moments when I've done this with with less that you want to establish a culture where people are comfortable telling you that you're all wrong and that if you're not comfortable if people aren't comfortable telling you you're all wrong then you're gonna make mistakes that you won't make if you're forced to confront people who are very critical of your judgment since we tried and this was something that Bob Rubin really led and I tried to continue during my time as Secretary to have a culture where anybody was free to object to anything or question anything and to really keep at it for a long time if they felt strongly but that once a decision was made everybody tried to rally round that decision and so the whole set of questions around establishing the right culture of decision-making that was something that during my time as a professor hadn't really ever occurred to me I thought of through my time as president was a complicated issue should we approved the loan of the World Bank should we not approve the loan at the World Bank how should we design the debt management program these were what the questions were and what I realized was that success in government was did involve thinking well and carefully about questions like that but at least as much it involved establishing organizational patterns and cultures and approaches that led to those decisions being made well and that good process would tend to produce good policy and bad process would be much more likely to produce bad policy and those kinds of questions were not questioned we're not things I had ever fought much about during my time as as an economics professor so you leave Washington in January of 2001 I guess as a Treasury secretary and a with a budget surplus or at least having had a historic budget surplus well-regarded economic policy of the full Clinton administration you come back eight years later and without assigning blame at all to any part of your administration suddenly you're President Obama's top economic adviser a very different circumstance you're in the White House you're not running an apartment you're a turd one of the few senior advisors to a president after a huge financial crisis I just what was that like I mean what's what's how was the White House contrast the Treasury have President Obama contrast the President Clinton well the biggest difference actually the bill is that it's very different for the crisis to be in another country and for the crisis to be in your country you know that's good and it wasn't something during the 1990s I had worked on the Mexican financial crisis which we just talked about there were financial crises in Brazil or a set of financial crises Asia in Asia and that had been a central part of what I had done but it was financial crises in other places where the United States was helping out it's very different to contemplate the possibility of a depression like event in your own country and that's what President Obama was contemplating and facing after he was elected if you look at any almost any economic indicator and you look at a graph from the fall of 2019 29 through the winter of 1930 and then you look at a graph from the fall of 2008 through the winter of 2009 the latter period was worse unemployment industrial production so the sense that the financial system had almost collapsed in September and that that could happen again was palpable and real so you had a very different kind of rhythm of policymaking the first question that I found myself involved in even before I had been formally named to my position because of the gravity of the situation was what was going to be the role of the new incoming administration during the transition on the one hand a great deal of financial policy is confidence its guarantees its assurances and a lame-duck administration was not going to be in a very strong position to do very much of that on the other hand as we said at the time American only have one president at a time and that president was going to be George Bush until January 20th and so we spent a great deal of time being involved with engaging with the Bush administration with Treasury secretary Paulson with the members of their economic team but what was quite extraordinary and different I suspect than most presidential transitions was in most presidential transitions it's a matter of preparing to govern when it's your turn here there were banks in extremis there was for example it became clear that if nothing happened General Motors would quite likely have found itself unable to pay its bills in December and so the question was what was going to happen who was going to take responsibility for what happened and how was that going to play out so that was the largest difference that you had this ongoing financial crisis it's also very different to be a senior White House adviser than to be a member of the cabinet on the one hand a member of the cabinet is the person in charge of a very large building in which a very large number of people work with a very large staff of people who do everything from handling relations with Congress to a dozen people who handle relations with the press to photographer and takes photographs of anything that happens in the building who sits in an office not as large as a gymnasium but in that direction where as a member of the White House staff has none of that my office as the director of the National Economic Council and the president's economic advisor was substantially inferior in any physical attribute to my office as a professor at Harvard on the other hand in real estate they say it's location location location and something like that's true in politics as well in the modern presidency things very much radiates out from the White House my experience was in the process my experience was in the Treasury Department and we were very much integrated with the White House during the Clinton administration as secretary of the Treasury I attended the president the White House chief of staff's morning seniors morning senior staff meeting we were present and involved it felt like in everything in the White House but that was quite unusual for the Treasury Department and you know there are many cabinet secretaries whoo go months if not quarters without having any personalized contact with the president whereas as a member of the White House senior staff you are in nearly constant contact with the President and with the president's other senior advisors and so one has a sense of connection to the pulse of the presidency that is quite different in the White House senior staff one has access to informal moments and connection with the president in a way that one doesn't as a cabinet a cabinet member and then of course President Obama and President Clinton had some things in common but they also had respects in which they were very different President Clinton was unlikely to begin a meeting on schedule but he was even less likely to end it on schedule so you were likely to get a little more than your a lot of time President Obama meetings could begin early and so you needed to be in your office and ready to come downstairs in case he wanted to begin a meeting early but you had better be pretty sure and you were able to say what you had to say quickly because when your time was over your time was over and he was going to move on President Clinton was less than a hundred percent certain to have read your memo but if he hadn't read it he would read it as you summarized it for him and he would master it there quickly President Obama was virtually certain to have read your memo and to have read it extremely thoughtfully President Obama brought a focused discipline he didn't want to talk about things that the president didn't need to get involved in if his economic adviser couldn't figure out the difference between subordinated debt and preferred stock he certainly didn't think it was his job to help President Clinton was prepared to try to do his job but was also prepared to offer you a tremendous amount of advice on how to do your job President Obama was focused on how whatever a particular issue was being discussed related to the rest of the issues in his presidency and the rest of the factors that were present in any political situation President Clinton was focused on those things but was likely also focused on things he had read somewhere or conversations he had had at some point in the past I remember his once telling the secretary of the transportation at substantial length about new developments and environmentally friendly concrete and how that needed to be needed to be considered President Obama's approach was a more sharply focused approach and I guess bill what I learned from watching the two of them or two they each had their own ways I was I've tried to give you a sense but I learned two things about leadership from watching both of them that I certainly hadn't appreciated as well before one and I don't think this is said often enough in discussions of leadership is that you have to do it in a way that's true to your character I don't think President Clinton would have been very good and doing it in the more methodical disciplined and focused way that President Obama did it and I don't think President Obama would have been as successful if he had tried to be as loose and in many ways open as President Clinton was you have to to be successful as a leader you have to do it in a way that's true to your personality and character because things that go against the grain ultimately won't work and ultimately they'll be inauthentic and a sense of genuine authenticity is enormous ly important to affect them this as a leader second thing I learned watching them and it something which probably the failure to appreciate it in an earlier stage contributed to some of the mistakes that I made as president as president of Harvard is that as an effective political leader goodwill is like capital you we do need to build it up because there will be times when you need to make decisions that aren't popular and aren't appreciated but as with capital there's really no ultimate point in building it up if you're never prepared to spend it and so President Clinton and President Obama would both sometimes do the expedient thing but they wouldn't do the expedient thing because they just wanted to be expedient and they wouldn't do the expedient thing just because they wanted to be reelected though they surely did well they wouldn't do the expedient thing just because they wanted to have a higher poll rating though they were not indifferent to their of popularity they did it because they realized that they had to build up goodwill in order to be able to do hard but necessary things hard but necessary things like bailing out Mexico in President Clinton's case to take the area where he and I intersected doing things like supporting the rescue of the banks which was necessary to maintain financial stability in President Obama's case and so that idea that politics is not some grubby necessity that interferes with the making of proper policy but is actually necessary and integral to successful functioning in a democracy was something that I learned from watching the two of them and the way in which they led what's it like day-to-day being at such a senior level of the White House staff and such a big crisis as oh no it must be totally I mean I was at the White House as vice president's chief of staff which is so they cut it to below being the top economic adviser to the president and they were several crises obvious at the end of the Cold War and stuff but I didn't have direct responsibility for any of them really so I worked hard but it must have been just crazy I mean was it sort of public verdicts a.m. to midnight first a few for the first few months it was you got in as early as you could you got in as early as you could and you left when you felt you needed to go to when you you left when you felt you needed to go to to go to sleep and there was never enough time to do all the things that you wanted to do it was a moment when I was modestly well served by some of the lessons that I had learned during my time at Treasury as about the importance of delegate importance of delegation and you know I tell the story of there was a meeting that would take place on Saturdays for several hours in the chief of staff's office to talk about the president's schedule to which every part of the White House was expected to send a representative there would occasionally be economic issues but more frequently they would discuss questions that were important but to which I didn't feel I had a great deal to contribute like should the president do Jay Leno Show or David Letterman's show and you know I didn't Fermi interesting to hear what they had to say but I didn't feel I had a great deal to contribute and I realized at a certain point that if I sent my deputy to the meeting and I didn't go everybody would be happier I would be happier because I'd have a little time to myself to think about economic issues my deputy would be happier because he would be participating in an inner White House Council and the White House would be happier because when they wanted to do something that was a bit political I would be a kind of heavyweight of conscience questioning it probably to some excess and that my deputy would deliver the same positions a little bit less forcefully and perhaps that was more appropriate and so in terms of navigating the situation the experiences that I had had at an earlier stage working in the Treasury Department were were helpful I found and this was probably especially this is always a attention if you work in the White House and it might be a little been a little bit more of attention in my personal situation you know there are two functions in some sense you have one function is to be an honest broker and to help all the cabinet members get their views into the President to pursue their priorities and to represent them accurately and honestly and the other role was to give the president the benefit of your own wisdom and judgment and that was something that needed always to be balanced and because I had been secretary of the Treasury before and because I was my experience was as an economist I probably had stronger opinions and so I would find myself in some tension from time to time with a cabinet a cabinet agencies where they would want to get their views to the presidents as quickly as possible I'd say I am happy to move your views to the president right away absolutely I will never block your access to the president I happen to think your views are wrong and I will share that I think your views are wrong or we can keep talking about it and see if we can find a common view and that seemed on one hand sort of reasonable for me to do on the other hand from their point of view they kind of wanted their views transmitted not evaluated and that was not an entirely unreasonable view for them to have and I think for the most part we worked it all through quite successfully but the job in the White House is less to run your own thing and it is not entirely in a job like the one I had which wasn't just economic advisor but was director of the National Economic Council was to support seize that led to good decision-making you think on the whole I'm it was such a tumultuous two years and all the political opposition not so much and well there's opposition on stuff you worked on to but particularly on health care and some of the more partisan kinds of things you think the country was well I mean do you think we can feel as Americans given that we had this terrible financial crisis which maybe could have been averted but if it wasn't do you think the system worked pretty well that is I'm sure we feel pretty good about our I think you should know anything about looks capacity I think you have just I'm asking that question honestly and not as a partisan I think you have III think you have to say that if you look at what happened this time compared to what happened after 1929 it is day and night different and you think that is if you look at if you look at well it may or may not be a fair comparison if you look at US versus Europe yeah that's a good point where you look at US versus Japan I think you have to say the fact that we had the sharpest V down and then up in since the second world war in the second quarter at the end of the second quarter of 2009 I think you have to say that that's a pretty good that that is a pretty impressive and pretty good record now has economic growth been everything or most of what we all would have hoped at that time over the next five or six years I think that's a very real question and there are a lot of issues you can a lot of issues you can raise there but if you take the question of the response to the crisis I would say by the standards of historical responses in the United States or responses in other countries it is hard to find one that was as rapid and effective as the one that President Obama and Secretary Geithner and Chairman Bernanke were able to amass if he was supposed to really fight I mean absolutely I think he would say or with what I think you would say they stepped up there there are that'll feel medicine is never perfect and I think in a different setting I could talk at length about tactical decisions that could have been made differently but I think net-net you have to say that the system held good well on a car Geno's thank you for the spending side love to continue this conversation thank you very much good night with you Larry and thank you for joining us on conversations

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