Summers in the Hot Seat

New Harvard University President Lawrence Summers got a quick introduction to the academic world’s tradition of vigorous debate last week, when the Clinton administration’s economic decisions over the last decade became fodder for an energetic panel discussion at the Kennedy School of Government.
Summers, who officially took office as Harvard’s president this past weekend, played a leading role in formulating and executing those policies, first as Deputy Treasury Secretary under Secretary Robert Rubin, and later as Treasury Secretary himself. Prior to entering public service, he had been an economics professor at the university – the youngest professor ever to receive tenure – at 28.

He opened the discussion by citing several successes he said he viewed as the administration’s positive legacy on U.S. economic policy, including a commitment to “financial rectitude,” increased economic integration between the industrial and developing world, and swift official response to crises in the global currency markets.

However, Allan Meltzer, who chaired the International Financial Institution Advisory Commission to the U.S. Congress in the mid-1990s, took a harsher view of the administration’s accomplishments. Reading from prepared remarks, Meltzer accused U.S. officials of sacrificing sound policy for political considerations and alleging that the methods used to finance the Mexican currency bailout in 1994 were “extra-legal, if not illegal.”

Meltzer further criticized the International Monetary Fund for “command and control” policies that subverted democratic principles in developing nations where it is active.
In addition, Meltzer said Summers traveled to Tokyo in 1996 to pressure the Japanese government to stop the devaluation of the Yen, a “massive and foolish change in policy” he said deepened the Japanese economy’s ongoing woes and contributed to the 1998 currency crises in other Asian nations.

Summers responded to Meltzer’s comments by calling the economist’s version of events in Japan “fanciful” and saying there was “no serious legal question” about the Mexican bailout.

He used the Mexican intervention and the other economic policies he cited to pay a strong tribute to Clinton, citing them as evidence of “the political courage of the president who pursued them.”

“There was no strong constituency in his party for deficit reduction, or a hands-off policy towards the Federal Reserve, and there is no constituency in the U.S. for engagement with the developing world,” Summers said. “He was very much committed to an expansive, inclusive vision at very great cost.”

The panel, on International Finance and Crises in Emerging Markets” was held as part of a three-day conference that panel moderator and Kennedy School Dean Joseph T. Nye described as an effort to compile some “instant history” about the economic policies of the past decade.

Compared to the sparks between Summers and Meltzer, the comments of International Monetary Fund chairman Stanley Fischer were considerably tamer, focusing more on the lessons learned in situations like the Mexican financial crisis, after which IMF officials moved quickly to monitor international markets more closely.

In addition to being better prepared for crises when they arise, Fischer said the IMF has developed better tools for dealing with them, changing the structure of its lending facilities to make it “more of a lender of last resort.”
Fischer said the IMF is preparing to launch its first “contingent credit lines” in which the fund will engage in precautionary lending rather than “waiting for the crisis before making the dollars available.”

Finally, Fischer did raise some doubts about whether the increased lines of communication between industrialized ad developing nations were all necessary, saying that there are currently “too many meetings of too many overlapping groups.”