The Fortune interview: Larry Summers

  @FortuneMagazine October 31, 2013: 6:36 AM ET
SUM18 larry summers
(Fortune)

Combining time in the academy and in government for the past 30 years, economist Lawrence Summers has a résumé with extraordinary range. His estimable intellectual gifts, particularly the ability to explain the arcana of public policy, have been matched only by his gift for ruffling feathers. The talents are probably related.

Many people like the 58-year-old Larry Summers -- and many do not. That was in evidence last summer when his name surfaced as President Obama's top choice to be the next chairman of the Federal Reserve. Summers withdrew in mid-September, citing the likelihood that his confirmation process would be "acrimonious." Fed vice chairwoman Janet Yellen was nominated by the President last month.

The son of two economists and the nephew of two Nobel laureates in economics (Paul Samuelson and Kenneth Arrow), Summers has long revered rationality as the means by which "to make the world a better place." It is fearlessness fueled by acute analytical skills that helped him in 1983, at 28, become one of the youngest tenured professors ever at Harvard.

In 1993, Summers joined the Clinton administration as a Treasury official, then Treasury secretary; he was a key architect of the financial deregulation that critics said helped cause the meltdown of 2008. Following Clinton's second term, Summers became president of Harvard for five years -- a tenure marked by complaints about his abrasive style. In the most notorious episode, during an academic conference in 2005, he asked whether innate gender differences might explain the underrepresentation of women in math and science. After the Harvard presidency, he made millions of dollars as a part-time adviser at the hedge fund D.E. Shaw. In 2009 he joined the Obama administration for two years as the President's chief economics adviser. Since his departure he has taught at Harvard, in addition to returning to D.E. Shaw and serving on corporate boards.

Summers recently sat down in Manhattan with Fortune's David A. Kaplan and talked about markets, globalization, and technology -- as well as Harvard, Silicon Valley, The West Wing, the Alamo, Hillary, and why he's "impatient" with "piffle." Edited excerpts:

Fortune: You just flew in on the dawn shuttle from Boston and were offering me an economist's tip for air travel.

Summers: If you never miss a flight, you're spending too much time in airports. From time to time I do miss a flight.

THE FED JOB AND CRISES

After so many great gigs, why would the Fed job have been appealing?

My view is if the President of the United States asks you to do something important ...

C'mon, you had a prior interest.

My area is economics, and I've gotten a great deal of satisfaction from public service. What the Fed does is obviously involved with central economic questions. I was prepared to do the job enthusiastically, but I've moved on and enjoy being a free man.

To the extent that tax policy is made by the elected branches of government, why is monetary policy set by an independent entity?

The answer economists give is the idea of dynamic consistency -- that a central element in monetary policy is that if you print more money than people expect, you'll goose the economy and expand it. If people come to expect that a lot of money is going to be printed, you get inflation. So an expectation of high inflation proves to be self-fulfilling without any economic benefit. So one wants to insulate decision-making from temporary political pressures that would be present for elected officials. Almost every country has an independent central bank.

We don't even have inflation these days.

The situation is extraordinary, unlike any the U.S. has faced since the Second World War: Inflation is below a target level of 2%, and we have high unemployment. The low, and on some measures falling, rate of inflation demonstrates that it's lack of demand, not supply, holding the economy back. That's why the austerity fetish of recent years has been so costly.

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