AN ARTICLE IN LAST SUNDAY'S BUSINESS SECTION MISSTATED THE ROLE PLAYED BY DEPUTY TREASURY SECRETARY LAWRENCE H. SUMMERS REGARDING A PROPOSAL BY HARVARD PROFESSOR JEFFREY D. SACHS FOR A NEW INTERNATIONAL BANKRUPTCY PROCEDURE TO HELP PREVENT FINANCIAL PANICS IN DEVELOPING COUNTRIES. SUMMERS ORIGINALLY WAS DRAWN TO THE IDEA BUT LATER CAME TO REGARD IT AS UNFEASIBLE. AT NO POINT DID HE LOBBY OFFICIALS FROM OTHER COUNTRIES ON THE ISSUE. (PUBLISHED 04/12/98)
They met as graduate students, working side by side most nights at the university computer center. In time, they gravitated to the same dissertation adviser and published a paper together showing how to apply the mathematics of rocket science to economic analysis. They argued fine points of theory over dinner at each other's apartments and attended each other's weddings. And on the same day in 1983, Jeff Sachs and Larry Summers became the youngest professors ever to win tenure from Harvard University.
Even then, however, it was clear that these two academic superstars had ambitions extending far beyond the ivy walls and the pages of technical journals.
Jeffrey D. Sachs, once dubbed the Indiana Jones of economics, was to become the leading economic adviser to developing countries around the world. His ideas helped tame hyperinflation and resolve the 1980s debt crisis in Latin America. And he was the first to prescribe "shock therapy" for Eastern European countries making the transition from communism to capitalism.
Lawrence H. Summers, meanwhile, went on to become the intellectual powerhouse on President Clinton's economic team. As deputy secretary of the treasury, he has been the in-house champion for deficit reduction, the force behind the U.S. bailout of Mexico and a tireless proselytizer for American-style capitalism around the world.
Now, however, these aging Wunderkind find themselves at loggerheads over the economic crisis engulfing Asia. What was once a friendly but unspoken rivalry has developed a noticeably sharper edge, animated not only by disagreements over economic policy, but also by a clash of roles and ambitions.
Although the two have refrained from publicly criticizing each other, they have been shadow boxing in speeches, articles and through surrogates in the cozy world of international economics. The two men are advocating fundamentally different solutions to the Asia crisis.
Summers, working with the International Monetary Fund, has taken the lead in structuring a $118 billion international rescue that requires Thailand, South Korea and Indonesia to raise interest rates, reduce budget deficits, open markets, close ailing banks and generally rid their economies of crony capitalism.
Sachs, as director of Harvard's Institute for International Development, has emerged as the leading critic of that international rescue effort. His line is that Summers & Co. have made a bad situation worse by imposing austerity and politically risky reforms. What the ailing Asian economies really need, he argues, is some extra time and cash to restore confidence and restructure their foreign debts.
This long-running feud actually began to take shape back in 1995 in the wake of the peso crisis in Mexico. To reduce the need for such international bailouts in the future, Sachs proposed a scheme that would allow countries to negotiate bankruptcy workouts with their creditors much as companies do in the United States. But the idea was vehemently opposed by Wall Street, big banks and Summers at the Treasury, who lobbied Western finance ministers to reject the idea.
Perhaps it was no surprise, then, that when the Asia crisis hit last fall, Sachs weighed in quickly with critical comments about the IMF and the Treasury. In news columns and op-ed pieces, he accused the IMF of economic malpractice for having failed to see signs of trouble until it was too late -- and then in the rush to get involved, triggering a panic that was akin to yelling "fire" in a crowded theater.
Sachs also suggested that U.S. officials cared more about making the world safe for Wall Street than improving the lives of ordinary citizens in the developing world. Back at the Treasury, according to several sources, Summers quietly seethed at the accusations.
Things got a bit tenser when Summers arrived in Jakarta in January carrying a stern warning for Indonesian President Suharto: If Indonesia did not press ahead with sweeping reforms of its economy, international aid would be cut off.
As it turned out, Sachs was also in Jakarta that day, offering quite different advice to Suharto's economic team. In his view, the urgent priorities for Indonesia did not involve eliminating cronyism and state subsidies, as Summers had argued. More important was defending the rupiah on international currency markets, rescheduling foreign debts and pumping fresh capital into a banking system that had virtually ceased to operate.
His advice -- subsequently shared with Western reporters -- appeared to undercut a carefully orchestrated international effort to bring Suharto around to the IMF's way of thinking.
Returning to Washington, Summers turned his attention to convincing a reluctant Congress that it risked triggering a worldwide recession if it did not allocate another $18 billion for the IMF to replenish coffers nearly depleted by the Asian crisis. Suddenly, there was Sachs again, urging Congress to withhold any new money until the IMF "and its supporters at the Treasury" implemented fundamental reforms at the agency and devised a better model for international rescues that did not bail out foreign lenders and investors.
The fault lines of this conflict also extended to Cambridge, most visibly at a private skull session on the Asian crisis in early March organized by Paul Krugman of the Massachusetts Institute of Technology. In attendance were most of the leading lights of international economics, including Sachs and Stanley Fischer, the legendary MIT professor who is now the No. 2 official at the IMF. Summers remained back in Washington.
According to several people who were present, Sachs opened the session by delivering a masterful accounting of what went wrong in Asia. But he was immediately confronted by J. Bradford De Long, a Summers protege at Harvard and the Treasury, who contrasted his reasonable private analysis with the inflammatory criticisms he had been making in public.
Sachs tried to explain that there had been no inconsistency. But almost immediately, he was cut off by Fischer, a man usually known for his mannered reserve.
"You know that's not true," Fischer reportedly shouted, the blood rising in his neck, as he ticked off five occasions in which Sachs had publicly impugned his competence and integrity.
"It got pretty heated," Sachs recalls. Fischer, calling the incident "just too painful," declined to discuss it further.
"This is a tight little village, so these kinds of tensions are very noticeable," Krugman said later. Sides of the Story
It is early enough in the day that Larry Summers's white shirt is still crisp, its tail still tucked into the pants of the blue suit that announces he has made the switch from Harvard professor to master of the policy universe.
The deputy secretary of the treasury wants to make it clear that he still values Sach's advice and friendship, acknowledging that Sachs's ideas "have influenced the way we all do business." But from his carefully chosen words, there is no mistaking a sense of impatience with a colleague who refuses to understand the difficulty in reforming large institutions such as the Treasury and the IMF and the tricky political and economic trade-offs required for any international rescue.
Sachs tells his side of the story by phone from his office, an airport waiting lounge and his car. His is a more frenetic kind of busy than Summers's, but in its own way more charming.
Sachs is quick to praise his old pal as "an obviously gifted individual who has done his job extremely well." But he voices exasperation with the "unfortunate compromises" Summers has had to make with political realities and the "fundamentally flawed" institutions over which he now presides.
Such tensions will be easily recognized by anyone who has played or observed the Washington policy game. But in this case, they are heightened by the fact that the two men are, in many ways, so much alike. Friends and colleagues describe them as tireless and prolific, with quick minds and near-photographic memories. Both are equally articulate in mathematics and English. They are also headstrong, abrasive and sometimes annoyingly self-confident.
Until recently, they had also shared a common approach to economics. Both had done extensive research showing how small imperfections in the ways markets worked led to the panics, recessions, monopolies and other inequities that didn't fit into the tidy neoclassical models. But while finding that markets do not always generate the best outcomes, Sachs and Summers were reluctant to jump to the conclusion that government ought to step in to correct for the market's imperfections -- too often, they argued, government simply made a hash of things.
As a result, both men found themselves perched uncomfortably on the ideological spectrum between liberals who argued for more active government management of the economy and conservatives who argued that markets always know best.
Sachs was the first of the two to test-drive this pragmatic course during the 1980s in Latin America. In many respects, the advice he dispensed could have come right out of the free-market playbook: stop printing money, open up to foreign trade and investment and eliminate regulations that protected entrenched economic interests.
But Sachs's insistence that banks and international institutions grant debt relief to the region was anathema to the Treasury, the IMF and the rest of the world's financial establishment. Only after a decade of slow growth in the region did Sachs's ideas about debt relief go from being a dangerous and radical idea to conventional wisdom.
By the end of the 1980s, Sachs was making similar arguments to governments in Eastern Europe struggling to make the transition from communism to capitalism. IMF officials had urged a phased transition, delaying the move to open trade and a convertible currency. But Sachs convinced Solidarity leaders in Poland to jump directly into the capitalist pool. He prescription of "shock therapy" -- supplemented by debt relief and large doses of Western aid -- generally proved successful in Poland and elsewhere in Eastern Europe.
Sachs had hoped to record his greatest triumph in Russia, where he was a key adviser to the early reformers. But when significant Western aid failed to materialized and the early "shock troops" were replaced by gradualists, a frustrated -- some would say impetuous -- Sachs left Moscow in a huff, claiming that the United States and the IMF had sabotaged Russian reform. A top U.S. official replied that Russia needed "more therapy and less shock."
Despite the setback in Russia, Sachs's influence had grown to the point that by the early 1990s, the hometown Boston Globe dubbed him "the most powerful economic engineer since John Maynard Keynes." The New York Times declared him to be "probably the most important economist in the world."
But it was also becoming clear that this son of a union lawyer from Detroit enjoyed lancing the economic establishment. "Jeff's style is flamboyant, although I'm not sure it's always productive," Rudiger Dornbusch of MIT, a former teacher, said at the time.
Summers, meanwhile, had taken a more traditional academic route befitting his pedigree as the son of two economists and the nephew of two others -- Nobel prize-winners Paul Samuelson and Kenneth Arrow. So imbued was the Summers household in the economic way of thinking that, as an exercise in market dynamics, father Robert would auction off control of the family's lone TV set.
Summers's first major foray into political economics foundered with the presidential campaign of former Massachusetts governor Michael S. Dukakis. But two years later he leapfrogged other, more experienced candidates to become chief economist at the World Bank in Washington, the IMF's sister institution. From there, it was only a short hop to the Clinton Treasury Department as undersecretary for international affairs.
Very quickly, however, Summers began moving beyond international issues -- and traditional Democratic economics. Inside administration councils, he argued that a strong dollar, deficit reduction and free trade would do more to expand economic growth than the tax cut and public works spending that candidate Clinton had advocated during the 1992 campaign.
And when others on the economic team wanted the president to jawbone the Federal Reserve Board to lower interest rates, Summers spoke up for tight monetary policy and Fed independence. He was the midwife to the Treasury's new inflation-index bonds and he has been the lone senior Clinton official arguing for partial privatization of Social Security and tax incentives for savings and investment.
Nothing in this constellation of market-oriented policies rivals Sachs's ideas for boldness or originality. But where Sachs has cultivated the role of independent consultant and critic, Summers has mastered the inside game.
It wasn't necessarily a predictable outcome. As a former college debating champion and graduate seminar leader, Summers arrived in Washington with a tendency to overwhelm and even ridicule those who disagreed with him. A number of former administration officials still smart from the sting of Summers's sharp tongue years later -- among them, former Fed vice chairman Alan Blinder, who turned down the job of chairman of the Council of Economic Advisers in part because of the prospect of having to tangle frequently with Summers.
Early in the first Clinton term, Summers also ruffled feathers inside the Treasury Department. Reporters love to recall times, at press briefings, when Summers would follow up comments by then-Secretary Lloyd Bentsen with his own explanations of what he thought the secretary had meant to say. Bentsen's jaw would clench as he listened to his upstart undersecretary.
Somewhere along the way, however, Summers came to recognize that succeeding in Washington had more to do with winning allies than winning debates. And he was careful to court the two allies that counted most in economic policymaking -- his boss, Treasury Secretary Robert E. Rubin, and Alan Greenspan, the chairman of the Federal Reserve Board. The two not only have helped advance Summers's career, but also now regularly include him in their weekly lunches and in their joint public appearances on Capitol Hill.
"Larry has proven himself, in a way that was not predictable, to be a successful team player and to operate in a political setting," says Laura D'Andrea Tyson, who headed the Council of Economic Advisers and later the National Economic Council during the first Clinton term. "He's been very perceptive about hierarchy. He has learned to disagree with people like Bob and Alan while allowing them to prevail."
One wise old hand noted that Summers is the rare academic in government who, when told about an upcoming meeting, is clever enough to care more about who will be there than what's on the agenda.
Summers's success, in fact, stands in marked contrast to the experience of his mentor, Harvard economics professor Martin S. Feldstein, who retreated from Washington after two years as chairman of Ronald Reagan's Council of Economic Advisers, having failed to persuade the president that his tax cuts would lead to massive federal budget deficits. As a young economist on Feldstein's staff, Summers was able to glimpse firsthand the constant trade-offs required in public life -- between speaking your mind and being a good team player, between holding out for the ideal solution or settling for second best, between being right and being relevant.
Now, 15 years later, Summers is struggling with those tensions himself. According to those who have worked with him closely, he has developed a taste for power and a knack for the give-and-take of politics. His early hubris during the Mexico crisis has given way to a more collaborative style that has put him at the center of global economic policymaking -- and in a good position to become treasury secretary should Rubin step down.
Back in Cambridge, Sachs has settled into a different role of critic, crusader and intellectual provocateur. He takes some comfort in the fact that the IMF has revised some of its Asia policies. And despite the active opposition of Summers and his Treasury colleagues, Congress is now poised to impose new restrictions on IMF funding that reflect many of Sachs's criticisms.
Still, even Sachs concedes there is probably a good reason why he remains rooted at Harvard while Summers has thrived in the policy hothouse of Washington.
"Look, I recognize that it is easier for an individual to come forward with a suggestion than it is for an organization like the Treasury or the IMF to accept it," says Sachs. "But that's what I like doing and I'm very comfortable in that role. I'm not sure I'd be a very good organization man." Staff writer Clay Chandler and researcher Richard Drezen contributed to this report. CAPTION: Jeffrey D. Sachs Director, Harvard Institute of International Development Age: 43 Grew Up: Oak Park, Mich. (near Detroit) Education: B.S. and Ph.D., Harvard University SAT scores: Won't tell Career Highlights: Economics professor, Harvard University; adviser to the governments of Bolivia, Brazil, Argentina, Venezuela, Peru, Poland, Russia, Ukraine, Mongolia, Indonesia Family: Married to Sonia Ehrlich Sachs, pediatrician at Harvard University Health Service; three children Sports/Interests: Skiing, collecting old currency Favorite Drink: Diet Coke On IMF Funding: "Although the IMF has repeatedly demonstrated deep weakness in its operations and strategy, the U.S. Treasury hasn't told us a word about how to fix these problems . . . The IMF needs fundamental reforms before it is given additional funding." Lawrence H. Summers Deputy secretary of the treasury Age: 43 Grew up: Merion, Pa. (near Philadelphia) Education: B.S., Massachusetts Institute of Technology; Ph.D. Harvard University SAT scores: Won't tell Career Highlights: Economics professor, MIT and Harvard University; staff economist, White House Council of Economic Advisers; chief economist, World Bank; undersecretary of treasury for international affairs Family: Married to Victoria Summers, a tax attorney at the International Monetary Fund; three children. Sports/Interests: Skiing, tennis Favorite Drink: Diet Coke On IMF Funding: "Not to fund the IMF now would be a little like canceling your life insurance policy when you have already gotten sick. It is simply not a risk that we should take." CAPTION: Jeffrey Sachs on the Harvard campus. Sachs has argued that the international rescue effort has made a bad situation worse in Asia.