Monday, April 6, 2009

Summers and the Street

The New York Times has a follow-on story that tracks Larry’s career in exile, when he was a celebrity part-timer at the Shaw hedge fund. Reading between the lines, the piece is eager to do two things: explain how someone with limited investment experience could be worth $5 million for less than 50 days of work per year, and persuade us that Larry’s stint on the street has increased his qualifications to run US economic policy.

Here are a few items missing from the story.

1. Summers’ false confidence in the Street’s risk models surfaced during his presidency at Harvard. According to this story in the Boston Globe, Summers funneled a large chunk of Harvard’s endowment into derivatives and ran a ship intolerant of dissent. This was before his time at Shaw, so perhaps you could excuse the careless investing as the result of being too far down on the learning curve. In any case, the endowment has been hit hard, and the university has been forced to retrench.

2. The Times article repeats the common error of attributing Summers’ foreshortened reign at Harvard to his one ill-considered (but diagnostic) comment about women and science. In fact, there were several contributing factors, and perhaps the decisive one was his unbending support of Andrei Schleifer. For those who don’t know, Schleifer, a star economist and close friend of Summers, was awarded a contract from the US Agency for International Development to advise in setting up financial markets in post-Soviet Russia. To make a long story short, Schleifer and his wife used the occasion to enrich themselves through rigged contracts and insider trading, the Russian economy was damaged, US-Russia relations were ruptured, and Harvard was forced to pay back $26 million to USAID in response to a finding of fraud. In response, Summers not only defended Schleifer, he gave him an endowed chair. This destroyed Summers’ credibility in the eyes of many on the faculty. For more details, see this account by David Warsh and follow the link to the article by David McClintick in Institutional Investor.

3. The deep question underlying US economic policy at this moment is whether the goal is to restore the status quo prior to the meltdown—the players, the institutions, the paradigm—or whether to let the older order collapse and build a different kind of system to replace it. Everything about Larry’s experience on the Street predisposes him to take the first course.

4. At the heart of the matter is an interesting paradox about Summers himself. He has a reputation for ferocious brilliance, largely on the basis of face-to-face interactions. Economists value quickness in understanding complicated models, and Larry is very, very quick. My first-person experience was minimal (we shared a single AEA panel), but enough to see that he must be difficult to keep up with. Despite his reputation, however, he hasn’t really planted his flag in the economic literature. He has coauthored several influential papers, mainly empirical, mainly important because they identified significant patterns in the data before others saw them. In a sense, they constitute a written version of his verbal skills. His name is not associated, however, with any substantive advance in economic theory or method.

For me, the most telling line in the Times story is this:

It was at that time [after his demotion from president to professor at Harvard], to the surprise of some colleagues, that Mr. Summers seriously contemplated his options on Wall Street in part because he believed his chances to return to a prominent position in Washington had dimmed, friends say.

Summers apparently never considered the option of simply remaining a professor of economics and making a more indelible mark on the discipline. There are many ways to interpret this. It could be that a simple professorship felt too “small” after more than a decade spent on larger stages. Perhaps he did not like the academic life—the round of lectures, seminars, writing and reading. Or perhaps he realized that his gifts for quickness and intensity would never yield the highest payoffs in the world of intellectual production, where persistence and depth are ultimately more valuable.


Shag from Brookline said...

Compare Summers with Henry Kissenger when he had to decide whether to return to Harvard to retain tenure. Does the word celebrity come to mind? "How're yur gonna keep 'em down on the academic farm After they've seen DC?" Henry cut the cord and didn't "hedge" his bet.

Anonymous said...

i did notice on his ideas page that he had a paper on 'hysterisis' which is not free, and that is a 'nonlinear' kind of argument which is fairly heterodox. most of his stuff looks 'data driven' (though such data have been questioned). he did apparently argue that welfare and unemployment benefits undermine employment figures, which is the standard right wing view. he also has a paper arguing against Lucas' real business cycle, which you might expect (UC vs HU).

kevin quinn said...

Closer to home, he, along with Rubin and Greenspan, ran interference for Gramm's bill barring regualtion of credit default swaps, telling wavering congress-people that failure to pass the bill would cause a depression! said...


Summers actually did some interesting stuff before he got involved with public policy positions after 1990, starting at the World Bank. The work on hysteresis dates to the late 1980s and was quite good. His best work was probably that on speculative bubbles, coauthored with Brad DeLong, Robert Waldmann (who is one of the angry bears), and the thoroughly execrable and corrupt Andrei Shleifer, his student.

Clearly in terms of money, he has done very well by playing with the hedge funds and speaking engagements, although he does retain his professorship of economics officially at Harvard. In that regard, he chose to have his cake and eat it too.