Justin Ide

"Spotlight: Lawrence Summers"

Newsletter Article, Belfer Center Newsletter

Summer 2008

Lawrence H. Summers is Charles W. Eliot University Professor and a member of the Belfer Center Board of Directors. He served as the 27th president of Harvard University from July 2001 until June 2006. Previously, he was U.S. Secretary of the Treasury and served as Chief Economist of the World Bank. Prior to his government service, Summers was a professor of economics at Harvard and MIT.

Back in August 2007, most on Wall Street and Capitol Hill believed the turmoil in subprime mortgages could be contained. Growth might be slower, they said, but the economy would still move forward.

But a small vanguard of economists — among them Lawrence Summers, former treasury secretary and a member of the Belfer Center Board of Directors — sounded a clear warning bell. "The risks of recession are now greater than they've been any time since the period in the aftermath of 9/11," Summers told ABC's "This Week." He added — presciently, as it turned out — "we can't yet know that there aren't more shoes to drop in the financial area."

Summers was one of the first economists to diagnose the current financial crisis, and his early calls to action fundamentally influenced the debate. As far back as November 25, 2007, when most were still scrambling to understand the problems, Summers was already looking toward solutions. He said then that the government needed to have a fiscal policy package "on stand-by," in case the situation worsened.

By December 19, 2007, he was calling for fiscal stimulus that was "timely, targeted and temporary" — exactly what Congress passed nearly two months later.

Summers' current recommendations have been highly influential with policymakers, and he has traveled several times to Washington, D.C. to testify before Congress and make public speeches. Behind the scenes, he is advising Congressional staff on legislation.

Summers said close reading of the economic data gave him confidence to speak out.

"I don't worry about providing as accurate judgments as I can," he said.

Summers, once the youngest person to have received tenure at modern-day Harvard, rose rapidly to the top of his profession. After a stint as chief economist at the World Bank, he moved to the Treasury Department under President Clinton and ultimately became treasury secretary. He was president of Harvard from 2001 to 2006. Summers is now the Charles W. Eliot University Professor at Harvard and has his home base at the Kennedy School.

"I've been around some pretty smart people," Jonathan Gruber, M.I.T. economist and former student of Summers, told the New York Times last year. "But it's a different level with Larry."

Summers frequently emphasizes the human impact of the current economic woes. Many of his policy proposals call for helping those most hurt by the current turmoil, including those on the verge of losing their homes.

He is unsparing in his assessment of the toll the economy is taking on American families. In December, Summers said during a speech that, even during a mild recession, the average family stands to lose $5000 in income.

Speaking before the U.S. Senate Committee on Banking, Housing and Urban Affairs in April, Summers predicted more distress ahead and called for several additional steps to mitigate the current crisis. The continuing woes in the housing market are likely to result in two million foreclosures within the next two years, and 15 million homes where the outstanding mortgage exceeds the current value of the home, Summers said.

He argued that the federal government should, in selected cases, purchase and renegotiate mortgages that would otherwise force foreclosure. Additionally, Summers called for bankruptcy reform.

"I believe it is very difficult to defend at a time like the present a bankruptcy code that provides more protection for the third home of a wealthy family than for the first home of a working family," Summers told the committee.

Here is a rundown of Summers' key economic analysis at the end of 2007 and beginning of 2008:

Aug. 26, 2007
Summers says: "The risks of recession are now greater than they've been any time since the period in the aftermath of 9/11." — ABC's "This Week"

It would be "premature to judge this [subprime mortgage] crisis over," in part because "we can't yet know that there aren't more shoes to drop in the financial area."

Nov. 25, 2007
"It is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall." — Financial Times, "Wake Up to the Dangers of a Deepening Crisis"

"Fiscal policy needs to be on stand-by to provide immediate temporary stimulus through spending or tax benefits for low- and middle-income families if the situation worsens." — Financial Times, "Wake Up to the Dangers of a Deepening Crisis"

Dec. 19, 2007
"The most urgent priority for policy over the next several months is containing the incipient economic downturn."

• In even a relatively mild recession, the average family stands to lose $5000 in income.
• "Fiscal stimulus is critical but could be counterproductive if it is not timely, targeted and temporary."
• "It is reasonable to suggest that stimulus approaching $50 – $75 billion — roughly in the range of 1/2 of 1% of GDP — is likely to be appropriate. The largest part of this stimulus should come in the form of tax cuts distributed equally among all taxpayers and recipients of tax refunds."

— Speech at the Brookings Institution, "The State of the U.S. Economy."

Jan. 27, 2008
"Along with macro-economic stimulus in the U.S., there is the need for further policy development in three other areas — repair of the financial system, containing the damage caused by the housing sector and assuring the global co-ordination of policy." — Financial Times, "Beyond Fiscal Stimulus, Further Action is Needed"

For more information about this publication please contact the Belfer Center Communications Office at 617-495-9858.

For Academic Citation:
Communications Office. "Spotlight: Lawrence Summers." Belfer Center Newsletter (Summer 2008).