BUSINESSWEEK ONLINE : MAY 24, 1999 ISSUE
NEWS: ANALYSIS & COMMENTARY

It's Summers Time
Larry Summers, named to succeed Rubin as Treasury boss, is no clone

When finance ministers from 21 nations gather in Malaysia on May 15 for an Asian-Pacific Economic Cooperation (APEC) powwow, they'll be welcoming a new member of the club: U.S. Treasury Secretary-designate Lawrence H. Summers. Treasury chief Robert E. Rubin, who announced his long-expected resignation on May 12, had already passed up the trip in favor of his No. 2. Now, the meeting will serve as Summers' coming-out party as the Treasury's new boss. But the changing of the guard won't stir a ripple of concern at APEC. ''We talk about Rubin and Summers in one breath,'' says a top Japanese government official.

Judging from the reaction to Rubin's resignation, that goes for Washington, Wall Street, and the rest of the world, too. In many key respects, Summers, 44, a former Harvard and World Bank economist, is a philosophical soul mate of Rubin, 60, the former Goldman, Sachs & Co. co-chairman. Both are fiscal conservatives and free-market internationalists who get along famously with Federal Reserve Chairman Alan Greenspan.

SMOOTH TRANSITION. Summers, who was swiftly nominated by President Clinton to succeed Rubin when he departs on July 4, has pledged to follow the circumspect course his boss has set at Treasury since 1995. Another sign that Treasury is unlikely to alter direction: Clinton nominated Stuart E. Eizenstat, a seasoned Beltway insider and now Under Secretary of State for economic affairs, to replace Summers as Deputy Treasury Secretary.

Senate Republicans indicated a smooth confirmation for the new team, and the markets reacted calmly. After an initial plunge, the Dow Jones Industrial Average closed down a mere 26 points on May 12, and Treasury prices actually staged a slight rally. ''Wall Street has a tremendous amount of confidence in Larry Summers,'' explained Morgan Stanley Dean Witter President John J. Mack. ''One of Rubin's final achievements is a smooth succession.''

But what happens after that? Despite all they have in common, Rubin and Summers differ in significant ways. The incoming Secretary instinctively favors bold solutions to issues such as reforming the tax code, overhauling Social Security, or fixing the global financial system. Rubin, by contrast, distrusts big changes. ''Bob likes to play the role of the CEO sounding board, while Larry's style is to be the new-idea generator,'' says Gene Sperling, economic policy coordinator at the White House.

That could mean a more activist Treasury. ''The key tenets of Rubinism are caution, credibility, and careful assessment of the probabilities,'' notes ex-Treasury Undersecretary David A. Lipton. ''Larry's strength is conceptualizing, creativity, and action. They've learned from each other.''

The duo's give-and-take was apparent in June, 1998, when the global financial crisis was flaring up. Rubin, pondering whether to intervene in the currency markets to support the Japanese yen, fretted that the U.S. would lose credibility if traders continued to drive down the yen. But Summers argued that the timing was right--and the move would prod Japan toward reform. That persuaded Rubin to intervene.

Throughout the emerging-markets crisis, Summers has often taken a more high-profile role than Rubin. He helped design a new International Monetary Fund emergency reserve that aided Korea and Indonesia. He was also an architect of the IMF's contingent credit program, intended to provide funding before countries fall into crisis.

Rubin and Summers agree on most aspects of a new international financial architecture. But Rubin feels strongly that investors should pay the price when deals go bad--so they'll be more cautious in the future. Summers, says a close associate, leans toward some bailouts of private creditors to keep the markets from getting too unsettled.

But do these differences matter, given how little time is left on Bill Clinton's Presidential clock? They could, if Al Gore is elected President in 2000. Summers has become a close adviser to the Vice-President, who might keep him on as Treasury chief, insiders say.

Summers has a more important champion: Federal Reserve Chairman Alan Greenspan, who issued a statement praising his ''extraordinary talent and judgment.'' In private, Greenspan speaks fondly of Summers as a promising protege who matured in the job.

Indeed, when Summers arrived at Treasury in 1993 as an Undersecretary for International Affairs, he earned a reputation for arrogance. Since then he has worked at smoothing rough edges. ''He'll open a meeting with a Rubin-like comment--'Well, I don't really know a lot about this, but....''' says a colleague.

That makes the new Summers more popular on Capitol Hill. A year ago, Senate Republicans were critical of his abrasive manner and handling of the global financial crisis. But no more, thanks to his charm offensive and a brighter global outlook.

TAX FIXER. A Secretary Summers could explore options for overhauling the tax code, something Rubin resisted. At Harvard, Summers pushed a consumption tax, a levy on securities transactions, and a capital-gains cut. He no longer favors those plans, but friends say they haven't lost their appeal. ''Bob believes a stable tax code is best for business. Larry believes you need to fix inefficiencies in the code,'' says former Assistant Treasury Secretary Michael B. Levy. ''That makes him sympathetic to capital-gains cuts that discourage shelters, and changes that boost savings.''

Summers and Rubin are eager to downplay conflicts. ''Our basic views are so similar,'' says Rubin, ''you can always work out whatever differences you have.'' In 1996, for example, Summers convinced Rubin to back ''indexed'' bonds, Treasury securities with interest rates that rise and fall with inflation. Summers argued that indexed bonds would be popular with investors seeking inflation protection. He was right.

The pair also differed initially on Social Security reform. Rubin had opposed an overhaul that would include market investments because he feared retirees would lose their savings if Wall Street tanked. But Summers was open to letting workers benefit from the higher returns stocks offer. ''Bob defended the status quo and Larry was clearly intrigued with more radical proposals,'' says a high-level associate. Last winter, they compromised on what became a key plank of Clinton's plan: a bid to let the government invest some Social Security money in the stock market.

Without Rubin around, would Secretary Summers push for bolder policy moves? Sources close to House Ways & Means Committee Chairman Bill Archer (R-Tex.) certainly think so. They expect Summers to be more willing to reform the tax code and Social Security.

Summers, however, has told friends that the job of Treasury Secretary has such enormous impact that it would force him to adopt Rubin's highly cautious approach to problem-solving. And on one pending issue--removal of federal restrictions on finance industry activities--Summers has vowed to stick with the Rubin position: No deal so long as Congress insists on shifting oversight powers from Treasury to the Fed.

But the lure of bold ideas is strong to an academic mind. With the approach of a Presidential race that may be fought over competing proposals to overhaul Social Security and taxes, Larry Summers might find the urge to think big irresistible.

By Owen Ullmann with Laura Cohn and Mike McNamee in Washington

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