LS: I didn't share many of the policy preferences of that administration, I found the experience to be one that was very interesting. I think from that point forward I hoped I would have a chance to work in government at some point in my career.
PS: It happened like so much in your life, fast. You were at the World Bank, by what, 1991? How did that happen?
LS: I was kind of going about, doing my work. My work was primarily in US economic policy. Barber Conable was then the president of the World Bank. I think for whatever reason the position had been filled by a series of really first-rate economists. I think he had the urge to appoint someone where somebody convinced him where he wanted to create positive ripples in the academic community. This set of people who would have been natural to a point as expert in development economics, for one reason or another didn't take the job. He found his way to me and I had spent some time in Indonesia as a graduate student and early on as a professor working on Indonesian economic problems and had found it very interesting. So I was attracted by the chance to become involved in working on development issues. I was also attracted frankly by the opportunity to try to be involved in leading a larger effort than a single professor with a few assistants, writing papers. I made my way to the World Bank, assuming that I would be there for two years, two-and-a-half years, and I would then return to Harvard. I did two things during that period of which I am rather proud, one thing that two thirds of people in this room are probably vaguely aware of. It wasn't one of the two things I was proud of. I wrote a report that I think subsequently influenced the bank a fair amount on investing in girls' education, and making the case that it had an enormously high rate of return. I guess I had an urge even then for generating a little bit of controversy. I chose to present this paper initially in Pakistan to the Pakistani Economic Roundtable. It was quite a remarkable event. There were people, sociologists sitting there saying, finally somebody from the World Bank saying something relevant, useful, not the old usual stuff about financial liberalization. But there was also, and I will never forget this, somebody standing up and saying: you know, sir, arguments like yours are the reason why America has 30 million latchkey children and is a sick society. But ultimately the thing had a fair effect. The other thing I did, more of less by serendipity, was I decided that the bank would write its annual report on health and on quantitative techniques for measuring which kind of health interventions were most effective. I could have been more thrilled to read three or four years later that Bill Gates, who at the time I had never met, said that it was reading that report that had led him to decide that global health was going to be the focus of his philanthropy. So one should remember that these kinds of reports can have an impact. I also signed my name to a memo where I tried to make the case that there is a complicated set of balances involved with free trade and economic growth and the comparative advantage that comes from it. A young man who is a good friend now who drafted the memo for me chose to express the thought that not every country should have the same environmental standards by saying, wouldn't it really be better if more toxic waste was dumped in Africa . This was a rather unfortunate event. The guy from the bank's press office would call me every two hours. Larry, they just denounced you in Aukland. They're having an environmental conference in Cape Town and they're going to pass a resolution about your memo. But as it turned out, I thought I was going to be there for two-and-a-half years, but it turned out to everybody's surprise – at least at the time I went to the World Bank – a Democrat was elected, Lloyd Benson. That memo was noticed by the Democrats who were elected. Lloyd Benson invited me to serve as his undersecretary of the Treasury and I then spent the next eight years in the Treasury Department, initially with a focus on international economic issues, but ultimately with a focus on all of the economic issues.
PS: First as undersecretary for international affairs, a job that many illustrious people, including Paul Volker, had had before you; then as deputy secretary to Secretary Rubin; and for the last two or three years as secretary yourself. There were huge events during this period that were crucial to the country, crucial to the Clinton presidency. I think of the tax increase that he put through. I think of the rescue of Mexican finances, which was very controversial and worked out very well at the time. There were numerous other things. What stands out for you as you think about that time in the Treasury?
LS: I will say one thing. I'm someone who admires President Clinton very much. Like all of us, he is not a perfect man. But I guess I was struck again and again with the 1993 budget deal, with what happened in Mexico with the way he worked to contain the Asian financial crisis. But on all sorts of things, he did the politically convenient thing. But when it was really important, I never saw him hesitate to do what he thought was the right thing. Probably the single moment I will remember with the greatest clarity was the night Secretary Rubin was sworn in as Secretary of the Treasury by Chance. We walked in and we told him that after Bob's swearing in, we walked in and we told him that Mexico was going to default within 48 hours if the United States did not make an appropriate commitment. He asked how large a commitment. Bob turned to me. I said $25 billion. One of his aides said you mean, $25 million. Bob said, no. He means $25 billion. There was a certain silence in the room. Another very senior person on the White House staff remarked – remember, this is January 1995, so it's two months after the President had lost badly the 1994 election. One of his most senior people remarked that if we send this $25 billion to Mexico and it doesn't come back, there is no way you are going to be reelected. The president didn't hesitate. He said – I'm going to clean up slightly what he said but the essence of it was – this is serious, this is why we're here. We are going to do our best to make the right decisions. If we make the wrong decisions and we lose an election, that is how the process ought to work. So I just want to know two things. First, is there a substantial chance that something very serious will happen if we don't do this? We said yes. Then he said, I realize there are no guarantees, there are no certainties, but is there a reasonable chance that is we are prepared to make a commitment that we will contain the situation. We said yes. He said, well, it's pretty obvious what we should do. That launched us on something that had a fair number of ups and downs. If I look back at the calendar of those events and look at graphs of the market, it was basically pretty clear that the thing was going to work within about two-and-a-half months. But if I take my subjective experience of those two-and-a-half months, and I think about it, it feels more like two years. That was probably the single most dramatic of the episodes that I was involved in.
LS: NAFTA? At the time, it's an interesting question. If somebody had told us that 15 years later Mrs. Clinton would be running for president and they told us that all the Democratic presidential candidates would be condemning NAFTA, I think we would have found both propositions would not have been something we would have been thinking in 1993. But I think we actually would have found the second proposition more surprising than the first proposition. We have a better economy. I think we have a very different relationship with Mexico than we would have had without NAFTA. I think the immigration problems, vexing as they are, the drug and corruption problems that are as vexing as they are, would have been much more serious if NAFTA had never passed. Is it a perfect treaty? With the benefit of hindsight, would we have done it in precisely the same way? No. With the benefit of hindsight, I'm sure there are things we would have done differently. Are there things that can be improved about NAFTA? Yeah. I'm sure there are things that can be improved about NAFTA, but I worked hard. I don't know exactly how hard I worked. I don't think the president's political advisors saw an outspoken 39-year-old professor from Harvard as necessarily the administration's best representatives, with the political figures who were going to have to vote on the treaty. But I was very involved in trying to pass NAFTA and I'm glad that I was, as I was glad to be pushing the Uruguay Round sometime after that.
PS: I want to fast forward and get you to Harvard, but 1998 you and the Fed successfully ward off the Long Term Capital crisis. You leave office in 2001 with the economy booming, probably over-booming to some extent, but unemployment at a very low level, all kinds of people having been brought into the workforce that all manner of government programs couldn't get into the workforce. In general a feeling things were going well at home. The internet bubble was about to burst but otherwise things were going very well. With scarcely a breath you land back at Harvard as its president, head of the greatest university in the history of the world, as this Yale man will concede. Knowing you as I have come to, I know that you did not look at this as the perfect enterprise and I am going to stay here and preside. You're always looking for change. What was at the top of your list and what were you happy about in your five years at Harvard? What would you do differently?
LS: I have a different view of the experience today than I did a year ago and I expect that five years from now I'll have a different view than I do today. In retrospect, I think I made a variety of tactical errors in diffusing my energy and failing to recognize the extent to which good will was capital, and you had to build it up as well as deplete it. I had a rather idealistic view of the academy that I never would have been so foolish to apply in Washington, which was that if you were right and you saw a way to make things better and pointed it out and you push to have it happen, that would be a very valuable thing to do and it would tend to push things in the right direction. So I had an opinion on almost every issue. Looking back I would be prepared to argue vigorously today that the vast majority of my opinions were correct. I wouldn't defend the strategy of having as many opinions as I had and I wouldn't defend all the tactics I used in pushing my opinions, which in retrospect I just didn't full appreciate the extent to which the university was a rather traditional and slow moving community and didn't appreciate the extent to which the university, like any other organization, was a political kind of institution. I had four or five major things I wanted to do. While the whole thing obviously didn't end as I would have planned, I think on most of them in fact I was there long enough to be fairly successful. I thought the university needed to do something fairly important about access and financial aid. We really did initially by saying nobody would pay tuition if they had income under $40,000, and subsequently pushing that threshold up, up equal opportunity on the agenda for higher education in the same way that diversity had been put on the agenda for higher education in the previous generation. We also did something that was quite important in the Harvard context, which is we really established the principle that it was sort of nuts that because investment bankers go to business school and make a lot of money there is more financial aid for students who want to study to be investment bankers than there is for students who want to study in the education school to be teachers. We started to make serious financial commitments to people who wanted to come and study public service. That job is not done but there is a lot of forward motion. There is a substantial emulation. So I fell very good about that.
PS: I want to get to the audience questions quickly.
LS: I'll be much quicker. I think that's the end. The university had really fallen quite substantially behind in science. The share of the faculty in the sciences over the past 20 years had actually fallen considerably and we reversed all of that and made a major set of investments in science. So by the time I left there were 17 football fields worth of scientific construction that was underway. It's important perhaps to say at the Council on Foreign Relations, we put in place a set of programs that assures that now essentially every Harvard undergraduate either has a semester abroad or participates in a summer program, where they go abroad during their years, which if you think about America's lack of concern for the world is I think a very striking thing. There were two other areas that go very much to the culture of the university where I was less successful. I felt that it was crazy that an institution whose business was creating new ideas and working with kids had a tenured faculty whose median age was 59, that the university needed to figure out how to hire young people and develop young people, and that there were a whole set of question about the whole way in which we hired and empowered faculty. During my time I made some progress and we made a set of different kinds of appointments that had been made before, but I'm not sure that it will fully stick. I think that is an important thing. The other thing is that there is a set of very difficult issues in universities about the attention faculty do and do not pay to students. On the day that I was named as president I met with kids involved in undergraduate government, the study body president and such, and these were the much more gregarious and outgoing than normal kids. I said, how many of you have three members of the faculty at Harvard who would know your name if you were walking across the yard? None of them raised their hand. Two. I got a couple of hands. One. I got 40 percent of the hands. I worked very hard to change that. We did some things that were good to do. Now almost every student can participate in the freshman seminar and such. But if I look back and say, did we produce a real culture change on that, during my time? There was obviously enormous resistance to things that will mean real change. I can't say we completely succeeded there. So I look back with a considerable sense of pride in the things we did accomplish and the issues that were raised and obviously some regret that it all could have been managed in a somewhat different way that might have proved to be more effective.
Q: (Inaudible) 49. As I told you I'm writing an essay for the next president of the United States with recommendations for federal higher education policy. Would you give me three major recommendations you would like to have in the book to be presented to her?
LS: I'll make you a deal. You tell me for sure who is going to read it and I'll give you three very good recommendations. First, there needs to be a substantial increase in reform in the availability of financial aid. It's great that Harvard is able to do the kinds of thing that it is able to do with its $38 billion endowment, but it is really a tragedy that if you look in the United States today, as somebody put it very directly, rich dumb kids are much more likely to go to good universities than poor smart kids. You can just see it in the statistics and it's wrong and it's about financial aid and effort. That is the first thing I would say. The second I would say is that, much as my colleagues in higher education don't like these ideas, it wouldn't hurt to start thinking about ways of, at least on an informal basis, evaluating what happens in universities and trying to come to judgments about the effectiveness in education and research of different universities. I'm going to give you four. Third, to take one that will be sort of universally popular but difficult, it is nuts that at the beginning of the century, the beginning of the life science century, we are cutting the NIH for the first time in history, and people under 40 basically can't get grants. It is just crazy, with all the progress that is possible. Last and not unimportant, there are few things that are crazier than the combination of tenure and mandatory retirement. It is sort of beyond belief that you have science departments in great universities where the decisions as to who the next generation is going to be made are being made by people in their 70s. Not only are they occupying larger amounts of laboratory space, filling slots that could be given to other people, they are also the decision makers with veto power as to who the scholars of the next generation are going to be, and it is just crazy. It would make a very substantial contribution to at least the leading institutions of higher education if an exemption were crafted for mandatory retirement. It should say something about how weird this is in a way that the professors who are least likely to retire are in the sciences. Something should be done.
Q: Graham Duncan from East Rock Capital. I was curious. When you look at the practicing economists out there, whether there are regular mistakes that you see in people's analysis of what drives the economy, and if there are one or two economists who you think get it right or that you read regularly?
LS: Did Ned Phelps pay you to ask that question? My colleague and friend Ned Phelps, who writes periodically in the Wall Street Journal, is not according to me always right but he is always interesting. What he has to say should be carefully considered. On some occasions when he had said things that were quite widely regarded as nuts, five or 10 years later they were regarded as the convention wisdom of the moment. To be fair, there were other moments when he said things that were regarded as wrong and didn't get better with the passage of time. But I think he is someone whose work should be watched very carefully. I find the excessive faith; there are two kinds of offsetting errors that in a way lead me to be dismissive of people's analysis. One is the motive analysis that assumes that whatever the market produces will be for the best, that denies, if you like, that the phenomenon of a wasteful bank run where a healthy institution is felled by lack of confidence and that somebody needs to do something to coordinate to produce a better outcome. The kind of analysis that denies that as a possibility and simply believes as an ideological matter that if you interfere in the market it will be worse. I don't find those types of analyses helpful. I suppose the other type of analysis that I don't find to be helpful are ones that commit the opposite error. Something bad happened. Therefore, the government should have a plan to stop it, and if only we had a better government the problem would not have taken place. If you are really good at figuring out when stuff like the subprime problem this August was going to happen, if you really can figure that stuff out, you really can make billions of dollars. So when I hear people say the government just needs to have more regulators so it will be able to warn people and stop those things from happening, maybe you will be able to find people who want to be GS16s who can be paid GS16 salaries who will persuasively warn the Bank of America about these coming problems. It's possible but it's not where I would assign the preponderance of probability. I guess those two kinds of analyses seem very good. I am a columnist for the Financial Times, and I would say leaving my own columns entirely aside and meaning no disrespect to the newspaper, that Paul edited for a long time. I would say its editorial page is somewhat susceptible to the first of the biases I identified. I think the general commentary that occurs in the Financial Times and particularly Martin Wolfe's columns I find to be very valuable.
Q: Lucy Komisar, I'm a journalist. I interviewed Joe Stiglitz not too many years ago. He was chief of the Council of Economic Advisors under Clinton . He told me that when Robert Rubin was Treasury Secretary, he didn't want to do anything to stop the free flow of money into the US . That meant not doing anything about money laundering because some of the freely flowing money was drug money, corruption money, money looted from developing countries. But when you came in, you really took some initiative to do something about the whole money laundering issue. I'm interested about what made you want to do that and how did you decide what you ought to do. Did you have problems with interests that didn't want you to do this because maybe they wanted the money to come in freely without any blocking? This is an issue which of course is important today. Obama signed on to stop tax havens.
LS: I got it, I got it. I'll take my compliments where I can get them, even from Joe Stiglitz who hasn't usually been complimentary. Let me just say that I'm aware of no difference in opinion on this question between Bob Rubin and myself, and some how the suggestion that he was representing Wall Street interests seems to me to be entirely unfair and unwarranted and devoid of merit. For a variety of reasons at the time when I became Secretary of the Treasury, given concerns that existed in a number of parts of the US government, given some of what we have been discovering at the IRS , we did launch a series of initiatives directed at what I like to call the dark side of capital mobility. But for the most part open capital markets, foreign investment, bring tremendous benefits. But we identified three highly programmatic things: tax havens that were costing the tax payer large amounts of money, principally because of bank secrecy, not just in the United States , but in the rest of the world. Pressuring the ability to maintain progressive taxation around the world. Money laundering and failure to adequately regulate levered financial institutions who could plant their leverage abroad. We launched a series of initiatives designed to multi-laturalize an effort, to diplomatically pressure jurisdictions with respect to all three of those issues. I would say that during the time that we did it, with the help of my colleagues – my colleagues Will Wexler, Neal Woollen and Todd Sturn – we made what by government standards was quite a bit of progress over a period of a couple of years. The new administration regarded this all as some kind of dangerous left-wing plot against the fundamental right of capital to hide itself and not pay taxes and basically eviscerated all the initiatives. They basically said they are not our policy anymore, we're done, finished. Yes, we have been working in the OECD through all this time but it's done. After 9/11 there was a bit of a change of heart, particularly around the money laundering parts of it. But I think we did the right thing, and by the way, if we are to maintain support for an open trading system, we had better be prepared in those places where open markets are coming with very substantial costs, to act aggressively and forcefully. I thought this was important in two respects. I thought the problems were large and important, and I also thought there was a broader symbolic purpose in making clear that our judgments and commitment to open trade were not some kind of ideological principle, but were based on a pragmatic judgment of what would best promote prosperity.
PS: I have been given the sign that we are out of time, but I can't let you off the stage without giving you a chance to respond to the questions that I get from my oldest daughter and her mother.
LS: I have a feeling that I know what is coming.
PS: Both are Harvard graduates. In your dealing with the issue of women and science, is there anything that you would do differently?
LS: Yeah. I think it's probably fair to say there are something things I would do differently. I obviously screwed up. I said things and somehow girls were reading that they had no possibility of becoming scientists. My job was not to have there be a causal change between the words that I said and girls reading that. Having said that, I think one of the unfortunate aspects of this is, I suspect, there are a whole set of research questions, that people are going to be much more reluctant to undertake a study because if what happened to me can happen to me. Others who were in less elevated positions will have that much more reason to be fearful. Whether you are worried about women in science or whether you are worried about the simple fact that according to projects from the Department of Education, some time in the next decade there will be three female college graduates in this country for every two male college graduates. That might have something to do with some difference between genders. I don't think that is the prevailing hypothesis.
PS: As a father of three daughters and one son, I am in favor of that ratio.
LS: I think we are going to have to find ways to research and study science and see where science lies. It is probably, given what 21st century is like, the role of a university president, to speculate and provoke on these topics, even in what is held out as a private session. That was a serious mistake. But I think that we will almost certainly make more progress in advancing the values that we all share, if every issue is open for academic debate and if the response to distrastful argument is logical counter argument, rather than statements of revulsion. So I will always wish that I had handled that whole situation differently, but at the same time I think it is very important to uphold the principle of the right to be speculative, the recognition that when you offer hypotheses and judgments in a tentative way, they sometimes turn out to be right and they sometimes turn out to be wrong. People will debate over time the merits of different hypothesis. But I think it is something that is very, very important. Which isn't to say that with the benefit of hindsight not gone to the NBR that day, but it is to say I think we do need to do a certain amount of soul searching around concepts of freedom of discussion and how we regard controversial hypotheses.
PS: Larry, on behalf of the council, I want to thank you for doing this. (Applause)
(END OF TAPE)