`Dr. Elbows' Gets More Room At Treasury

Treasury's tough guy, Larry Summers, pumps up his power

Larry Summers was getting fidgety--never a good sign. The Deputy Treasury Secretary was 90 minutes into a Saturday-morning retreat with top Internal Revenue Service brass in March, 1996. And he was seeing firsthand that many of the charges against the agency were true--IRS officials were more focused on defending their turf than on digging the agency out of its mess. The flashpoint: Capitol Hill complaints that the IRS had wasted much of the $4 billion spent on updating its antiquated computer system.

What followed was classic Summers: "He just ripped their agenda to shreds," says a former IRS aide. With withering questions, Summers pressed agency officials to figure out how to rescue their foundering project and improve taxpayer service. Their answers told Summers that IRS managers weren't up to the job. By day's end, Summers was ready to acknowledge to Congress that the IRS 's computer upgrade was "badly off the track"--and to force the insular agency to turn much of the project over to outsiders.

CENTRAL ROLE. Lawrence H. Summers, management expert? The image hardly seems to fit the enfant terrible economist best known for the wide-ranging research that won him tenure at Harvard University at the age of 28. But over six years in Washington--first as chief economist at the World Bank, then as top international negotiator and No.2 official at Treasury--Summers has certainly learned the capital's power games. Now, he has a central role in forging Administration economic policy.

President Clinton acknowledged Summers' growing role in December when he made the 42-year-old economist the only sub-Cabinet official with a seat on the White House National Economic Council. Summers is also at the table most Thursday mornings when his boss, Treasury Secretary Robert E. Rubin, has breakfast with Federal Reserve Chairman Alan Greenspan.

The next few months, however, may leave Summers longing for quiet, ivy-covered halls. A congressional commission is likely to recommend in April that the IRS's tax collectors be spun off into an independent agency, leaving Treasury with at most a small group of regulation-writers and tax-crime investigators. Summers will have to persuade skeptical legislators in both parties that his more modest plans, announced Mar. 17, can shake up IRS management and improve service for taxpayers without stripping Treasury of its oversight of the tax collectors--who make up more than half its employees.

At the same time, trouble is brewing on Summers' old beat, international economics. Since 1995, Summers and Rubin have promoted a strong dollar to help keep U.S. interest rates down. But now, the greenback's strength is feeding a surge in Japanese exports. "We're headed back to the mid-1980s, when the strong dollar and weak yen created enormous trade and financial tensions," warns C. Fred Bergsten, director of the Institute for International Economics, a Washington think tank.

Rubin and Summers downplay that risk--but are acting to head it off. The Treasury chief now says the buck shouldn't go up anymore. And Summers went to Tokyo in March to warn Japan not to try to export its way out of its long slump. "We thought it was an appropriate time to send a signal to Japan on the importance of domestic demand," he explains. Economists in Tokyo, however, question Summers' timing, since Japan's budget--the main vehicle for boosting domestic growth--was already set.

BRUSQUE MANNER. Back home, White House aides are promoting Summers to lead what could be the biggest economic initiative of Clinton's second term: drafting a plan to ensure Social Security's solvency. Based on Summers' pro-savings writings while in academia, the few remaining liberals in the Administration fear he'll push for mandatory private retirement accounts to supplement Social Security. But Clinton hasn't yet decided whether to tackle entitlement reform, and all Summers will say for now is that "nothing we do should jeopardize Social Security's great achievement" of ensuring that the elderly don't live in poverty.

To take on Social Security, Summers will need a keen ear for political nuance and a deft touch--not qualities he's been known for. After Clinton's election, he was passed over for the chairmanship of the Council of Economic Advisers because of his prickly reputation. And once he was at Treasury, Summers left his footprints on many backs as he ripped up competing policy ideas with whirlwind analyses and brusque attacks. Behaving as if he were still a college debater back at the Massachusetts Institute of Technology, "Larry didn't have time for people who weren't up to his intellectual caliber--and there aren't many people who are," says a former Treasury staffer. His style didn't win him friends abroad, either. Although Summers and Rubin rescued Mexico from the 1995 peso crisis, Bundesbank President Hans Tietmeyer privately complains that he first heard of the U.S. bailout during a radio news report.

But colleagues say Summers wields his elbows with far more care now. "I've even heard Larry say recently that he knows less about a topic than someone else does," laughs an academic chum. Summers is learning his people skills from Rubin, a master of conciliation. Clintonites say that Secretary Smooth and Dr. Elbows make a strong team: "Bob has put a softer edge on Larry," says former Labor Secretary Robert B. Reich, "and Larry sharpens Bob's edges. Together, they get it about right."

That doesn't mean Summers and Rubin always see eye-to-eye. In internal debates, Summers argues for investment incentives, including bigger tax breaks for capital gains. Rubin sees a capital-gains cut as poor economic policy fueled by political necessity. Colleagues also say Summers is a hawk on fixing cost-of-living adjustments, siding with a congressional panel's finding that the consumer price index overstates annual inflation by 1.1 percentage points. Summers insists that he's "in the middle of the range" of Administration policymakers on the size of the CPI error, which affects Social Security COLAs and tax brackets.

Even when they disagree, Rubin still gives Summers' views great weight. For example, Rubin was skeptical that Treasury could lower its borrowing costs and help investors by issuing bonds with floating interest rates indexed to inflation. But the former Wall Streeter became a convert under the barrage of his insistent deputy's research. Summers "combines an extraordinary economic mind with a deep understanding of the political dimensions of issues," Rubin says.

He'll need that--and more--to fix the IRS. Summers has hired a chief information officer--the highest-ranking outsider to penetrate the IRS bureaucracy in years--and is pushing for a top manager to serve as IRS commissioner. He's also farming out more of the computer work to contractors like Lockheed Martin, TRW, and NCR. Up next: a blueprint and executive advisory board to guide the agency's computer update.

SCORING POINTS. IRS critics praise Summers for tackling the agency's problems--but don't think his plan goes far enough. "It's going to be difficult to make the personnel and management changes IRS needs without an independent and strong board to run the agency--not just advise it," says Senator Bob Kerrey (D-Neb.), co-chair of the National Commission on Restructuring the IRS. That congressionally sanctioned panel is likely to recommend converting all or a major chunk of the IRS into an independent agency run by a business-oriented board, like the Federal Reserve System or the U.S. Postal Service.

Summers begs to differ. "Tax administration belongs in the same agency as tax policy," he says. But that's a debater's argument, and Summers has learned that he has to score political and practical points to prevail in Washington. So he's negotiating with the commission to soften its position, noting that time spent debating IRS independence could better be used "actually fixing the IRS." Summers is still a man in a hurry. But now that he's fixing economic problems instead of studying them, he recognizes that barreling ahead at full speed doesn't always get the fastest results.

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