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June 14, 2009
David Warsh, Proprietor


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Up or Out?

 Plenty of shoe leather went into Jackie Calmes’ account in The New York Times last week of the simmering tensions among the five top economic advisers to President Barack Obama – “several dozen interviews with administration officials and others familiar with the internal debates.” The story even included a little map of the White House grounds showing the locations of the offices of Christina Romer (chair of the Council of Economic Advisers) and budget chief Peter Orszag in the Old Executive Office Building; of Treasury Secretary Timothy Geithner in the grand old Treasury Building across the lawn, and in the White House complex itself, with head of the National Economic Council, Lawrence Summers, “the only top economic adviser with a West Wing office.”

 It was more than a little reassuring to hear some news of Summers’ clashes with the others – especially Austan Goolsbee, Obama’s chief economic adviser during the campaign, now a member of the Council of Economic Advisers. Although his photograph was included with the others’, he was omitted from the map. Things have been happening so fast in Washington that even a big story, such as the Supreme Court’s willingness to let the White House overturn 150 years of precedent in bankruptcy law in order to facilitate Chrysler’s sale to Fiat, can pass all but unnoticed (bondholders’ claims ordinarily supersede the unions’). Goolsbee, MIT-trained, but accustomed to teaching at the University of Chicago’s Booth Graduate School of Business, is an especially useful voice among the choir. Vigorous argument among competing views, about all manner of government interventions, is exactly what the president needs to hear. Who cares if participants get a little hot under the collar?

 There was, however, another aspect to the story, an undertone evocative of the ticking of a stove-top timer. “By all accounts,” Calmes wrote, much of the tension derives from uncertainty about Summers’ remaining as National Economic Council director in a position that traditionally has been filled, not by a policy impresario, but by a low-key broker among competing views.

 “The widespread assumption, from Wall Street to Washington,” Calmes wrote, “was that the job would be Mr. Summer’s way station until the president could name him chairman of the Federal Reserve when Ben S. Bernanke’s term expires early next year.”

 Now, she continued, Bernanke’s reputation has improved so much, the result of his aggressive handling of the crisis, that “people close to Mr. Obama increasingly suggest the president could well reappoint him in the interests of financial stability.”

 What happens to Summers in that event? The office at the Treasury Department he had first wanted, the one that he had occupied before, under President Bill Clinton, went to Geithner. If Bernanke remains at the Fed, would Summers settle down in his present job, content to continue to give the president his daily economic briefing, hoping eventually to be given more authority in the game?

 It depends. What the Times didn’t acknowledge – what Summers himself may not accept – is that in any event the White House probably can’t send his name to Capitol Hill for Senate confirmation.

 A major reason is Harvard University’s Russia scandal. Summers’ temperament and his policies at Treasury, both under Robert Rubin and as secretary himself, and how they might have contributed to the financial meltdown, would weigh in the balance, too. From a distance of twelve years, the Russian episode may seem musty with age. Who cares what happened when Harvard undertook  its mission to Moscow in the brief heyday of the Russian robber barons?

 What keeps the memory fresh is Summers’ precarious position – and the continual need to omit any mention of the incident from the record. In fact, the care with which it has been edited out is a clue to its significance.

 The latest example arrived in April. The Russia Balance Sheet, by Anders Åslund and Andrew Kuchins, published jointly by the Peterson Institute for International Economics and the Institute for Strategic Studies, promises “a comprehensive look at the complex dynamics of change in Russia,” “balanced and accurate information on all key aspects of Russia’s developments.” What happened in the spring of 1997, in the weeks just before Russia becomes a full member of the G-8, doesn’t rate a mention – not even in the otherwise highly useful ten-page timeline that concludes the book.

 To recap: a young Harvard professor, Andrei Shleifer, a Russian émigré, is hired by the US Agency for International Development in 1992 to advise the government of Boris Yeltsin on behalf of the US government. In 1997, Shleifer is caught investing in the Russian economy (and trying to set up his wife in a government-licensed business there) and fired by USAID. For the next eight years, he is shielded, at least to some extent, by his friend and mentor, Larry Summers, first at the Treasury Department, then as president of Harvard.

 In 2004, a Federal judge finds Shleifer and Harvard to have committed civil fraud and orders Harvard to repay. Two years later, when Summers is asked to resign the Harvard presidency, his conduct in the affair is described as one of the reasons. When he returns to Washington as senior advisor to President Obama, listed among his brain trust is none other than Nancy Zimmerman, Mrs. Andrei Shleifer.

 The episode received wide attention in Russia at the time. Harvard imperialism became an item in the standard litany of Russian suspicions of the West (the university’s endowment invested in Russia at the time), along with “shock therapy” recommended by Western advisers, US aid to Afghanistan during the Soviet Union’s war there in the 1980s, the Strategic Defense Initiative (“Star Wars) in the 1980s, and NATO enlargement in the 1990s. As correspondent Daniel Williams wrote in The Washington Post in August 1997, after the Institute for Law-Based Economy in Moscow carted off the Harvard Project’s computers and files “for safekeeping,” “[A]llegations of profiteering aimed at the Harvard advisers seem likely to confirm widespread suspicions that they are here only to help themselves. And the removal of office gear by the lawyers’ institute will almost certainly reinforce a feeling in foreign business circles that Russians rely on strong-arm tactics rather than law in settling business disputes.”

What makes the The Russia Balance Sheet’s omission of the Harvard scandal almost laughable is chapter seven, “Russian Attitude towards the West,” in which Åslund and Kuchins profess to be puzzled about the wellsprings of Russian misgivings, especially among the young. “Although the transition to a market economy and democracy has eventually delivered economic benefits, most Russians are now skeptical about Western economic and political values.” Even though McDonald’s, Hollywood movies and Hummers are everywhere in Moscow and other cities, they write, young Russians persist in mistrusting American motives. The authors are disappointed but not surprised: “[W]aves of fascination and disillusionment with Western ways have followed each other for centuries.”

True, there is ample precedent for ignoring the episode among the various writers on Russia during the 1990s. A pair of books by journalists, The Oligarchs: Wealth and Power in the New Russia, by David Hoffman, of The Washington Post; and Sale of the Century: Russia’s Wild Ride from Communism, by Chrystia Freeland, of the Financial Times, fail to mention the incident, though both appear to rely on Shleifer and his deputy, Jonathan Hay (who was also charged with fraud), as sources. The Russia Hand: A Memoir of Presidential Diplomacy, by Strobe Talbott, president of the Brookings Institution, about his days as ambassador-at-large to the newly independent states of the former Soviet Union and then deputy secretary of state, doesn’t mention the episode, despite the book’s candid day-by-day narrative format and colorful descriptions of Summers’ special qualities: “Larry’s brain was like a tank powered by a Lotus engine: it purred as it rolled over anything in its way.” (Talbott was for many years a Time magazine correspondent.)

Nor do either of the best-known biographies of Boris Yeltsin assess the meaning of the rupture that occurred in 1997, or even mention it – Yeltsin: A Revolutionary Life, by Leon Aron, of the American Enterprise Institute; and Yeltsin, A Life , by Timothy Colton, of Harvard University. “I didn’t think to include it,” replied Colton, when I asked him about it. “It would not have reached the level of Yeltsin.” Shleifer’s own book, A Normal Country: Russia after Communism, omits the matter as well. Such a “conspiracy of silence” is one thing among, say, physicians.  For those who perform especially difficult tasks, professional ethics sometimes enjoin: “Forgive and remember.”  The tacit agreement here involves, not just professional economists, but blue-chip think-tanks and even the press. Nor is there evidence of intent to remember.

When I asked Åslund in 2007 whether he shouldn’t have addressed the issue in two previous books, he replied: “Some discuss the world. Others deal with personal intrigues and the invention of scandals. The question has been answered: no crime was ever evident. Should you draw any conclusion from that?” And indeed, his was a standard response: the implication is that since the US government case was a civil complaint, not a criminal matter, it was unimportant. Seldom mentioned is the difficulty of pursuing a criminal investigation in Russia (those missing computers, for one thing). The US attorney in Boston tried anyway, empanelling a grand jury. The case was downgraded when US Attorney Donald Stern concluded a perjury charge would be expensive and difficult to prove.

Never mind Åslund’s sophistry, then. What happened at the Harvard offices in Moscow after Boris Yeltsin was re-elected truly was a crime against the American people, an affront to precisely the virtues their government was supposed to be demonstrating to Russians worn down by decades of corruption: probity, transparency and common sense. It was betrayal of friendship as well. Hired to give disinterested advice, Shleifer made a clumsy attempt to cut his family and friends a substantial piece of the pie. Instead of being publicly scolded and sent back to work on other matters, he was protected and defended by his boss (Summers) and his employer (Harvard) until the case was lost. Even then Shleifer maintained his innocence. (For a penetrating but necessarily incomplete account of the matter, see David McClintick’s “How Harvard Lost Russia: The inside story of what happened when the enormous power and resources of the United States were put in the wrong hands” in the December 2005/January 2006 issue of Institutional Investor.)

And so, behind the scenes, the Harvard Russia scandal continues to fester. (All this, naturally, is well known to White House investigators who perform background checks.) Why not view the episode as being akin to National Lampoon’s Excellent Moscow Adventure, and forget about it with a wink and a nudge? The ’90s were wild and crazy times, after all, in the United States as well as in Russia. Shleifer and Summers are well liked and widely admired by their colleagues. They deal on an equal footing with nearly everyone in the world in their respective spheres. They have a great deal to contribute. And these are most challenging times.

The nub of the matter is the lack of shame, the brazening-out, the implication that Harvard’s economists were above the law. Caught red-handed sabotaging his mission in the very cockpit of US-Russian diplomatic relations at the end of the Cold War, Shleifer maintained he had done no wrong. He didn’t even seem to understand how deeply he had contravened the law, which perhaps is not surprising when you remember that he was fifteen before he left the former Soviet Union. Yet at every juncture, Summers and Harvard itself defended him. Summers stayed with the Shleifer family when he interviewed for the president’s job. If just one of the worthies among their supervisors and seconds had come forward to lay out the facts, it might have been different. Instead, short months before he died in 2008, faculty Dean Jeremy Knowles ruled that even the report of the Committee on Professional Responsibility must remain secret.

The aftermath of the court case has been characterized by reluctance in almost all quarters to speak frankly about the case. How is it that so many people have said so little of what they know? Presumably such reticence has been born of a wish not to harm a star very much in the ascendant – or incur his enmity. But what does the penumbra of silence say about American reverence for “the rule of law?” To this point, almost no public attention has been paid to Summers’ involvement while he was at the Treasury Department. But a confirmation hearing would re-open the matter and require testimony under oath.

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