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Lawrence H. Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University. He served as the 71st Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama.
In this week’s conversation, Yascha Mounk and Larry Summers discuss why tariffs are so concerning, how Harvard should react to the Trump administration cutting its funding, and whether the Democratic Party can become a credible opposition.
This transcript has been condensed and lightly edited for clarity.
Yascha Mounk: Larry, we're recording a couple of weeks after Liberation Day. Are you feeling liberated?
Larry Summers: No, I'm feeling like I'm part of some kind of Kafkaesque economic tragedy. I think the master narrative, the big picture here, Yascha, is that the United States is turning itself into an emerging or a submerging market. There are set patterns that we associate with mature democracies. There are set patterns that we associate with developing countries, for which some people would use the term “banana republic.”
In mature democracies, it's institutions that dominate; in banana republics, it's personalities that dominate. In mature democracies, it's the rule of law that governs interactions between businesses and between business and government; in emerging markets, it's personalities, personal connection, and loyalty. In mature democracies, the central bank and finance sits with independence relative to politics; in emerging markets, that is much more in question. In mature democracies, the goal is interaction, openness, and prospering along with the world; in immature democracies, in emerging markets, it is nationalist economic policies tied to particular interests.
The United States in a stretch of a few short months is transforming from being the United States to being something much more like Juan Perón's Argentina—and that is being recognized by markets. It's being recognized in the economy. It's being recognized by people.
The market version of it comes from looking at patterns. In the United States, traditionally when stocks go down, that's because the world is riskier and less certain. So bond yields go down as well, people rush to buy bonds, and the dollar goes up, as people in a more uncertain environment seek safety in the dollar.
There's a different pattern. It's the pattern of emerging markets. It's the pattern that prevailed very briefly in the United States before Paul Volcker was appointed to the central bank during the Carter administration. It's the everything-goes-together pattern. Stocks go down, bond yields go up, the currency goes down. We now have that pattern in markets in the United States. But that's the market version of it.
Here's what I'm more struck by. It's been the case for a long time—I imagine you've done it too, Yascha—that when an American businessman or journalist or government figure goes to China, they don't bring their usual cell phone. They bring a burner phone, which they're going to discard afterwards so that they won't be hacked. I've heard a half a dozen anecdotes within the last five days about people feeling a need for burner phones when they come to the United States from other countries. I’ve heard more than one anecdote of Americans taking a burner phone with them when they leave the country so that they're not at risk of having their regular phone searched by the American government when they return. So it's not just a market-economic thing. We are being seen the way authoritarian countries are usually seen, and that's not something I ever expected from the United States.
So, yes, this is a stagflationary shock that can be predicted to increase inflation and cause more unemployment and reduce the competitiveness of the United States. But this goes way beyond economic blunder. This is not an economic blunder motivated by poor economic thinking. This is an agenda about power, about crony capitalism that's having highly perverse economic consequences. And it is tragic.
Mounk: Thank you for speaking to the gravity of the situation in these very clear terms. It seems to me that from an economic perspective, there are two kinds of risks and perhaps we run them together too much. And I'd like to hear you spell out each of those to an audience of non-economic experts. The first is, why is it that the very high tariffs that persist even after the partial break on the tariffs that the administration had imposed originally are bad for the American economy? Why is it that the advantages from international trade are so significant? And why is it that the very broad-based and significant tariffs in general, and the prohibitive ones that are currently still in place on China in particular, are going to decrease our expectations for what economic growth looks like in the United States over the next few years?
The other question I have is about where the tail-end risks lie, which is to say that it seems to me that we haven't actually discussed enough in the public debate the danger that all of those things going together, stocks going down at the same time as bond yields go up at the same time as the dollar weakens—that all of this uncertainty just leads to a financial crisis in one of the big banks or a loss of trust in the financial system or a precipitous recession, which can kind of spiral out of control. I think there's still a little bit of a sense that, if the Trump administration tomorrow decided that this was all a misadventure and they walk it back and Trump claims that he's showed us the art of the deal because he gets some concession from somebody somewhere, then things are going to go back to normal. How high is the risk that we could see a chain of events which make it impossible to go back to normal, even if we reverse all of these tariff policies?
Summers: With your permission, I'm going to do a slightly more intricate parsing than you just did of the categories of economic risk here.
Mounk: You know more about the categories of economic risk, so take it away.
Summers: I'm going to distinguish four areas of economic risk. The first is the near-term cyclical. When you put tariffs on, prices go up. You put a sales tax on hot dogs, the hot dog vendor raises prices. You put a tax on foreign steel, the price of it goes up. Talk to the executives of any major U.S. retailer and they can't remotely absorb nor can their suppliers absorb tariffs of this magnitude. So prices are going to go up—which means more inflation, which puts pressure on monetary conditions and also means people have less to spend since they're paying more for other things. That's the kind of supply shock cyclical aspect. I would judge that this is, in its current form, probably the equivalent of a $30 or $40 a barrel increase in the price of oil, just as a supply shock. It's probably the equivalent of $1.50 or $2 on gasoline prices, and that's a very costly thing. So first, more recession, more inflation, stagflation risks increased.
Second, the breakdown of the international division of labor. That's what you were talking about in some of what you said. Even if we manage the business cycle fine, we are more efficient if we're able to buy from the lowest cost suppliers. So for example, there are 60-ish times as many people who work in industries that use steel as there are in the steel industry. And so we are doing much more damage to our export industries than we're helping our import industries with these tariffs. If we are subject to retaliation, as seems very likely, that will interfere with our ability to sell goods in other countries and potentially people will retaliate with a reluctance to sell us inputs that we need. I'm particularly worried about rare earth minerals from China, where I suspect they have enormous leverage over significant swaths of U.S. industry. So the second issue is that economies that are insulated from the world just become less efficient, less well-functioning, less prosperous economies.
The third risk is the one you raise, which is a financial crisis. We're seeing very high levels of volatility in financial markets. There's a classic precedent for what's happening. In October 1987, there was an argument between the United States and Europe about who should cut interest rates, about who should be more competitive. And there was a certain amount of sparring back and forth between our then Treasury Secretary and the German Finance Ministry official, Hans Tietmeyer. And that was the prelude to what was in some ways the scariest single day in American finance, the October 1987 crash. And we are at risk of that kind of thing as long as this drama continues.
The reason why the administration backed off the reciprocal tariffs was not that this was part of some grand strategic plan to keep them guessing. It was that they heard, accurately in my view, from almost everywhere that they were tempting fate in terms of a major financial incident every hour that they did not send a sign that they were relenting. So we are living at an increased risk of a major financial incident for as long as we're engaged in this kind of erratic behavior. In some ways, that's making it more complicated than it is. We have huge amounts of debt in the United States emanating from the federal government. We finance a substantial part of that from abroad. As a matter of arithmetic, the capital surplus and the trade deficit offset each other. A commitment to reduce the trade deficit is also a commitment to reduce the capital surplus. If we deny the major source of purchases for what is our biggest export, debt, we are calling into question what interest rates are going to be and the stability of finance. So cyclical problems, breakdown in growth, increased risk of financial accidents.
And the fourth problem is that we're incurring a much more unstable and uncertain environment. There's a cliche in a different context that it takes a generation to grow a forest and an hour to burn one down. Something like that is true with respect to credibility. It takes a long time to build up and very little time to dissipate. We’re becoming unpredictable because we're being mercurial. And even if someone stops becoming mercurial, they don't become immediately predictable. And so anyone thinking about buying a U.S. asset is going to assign a bigger uncertainty premium. Anybody thinking about whether to do something in a permanent way—to rent a warehouse in the United States or buy or build a warehouse in the United States—is going to do it in a more temporary way. And so all of that uncertainty is going to just make the system function much less well.
All of us have been in organizations with steady, calm, rational leaders, where people don't come in to work with a pit in their stomach wondering what's going to happen next. And also in environments with much more mercurial leaders where everything's getting shaken up every week. The United States is that second kind of environment and that's going to make the economy function less well and it's going to make American prosperity increase less rapidly. So it's uncertainty premiums, it's increased risk of financial accidents, it's degraded efficiency and growth, and it's a bad business cycle. Those are the four parts of what's economically wrong with this program.
Mounk: What do you think the impact of all of this on international trade and globalization is going to be in the mid to long run? I can imagine at least three kinds of scenarios. One is a scenario in which we get a major trade war and the United States putting up trade tariffs leads other countries to do the same. I know, for example, from having spent some time in Europe recently, that European policymakers are very, very worried that all of the cheap goods that were coming from China to the United States may now be flooding the European market and that's raising demands for protectionist measures to protect European industry as a result. So you could imagine a kind of set of domino stones in which we get the generalization of very high trade barriers and really a complete change in our trading system.
The second scenario perhaps is one in which countries outside of the United States somehow recreate or preserve a relative free trade zone. You could imagine countries saying, we don't want to deal with that mercurial leadership in the United States. We still believe in some benefits of the free trading system. Let's try and strengthen barrier free trade between Canada and Europe and China and other places around the world. And the United States will be left on the outside of it.
The third perhaps is that this turns out to be such a disaster and exacts such short-term economic pain that in a strange way it ends up strengthening the international trading system. That it turns out to be an abortive experiment that actually reminds people of the benefits of international trade and of a relative absence of international barriers. And actually it'll be remembered as a short aberration from a system that ends up being put back into place for the coming decades. I'm sure, just as earlier you had more sophisticated categories for financial risk than the two I put to you, you might have four five different scenarios in mind, but what kind of scenario do you think is likely to play out?
Summers: Sure. I like the way you put it. Let me comment on your scenarios in the reverse order that you listed them. Your third scenario, I would call “Scared Straight”—the Cuban Missile Crisis version of trade war. After the Cuban Missile Crisis, John F. Kennedy and Nikita Khrushchev both recognized how close to the brink they had gotten. And there was all of a sudden an interest in a nuclear nonproliferation treaty, test ban treaty, arms control, all of that. I do not see that as very plausible, because I do not see the change in consciousness on the part of the President of the United States as likely at all. I don't see the short run consequences of a breakdown as being sufficient to alarm people sufficiently. So I think anything's possible, but I would heavily discount the third possibility.
Your second possibility was a Cold War scenario, with the United States being the Soviet Union. What actually happened after 1945? Basically what happened was, in significant part, the threat of the Soviet Union, which didn't participate in the GATT, didn't participate in trade agreements, didn't participate in the IMF or World Bank, didn't participate in any of the Bretton Woods stuff. Basically there was all the cooperation without the Soviet Union, motivated in part by concern about the Soviet Union, which provided a glue led by the United States.
I think that's a possible scenario, but I would say a couple of things about it. One is it would be a disaster for the United States if there was basically a bloc that excluded us that came together and whose cohesion derived in part from concern about us. The second is that would be one of the greatest strategic gifts in all of history to Xi Jinping because that is not something that would spontaneously create itself, but it is something that would be led—and, with America in exile, by far the largest and most powerful and technologically leading economic country would be China, so it’s hard to imagine that bloc coming together without Chinese leadership. It's hard to believe that its consequences for the United States would be other than catastrophic with Chinese leadership. So I pray that that is not what we see. I think it's more likely than the Scared Straight scenario, but it is not what I would expect.
I think the most likely scenario is your first one, which I would call “Protectionism Is Like Armament.” That once one country arms, then its immediate adversaries feel a need to arm, and then nobody's quite certain what's a defensive weapon and what's an offensive weapon, and others feel a need to arm, and all of sudden the world gets to be a much more dangerous place. Both in general it's more dangerous and there's a much greater risk that misunderstandings send something over the brink. One might think of that as being a pre-World War I kind of scenario—with Germany arming and therefore Britain taking steps and Russia getting nervous, and nobody wants to be the one who responds second. And the economic version of that is I think the greatest risk here. But it's hard to believe that this is other than highly adverse for the economic order.
I want to make, if you'll indulge me, an important point about what's going on. There's a set of debates that have gone on for a long time about free trade. Some people frame the debate as to whether the neoliberals like me have led things astray and whether one should have much more pro-manufacturing policy, and one should have a somewhat different approach than was pursued by the Clinton administration or by the Obama administration. I tend to be skeptical of a lot of the people who put those ideas forward, but that is not what we are debating when we are debating the Trump administration's economic policies. There is a responsible, hating on TPP, skeptical about NAFTA, favoring industrial policy set of approaches, which would not be my recommended approaches, but for which I could make rational arguments and which has some chance that its advocates are right and that people like me are wrong, but that I would put within the domain of reasonable policy and honest disagreement that is in good faith.
That is not the way to understand what is being done here. The Trump administration approach is a revanchist approach of emulating Juan Perón. And I know of no thoughtful policy advocate. I've certainly had my differences with Elizabeth Warren, I've had my differences with Tom Cotton, to take a couple of examples. But I know of no responsible policy advocate in the United States who has conceived of an approach that is so brutally nationalist, so volatile and uncertain, and so oriented to crony capitalism. So I think that it's very easy to link these debates to the debates that have gone on between the Warren wing and the middle of the Democratic Party or to the merits or demerits of the approaches that have been taken within traditional debates. That is not what these debates are about. These are about an entirely different level of adverse movement.
Mounk: It’s a case of careful where you wish for, because I think there are certain intellectuals or policy thinkers who thought that they were trying to spearhead a change in the reigning economic paradigm. But what they got was not a sort of responsible attempt to put the ideas into practice, but this much more revolutionary, radical, and unfounded thing.
Summers: A different person I would mention who might be familiar to some of your listeners is Oren Cass. Cass approaches economics from a populist-right perspective. He puts overwhelming weight on producer interests relative to consumer interests. I don't agree with his approach, but I wouldn't speak in remotely the same way if we had an administration that was following his writings as I understand them. What we have is something much more radical and dangerous in its economic scope and also in its political economy.
Mounk: Trade policy is one area in which Trump had, in a sense, announced what he was going to do. He's been obsessed with American trade deficits since he started talking about Japan in the 1980s and so on. We just didn't quite take literally how radical his plans were.
Summers: I just want to say that I've read reasonably carefully what he said, and there's always this phrase that “you should take him seriously not literally.” What he has done has gone way beyond anything he said literally during his campaign. There was not a hint of three digit tariff rates against everything Chinese in his campaign. There was not a hint of formulaic punitive tariffs against Lesotho in his campaign. So this is a case where he has gone well beyond the concerns that were raised literally. So, the people who were kind of trying to whitewash his campaign by saying, seriously, not literally, have a lot of soul searching to do because they did turn out to be wrong, and the literal statements turned out to be as wrong as the forecasts, but in the opposite direction.
Mounk: That's very interesting. So I don't know exactly how to apply that to the question of universities, but perhaps that's another area in which it was obvious that attacks on universities were going to come. That's partially because universities really have lost a lot of public trust over the course of the last decades, and it's partially because Republicans feel that conservatives have effectively been run out of those universities. Donald Trump and his allies have verbally attacked universities for a long time, so perhaps it was obvious that some form of attack was coming. And again, the extent of the attack, the brutality of it, and the ruthlessness of it probably go beyond what he had literally announced in certain ways.
But we now find ourselves in a situation in which the administration claims to care about problems at Harvard and other universities that are real—and you've spoken and written about some of the action that’s been lacking on topics like antisemitism quite forcefully—but, at the same time, the administration is using these problems as a pretext to really try to take down those universities as alternative centers of power, or as places of free inquiry, both in terms of the demands the administration has made of certain universities like Harvard and Columbia, and in terms of cutting funds in areas like the hard sciences.
Now, as we're recording, we quite recently heard the news that the president of Harvard has decided not to give in to the demands that the Trump administration was making of the university. And in return, the Trump administration has said that it will go ahead and freeze multi-year grants and funds amounting, I believe, to over $2 billion. Tell us about how we ended up in this situation. What shortcomings of the universities are real? How do you view the demands of the Trump administration, and is your successor as president of Harvard taking the right step in refusing to bow to those demands?
Summers: I support Alan Garber's resistance to what are extortionate and extralegal and wildly unreasonable demands. I think that any institution depends upon its contract with the broader society, and I think universities have on that dimension importantly lost their way. There's a crucial role for universities as seekers of truth, as disseminators of learning—particularly about tradition—and as instillers of values in people at what's the most malleable stage of their lives, between the ages of 18 and 22. And I think the aftermath of October 7 brought to light that there had been enormous failures on all of those dimensions in universities.
There was an emphasis on particular concepts of social justice rather than seeking truth. There were values being instilled that were very much inimical to the broad success of the American project. There were degrees of relativism and promotion of mutual self-esteem that were highly problematic, and the ways in which antisemitism on the left was tolerated, and in some cases even encouraged in universities, was, I think, shameful. And so, when Congress very dramatically called universities to account, of course there was some demagoguery in what many in Congress said, but I thought the impulse to call universities out was broadly appropriate. And I think universities like mine have moved too slowly to make the necessary adjustments.
That said, in America, if you commit a videotaped murder, you get a trial with due process, and for the government to simply announce that promised and committed funds are being frozen based on diktat contained in a hastily drafted letter that makes extra-legal demands… that is not how things are done in the United States. It is not consistent with the law under which the administration is claiming to act. Some of the demands are inconsistent with constitutional protections in addition to due process requirements.
I don't think there's any viable course for a great university, or a university that aspires to be great, other than to resist. I also think that in a broader sense, as I wrote in The New York Times, an institution like Harvard—not very often, but occasionally—has a fundamental obligation to society because democratic governance is a necessary prerequisite to academic freedom. And if we allow the democratic institutions of society to be entirely subverted, there is no prospect for the continuation of academic freedom. And if Harvard—with a $50-plus billion endowment, with all of the prestige and tradition that it represents, with the unbelievable network of people who have passed through its yard—if Harvard felt that it couldn't resist, then who would? And so I think that with privilege, with venerability, comes obligation. And so I think Harvard is right to be resisting this kind of extra-legal assault.
I think you were right to point out that this is not on the up and up. A president and a government with a genuine concern for antisemitism would not have made common cause with the neo-Nazis in Charlottesville, with the neo-Nazis who were entertained at Mar-a-Lago, or with Nazi descendants who were present in Munich in the German AfD, who were celebrated by the Trump administration. So this should not be seen as any kind of genuine reflection of concern about antisemitism. Rather, Yascha, I think it should be seen, as you suggest, as some combination of spasmodic anger at the opponent. That's actually the more charitable interpretation. Or some kind of attack on potential sources of opposition. Let me put it a simple way. Joe McCarthy was thought of as representing a major attack on the American Academy and American intellectual life. The question that I suspect reasonable people could debate is whether the current moment is 10 times Joe McCarthy or 100 times Joe McCarthy.
In the rest of this week’s conversation, Yascha and Larry discuss the impact of the Harvard funding cutoff, and whether Democrats can be a credible opposition to Donald Trump. This part of the conversation is reserved for paying subscribers…
