Larry Summers Warns: Trump’s Tariffs, Fed Threats, and University Pressure

Dan Koh: So what's next for our economy and for our society? Few are better positioned to weigh in than Larry Summers. He's a former treasury secretary, director of the National Economic Council in the White House, and president of Harvard University, and remains one of the most influential voices in economic policy in the world. Larry joins us to discuss where the economy is headed, the continued pressure universities will face, and just how unprecedented all of this is. Let's switch to the people's cabinet. Larry Summers, Larry Summers, Welcome to the People's Cabinet. Thank you for being on.

Larry Summers: Great to be with you.

Dan Koh: So you are someone who has successfully predicted the future of the markets and the economy many a time. Where do you think we end up with everything that's happening right now?

Larry Summers: I think the odds are a bit better than 50/50 that we're going to have a recession. I think inflation is not likely to come down substantially and may well increase. These tariffs are a self-inflicted supply shock raising prices and reducing demand in the economy. The president has shown some flexibility when they appear to be having the most serious consequences. And so it may well be that they will be scaled back in ways that will minimize the damage. But I think it's pretty clear that we're making an economic error and that that will have consequences over time. But there's enough uncertainty in the world that I think it's a mistake to be confidently apocalyptic.

Dan Koh: And you have seen obviously variations in the market, undulations of the market, financial crises. How do you see what's happening, especially the role of the president and what's happening in the markets? Just give us, our listeners, maybe some precedent of how you've seen this compared to what you've seen in the past.

Larry Summers: Look, usually there are events in the outside world to which markets are responding, and it's the task of public policy, the task of the president, the task of the secretary of the Treasury, the task of the chairman of the Fed to calm things down, reduce volatility, minimize instability. That's what happened during the 2008 financial crisis. That's what happened during the Asian financial crisis in the late 1990. That was, that's what happened during the COVID alarm. This is a rather different, to use an analogy for medicine, I AstraZeneca illness is when you go into the hospital and you get sick from an infection that is hospital borne. We now having iatrogenic volatility in financial markets, it's generated by the president and his policies. That's the situation that I don't know of. A precedent for the precedents in Erdogan's Turkey. There precedents in various emerging markets. But I don't know of a precedent in the American experience for that. And that speaks to one aspect of our current situation, which is a rather troubling correlation pattern. A correlation pattern in which stocks, bonds, and the dollar all move in the same direction. Usually in the United States, when stocks go down, It's because the world's in less good shape or riskier than people thought. And so people rushing to bonds as an insurance policy. Today we have a quite different dynamic, dynamic much more characteristic of countries in Latin America or of other emerging markets where pessimism and optimism sort of vacillate and stocks and bonds and the currency move together.

Dan Koh: So how, if you could help our listeners understand what that means, what the implications of that are? Is it a sign of just a lack of confidence in our leadership and the American economy? How should people think about it in layman's terms?

Larry Summers: I think they should think about it as the United States is being judged in the way that Argentina traditionally has been. Is this a stable, reliable place, or is this an unstable, unreliable place? And depending upon the latest thing the president has said, the probabilities between those two scenarios vary. And so you see stocks and bonds all moving together along with the currency. But it is a sign that the basic idea of us as the world's bastion force, as a secure place with deep rule of law and deep capital markets, is something that is now in question. You have the secretary of the Treasury talking about our credit worthiness being in doubt, possibly going to be repaired. No previous secretary of the Treasury has ever talked about US credit worthiness as something that could be doubted by a reasonable person.

Dan Koh: And you know, Trump's mindset seems to be that reshoring a lot of manufacturing, if not all of the manufacturing that was once in the United States and has gone to other countries like China, is something that we should do, and that tariffs will be incent, will incentivize that. What is your opinion on that, and how realistic that actually is? And where do you think he actually thinks that the happy medium or sweet spot, so to speak, should be with regard to American manufacturing?

Larry Summers: You'll have to ask others about what the president's thinking is. I think there's a strong case for measures like the Chip Schacht directed at making sure that we have a substantial semiconductor production capacity in the United States. I think that rational economic policy should put substantial weight on the resilience of the economy. But to take what the president commented on most recently, I don't think our national security is in any way at all dependent on the production of Barbie dolls. I don't think very many Americans are looking for jobs producing Barbie dolls, and so putting protection on that seems to me mostly to harm American consumers and make them poorer for no importantly positive objective. So I think a strategic trade policy that is carefully targeted around resilience is a good idea. I think the idea that there's some kind of large scale renaissance of manufacturing production jobs possible is illusory. It's illusory cause we're already at 4% and trending downwards rapidly. It's illusory because large parts of any factory staffing are going to be done by robots, not people in the jobs. Supervising the robots are going to be for highly skilled engineers, not the people who traditionally had factory jobs. And it's illusory because the evidence is that people will actually much want to have factory jobs in this day and age. So I think this fetish with manufacturing, which to be honest is something that the Biden administration had to a significant extent, is rather badly overdone.

Dan Koh: And another-thing that the president and Elon Musk has prioritized is doge and government efficiency, at least their version of it. And they've targeted the Treasury, your former agency, and they've talked a little bit about tracking payments. They've talked a lot about government employees and many ways mock them. Can you just give your reaction to what you hear when you hear about that, especially about the Treasury Department and the way payments are done?

Larry Summers: Dan, There's a lot of nonsense. The secretary of the Treasury told a House Appropriations Committee that there's no evidence that adding high end auditors produces more tax revenue. That's just not true. The evidence is that an extra tax auditor can generate about 30 $600 an hour in additional revenue from his or her efforts. And that's without taking account of the fact that people, once burned by a tax order, are more careful in the future. That's without taking account of the fact that, if you got more people doing auditing, there's more general deterrence with respect to tax cheating. That's without taking account of the fact that there's all kinds of invasion of privacy risks when you start having private sector people with multiple agendas crawling all over the IRS tax records. And very much the same thing can be said of federal payments more broadly. Very much the same thing can be said about the Social Security system.

Dan Koh: So you mentioned the Treasury secretary, and you obviously have served in multiple presidential administrations. You had a now famous debate on the Island podcast. Ezra Klein was there. David Sachs, as a member of the administration, was there. And it just kind of spoke to, when you're a member of administration, obviously you want to strive to represent the administration, its views. But there's obviously a risk of, you know, no matter where the president goes, credibility, etc., of, you know, trying to rationalize actions that you may not completely be privy to. Can you just comment in general about if you think the people who are working for President Trump will ever break or show any kind of independence from what they're seeing right now? Or do you think that this is just going to continue the way Ken Burns on your debate?

Larry Summers: I don't know what these people believe or don't believe. I know that when the secretary of the treasury said there was no evidence that tariff increases were passed forward in terms of price increases, he was contradicting a vast research literature by economists and a vast range of assertions by retailers and other business executives. I know that when the statement was made about the destruction of the IRS having no impact on tax collections, that that was not a statement that was supportable by real research or the track record historically. So I don't know why people are deci, are saying things that are essentially unsupported by facts. Whether it reflects the fact that they haven't made an adequate study of the matter, Whether it reflects a kind of reflexive and blind loyalty to the President, I don't presume to know, but I think it's unfortunate for the country either way.

Dan Koh: Another area that the president is focused on that you obviously are well-experienced in is pressure on universities. You were president of Harvard University. You are intimately familiar with all of the details of how federal funding affects universities. First and foremost, can you just talk about what is at stake when you hear that federal funding may be cut off, that tax exempt status may be cut off from Harvard? Progress

Larry Summers: that comes from research, whether it's in fighting cancer, developing new tools for promoting citizens well-being, Sesame Street, the idea of the designated driver. Those things came out of Harvard Research Opportunity. Harvard's been a place that's provided immense opportunity for all kinds of people who came here on scholarship. So progress, truth, opportunity, forging national traditions, and telling national stories, all that's under attack. When you go to war with universities, and in a more profound sense, perhaps, the Supreme Court's recognized for more than a century now that academic freedom is another aspect of the First Amendment, and the ability to have open debate, the ability to choose what subjects are going to be discussed and researched and taught on universities, is an important aspect of the First Amendment. And when there's an effort to suppress that with the kind of letter that the Secretary of Education sent to Harvard, that is, I think, very threatening in those terms as well.

Dan Koh: And you know, his rationale for doing this, he has talked about some of the DUI policies of Harvard, for example, just using Harvard as an example. He's talked about DIY policies, also talked about Harvard's response to some of the protests that we've seen on campus, anti-Semitic activity. You have, you have been very clear about your opinion on some of Harvard's response to the anti-Semitic activity on campus. I just want to get your reaction to the president's use of DIY, anti antisemitism reaction, etc., as justification for these actions.

Larry Summers: I think this is pretextual. Look, Harvard has, in my view, been inadequate in responding to substantial disruptions by anti-Semitic elements. It's not engaged in discipline in the way that I thought was appropriate. But that's a very different thing than to say that the government should take control of all of this. And I have to say that President Trump, who has repeatedly dined with Holocaust deniers, does not seem to me in a strong position to push concerns about anti-Semitism. I do think there are legitimate concerns about excesses in the name of diversity that have led to reverse discrimination of a kind that the Supreme Court has ruled out as unconstitutional. But there are established procedures and established processes for looking at issues of discrimination, and blatant extortion, where the government cuts off all funding and Doesn't provide for any kind of due process. That's not the way we do things in the United States. Even criminals who are videotaped breaking and entering get trials before their punishment, have the right to due process. And to respond to these concerns In that way, it seems to me, is extralegal. And I have to say that it's actually likely to be counterproductive. Because for those of us who have been working hard with some impact to bring about change within Harvard or change within other leading American universities, when our voice is echoed by practitioners of extortion, it becomes easier to tune it out and easier to excuse the status quo by saying that it's the subject of outrageous attack rather than considering the very real problems that should be addressed.

Dan Koh: So we've talked a lot about Harvard, The market's kind of unwelcome pressure on, on both of those things. The other factor that he's brought up, or the other entity, is the Fed, and making some threats of the independence of the Fed. But I just would love your reaction to these threats, and someone who's seen this from the inside, how serious we should take those Fed bashing, sort of fools game?

Larry Summers: Dan, when an administration does it, the Fed doesn't listen. And so short term interest rates don't go down. Once the Fed sets, the market does listen, and gets nervous, inflation expectations go up. What policies might be less responsible, and therefore long term interest rates go up. So even in terms of the narrow objective of reducing interest rates, this is very problematic.

Dan Koh: And finally, you said recently that events are 75% bad, but trends are 75% good. And I think there's a lot of people right now who are feeling pretty hopeless. They're feeling incredibly scared about the future of their country. As someone who has seen many presidents, many market fluctuations, I'd be grateful for you to leave us with just a little bit of hope. And what you tell listeners to go to their community to try to reengage the people who are currently disaffected to get them back involved and fighting again?

Larry Summers: Look, I'm alarmed, but I have a reading of American history that it is a history of self-denying prophecy. People become alarmed. They express, They alarmed. They gather together, the pressure. They write. And ultimately, that sets in motion the forces that lead to reversal. That's what happened during the Joe McCarthy period. That's what happened in the aftermath of assassinations, Vietnam, and Watergate. That's what happened after a president of United States declared malaise and a crisis of the national spirit. And I think that, if a commitment is maintained to progress from the center in the United States, People can keep their head and can resist efforts to violate law, efforts to undermine democracy, and can stay focused on the idea that in America, there's always a brighter tomorrow. I think we will make our way through this difficult period.

Dan Koh: Larry Summers, thank you for coming on people's cabinet today.

Larry Summers: Thank you.

Dan Koh: I'm Dan Koh and that's it for the People's Cabinet today. Follow us on social media. Subscribe wherever you get your podcasts, and see you on Tuesdays for new episodes. Let's go.