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- [00:01]
Larry Summers
And if Harvard, with a 50 plus
- [00:03]
Larry Summers (continuation or emphasis)
billion dollar endowment, with all of the
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Larry Summers
prestige and tradition that it represents, with
- [00:13]
Larry Summers (continuation or emphasis)
the unbelievable network of people who have passed through its yard, if Harvard were to have felt that it couldn't resist,
- [00:26]
Larry Summers
who would have felt that they were in a position to resist?
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Larry Summers (continuation or emphasis)
And so I think that with privilege, with venerability, comes obligation. And now the good fight with Jascha Monk.
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Yascha Mounk
My guest today needs no introduction. Larry Summers was the Treasury Secretary of the United States under Bill Clinton, a senior economic advisor of Barack Obama's, the president of Harvard University, and is now one of the board members of OpenAI. We talked about all the big things going on in the world, about why the tariffs that Donald Trump has levied on practically every country in the world won't just drag down economic growth, according to Larry, but are now posing a very serious danger of a financial meltdown. We talked about the recent attacks on Harvard University, where it is that universities went wrong in losing so much trust in the public, and why it is that the current president of Harvard University is nevertheless right to stand up to the demands from the administration. Finally, in the part reserved for paying subscribers of this podcast, we talked about how universities can regain the trust of the public, what changes they need to make to actually renew their compact with the American people, and about how to stand up to Donald Trump, what the left and what progressives now need to do to make sure that they actually become a credible alternative to Trump, rather than falling into the trap of merely being reactive to the outrages of the presidency. In order to listen to that part of the conversation, please support this podcast. Please become a paying subscriber. Please please go to jasamunk.substack.com and I'm throwing in a little special offer this week. If you want 25% off your annual subscription, please go to yashamonk.substack.com the Good Fight. Larry Summers, welcome back to the podcast.
- [03:05]
Larry Summers
Glad to be with you, Yasha.
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Yascha Mounk
Larry, we're recording a couple of weeks after Liberation Day. Are you feeling liberated?
- [03:12]
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, Yasha, is that the United States is turning itself into an emerging or a submerging market. There are a set of patterns that we associate with mature democracies. There are a set of patterns that we associate with developing countries that some people would use the term banana republic for. In mature democracies, it's institutions that dominate in banana republics. Its 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 contemporary 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, in it is nationalist economic policies tied to particular interests. In mature democracies, it is open debate that is venerated. It is checks and balances, divisions of power that are respected. In emerging markets, those things are much more in common to people have fear of the government. The United States, in a stretch of a few short months, is transforming itself from being the United States to being something much more like Juan Peron'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. And so bond yields go down as well, as 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. All anybody in markets wants to see is more protectionism or less. 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, Yasha, that when an American business 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. With respect to everything on that phone, 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 have 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. It's 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 of the United States. But this goes way beyond economic blunder. This is not 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.
- [09:40]
Yascha Mounk
Well, thank you for speaking to the gravity of a situation in these very clear terms. It seems to me that from an economic perspective, there's 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 it is 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, what affluence looks like in the United States over the next 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 about 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. All of this uncertainty happening 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 a 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 a deal because he gets some concession from somebody somewhere when 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?
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Larry Summers
Yascha, with your permission, I'm going to do a slightly more intricate parsing than you just did of the categories of economic risk here.
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Yascha Mounk
You know more about the Categories of economic risk. So take it away.
- [11:41]
Larry Summers
And 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 drugs, the hot dog vendor sells more. You put a tax on foreign steel, the price of it goes up. Talk to the executives of any US major retailer and they can't remotely absorb, nor can their suppliers, tariffs of this magnitude. And 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 increase. Second, 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.
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Larry Summers (continuation or emphasis)
I'm particularly worried about rare earths from China, where I suspect they have enormous
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Larry Summers
leverage over significant swaths of US industry.
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Larry Summers (continuation or emphasis)
So the second issue is that economies
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Larry Summers
that are insulated from the world just
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Larry Summers (continuation or emphasis)
become less efficient, less well functioning, less prosperous economies. The third risk is the one you raise, which is financial crisis. We are seeing very high levels of volatility in financial markets. There's a classic precedent for what's happening. In October of 1987, there was 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 Tetmaier. 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 is continuing. 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 major financial accident. 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 accident for as long as we are 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 accident. And the fourth problem we're incurring is 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. Takes a long time to build up and very little time to dissipate. And we are 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 US 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 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 into 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.
- [20:38]
Yascha 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, but 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 that 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 preserve, recreate, strengthen barrier free trade between Canada and Europe and China and other places around the world, and the United States will sort of be left on the outside of it. The third perhaps is that this turns out to be such a disaster and 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 the kind of short abbreviations, 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 or five different scenarios in mind. But what kind of scenario do you think is likely to play out?
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Larry Summers
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, Kennedy and Khrushchev both recognized how close to the brink they had gotten. And there was all of a sudden an efflorescence of interest in nuclear, non proliferation 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, to alarm people sufficiently. So I think anything's possible. But I would heavily discount the third possibility. Your second possibility was Cold War 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 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, 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 things about it. One is it would be a disaster for the United States if there was basically excluding a bloc that excluded us, that came together and whose cohesion derived in part from concern for 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 in America in exile world, by far the largest and most powerful and technologically leading economic country would be China. And so it is hard to imagine that block coming together without Chinese leadership. And 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. And I don't. 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 a 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 of Germany's arming and therefore Britain's taking steps and Russia's 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, who they call me a neoliberal, 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.
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Larry Summers (continuation or emphasis)
I tend to be skeptical of a lot of the people who put those ideas forward, but that is not what
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Larry Summers
we are debating when we are debating the Trump administration's economic policies.
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Larry Summers (continuation or emphasis)
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 argument and which have 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 kind of revanchist approach of emulating Juan Perot. 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.
- [31:38]
Yascha Mounk
And it is 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 kind of reigning economic paradigm, but what they got was not a sort of responsible attempt to put their ideas into practice, but this much more revolutionary, radical and unfounded thing.
- [32:01]
Larry Summers
Just to take an example, I mentioned Elizabeth Warren. A different example I would mention, who might be familiar to some of your listeners, is Oren Cass. Orrin Cass approaches economics from a populist right kind of perspective. He puts overwhelming weight on producer interests relative to consumer interests. I don't agree with his approaches. I would reject his approaches, 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 that is much more radical and dangerous in its economic scope and also in its political economy.
- [33:09]
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- [33:40]
Yascha Mounk
So trade policy is one area in which Trump had, in a sense, announced what he was going to do. He's been obsessed with with American trade deficits since he started talking about Japan in the 1980s and so on. And we didn't quite take perhaps literally how radical what he was going to do was going to be.
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Larry Summers
I wanted to say on that 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 is gone well beyond literally the concerns that were raised. So the people who were kind of trying to whitewash his campaign by saying seriously, not literally, should have a lot of soul searching to do because they did turn out to be wrong in there. The literal statements turned out to be wrong as forecasts, but not in the directions they supposed.
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Yascha 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 be coming. That's partially because universities were really have lost a lot of public trust over the course of the last decades. And it's partially because Republicans feel that conservatives effectively run out of those universities, partially because Donald Trump and some of his allies have verbally attacked universities for a long time. So perhaps it was obvious that some form of attack was coming. And I know you'd say that it's similar or different from the example of trade policy. The extent of the attack, the brutality of it and the ruthlessness of it probably goes 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 lacking action on topics like antisemitism at Harvard quite forcefully, but in which they're being used as a pretext to really try, I think, to take down those universities as alternative centers of power or as places of free inquiry, both in terms of the demands that the administration has made of certain universities like Harvard and Columbia, and in terms of the cutting of funds in areas like the hard sciences that really aren't directly connected to some of the points that are at issue. Now, as we're recording, we quite recently had 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 to rectify some of what the Trump administration sees as the shortcomings of Harvard. 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 you see the demands of a Trump administration, and whether your successor as president of Harvard is taking the right step in refusing to bow to those demands.
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Larry Summers
I support Alan Garber's resistance to what are extortionate and extralegal and wildly unreasonable demands. Look, Yasha, 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 of universities as seekers of truth, as disseminators of learning, particularly about tradition, as instillers of values in people at what's the most malleable stage of their lives between the age of 18 and 22. And I think the aftermath of October 7th brought to light that there had been enormous failures on all of those dimensions in universities. There was a 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 anti Semitism of the left were tolerated, in some cases even encouraged in universities was, I think, shameful. And so I think 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 to account for 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. And I don't think there's any viable course for a great university or a university that aspires to be great, but 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 the society because democratic governance is a necessary prerequisite to academic freedom. And if we allow the democratic institutions of the society to be entirely subverted,
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Larry Summers (continuation or emphasis)
there is no prospect for the continuation of academic freedom.
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Larry Summers
And if Harvard, with a 50 plus
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Larry Summers (continuation or emphasis)
billion dollar endowment, with all of the
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Larry Summers
prestige and tradition that it represents, with
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Larry Summers (continuation or emphasis)
the unbelievable network of people who have passed through its yard, if Harvard were to have felt that it couldn't resist,
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Larry Summers
who would have felt that they were
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Larry Summers (continuation or emphasis)
in a position to resist? And so I think that with privilege, with venerability, comes obligation. And so I think Harvard is right to be resisting this kind of extralegal assault, which I think is the only way to describe it. I think you were right to point up that this is not on the up and up. A president and a government with a genuine concern for anti Semitism 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 from 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, Yasha, I think it should be seen, as you suggest, as some combination of spasmodic anger at opponents. 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 ten times Joe McCarthy or a hundred times Joe McCarthy.
- [45:43]
Yascha Mounk
Thank you so much for listening to this episode of the Good Fight. In the rest of this conversation, Larry and I deepen our conversation about American University and he lays out what they would need to do to regain the trust of ordinary people. We also talked a little bit about the political response to Donald Trump. What do Democrats now need to do to become a credible alternative to the current government? And where do the dangers lie if they fully lean into a reactive attitude thinking that they don't need to course correct in any way because of the outrages of what the Trump administration is doing? To listen to that part of a conversation to gain access to all the bonus materials in this podcast, including our very special episodes. To do all of that ad free and at a 25% discount, go to yashamonk.substack.com thegoodfight that's yashamonk.substack dot com the good fight. You will gain access to this really interesting part of the conversation and my eternal gratitude. Thank you so much for listening to the Good Fight. Lots of listeners have been spreading the word about the show. If you two have been enjoying the podcast, please be like Rate the show on itunes, Tell your friends all about it, share it on Facebook or Twitter. And finally, please mail suggestions for great guests or comments about the show to goodfightpodmail.com that's goodfightpodmail.
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Larry Summers (continuation or emphasis)
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