on with kara swisher

Larry Summers Was Right on Inflation. Now He’s Got Another Worry.

The former Treasury secretary thinks we’re headed for rough economic seas.

Photo-Illustration: Intelligencer; Photo: Getty
Photo-Illustration: Intelligencer; Photo: Getty

During Larry Summers’s long career, which has included stints as Treasury secretary under President Clinton, director of the National Economic Council under President Obama, and president of Harvard University, he has embodied the part of centrist-Democratic wise man — while inspiring plenty of opposition on the right and left. Lately, though, Summers has embraced a different role: teller of hard truths. He had little company when he warned about the dangers of runaway inflation in 2021, but the rest of the world soon caught up. Now, Summers thinks that while inflation may have been tamed, the country is likely to experience more substantial economic turbulence soon.

In the latest episode of On With Kara Swisher, Kara speaks with Summers about how he thinks the Fed fumbled inflation, why he believes people who criticize the rich are often just envious, and whether the U.S. still might escape a recession.

On With Kara Swisher

Journalist Kara Swisher brings the news and newsmakers to you twice a week, on Mondays and Thursdays.

Kara Swisher: Let’s start with everyone’s favorite topic, inflation. As everyone knows, you called it and Jay Powell got it wrong. About a week ago, you said the Fed had to “engage in serious soul-searching.” What did you mean by that, and how much faith do you have in Powell’s ability to steer this economy?

Larry Summers: I think the Fed made a big mistake in not recognizing the inflation threat going back to 2021, and they stuck with the error for much too long. And when an institution makes a serious mistake with respect to its core mission, it needs to reflect: Was it an intellectual issue? Was it an issue of particular people? Was it an issue of culture and lack of diversity? And I think they need to do that with respect to the inflation error. In some ways, they compounded that error by not acting on Silicon Valley Bank soon enough and allowing that to become a broad systemic problem. So I think they need to reflect on what may be an excessive tendency to complacent groupthink within the Fed. I’ve got huge respect for the individuals involved, but I do think that, after errors of this magnitude, institutional reflection is appropriate.

Swisher: What does soul-searching mean, then? Who does the soul- searching, and how does it manifest itself?

Summers: It might manifest itself in the form of committing to a public report. It might manifest itself in the form of some kind of committee of external evaluators. It might manifest itself in some changes in process to open things up and create more space for dissenting views. It might manifest itself in communications strategies that reflect more humility. I certainly did not mean to be impugning individuals at all as distinct from addressing matters of the culture of the institution, much like the military does after a failed military action or much like is done at an airline by the FAA after an air-safety failure.

Swisher: Does it ever happen in that way? Looking at the errors they made and doing a real serious —

Summers: I think there hasn’t been enough of that at the Fed over the years. At the IMF, for example — which in some ways is a global central bank — after they had problematic episodes with respect to missing aspects of the financial crisis, with respect to very large loans to Argentina that prove to have been unwarranted, they have written really very thoughtful reports trying to learn and distill the lessons of those episodes.

Swisher: What about Janet Yellen? She also got it wrong. First she said there was no inflation, and then she said it was transitory. What’s your assessment of her? And you did mention Silicon Valley Bank, and you’re linking it with this inflation situation, I think.

Summers: Well, I think SVB and inflation are linked in two ways. One is they’re just both big problems that got missed. And the other is that if we had dealt more promptly with inflation, we wouldn’t have had the kind of dramatic spike in interest rates that we had that then led to the difficulties at SVB. Janet was my teacher in graduate school. I’ve got great respect for her. I don’t think she was as quick as she might have been to recognize the magnitude of the inflation threat in her public comments. I think that she’s probably been as optimistic as anybody in Washington this week about the economic future. And I’m not sure that a harder landing than she expects isn’t what’s likely. But, look, it’s much easier to make observations from the cheap seats than it is to be in the job and sitting with the responsibility of speaking on economic issues for the president. That affects what one is able to say and assess.

Swisher: Right. They’ve got to toe the administration’s line, basically, is what you’re saying. But do you think she realized it privately and didn’t say it publicly?

Summers: I have a long-standing policy that I don’t speak to public officials’ motives. I don’t speculate on what they were or were not doing internally, and I just try to focus my observations on the economic issues.

Swisher: How high do you think the Fed will have to raise rates in order to actually tame inflation? And how long will they have to keep it at that rate?

Summers: No one knows. And, in a way, I think the mistake that they have tended to make is making overly confident pronouncements and forecasts which turn out to be wrong and then undermine their credibility. I think the Fed probably needs to learn the lesson of the Delphi oracles. The Delphi pracles understood that they were human, that they didn’t know the future, and they therefore kept their pronouncements a bit vague and oracular. No dot plots for Delphi. And I’m not sure dot plots laying out specific scenarios are the right mode of communication for the Fed.

I certainly think we are a substantial part of the way through — a large part of the way through — the necessary tightening. If there were not a credit crunch and a banking set of issues, I would feel that the Fed needed to engage in three more tightenings, perhaps a little more than that. Given that we have this credit crunch coming from the banking side that’s doing some of the work of interest-rate increases, it’s possible that we’ll have had enough after May. But that’s a judgment we’re just going to have to hang on every economic statistic.

Swisher: Probably one of the reasons that they want to seem confident is in order to hold on to their status as oracles. They probably think Americans do better with definitiveness, although that didn’t really work for COVID, either.

Summers: I think you maintain confidence best by measuring your pronouncements with your degree of knowledge. And there’s an ever-present temptation to provide confidence in the immediate run by providing specificity and firm, clear statements. But it’s a very short-run bit of candy because when the statements turn out to be wrong, as they inevitably will, your credibility is undermined.

Swisher: Two percent inflation, for those who don’t know, has been the stated goal of the Fed. Will 3 percent or even higher become the new normal?

Summers: I hope not. I think that the idea of price stability — people not thinking about inflation all the time — is something that’s immensely important to helping the economy function. I think when you have inflation, people like you and I are better able to protect ourselves from it than the vast majority of Americans. So I would prefer to see us remain a low-inflation economy. That’s certainly been Jay Powell’s repeated commitment over the last year. And it seems to me we have enough doubts about public institutions in our country without this much-repeated goal by a very important institution being abandoned.

Swisher: So you got into a spicy debate with Jon Stewart over inflation. Let’s play the clip.

Swisher: Leaving aside the discussion of how to cure the illness, corporate profits have been near record highs for a while now. Is that partially to blame for the disease from your perspective?

Summers: I don’t think so. I think the right way to understand it is that business hotels make more money during the week than they do on weekends because there’s more demand. Resorts do better on weekends than they do during weekdays because there’s more demand. We pushed demand way up, and the consequence of pushing demand way up was that when demand equaled supply, prices were much higher, and that led to higher profits. I don’t think having price controls would’ve been a very good strategy. It just would’ve created shortages and all kinds of evasion. If you pump up demand beyond capacity, what you’re going to get is rising prices. Yes, that is going to show up in higher profits. There’s no good way to reduce the profits and reduce prices while keeping the economy functioning.

Swisher: But you understand why people see these corporate profits and feel like it’s good for them even though everybody else suffers.

Summers: I do, and that’s why one of the things I’ve worked very hard on is a range of proposals, including the corporate minimum tax that was just put into place in the Inflation Reduction Act, to make sure that we’re fully taxing corporations and recycling profits back for the benefit of ordinary citizens. That’s why I focused a lot of my work on the various uses of information technology around strengthening the IRS, because I think it’s sort of beyond belief that the computers we use to check on the tax integrity of the wealthiest people in our country use COBOL as their programming language. I’m all for doing things that work. But I think we need to be practical.

Swisher: You’re sounding very progressive there, but do you think that the progressives get it wrong by focusing on corporate profits? Do you think they’re ignorant of a larger issue?

Summers: I think they are onto a legitimate source of unhappiness, but I don’t think they have practical proposals. When they raise ideas like that the government should punish people for gouging, I think they’re proposing things that probably ultimately won’t be very effective and are likely to do very substantial damage to incentives for innovation. I guess it comes down, in some ways, to a basic judgment. Does one think that America has too many people like Jeff Bezos and Bill Gates and Steve Jobs and Sergey Brin, or does one think it would be even better if we had more people who created world-leading institutions like the ones those people created?

I think the answer is that I wish we had more hugely successful entrepreneurs creating world-leading institutions that produce transformative new opportunities for consumers. I think we do need to work harder than we do to make sure that they pay their fair share in taxes. I think of myself as very progressive, but I believe in a politics and in economics of opportunity, Kara, rather than a politics and an economics of envy.

Swisher: Envy?

Summers: I think that’s the distinction we have to draw. When I hear people who are always framing it in terms of their indignation about the success of others, I see it too much in those cases as being a matter of envy.

Swisher: Okay. You tweeted that inflation is unsustainable unless “the economy turns down fairly hard.” Give me your best- and worst-case scenario because the Fed is forecasting a mild recession, and they expect it’ll start later this year.

Summers: I think we’ve got to be realistic. We don’t know what the future’s going to hold, and we don’t know the exact effects of the instruments that we’re using. The Fed’s job is a little bit like one’s task when one is in an old hotel. In an old hotel, there’s a lag between the time you turn the faucet in the shower and the time the temperature of the water changes, and it’s very hard to avoid scalding yourself or freezing yourself as you adjust. I think the Fed’s challenge is a little bit like that.

If we’re very fortunate, we will find our way to a soft landing. The more likely outcome, it seems to me, is that some combination of the delayed impacts of the monetary policies we’ve engaged in, the rethinking that has to be going on in banks across the country in the wake of SVB, the need to make sure that we’re not providing too much liquidity in the economy at a time when money has been losing its value quite rapidly — that all of that leads to a downturn, and it’s very hard to hit the brake in a completely controlled way, and so the economy goes into recession. Not the kind of recession we saw during the financial crisis or after COVID, but the kind of recession where the unemployment rate gets up to somewhere near 6, where there’s a period of several quarters where the GDP is actually declining, where corporate profits decline.

We’ve had more than a dozen of them since the Second World War. We very much want not to have them, but it’s not the end of the world if we do. I think what would be a terrible mistake would be to be so squeamish about the possibility of recession that we allowed a high rate of inflation to become built into expectations. Because then, ultimately, it’s like what happens when you ignore any illness. The treatment that’s necessary when you’ve put it off much too long tends to be much more painful, difficult, and with lower prospects of success.

Swisher: The Biden administration disagrees. White House spokesperson Karine Jean-Pierre said, “Recent economic indicators are not consistent with a recession or even a prerecession.” Is that smart politically, pretending you’re not sick? Or are they saying that publicly and thinking something else privately?

Summers: Economic success depends on confidence, and when you’re in public life, it’s always tempting to try to infuse confidence into the situation because if you’re not optimistic, who will be? On the other hand, I think one always has to think as a public official about not just how one’s words sound today but how they may sound three or six months hence. I’ve been surprised by how optimistic the Biden

administration and its various spokespeople have chosen to be. I think they’ve cost themselves some real credibility with consistent optimistic forecasts. There may come a time when the truth is optimistic and it’s going to be really important for them to be credible, but they’re not going to be completely credible because they’re always optimistic. But again, I don’t sit where they sit with all the pressures they’re facing, so I use the words “I’ve been surprised” rather than make confident statements that they’ve been making a mistake.

Swisher: Okay. If you’re Biden and you’re heading into the election, would you rather have high inflation or recession?

Summers: I would rather have neither. I think in both cases it probably depends less on the level than the rate of change — that is, a weak economy that is growing is probably better than a strong economy that is contracting. A more elevated rate of inflation that is clearly coming down is probably better than a lower rate of inflation that is in the process of rising. There’s an old political observation, Kara, that 100 percent of the people pay rising prices, and only 6 percent of the people are unemployed. And so inflation is particularly salient. And I think there’s some logic to that, particularly with respect to middle-class voters who are very much swing voters in an election like the one we’re going to have.

Swisher: Biden has also had the most ambitious industrial policy you’ve seen in America in multiple generations. He’s pushing for reshoring, “made in America,” green-energy loans, subsidies for chips. You’re one of the standard-bearers of neoliberal free-market capitalism, but you also helped him get his big infrastructure bill, the Inflation Reduction Act, over the line. How come? Have you had an ideological conversion?

Summers: I don’t think so, and I didn’t really completely recognize in myself that litany of adjectives that you offered. I think that government has long had an important role. You go back to Abraham Lincoln and the transcontinental railroad, and you go back to the land-grant colleges, you go back to DARPA and the internet. So I thought that basically supporting the dissemination of clean green technologies was the right thing to do, and that’s why I urged Senator Manchin and others to support the IRA.

I am worried when these programs are not just about particular objectives, like helping to fight climate change or promoting resilience, but become more general wish lists. So I think we should have supported the semiconductor industry in ways that focused on semiconductors and let the companies figure out whether child care was an important aspect of their recruitment strategy or not.

I think we should not be engaged in telling people where their electric cars that they’ll get a tax credit for need to be produced. I think we set back the cause of promoting our industry when we impose various requirements that wages be high. I think when we restrict technology, we need to make sure that there’s a strong general national-security rationale for it rather than just a desire to help American companies or American workers vis-à-vis foreign workers and foreign companies.

One way I like to say it is that I think the best generals are the ones who hate war the most but recognize that it sometimes needs to be fought. And I think something similar is true about industrial-policy advocates. The best ones know that it’s sometimes necessary but really like markets better. And, frankly, I think we have too much enthusiasm for the idea in the current moment where people just like any rationale for the government getting involved in planning, directing, managing every aspect of the economy.

Swisher: I’m going to do a lightning round. So very quick answers. How do you think the Biden administration handled the Silicon Valley Bank debacle? It seemed like you thought not so well.

Summers: Overall, they got the right decision. Some of the details could have been handled better.

Swisher: Such as?

Summers: Such as why are the bond holders of the holding company getting paid off in a significant way? It certainly could have been caught much earlier, and it would’ve been much less painful if it had been caught earlier.

Swisher: Staying on SVB, you said progressives were right to blame Trump’s 2018 partial repeal of Dodd-Frank for the SVB collapse. Expand on that.

Summers: What the world needed was more regulation of regional banks, not less, and the Trump administration, supported by its designate on the Fed with responsibility for regulation, Randy Quarles, were always working to reduce the regulation of banks when things should have been moving the other way. Would it have mattered? I’m not sure it would’ve, but it’s better to be moving in the right direction.

Swisher: Break down the culpability — the percentage culpability —of the crisis between bank leadership, legislators, regulators, and Silicon Valley tech VCs and start-ups, if you had to stack rank them.

Summers: All of the above. Bank management, No. 1. Supervisors and regulators, No. 2. The broad framework, No. 3. Tech companies and their venture capitalists, No. 4.

Swisher: What role do you think their Twitter fearmongering played in the crisis in putting pressure on the government or creating fear?

Summers: I think this would’ve been a one-week run rather than a two-day run without Twitter. That institution was fundamentally insolvent, and fundamentally insolvent institutions need to be resolved. And when they’re fairly big institutions, that can’t take place without sending shock waves that then affect financial stability more generally.

Swisher: So it would’ve happened no matter what?

Summers: I don’t think it’s right to blame this on social media. There’s plenty to worry about with social media but not this.

Swisher: During the Silicon Valley fiasco, you were on TV calling for the government to step in. You said, “I don’t think it’s time for moral-hazard lectures.” I agree, but nonetheless, when is the right time for moral-hazard lectures?

Summers: The right time to fix the roof is when the sun is shining, not when it’s raining. The right time to debate the structure of the fire department is not during the fire but is after the fire has been put out. I think we’ve got a lot of thinking we should be doing now about the financial system, about what kinds of buffers banks are required to have. In general, Kara, I think the philosophy we need is one of not trying to make everybody smart but instead trying to make the system safe for when people are stupid. If you look at auto accidents in our country, we were making no progress really in the ’50s and ’60s, when we had a driver’s-ed paradigm for reducing automobile accidents. And when we moved to seatbelts, guardrails, safer windshields, and the like paradigm, that’s when we started to make real progress. And I think some similar idea needs to apply with respect to financial regulation.

Swisher: Mohamed El-Erian is warning that the Silicon Valley Bank–led crisis could lead to more cautious lending from banks and therefore stagflation. You’ve already mentioned a credit crunch. How likely is stagflation from your point of view?

Summers: I think it’s a real risk. I think there’s stag and there’s flation and there’s stagflation. When I say that I think a soft landing is unlikely, that’s a statement that I think it’s very likely that we’ll get at least one of stag or flation. And given where inflation is right now and given the downward pressures on the economy, I certainly think stagflation is a meaningful risk, and it’s probably a risk that’s underpriced in the markets.

Swisher: I’m going to stay with tech. You’ve been involved in crypto for a relatively long time. You advised the Digital Currency Group over six years but scrubbed them from your website not long after the DOJ opened early-stage investigations into the company. Crypto is notoriously full of grifters and fraudsters. Do you regret embracing the industry or in general? What’s your assessment of the sector now? Many people have gotten burned in this area.

Summers: I think that if you look at almost anything in its early stage, whether it’s the automobile industry, whether it’s the application of electricity, whether it’s the internet, there are a lot of drifters and grifters who are in it. And that’s certainly true of crypto. And I think the question is how this will all play out. I think government has made more errors of being too slow to regulate than it has of being too rapid to regulate. I think a substantial fraction of what people have been excited about will shake out. Do I regret having put myself in positions where I didn’t have fiduciary responsibility but did provide some advice and had an opportunity to have at least a second-row seat and learn about what was going on? No, I think I probably would’ve made those decisions if I had it to do over again. Do I have an assessment with respect to any particular entity? No, I don’t. I’m not in a position — don’t have the knowledge — to judge any particular entity. I would be quite surprised if there wasn’t some residue from all of this innovation that proved to be quite important. And I would be even more surprised if there wasn’t a very large amount of shaking out. But that’s always the way it is in market economies with new technologies.

Swisher: You did provide — you and many others — provided chains of credibility to these companies. Would you still do it again? They brought you in because you’re Larry Summers.

Summers: I don’t know. I’ve had a policy, Kara, that I never engage in public advocacy on the part of any company I have an involvement with. And I never contact public officials on the part of any company that I’m involved with. And I say to them that if what they want is such wisdom and experiences I’m able to provide without any fiduciary responsibility, I’m sometimes prepared to offer that. But I at least try to always present myself as not in a position of warranting or vouching for any institution where I don’t take on work as an employee or as a fiduciary of some kind.

Swisher: Just a few more questions. There’s been a lot of pushback on ESG investing right now from the right, led by Silicon Valley folks like Peter Thiel and Vivek Ramaswamy. Is the criticism valid or is it Culture Wars 201?

Summers: I’m not with the zealots on either side of this. I wouldn’t have divested from fossil fuels as the head of a major institution. But I think that part of what makes our system great is that different people make a range of different choices. And I think Peter Thiel and Vivek are free to invest their money as they see fit. I’m not sure they should be quite as angry at others who choose to make investment choices on a different basis. Pluralism, it seems to me, has a lot to recommend it.

Swisher: Yeah, anger is their brand, just so you know. All right, the last few things: I’m going to ask about the debt ceiling. Biden and the Democrats are heading into a fight with Kevin McCarthy and Matt Gaetz over the debt ceiling. They seem to think that the country might default. How would you make a deal if you were Biden to prevent default?

Summers: I think there’s some things you just have to not negotiate about. And my kids sometimes spend more money than I wish they did, and we discuss whether they’re going to pay or whether I’m going to pay, but we don’t discuss whether the family should default to the Visa organization. And that’s how I feel here. I don’t think the idea of defaulting on the debt associated with spending we’ve already done should be on the table. And I think we do need more serious bipartisan discussion about containing the rate at which the government is borrowing going forward. But I think linkage between the two is really very unhelpful.

Swisher: What would you do at this point if you had a magic wand to prevent a default? Obviously it would be disastrous, correct?

Summers: I think that, in a democracy, fear does the work of reason. I think you need to not prematurely negotiate. And I think eventually reason will prevail, but it will require a bit more alarm than we have now. I think the administration’s playing this about right.

Swisher: So who do you think will blink first, Biden or McCarthy?

Summers: I’m not sure that I would accept that characterization.

Swisher: Okay.

Summers: But I think we’re likely to have a successful agreement. And I’d be surprised if it came with extensive fiscal measures. I hope we’ll get both, but I hope we’ll get them unlinked rather than linked because I think it would be a terrible precedent. Look, taking hostages and kidnapping people and demanding ransom in the form of change is the wrong thing to do even if what you want from your hostage taking has some reason and logic in it. And this debt feeling thing is a kind of kidnapping and hostage taking.

Swisher: I have two more questions. Will you be the next Fed vice-chair?

Summers: Well, I’m very happily ensconced as a professor who tries to participate in the public debates by engaging in dialogues with people like you.

Swisher: Would you want to be?

Summers: That’s what I really enjoy at this stage.

Swisher: Would you want the job?

Summers: I was very satisfied by all the experiences that I’ve had in Washington. And I think, right now, trying to think in more fundamental ways about the problem, and speaking in the relatively free ways that one can speak when you’re only speaking for yourself, is what I will find both satisfying and impactful.

Swisher: So when you view your role and your legacy in the political world now, if you don’t hold office, what do you think it is?

Summers: I think it’s always best to let other people judge one’s legacy. I’ve tried to think clearly about problems, to speak candidly about problems, and to point the way towards how to make the best progress with respect to the many challenges we face.

Swisher: But if you were asked to serve as Fed chairman, would you do it?

Summers: Kara, I think we’ve exhausted this particular line of questioning.

Swisher: Okay, Larry, I really appreciate it. I’m just teasing you. I know you’re not answering it, but I really appreciate your answers and the time that you’ve spent with us, and I appreciate it.

Summers: Good.

This interview has been edited for length and clarity.

On With Kara Swisher is produced by Nayeema Raza, Blakeney Schick, Cristian Castro Rossel, and Rafaela Siewert, with mixing by Fernando Arruda, engineering by Christopher Shurtleff, and theme music by Trackademics. New episodes will drop every Monday and Thursday. Follow the show on Apple PodcastsSpotify, or wherever you get your podcasts.

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Larry Summers Was Right on Inflation. He’s Still Worried.