Tariffs, Decline, and the Promise of AI | A Conversation with Larry Summers and Niall Ferguson

Summary

Highlights

• Larry Summers defends the state of economics, rejecting the notion of its decline. 📈
• The complexity of tariffs is critiqued, noting potential negative impacts on the economy. 🏭
• Summers highlights the disruptive potential of AI in driving future economic growth. 🚀
• A call to integrate historical knowledge into economic and political decision-making. 🕰️
• Summers emphasizes the importance of social innovation alongside technological progress. 🌐

Key Takeaways

• Economics is evolving, not declining, with better forecasts and integration into policy roles. 📊
• Tariffs could lead to economic setbacks, increasing both inflation and unemployment. 🚫
• AI holds potential for a new growth era, transformative like the Industrial Revolution. 🤖
• Historical knowledge is key to understanding and navigating economic and political realities. 📚
• Social innovation should not be overlooked amidst technological advancements. 💡

Overview

Chapters

• 00:00 - 10:00: Introduction to Economic Decline and Forecasting The chapter discusses whether economics is an intellectual discipline in decline. It starts by questioning if the ability to predict imminent events is a valid measure of a science. The comparison is made to other sciences like geology and seismology, where experts understand phenomena but cannot predict exact timing, similar to meteorologists with hurricanes.
• 10:00 - 18:00: The Importance of Models in Economics This chapter discusses the significance of models in economics, with a focus on the parallels to forecasting in meteorology, such as predicting hurricanes. It highlights the improvement in the accuracy of economic forecasts over time, using the root mean square error as a measure of prediction error, which indicates a decline in forecasting mistakes. Despite inherent uncertainties, economic models have become more precise, showcasing their growing importance and reliability in assisting economic predictions.
• 18:00 - 33:00: Impact of Tariffs and Protectionist Policies This chapter explores the impact of tariffs and protectionist policies on economic dynamics. The discussion highlights a better understanding achieved over time, particularly regarding inflation. There is mention of a puzzle concerning why certain forecasts were not accurately made by others, suggesting that political incentives may influence these predictions more than any inherent intellectual shortcomings.
• 33:00 - 48:00: China's Trade Practices and Global Economic Fairness The chapter discusses the probabilistic nature of economic forecasts and the challenges in predicting economic events such as recessions. It highlights that stating a recession is more likely than not, without it occurring, isn’t considered a significant error within the field of economics. Additionally, it suggests assessing the state of the economics discipline over time by comparing the role and focus of economists from the beginning of one's career to the present.
• 48:00 - 63:00: US Fiscal Challenges and Policy Decisions The chapter discusses the integration of economists into various governmental agencies, highlighting the shift from traditional backgrounds, such as ex-bankers at the Treasury and the Fed, to roles focused on economic analysis across departments. This includes the EPA employing economists for cost-benefit analyses of regulations and the Justice Department using economists to enhance competitive practices within antitrust policies.
• 63:00 - 76:00: The Future of AI and Economic Growth This chapter explores the influence of economics on other social sciences, particularly political science and sociology. It highlights how these disciplines have adopted economic techniques and approaches. Additionally, it delves into the trend of appointing economists as heads of central banks, suggesting the significant role of economic perspectives in shaping policies and growth strategies.
• 76:00 - 131:00: Open Q&A Session on Economic and Geopolitical Issues The chapter discusses the credibility and understanding of economists regarding economic issues, suggesting that despite their limitations, economists' judgments are generally more reliable than those of other commentators on economic and geopolitical matters.
• 131:00 - 133:00: Closing Remarks and Reflections The chapter titled 'Closing Remarks and Reflections' discusses the significant impact and success of economics among social sciences. It highlights how various statistical tools and measures used to analyze economic phenomena were created and improved by economists, underscoring the field's dominant influence and contribution to social sciences.

Tariffs, Decline, and the Promise of AI | A Conversation with Larry Summers and Niall Ferguson Transcription

• 00:00 - 00:30 Is economics a discipline in intellectual decline? I don't think so. First of all, I'm not sure it's a proper test of a science to be able to predict imminent events. Geologists and seismologists know more about earthquakes than anybody else does, but they can't predict when the next one is uh going to come. Meteorologists understand hurricanes
• 00:30 - 01:00 better than anybody else does, but they don't know exactly when or where the next uh hurricane is going to come. I find the use of the word decline odd. If you look at the quality of economic forecasts is measured by to use the fancy statistical term root mean square error basically how big's your average mistake that's trended downwards through time. So by that standard economists
• 01:00 - 01:30 have a better understanding than uh they used to. Yeah, I did get it right on uh inflation and I think it's a bit of a puzzle why others didn't. I think it probably has more to do with the political incentives of people making forecasts than it does some fundamental intellectual failure of uh the
• 01:30 - 02:00 discipline. Forecasts are probabilistic. I don't know of anybody who said they thought there was an 80% chance of a recession. So if you say you think it's more likely than not that there's going to be a recession and then there isn't, I don't think that you've made a hugely consequential error. So if I wanted to judge whether the discipline of economics was in decline, I'd look at the fact that when I started out, economists were mostly
• 02:00 - 02:30 people who tried to guess whether there was going to be a recession or not. And now the EPA is filled with economists doing costbenefit analyses of regulation. The Justice Department is filled with economists doing analyses of what will promote competition in the context of uh antirust policy. The Treasury and the Fed used to all be people who were exbankers. Now they're large numbers of
• 02:30 - 03:00 people with the discipline of uh economics. If you look at what's happened in the cutting edge of the other social science disciplines, political science, sociology, basically a lot of it is importing techniques and approaches from uh economics. If you look at uh who gets appointed central bank heads around the
• 03:00 - 03:30 world, it's mean much larger number economists than it ever used to be. So, God knows economists don't understand everything about uh the economy, but I'd sure take the judgments of economists over the judgments of any other uh group of people who make comments or certainly take it over uh
• 03:30 - 04:00 their critics. And you know it's all the statistics we use to measure all these things were invented and developed and refined by econom by economists. So I would say if you took among the social sciences I don't see how you could escape the conclusion that economics has been by far the most successful over the
• 04:00 - 04:30 last half century. But I remember you making a comment I think at a Hoover Institution conference a couple of years ago about the Fed model and I want to get you to talk about that because at the heart of modern economics is is the idea that one can model human behavior. One can model the behavior of of the economy and the most influential model in the world is the model that the Federal Reserve uses.
• 04:30 - 05:00 And your observation, I'm probably going to misquote you here, was that when you fed into the model, uh, very extreme values, I think, on fiscal policy, its results were bizarrely, uh, bizarrely clustered together in ways that seemed intuitively wrong. So talk a bit about that. Uh because it seems to me that if there's a problem with the Fed model, one of the things that
• 05:00 - 05:30 revealed that was what they got wrong in 2021 that you got right. If there's a problem with the Fed model, isn't there a problem, a deep problem with economics itself? I don't think so. At multiple levels, though, if you're going to remember what I say on previous occasions and throw it back in my face, we're going to stop having sessions uh like this. That kind of thing's uh what you do to meas that kind of thing is really not quite fair, Neil. Um look, I I think there are a few points to make.
• 05:30 - 06:00 First of all, we all have models. How do you think about things except with a model? Why is it that when somebody sticks their hand out, I understand that I'm supposed to stick my hand out to shake hands? It's because my model of human behavior is that when somebody shakes their hands, that's what you do. You shake hands. So all thought essentially takes the form of models all judgments about you know is UATX going
• 06:00 - 06:30 to be a success over the next 5 years is the economy going to grow fast next year reflect a kind of mental model of how the world operates. So the question isn't should we have models or not have models in the absence of models you can't think. So the question and it's not that non-economists have some alternative model. So the question can be what are the virtues of explicit more
• 06:30 - 07:00 mathematical models versus implicit more subjective models? And certainly quantitative models sometimes go wrong but they have the feature that when they've gone wrong you can see that they've gone wrong and you can change them and uh you can uh fix you can fix them. So I think the impulse to use mathematics, to use statistics, to use data more rather than less has to be a
• 07:00 - 07:30 proper uh impulse. Do I think some people are overly mechanical about believing some statistical thing they estimated on a computer and not applying judgment? Absolutely. Is that something I've tried to avoid when I was a policy maker? Absolutely. Is there a particular tool that is used more by the Fed staff than
• 07:30 - 08:00 by the Fed uh policy makers that isn't the tool that I would use if I was the Fed staff? Yeah, they they use a model that I don't think is a very good uh model. One of the problems in any organization with having people do the same job for 15 or 20 years is that they tend to get a little attached to the way they've done things before and not update uh things in respect to
• 08:00 - 08:30 the ways the world has changed. Is there that kind of tendency at the Fed? Absolutely. There is that kind of uh tendency at the Fed. So yeah, I think I was right to criticize the Fed's model, but I don't think of that as some kind of deep critique of the field of
• 08:30 - 09:00 economics relative to uh some alternative uh paradigm uh that uh exists. It seems to me most of the interesting and significant criticisms and improvements that have come from econ come to economics have come more from within economics than uh from the outside. You
• 09:00 - 09:30 know the Marxists have been yelling for decades I think to know to produce no improvement in prediction or explanatory power. the so-called modern monetary theorists represent a challenge to the orthodoxy that I don't think has uh gotten anywhere. So yeah, are there a ton of economists who are much too complacent about the
• 09:30 - 10:00 current models? Yeah, I I certainly do uh think uh that that's true, but thinking of it, I think there's no evidence for the proposition that it's a profession or a discipline in decline and you have to judge things relative to some kind of comparative uh standard. So we're on the eve of one of the biggest policy induced
• 10:00 - 10:30 shocks that there have been I suspect in our lifetimes in that the president intends tomorrow to increase tariffs on a substantial number of US trade partners. some uh on the reciprocal basis and more perhaps to come on the sectoral basis. I've seen estimates that
• 10:30 - 11:00 make it a return to the average US tariff rate of 1937 if he goes through with all of the things that he's talked about. This seems like a really easy problem for economists. uh which I guess is why so many Nobel laureates in economics urged people to vote against Trump last year. Is is is this just straightforwardly bad because free trade is
• 11:00 - 11:30 straightforwardly good? I think the simplest way to think about this is as a self-imposed supply shock. We're going to take all the things we buy and we're going to make them more expensive. And when we do that, the price level is going to be higher. That's bad. People are going to have to pay those higher prices. So the same income is going to go less far. So they're going to be poorer and they're
• 11:30 - 12:00 going to be able to buy less and that's going to mean there's less demand and that's going to make unemployment go up. So doing something that increases both inflation and unemployment kind of seems like it's not a very good idea. And so I think this is not a very good idea. It's really a quite terrible idea. But even if one believed in a
• 12:00 - 12:30 protectionist philosophy, there is a protectionist philosophy which says look somehow we can't find enough work for everybody to do in our country. And so if we get more work done in our country, then we will put more people to work and that'll be better for the economy. And so it's a good idea to restrict imports. That has a certain logic to it.
• 12:30 - 13:00 I think it's basically more wrong than right because the premise is wrong. We can find enough work for everybody to do. The unemployment rate is 4%. But let's suppose that it was right. Then what would you want to put tariffs on? You'd want to put tariffs on things that were directly purchased by consumers so that the people who were producing them would produce them in the
• 13:00 - 13:30 United States, not abroad. That's at least an understandable proposition. So why is a centerpiece of the Trump policy tariffing steel and aluminum when there are 60 6 times as many people who work in industries that use steel and aluminum as there are in the steel and aluminum industries? Why are we making automobile
• 13:30 - 14:00 parts a central part of what we're putting tariffs on when the process of producing a vehicle involves it moving back and forth across the Canadian border or the Mexican border half a dozen times. So even if the goal were to make our producers more competitive somehow, I don't think that's the right way to think about economics. I think the right way to think about economics is in terms of promoting exchange and division of
• 14:00 - 14:30 labor and gains from trade. But even if one thought the whole idea was about making yourself more competitive, these are policies are terribly designed with respect to that uh objective. And that's even before you get to the question of them retaliating. These are bad policies
• 14:30 - 15:00 before anybody has retaliated against us. I mean, a football team that can't run a play in practice when there's no defense is a pretty feudal football team. And we have noticed that I've said that these are going to hurt our economy before. I've considered the fact that other countries are not going to take this lying down and are going to respond in a whole set of ways. So the answer to the question, Neil, is this is much
• 15:00 - 15:30 worse than a bad idea just because of the standard arguments for free trade because these policies seem almost welldesigned to invite retaliation and almost welldesigned to um hurt American exporters. And that's a big deal. Well, here's a number that when I first heard it, even though I've been studying this stuff for a long time, surprised me. 45%
• 15:30 - 16:00 of American imports are inputs to American exports. And so, it's really a big deal this stuff about uh competitiveness. So I don't get I don't get where this is coming from. There's no constituency in the business
• 16:00 - 16:30 community for doing this in this way. There's an additional problem in the way it's being done which is um that you're inducing enormous amounts of uncertainty and when there's uncertainty people delay hoping that the uncertainty will be resolved. So you
• 16:30 - 17:00 know tariffs up for three days, tariffs down for six days. I mean we in addition to what the effect of it is, everybody thinks God why should I buy a washing machine till this is all clearer? Why should I buy a car till this is all clearer? Why should I put start make commit to building a certain kind of factory until this is all kind of clearer? So, you know, there have been I was just looking at some data. There have been 20
• 17:00 - 17:30 presidential terms since 1948. This is the second worst in terms of the performance of the stock market in the two months to the end of March since inauguration day. That can't be very surprising. If you asked all the consensus forecasters at the beginning of January what the odds were on a recession this year, it'd be they would have said 10 to
• 17:30 - 18:00 15%. You ask people today, they'd kind of say 40 to 50%. That's like doing a lot of damage for your central economic policy. And you know, I've been doing this stuff for 40 years. I've never heard a president say, "Well, we might have a recession. It'll be okay." I've heard presidents say, "We won't have a recession." When they're probably wrong, and they're trying to add confidence to the situation, but saying like, "We might
• 18:00 - 18:30 have a recession. It'll be okay." I've never heard uh that particular uh play before. So, I find all this quite bizarre and I don't really understand what the constituency for it is. There are many more automobile workers being screwed by the steel tariffs than there are steel workers being helped by the steel
• 18:30 - 19:00 tariffs. So, let me ask you a slightly different question. It's it's clear if one goes all the way back to 2001 that after it was admitted to the World Trade Organization, China cheated in multiple ways. China continues uh to subsidize its industries in all kinds of ways. It engages in unfair competition. It does things that look to me at least like dumping. And it's done this uh for a
• 19:00 - 19:30 quarter of a century nearly. What do you do to stop that to check that kind of behavior of gaming a free trade system if it's not tariffs? Or is there nothing you can do to just have to live with it? Can I ask a question? Could every student here who's paying $10,000 or more in tuition raise their hand? Yeah, we we don't have tuition. I'm aware of that.
• 19:30 - 20:00 I'm aware of that. Yes, that was the point that I was making. So, you have no tuition. Why do you have no tuition? You have no tuition? Because somehow you have succeeded in mobilizing funds that have enabled you to admit students without paying. So students get the benefit of an
• 20:00 - 20:30 education without paying. Do you think that if the University of Texas or Harvard or Rice called this an unfair practice because it put them at a competitive disadvantage that that would be a reasonable thing? Or do you think that it's a good thing that you're able to provide free college educations and it would be even better
• 20:30 - 21:00 if more people could provide free college educations. That's I kind of have the latter view. So if China wants to sell us things at really low prices and the transaction is we get solar collectors that help make there be less global climate change or we get batteries that we can put in electric
• 21:00 - 21:30 cars. and we send them pieces of paper that we print. Think that's a good deal for us or a bad deal for us? Kind of think it's a good deal for us. So the idea, the way you frame the question, which is that this is cheating and is there a way to deal with the problem of cheating? I think is largely wrong. It's just like,
• 21:30 - 22:00 you know, was it unfair to dentists. When fluoride water got invented, it was terrible for the dental business. Terrible. Far fewer cavities, far less for dentists to do. Was it terrible when electric light got invented? Terrible for the candle makers. So, there's this thing that lets people buy things for lower cost. Should
• 22:00 - 22:30 you say that's terrible? I I think the whole way of framing the question is wrong. Now there I'm making it simpler than it is. There is an issue. It's called uh which economists call predatory pricing which is the idea that somebody will sell things at a really low price then they'll drive all their competitors out of business and
• 22:30 - 23:00 then they'll jack the price way up. And so if you thought that all of this was sort of setting us up for the kill in terms of total dependence on China, that would be a an argument that might lead you to want to have a policy. It's pretty hard to make that case with respect to the vast number of things we're importing. China is only one source of them. if the price did get
• 23:00 - 23:30 jacked up, our producers could re-enter uh the market. In the entire history of economics, there have been almost no examples documented of where predatory pricing actually happened. There's an argument you can make that is about dependence perhaps with respect to really sensitive technologies. We don't want to depend on
• 23:30 - 24:00 China because then they might cut us off and their government might take control and that might be bad for our national security. And there are a lot of things to do about that. We should stockpile more things than we do. There probably some areas like semiconductors where we should be investing in developing domestic capacity, but that's not an argument that because they're making something available cheap, it's cheating and you should have a policy. So I I'd
• 24:00 - 24:30 reject the entire way in which you framed uh the question. actually like the idea that the University of Austin is perhaps engaged in predatory pricing aiming at driving Harvard out of business and we should definitely adopt that as as part of our business plan. Um, let me switch then from trade policy to fiscal policy because one thing seems pretty clear even to a simple economic historian. The United States cannot run
• 24:30 - 25:00 a fiscal deficit north of 6% of GDP indefinitely. And that leads at some point uh to to real trouble. The way I've tried to formulated is that if you're spending more on interest payments than on defense as a great power, then you almost certainly have a problem coming. The Trump administration says it's doing something about this. I mean you could argue indeed some people in
• 25:00 - 25:30 the administration do argue that the tariffs will be a source of revenue and that there there will therefore be some fiscal benefit. There's a department of government efficiency which is alose also supposed to be addressing uh waste in the federal government if you were back in the position of treasury secretary which I grant you is unlikely under Donald Trump. But if you were back in that position and the president said to you, "We urgently need to address the
• 25:30 - 26:00 fiscal problem," what would your recommendations be? How would you go about stabilizing American public finance? First, I equip the president with some facts. I tell him that even if we fired every federal employee, it would reduce the deficit perhaps from six to about 5.4. before that the vast majority of what the government does is write checks, not
• 26:00 - 26:30 employ people. So the notion that you can get a bunch of efficiency experts and run around like you were a corporation taking costs out is just not there there is some waste to find and it's a good idea to try to find it but it's not a largecale policy for uh reducing uh the deficit and I would tell the president that he is
• 26:30 - 27:00 president at a time where there is a big challenge for the country. And the big challenge for the country is that it used to be that we had four or five working age people for every person over 65. And now we have two and a half people for every person over
• 27:00 - 27:30 65. And so if you want to provide the same benefits that we did before, you need to have relative to the payroll that working people are earning, you've got to have a much higher tax rate than you did before. And that that's the basic logic of what happens when half your federal budget is
• 27:30 - 28:00 spending on the aged and another quarter of another sixth of your federal budget is spending on interest. And so you have a choice, Mr. President. You can either tell people that the social contract we've had in terms of how much the age that are getting relative to the working people is going to get cut way back or you can have higher taxes than
• 28:00 - 28:30 we used to. And you have to decide to have one of those two things. But if you say we can balance the budget without having one of those two things, you're not speaking the truth. My personal view would be when the maximum social security benefit in the country that a person can get if they've worked for their whole life and earned about $125,000. Their maximum possible social
• 28:30 - 29:00 security benefit that they can get is $45,000. I don't tend to find it all that attractive for people like me and you who've been fortunate to talk about how we need to find the courage to bite the bullet to cut the benefits of a bunch of people who are at most going to get $45,000. My values somebody else might have uh different uh values. So I think a s significant part of the adjustment
• 29:00 - 29:30 has to take place on the tax side. Here's a fact. The projections are that over the next 10 years, there will be 8 trillion, that's trillion with a tr dollar in taxes that are owed but not paid. In 2018, which is one of the most recent years for which we have uh the data, there were a 100 people who paid who had incomes over $10
• 29:30 - 30:00 million, who didn't file any tax return at all and the statute of limitations for three years ran without anybody at the IRS noticing and trying to audit them. And that's related to the fact that the IRS budget has been cut relative to the scale of taxes by about half since 2010. The Biden
• 30:00 - 30:30 administration was trying to fix all of that. The Trump administration has taken away what the Biden administration did and then done a bunch of other cutting besides. And that's why there are people at the IRS, and we don't yet know whether they're right, who think that we're going to have a who think that tax collections are running way behind schedule because people are deciding that nobody's going to do anything to them if they don't pay taxes. The first thing we should do is we should enforce
• 30:30 - 31:00 the tax law and we could raise hundreds of billions of dollars a year just by enforcing the law we have. Do you think you need additional taxes? I mean, is it's it's interesting that the Trump administration has gone after a value added tax, arguing to me somewhat implausibly that it's some kind of non-tariff barrier, but isn't the real argument that the US needs a value added tax? And it's odd that it doesn't yet have one. Would you advocate an additional tax like that? Maybe. I think look I've said something 35 years ago
• 31:00 - 31:30 and it was true then and it's I think still true today which is that liberals oppose a value added tax which is basically a kind of national sales tax because they think it's regressive and conservatives oppose it because they think it's invisible and therefore a money machine that will enable a larger government and we'll get it only when
• 31:30 - 32:00 liberals decide it's a money machine for government and conservatives decide it's regressive. And I made that quip up in the mid80s and it still works today and I don't think it's going to happen uh anytime hugely anytime hugely soon. But I think the serious issue for the country that we haven't really reckoned with is that even if everybody does everything
• 32:00 - 32:30 right because more of the population is aged because what government does is provide services and the price of services goes up relative to the price of physical uh uh goods because we've got a bunch more debt than we used to. We just to even if we don't do anything new to avoid a big deficit, we have to
• 32:30 - 33:00 find a way to raise more revenue. I'm going to ask one more econ question, then a little higher ed, and then we're going to open it up uh to the audience. Uh you are on the board of Open AI. tell us what AI is going to do for the economy and does it help solve these intractable fiscal problems that we've just been discussing? It's hard to make
• 33:00 - 33:30 predictions especially about the future. Um, and proposition one. Proposition two, in general, almost always things take longer to happen than you think they will. And then they happen faster than you thought they could. And so will AI change the economy nine months from now? I doubt it. Will it have hugely profound
• 33:30 - 34:00 effects 9 years from now? I think the answer is yes. I hesitate to do this in the presence of one of the world's most distinguished economic historians, but here's an economic history of humanity in 90 seconds. From the beginning of time until roughly the time of Pericles, there was no growth. Sometimes
• 34:00 - 34:30 there was a lot of food and people ate better. Sometimes there was less food and people ate worse. But basically there was no progress from the time of Pericles till kind of after the Renaissance maybe 1500 there was growth at about two or three basis points a year. That means it was two or three% a century.
• 34:30 - 35:00 Then nobody can measure these things exactly but around 1500 there was a seismic change. The growth rate went from two basis points a year 2% a century to 20 basis points a year 20% a century. And so it was very clear that in England in 1800 things were better than they had
• 35:00 - 35:30 been in 1500. But the growth wasn't fast enough that anybody could see between the beginning of their life and their end of their life that standards of living had systematically improved. And then there was this extraordinary epic event, the industrial revolution. And for the first time in human history, you could expect that living standards would be better at the end of
• 35:30 - 36:00 your life than they were at the beginning of your life. And growth rose, depends on exactly the period and exactly the place to one and a half or 2% a year. So we've had several discontinuities. Zero to growth, tiny growth to 10 times as much, 10 times as much to 10 times as much as all of that. I think it's
• 36:00 - 36:30 possible that artificial intelligence will lead to another discontinuity in the growth process. that will lead to very substantial acceleration in the rate of growth. Part of that is because of what everybody focuses on which is that gosh an AI can do this and an AI can do that and it can do this job and it can do that job and it can do the other job. So isn't that
• 36:30 - 37:00 going to make things much more productive? That's aspect one. Aspect two is it might mean we have 50 years of scientific progress in seven and ultimately it's scientific progress that drives growth and aspect three is it permits a degree of coordination that and replication and scaling that isn't possible with
• 37:00 - 37:30 people and so potentially This is going to change everything about how the economy uh operates and is going to be an industrial revolution scale um event. Am I sure that that's going to happen? No. But the changes are really quite extraordinary.
• 37:30 - 38:00 And I would say the thing that has surprised me most is that in the year and a half that I've been involved with AI, that rule I said about things take longer to happen than you think they will hasn't happened. Most of the things that a year ago I was told would take three years to happen have already happened in terms of progress with uh these uh models. So
• 38:00 - 38:30 this is going to be an immense thing when your intellectual great grandchild writes the history of this period in uh 22 212. My guess is that stuff about Donald Trump will be the second or third story
• 38:30 - 39:00 and stuff about Xi will be the second or third story and the first story will be that we had this transformative change in the ways in which um the things way ways in which people lived and the ways in which the things they enjoyed were produced. But what we're going to do now is open this uh up to questions. There's a microphone there and if you want to ask
• 39:00 - 39:30 a question, form an orderly line or I guess it's UATX. You could start auctioning places in the line, but it's probably more efficient just to have a line. Uh and maybe just introduce yourself before you ask the question. Um hi, I'm Alistister. And any Fed hot takes, Larry? Or is fiscal policy more important than monetary policy? Fed hot takes. We should point out that
• 39:30 - 40:00 you could have been Fed chair in a parallel universe. You became Fed chair. So, this is a question you're quite well qualified to address. Look, I think the Fed is as uncertain as every place else is. uh you would have said a little while ago that the issues were mostly about uh reducing interest rates. Now that we're getting all this inflation pressure from the
• 40:00 - 40:30 tariffs, I don't think it's 100% clear which way interest rates uh will uh which way interest rates will move. My view is that the neutral interest rate is much higher than the market consensus thinks. And so I don't think interest rates will come down substantially unless we have a recession, but I think there's a reasonably good chance that we'll have a recession reasonably good is still what
• 40:30 - 41:00 50% in the neighborhood of 50%. And then is one question per student otherwise we'll never get anywhere through this line. Thank you, Mr. Summers. You're old. I'm young. You mentioned before, you said before that you didn't think that you were in a position I like to think of myself as middle-aged with a extended middle. You're middle-aged. I'm young. You said before that you didn't think you should be telling other middle-aged people that their social
• 41:00 - 41:30 security should be cut. But the effect of that is to place the burden on people like us tonight who are young and who are going to have to spend the next 40 or 50 years paying for people who are in the scheme of things compared to us already quite well off. Boomers are on average one of the wealthiest generations in US history and at a time when there are fewer of us as you mentioned before and so we're going to be per capita paying far more. How do you think that's fair? I feel your pain. Not really. Um, I actually have a quite different I
• 41:30 - 42:00 actually have a quite uh different view about this. It could change. But if I think about the morality of myself versus my great my grandparents or my great-grandparents, gosh, I wish there was a way to go back in time and give them more and have less. I live so much better than they had the opportunity to that the last thing that I would worry
• 42:00 - 42:30 about is that somehow I was overburdened by taking care of them. I wish I had done more. That was the had been a way that more could be transferred back to them. If I'm even close to right, if 6% of what I said about AI is right, your generation is going to have opportunities to work with far more ease to enjoy opportunities and forms of
• 42:30 - 43:00 entertainment and forms of spending that go beyond anything that my generation uh enjoyed. that the notion that the tax rate would be a little bit higher for the most fortunate members of your generation than it was of my generation. I mean, take like a canonical member of uh the generation that I would imagine
• 43:00 - 43:30 is between us, Mark Zuckerberg. He's got $200 billion. If his tax rate went up a little bit and $200 billion pays, you know, who knows exactly what it pays, but let's say it pays 6%. That's $12 billion a year. I promise you he's not paying $1 billion a year in taxes. Um, he paid more taxes. Be okay with me.
• 43:30 - 44:00 So yeah, I think we should think about generational fairness, but the overwhelming thing to keep in mind about generational fairness is progress. And that's the overwhelming thing to keep in mind when you think about generational fairness. So as you're writing your checks to the IRS, just think of all the benefits AI is going to bring your generation. That's that's our message. Thanks very much. We'll take the next
• 44:00 - 44:30 question, please. Hello, my name is Rhett. Thank you so much. This is so fascinating. So, China has raised the quality of life immensely for a billion people in just 50 years, and they don't really seem to pose a threat to like us that much at all, and don't seem to in the future. Why should we be so set on like beating China in this, I don't know, trade war or geopolitical or or indeed AI competition or AI. Exactly. Yeah.
• 44:30 - 45:00 Well, so, so as far as the trade war is concerned, I won't repeat the whole explanation I gave about how if they wanted to give us stuff, we should take it and not tariff them and all that. So, as far as that's concerned, I was kind of taking the position uh that uh you that you're taking. I think you have to make a judgment um about the possible their possible
• 45:00 - 45:30 paths forward. And if you were confident that they were going to pursue their greatness in their way and we were going to pursue our greatness in our way and we were going to benefit from exchange, there would be no reason to hold them down or have any kind of struggle. But if you thought that their concept of defining their greatness was going to involve substantial
• 45:30 - 46:00 encroachments that could ultimately bear on our security in the way that people came to think of the Soviet Union after the Second World War, or that you thought that their defining their greatness was going to involve of attacks that would um fall on countries that we had committed ourselves to defend and that if we gave
• 46:00 - 46:30 up that commitment, they would then defend themselves by getting their own nuclear weapons in ways that would make the world much more dangerous. That's something that you have to think very hard about how you're going to protect against. And so the strategic dilemma with respect to China and it's a very hard thing to manage is how do you hedge
• 46:30 - 47:00 against the possibility that they are going to aggressively seek hegemony in ways that deeply threaten us without your effort to hedge seeming a provocation to to them to build up more strength because they fear you. And that's the task of statesmanship. And Neil has chronicled
• 47:00 - 47:30 occasions when it has been done well and occasions when it has been done uh poorly uh through uh the years. But I think it is fair to say that if one looks over the last decade that it is harder to make the case that China is entirely benign than it would have been a decade ago. If you
• 47:30 - 48:00 simply look at the speeches of Chinese leaders, both what they say publicly and what it is reported that they have said privately. If you look at the extent of Chinese military spending and buildup of what of weapons that are really only with offensive use, if you look at their interactions with uh neighboring uh
• 48:00 - 48:30 countries, if you look at efforts in various ways to sabotage and subvert uh things that are going on in our economy, it is harder to see them as entirely benign and to think that it's responsible to not hedge than was the case a decade ago. That doesn't mean
• 48:30 - 49:00 that the most extreme cold warriors with respect to China are right, but it's why I think it's a little bit more complex than the way your initial formulation uh would suggest. Is that an example of a question that you need history to answer that economics can't answer? feels like we should at least contemplate the possibility that there are a class of questions that really do require history to be answerable. I
• 49:00 - 49:30 think we should do more than contemplate it. I don't know what we can learn from in human affairs other than history. So, I very much share uh you're you're sort of trying to provoke me into doing an advertisement for you and you're s you've succeeded. Um me I think provoke I think Neil Neil has been a progenitor of a whole movement towards what he
• 49:30 - 50:00 calls applied history which is basically the idea that we should as I as it has reach as it is process been processed by me is basically the idea we should study history not just because we're kind of curious about what was going on during the Victorian period but because human nature is kind of a constant and so studying how it plays out in all kinds of different contexts
• 50:00 - 50:30 can help us think about the problems that we have today and I think absolutely in considering the implications of China's rise there are all kinds of historical episodes that are that are relevant uh people often talk about uh the relationship between Germany and the UK before the first world war. I think there are things to be learned there. Uh I have been
• 50:30 - 51:00 influenced in your direction as I thought about these things by what I've learned about uh what provoked the Pearl Harbor attack. And that is I think cautionary with respect to some concepts that American policy makers uh have. So absolutely uh history uh is really the only tool uh
• 51:00 - 51:30 that we have for helping us think uh systematically about problems as they arise. Thanks, Larry. Hi, my name is Ben. My question is, do you think it was wise to move on from the gold standard to a central bank or was that a blunder? Yeah, it surely it surely was wise. There are lots of arguments you can make
• 51:30 - 52:00 about exactly how you should determine how much money you want to have to be in circulation, but having it depend on the accident of how much gold miners find and decide to get out of the ground seems a an approach that's extremely unlikely to generate monetary arrangements that are conducive to a well functioning economy. So what exact regime one should have is
• 52:00 - 52:30 debatable. But the idea that you should be hostage to gold mining seems like a very poor way to organize a uh global economy. And so I would I think there's very little support among people who think about these things for the idea that a that there should be some kind of return to the gold standard. Thanks
• 52:30 - 53:00 Larry. Uh next up please. Given that um Russia in its war against Ukraine has done I think better than anyone would have expected um in face of the sanctions Western countries have imposed on it. What do you think that reveals about Western economic statecraft? Do you think that the economic warfare that the Trump administration is considering just is
• 53:00 - 53:30 ineffective or has fundamental limitations in a multi-polar world? I I think you've raised a a very very important question that I wish I had studied more and had more insight into. What it brings to mind when I think about there basically are two broad ways of understanding this fact and I don't know which of them is right and in what proportion.
• 53:30 - 54:00 John Kenneth Galbre, the great economic palemicist, the first significant thing he did in his career was he was in charge of the review of Allied strategic bombing of Germany after during World War II and the Allies dropped a ton of bombs on Germany and they were doing what they thought was strategic bombing. There were all kinds of good ideas like if we there are only two factories that
• 54:00 - 54:30 make ball bearings and if we knock out the two factories then they won't have any ball bearings and then all their stuff won't work. And so it was assumed that strategic bombing could really do enormous damage to an economy. And what appears to have been the case is that our strategic bombing did remarkably little damage to the functioning of the German economy. And I think that part of the right interpretation of that fact is that economists are more like uh frogs
• 54:30 - 55:00 than they are like people. If you cut off a frog's tail, it regrows the tail. It's able to reconnect all the systems. And that economies probably have more capacity to work around blockages than we imagine. That's one aspect of it. The other aspect of it is whether we were really sanctioning them or whether there was all kinds of corruption and leakage that caused the sanctions not really to
• 55:00 - 55:30 happen. And we had a big problem which was we had two big problems. One is that their big revenue source was the thing that we most wanted, that being oil, because gasoline prices are hugely salient politically in the United States and around the world. So, how good a job were we really going to do of cutting off their exports? Answer, not very. and
• 55:30 - 56:00 that we had a whole continent with a relatively stagnant economy that really liked selling things to Russia. And so how good a job were we going to do of stopping selling things to Russia? So if you don't stop them from selling and you don't stop them from buying, then you don't sanction them that effectively. And how much of their economic success, you know, President Biden famously said we were going to reduce the ruble to rubble. We didn't. And why
• 56:00 - 56:30 the sanctions were so ineffective, I think, is a hugely important question for study. And it reinforces my skepticism about economic sanctions as a huge tool of diplomacy. But every time I get too skeptical about economic sanctions as a diplomacy, as a tool of diplomacy, I remind myself that usually there are three things you can do when a country has done terrible
• 56:30 - 57:00 things. You got basically three options. Do nothing, do economic sanctions, or have like a shooting war. And given that those are the three choices that are exist, it's not that surprising that pretty often people go back to economic sanctions even if they're not the world's greatest policy because they're better than the alternatives. That
• 57:00 - 57:30 reminds me of the the Kissinger point and this shows that you've been in government that recommendations to the president should always be three. Uh in in the case of a foreign policy problem, the choices are one, surrender, two, what the bureaucracy recommends, three World War II, and this is the way that you should always present any decision to the president. That's kind of a good illustration of the point. By the way, your disclaimer
• 57:30 - 58:00 that you hadn't looked into this too deeply uh was a little insincere given that you've been one of the co-authors of a very important piece of work on how we should deal with the Russian uh reserve assets that were frozen when the war broke out. And I think I should pay tribute to you because you Phil Zelico or Bob Zelich have been consistently arguing that there should be much tougher action on those frozen reserves than has so far been been envisioned. Do
• 58:00 - 58:30 you think that might change under the new dispensation? The Europeans were the people who resisted confiscation or some other tougher measures. I I have a sense that their attitude has changed quite significantly since January the 20th. Do you think there's going to be more action on on that front? I am uh guardedly optimistic that there may be that there may be more actions because
• 58:30 - 59:00 Europe's going to have to come up with a lot more money. And while they didn't much like seizing the Russian assets, as between seizing the Russian ass assets and taxing their own citizens, seizing the Russian assets is likely to look a bit better. Thanks for that. We'll have the next question, please. That line just keeps getting longer. We'll we'll try and try and go at a fair clip. I'm conscious that we're approaching 7:00, but we started rather later than advertised. So I think we've probably
• 59:00 - 59:30 got have we got 10 more minutes in us to try and get uh through the the line. Uh great questions. Next up, hi, I'm Christian. Thank you very much for your time, for the engaging talk, and for your support of this uh fledgling institution. My uh question is in regards to crowding out from high and persistent debt levels. Um what do you foresee as uh going forward um is like a linear or like an
• 59:30 - 60:00 exponential uh increase in the debt level going to have a commensurate crowding out effect? Do you think it's not very significant an effect? It's going to be harder for you guys to buy houses because of higher interest rates because of all the debt that we have. It's going to be harder for businesses to make new investments because of the debt that uh we have. I have kind of thought that long-term interest rates were likely to rise
• 60:00 - 60:30 substantially. I've been wrong for the last 3 months. I think that is because it's looking more likely that we're going to have a recession and that's a bigger deal than what's happening with uh the deficit. But I have been wrong so I gives me a little bit more humility in making forecasts. But my instincts are towards substantial and costly crowding out and there being a real risk of a
• 60:30 - 61:00 vicious cycle where higher interest rates mean bigger deficits and bigger deficits mean higher interest rates and the thing can become a bit explosive and highly problematic. Um, it's been said that in democracy, fear does the work of reason, and my guess is sooner or later we'll do something about the deficit, but it will take spiking interest rates before we do. Thank you. We'll take uh
• 61:00 - 61:30 as many more questions as we can. We're going to go to lightning round mode to keep the questions punchy and and Larry, you'll keep your qu your answers punchy, too, please. Howdy. Howdy. Um given the experimental university that you speak of, what are the bounds with which that university ought to experiment? UATX just announced their new admissions policy which is test or scores only and some um achievements. That's certainly an experiment and we'll see how that turns out. But there are many aspects of UVATX that still look like a traditional
• 61:30 - 62:00 university. There's still a teacher in front of the class. No electronics, no AI. are those things that ought to be experimented with as well given the advancement in technology. Look, UATX is not the only experiment in the world and so not all experiments that are good ideas have to be done at UATX and I don't know what's exactly right uh for UATX but my instincts would be that
• 62:00 - 62:30 experimental institutions should be paying a lot of attention to AI and the use of AI in pedagogy and models that move away from uh teacher in front of room, students in back of room. Um I think there should be a lot of experimentation uh with that whether this is the right venue and what form those experiments should take. Uh I don't I don't know. I
• 62:30 - 63:00 mean the great thing about experiments is that if they succeed then they can be multiplied a hundfold. If they fail, then we've learned that something we might have tried doesn't work and we don't have to try it again. And so in general, the world engages in much too little experimentation because the person who does the experiment doesn't get all the benefit from all the people who copy it and doesn't get all the benefits from the people who don't have to try it again after it fails. So
• 63:00 - 63:30 there's just too little experimentation in the world in general. And that's why this the kind of experimentation that you represent is so positive. Thank you. Next up, Constantine. Thank you. My name is Constantine and my question goes to both of you given that we live in a time where um people that are championing interdependence are are viciously attacked and quite harshly accused of things. Um, you just hinted at this, Professor Summers, but in 1910,
• 63:30 - 64:00 uh, Norman Angel, I think it was, wrote The Great Illusion, in which he describes how impossible it is for Great Britain and Germany to go to war given their economic interdependence. And I want to ask you in regards to the current tariffs and other protectionist measures that are being implemented, what what implications this uh could have for you know the potential um conflict in in Taiwan especially given that that seems like that's the only thing holding up um um um catastrophe or a hellscape.
• 64:00 - 64:30 Well, you were talking, Larry, about the the analogy with Pearl Harbor, and I was quite tempted to ask you to talk more about that. This is a great opportunity to do it. Hypothesis, the Trump administration is applying ever greater pressure on the Chinese economy. Tariffs already are at above 30% on Chinese exports. They're going to go higher. The Chinese make it sound like they can handle that, but their economy is heavily reliant on
• 64:30 - 65:00 exports. And so I'm not sure I believe them. And there is an alternative retaliation option open to them, not to retaliate through the trade channel, but to retaliate through the national security channel. Taiwan was the object of yet more exercises in the last 24 hours with the largest force yet of vessels around the island. Do you worry that we are stumbling through an
• 65:00 - 65:30 aggressive trade policy towards a war with China? My instincts would be towards significantly less economic suppression of China except in with respect to national security technologies and significantly more strengthening of our military capacities with respect to the Pacific region than
• 65:30 - 66:00 appears to be the policy that we are pursuing. The idea that has been brooded several times, though not implemented, by the Trump administration, that in the face of what's happening right now, we should substantially cut our defense budget seems to me to be a Neville Chamberlain level error. That's a very big error. Um, I thanks, Larry. I think I think we've got
• 66:00 - 66:30 time for one more question and then we should probably call it a night with sorry to disappoint. We can do two more. We can do two. We'll do two more. All right. Two more, please. Thank you so much for being here, Mr. Summers. I remember reading your Wikipedia page, Benzo years ago. So, I'm on a mission to impact 1 billion people positively in the next 10 years. And right now, looking at technology as the asymmetric lever to pull. seems like quantum computing is going to be the next great revolution that can unlock change. Um,
• 66:30 - 67:00 and I wanted to ask you about what black swans, obviously they can't be predicted, but what black swans do you see and what asymmetric uh areas do you recommend that we go into right now? Quantum sensing seems to be something that can significantly improve US defense against China. And I'd love to hear your advice on all of us who are looking to impact the world. What What should we do? I don't have nuanced intelligent opinions on different
• 67:00 - 67:30 aspects of quantum computing. I suspect that with all the excitement about AI at this instant, the various revolutions in the life sciences and their capacity for human augmentation and all the ethical implications that follow from that are probably receiving less attention. uh than uh they should. And so I think
• 67:30 - 68:00 that that would be a that would be an area that uh I would be paying uh that I would advise uh paying close uh attention to. I'd also just encourage you to think about um social um social science and social innovation. You know, I learned when I was president of
• 68:00 - 68:30 Harvard that the Harvard School of Public Health and some kind of social science person of some kind had germinated the whole designated driver idea. And my guess is that the designated driver idea saved as many lives as a huge amount of biological uh research. Like Neil, I'm pretty against the excessively woke. And so
• 68:30 - 69:00 there's all kinds of things that happened at the Harvard Education School that I was skeptical of. But the Harvard Education School did incubate Sesame Street. And I think you could make a case that the good that Sesame Street did was enough to justify 50 years of the Harvard Education School, even if you even if you didn't like some of the other things that happened in uh the Harvard uh education
• 69:00 - 69:30 school. So, I'd encourage you as you think about innovation, not to confine it to hard science, but to think about social innovation uh on the Sesame Street uh designated driver model as a type of area to work in. Not many people can get you from Quantum to Sesame Street in one answer. We're going to give Larry one more
• 69:30 - 70:00 question. Thank you very much. One more question before we call it a day or a night, please. Okay. You're very reluctant to make predictions which is quite prudent. I ask what is the purpose of social sciences if not to make predictions? It is to understand how social processes operate both because that's intellectually
• 70:00 - 70:30 satisfying and because with a better understanding of how social processes uh operate, one has a better prospect of contributing to their design. and contributing to the choices that people operating in social settings make so that there will be better uh so that there will be better outcomes and so I can I can't predict with any great
• 70:30 - 71:00 accuracy where and when the next automobile accidents will come but by studying automobile accidents one can contribute to the development of better brakes and better tires and therefore make cars safer. And so judging the ability to make something better by the ability to uh make uh predictions is I
• 71:00 - 71:30 think uh not uh the right uh not the right criteria and indeed in some cases science predicts unpredictability. If you've taken I don't know how many people here have taken a finance course, but one of the two or three most important ideas you'd be exposed to if you took a finance course is what could be called the efficient markets or the
• 71:30 - 72:00 martingale theory, which in essence is the following idea. Think about IBM stock. If there was a good reason to think that it would go up, people would buy it and then it would have already gone up. There was a good reason to think it would go down, people would sell it. And so almost the fundamental logic of the situation is that the price goes to a
• 72:00 - 72:30 level where there's equipoise between opinion dollar weighted that it's going to go up and that it's going to go down. And it follows that the movements will be completely unpredictable. And so you can explain why things become unpredictable by applying various kinds
• 72:30 - 73:00 of social scientific reasoning. But that doesn't mean you can't think about how a stock market could be uh better or better organized and less prone to have uh crashes, for example. Well, you've just heard uh tonight uh a kind of master class in fielding questions and that in itself I hope was worth your time.