Transcript: Martin Wolf interviews Larry Summers — Is Trump a threat to the US economy? (2025)

This is an audio transcript of The Economics Show podcast episode: ‘Martin Wolf interviews Larry Summers: Is Trump a threat to the US economy?’

Martin Wolf
Hello and welcome to The Economic Show. I’m Martin Wolf, the FT’s chief economics commentator in London. While our regular host, Soumaya Keynes, is on maternity leave you’ll be hearing a lot more from me over the coming weeks. Today, I have the pleasure of talking to someone who has uniquely been a hugely distinguished academic, a top official, and a highly influential voice on global economic affairs. He’s also somebody I’ve known since the mid-1990s when he joined the US Treasury. I’m talking, of course, about the former United States Treasury secretary and president of Harvard University, Larry Summers. His signal characteristics are his originality and moral and intellectual courage. This combination is why he has sometimes upset people. It is also why he’s so influential. Larry, welcome to the show.

Larry Summers
Good to be with you, Martin.

Martin Wolf
So this interview is inevitably going to be dominated by Donald Trump’s return to power and why he won. And in addition, what this earthquake, political and potentially economic means for the US and global economies. So how did you personally feel during the small hours of 6th of November as the results started to roll in and it became clear not only who the winner was, but how decisive his victory seemed to be?

Larry Summers
I was very disappointed. I was not astounded. I thought the combination of the manifest unpopularity of inflation, people’s concerns about how we were doing on the economy, the sense that the Democratic campaign was out of touch with what most people felt were cultural norms and the late change in who the standard bearer was going to be for the Democratic Party meant that it was going to be very difficult for the Democrats. And when I heard on one of the shows at seven in the evening that in an exit poll, the fraction of independent voters who had gone Democratic had moved by 25 points between 2020 and 2024. I reckoned the Democrats prospects were pretty bleak. And unfortunately, that’s how it turned out to be. And I have very, very substantial reservations about what the consequences of a Trump presidency will be.

Martin Wolf
So let’s start then, with why the people of America were so unhappy with the Biden presidency. Because some of us over here looked at the performance of the US economy. It had very strong growth, apparently. Unemployment fell to very low levels. The labour market was very robust. It had far and away the strongest recovery of the developed countries from the pandemic. So it really looked rather enviable sitting in London, for example, and indeed the whole continent. So was the disappointment really all about inflation? Was there nothing else there in the economy that explains this?

Larry Summers
I think people experience the cost of living as having risen very sharply. They experience that as a taking from them, and they were angry about it. Beyond the inflation that was manifest in the Consumer Price Index they saw the cost of money, which economists don’t treat as part of inflation but is a crucial part of people’s lived experience as way up. People think of the price of a car as the monthly payment when you buy one. People think of the price of housing as the monthly payment on a house. If you took that perspective, costs of living were very high and inflation was continuing and that was a shock and a big disappointment to people.

I spent a fair amount of time since the election talking with pollsters and election analysts. Perhaps the thing I found most striking was a set of analyses in which large samples of people were given pairwise comparisons. Which is a more important issue for you inflation and cost of living or abortion? Inflation or cost of living and immigration? Inflation or cost of living on job creation? Every choice people regarded inflation and the cost of living as the more important thing.

We can explain as economists that the reason why wages went up was also because of inflation. And so it’s wrong to say that 6 per cent inflation is robbing you of a certain amount of purchasing power. But that’s not how people experience things. And you’d think progressive politicians would understand that. This is the third time in my lifetime when the progressive project was derailed by looking past inflation in favour of other objectives. It’s what happened in the late 1960s and brought Richard Nixon to power. It’s what happened in the late 1970s and brought Ronald Reagan to power. And it’s now what happened and brought Donald Trump to power. It’s just a reality that people don’t believe they’re in a stable, comfortable environment unless there’s control on growth in the cost of living. That control was lost and there were substantial consequences.

Martin Wolf
Now, you, of course, warned of these dangers really from the beginning of the administration. But there are people out there, quite distinguished economists. I’ve talked to quite a few of them who would say this wasn’t really the administration’s fault at all. There were . . . we had the recovery from the pandemic, which was natural and desirable. We had supply shocks partly associated with the speed of that recovery. And in addition, we had the shocks caused by the war in Ukraine, which raised the prices of food and energy. And these are globally traded commodities. And so it was inevitable and it’s quite wrong to blame the administration for this. And now how does that look from your perspective?

Larry Summers
I find it surprising that serious people who I respect would take the position that you just laid out. And I’d make a few points. First, I’d advise those at some distance from the debate that they may want to give more weight to the views of those who forecast inflation than to the views of those who are confident that it would not take place. And we’re confident that when it started to appear, it was only transitory.

Second, here’s a very simple elementary economic way of thinking about it, Martin. Nominal GDP in the United States has risen 35 per cent over the last almost four years. The economy’s natural growth of potential is about 2 per cent a year. You can argue how large the shortfall from potential was at the end of 2020, but no one serious would say that it was more than 5 or 6 per cent.

So if you generate 35 per cent nominal GDP growth and the room for the economy to grow in real terms is perhaps 2 per cent a year for four years, 8 per cent plus, say another 6 per cent then you’re going to have an increase in the price level at far more than 2 per cent a year. And what is it that determines the level of nominal GDP total spending? That’s what’s determined by monetary and fiscal policies. And I frankly have difficulty seeing why people can’t acknowledge that reality.

Martin Wolf
Well, I am pretty sympathetic to this point of view because I’ve written a number of pieces on nominal domestic demand and how vastly above trend it was. But one of the views you did have was that in order to lower inflation, there would have to be a significant tightening of monetary policy, which unquestionably was. And then in order to lower inflation, there would have to be a really pretty significant rise in unemployment, which hasn’t in fact, happened. So while you are absolutely right, it seems to me about the causes, would it be fair to say, at least in terms of the real costs of the disinflation in the US, at least, have been considerably smaller than you feared?

Larry Summers
I think that’s a fair judgment, Martin. I would not have expected to have inflation as low as we do without having had significantly more disruption to output than we’ve had. So, yes, you’re absolutely right to call me out on that. As you’d expect, I’ve reflected on what it was that happened, and I make these three points. One, we’re not yet back at 2 per cent inflation. And so let’s not come to a completely definitive judgment on whether disinflation has successfully been achieved.

Second, we encountered a variety of bottlenecks in used cars, for example, where the price of certain items in the economy went up very, very sharply and made the inflation statistics look worse than the underlying reality for a time. And over the last interval, those prices have mean reverted. And that’s had the effect of flattering the inflation statistics relative to the underlying rate. So I think the decline in underlying inflation has been more like a point and a half then like the 6 or 7 points that some people suggest.

I think the third point is that we did an experiment the likes of which we didn’t really attempt in the 60s and 70s, and after 40 years since Paul Volcker of low inflation. Inflation expectations turned out to have been really quite entrenched. And so it proved to be easier to achieve disinflation than I might have expected. If that view is right, there is a certain fragility in the situation because we’re not all the way back to that kind of confidence about price stability public that we had in 2020. And so the next administration and the Fed going forward needs to be quite cautious that households and markets are on edge with respect to inflation psychology.

Martin Wolf
Yes, I very much take the view that inflation expectations were better anchored than I thought they would be. But the implication I take from this is that we really better not do this again, or at least not soon. We’re going to take a quick break now. But afterwards, I want to turn to the future. And above all, what the Trump presidency might mean for the US and the world.

[MONEY CLINIC PODCAST TRAILER]

Martin Wolf
We’re back from the break. Larry, I think we’ve agreed it will be a very good idea not to have another inflation episode. And we can’t be confident. When you look at the level of output in the economy, the state of the labour market, that that isn’t really quite a serious risk. And that would be particularly true if you had a really big expansion of demand and a contraction in supply potential. The US has been running extraordinarily large structural fiscal deficit of maybe 6 per cent of GDP. You might have slightly different numbers though to what I’m reading. The Trump administration is proposing to keep all the past tax cuts and there are possibility of new ones. There is a plan to impose sizeable tariffs. We don’t know how that will work, but that removes or at least reduces one potential source of supply for the economy, imports and makes them more expensive. And of course, there is a discussion of removing a pretty sizeable part of the labour force if they get to it through deportation. And leaving aside any moral or political aspects of this, this to me sums up to a pretty inflationary program. Standard economics would suggest that. Do you have a different view and how do you think it might play out?

Larry Summers
Martin, I think you got it right. If the program were implemented as described in the campaign, I am very confident that the inflationary impulse would be significantly larger than the impulse represented by the Biden program that was put in place in 2021. The combination of the deficits that you referred to, the discussions that went with it about influencing the Federal Reserve’s monetary policies, about weakening the currency, the sense that the incoming Treasury secretary is influenced by the Abenomics example, which doesn’t speak to the situation of an inflating economy at full employment like the United States. All of that is very worrisome on the demand side. And if you create a labour shortage, you create wage pressure.

It’s kind of the argument he’s making for creating the labour shortage, by the way, that we’ve got to stop all these immigrants from competing with American workers. Well, the reason why American workers like that is they think it’s going to push their wages way up and that will have inflationary consequences. And of course, tariffs operate to raise prices not just because they’re like a sales tax on the imported goods, but because the imported goods are inputs to domestic goods, which then get marked up in price because of the higher input costs. And imported goods compete with domestically produced goods. And so when imported steel becomes more expensive, probably US-produced steel is going to become more expensive as well. That’s why US steel lobbies for protection.

And of course, as you and I agreed, the Fed and the underlying credibility of low inflation expectations is less secure than it was four years ago. So we’re nearer a precipice of an inflation spiral. So if the program as described is implemented, I think the consequences are likely to be as or more inflationary than what we saw a few years ago.

I think there is an important check that wasn’t present four years ago, which is that the markets are now hair-trigger sensitive to inflation. And therefore, I suspect that if things are moving forward in the way I describe, you’ll see quite dramatic reactions in markets. And this appears to be an administration that is very sensitive to market signals. And so I think it’s possible that the bond vigilantes will be availing in helping us get to more favourable outcomes on inflation.

Martin Wolf
Given what you’ve described and the dangers. And I have to say, when I look at this, I sort of think back to Nixon’s presidency, which really, I think, laid the ground for the subsequent inflation, that, of course, other aspects, but it looks extraordinarily dangerous. But then the stock market indicates very profound confidence that these sorts of shocks are not going to happen. Do you think it’s actually in part that they’re buying stocks simply because they only hedge against this sort of world or because they are actually missing the risks? They are so used to price stability still that they’re quite confident that inflation is just not really a big danger.

Larry Summers
So, Martin, I don’t know the answer to that question. I agree with you about the Nixon period being very instructive. If people were looking for a historical precedent for Trump, the one I would advise them to look for is the August 15th, 1971 US tariff imposition, going off gold and abandonment of fixed exchange rates. And John Connally’s famous utterance that it’s our currency but your problem. Many people have been surprised when I said this, but I would not be astounded if sometime in the next four years we hear populist price rhetoric about gouging and controlling prices and limiting and freezing things . . . 

Martin Wolf
Exactly.

Larry Summers
 . . . from the Trump administration, which I think very much has the kinds of instincts that the Nixon administration had and I think is less likely to be inhibited by strong and thoughtful advisers. Such as did exist, albeit to be overruled in the Nixon administration, people like George Shultz and Herb Stein. So I think we’re in for what’s potentially a quite populist period. I think the right set of experiences for people to draw on is Latin American populists in the Peron tradition. And if you study those episodes, they rarely end happily, but they not infrequently begin happily because there’s a fair amount of stimulus and goosing of the economy that takes place and because corporations are given a sense that policy is going to be made in their interests with respect to corporate taxes, with respect to regulation. And I think that there’s a tendency of market participants to confuse those who are solicitous of them with those who are effective for them.

I also think the fact that there was some punitive regulation during the Biden administration, the concerns that a Harris administration would have substantial anti-business elements. I think there’s an element of relief rally from all of that. I think the data point that in some ways runs very much in the direction of your fears, Martin, is that gold has been very strong of late, and that’s where people would go if they were very nervous about an inflationary environment. And so when you see gold and the stock market moving together, people often think of gold as their asset. You take when you want to de-risk. And the stock market is what you buy when you want to take risk on. And when you see the two of them moving together, then the kind of idea I’m suggesting, you’re suggesting gets to seem more plausible.

Martin Wolf
If you think the Bitcoin is a sort of modern form of gold, it’s extraordinary price rises might actually support that view. When you look back in that Nixon period, it’s very, very clear in retrospect, it damaged the Fed very badly. And it took a long time for monetary policy to regain credibility. In fact, really a decade. So if you work through this, is it sort of inevitable that there will be a conflict between the administration and the Fed? Because that would clearly be potentially very destructive.

Larry Summers
I’m not sure how that will play out. I’m encouraged that the president-elect is back way off some of the things he had said about replacing the Fed chairman. The Treasury secretary is a very sophisticated market participant and I think is aware that signs of losing the Fed’s independence could have very damaging short-run market consequences. So we’ll have to see where that goes.

This may be a case of self-denying prophecy, where the horror and the strength of the reaction becomes to even suggestions that the Fed’s independence might be compromised, create an equilibrium where in fact, it doesn’t get compromised. So I am more confident of the consequences of a serious attack on the independence of the Fed than I am of the likelihood. And I slightly have a suspicion that there’ll be an element of self-correction if policy moves in that way.

Martin Wolf
You and I agree that the success of America’s economy and society is dependent on the rule of law. Ultimately the institutions that underpin the independence of the legal system. Do you think that there are risks here that we will be moving more towards crony capitalism, that if you look at the president-elect’s team and some of the discussions about the law and the use of the law, that we won’t be able to rely on this absolutely fundamental ingredient of US policy and US institutional strength in future.

Larry Summers
My friend and former colleague Lant Pritchett likes to distinguish between rules-based capitalism and deals-based capitalism. And believes that rules-based capitalism is a far better system and that that’s the one we’ve traditionally had in the United States. And that is at some risk right now. I think those are real risks. It’s difficult for me to gauge just how serious they are. But it’s very serious that we’re thinking about them at all.

On the one hand, I have to acknowledge that I was very alarmed about this when the first Trump administration came in and there were various efforts to muzzle individual companies. Looking back, I would not say the fundamental rule of commercial law was undermined during the president’s first term. Typically second terms of US presidents work much less well than first terms because typically the level of hubris is much greater and the level of competence of those surrounding the new presidents is much lower. And so a combination of hubris and incompetence that leads to attacks on the rule of law seems to me to be a very real concern.

There’s a concern about favouritism to cronies, about selective prosecution of adversaries. And I would just advise everybody thinking about this and those in the administration making policy to be aware that one of the reasons why US asset markets are so robust is that a given economic prospect, a given cash flow is much more heavily valued in the US than it is in other parts of the world, because it’s more secure, because people rely on a stable environment, property rights, contract enforcement. And those are immensely important things to preserve.

I think the likelihood is that the fundamentals of the American system will hold. But I do think there is a real risk of a quite fundamental attack on institutions and the rule of law, which is central to our prosperity. I would say that in my lifetime I’ve encountered a certain number of people contemplating the possibility of having to leave the United States and live elsewhere because they feared the government of the United States. Of all the conversations that I have had on that topic in my 50 years of adult life, 80 per cent of them at least, have happened in the last 4 or 5 months. And I think the right priority for the new president and his economic team, if their goal is to promote prosperity, is to speak and more importantly, to act in ways that are celebrating and respecting the importance of the rule of law.

Martin Wolf
Thank you very much, Larry. Wonderful to speak to you as always.

Larry Summers
Good to talk to you, Martin.

Martin Wolf
That’s all for this week. Next week, we will actually be speaking to Lant Pritchett, whom Larry just mentioned. You’ve been listening to The Economics Show with me, Martin Wolf. This episode was produced by Laurence Knight with original music from Breen Turner. Our executive producer is Manuela Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Martin Wolf. Thanks for listening.

Transcript: Martin Wolf interviews Larry Summers — Is Trump a threat to the US economy? (2025)

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