Larry Summers

Welcome to the Puck Venture Capital and Beyond, the show that examines the changing landscape of our world. We'll have candid conversations with VCs, entrepreneurs, and thought leaders grappling with our current challenges and providing solutions to key problems we face as a nation. I'm Jim Beer, president of CMG Advisors. This podcast brings change makers to the table to discover the inner workings behind their decision making strategies and ultimately how they got to where they are today. I think we're making a mistake in The United States by running budget deficits that are as large as the ones that we are running.

I think it's a geopolitical issue. The question arises, how long can the world's greatest debtor remain the world's greatest power? On today's episode of The Puck, I have the pleasure of talking with economist Larry Summers. Among his many distinctions, Summers served as the 70 during the Clinton Administration and Director of the National Economic Council for President Barack Obama. Summers is the Charles W.

Elliott University Professor and president emeritus at Harvard University and serves on the board of OpenAI. Our conversation covers the recent university protests, the economic challenges following the two thousand and eight financial crisis and COVID pandemic, the real cost of budget deficits, and so, so much more. With no further ado, Larry Summers, welcome to the puck. Glad to be with you. So, Larry, over the last thirty years, you have really been at the forefront of two of the most hot buttoned sectors of American life, the economy and higher education.

Before we get started, can you briefly walk our listeners through your background? I, started at MIT in 1971 thinking that I might well be a mathematician or a physicist. Wow. I learned what real mathematicians and physicists were like, which is that they had a capacity for abstraction that I lacked, and I learned that my passion was solving real problems and policy issues, and that economics brought those two things together. I studied with Marty Feldstein in graduate school, and while I didn't share some of his political convictions, he very much gave me a sense that you could use data and economic reasoning to make life better for large numbers of people.

It occurred to me that a doctor could treat only so many patients, but that if an economist, did something that caused the unemployment rate to be one tenth of 1% lower for one month, that was a 150,000 kids who saw their parents go off to work rather than stay at home. And so I decided to devote my life to economics, broadly construed. I've been fortunate to range widely across economics, doing research on everything from unemployment to the efficiency of financial markets, to everything from global health in developing countries, pandemics, to corporate taxation. And so I have spent a lot of my life engaged in doing economic research, but I've also been very concerned to influence the public debate, both by being an active participant in the public debate and by having an opportunity to serve president Clinton and to serve president Obama in senior roles. I've also come, and it's in a way a broader concept than my commitment to economics as a field, to have a deep commitment to a set of values that I think animate universities at their best.

A commitment to the idea that there is such a thing as truth, that through study, debate, argument, challenge, data, we can better approach truth, that there is better and worse, there is such a thing as excellence, that it is important to privilege getting to write answers rather than simply answers that validate feelings and perspectives that people have. And so I've tried to bring those kinds of values to the Harvard presidency when I was Harvard president and to debate about the future, not just of public policy, but also of universities at a time when there's more debate over universities than there has been historically. Absolutely. And, Lariat, if we have time at the end, I'd love to talk a little bit about the university side of things. But staying focused for a minute on the economy.

On the puck, we like to discuss where the world is going. And the last couple of years, much discussion has taken place on interest rates, the federal debt, and the overall economy. We had Chris Leonard on the puck a while back who wrote a book about quantitative easing, which included a deep dive into Tom Hoenig at the Kansas City Fed and his disagreements with Ben Bernanke in the aftermath of the two thousand and eight financial crisis. Can you take a moment and explain to our listeners the levers that were pulled to jump start the economy in the aftermath of that crisis? Look.

I think we didn't do enough to jump start the economy. The fact that it took many years before unemployment returned to its neutral level. The fact that inflation was below the Fed's 2% target for almost an entire decade says to me that we didn't do enough to accelerate the economy after the financial crisis. I think in retrospect, that was a period given how low interest rates were where fiscal policy should have been used more extensively, and where it was actually reasonable to think that more expansionary fiscal policy by expanding the economy and by raising prices could have actually led to a lower debt to GDP ratio. So I don't share Tom Honig's concerns about the policies that were pursued in the aftermath of the financial crisis.

Seems to me we had a situation then, in many ways, reminiscent of the situation between 1935 and 1939, where the economy suffered from the problem of too little demand relative to its supply potential. I think things are very, very different now. With the incredible level of spending that was launched in 2020 and 2021, a level of fiscal spending, fiscal impulse relative to the size of the economy shortfall that was maybe five, even 10 times as large as had taken place during the financial crisis, I think we acted irresponsibly. And that's why we got the substantially high rates of inflation and bottlenecks, increases in corporate profits that have caused such concern. At the same time, I think it was odd that the Federal Reserve acting as the agent of the government, acting ultimately as the agent of us and our fellow citizens chose to issue large amounts of short term debt and to withdraw large amounts of long term debt.

That's what QE was. And so, ironically, at a moment when every smart homeowner was refinancing into a fixed rate mortgage, The government was going the other way and moving from long fixed rate debt to shorter term floating debt. That's been expensive. Over time, it's probably gonna be more than half $1,000,000,000,000 in extra burdens on taxpayers because that decision was made. And so I don't agree that we did too much after the financial crisis.

I think if we did anything, it was too little. But, certainly, I think we overreacted to COVID in terms of our financial policies, if not our vaccination policies, and we stuck with the overreaction for a good deal longer than was prudent. And I think we're living with some of the consequences of that to this day. So if I'm understanding what you're saying, and these are complex issues, there's monetary policy and there's fiscal policy. And what I'm hearing you say is that if we had done more in a balanced way in 2008 in terms of fiscal, for instance, plant and equipment and investment, we could have grown the pie, so to speak, and been in a different situation a day.

I get that, and that makes total sense to me. But going back to the fact that we didn't do that, when I watched 2008 to today. One of the concerns and questions I have for you is that in the same way Barbara Tuckman wrote a book, The Guns of August, when she looked at history and she said, you know, World War one, we didn't really fix certain things, just like you're saying we didn't fix certain things after the February, and that World War two was essentially a continuation of World War one. One question I have for you is, is it possible that because we haven't done enough in terms of earlier on the fiscal spending that we, in a sense, band aided the situation over for the past fifteen years. We've essentially created this income inequality at the expense of the middle class.

And what did we, in a sense, not do enough in in jump starting the economy at the expense of our middle class? I don't find, the Barbara Tuckman analogy a helpful one. The Guns of August is actually not actually about World War two. It's really all about the errors that led to World War one. And there certainly were failures of anticipation that contributed to the financial crisis.

I gave a speech in Sanford in March 2008 that laid out pretty clearly what was going to happen and urged that capital be infused into banks and then at a minimum, banks not be allowed to continue to buy back their shares and dividend out their scarce capital to, shareholders. And if that kind of advice had been followed, I think we would have done a good deal better in dealing with that financial crisis. And there's no question that the sense around that financial crisis contributed to disillusionment of many people and that that contributed to what I think was the very unfortunate election of Donald Trump as president that is having consequences that are still very much with us today. But I don't think of our current problems as being related to the financial crisis problems in the way that World War two was an outgrowth of the failure to achieve a reasonable security resolution in Europe. I think the mistakes that we've made that have contributed to some of our current macroeconomic difficulties really were in a sense an overcorrection from the errors that were made immediately after the financial crisis.

Yes. We should have stimulated the economy more then, but not nearly as much as the economy was stimulated in the aftermath of COVID. And I think that's in part the responsibility of fiscal policy makers. It's also the responsibility of the Fed that was proclaiming that inflation was transitory for considerably longer than that was a reasonable belief for them to hold. In addressing these challenges and when we're discussing what went right and what went wrong, how does this differ from your understanding of secular stagnation, or did we just supercharge it?

Look. Go back to the late nineteen thirties when the secular stagnation type theory was first conceived. In my view, it was a powerful and helpful theory for understanding events from 1935 to early nineteen forty. Once we launched on a massive military buildup, which actually began before Pearl Harbor, secular stagnation was no longer the issue. The issue had to do with mobilizing sufficient resources to fight the war.

The issue had to do with the overall capacity of the economy and the people who believed that after World War two, the economy would return to depression because secular stagnation would reassert itself proved to be badly wrong. The pandemic was not as large, obviously, an event as World War two. But if you look at the surge in spending, on some measures, it may have been half as large in 2020 and 2021 in an economy where there wasn't nearly as much slack as there had been in the late nineteen thirties. So I think that the dynamic fundamentally changed because of a massive shock. World War two with respect to the secular stagnation of the nineteen thirties.

And by 1947, there were a lot of issues to think about in the American economy, but secular stagnation was very much not the right model. And something similar is true right now. So I think I called it roughly accurately in the early part of the decade of the teens by emphasizing secular stagnation. But I also think I got it right in recognizing that the massive fiscal policy that we were having, along with the investment that was going into the green transition, the investment that was going into resilience, made secular stagnation not the right theory. And look, this is a general difference between economic theories and physics or math theories.

The, Pythagorean theorem is eternally true. The law of gravitation is eternally true. The Malthusian theory that population rises to exhaust food supply was true for millennia prior to the advent of the industrial revolution, but ceased to be the right theory. Similarly, Keynesian kinds of ideas about secular stagnation are the right theories for some economic circumstances and configurations, but not for all. And it's part of the challenge of economics that one has to find mental models and theories that are appropriate to moments rather than that are eternal.

You talked about just now that there's certain laws of, like, physics and and gravity and so forth, and you talked about Keynes. It reminds me of, you know, a famous story going back thousands of years where Joseph said to Pharaoh, you know, during the good times, let's save wheat when I'm interpreting your dreams, and then we'll we'll eat the wheat in the bad times. If truth is truth and you look at two thousand years of history, how concerned should we be that we are running a large fiscal deficit at a time of a growing economy as opposed to essentially saving money at the time of a growing economy? Are we violating the laws of physics? And if so, what are the consequences?

I think we're making a mistake in The United States by running budget deficits that are as large as the ones that we are running. I think it's a geopolitical issue. The question arises, how long can the world's greatest debtor remain the world's greatest power? I think it's got potential consequences for financial stability, as Britain saw about a year ago when all of a sudden there was chaos in British financial markets and in the British bond markets. I think it's a question about having room, for contingencies.

We may need in our country, I kind of fear that we will, to increase our national security spending substantially. That's easier if we haven't borrowed to the hilt already before we had a major national security problem. In any event, larger deficits mean more pressure in credit markets, mean higher interest rates, and higher interest rates are basically raising the cost of doing anything that's future oriented, whether it's building houses for young families or whether it's making investments in speculative technologies. So I think we are making a mistake by running deficits as large as the ones we're running in the face of the kind of challenges that we face. So building on that, there was a recent interview that I heard that Lacy Hunt did as an economist, and he indicated and I and I have not verified this, but he indicated that one of the challenges we're facing today in The US is that we have a negative real savings rate.

And first, my question to you is, do we have a negative real savings rate? And if so, what are the challenges that that poses? I think there are a lot of different measures. That seems to me to be a rather apocalyptic view. I think on net, if you look at the size of our country's capital stock, the amount of ideas we have from research and development, the value of all the structures, the value of all the equipment, that's a number that is basically going up over time.

And in some sense, how much more we have that we own is the right measure of our savings rate. So I wouldn't quite accept the view that we have a negative savings rate. I don't think that's a particularly helpful way to view the American economy. Okay. Thank you.

So staying with monetary policy and staying with inflation, which you've talked about, I know there's different ways in which we as a country have measured inflation. Are we, in your opinion, underestimating or underreporting inflation? I think that's a very complicated question, and it really depends upon for what purpose we're measuring inflation. I think for the analytical purpose of understanding the price of goods, I wouldn't push back hard on our current measures. Think if you wanna understand consumer psychology and why consumers aren't happy, it's important to recognize that for the average consumer, for the average household, the price of money is part of the cost of living.

And so when most Americans look at the cost of a car, they're really looking at a monthly payment rather than a sticker price. When they think about the cost of their family, they're looking at the credit card bills, which depend on interest rate. When they think about the fact that they may wanna buy a home or they may want to move from a smaller home to a larger home or they may wanna help their kids or their cousin buy a home, then you're looking at the monthly payment on houses. And so I think the increase in interest rate has a substantial psychological impact. And I think that people have been a bit too quick to dismiss the similarities between the current episode and the episode that was so painful for our country in the late nineteen seventies because we used to measure inflation differently.

And in the the measures that we used in the nineteen seventies included the cost of money as part of the cost of living, and that's not true today. And so the seventies look much worse relative to today than they would if we used those kinds of measures today that include interest rates or if we redid the history of the seventies using current conventions. But I don't wanna attack the civil servants at, the Bureau of Labor Statistics who make these numbers because they're not really trying to do an exercise in political psychology. And for the conceptual purpose that they're working, I think there's a lot to be said for the approaches that they use. K.

That's helpful. So we've talked about debt levels in The US, and let's zoom out for a minute. And if you look at the world right now, we've heard a lot about China's debt and Japan's debt. What is the solution for the world's economy that has doubled its debt over the last fifteen years? I don't think that there's any silver bullet or single, solution.

Ultimately, judgments about debt for countries are in a way like judgments about debt for companies. If you borrow money and you invest that money in a way that generates cash flow that covers the debt and covers more, you've done a wise thing. If you've borrowed money and you've invested unproductively, then you've done an unwise thing. And so a lot of this has to do with making sure that borrowing is supporting investment rather than consumption and productive investment rather than unproductive investment. And that's been a very important problem in China where there's been all kinds of investment in relatively unproductive state enterprises, in excessive real estate holdings that have really been very economically inefficient.

So I think a focus on containing consumption and shifting towards investment and making investment more productive have to be the top priorities in any strategy for containing debt. And that makes sense and kind of ties into where I wanted to go, which was this issue about moral hazard, the Fed's perceived put, and creative destruction. Have these policies since 2008, in your opinion, have they changed our economy? You keep coming back to this theme, which it sounds like you're very attached to drawing from Tom Honig's thinking about some kind of moral hazard. I don't see that as a large part of our economic problems.

I think in a way, that is the kind of thinking that made the depression great. And that was exactly what Andrew Mellon had in mind when he told Herbert Hoover not to bail anything out and to allow a massive liquidation. And that massive liquidation destroyed all kinds of productive enterprises and really set the stage for the catastrophe of the depression, which in many ways, I think, if you look at what was happening in Europe, contributed to the dynamics that led to the second World War. So I I think one obviously has to be attentive to concerns about moral hazard, but I think one also just has to be attentive to concerns about Frank Run psychology and the catastrophes that can follow if there is no effort to restore confidence and you create a situation where people are all rushing to put money under mattresses, and therefore credit is being diminished. And so as I look back, battlefield medicine is never perfect, and they're questions you can ask.

And right now, looking back and seeing that we basically had a much more serious financial situation in the fall of two thousand and eight than we did in the fall of nineteen twenty nine. And seeing that for all the problems we had, what turned out was nothing like the depression. Knowing that's happened, some people can say, well, we shouldn't have bailed this out. We shouldn't have bailed that out. Maybe people would be more responsible if we hadn't.

But, gosh, that doesn't seem to me it would have been a prudent chance to take at the time when decisions had to be made. So, yeah, we clearly need to be attentive, but I think the better way to deal with moral hazard is actually through proper regulation. You know, take the classic example of moral hazard. If you give people fire insurance, maybe they'll smoke in bed too much, and maybe they won't have fire extinguishers or fire alarms in their houses. And so one view is that fire insurance is a bad thing because it causes moral hazard.

Another view is, oh, come on. Are people really smoking in bed because of fire insurance? And maybe what we should do is give people fire insurance, and somebody should come inspect their house and make sure that they need to have a fire extinguisher present in their home. And I think the right approach is to give people security that the financial system is gonna work and then regulate financial institutions to make sure they have adequate liquidity and have adequate capital. And I think that is the better approach.

So I've been a corporate lawyer for forty years, and I started when well, my mentor was a man by the name of Frank Weed who wrote the Wheat Report at the SCC. And so I understand the importance of regulation. And when I started as a lawyer in 1983, there was real respect for the SEC, the IRS. There were real guardrails around a lot of things. And then we've lived through, you know, the repeal of Glass Steagall and a lot of changes, and we've lived through certain crises.

And so you're you're right. You point out that I have this theme I'm pointing to. If you go back to the students of history, you know, Germany was a little less ready to print money because they had gone through inflation. We had a bad depression. Ben Bernanke was a student of the depression.

As you said, you know, we did not wanna go back into a depression. We should have done more on the fiscal policy perspective. Couldn't agree with you more. But as we're sitting here today, one of the things that I'm trying to get at is an issue that just came up recently in Japan, which was this off balance sheet non bank financing. And so one of my questions for you is, we're talking about things like commercial real estate needing to be refinanced, when we're talking about apartment buildings that were financed on variable rate loans that are going to have to be refinanced.

As a technology lawyer and as a restructuring person, I go to conferences and I talk to people all the time, and I'm aware of hundreds, if not thousands, of non banks that have gone out and borrowed money from the banks with a diversified portfolio of technology companies that are, quote, not yet profitable, that have had their balance sheets go up in value because they've been able to go to the banks and say, look at these new rounds of financing. Is there a potential hidden, you know, bump in the road for the economy because of all these non banks and the money that they have lent out without collateral? Time will tell. I think it's important to remember that there is a big difference between the non banks and the banks, which is that a substantial part of the money that I have in the bank is money that I can take out tomorrow. Whereas a substantial amount of the money that I have in a credit fund is money that I've committed to that credit fund for three years or that I've committed for some length of time.

And therefore, the risks of a bank run type phenomenon are much less serious. But I'm certainly not gonna tell you that regulation has been fully adequate in the non bank sector, just as I'm not gonna tell you that regulation is fully adequate in the banking sector. I think one important difference that leads me to not share your bias in favor of banking is that banks typically make only limited use or no use of mark to market accounting, where when an asset goes down in value, they reduce its they reduce their capital and recognize that their loan is less good. Banks do that to a much smaller extent than do the non bank institutions. And that means you're getting a kind of immediate market signal that promotes more rapid adjustment from the non bank sector.

So as I look at financial history, I see many more problems that have come from the combination of short term borrowing, long term lending, failure to mark to market, which is the essence of banking, rather than longer term liabilities closer to matched with the duration of assets with more reliance on mark to market accounting, which is the essence of non banking sectors. So I think you're right that we've gotta keep looking at our regulatory system, system, keep looking at what is and is not robust. But I think there is a tendency for bankers, and there's a tendency for regulators who too often come to identify with the interest of the regulated to frame everything in terms of banking good, non banking a challenge, and bad. And I think we have to look at those issues in very careful ways. So do you have specific suggestions that we could do to strengthen our regulation agencies at this time?

I'd like to see more emphasis on mark to market accounting in assessing the health of banks. I'd like to see broader supervision of potential maturity mismatches and the capacity for run phenomena in the context of non banks. I'd like to see an overhaul of stress testing, which I think is done in a way where it's not quite like giving the exam paper to the students a week before the exam, but sometimes it seems to come pretty close to that. And I'd like there to be a bit more rigor in that, stress testing process. I'd like to see more emphasis on core measures like capital and some aspects of liquidity and less extreme involvement of the government in prescribing and describing process within these banks.

You know, when you have 200 or more federal regulators every day spending all day in a big bank. It's kind of inevitable that there may come to be some identification of the regulators with the regulated. And I think a little less detail, a little more arms length, a little more reliance on market would all be helpful in strengthening our system of financial regulation. That makes sense. If I remember correctly, I back in 2001, you had offered a solution to secular stagnation was then private investment was slow.

Picking up public investment was important and vice versa. When you look at Build Back Better and the CHIPS Act, how how have they done in terms of mitigating the concerns about secular stagnation? I think they were constructive steps. I was very much involved in supporting both the CHPS Act and the IRA. I recognized that they involved borrowing money, but they involved borrowing money, I thought, for the most part to invest it productively.

I was less supportive of some of the large tax cuts and, some of the transfer payments that were made in the immediate aftermath. So I think, the IRA was a broadly appropriate strategy. And then on a lighter note, Larry, in 2010, The Social Network, I believe, you were portrayed as a Aaron Sorkin character. How how did it feel to be famously portrayed in that movie? I enjoyed the portrayal.

It wasn't exactly right as to what actually happened in my meeting with the Winklevoss twins, but it caught the flavor of it in the way that a work of ours does. So I had some apprehension when I went to the movie theater, but I was laughing and enjoying the portrayal in that movie. Got it. Terrific. So, Larry, switching gears for a second, there's a lot of debate going on about higher education and what's going on in the college campuses today.

What's your take on that, and and what might we need to do to change things and make things a little more civil? Look, I think our universities are a great national asset. If you think about American exports, all the foreign students who come to American universities are actually a major export industry for The United States, and it's one where we're extraordinarily competitive. I certainly wouldn't trade the American university system for any other foreign university system. That said, I think in some very important respects, American universities have lost their way.

It used to be that the animating values were truth, excellence, and opportunity. And now too much the animating values are feeling and validation, social justice, and identity. I think with that transformation, a great deal has been lost in terms of their connection with the broad nation, in terms of their ability to maintain themselves as open and tolerant, communities. I have been shocked and appalled by the extent of antisemitism on the Harvard campus and the failure of Harvard's leadership to respond vigorously to that antisemitism, which I think bears no resemblance to the kind of response they have made to racism and misogyny in the past. And I think the emphasis on identity has led to a stifling of, discourse and a reduced commitment to open debate that takes the argument wherever it may go.

If you look at the vast majority of leading universities in The United States today, when a faculty member is hired, the faculty member has to provide a statement about all their research. That's what college professors do. That is totally appropriate. A statement about all of their teaching. That is appropriate.

We want to hire the best teachers. And a statement about their commitment to something called diversity that is interpreted as their commitment to policies that promote the interests of particular identity groups, that in many cases are reviewed by a dedicated core of non faculty administrators before the person can even be considered for a faculty appointment. And I think that kind of litmus test is very much inappropriate. So I think there has been a general abdication on the part of trustees and that that has enabled our great universities to go quite a bit off track, and I hope they'll get back on a healthier trajectory. And I expect they will in the years ahead.

Thank you, Larry. The Puck Venture Capital Beyond is produced by CMG Advisors. If you enjoyed the conversation today and haven't yet subscribed to our show, you can find us on iTunes, Apple Podcasts, and SoundCloud. Feel free to leave a review while you are there and maybe even a five star rating. Thanks for listening.

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