Former Treasury Secretary Larry Summers has expressed concern over President Trump’s recent adjustments to tariffs, indicating that these changes do not alleviate his worries about the economy. During interviews with Fortune, Summers, known for his economic foresight, discussed his apprehensions regarding the current economic situation, particularly relevant to stockholders, bondholders, and those affected by increasing prices and interest rates.
Summers emphasized that despite the pause on reciprocal tariffs, the U.S. still maintains the highest tariffs in a century. He pointed out that the impact of these tariffs is deterring foreign investment crucial for funding capital expenditure and federal borrowing at reasonable interest rates. According to Summers, recent developments would not convince cautious potential investors to move forward in light of such instability.
In terms of the bond market, Summers highlights the volatility reminiscent of emerging markets, raising doubts about the U.S. as a safe asset haven. The move of investors away from U.S. long-term bonds suggests alarming levels of perceived risk.
Summers has also identified early signs of a possible recession, noting a decline in confidence indicators and delays in business investments due to uncertainty. He described the potential downturn as self-inflicted and potentially severe, akin to an "iatrogenic" recession caused by the government’s own actions rather than external factors or inherent market dynamics.
Regarding Trump’s tariff strategy, Summers finds significant contradictions. Treasury Secretary Scott Bessent argued that the tariffs would strengthen U.S. manufacturing, bring new jobs, and ultimately balance revenue through increased taxes. However, Summers struggles to align this view with any known economic theories and questions the feasibility of tariffs leading to permanent business relocations to the U.S. He expresses doubts over the administration’s rationale, particularly its methods for setting reciprocal tariffs and achieving a noteworthy increase in manufacturing employment.
Summers further criticizes the inconsistencies among Trump’s advisors on trade, notably Peter Navarro and Bessent, each presenting conflicting perspectives. This disagreement adds to the uncertainty about the administration’s trade policy direction.
On Elon Musk’s recent campaign related to federal spending, Summers criticizes Musk’s approach to the IRS, arguing it could diminish government revenue more than it reduces the deficit. Moreover, he suggests that the fiscal policies, including maintaining Trump’s initial tax cuts, could exacerbate federal debt issues.
President Trump’s assertion that tariffs generate significant daily revenue for the U.S. Treasury is met with skepticism from Summers, who warns about their regressive nature, likening them to consumption taxes that disproportionately affect lower-income individuals.
In conclusion, Summers advocates for reducing trade barriers, apart from exceptions related to national security. He challenges the notion that the U.S. has been naively exploited in international trade, suggesting that America has enjoyed robust economic opportunities compared to other global powers and cautioning against mismanaging this advantageous position.
