Larry Summers: Beware of Toxic Trumpflation

Trump's proposals for tariffs and mass deportations will lead to toxic, higher inflation

Inflation may have been the downfall of Kamala Harris’ candidacy.  But, according to Larry Summers, it stands to get a lot worse under President Trump.

Summers is a professor emeritus at Harvard University and a former secretary of the Treasury. He spoke on November 14 at the Harvard Kennedy School.  The title of his talk was Economic Policy Before and After the 2024 Election.

The last time I heard Summers speak was at the Morningstar conference in April 2023.  At that time, he urged attendees to avoid U.S. equities – and even to short large-cap domestic stocks.  Since then, however, the S&P 500 is up 46.7%.  He also predicted that inflation would remain close to 5%, there wouldn’t be a “soft landing,” and a recession would follow if inflation got close to 2%.  None of those predictions were accurate.

Summers identifies as a Democrat.  Three times in the last 75 years his party has prioritized something other than inflation, and the result was a major lurch rightward.  That happened with Nixon’s victory in 1968, with LBJ after the Vietnam war, and with the rise of Ronald Reagan.  “All those elections were lost because of inflation,” Summers said.

He said that one can argue how much inflation was due to fiscal stimulus, monetary policy or supply-chain problems. But he said the price level is high because of fiscal policies (spending) in 2021.  Without that, the Democrats could have escaped blame for inflation

People overstate how bad inflation is, Summers said, but inflation affects everyone, unlike unemployment.

“Inflation is deeply toxic for the progressive project,” he said.

If President-elect Trump does what he promised, the inflation shock will be substantially larger than what happened under Biden. Trump promised huge defense increases, tax reductions, a less highly valued currency, the loss of Fed independence and, most prominently, tariffs on imports.  Those tariffs, he said, would also drive prices higher on everything that competes with imports.

Summers said he believes in globalization and free trade, but “China is doing its level best to make that hard.  Tariffs of 60% on Chinese goods would make it twice as expensive for parents to buy toys for their children and would force production to relocate to Vietnam.  

“Being a supplicant is not a strategy,” he said, “but we need to calibrate our strategy based on our objectives.  The worst thing we can do is to make it easy for China to scape ghost us for its failings.”

“Mass deportations are a prescription for large-scale labor shortages,” Summers said. “That will be politically toxic.”

The direction of monetary policy

“The Fed missed the plot,” Summers said. 

In 2021, with a $2.5 trillion fiscal stimulus, the Fed said rates would stay at zero until summer 2024.  For the first year and a half of Biden’s administration and for one year prior to that, corporations and individuals used lower rates to refinance their debt.

But the Fed was doing the opposite: buying long-term debt and issuing short-term securities.

The Fed eventually figured it out, changed its tactics, and avoided a hard landing. But it “lost” $0.5 trillion with its yield-curve strategy, according to Summers.

The risk now is that the Fed makes directionally similar errors.  GDP growth is close to 3%, core CPI was about 3% last year and 3.5% for last few months, and the stock market “on fire,” he said.  “This is not the time to hit the accelerator hard,” Summers said, meaning that the Fed’s 50 basis-point rate cut was misguided.

Geopolitical issues

Summers has been reading Why England Slept, a book by John F. Kennedy based on his Harvard undergraduate thesis.  JFK wrote it in the 1930s, when his father was the ambassador to England, about why Great Britian did not spend, rearm and prepare for conflict, given the fascist threats from German and Italy.  

JFK believed it was because of post-World War I exhaustion, worries about fiscal prudence, isolationism and a desire to focus on problems at home.  

The U.S.  faces similar threats now, according to Summers.

Over the last dozen years, the leaders of the U.S. and U.K have met 20 times, but China’s and Russia’s leaders have met twice as often.  

“We are contending with a set of authoritarian powers with a different view than ours,” he said, “and a willingness to act.”  

Military spending will limit our options to respond. Defense spending as a percentage of GDP went from 3.5% to less than 3% under President Biden. The average post-WWII spending was closer to 6%.  “That is not a responsible trajectory,” he said.  

Summers advised against taking “nationalistic policies” with respect to our allies by imposing tariffs.  

Nor is it responsible to accumulate debt in peacetime, he said.  Trump’s recommendation to eliminate taxes on tips should be supplanted by a renewed focus on patriotism, and that focus should be more widely embraced in politics and academia. 

A message for Democrats

Summers reiterated the conventional wisdom that the Democrats lost the election by “failing the common man and woman” in favor of academic theories that he referred to as “the faculty common room.”  To fix that, his prescription was to emphasize economic growth, containing inflation, celebrating our country and its strengths, focusing on ideologies that emphasize opportunity over identity, recognizing that order (reducing crime) is a basis for comfortable and secure lives, enacting strong policies at the borders, and having government be a place that “gets things done.”  

He lamented the inefficiency of many government efforts. It took 62 months to repair the Lars Anderson bridge, which connects Harvard and Cambridge to Brighton on the other side of the Charles River.  But it took only 45 months to win WWII.  

Something is wrong when Elon Musk can put four times as much payload into space as NASA, he said.  

“The Democrats need to figure out how to get things done effectively and quickly,” he said. We need a better electric transmission grid to address climate change, and more starter homes to make housing affordable.

The AI revolution

When historians look back at the late first quarter of the 21st century, the most important thing will be the sharp evolution of artificial intelligence (AI).  Summers is not sure how quickly it will happen, but it will be a “massive acceleration of scientific progress.”  

Summers is on the board of OpenAI.

“AI will be to the internet as the computer was to the calculator,” Summers said.  

AI tools will be intelligent in “the way we are” and will “improve like us,” he said, and there will be another big ratchet in the rate of progress.  The opportunities exceed the risks, but we need to be thoughtful about risks.

Innovation generally increases inequality, according to Summers, but it is not clear that will be true with AI.  Medical diagnoses by doctors can be replaced by AI, he said, but not the nurse who holds the patient’s hand going into surgery.  AI may end up replacing higher priced skills.  

“AI will come for IQ before it comes for EQ,” he said, which could mean substantial and favorable implications for equality.  

Robert Huebscher was the founder and CEO of Advisor Perspectives and was a vice chairman of VettaFi/TMX until April 2024.