Summers on Tariffs
The adverse stagflationary impulse....
Tariffs!
Here’s a lengthy excerpt from an interview with former U.S. Treasury Secretary Larry Summers on the subject of tariffs. The interview was conducted by Oliver Wiseman of The Free Press.
What follows was “lightly edited for clarity and length” (by The Free Press).
Oliver Wiseman: Give me a sense of the scale of these tariffs. How significant are they compared to past protectionist measures?
Larry Summers: The cumulative impact of these tariffs is vastly greater than what President Trump imposed in his first term. They are—by a substantial measure—the largest protectionist steps that the United States has taken since the Second World War.
OW: What is your 30,000-foot view of what the economic impact of these tariffs is going to be for the United States?
LS: This is a self-imposed supply shock. It lowers the quantity of goods available to the American economy, and raises their prices. So, as markets are recognizing, they represent a push toward stagflation—which means higher inflation and slower economic growth. Quantifying the stagflationary impulse is hard because we don’t know how long the tariffs are going to last, in what ways they are going to be extended, or in what ways other countries are going to retaliate. But there’s no question that the adverse stagflationary impulse exceeds the impulse that would come from a 50 percent, or more than $40, oil price increase. This is the equivalent of a massive oil shock.
OW: I’m getting the sense you don’t think these tariffs are a good idea! But do your best to explain what you think the administration is trying to achieve with these tariffs?
LS: I find the strategy of promoting trade with Russia, while undermining trade with Canada and Mexico, inexplicable. I do not see what the economic argument that that helps could possibly be. It is hard to know whether the strategy is focused on leverage to pursue other issues like fentanyl. That probably is ill-advised as policy, but there is at least a logical argument.
The problem is that fentanyl and illegal immigration are not problems with Canada, where we are applying the tariffs symmetrically, and the president recurrently celebrates the virtues of tariffs as pure economic policy.
Sometimes the administration makes arguments of a mercantilist form, where the idea is that exports are good and imports are bad. Economists, for very good reason, don’t like mercantilism. But even on mercantilist grounds, these measures are pretty catastrophic. We are going to penalize automobiles made in North America, where the chassis go back and forth across the Mexican and Canadian borders, quite severely—but levy no burdens on cars imported from Japan or Korea. We are going to benefit the Chinese supply chain through Asia at the expense of integrated North American production. The aluminum and steel tariffs that President Trump has implemented on a forward basis will penalize export industries that employ 60 times as many people as the industries that are being protected.
These policies are a major penalty to U.S. consumers that reduce the real income of middle-class families. They are a pro-inflation impulse and, ironically, they help exporters to the United States at the expense of American producers, and they penalize American exporters. I have never seen as irrational a consequential policy put in place by an American administration.
OW: We all know Trump is a protectionist, but what you’re saying is that—even given all of that—you’re very surprised by the size and significance of these policies?
LS: Protectionism is misguided economic policy. I think a substantial part of the way the global economy has prospered with America in the lead has had to do with a reduction of protectionism in all its forms. But even if one accepted the argument for protectionism, tariffs on Mexico and Canada, and aluminum and steel, seem a uniquely irrational form of protectionism, because of the reality of integrated North American production. Our companies, whose primary production is in the United States, rely for portions of the supply chain and portions of assembly on Canadian and Mexican producers. It is American companies and American workers being disadvantaged relative to producers in Europe and Asia.
OW: One of the things that was always said about Trump in his first term was that he was very sensitive to the impact of his policies on the stock market. Do you think that’s still true? It seems like he’s pushing ahead with this, in spite of the fact there’s a massive sell-off.
LS: If you look at the timing, with sharp declines immediately following protectionist policy announcements, markets are rendering a clear verdict. Whether the administration will respond remains to be seen. I wish it weren’t necessary to run the experiment. But I hope the administration will respond to the market evidence if economic logic and past empirical evidence isn’t persuasive to them.
OW: And so from your point of view, the best-case scenario from here is that the administration listens to the market and learns its lesson, and there’s something of a retreat.
LS: One always hopes that poor public policy or policies and producing unfortunate outcomes are reversed.
OW: And what about the worst-case scenario?
LS: I think we are risking stagflation, increases in inflation to levels unambiguously above the 2 percent target, and growing concerns about an inflation spiral, simultaneous with withdrawals of confidence and purchasing power that could possibly tip the economy into recession. Given that we don’t know how long these policies are going to last and what’s going to follow, it would be premature to confidently conclude that grave economic damage is going to be done. But that is certainly the risk.
The interview is worth reading in its entirety. The link is here.
The Free Press is well worth the price of subscription.