How extraordinary or unusual are these balance of trade deficits which the president invoked? As an economist, how unusual are these trade deficits?

I mean, I want to be fair, David, and recognize that there have been a lot of emergencies to find over time for a lot of different purposes, not all of which would be the kind of thing that if they happened in my family, we would call an emergency.

So I think we do need to pay attention to the statutes and the history as well as that.

And that's what the lawyers do and what the Supreme Court will deal with.

But if you ask, is the United States in some kind of unprecedentedly disastrous situation of borrowing that is related to a lack of tariffs? The answer is absolutely not.

If you ask the question, according to economics, are tariffs the right response to a foreign borrowing emergency? If there was a foreign borrowing emergency, the answer is no.

The right measures would involve reducing the budget deficit, increasing the country's level of savings, for example.

Just on that limited issue, is he right?

Were you surprised at how far Chair Powell went in saying, don't expect it in December?

I was slightly surprised, but much more importantly, I was glad.

This was the right thing to do.

Inflation is much further from its reasonable target than unemployment is.

The Fed can have much more of a durable impact on inflation than it can on unemployment.

Given deficits, given AI spending, we're probably at or below the neutral rate of interest.

There was no reason to be committed into further rate cutting in this environment.

How significant, in terms of the economy, is what happened over in South Korea?

Is that a healthy thing as the practical matter to have some of the regional banks get together?

Look, I think people always make a mistake when they go deregulation good or deregulation bad.

I think you have to look at the particular area of regulatory policy.

And when you see a failure to protect market integrity, as I think we have in some aspects of crypto regulation, that is, I think, a cause for concern.

When we see huge facilitation of anonymous money, of money that can't be traced and that facilitates money laundering, that is, I think, a cause for concern.

So I certainly think there are areas where we're probably deregulating and moving in the wrong direction or where there would be a case for stronger regulation.

In the area of consolidation, it's a step towards efficiency because in many cases there are substantial economies of scale that can be realized as entities get larger.

What can you tell us about when that makes sense and when it does not?

Former Treasury Secretary Larry Summers sees real value in prediction markets like the ones Kalshi and Polymarket have created, not only for the people betting on events, but also for those hoping to learn about the outcomes.

Polymarkets is probably the largest of the various prediction markets that are out there.

There are a number of them.

I think these are a very useful tool.

Because what markets do, markets where people can place a bet, take a position, is they enable you to get access to a kind of consensus opinion where people aren't just talking, but they have to put their money where their mouths are, and they're taking a stake in something.

So let me give you an example.

I don't live in New York.

And by the way, are they more susceptible of being gamed?

Is he right? Does he have reason to be confident that after an initial spike up, it'll come back down?

Well, I think it's important to distinguish two concepts of one shot or transitory.

There's what we had in 2021 when, for example, the price of used cars spiked up.

And the right assumption would be that the price of used cars would come back to the normal price level.

That's not what is reasonable to expect with tariffs.

With tariffs, you're getting a permanent increase in the price of the goods that are tariffed.

But the question is whether that's going to be an ongoing rate of change or a one-off level of adjustment.

Is that a good idea? I

Whether it's to break down barriers to U.S. exports or to discourage production abroad, one of President Trump's main goals is increasing U.S. manufacturing overall, something special contributor Larry Summers of Harvard says tariffs will not accomplish.

This isn't a debate about whether manufacturing is important or not.

That's an important debate to have as we go forward.

But even if you take as given the central importance of cutting edge manufacturing, taxing inputs, alienating partners, and enraging those who control the external markets, can't possibly be the right strategy for rebuilding american manufacturers look i take another way of looking at this um we think of ourselves we think of automobiles as like a traditional industry that we're trying to protect in a good uh way but This is slashing General Motors profits.

This is slashing, all the automobile companies are complaining about our tariff policies because what they mean for integrated production in North America.

So even for the people who were the traditional constituency for this kind of policy, they're not seeing it as a positive.

So this is not some debate between the coastal people who like finance and movies as businesses and the people in the middle of the country who are focused on the heartland of manufacturing.

Our special contributor Larry Summers takes us through what he'd like to see.

I'm not sure that it's the right time for a big new framework when you have an outgoing chairman.

I would have thought that a new chairman should be providing a new framework when the new chairman arrives after the new chairman has consulted.

So this seems a rather odd timing for a major new framework announcement.

It seems to me that if anything, the errors have been on the side of excessive transparency, excessive forecasting, excessive what we used to call when I was in government, iatrogenic volatility.

Iatrogenic illness is when you get sick from being in a hospital.

Iatrogenic volatility is when officials' comments end up adding instability to markets.

I think Probably one of the most politicized governors just went off the board.

Whether it's to break down barriers to U.S. exports or to discourage production abroad, one of President Trump's main goals is increasing U.S. manufacturing overall, something special contributor Larry Summers of Harvard says tariffs will not accomplish.

This isn't a debate about whether manufacturing is important or not.

That's an important debate to have as we go forward.

But even if you take as given the central importance of cutting edge manufacturing, taxing inputs, alienating partners, and enraging those who control the external markets, can't possibly be the right strategy for rebuilding American manufacturers.

Look, I take another way of looking at this.

We think of automobiles as like a traditional industry that we're trying to protect in a good way, but This is slashing General Motors profits.

This is slashing, all the automobile companies are complaining about our tariff policies because what they mean for integrated production in North America.

Special contributor Larry Summers joins us with what he expects for the U.S. economy with President Trump and the Fed chair on opposite sides.

There certainly are some risks of a downturn.

There are also some inflationary risks coming from the tariffs, coming from general economic strength.

And so he decided not to commit, but to preserve flexibility.

I think that was the right course of action for him to take.

If the economy turns down, there's the scope to cut rates very rapidly.

But if inflation is a problem, there's a risk of a loss of credibility.

What everyone thinks of those tariffs, and you've talked about it in this program before, we have to admit President Trump has gotten a lot of tariffs deals done in a fairly short time.

Our special contributor, Larry Summers of Harvard, has been outspoken about what he says it will cost us over the long run.

David, this is the biggest cutback in the US social safety net in history, measured relative to GDP.

It's substantially larger than anything that happened in Ronald Reagan's revolutionary 1981 tax cut legislation.

It's substantially larger relative to the economy than the welfare reform that took place during Bill Clinton's time.

So this is a big deal.

It's gonna mean that some number, it's hard to evaluate exactly, might be 10 million, might be 12 million people are gonna lose their Medicaid benefits.

It's gonna mean that ancillary services that are hugely important for people, getting a ride to the hospital so they can get their dialysis, being able to go to a rehab facility when they can't take care of themselves, but they no longer need to be in a hospital.

We can talk about whether that's a moral thing to do or an immoral thing to do, but what does it mean in macroeconomic terms in terms of growth over the long term?

What went through your head when you were watching the Fed chair fact check the president in real time over the cost of the renovations?

It's not a scene like anything that I've seen before in many years in Washington.

I don't really understand why the president of the United States and the chairman of the Federal Reserve are negotiating or discussing building procedures and building costs.

But here's what's really important.

If there's a sense that the Fed is gonna yield to political pressure and make money easier-...

the market's gonna see that and it's all gonna backfire.

Maybe interest rates will be a bit lower in the short run, but in the long run, because people will see that that leads to more inflation, interest rates will go up.

I don't know if one can say the president's literally trying to strong-arm the Fed chair into lowering interest rates, but what about the, the dynamics and the body language between the two? How will that be perceived when it comes to Fed independence?

Te- tell us, you know, tell most people who may not have been following this as carefully as you have, what is the thing that, that, uh, offends you most, that upsets you most about this, what has, what has just passed?

So there's numbers and there's stories, Fareed.

The numbers are that this is the biggest cutback in the American social safety net relative to a baseline that we've ever had.

If you look at the Welfare Reform Bill that was passed during Bill Clinton's presidency or if you looked at what happened at the beginning of Ronald Reagan's, uh, presidency, the cutback here is a much, much larger, uh, cutback.

Those are the numbers.

The stories, which I heard from my daughters who work in medicine in Northern New Hampshire really are harrowing.

There are stories of people who used to be able to get rides to the hospital for their dialysis treatments and now won't be able to.

Why has there not been much of an effect on the economy or the stock market so far?

We welcome back our special contributor Larry Summers to tell us what is likely to have long-lasting effects.

David, it has to be recognized that it's a big legislative accomplishment.

It's a larger bill passed sooner than other presidents have achieved.

But I don't think it's going to take the country in the right direction.

I think it's going to grow our budget deficits in the future very substantially, and you're already seeing some market reaction to that.

And I think that what it does to our social safety net is really going to be devastating relative to the path the country would have been on.

If you look at cutbacks in the social safety net, there were cutbacks in the welfare reform bill that was passed during Bill Clinton's presidency.

And yet if you look at the CPI numbers, the PPI numbers that are coming out, they don't indicate the inflation that most economists predicted.

We asked our special contributor Larry Summers of Harvard why.

David, it's something I've noticed over long periods of time.

Geopolitics are much less significant for markets than geopolitical people think that they should be, whether it's events in the Taiwan Straits or events with respect to North Korea and what happens in South Korea.

markets kind of have a life of their own, driven by longer-term assessments and less responsive to even very dramatic short-term events.

So I think this is just something we should all be used to.

It's a version of my observation about events ultimately being less important than trends.

I think on top of that, you have the reality that it sure doesn't look like oil is as important to the global economy as it used to be, that imported oil is much less important to the US economy than it used to be.

If, in fact, the United States is relatively more assertive on the international stage rather than less, does that have potential ramifications for economics as well as for markets?

As a macroeconomist, how do you approach that question?

Look, No one knows.

I suspect that the president doesn't know completely what he's going to do because he is watching events.

I just say a couple things, David.

One is that we got a lot of divisions within our country.

But I would hope that at a moment like this, with respect to the kind of threat that Iran represents, that there'd be a lot of desire to come together and support policies that will put the greatest stability possible in.

Second thing I would advise your listeners, what I do to track very complex events and spheres where I don't have deep expertise is I look for prediction markets.

What do you make of that?

What the heck are you gonna do about those three things, which seem inexorable?

So, you don't fix a flat tire by finding where the leak is.... and putting air into it.

So we're probably not going to be able to fix the fact that more of us are over 65.

We're probably not going to be able to fix the fact that services like healthcare and education tend to trend upwards in price, and we've already taken on, uh, the debt.

But here's some things we can do.

We can do a better job of enforcing the tax law we already have.

And if we put the Biden program back in place and we executed it with serious information technology assistance, it could generate more than a trillion dollars in revenue over the next 10 years.

What percentage of folks who are outwardly and publicly in favor of the tariff program are in fact on board, um, analytically and substantively versus on board because they fear the wrath of Donald Trump? Do you have any sense of that?

As much as Larry Summers agrees that the U.S. and China need each other, he does think we may be wrong about the extent of Chinese economic power.

I think the big change that, to my mind, people are underestimating is that China has immense challenges ahead of it.

Yes, they have done very well in a number of key technologies, but Their population is going to shrink.

Their debts are immense.

Their economic adjustment towards a more consumption-oriented economy would force the Communist Party to give up a lot of power, which I don't think they're going to do.

You know, David, here's a rule.

When the American elite tell their children to learn a language, it's time to bet against the country in question.

SO THE CHINESE LOOK AT THE UNITED STATES, AND I THINK THEY OFTEN SAY TO THEMSELVES, THESE GUYS HAVE REALLY PASSED THEIR PEAK AND THEY DON'T HAVE A COHERENT STRATEGY TO DEAL WITH US.

a power that the U.S. has capitalized on for most of the last century.

During World War II, the United States leveraged its scientific excellence and the high-quality scientists we had in universities and some of those that we attracted from abroad.

And in the wake of World War II, the government vastly expanded the amount of funding that it provided to American universities in order to conduct research on behalf of the American people.

So this has led the United States to be a leader in innovation, in building the information economy that we have today, in health care, and in a wide variety of other fields that help to support our economic prosperity and our security.

And when you ask, why is it? that such a huge proportion of Nobel Prizes get awarded to Americans.

Why is it that the best scientists and engineers from all over the world want to come to the United States? It's because of this extraordinary partnership we've had here where the government says we're going to do research through these universities, we're going to fund that, and we're going to enable these universities to become the best in the world and produce these extraordinary innovations on behalf of the American people.

But first, we start with the money.

The list goes on.

My- I guess my question is on th- on that, and some of the subjects you just raised, how much in the aftermath of October 7th, uh, how much, uh, progress or how much changes or what steps has Harvard taken to address these missteps?

Here's the painful and unfortunate truth, Al.

If you took the agenda that I thought was necessary after October 7th, Harvard did 10% of that agenda between October of 2023 and February of 2025.

Since then, in response to what's been happening, or at least observing what's been happening, Harvard has done half of that agenda.

They've replaced, um, politically biased actors who were running big centers, they've put discipline not in charge of professors who love to do juror nullification, but in the, in the president's, uh, office, they have scaled back some of the DEI stuff where, like, the story I told you about the Stem Cell Institute, where it was just going, um, a bit, uh, crazy.

They have clarified that there's certain kinds of protests you can do and certain kinds of protests you can't do in terms of, uh, intimidating, uh, people.

So they've really done a fair amount, but they did it slowly and a bit reluctantly.

Right.

Was this a step forward for the Trump administration?

I salute Secretary Besant.

The avoidance of value subtracted is value added.

And by that standard, we added value.

The United States backed off of what were extremely imprudent and potentially economically very damaging prohibitive tariffs to the point of embargo on China.

That was a good thing for the U.S. economy.

And as a consequence, the U.S. stock market rose substantially in recognition of that.

How do you deal with that in terms of trade terms and making sure that it doesn't distort things in our country?

What do you make of what happened with the Asian currencies in the last week? I mean, like, for example, the Taiwan dollar went up more than it had done in decades.

My instinct is that the Taiwanese situation, because of the national security aspect, because of how much the currency had been pegged, because of aspects of the hedging behavior, is somewhat unique.

So I don't think it would be right to see it as a precedent for multiple other moves that are going to take place.

But I'm not certain of that.

And I'm very much aware that there are huge foreign holdings of treasuries at this point.

that the other side of that flow into US treasuries, that what enables other countries to buy all those treasuries is the dollars they're accumulating, because in total, they're exporting more to us than we're exporting to them.

But I don't think the contradiction between hating the trade deficit and loving the capital inflows is entirely clear in the mind of the administration.

I think you're going to see tax professionals who prepare returns are telling me people are coming in saying, well, why do I need to file the return?

Is there a growing case for what President Trump is arguing for.

I think the economy probably looks softer today than it did a couple months ago.

But I think there are also some troubling signs of inflation risk going up.

I wouldn't argue with the market's judgment that The full set of developments in the economy points towards more easing than looked like it would be necessary a month or two ago.

But I think it would have been a grave mistake to have eased already and would be a very serious error to ease at this upcoming meeting.

i think the results would be a lack of confidence in the fed's determination on inflation and that would mean higher interest rates at the long end and that would mean higher mortgage rates and would probably ultimately mean more economic uh weakness So I think the president's advice is really quite misguided, both as to the substance and as to the appearances.

I've said many times, Fed bashing for a president is a fool's game.

Is that a good benchmark?

But where does it all lead? We ask our special contributor, Larry Summers of Harvard.

From a financial point of view, President Trump vowed to do new things, and we have something new, the American capital flight trade.

It's a major pattern in markets.

When the president does something consequential and new, we see four things.

Stocks go down, bonds go down, the dollar goes down, and gold goes up.

The signature is very clear.

It's revulsion against American assets.

Will the markets keep President Trump from moving on Chair Powell?

here.You know more about the categories of economic risk, so take it away.

And I'm going to distinguish four areas of economic risk.

The first is the near-term cyclical.

When you put tariffs on, prices go up.

You put a sales tax on hot dogs, the hot dog vendor sells more.

You put a tax on foreign steel, uh, the price of it goes up.

Talk to the executives of any US major retailer, and they can't remotely absorb, nor can their suppliers, tariffs of this magnitude.

Um, I'm sure, uh, just as earlier you had more sophisticated categories for financial risk than the two I put to you, you might have four or five different scenarios in mind, but, but what kind of scenario do you think is likely to play out?

What will it do to their operations?

Look, they'll have to make some very important strategic choices.

I hope that the university will find ways, even if there is a cut off for some interval of funds to maintain vitally important programs to not cut back our research.

But potentially, if the US government goes to war with our great universities, it means a sharp reduction in the kind of scientific progress that has caused the United States to be the envy of the world and pull so far ahead of Europe and Japan.

It means the end of efforts at cures to diseases like cancer and diabetes.

It means a substantial risk to our national security.

Because one of our great national assets has been our capacity for innovation, which resides very heavily in our leading academic institutions.

That's why they're so dependent upon them.