20VC: Larry Summers on How to Manage Inflation; Should We Increase Rates Even Higher, Why We Need To Change The US Tax System, Why Europe is a Museum, China is a Jail and Bitcoin is an Experiment & How a Trump Win Would Hurt the US Economy

0:00Europe, to the museum, to pants and nursing home, China is a jail, and Bitcoin is an experiment. The United States always does the right thing, but only after exhausting all the alternatives. So the first thing I would do, is enforce the tax law we have much better. This is 20VC with me Harry Stebbings and stay, I'm so excited for the show. I've wanted to make this one happen for a long time and so I'm so excited to welcome Larry Summers. Former Treasury Secretary, and one of America's leading economists, In addition to serving as the 71st Secretary of the Treasury in the Clinton administration, Larry Summers served as Director of the White House National Economic Council in the Obama administration and as President of Harvard University and as the Chief Economist of the World Bank.

0:43And I do want to say thank you to Sarah Cannon at Cotu for the intro to Larry's day without which this episode would not have been possible. But before we dive into the show's day, this episode is brought to you by Tegas, the size analysis and financial data to give you powerful perspective for your investment decisions with lightning fast access to over 60 ,000 transcripts across 20 ,000 companies. You'll discover a wealth of unique insights to fuel your fundamental research, gain perspectives, synthesize information, model outcomes and ultimately make better decisions all on Tegas. As a 20 minute VC listener, you can try it for free at teagas .com, forward slash gross, and speaking of tools we cannot live without there.

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2:52You have now arrived at your destination. Larry, I am so excited for this. Thank you so much for joining me first off. Glad to be with you. Now I would love to start. I think parent shape us in the most unique and wonderful ways. Your parents, your mother's and economists, father and economist, how did your parent shape you do you think, Larry? I came to believe in thinking analytically and thinking rationally about social phenomena. And so from a young age, I was used to asking economists like questions. What about getting one more of those marginal analogies? How do costs compare with benefits?

3:35thinking analytically about why houses were built the way they were all those kinds of questions for parts of my childhood. I have to ask we just mentioned you know you're being a father and your son did that impact how you brought up your son and being a father yourself in terms of the conversations you have around the dinner table. Yeah it was a part of my kids upbringing sometimes it It worked better, sometimes it worked worse. When my daughter Ruthie was four or five, I needed to get a taxi. An taxi didn't come to my house when I wanted it. And I said, damn it, that's what you get with a monopoly cab company.

4:21And Ruthie said, what's a monopoly, daddy? I said, well, it's when there's no competition. And she didn't understand. And so I wanted to explain it to her. So I said, Ruthie, what would you do if you went to a toy store and they didn't have the toy you wanted and they were really mean to you? And I was hoping for the answer while I go to a different toy store. So I could explain to her about competition. But in fact, she said, well, then I steal their toys. Maybe Ruthie learned something out of that whole conversation, but I sort of learned something about how people react to market mechanisms.

4:57You learn that there's no such thing as lack of creativity in children. Something like that, I learned something about how people react when the market makes them unhappy. Listen, I'm a big believer in Charlie Munger's statement, which has obviously shown me the incentive, and I'll show you the outcome. You've had many a discussion, I've listened to many on recent runs, on inflation, and I really wanted to start, honestly, Larry, with the question of do you believe that inflation targeting is fit for purpose as the main focus of central bank policy today. The main problems have been bad use of inflation targeting and misjudgment about how the economy was functioning rather than the broad framework.

5:43I think some of the things that Fed did in terms of its so -called flexible average inflation targeting framework We're not what I would have advised, but I think the much bigger problem was hopeful diagnosis and assessment rather than realistic diagnosis and assessment. When you say about kind of bad inflation targeting, what makes good versus bad inflation targeting, given the transient nature of the future, is it not fundamentally the most challenging thing to do well? What you have to do is form a realistic assessment of the economic forecast. And my view in 2021 was when we had massive budget deficits, 14 % of GDP, when they were saying they were going to keep interest rates at zero for three or four years.

6:33And when they were buying up every bond in sight, it was kind of predictable that that will be inflationary, but they wanted to do it. They were still fighting the last war, and they convinced themselves as contrary evidence developed that it was all temporary, transient stuff rather than being willing to be realistic about uncongenial belief. I think a very important actually you as a policy maker is you have to not get confused about what you want and what is. And I think the Fed got itself convinced that things were much more under control than they in fact were. What you want versus what is, I love that.

7:22If it's what is, what would you have done? I would have recognized that a situation of very substantially accepts the man was developing. I would have moved to single my awareness of that and to start putting my foot on the brakes much sooner than they did. And certainly, as inflation was rising, as we were having a record inflation bubble, I would not have been putting my foot forward on the accelerator by buying up mortgages in large quantity as the housing market was bubbling over. Now, I heard you on a recent podcast and you said a fascinating stat that about 30 % of the stimulus packages had actually been spent, meaning 70 % was actually still in kind of consumer wallets.

8:16To what extent is that going to be shown in the subsequent quarters inflation numbers, the 70 % remaining? The stimulus was largely delivered in 2021. Part of the reason why inflation accelerated through much of 2022 was that it was still being spent in 2022. And some of it is still going to be spent in 2023. And that's part of why the economy has seen so strong, even as interest rates have gone up very substantially. Can we increase interest rates at the level we need to without tanking the economy, Larry? I think that when you need to break the car and the car is going very fast, it may well be that you can't bring it down to a stop or to sustainable speed without surreal skidding and risk of accident.

9:16And I think we have worked our way into a position like that where my own view is that what Samuel Johnson said about second marriage is true about soft landings. They represent the triumph of hope over experience. And I don't think we're likely to be able to bring inflation down to its target level without some kind of economic downturn. That doesn't mean I want an economic downturn. It doesn't mean the goal of policy should be to have an economic downturn. But it means to recognize reality. Sometimes a medicine that's necessary has unpleasant side effects. That doesn't mean the doctor who prescribes it wants to hurt you.

10:06But the doctor who prescribes it recognizes that if you don't take it and you defer taking it, there's even going to be more pain and problem later. I think the fed was much too slow to make the necessary prescription and therefore the economic disruption is going to be greater than it needed to be. If we think about like Volker taking rates to you 19 -20%, is there any incentive for the fed or anyone else to raise interest rates to such a level which would cause such economic harm in the short term. Is there any incentive to you, really? We're gonna have to raise interest rates higher than we would have if we raised them more promptly.

10:48And if we delay excessively, we'll have to raise the heat and higher as a consequence of that delay. There's nothing in the current situation that says to me that we need to get rates anywhere near where vulgar took them. But if we were to neglect this problem for long and up and neglected for a decade during the 70s, we might get to such a point. But I think an important part, Henry, the reason we have independent central banks and we don't have the political process make the monetary policy decision is because we need it to be taken with a view to the long run. In a short run, it's always easier to print more money and paint for over problems.

11:42But when you keep doing that, you get into more and more trouble as people come to anticipate that inflation. And ultimately, it's like being a treadmill. You have to go faster, faster, and print more money. But you're not really getting any benefit from it. You're just doing what's necessary given people's expectation. A blunt question, Larry, and forgive me for it. What's the path out of US indebtedness? It feels like the treadmill that we can't get off. What's the path out of US indebtedness and the next physical cliff, I think, that's 34 trillion of debt and growing? How do you think about that?

12:21Well, first of all, we need to put it in perspective. A growing company can have a permanently growing debt. a growing economy can have a permanently growing government debt. A company probably wouldn't think about its debt by comparing its debt to its earn. It would probably be much more likely to compare its debt service to its cash flow or to compare its debt to the market value of its equity. If you look at the US debt right now, the debt ratio is very high. The debt service ratio is much less exorbitant. And if you look at the ratio of debt to the present value of our tax collections, that's also lower.

13:10I think that one needs to keep the problem in some perspectives, but ultimately we are on a unsustainable path. And my view is that we're going to have to Greece revenues quite substantially. I don't think there's going to be a lot of scope for cutting spending given the way in which our population is aging, given the way the price of healthcare rises to other things, given that interest rates are more likely to go up than down, given that our national security needs are likely increasing. So I think as a country, we're going to have to find ways to increase revenue collections. And of course, that's never easy for the political process to accept.

13:59It's not, and you do that in the form of taxes, and I mean, you perfectly teed me up like, because that was my question, which is, why do the IMF and governments still stick with conventional fiscal rules that constrain public sector growth in Hansing's bandit? I do think that it's appropriate to pay attention to the growth of debt. As I said, some growth of debt to be okay, but debt that is growing faster than income when income's doing its best, that's likely to be problem -wide. And the need is going to be to find more revenue in the United States. I think there's some good ways to do that.

14:41But I certainly don't think we should be putting any arbitrary ceiling on the level of government spending Given the magnitude of both national security needs in our country and social needs in our country. Larry What would you do to find more revenue? So the first thing I would do is Enforce the tax law. We have much better. We have a gap between taxes that are owed that everybody agrees our owed under the current law and taxes actually collected that will total eat trillion dollars over the next 10 years, eat trillion dollars. And that's because we don't want a vast majority of even the wealthiest people.

15:22And so many of them just cheat, but it adds up to a lot of money. We could deter that if we went back to auditing people even at the rate that we did a decade ago and we have stopped doing that. So we need to beef up the IRS very substantially so it can collect taxes that are owed. Does that really make that much of a difference Larry? Forgive me because it's in proportion to the spending and the needs taxing your individuals who are evading does it make a difference? A trillion dollars here, a trillion dollars there pretty soon you're talking real money. We could raise between half a trillion dollars and a trillion dollars that way.

16:06The business community was right to be very concerned that the corporate tax rate was too high a few years ago, but there was no need to take the corporate tax rate down since it's 21%, 25 % that give very substantial incentives for business. and the United States stands out right now for rejecting a global agreement that a group made much more difficult for corporations to put their income into Kina islands or Ireland and therefore essentially completely avoid taxation. So we need global tax cooperation and reasonable corporate tax rates. There are also things that are frankly loopholes. I suspect many of the people who listen to your show.

17:00Take advantage of carry interest. They engage in real estate exchanges, so -called lifetime real estate exchanges, when carry interest gets capital gains tax treatment, even though it's compensation for working really. If I sell a stock and buy a different stock, I have to pay capital gains tax on the stock I sell. If Donald Trump sells a property and it changes that property for another property, he doesn't have to pay any capital gains tax. And that's not a reasonable tax provision. There are a variety of tax shelters. Basically, they make it possible for people who earn their living by training assets to pay much lower taxes than people who earn their living making things for providing services.

17:59And if we fix that, we can also generate substantial revenue. Is she carried interest, Beatastas, income tax? Is that what you're saying as the solution? Of course it should. Of course it should. And you know it's, and I know it would probably be costly for you since you have a fund and the more successfully your fund was, the more costly it would be for you. I would participate in funds, so I would beneficiary as well, but it's wrong. There's no real reason why the fact that we're paying a bonus based on our performance should be a reason why our incomes should be taxed at a lower rate than those of the people who clean the floors in the buildings that we work in.

18:52You know that. You're putting me on the spot on my own show, Larry. My point to you is I think we should have a base rate of tax. I'm going to go out there. I don't think a progressive tax system I think it disincentivizes people to work hard. I work my ass off. I have heart palpitations. I have psoriasis. I've given my life for this. And I don't work 35 hours a week or 40 hours a week. I work 90 or 100 and I have done for eight years. And now I get taxed 50%. That doesn't seem fair. First of all, let's make sure we understand each other. Your brother gets taxed at a lower rate on, say, the first $100 ,000 of income viewers of the tax that will lower rate on the first $100 ,000 of income that you earn.

19:38The only difference is that you see there are a lot more money than your brother, and on the extra money you earn, you are paying the higher fraction of this to the government. And I guess I would ask you, because a marginal dollar mean more to somebody who has $10 million, dollars or to somebody who has $10 ,000. My guess is it means more to somebody who has $10 ,000. So if we have to take some away, it's better to take some away from those who are less painful. And I will tell you that this is something that economists have studied a lot. I've had a lot contact with a lot of entrepreneurs and yes the Wavy United States won in the 1950s and 60s with 90 % tax rates crazy.

20:34The Wavy United States was in the mid 60s and 70s 70 % tax rates crazy but do I think that the current top federal income tax rate of 37 % really is working to discourage very heavily work. I'm not sure that it is for very many people. One other thing, the biggest tax that we have in the United States, the tax that collects more tax than the income tax, the payroll tax, you'll pay any payroll tax if your income is above $150 ,000 on all the income above $150 ,000 and yet people pay that 8 % tax and their employers pay that 8 % tax up to $150 ,000. So, look, we've got to make tough choices. Who gets the best advantage out of the fact that our country is well defended?

21:33Who gets the greatest advantage out of all the fruits of our national laughs. I think it's people who are fortunate like you and me. Regardless of like whether it's fair or not. A question I have is like, is it realistic Larry? Because like you said very accurately, a lot of our audience do take advantage of the benefits of moving abroad, moving to Lisbon, moving to Milan or Italy now, they have great tax treatment. Is it even realistic when you can move and avoid taxes, but me. If you're an American citizen, you cannot avoid taxes by moving your tax, your global income, wherever you are, if you are an American citizen.

22:15You can renounce your American citizenship and there are a certain number of economic, bad, and agarles. You just that. But most people don't want to renounce their American citizenship because it comes with a great deal of benefit. So I don't think it is impractical. If you look, the economy grew faster during the period several decades ago when we had higher tax rates, then it has grown more recently. I think the argument for cutting eye tax rates is pretty much indefensible starting from where we are. Now look, I am not someone who believes we should have a wealth tax. I am not someone who believes we should soak the rich.

23:07I am somebody who believes in creating opportunity rather than going war with inequality because I think if we had more entrepreneurs, more multi -billionaires like Steve Jobs or Bill Gates, that we would be a better country. But to suggest that somehow we can't impose taxes at current levels, that we can't reform the estate tax to make the estate tax something that people pay rather than they're largely successful in avoiding. I think that's to be honest, demagogic and contradicted by all the evidence that we have. Now true, it's much easier for the federal government to do this than it is for an individual state to do this because the state doesn't, and California doesn't, people will move to Nevada.

24:02If New York doesn't, people will move to Florida. But at the federal level, I don't have any doubt at all that we could maintain the current level of taxes and that we could actually raise more raise. You said about renouncing US citizenship down. It made me think about kind of actually the US dollar itself as the reserve currency. How do you think about the demise of the US dollars to reserve currency stay? And do you think people are getting ahead of themselves in their negativity and pessimism? If they are, I think first of all, if you look at the history of when other countries have lost their reserve currency status like Britain, it's the least of their problems.

24:42Britain will lost the pound special role after it stopped being a superpowers and stopped being an effectively functional economy. So we may make serious enough mistakes as a country that people no longer want to hold the dollar, but if we make the state to that grave, the fact that people aren't rushing for dollars will be the least of our problems. I also think that if you want to get out of the dollar, you have to get into some other currency. There's a lot that's problematic about other currencies. It's a joke, but not without some elements of truth, to say that Europe's a museum, Japan's a nursing home, China's a jail, and Bitcoin's an experiment.

25:28So I did the dollar as a lot of the kind of advantages that the English language has. It's right now kind of where everybody else is, and so that makes it where everybody wants to be. So if we don't make great mistakes, I think the dollars get to remain the world's reserve currency. How do you think about the next five years for Europe, Larry? I'm fascinated. You said about it there as a museum. How do you think about the next five years for Europe? I'm fascinated. Look, I think Europe's challenge is to catch the waves of innovation. You think about entrepreneurship. If you think about great companies that have been created in the last 25 years.

26:11Europe has not been a creative and a scammer of great enterprises. If one thinks about the whole information technology wave, one thinks about American companies, one thinks about Chinese companies, one thinks about Israeli companies, and I don't know what part of that is a reflection of the way the financial system is structured with a lot of emphasis on large, relatively bureaucratic banks. I don't know how much of that is a culture in the educational system that disproportionately focuses away from science and math and that That came to be disciplined and to discourage iconoclasm. I don't know what the roots of it are.

27:09I don't know whether it has to do with regulation that makes fluidity and flexibility very difficult. You know, no one would check into a hotel if they thought they might not be allowed to check out. and people are very reluctant to hire other people when they think they won't be able to fire them if it doesn't work out. I think there's a lot of rigidity. Some of it comes from regulation. Some of it comes from culture that means, at least the last generation, or probably more than a generation, the Zuckerbergs and the Bezos and the Jack Mars tended to not be European and I think that has a very broad and substantial impact on European economies.

28:05Final one for you to a quick fire, but we mentioned Jack Mars, we mentioned China there. When you analyze the next five years for China, Xi Jinping's got a lot on his plate. How do you analyze the next five years for China and give them what we said there about the challenges for How do you think about them? In difficult five years for China, look, what makes GDP, what makes an economy? It's people and it's capital. China has more desire for capital flight than any country ever has in the history of the world. It's controlled, but if it wasn't controlled, there would be staggering capital flight from China.

28:41And the number of babies born in China has fallen by just about half in the last six years. And so if you're thinking about a society where people don't want to have children and they want to take their capital out, that's a society where the broad swath of the society is showing a lack of confidence. If a country's own people are confident, I'm not sure why I should think. Are you confident about any nation or which nation are you most confident about? I'm not confident about any place and Andy Groves said something very wise when he said that only the paranoid survive. But I am ultimately really quite optimistic about the United States.

29:26I'm very mindful of Donald Trump, I'm very mindful of deaths of despair, I'm very mindful of paralysis in Washington. And yet, the lesson of American history is that America has this extraordinary capacity for self -denying prophecy. When Jimmy Carter declared a crisis of the national spirit, when people felt that America was ungovernable after three presidential assassinations and watergate in the early 1970s, those predictions, those worries, those alarms, sending motion, the changes that have made America such a resilient society. I believe that that capacity for alarm doing the work of reason and reflection and ultimately renewal gives me an ultimate sense of optimism about the United States.

30:32Winston Churchill did not say it although it's often attributed to him. The United States He's always does the right thing, but only after exhausting all the alternatives. Is Trump better than Biden? Would he place us in a better economic situation or a worse than Biden? And I'm not asking who you want to win or who you don't, but just would he make economically the US stronger or weaker? I believe very strong that by undermining the rule of law, on which contracts exchange and property depend. by alienating the rest of the world and by pitting some groups of Americans against other groups of Americans and devaluing the idea of unity and common aspiration.

31:22That a second Trump administration would do great damage to the American economy or a sustained fury. I say that as someone who has been a member of the Democratic Party, but always resisted the tendency to become hyperalarm about the policies of the Republican Party. I fear that Trump represents a different and dangerous possible dimension in American politics. Perhaps the model would be one problem in Argentina with a strong emphasis on the soil, a strong nationalist inward term. and what he said in motion had catastrophic consequences for Argentina for many decades now. After World War II, people expected that there were a set of natural resource countries that were likely to be quite successful.