Larry Summers: ‘Smart Businesses Are Going to Maintain Flexibility’
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At Okta, they know no business leader wakes up thinking, gee, I hope I'll make some huge trade-offs today. That's why Okta offers identity security with less friction and more possibilities. Great security without trade-offs? It's possible. It's Okta. I'm Adi Ignatius. I'm Alison Beard, and this is the HBR IdeaCast. Alison, I know we talk a lot about how difficult it is these days to be a business leader, and

I'm interested in your conversations. What do you think is top of mind for business executives who are trying to manage these very uncertain times? That is a good question because there are so many different things right now. I would certainly say shifting economic policies. Artificial intelligence has to be incredibly high on the list, how to harness technology.

Gen AI and agentic AI for the best use and not be disrupted by it. And then geopolitical instability in Europe and the Middle East, I think,

There are plenty of things to keep CEOs up at night right now. It feels like an unprecedented level of uncertainty. You know, at the same time, there's a playbook for uncertainty. And there are people who have something to say about how to manage a company when things are as uncertain as they are in all the areas you talked about. So today's guest is somebody who I think can really talk at all levels about how to think through all these challenging issues, but also how to cope

how to manage the uncertainty in your own company. And that is Larry Summers, former Treasury Secretary, former president of Harvard University, and an economist who is just generally well-respected. He's certainly someone that can connect all those dots I just talked about. He's also currently on the board of OpenAI. So I'm very interested to hear what advice he has. You know, businesses can't wait for these things to be resolved. Many of them will never be resolved. So

I think there's some insights here into how to move forward, how to take action. I spoke to him as part of our new HBR Executive Live series, and we decided to open this one up to the broader IdeaCast audience. So I hope you enjoy it. This is my interview with Larry Summers.

You know, you're a guy who is much in demand, I would think, particularly in an era where we're just dealing with what feel like unprecedented levels of uncertainty, unprecedented sort of shocks to the system. And I want to talk about a few of them, but maybe start with tariffs. A couple of months ago, tariffs were all we could talk about. There's been a bit of a lull as the negotiations play out. How do you see things playing out? And what should business even be rooting for at this point?

Look, this is mostly a self-inflicted wound to the American economy. It simultaneously raises prices and increases unemployment and for most industries reduces competitiveness because it raises the price of inputs. For example, 60 times as many people work in industries that use steel as work in the steel industry.

It's not surprising that the Fed has done something over the last six months that's very rare for it and raised its forecast of inflation, but at the same time, it was also raising its forecast of unemployment.

I think it's pretty clear that these policies are a mistake. They're not going to make American businesses substantially more competitive in aggregate. They're unlikely to have a large favorable impact on the trade deficit.

They're going to alienate other countries who are going to, in at least some cases, retaliate against the United States. And I think they're going to be a strategic gift to China. It can't be the right thing for the United States to do, to be raising tariffs back most of the way to the Smoot-Hawley level,

And given the extremity of the statements that were made on Liberation Day, that's about what we are doing.

Now, all of that said, I think that businesses are ultimately judged not on tariffs, but on the products they produce. And there are many products that many American companies produce for which there has been and will continue to be very strong global demand.

So to say that these are unwise policies is not at all to say that all businesses should hunker down and go into a shell because of these policies. I mean, one of the other questions, though, is, you know, are these even real? I mean, to what extent is as America leans forward on on the threat of high tariff rates, is this real?

a negotiating ploy? Does it fundamentally reset trade? And how is business supposed to deal with that level of uncertainty when it's not clear? We have to make economic decisions. Do we invest? Do we change our supply chain? But we're not really sure where this ends up, this complete lack of certainty. So look, I think businesses, smart businesses are going to maintain flexibility and have robust strategies that

work at least reasonably well in a variety of different environments. In round numbers, tariffs were about 1.5% on average when the president took office in 2016. During his first term, tariffs went up from 1.5% to a little bit below 3%. On Liberation Day, they were raised up to 28%.

And I think most people now expect that they'll settle at 13% or 14% as an average tariff rate. So I don't think there's any serious question that the United States is engaging and will, after all the negotiations, have lifted tariffs in a very substantial way. So I think people should just build that into their planning.

That said, there's still going to be substantial doubt, depending on what your industry is in, just what rules there will be. And there also is uncertainty about what concessions will be extracted from other countries, which for some businesses will affect export opportunities.

Yeah. Well, so that maybe leads to a more short-term question, which is, are we headed toward a recession in 2025? I'd be interested in your response, but also what are the indicators you're most focused on as you think about that question? I think that right now you would say that there was a real risk of recession, but I think you would say that it was less than 50-50.

I pay a lot of attention to divergences between sentiment measures, business confidence, consumer confidence, and hard data, same-store sales, industrial production last month. There has been, over the last several months, a divergence with sentiment being substantially negative and the hard data being firmer.

And I would say the indications most recently are of sentiment getting better rather than of the hard data deteriorating sharply.

And so my best guess is you're not going to see, barring further dramatic events, a substantial turndown in the economy. I am more worried that as the tariffs feed through, which they surely will, that you'll see some increment to inflation. And given that we've just been through a difficult inflationary period,

that may translate into higher inflation expectations. So what explains the improvement in sentiment? I mean, is that, I'm not sure what that measures exactly, but does that mean, you know, there's less panic about the uncertainty? There's less concern about, you know, how tariffs will ripple through the economy? I mean, what does that mean? I think there were a number of indicators of shoes that could have dropped.

that haven't. A big shoe could have dropped on inflation spiking. A big shoe could have dropped on the bond market sending interest rates to the sky.

A big shoe could have dropped on a major air pocket after tariffs were imposed because people had bought in advance of the tariffs, sort of hoarding ahead of the price increase. And so when none of those shoes dropped in a huge way, I think people are feeling a bit better.

We're certainly not out of the woods and especially not out of the woods, given that there's a lot of geopolitical uncertainty. And frankly, given that the president's behavior is somewhat unpredictable. But I think a fair-minded person would have to say, you haven't seen some of the most alarmist scenarios play out. And actually,

As they don't play out, people become a little bit more confident. So on this topic, this is a question from one of our subscribers, Paul. I don't know where Paul's writing from, but question, you know, how do you think about the inverted yield curve as a potential recession predictor? You know, the yield curves had a pretty good track record, but the yield curve is really a tracker indicator.

Based on the idea that if we have a recession, the Fed cuts rates, and if people think the Fed's going to cut rates, then maybe that means they're thinking that there's going to be a recession and markets are relatively efficient.

I think you've got some different factors going right now, given that you've got a president who's very worried about the capital inflows associated with the trade deficit, given that the long run fiscal picture appears relatively problematic. It's a thing that I would pay attention to, but it's probably not the thing that's

that I would be most focused on. I don't think that anybody thinks that the yield curve has a causal impact on the economy turning down. It's an indicator of what people think the Fed's going to do and what people think the Fed's going to do is correlated with what they think the Fed's going to be responding to in the economy. But I wouldn't overplay its prediction power.

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So you mentioned China earlier. And, you know, when you're talking about shoes that could drop, that would that could have significant impact on everything we're talking about. It could be, you know, a real rupture, a deeper rupture in the economic relationship that the U.S. has with China. I suppose on the flip side, a shoe that could drop would be a much improved rupture.

relationship. In your mind, and I don't know how much you think about this, is there a plausible deal that the US could do with China or an understanding we could reach with China that would be meaningful to both sides? I think it's going to be pretty difficult given the degree of distrust on both sides. But if there was a sense that they were not going to use

rare earths as a tool, of course, of diplomacy vis-a-vis us, and that we were not going to restrict the flow of chips and other technologies to them beyond the stuff that was most specifically targeted on national security. I think that would probably be a constructive agreement that would help to rebuild trust

to some degree. So I think that this isn't a matter of having one mega agreement and then it's all better. It's a matter of having a series of trust-building bits of cooperation that work out to be mutually beneficial and that are then built upon.

You know, you've been you've been critical of the Trump administration. And on the flip side, I was talking to a Silicon Valley CEO the other day who said, you know, in his view, his circle, he said, you have to understand, you know, we hit this group.

was sort of deep blue politically, you know, liberal, pro-democratic politically, and they sort of flipped to deep red, really making the case that the Democrats lost business through perceived excessive regulation, other restraints. I have a couple of questions here, but, you know, is anyone articulating an appealing economic middle ground that isn't trade war, you know, tariffs everywhere, but isn't a kind of, you know, high regulation approach that

caused that flip for a lot of business people. There have been a number of ideas that have been put forward. I think a phrase that's been used a lot after a book by Ezra Klein and Derek Thompson is the abundance agenda. I think that anybody sensible should think, in addition to allocating money to infrastructure, we just need to figure out as a country how to get it done

faster and more efficiently. I like to tell the story of the bridge from Harvard Square across the Charles River to the Harvard Business School. That bridge is 362 feet long. It had a lane of traffic closed for 62 months. That's 50% longer than it took the United States to win World War II just to fix a bridge.

And, you know, I did some research on it. There's a bridge across the Rhine. The Rhine isn't 362 feet across. It's 3,600 feet across. And Patton built a bridge across it from nothing in one day.

And perhaps even more striking, Julius Caesar, who didn't have any of the modern tools that we have today, built a bridge across that 3,600 feet in nine days. And yet it takes contemporary America 62 months.

That's not an isolated example. The Second Avenue subway in New York cost about 12 times as much as a comparable length subway put in in two countries that we don't usually think of as paragons of efficiency, Paris, France, and Ankara, Turkey. So I think there's a lot that we need to do to loosen things up.

I think it's very important not to practice the politics of envy. Yes, everybody should pay their fair share and the fair share of people who've been more fortunate should be higher than the fair share of people who've been less fortunate.

But that's not to say that there's something evil about being rich or that our goals should be for everybody to earn the same income. I like to ask people the question, would America be a better country if there were more success stories like Bill Gates and Steve Jobs and Jeff Bezos, or would it be less successful?

And I think it's pretty clear that it would be more successful. It'd be better if there'd be more jobs for workers. There'd be better opportunities for consumers. America would be standing taller in the world. But it is true that if we had more great entrepreneurs, we'd have more great fortunes. I think that is fine.

But I think when too many in the Democratic Party treated any success, any huge success as ground for protest. So I think it's very important to recognize that there can't be employees without employers. And therefore, for those of us who are progressive,

to maintain a pro-responsible business sensibility. And I certainly do think there have been moments when the Democratic Party lost sight of that and put an overwhelming emphasis on values associated with culture and identity politics, or put great emphasis on tearing down the rich and

rather than on building up the middle class. Okay, so let's talk about labor then more directly. And this is a question from Maureen from somewhere or another. What is your view, let's say, on the U.S. labor market? What should employers in particular be watching most closely as they think about the labor input? I think we have done poorly as a country with the half of our population growing

Probably the 60% of our male population that really isn't oriented to going to college and that wants to participate in a variety of kind of trade activities, often providing services that are in extremely short supply.

And I think our institutions and our educational system has been shaped somewhat more by the Harvards and by the institutions that want to emulate the Harvards. And I'm not sure that they are appropriately attentive to the needs of many, many of our people who want to learn more

a set of skills for which they can be rewarded in a substantial and secure way. And so I think that our educational system, particularly with a view to those going into non-academic paths, is something that deserves a great deal of attention. I think we need to find

models of more cooperative unionism. I think we've had some serious issues in our country where without unions, labor, frankly, has been exploited excessively for the benefit of capitalists.

But we also have situations as in the education sector and as years ago was the case in the automobile sector where strong unions made it very, very difficult for enterprises to produce as productively as they otherwise could. I'm interested, I guess, in

Your kind of experience in talking to business leaders, I assume you're talking to a lot of them right now. You know, we launched this whole thing, HPR Executive, because we felt that, you know, we're leaning into a moment of real uncertainty. And I think it comes from two main areas. I think artificial intelligence, which is likely to remake business.

most of our businesses, but we're not sure when and to what extent, and then the political and geopolitical uncertainty. So I guess I'm interested, when you talk to business leaders, are those the issues they're most concerned about or is it something else that we need to pay attention to? I think that it's very often that, in general, it was my experience when I worked in Washington

That if I got to know a business leader too well, it would probably be a good time to short the company. That there are a lot of business leaders who, and some of this is clearly important and the right thing to do, involve themselves extensively in public policy. That's right. And it can be very important for business, but it's also very important to produce a good product efficiently.

And I always think of a quintessentially cautionary tale for business leaders. In the early 90s, the CEO of Kodak spent a great deal of time in Washington pushing the U.S. government to pursue various kinds of antitrust and competition policy-related actions to

directed at opening up the market in Japan for Kodak to create, to compete with, Fujifilm. And certainly some of the arguments being made were legitimate. I don't think Kodak was being treated fully fairly in Japan.

But I can't help but wonder whether it would have been a much better use of that CEO's time to focus on the overwhelming strength that Kodak had in digital photography patents, strength that it never successfully exploited. And so I would urge business leaders in general, in any environment, and certainly in this one,

to focus on what is the distinctive strength that my business has. And in a world where there's going to be more and more division of labor, how can we focus the most on that distinctive strength

so as to deliver value for all our different constituencies. And let's talk more about AI specifically. You know, we all have an opinion. We all probably have a strong opinion on AI and what it's going to do. You know, I interviewed one of your colleagues, Kareem Lakhani from Harvard Business School, who's an expert on AI in the workforce. And, you know, his view is that

AI is not being overhyped, probably the opposite. CEOs talk a lot about it. They talk to their boards about it. They talk to the shareholders about it. They don't really know what's going on. They're not getting their hands dirty. They don't understand the revolution that is taking place. I'm interested in your view. You probably have a view. You're probably talking to experts as well. Do you see AI, Gen AI, as fundamentally reshaping the economy?

or are you more cautious about that? I think there's a better than even chance that this is the most important issue

technical change or the most important change in technology in my lifetime. That it's going to change more about the way people live and the way people work than anything else that has happened during my adult lifetime. I think it's very hard to know

exactly what the timeframe will be. I think it's very hard to know exactly what the changes will be, but we haven't had a technology that is self-improving before ever. PCs don't make new, better PCs.

But AI models have the capacity to what one might call the recursive aspect to figure out how to be self-improving in the same way that human societies acting together have the way to be self-improving.

And so I think that capacity for self-improvement is something that's very fundamental. Now, how much it's going to change in terms of regular day-to-day business interactions, in what time frame, I think that's a much more difficult thing to judge. And I think that it is often the case in these things that it's not best to be a first mover.

It's best to hang back a little bit and see what works and see what doesn't before making large CapEx commitments. But I think ultimately, this is going to be a pretty big deal. Larry, I want to thank you. This has been an amazing conversation. Thank you very much for being with us. Thank you. That was former Treasury Secretary Larry Summers. He spoke to me as part of our HBR Executive Package for Senior Organizational Leaders. You can learn more at hbr.org slash executive.

Next week, Allison will talk about how to build your own AI assistant in a conversation with Alexandra Samuel. We now have more than a thousand IdeaCast episodes plus many more HBR podcasts to help you manage your team, your organization, and your career. Find them at hbr.org slash podcasts or search HBR in Apple Podcasts, Spotify, or wherever you listen.

Thanks to our team, senior producer Mary Du, associate producer Hannah Bates, audio product manager Ian Fox, and senior production specialist Rob Eckhardt. And thanks to you for listening to the HBR IdeaCast. We will be back with a new episode on Tuesday. I'm Adi Ignatius. In business, they say you can have better, cheaper, or faster, but you only get to pick two. Well, what if you could have all three at the same time?

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