Transcription
Trump is bringing or promising to bring to us all. From the one big beautiful bill to more tariffs he says are only days away. 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 uh 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 uh in the welfare reform bill that was passed during Bill Clinton's presidency. There were cutbacks made by President Reagan in his original tax and budget legislation. This is the largest cut back in the social safety net that anybody has uh been able to uh find. And it's coming at a time when we appear to be on a trajectory to massive cutbacks in spending on scientific research, massive cutbacks in support for the arts and uh humanities. maximum uh cutbacks in support for foreign assistance programs including ones on which uh large numbers of AIDS patients in Africa are dependent for their lifesaving uh medicines.
So this is legislation that to my mind both compromises our capacity to defend ourself as a country because of all of the debt and frankly compromises what makes our country worth defending in terms of being a humane force in terms of the world in terms of our sense of national community and protecting everybody in terms of some some of our greatest contributions to humanity in both the sciences and uh the arts. And so I think this is a very troubling uh piece of legislation in ways that go beyond the problematic immediate economics.
This one big beautiful bill is one part of a more sweeping plan that President Trump has for, I think it's fair to say, really redoing the American economy. And yet we don't see much reaction yet from the economy in the numbers. And I'll give you an example in the tariffs. A lot of talk about tariffs, a lot of fear about tariffs. 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.
I think it's uh early days. It may be that there are a set of other developments going on through artificial intelligence through technology that are exerting a deflationary force. It may be that people given all the huge uncertainties about tariffs are waiting to see how it shakes out before they establish their new uh price structures. It may be that for a time it's possible for the people in the middle to eat uh the tariff increases in order to try to get uh market share.
I agree. I agree with you, David. I would have expected more inflation and what you have always have to do as an economist is watch uh the data and be prepared to change your mind. But for now, I think that I wouldn't want to rush to a judgment that these tariffs are innocuous uh for inflation. I think the more likely thing is that they're going to be somewhat more delayed uh in uh their impact. Certainly, there have been many careful studies that compared the sectors that were tariffed and the sectors that were not tariffed during the president's first term and found that tariffs did translate into higher prices.
So, I would rather wait and see uh on this. I think that's the approach that the Federal Reserve is uh taking and I think frankly uh that is the right uh approach. I mean we've really seen a move up in the 30-year yield. We're above 5% relatively constantly now. There are some who are concerned about exactly what that's telling us about inflation expectations and term premium.
David, you know, I look at the 10-year market relative to the 20 year or 30-year market as a sign of where the markets see very long-term rates going over the very long term. What market participants call the forward rate. And we now have forward rates on regular bonds that are well above uh 5% and forward rates on tips on bonds linked to inflation that are well above 3%. And those are ominous indicators about our nation's credibility over the medium term. They're ominous indicators with respect to the government's ability to issue long-term uh debt. They're ominous indicators with respect to the deficit because if you look at the projections people quote from the Congressional Budget Office, from other places, they're building in much lower interest rate assumptions.
So I think if you look at what's happened to bond markets, if you look at what's happened to the dollar, you have to view our nation's fiscal situation with uh considerable trepidation and concern.