Breitbart Business Digest: The Tariff Tantrum Se…

Larry Summers Is Very, Very Worried About Tariffs

The hope that markets had already priced in the cost of reciprocal tariffs was dashed this week by the calamitous decline of nearly every asset traded by man and robot except U.S. Treasuries. Stocks plunged, oil slipped, the dollar declined, and even gold lost some of its recent shine.

If bull markets are breeding grounds for irrational exuberance, bear markets tend to produce prophets of doom. The declines in equities markets following Liberation Day certainly lived up to this expectation. No less an august personage than Larry Summers, economic sage to Democrat presidents and Harvard professor (once dethroned from the presidency of the university by the feminist orthodoxy), took to social media to predict President Trump’s tariffs would create an almost unfathomably large hole in the economy.

Thirty trillion dollars is larger than the entire gross domestic product of the United States. It is around 28 percent of the GDP of the entire world. It’s around 26 percent of the total market capitalization of all the world’s stock markets.

This was a much more severe decline than Summers was predicting about a quarter of an hour before that.

How is Summers arriving at these terrifying numbers? He began by noting that U.S. stock markets fell by two to three percent, or about $1.5 trillion, as Trump announced the tariffs in the Rose Garden, and suggests that when factoring in losses already priced in before the announcement, a $4 trillion decline is a more accurate reflection of the market’s response.

Summers argues that because corporate profits represent roughly 10 percent of GDP, stock market losses only capture a fraction of the broader economic impact. Using this ratio, he estimates the full economic cost at five times the market loss, arriving at a projected $20 trillion loss—equivalent to more than $200,000 per American family of four. As stock futures continued to decline, Summers upped his estimate for the total loss.

Unfortunately, Summers stopped updating his estimate sometime late Wednesday night. But since the stock market continued to fall by even more than indicated by the futures, he may now be thinking we’ll see a $40 trillion or $50 trillion loss.

Falling Stocks Do Not Predict Economic Disaster

Before you panic and sell everything except your guns, ammo, and those freeze-dried meals you stockpiled in the attic during the pandemic, take a breath. These figures come mostly from Larry Summers’ imagination rather than economic history. There’s no consensus that a $1 decline in a major stock index translates into a $5 loss in real economic output. Market prices reflect expectations of future profits, discounted by opportunity costs—not necessarily declines in production or national income.

There’s a deeper problem, too. The stock market is dominated by incumbents—firms that thrived under the existing economic regime. This is especially true of the companies large enough to move the major indexes. When the regime shifts, it’s no surprise that the incumbents take a hit. But what about the unlisted companies, the ones not yet born, or those whose value has yet to be discovered? A disrupted status quo creates new opportunities that won’t immediately register in index valuations. Summers ignores the potential for these offsetting gains.

Jason Furman Reasons From A Price Change

We were tempted to call the authorities in Cambridge, Massachusetts, to report a possible contamination in the water supply—something inducing irrational panic among the local academic population. Fortunately, Harvard economist Jason Furman had a somewhat cooler reaction. Instead of seeing the decline in financial assets as presaging economic devastation equal to the entire U.S. annual output, Furman merely indicated that we should take the sell-off as a sign that the market views the policy as economically harmful.

“Thought this might be a good moment to re-up this one,” Furman tweeted on X, linking back to his post from last month.

That sounds clever—and it’s certainly more level-headed than Summers’s belief in a tariff-spawned blackhole in the economy. After all, the stock market is supposed to reflect expectations of future cash flows. So, if something involves pain in the short-term but gains for the long-term, prices should increase at least in theory. And so, when the stock market plunges in reaction to a new policy, in theory it is a fair assumption that investors must not think the new policy is a “credible plan” to create long-term gains.

History, however, has not been kind to that theory. Stocks have moved up on news of what we subsequently learned was a policy mistake and dropped precipitously on obviously correct policy choices. When Fed Chairman Jerome Powell made his famous hawkish pivot in a speech in Jackson Hole, Wyoming, a few years back, stocks reacted violently. The Dow fell three percent, the S&P dropped 3.4 percent, and the Nasdaq fell almost four percent. According to Furman’s logic, this should have been viewed as evidence that the Fed’s hawkishness was bad for the economy in the long-term. Does anyone seriously believe we’d be better off if the Fed had just let inflation rip instead?

Markets reacted negatively to the tariffs. But prices are not prophecy and a decline is not destiny. A cardinal rule of economics—never reason from a price change—reminds us that movement isn’t meaning. And panic isn’t policy analysis.