The Oracle of Sun Valley

Larry Summers
Former Treasury Secretary Larry Summers. Photo: Rob Kim/Getty Images
Dylan Byers
July 8, 2022

Mid-day Thursday, Bloomberg TV spent nearly five minutes speculating on Elon Musk’s flight plans for Sun Valley. The Tesla, SpaceX and maybe-but-probably-not soon-to-be Twitter chief, who is scheduled to speak at Allen & Company’s annual confab here on Saturday, still had yet to arrive at a weeklong summit that most executives attend more or less from start to finish. Musk would arrive later that evening, but the uncertainty surrounding his plans had become a preoccupation for media outside the conference, as well as an amusing sidebar for executives inside the Lodge. This was understandable: Musk, intriguingly idiosyncratic—even by the standards of the Sun Valley set—was effectively the week’s headliner, occupying the close-of-conference slot usually reserved for a Warren Buffett or Bill Gates.

Many executives won’t be staying for Musk’s address, conference attendees told me (in some cases, as they were heading for the airport). It turns out that it takes at least a Buffett or a Gates to keep many of these people here into the weekend, especially since the lingering pandemic put the kibosh on Mark Zuckerberg’s annual, highly-attended Friday night karaoke party in Ketchum. But, more to the point, Musk actually isn’t the real headliner—at least, not in the eyes of so many of the tech and media luminaries I’ve spoken with here. That informal nod goes instead to a far less colorful historical figure: former Treasury Secretary Larry Summers, who speaks Friday morning.

In previous years, the “conversation” at Sun Valley—to the extent that hundreds of executives from media, technology, finance, sports and so on can ever really have one monolithic conversation—has focused on myriad topics: consolidation, innovation, regulation, and so on. But this year, there actually has been one very omnipresent subject dominating the attendees’ time: recession. “It’s all recession,” one Silicon Valley executive told me when I asked what people were talking about on the inside. “Covid stories and recession.” 

The prevailing wisdom among this set is that the coming recession will be brutal, and could last for a year, if not longer—resulting in all manner of adverse near-term effects on their businesses, from diminished ad revenue to staff cuts to supply chain issues. Heading into this long and dispiriting slog, executives from every industry are looking for answers to the same three questions: Was this avoidable? How long and how bad will it be? And what will it take to get out of it?

Enter Summers, a longtime, sometimes controversial economic Cassandra who has been among the most prescient—if not the most prescient—voices warning us about our impending crisis. As early as February 2021, Summers was warning that Joe Biden’s $1.9-billion Covid-relief package could “set off inflationary pressures of a kind we have not seen in a generation.” In March of this year, he warned that the Fed’s policy trajectory “is likely to lead to stagflation… and ultimately to a major recession.” In a much-discussed appearance on Ezra Klein’s podcast in April, the host of the show noted that things Summers was saying six months ago were now “conventional wisdom.” The Wall Street Journal editorial board has proposed Summers for Fed chair, “given his prescience about inflation.”

“Everyone wants to hear what Larry is going to say,” one media executive here said. Under the circumstances, I figured it would be good to ask him for a preview of his remarks—or at least an answer to the attendees’ burning questions. So, while the media scrum was outside the Lodge on Thursday evening eagerly awaiting Elon’s arrival—an uneventful arrival, I later learned, as he was quietly shepherded through the back of the building—I caught up with Summers, who was fresh off the golf course. The following is a lightly edited version of our conversation.

Dylan Byers: Was all this avoidable?

Larry Summers: We could not have avoided difficulty in a period with the Ukraine war, and with the dislocations associated with Covid, but excessive stimulus in the early part of the year and continuing excessive monetary stimulus through the year from the Fed exacerbated our inflation problems and increased the severity of the hangover we are going to suffer.

How bad will it be?

There is no reason as of now that this needs to be like the great financial recession of 2008, but the recessions after the speculative excess of 2000 or after the excesses of 1990, where unemployment rose by several percentage points and the economy was notably soft, are indicative. Unemployment—if the recession is sufficient to contain inflationary pressures—quite likely will reach 6 percent.

How long will it be?

We should be prepared for a downturn like in 1990 and 2000, but that is different from a downturn where people are worrying if cash is going to come out of ATMs. There is nothing in the current environment that should lead people to expect the level of abyss of 2008 or 1982. There’s a big difference.

How do we get out?

For the sake of the economy, just as it’s dangerous not to carry through on a full course of antibiotics even if you feel better, the Fed would be making a mistake if, whenever inflation starts to come down, even if the economy appears weak, they were not to carry through on a program of tightening. In terms of how much of an increase in interest rates is necessary, that needs to be judged as the economy unfolds. But it can take more than one downturn to bring inflation under control, and that’s something we want to avoid by taking the necessary medicine. 

It’s vitally important that there be an optimistic vision for where the country can go. Working to promote innovation, strengthen education, to keep markets open. Recessions are not ultimate catastrophes. We are the place where money wants to come, the place where most of the world’s good ideas come from, the place with vast entrepreneurial capacity. So if we can get out of our own way politically, there is enormous potential for the U.S. economy over the next decade… I would rather be playing the hand of the U.S. than of any other country.

Running of the Bulls

Summers’ prognostications will resonate with executives long after they return home to California and New York, and are likely to shift strategic priorities. As I reported earlier this week, media companies that last year looked unstoppable—Netflix, Disney—have since seen their share price plummet and are now even being loosely discussed as hypothetical acquisition targets. Silicon Valley’s social media firms, ever-reliant on ad revenue, will have to slow growth and can’t rule out layoffs. Meanwhile, Hollywood giants who spent years operating on a streaming-or-bust logic are once again discovering that it’s not so bad to have multiple revenue streams and boring cash flow positive businesses. As I reported Wednesday, Bob Chapek has scrapped Disney’s potential plan to spin off ESPN, a recognition that linear revenue may be crucial in a down market where Disney+ subscriber growth has slowed.

Still, much of the next 12 to 18 months is well out of business leaders’ control. And they can’t do much besides wait and hope for the economic situation to improve—something almost no one I spoke to this week feels terribly bullish about. Especially given that the Federal Reserve, tasked with taming inflation while finding a “soft landing” for the economy, is led by the same group of people who helped get us into this mess in the first place.

At the end of my conversation with Larry Summers, one more question occurred to me—far-fetched, but maybe worth asking: Would he take the Fed chair job, if offered? “My wife is not the only one who thinks that’s a terrible idea,” Summers told me. “I’m thrilled with the life I have right now—and the opportunity to speak freely.”