The first shutdown of the federal government in 15 years now looks more likely than not. Less clear is what that event would mean for the economy. For some perspective, Fortune talked to Larry Summers, who was Deputy Secretary of the Treasury during the 1995-1996 shutdown, before going on to lead the department, serve as president of Harvard University, and make a return to Washington as President Obama’s top economic adviser. Now teaching back at Harvard, Summers says if Democrats and Republicans have a similar stalemate on lifting the debt ceiling, the results would be cataclysmic.
How severe was the economic impact of the last shut down?
I think it was damaging to confidence and had some mild impact in directly reducing the GDP. But it was not a catastrophic event because people perceived it would be relatively temporary.
Is that same dynamic at work here?
The last shutdown came at a moment when the economy was riding high. The economy is now riding pretty low in the water, so the risks are significantly greater.
To confidence, or in terms of the direct impact?
The adverse effects of a reduction in confidence are greater and the direct effect’s the same, but it will potentially have a larger effect at a moment when there’s less positive going on than there was then.
How does it compare to uncertainty sown by the threat of a default on our debt?
A default on the debt is of a different order. An actual default on the debt would be a catastrophic event that would cast shadows for years to come. I can’t conceive that the debt limit stuff will actually end in our default. But if it did, that would be cataclysmic.
But is the threat of a default already hurting confidence?
I think markets do not yet have in view any real probability of a default. And if that were ever to change, it would be very serious indeed.
Beyond this funding debate, Congress has a much tougher fight looming on the 2012 budget and entitlement reform. What do you make of Paul Ryan’s proposal?
I share the objective of getting the debt under control but think that it is a constellation of magic asterisks and unspelled-out assumptions — the medium and long-run judgments about how much government spends — and there’s nothing terribly specific in it in describing what the actual cuts will be. There’s much less there than meets the eye.
Is the White House ready to engage seriously in a debate on entitlement reform?
I don’t want to speak for the White House. I just don’t want to do that.
Should we be looking to raise revenue from tax reform as part of the mix?
The deficit problem is serious enough that we’re going to need both revenue increases and expenditure cuts.
House Republicans are aiming for a corporate top rate of 25%. Is that achievable?
Not without extraordinary base-broadening.
So that would involve getting into the mortgage and charity deductions?
Let me leave it the way I said it.
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