Paul Krugman
Appearances
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
That's right. He thinks of it as a zero sum, that basically if we sell more to foreigners than they buy from us, than we buy from them, that we win. And if we buy more than we sell, then we lose. And that's never made any sense as a story. And it's pretty clear. I mean, when he, I have to, even I was shocked when he, said, I'm going to have 25% tariffs on Canada and Mexico.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I mean, if you know anything about modern manufacturing, there is no U.S. manufacturing sector. There's a North American manufacturing complex in which things like auto parts may cross the border six or eight times in the course of putting a car together. And so that's completely crazy, but he doesn't know that. And who's going to tell them?
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Oh, yeah. I mean, this is, we have a remarkably, the tech sector is remarkably oligarchic. There are a handful of players that have strong market positions. It's It's called a Broligarch. Well, I like the Broligarch too, and that's good. But it's a... And they do their best to prevent competition. They do... The nature, to some extent, of tech is that once you've sort of committed to a platform...
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
It's very hard to get out of it, which gives them a lot. And this is, you know, if there are things I, again, something I'm sure I would never be able to write for the Times, but I'm a big fan of Cory Doctorow's, uh, uh, Intuitification.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
You build it, you build a platform that could get a lot of people locked in through network externalities, and then degrade the experience, step by step to extract the maximum amount of money from it. So these guys, and they're, of course, they're using the courts as well to try and, and prevent competition. So, but really, is anybody surprised?
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I mean, I don't know where we are on this. First of all, the ultimate value of AI is very much up in the air. We still don't know what it's worth. I mean, I actually had someone who works with us on the text. I have a textbook. But he also teaches students, and they're all totally into it. AI, and he fed one of my Substack posts into ChatGPT for a summary.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And my God, it bore no resemblance at all to what I said. And it fantasized. It somehow had me talking about Brexit, which wasn't in there at all. So, I mean, that's just an example. They say there are some things that it's really useful for, but we don't know. There's a real question whether the amount of money that's being thrown at it will ever make sense. Right.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Well, basically, at the moment, I'm trying to build an audience for Substack. Okay. And, yeah, one of the things that I couldn't do at the time was, you know, have an independent newsletter. I used to have an independent blog, but they eliminated those a long time ago. And so now I'm off there, able to weigh in on...
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
With the right players, although it's a little bit what we used to call the Sierra Madre effect, where somebody said, the reason gold costs so much is because of all the people who went out looking for it and didn't find it. And tech is a lot like that. But, yeah.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
The question is, it turns out that a lot of established tech has turned into kind of, you know, one of the old days we would have called natural monopolies. It settles into a handful of big players and... That happens really fast, actually, with internet-based stuff. I suspect it may happen with AI.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Now, whether it's, I mean, open AI does look like it's got a big lead, but maybe there's still room for somebody to jostle the side. But I very much doubt that we're going to have 10 years from now multiple competing LLMs. It's commodification of them. That seems unlikely. What's more likely is that we'll have a kind of network effect where everybody is using something.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
That's right. And we have no idea, really. Right.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And I think further, we can say that nobody has any idea. We just don't know how it plays out.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
You know, just generally, you know, how about learning a lot of basics? You know, particularly grad students, actually all students, they want to learn a lot of tools for analysis. And if you start using AI for every question, first of all, you're not going to get those other skills. And secondly, you know,
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And apparently, again, there are some things it does, but on anything I happen to work on, the Munkhausen effect, it fabulates. It just makes up stuff.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Actually, it was funny. I was ahead of the curve because they already had digital ride hailing for taxis in the U.K. years before it came to the U.S.,
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
So I was spending time over there, and I got cussed into it. But it's true. And something, look, something that actually is useful to me, and it's fundamentally the same kind of big data thing, is translation. I remember when translation or speech recognition were both total jokes, and they're completely usable now.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I haven't looked at it.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
By the way, in terms of giving students advice, it's not very long ago, like maybe two years ago, that you would have been telling your students learn to code.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And it turns out that's exactly one of the jobs that,
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Plumbing is going to be a long time before we have robot plumbers.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
whatever seems appropriate, and even have charts and funny pictures and whatever else. So that's what I'm doing for now.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, on TikTok, you know, that is one social media platform that I have never visited in my life and don't really expect to. But we know that, you know, in many ways, the... Social media are media. And we wouldn't want a largely corona-controlled entity to own the New York Times. We wouldn't want it to own one of our major cable news networks.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And the same logic really does apply to social media. So I'm fine with the idea that we really need to force divestiture. Now, I mean, you could say the general principle is you shouldn't have people who are fundamentally hostile to American values, owning social media platforms. And so, of course, Elon Musk did divest Twitter.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
But anyway, the China story, let me just talk about stuff I actually know something about. China, it's a really interesting case because China has moved very quickly from incredible, roaring economic success story towards something that looks a lot like Japan. circa 1990.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Of course, Japan was a huge... I'm old enough to remember when airport stores were full of books with samurai warriors on their covers promising to teach you the secrets of Japanese management. But what's happened with China is we go to the fundamentals. Their working age population has been declining now for almost a decade. So they're in a kind of a real...
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Japanese-style demographic slowdown, it's interesting. They are still doing really impressive stuff on some advanced technologies, but as best we can measure at the overall technological level of the economy. what economic jargon calls total factor productivity. But anyway, the overall efficiency of the Chinese economy is not growing very fast.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
The big convergence on Western economies that they were experiencing in the 80s, 90s, even the first decade of the 21st century appears to have largely stalled, which means that China has gone from an economy that's capable of doing you know, 8% growth not that long ago to something where 3% or 4% would be really a lot. But their whole economy is set up to be an 8% growth economy.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
They have very, very low consumption relative to income. The government kind of suppresses distribution of
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
of income that comes from production to the public as a complicated story but basically lots of their growth does not filter down to consumers um and they maintain investment of you know 40 of gdp which is like triple what uh uh what we do um and there's no place for that money to go so they were able to mask it for about a decade with a gigantic housing bubble
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
with all those ghost cities and all of that. But they run out of room. They can't do that really anymore. But they seem to be weirdly incapable of accepting that they need to kind of grow up and accept that they are going to be a middle-income, moderate-growth economy from here on in.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
That just adds to the pressure, because one way that you can temporarily try to deal with that kind of stagnation is to run You have this productive capacity and not enough domestic demand, so you want to export stuff. And I'm not sure exactly how TikTok plays into that, but the reality is the world is not going to accept all those exports.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
The world is not going to see BYD destroy their auto industry.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, it's just not. I mean, even if you can make an intellectual argument that we should accept it, it's not going to happen. I used to spend a lot of time in and studying Japan.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I was one of the relative handful of Western economists who looked at Japan's problems in the 90s, and instead of saying, oh, those stupid Japanese said, gee, this is a big, advanced country with policymakers who are not ideal but are not idiots. If this could happen to them, it could happen to us. And sure enough, it did.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
But a lot of us were very, very critical of the Japanese for not being more forceful about And I've often argued that those of us who were critical with a group that included, among other people, Ben Bernanke, that we should all go to Tokyo and apologize to the emperor because they actually did a better job.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
First of all, they did a better job of dealing with their financial crisis than we did, but also that they, in the end, handled it pretty gracefully. You know, Japan is no longer going to rule the world, but they never had mass unemployment. They haven't had mass social unrest. there's every indication that the Chinese are not managing that kind of graceful downshifting in their growth rate.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And so that could be really ugly.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Oh, but they, no, but they just need to let more income get through to consumers. They need to shift from 40% of GDP invested to 25 and then 20%, which means increasing the consumption share by the same amount. And now it's true, they took the Japanese about, 15 years to make that kind of shift. And the Chinese have delayed this so long that it's a much more violent thing. But still.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, what a strange thing.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah. Well, and it's, I mean, during the campaign, Trump was saying 60% on China, and that may now escalate. And, yeah, this is rough. I mean, particularly, you could say, well, all right, they can just export to someplace else, but where? A fair bit of stuff was probably, in effect, you know, rerouted through Vietnam, but that won't be, that will be cracked down on.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I mean, I was hired at the beginning of 2000, and literally, a Halloranian who recruited me at the time said, you know, we have five guys writing about the Middle East and nobody writing about the economy, and the Middle East just isn't interesting anymore, which turned out to be a pretty bad call, but it was also the economy, and it was just a very different time, and we were all having fun with dot-coms and all the...
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
No, because we, you know, we do not want... the world's biggest country, by some measure, the world's biggest economy, we do not want to see them descend into chaos. And I mean, other things, you know, autocracies that are failing at economic management have this habit of trying to distract people by launching wars. You know, I find myself thinking about the Argentine junta and the Fallen Islands.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
You know, I've been around for a long time here.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, a lot tougher, although that didn't work out too well. No, still. And that would be disastrous for all of us.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, so a trade war would be bad for just about everybody, but it would be especially bad for Apple. And Tesla. And Tesla. But one of the things that makes me very unpopular when I do talk to tech types is saying that for practical purposes, in terms of the lived experience, technology has really slowed down a lot. I remember when people were enormously excited at the latest iPhone.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Or, you know, I remember when smartphones first became available. And now it's okay. It's going to be thinner and foldable. Well, that's fine. I have nothing against that. In fact, I'm pretty much in the Apple ecosystem in terms of my own phone and computing and all of that. But it's not. world-changing by a long shot.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And so, yeah, they're going to, in a way, Apple is kind of in the position that China's in, you know, a very high growth past and a kind of, if they do it right, an okay but not spectacular future.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, maybe there's something out there that will do it. Although at this point, everybody's into AI, and that's where all this attention comes from. But hard to know. I mean, new technologies are, by their nature, really hard to predict what might be coming down the pike, what might be transformational. But as they are, Stan, no, it's hard to... Like China.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
That's on my, not even decline. It's just downshifting. It's sort of, you've been driving along the highway at 70 miles an hour, and now you're on local streets where you really shouldn't be going above 30. And how do you, can you make the adjustment to driving safely under these conditions?
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
It's, you know, stuff looks silly, but interesting. And then, you know, turned into a much grimmer world. But, you know, there was a period, my best year, the best years of my life were the worst years for the world economy, which was the aftermath of the financial crisis when there was a perfect convergence between my job as a journalist and my own academic research.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Foldable phones. Will you get one? I wait until the last, you know, I only have my current phone because my last phone was viciously attacked by a tile floor. Okay.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, well, different business. I want this phone.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I've actually invested in one of those poor pay search engines that doesn't do AI. Oh, okay. Because anything I actually really need to research, I have a much better idea than ChatGPT of what's actually a relevant result. For now, Paul. It just gets in the way. For now. No, eventually. Lots of things can be replaced. And then me as well.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Let's just say watch this space.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I love, it's such a... Well, you know, there's, first of all, I'm talking with various people on various things, and I also have some constraints because, you know, and just in general, I'm still on the payroll at the Times through the end of this month, and also I don't want to be one of those people who trashes their place on the way out. Yeah.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Well, let's try. I don't know. I haven't quite figured that one out yet. Skims?
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Look, I'm 72 and fighting it, but I don't think fashion is going to be my thing.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
It's more than that. What we're seeing is that, I mean, some of us had warned that a second Trump administration would be one in which the coercive power of the government against business would be confused. It's really a mixed economy. The government plays a big role. Private sector plays a big role.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Lots of things in the private sector depend upon government decisions that are reasonably favorable. As long as you have rules, nor rule of law, then that kind of works okay. But if you start to have arbitrary exercise, and one of the things we worry about on tariffs, it happens to be the case that the way that our trade laws are written, the president has enormous discretion in tariff setting.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And in some ways, one of the worst things about Trump tariffs will be not the tariffs he applies, but the ones he doesn't, because he can play favorites with who gets to get exempted from a tariff. There's some evidence he did even on the relatively small tariffs he imposed in the first term. So if you're ABC and you're looking at all the ways that Trump can hurt you if he wants to, then you...
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Not only was I an economist, but I had literally spent a lot of time on the Asian financial crisis in the 90s and had warned that something like that could happen here, and it did.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Pay protection money. That's what just happened. And this is a much bigger thing than just competition. This is basically big business already acknowledging that we've become a protection racket.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And that's scarier than anything. I mean, it's one of those reasons to wonder whether 2024 was maybe the last real election.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, for the last 25 years. In 2000, roughly all advanced countries seemed to be about on the same level technologically. The U.S. has now pulled well ahead. And one of the pieces I've written recently says a lot of that is actually just geography. There's probably room for only one Silicon Valley anywhere in the world.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
But a lot of it is also, yeah, openness, rule of law, success depends upon actually producing stuff that people want and can use, on being able to attract the best and brightest from around the world to work. And all of that is at risk. You're in a situation where
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
We know that there are people with influence on Trump who think of tech jobs as being goodies to be handed out, and don't let foreigners have those. We know that we may well be heading for a situation in which success in business depends upon poll with the administration, depends on whether you're in or out of favor. Right, proximity.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And we even have, I mean, for what it's worth, regimes like that, according to an IMF study, it subtracts about 1% from growth.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I mean, I am actually not surprised because I'm a cynic. And the thing about tech, by the way, is these are no longer upstart innovators that we're talking about now. No, they're not. We're talking about people who made their billions very, very young, but they're now middle-aged. And they're sitting in many ways on these monopoly positions created by... by their past efforts.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And of course, they're going to try and curry favor with the government. The libertarian ideology was never more than skin deep. But I also think that backing Trump This is the classic error. Oligarchs, it's funny, in a democratic rule of law nation, great wealth brings a lot of power with it.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
There's a lot of stuff I think I probably shouldn't talk about. Okay. But one thing was exactly to be able to do this. I mean, there was no... The Times had actually canceled my newsletter, even at the Times. And look, I'm still a wonk. I want to do stuff where I can have lots of charts, maybe even an occasional equation. And also the flow.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And it's natural to think, well, if I help elect an autocrat who is sympathetic to my interests, that I'll have even more power. But you very quickly find out. that actually all of the power is on the other side. I don't think analogies with Putin, I mean, I'm hoping that we're not going to go full Putin, but the analogies are really clearly there.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And the oligarchs who helped put Putin in power thought that they had bought themselves a government, and they found out that they were working for him, not the other way around. And if they didn't work for him, their fortunes can disappear quite quickly. Yes, windows started to look... Well, falling out of windows. I hope we don't get to the falling out of windows stage, but it could.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And so, no, this is a... And that's going to happen very, very fast. I mean, I think there's a reasonably strong case, too, that Elon Musk and Trump will have a falling out and Musk will not be the winner. And I don't know that for sure, but... I'm actually kind of looking forward to it, to be honest. I'm not a saint.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
No, it's totally precedent.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I actually have been wondering about that. I'm planning to do a little... I'm not a historian, but I think it really is an interesting question. We had a Gilded Age in which there were enormous fortunes and a lot of raw corruption, and yet... democratic institutions were not corrupted too much. I mean, a lot of purchased votes and all of that.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
But in the end, when people voted for something different, those votes were honored. We didn't lose, in some ways, the essence of what America's about despite all of that. And it's an interesting question to ask, why didn't the J.D. Rockefellers and the J.P. Morgans You know, go to the limit. Why were they willing to allow, you know, Teddy Roosevelt to be elected?
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah. Well, FDR brought us closer to a coup than we like to think, but yeah. But the, you know, how did the progressive movement manage to flourish in a time when the wealthy also had that? And I don't quite know the answer, although it's possible.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
hard to believe, but it's possible that people actually had at least some values and ideals, enough to say that, okay, I will go this far, but not beyond that point.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I'm not so sure either, but whatever it was.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
It's one thing, I mean, you would know better than me, but my really strong sense is that particularly the tech bros I mean, everybody loved and admired them 10, 15 years ago. And now they're not loved and admired universally. And I think that really... I do spend enough time in meetings with people of various... People at the top of multiple status hierarchies.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And everybody wants to be what they aren't. And these are people who can buy anything except... Except love and adulation.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I'm sorry, can I say this? Apparently somebody used grok to search for the word most used to characterize Elon Musk. And it was asshole.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Rather weirdly, I felt like I wanted to write more than I was able to at the time because I was limited to two columns a week. And there's so much going on right now. I've got subjects and topics stacked up in a holding pattern waiting for a chance to write about them.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Why don't you go first?
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Okay. Wow. So fails, you know, I live in New York, although it's not where I am at the moment. But, and I have to say this whole business with congestion pricing, which was on and then off and is now down on, you know, this is completely insane. Driving into lower Manhattan, the costs you impose on everybody else by making that, you know, this is insane.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
If there was ever, and not only was it something that we should be doing just plain to discourage people from doing this, but it was also a revenue source for really badly needed. So that has been a, I thought we'd finally gotten to the point of doing the right thing there. And it's, you know, I mostly take the subway, but this does get at the quality of my life
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
If you try to estimate, you know, what the true cost that you impose on other people by driving into lower Manhattan during the workday, it's on the order of $100 to by slowing up other people. So the congestion pricing should be really strong. So that's a big fail. And New York is still my... I sometimes, even when I'm elsewhere, I say something, well, I'll be in the city tomorrow.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
The city means New York. There's only one city. There's only one city. But this is really... Anyway, Wynn's. So I have lots of questions about Apple and Tim Cook, but Apple TV, I'm a science fiction fan. And first of all, just in general, film science fiction, we are in a golden age for that. The two Dune movies, I grew up with that book and that, my God. Villeneuve was incredible.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And now I just saw, just about an hour before we got online with each other, that Tim Cook has extended Silo for two seasons. And I'm both a total Silo freak and a total Rebecca Ferguson fan. So two more seasons of Silo, that's a significant improvement in the quality of life.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, I found it's funny. I have good friends on Wall Street who are absolutely into severance. And I not not quite maybe because I've never actually worked in a cubicle. I don't it doesn't quite work the same way for me, but I sort of see it.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Dark matter I've been working through. It's stressful for some reason. Yeah. Maybe a little too stressful for these times. You would think that Silo with everybody buried underground would be worse.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I have a cluster of civilized Wall Street friends. They were constantly going back. I was the one that turned them on. This is already old stuff, but Orphan Black once upon a time. Amazing. Amazing. So this is, anyway, so, you know, I think my, I'm reading a little bit less news now because it is painful and so better streaming entertainment.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Oh, I should look at it.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah. All right, well, yeah.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I'm still absorbing Dune 2. And... Nothing has really, really grabbed me since then.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I should go to it. Although I did actually see Oppenheimer a little bit back. Monk. Wonk. Wonk. Wonk. Wonk. Wonk. Wonk.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah, among other things, it gives me a chance to be silly, you know?
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Oh, and actually, by the way, I'm always a little bit shocked in general in pop culture at what I like. It's the musical stuff that's showing up now again at the end of my newsletter. But I was absolutely shocked to find out I really enjoyed Fola.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Well, but that is, you know, I was able to start, you know, the most recent, just before we recorded this, with Mike Myers as Dr. Evil saying $1 million, you know, and I'm not sure that would have been beneath the dignity of the times, but not beneath mine.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I think that's a little bit, you know, it's certainly a little distressing that billionaires are so important to the finances of both parties. But, you know, the... I... I mean, I watched the campaign a lot, and I didn't see any real evidence that Harris was being more centrist than would have been warranted by the politics.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And in general, I think there are times when it's clearly billionaires are buying their interests, but I didn't see a lot of that in this campaign. I'm going to have a newsletter on that very quite soon about that. about, given the assassination in New York, about healthcare. But the reason we can't have Medicare for all just now is not because billionaires are in the way.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
It's actually much more just that most people are reasonably happy with their private insurance. And even if you tell them, look, this government-provided insurance will be better, and people who have Medicare actually are happier than you are, that's just not, people won't believe it. So it's not the billionaires that are stopping this.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Well, the polls actually show us that people really like their private insurance unless they get sick.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Oh, yeah. Buying political influence is still an incredible bargain.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Well, and I'm, you know, as a New Yorker watching... The current mayor and the scandal of the bribes that he was receiving from the Turks. Yeah, it's tiny. It's like two days in a luxury hotel in Istanbul. My God, that you can buy the mayor of New York for that little money? I know.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I'm definitely going to have a good time.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
So crypto has been, you know, I've been following the crypto thing. I've actually made money in crypto by going to conferences as a paid speaker, as a designated enemy. I'm there for people to yell at, and they paid me a fee in actual money. But, you know, it's a remarkable phenomenon.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And a lot of people, what makes it remarkable, aside from the fact that they're incredible price gains, but those of us who think we know something about monetary economics have asked, you know, does this thing look like money? Does it fulfill at all the functions it's supposed to? And not just talking about academics, but also, you know, financial industry types.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I'm part of various groups that have informal meetings. And in some of them, we've actually invited articulate crypto people. And the question is always, what... purpose does this serve? What can you do with crypto that you can't do more cheaply and more easily with conventional stuff? Bitcoin and Venmo are roughly contemporaneous in terms of of their creation. And then Mo is clearly useful.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Everybody uses it. Why would you want to go through all the somersaults and so on? And have never gotten an answer in terms of legitimate uses.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
It's crazy high, but still not in use for anything legal. That's the most amazing thing, even where they've tried. I mean, the... You know, El Salvador tried to make Bitcoin legal tender and actually subsidize people's crypto wallets on their phones, and they still don't use it because it's awkward. It doesn't really, you know, dollar-linked digital payments are just a much easier tool.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
But it just occurred to me after a few stories, in particular, after seeing some of the latest whining from Elon Musk, that the real trick here is that we were asking the wrong question. We're asking, what legitimate use case is there for this? And there still is none. Nobody has actually come up with one. But illegitimate use cases are a pretty big deal.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And if you actually know anything about currency, you know that actually crime is big business. You know, the vast bulk of the dollars in circulation by value are $100 bills. And nobody uses $100 bills. Most people never see one. You can't actually go into a store with a $100 bill. But there's trillions of dollars.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
There's actually about $6,000, $60,000 bills in circulation for every man, woman, and child in the United States. Most of them, we think, and this is all inferential, are outside the country. But we also are reasonably sure, although this is inherently impossible to prove, that they're mostly for illegal purposes.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Well, I mean, we've been through that before. Now, this is a longer run than most, but I've been around long enough to remember the dot-com bubble.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
uh when lots of people thought you know you're just stupid for thinking that this is a bubble um i remember the housing bubble where people um got extremely furious if you've said you know the housing prices circa 2006 did not make sense so you know it's the old line the market can The market can stay irrational longer than you can stay solvent.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Plus, there's also, and this is something I did write about in my last newsletter, there's a strong element of kind of, it's not just speculation, it's gambling. We ask, you know, who... A lot of crypto is clearly being used by... by Putin and by drug lords. But a lot of small players buying crypto are basically young men.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And contemporaneous with this big rise in crypto prices has been an explosion of sports gambling.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Also meme stocks, like GameStock is also, so that's probably a general phenomenon of people, you know, they probably would say, oh, I'm being a forward-looking investor, but the psychology is really that of gambling or, and so, you know, put all these things together, it's still kind of astonishing that it's gone this high, but then, you know, the National Bitcoin Reserve
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Amounts to a huge government bailout, which is, you know, for a libertarian invention, it's... Very fair point.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Yeah. So, first of all, you know, the fact that somebody's bringing money to the United States, you know, the regulations are there for a reason. Now, if you want to fix the regulations, fine. But to say, well, you know, bring a billion dollars to the U.S., it'll— And I'm not sure what. We won't care if you're polluting the air. We won't care if you're poisoning the water.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
But what's really funny for somebody certainly with my background is there's a... I'm trying to figure out if there's a way to say this and that it doesn't totally put people off. But it is a fact, it's an accounting identity that the trade balance plus... net capital flows into the United States equals zero. The balance of payments always balances.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And so if we can persuade foreigners to invest more in the United States, then Arithmetic says that we have to have a bigger trade deficit. So you have Trump on the one hand saying, you know, we're subsidizing Canada and Mexico because we run trade deficits with them.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And the other hand saying, it's great I'm bringing in all this foreign money, which guarantees one way or another an even bigger trade deficit. And I... I have no question in my mind that he has no idea that that's how it works.
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SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
I mean, I have no way of reading Trump's mind, but lots of stuff he makes, you know, on crypto, he was, it's total nonsense. Oh, and also I'm going to throw hundreds of billions of taxpayer money at it. So he changes his mind on lots of things. But tariffs... have been an obsession of his for a very, very long time, long before he really entered politics.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
Trade deficits are bad as a long obsession of his. So I would be surprised if he's willing to water it down too much. But if he doesn't, then the... He has a very kind of 19th century, if you like, view, which kind of makes sense, you know, given he loves William McKinley, but of trade as countries trade food and manufactured goods for each other, and that's kind of the end of the story.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
That's not the world we live in now. We live in a world of these... highly interdependent economies and supply chains. Trump thinks that because we run a trade deficit, because we buy more from other countries than they buy from us, that we have all the leverage.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
But the fact of the matter is that some of the most effective forms of retaliation that other countries can do are not levying tariffs on U.S. exports, but putting taxes or restrictions on things that we import. And I thought it was striking to see that even the Canadians are talking about putting export taxes on oil to get the Canadians mad, and seeking revenge takes special talent.
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
So the fact of the matter is that we could be very much in a world of Mutual punishment over trade, escalating trade war. And the trade war will not look the way I think Trump imagines. He imagines the US puts on tariffs. Everybody says, oh my God, we need access to the US market. What can we do?
Pivot
SoftBank's Investment, ABC's Trump Settlement, and Guest Co-Host Paul Krugman
And they surrender, although it's not even clear what they surrender, because I'm not sure he has coherent demands. But what would actually happen is a mixture of retaliatory tariffs, but also retaliatory export restrictions and just a big global economic mess.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
But then along comes this, which is like nothing we've ever seen before. That's a very Trumpian phrase, like you've never seen before. But I can't recall, I don't think there is any case in American history, short of the onset of World War II or something, where there's been so much uncertainty about what really important policy will be even like next week, let alone over the next couple of years.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
You could, we could imagine. If Trump had, I think probably too late to fix it now, but if he had convincingly said, we will now have 20% tariffs on everybody from now on, that might have been absorbed as businesses would start to invest on that basis. And yeah, we pay a price, but those tariffs Stable protectionism is a bad thing, but it probably does less damage than many people imagine.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's one of those things where the more you know about it, the less it worries you. But unstable protectionism, coupled with all the other instabilities out there in policy, you know, how many programs is Doge going to axe? How many federal workers are going to be laid off? What's going to happen to Medicaid? That all creates an environment that is really bad for business.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
I think, I mean... God knows, I mean, the 1930s scenario is always there. I guess my concern would be, first of all, that, yeah, we are really in a completely new space in terms of policy. There's never been anything like this craziness in U.S. history. And so that would make you worry. And then there are other things. I mean, we've had an incredible... boom in tech stocks and AI and so on.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And I have been in the budgeting business since the 90s dot-com bubble. So I do worry that these things can be big and they can lead to years of painful losses.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's always a question, what does Donald Trump actually know? I mean, there's a guy who goes around saying that his approval rating is in the 70s. So, yes, I mean, I'm sure that Scott Besant at Treasury knows that those indicators are all flashing yellow or red. Does Trump know it? Is there anybody who's brave enough to go in and say, Mr. President, this is really working out badly?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's not clear. But he knows the markets. He knows the markets. He can see the stock market. Well, but he may think that they just don't understand the brilliance of his policy.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
I think he's got this very crude view that whenever somebody sells more to us than we buy from them, that they're taking advantage and he's going to end that and people will see that he was smarter than everybody else all along. I mean, there's no indication that there's any deeper agenda, any deeper thought.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
I mean, if nothing else, anyone who thought that there was a bigger agenda, that there was some subtle reasoning going on here, the shape of those tariffs that were announced yesterday should tell you that no, it's just... Donald Trump doesn't like trade deficits, and he thinks that tariffs can cure them.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Wow. I think most people thought it was going to be some kind of across-the-board tariff, the same on everybody, or maybe two or three different types of tariffs. Instead, he announced this whole complicated different tariff for every country at levels much higher than the smart money or the money that thought it was smart was betting, something like 23% average tariff now, which is huge.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah. I think what you need to bear in mind is that the starting point for all of this is Donald Trump wants tariffs. And people around him are going to give him those tariffs. And then everything else is kind of backfilled, trying to rationalize what they're doing. And there's no reason to believe that any of this is actually motivating what they're doing.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
This is just who they are and what they want to do. So, yes, there are multiple layers of internal contradictions in what we're hearing from the Trump administration and its supporters, but not clear that any of that is real. That's just all problems with the stories they're telling. But the fundamental policy is we're going to slap on a lot of tariffs.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
can tariffs really reduce the trade deficit a lot? And the answer is, it's really hard. There's a lot of stuff offsetting forces so that even lots of tariffs won't do much to reduce the trade deficit. But if you put them high enough, if you basically shut off international trade, then yeah, you can't run a trade deficit if you can't trade. So there's a bit of a story there.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
But then there's the second level, which is even if we eliminate the trade deficit, Would we re-industrialize or would we re-industrialize to an extent that you would notice? Germany. Germany runs enormous trade surpluses. And even Germany has seen a large decline in manufacturing as a share of total employment.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
So if we were to somehow raise ourselves to German levels of manufacturing, people would still say, what happened to the industrial nation we used to be?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And then there's a calculation, which I probably won't inflict on our listeners here, but if you try and figure out how much additional manufacturing we'd get if we could somehow eliminate the trade deficit, yeah, it's significant, but it would get us from 10% of employment to maybe 12.5% of employment, but not back to the, 30% of employment that used to be once upon a time.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And basically, the decline in manufacturing employment is mostly driven by automation and productivity growth, not by the trade deficit.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's fine as a principle. International trade is governed by something called the General Agreement on Tariffs and Trade, which goes back to the 40s. And Article 21 basically says forget about everything else we said here. If your national security is at risk, do whatever you feel you have to do. So we can ask whether being so dependent on semiconductors from Taiwan –
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's higher than U.S. tariffs after Smoot-Hawley was passed. And trade is a much bigger part of the economy now than it was in 1930. So this is the biggest trade shock in history.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And I actually think probably not.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, because there would be such a huge cost. So there is just obvious how much it would raise costs. But in fact, well, we have the CHIPS Act, which is supposed to make us more, among other things, more independent on semiconductors. But Trump says that's terrible.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
If you were asking what does our national security-oriented industrial policy that tries to keep production of strategically important stuff in the United States look like, it looks like the CHIPS Act. It looks like what the Biden people were trying to do. Now, probably bigger than that. In an ideal world, we'd be doing substantially more, but that's how you do it.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
The idea, you know, putting high tariffs on imports of clothing from Bangladesh is is exactly what you shouldn't be doing. That's the kind of thing that is disruptive, raises the cost of living for American consumers, does nothing to make us more secure.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
There is a national security rationale for domestic production, but also for friendshoring and for nearshoring, because stuff that's close by is a lot easier to secure. If that's what we're wanting to do, then we would not be levying tariffs on Vietnam and Bangladesh, and we would certainly not be putting tariffs on Canada and Mexico.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, I mean, again, if you go back to the, you know, how did we end up with the trading system that Trump is now demolishing? It was actually, it was partly about economic efficiency, but it was also very much about a kind of enlightened, broad view of national security. Go back all the way to Cordell Hull, FDR Secretary of State. He viewed enhanced economic linkages as,
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
across the free world as a way to draw us closer together, as a way to create greater solidarity among democracies against, at that point, the threat of Stalinism. So what we're doing is tearing up, partially in the name of national security, a policy that was actually partially intended precisely to enhance national security. No question that the U.S.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
is alienating its allies or its erstwhile allies by doing all of this. And in some cases, they're making common cause with our potential enemies.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Okay, that was interesting because on the first thing was, where the hell, sorry, but you know, where the heck are they getting these numbers from?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Well, we have some direct evidence that that's what's happened. I mean, Peter Navarro, who is sort of Trump's trade czar, I don't know if he's still called that, but effectively, at least according to some of the reporting, he was recruited because they basically sent Jared Kushner out to search through Amazon to find somebody who'd written books hostile to China, right?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And so they actually looked for people who would tell the king what he wanted to hear.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
One of the stories I find really interesting, there's this, you know about it, I'm sure, but listeners probably don't, Bob Lighthizer, who's this longtime contrarian protectionist voice in Washington and generally regarded as kind of a, among my friends, as a sort of dark, satanic force in the trade policy debate, but is respected because he clearly knows his stuff.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's a podcast. Yeah, but where is this coming from? And in the Rose Garden speech, Trump said, this is all based on, we've examined the barriers that countries are putting up. And this is our calculation of their tariffs plus other things that count as tariffs. And we're trying to figure out where is that coming from? And that's a... I mean, it wasn't inherently a close. Who would be doing that?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And people had sort of assumed that he would play a big role in this administration. And he was passed over. And almost for sure, that's because he is independent. He's his own man. He didn't come to this out of fealty to Donald Trump. And so he might actually say to the king, no, no, not tariffs on Bangladesh. And so this is clearly a kind of courtier-driven thing.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
catering to and Donald Trump has been a you know has had this thing about tariffs going back 40 years so here we are the idea that there's some master plan or some deeper strategy it just it requires torturous ignoring of what's very clearly happening well one of my broader views about this administration I keep meaning to write a piece about this is that you can really tell the story of Trump one and Trump two by which is the other most powerful member of the family and
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, I mean— There was a moment a day or so ago, I guess, when Mike Johnson, the Speaker of the House, was asked about how this tariff thing is going to work. And he said, we must trust the President's instincts. And I was like, this is America? You know, we're not supposed to believe in the mysterious godlike divination powers of the leader.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
There's an essay by John Mayer Keynes in which he says that economics, although no one will believe it, is a difficult technical subject. And, you know, Trump presumably doesn't understand how feedback from your economic policies can come back and bite you on the rear. And left to himself, he just thinks, I know this, I'm a businessman, and God backs me.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And so you get these, without somebody who can say no to him, and everybody who can say no is gone, then he's going to do very strange stuff.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Okay. By the way, this is a topic that is... There's tremendous amount of mysticism about it. And you wouldn't believe how hard it was for me to write a Substack post about the role of the dollar because I kept on wanting to stuff too many things into it. And basically had my editor-in-chief, otherwise known as my wife, say, no, no, that's too many charts and too many tables. So, okay.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
careful assessment of other countries' trade policies, country by country. That's a massive undertaking. And it seemed implausible, basically impossible, that they could have done that. And it turned out that they basically took each country's trade balance with the United States, the bilateral trade deficit that we have with them, divided by the amount of their imports.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Look, the dollar is... Very special. A lot of international commerce is conducted in dollars, even between countries, even trade between non-U.S. countries. A lot of international lending and borrowing is in dollars. And one of the things is that countries that want to hold a stockpile Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And that, we said, was their balance. de facto tariff rate, and then they cut it in half. So it was this kind of weird calculation, not grounded in anything that back in the days when I used to teach trade courses that I would ever put in, but they came up with this sort of out of the blue calculation method that is country by country. And it's certainly original.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Which, believe it or not, is interesting, even if you aren't investing. He's just really a lot of fun. And, oh yeah, I'm just reading the latest book by Phillips O'Brien. He's a military historian, and he has a new book called War and Power. And he is always fantastic writers. He's pretty scathing, actually, even about Biden administration policy. But anyway, it's a really interesting book.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Okay, so every country has stuff that it sells to other countries, has stuff that it buys from other countries. The trade balance with any particular country is what we buy from them minus what we sell to them, there's no particular reason to think that these numbers should be balanced country by country. All kinds of things can go on.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
So there's a whole discussion, there's a whole literature in the research on what explains bilateral trade imbalances, but nothing that says that they are ipso facto evidence of foul play, which is what the Trump people seem to believe. U.S. trade policy has been based upon reciprocity.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
The legal basis for all of these trade agreements that we've had these past 90 years is the Reciprocal Trade Agreements Act of 1934, which is FDR establishing a system where the United States would negotiate that we will cut our tariffs if other countries cut their tariffs. And for the most part, there are a few exceptions, a few countries that actually do have
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
substantially higher tariffs than we do. But other advanced countries, actually, like us, had very low tariffs. So it was really kind of strange that that was the claimed policy because if that was the policy, then there was nothing to do because we'd already done it.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And then they have this other thing which basically says, if you are running a trade surplus with us, then we're going to take that as evidence of bad behavior anyway. We're going to try and kick at you if you do that. And that wasn't at all at least in the selling of this policy, what they said they were going to do.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, so I mean, Terminator, whatever it would be, Terminator 7, the movie would be, actually, Skynet doesn't bother starting a nuclear war. It just gives bad tariff advice. So this is part of the problem in general with what we're calling AI, with large language models, is that they pick up what's out there without necessarily being able to discriminate what's sensible and what is not.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
There's certainly no paper, I would imagine, in any economics journal saying, do this. But maybe some people out there are saying something like this, but it really is not... It's not something you would recommend if you know anything about how trade works, which ChatGPT does not. And so it really is kind of weird that it would come up with this.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And by putting different tariffs for different countries, you create an immediate problem. So we just put a much higher tariff on... goods from the European Union than from Britain. So if something from the European Union crosses the English Channel, spends five minutes in an English port, and then heads for America, is that a British good or is that a European good?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
You would have to have what we call rules of origin, which are very onerous. The amount of paperwork involved in enforcing rules of origin is huge. So anyone who knew anything about trade would say, wait, wildly different tariff rates on seemingly similar countries. is a big, big problem.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Probably a lot of EU goods transship through Northern Ireland to get the lower tariff rate that applies to Great Britain. And, you know, it's crazy. So this recommendation, you know, if it really is coming from large language models, from AI, this is a kind of, it's more of a cautionary tale about AI than it is something about economics.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, it's almost as if the markets actually think that the economics textbooks are right. And this kind of protectionism is a really bad idea. And specifically, I mean, there are multiple reasons why this whole notion that tariffs are going to restore U.S. manufacturing are wrong. But one of them is that we've had now decades of of integrating American manufacturing with other countries.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Particularly, there is no U.S. auto industry. There's a North American auto industry, which is sprawled across Canada, Mexico, and the United States. And when you say, okay, we're not going to allow the components factory here to send goods over to the assembly factory there, you're raising the cost of the whole thing enormously. You're creating huge disruption. So it ends up being...
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
bad for the U.S. auto industry, for those auto plants. And there are layers and layers of wrongness here. But the most immediate one is right away, this is actually hugely disruptive to U.S. manufacturing, not a support for it.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah. So there's an old argument that says you should not respond because other countries have rocky coasts should we block up our own harbors. That's the way it's sometimes put. And in straight Economics 101, that is mostly right. But first of all, there is still some hope of swaying Trump from this course. And then look, other countries, this is a problem Americans really have.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
We tend to not think of other countries as real. But they are. They're real. They have their own national identity. They have their pride. Economists have a standard argument for free trade, which does say you should always do free trade regardless. That has never worked politically. We did not get to our world of relatively free trade by convincing politicians to read David Ricardo.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
We got to a world of relatively free trade by actually exactly the thing that Trump is saying to do by reciprocity. I would not advise... Mark Carney, the Canadian Prime Minister. I could imagine. I actually do know him. For once, I actually know somebody who is actually governing a country. And I would not advise Carney to turn the other cheek towards U.S.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
tariffs, even though on a straight cost-benefit position, that might make sense, because you have to respond to that. You have to do something that appeals to Canadian national pride, which very much exists. So I would say that There's a pretty good case for retaliatory stuff. Yeah, if you can target it and go after Tesla, that might help.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
But for retaliatory stuff, partly just to—in some hope of changing U.S. policy, and also with some hope of at least offering some satisfaction to national concerns.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Okay, now there's a funny thing here, which is that ordinarily, I would say that while tariffs are bad, they don't cause recessions. It makes the economy less efficient. You turn to higher-cost domestic sources for stuff instead of lower-cost foreign sources, and foreigners turn away from the stuff you can produce cheaply.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
But that's a reduction in the economy's efficiency, not a shortfall in demand. What's unique about this situation is that the protectionism is unpredictable and unstable. And it's that uncertainty that is the recessionary force. If you were a manufacturing company in the United States, and your next investment is going to be, well, let's say a components plant or something.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And, well, should you put that components plant in Mexico, where it's cheaper? Well, not if there's a 25% tariff. But should you put it in the United States, where it's more expensive? Well, what if the tariff comes off? And so either way, you run substantial risk of just having stranded investments. And that's happening across the board. So this is the instability of policy.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
The fact that nobody knows what's coming next is, I think, makes a recession certainly a whole lot more likely.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah. I mean, the arguments were very much in bad faith in the aftermath of the Great Recession. It was just an excuse for somehow saying that this fiscal austerity that Republicans in Congress are forcing is not because of slow recovery. It's all because of Obama and uncertainty and whatever. And that was a Yeah, I became viscerally hostile to anyone invoking uncertainty.