Paul Krugman Podcast

For all my interviews and more, subscribe on YouTube.TranscriptFor most of last year, Elon Musk was the second most powerful man in America. He was running a large part of the government’s budget. And during that time, he established a track record of evil incompetence. I mean, really evil and really incompetent on enormous scales. And why aren’t people talking about it more?Hi, I’m Paul Krugman, doing a brief follow-on to my discussion that was posted earlier today with Ro Khanna, the Congressman from Silicon Valley, who’s a very interesting guy in many ways. One of the things that has made him especially interesting in the last few days is that he said something entirely reasonable, which is that if Democrats retake Congress, they should hold investigations into the role of Elon Musk as head of DOGE, the sort of not exactly but effectively government agency, in destroying USAID, the agency that was the principal channel for aid to the most desperate, poorest people in the world. That’s entirely reasonable, and Khanna went on to say that there are credible estimates that the cancellation, the destruction of Doge has led to millions of unnecessary deaths, including millions of children — which is exactly true. There are studies that say that there is both in the field evidence of widespread death as a result of the cancellation and, of course reasonable health models. Because what do you think happens when you cut away tens of billions of dollars of aid to people who are living right on the edge? So of course it’s a reasonable thing to say. Musk, of course, responded not by saying, no, it’s not true or something like that. He did say that not a single person has died because of those cuts, which is utterly implausible. But he also went on to say that he was going to sue Khanna, though he hasn’t actually so far, and that Khanna should be in prison for saying — not even saying that Musk killed people, but that there are studies that say that he killed people. It’s quite evil and so much for free speech. Musk is very much like Trump, somebody who can dish it out but can’t take it, can’t even handle the kind of criticism that any public figure should expect to receive. Honestly, you shouldn’t be at all in the public domain unless you’re prepared to deal with a lot of insults and accusations. When you have the kind of role that Musk did that would come with the package even if he had done a decent or non-catastrophic job. But of course he didn’t. And so let’s talk first about the evil.It’s not just that Musk more or less personally set out to destroy this aid agency set out to cut off healthcare, nutritional assistance, just basic necessities of life for millions and millions of extremely desperate people. But he did so callously, carelessly, he even actually tweeted out, oh, “I just fed USAID to the wood chipper and I could have gone to some great parties instead.” What can you say? This is an extraordinarily evil act. It came in the context of somebody who made enormous promises about what he was going to do. People have kind of forgotten that Musk came into DOGE promising to find trillions of dollars in waste, which he would eliminate, none of which happened. Overall, it’s pretty clear that DOGE actually worsened the budget deficit at least a little bit. He also made specific claims along the way, most notably his claim that there were something like 20 million dead people receiving Social Security benefits. That was because the 19-year-olds that he put in positions of great influence, the Muskrats, whatever you want to call them, didn’t understand government databases. You know, you get parachuted into an agency with access to the computer system but absolutely no knowledge of what the agency does or how it does it and then couple that with a kind of arrogance — believing that these people must all be stupid and I can just sit down for a day or two with their data and find vast waste and fraud. Well, nobody in a position of responsibility should believe that kind of thing.It’s possible that Big Balls and his other hench people actually believed that they knew what they were doing. But my god, if you’re put in charge of a hugely important government function, you don’t assume that everybody there is an idiot and that your neophyte attaches have somehow stumbled on things that nobody else noticed. And of course, Social Security is so pervasive, such a large part of everybody’s life, that the idea that there could be tens of millions of dead beneficiaries and nobody has noticed it, that’s completely crazy. You even wonder, did Musk really believe that? Does he even have a notion that some things are true and some things are not?But in any case, there you are. And so it was a total disaster. He left the government not, clearly not because Trump thought that he was too extreme, too bad a guy, but because it was so clear that he did not know what he was doing.And the reports of alleged savings from DOGE: it was starting to get embarrassing because it was so easy for news organizations to find out that the claims were utterly false, that none of what they claimed was happening was actually happening. So he left. and then he goes back to his companies and becomes at least temporarily a trillionaire with an enormous public offering. Why didn’t people think that his record with enormous public responsibility was somehow relevant to his financial future? I mean, if a guy who can convince himself that there are 20 million dead Social Security recipients, who can convince himself that you can massively slash foreign aid and it’s all waste and fraud and nobody will be hurt — why would you trust that person to run a company? And furthermore, the character flaws that are revealed here — flaws is what too weak a word, but anyway — when you have somebody who refuses to acknowledge uncomfortable reality, refuses to acknowledge error, who responds to any perfectly truthful statement that reflects badly on him by saying, I want that guy put in jail. — those are not the character traits that make for an effective manager. If you can’t accept that you are ever wrong, how are you ever going to get things right?Because things will go wrong, and you will make mistakes. We all do. So all of this seems terribly relevant, and yet it says something, I guess, about America that people piled in to SpaceX stock, although some of that has come off now. It really was clearly an early frenzy, a fear of missing out frenzy.There are now reports that SpaceX also sold bonds, which itself is a little troubling. Why should they be needing to go into debt right away? What is that about? And those bonds have already lost some of their value, which is much more serious than the stock coming down. When bonds lose value, that’s because people think that there is now a risk that this company might default, might not be able to honor its promises. So seeing those bonds start to trade at a discount almost immediately is a pretty bad sign for the company. But again, why did anybody believe any of this?Musk is a horrible, terrible person and has the blood of millions of children on his hands. Let’s be clear. Yes, it’s not something that has been proven, but it’s close to. It’s so overwhelmingly likely that it clearly has to be true. And he’s also a weak personality — very much like Trump again — he can’t take criticism, he can’t admit error. So what does it say ultimately about our society that so many people are willing to throw money at this guy and that they’re so willing to forgive the incredible failures that he carried out, the incredible disaster of his time in a position of public responsibility. And I don’t really know the answer to that. There’s a real question about how it is we got at our current age of irresponsible oligarchs and with so little public backlash. And it’s starting to develop. But still, the fact that Elon Musk is still in business, let alone the world’s richest man, is in some sense an indictment of all of us. On that happy note, take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.A short talk in lieu of a post. Back on full duty tomorrow.Transcript:Hi, Paul Krugman here. I’m recording this on Tuesday afternoon. I just won’t have time to write a normal post for tomorrow when you’ll see this. And I would take the day off, except it seemed to me as if people might want some reaction to the carnage that’s been going on, at least in part of the tech sector and stock markets around the world, which has been pretty remarkable. It’s really tempting to say that it’s deeply meaningful. But in general, you want to be very cautious about putting too much stake in stock market events. I’ll come back to that in a minute. But it is striking enough that it does seem to be worth commenting on. So what’s happened? There’s been a fall in tech stocks very much concentrated in semiconductors. The Philadelphia Semiconductor Index was down almost 8%. on Tuesday. The KOSPI Korean Index, which is largely a semiconductor index, was down just about 10% sort of the previous day or the same day, you know, time zones. And there was a 2.2% fall in the NASDAQ. We’ve seen a lot of decline in tech stocks, things related above all to chips. What’s going on there? Part of the answer is that trying to understand why the market does what it does is, generally speaking, a mug’s game. In this case, however, it does seem that part of what’s happening, probably a large part of what’s happening, is that the tone, the rhetoric surrounding use of AI, and hence the demand for compute, has really shifted quite a lot just very recently. All of a sudden, we have a spate of studies that seem to show that, yeah, AI models allow people to churn out a lot more stuff, but the actual payoff to that stuff is much, much smaller than the volume of stuff that they’re churning out, most obviously lines of code, but just in general. AI lets you do much more, but how productive that is in terms of the ultimate goals of a business, let alone economic growth and quality of life is much more doubtful. On top of that you have a rather abrupt, jarring turn in business strategy. Up until just the other day a lot of businesses were more or less whipping their workers into using AI — you know, we’re going to judge you on how much you’re using AI whether or not you really want to whether or not you yourself think it’s valuable. We’re actually going to score you, we’re going to require that you do tokenmaxxing. And then, with compute getting scarce and with the price of chips having gone through the roof, suddenly the AI companies began charging and the marginal cost of using a lot of tokens became really, really very high. And suddenly companies were saying, oh wait, stop. We want you to economize on your use of tokens and hence to ultimately reduce the demand for compute. And that’s a sudden U-turn. This is part of a broader phenomenon, which I’m going to write about very soon, which is that there is a kind of lack of organicness to the AI boom. There are people who are using it because it looks great. They’re using it because it’s fun. I have colleagues who are just mucking around with Claude and finding some uses for it. But there’s also a large amount of Corporate America that thinks that this is the way it has to go. Fear of missing out, not by the individual investor, but by the corporate bureaucracy. And then pressure from the financial markets, saying, you know, your company better be on the cutting edge of AI or else. All of which is very fragile. It’s a kind of a bubble, but not in the normal sort of asset price form. It’s more of a kind of fad, almost a social delusion. And that, it seems likely, certainly got ahead of itself.Now, I’m reading way too much into these stock prices. And so let me give you a little bit of a caution on all of that. So yeah, the Philadelphia Semiconductor Index was down 8% in a day, which is one hell of a drop. But it was up 157% over the past year.So you want to have some perspective here. This is a stunning setback, but the fact of the matter is that over the course of a year, these stocks have been incredibly high-performing. The KOSPI, the Korean index, was down 10%, strictly speaking, 9.99%. But anyway, it was down 10%.But after that 10% fall, it was up 172% over the year. So we’re not talking about a catastrophe. We’re not yet talking about, we aren’t even talking about a Bitcoin level of disappointment for investors. But okay, it’s a break in the trend. The other thing we should say: the famous old line by my teacher and colleague, Paul Samuelson, was that the stock market had predicted nine of the last five recessions. There’s many more than that now. In fact, just over the course of the past year and a half, we’ve had two major stock market declines that turned out to be false alarms. There was a big decline in April of 2025 after Liberation Day, the Trump tariffs, because there was a lot of people just sort of, it’s chaos, terrible things may happen. While the tariffs have been a bad thing, they did not cause an economic catastrophe and stocks recovered the losses that they experienced then. And then there was another round of major stock declines associated with the Iran war. Of course, the Iran war has been a complete debacle and a disaster, and we’ll be paying a price for that for a very long time. But the consequences for short-run macroeconomics were more modest than many people, myself included, expected. And it appears that the Strait of Hormuz is going to gradually open because the United States basically said, okay, you win. It won’t literally say that, but in practice, that’s what we’re doing. So that is going to be over. So it’s not that uncommon for the markets to react as if something terrible is about to happen and be wrong.And so you really don’t want to assume — there’s a real temptation to assume — that because there’s so much money involved, a big decline in markets must be signaling that something is really very much amiss in the fundamentals, that where there’s smoke, there’s fire. And sometimes, no, there’s just smoke, no fire.So this might not be that big a deal. But it comes at a moment when the rhetoric really has shifted. You can see that there’s just a kind of a walking back. There was a really striking interview just the other day with Satya Nadella of Microsoft. Microsoft is actually a consumer of AI, rather than a producer. They have tools you can use within Microsoft products, but I think they run basically off OpenAI. And Nadella was pretty scathing about saying, you know, we can’t give all of this power and all this money to the big AI companies, and we should be using cheaper models. And hinted that Microsoft may start making use of DeepSeek, the Chinese model, which is less comprehensive. In general, the Chinese models are less comprehensive, but immensely cheaper, and among other things, just do a lot less computation. That’s kind of the core of why they’re cheaper.And in that case, the picture changes a lot. What bearing does all of this have on AI and the future of the economy and AI and the future of humanity? Well, part of what we’re seeing may not be so much disappointment in what AI can do as realizing that this extremely compute-intensive AI is not essential.And maybe you can still get whatever the big productivity benefits are and still possibly the big labor-displacing effects without quite so much compute. But it’s not entirely separate either. I think we need to be saying that this is what a quasi-bubble quasi-bursting might look like. Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

TranscriptHi everyone. Instead of a regular post today, I’m going to put up a video. There are a number of reasons why I feel like doing that instead of the usual. One of them is that this is a dry run for a talk that I will be giving virtually later today.There’s a conference on the economics of digital transformation taking place in Croatia, although I’ll be doing it remotely. And they have asked me to talk about global power, geoeconomics, and Europe. Those are all themes that I’ve been thinking about quite a lot. And today’s miniature talk is an opportunity to try talking through those themes.And the way I want to structure it is as what has changed, at least in the way that we all now understand the world, since, well, basically since Donald Trump returned to power. That’s an American-centric point of view, if you like, but it’s kind of a natural bracket.And of course, everything really has changed, mostly not for the better, under Trump. And it has, as it turns out, big implications for Europe as well. So let me just try to get into that. Start by talking about the world as it seemed to be at the beginning of 2025.There were, and still are, three great economic superpowers in the world: China, the United States, and the European Union, in that order. If we measure GDP in 2024 at purchasing power parity, which is basically just adjusting for differences in national price levels, you had China with a GDP of something like $37 trillion, the United States with something like 29 trillion and the EU with something like 28 trillion. That last bit may be a bit of a surprise — maybe all of it is a surprise to some people — but yes, in terms of the actual amount of stuff it produces the Chinese economy is now substantially bigger than the US economy. And the European economy is almost the same size as the US economy. If you think that Europe is backward and poor and helplessly dependent, it’s not. It is an economic superpower. And in fact, by this measure, Europe has basically maintained this position of being about comparable to the United States for a long time. This is a whole other topic that I’ve been writing about and will continue to write about in the future. In that world, basically, two things were really kind of striking. One is that the United States seemed to perceive itself as being a dominant power, even though China was bigger and even though Europe was about the same size, and Europe acted as if it seemed to perceive itself as not being in the same league, as being not a superpower at all. All of that may be changing, and events are part of the reason, so let’s talk about the events. Now, the most obvious: the United States just lost a war. Just lost it bigly, as Trump used to say. It’s an astonishing story. We went up against Iran, which was definitely not a major military power or a major economic power, a sort of middle-ranked power, if that, and utterly failed to achieve our war goals.In the process, we inflicted a lot of damage on the world economy and depleted our stocks of high-tech weapons that will take years to replace. Altogether, immense damage was inflicted on Iran, but Iran has clearly emerged stronger. The United States has emerged humiliated. The attempts by Trump and minions to pretend that it was a victory don’t help. They only make the United States look not just humiliated but delusional. So that’s a big deal. It has large implications for US power and influence going forward as well. To explain those implications, it’s helpful to talk about one of the other things that really dramatically changed with Trump coming back into office, which was trade policy.The United States began really seriously trying to throw its weight around. Liberation Day, the tariffs on everybody, basically trying to pressure all of the world into giving us various kinds of concessions. Give us what we want or we won’t let you sell in our market and everybody needs to sell in our market.Okay, what we learned from now well over a year of trade war is that U.S. power in that dimension is substantially less than certainly than Trump appeared to believe it was. And just in general, trade, leverage and trade negotiations, leverage in trade disputes has less to do with market access than a lot of people assumed and more to do with supply chains, with getting stuff that you use in your economy, means of production, not in the sense of capital, but intermediate inputs or just inputs in general. The nation that has more ability to strangle its rivals by cutting off supply chains is the one that has the upper hand.So it turns out, and we had already learned this from the trade stuff, that China with its dominant position in rare earths and some other crucial industrial materials actually had a stronger hand than the United States. Yes, we have a big market, but loss of a market can be offset to some extent by domestic stimulus, domestic support programs. Not having crucial industrial materials is not so easy to make up for. So we learned that the power in international trade disputes in a fundamental sense reflects power over supply, not power over demand, which is something economists have always tried to say. The point of trade is not to sell. The point of trade is to get stuff. You sell as a way to pay for things that you get from other countries. But now we have it demonstrated very obviously in real life. So that in itself meant that we’ve had a blow to the perception of US power. It turns out the US market is not almighty; access to the US market is not anything like as powerful a tool as we thought and Chinese strangleholds over key inputs are much more important.And then of course we’ve seen that even more graphically demonstrated by war with Iran and it turns out that Iran’s ability to disrupt traffic through the Strait of Hormuz was a really huge empowering point, and it was the kind of thing that the United States really didn’t think about, and certainly the Trump administration didn’t think about. And it shows the true rules of global economic power, because largely Iran was able to win this war through economic power rather than strictly military action, the rules of economic power are not what a lot of people thought they were. Who benefits from that? Well, obviously China. What we’ve seen now is that in terms of a global power competition, China has demonstrated that they have substantial power over supply chains. They’ve also demonstrated that they can weather a cutoff of oil pretty well. And global power is a zero-sum game. So the United States, by weakening itself, by showing that we don’t have the ability to impose our will militarily, we don’t even have the ability to keep international shipping routes open, has emerged as just a much less formidable player, which means that China by comparison looks better. Add to that the fact that the United States has been erratic and unreliable. Our current leadership just doesn’t understand that a reputation for doing what you promised, honoring your agreements, is itself a source of power, and we have done an enormous amount to undermine that. Not news to anybody. Trump looks much weaker. America looks much weaker. To a certain extent, China is the beneficiary of all that, at least in terms of power. Now, of course, life is not all about power. And in the end, you don’t run a country to maximize global power. Maybe the Chinese do. I’m not sure about that. But in any case, it’s not a zero-sum game in terms of living. But in terms of power, it is a zero-sum game. And the United States share of that power, however you measure it, is clearly down as a result of the war. Europe is a little bit interesting here. Europe played essentially no role in any of this. Europe wasn’t involved, obviously, in the war. Europe didn’t do very much at all except to suffer. Still, one thing that is kind of important is that Europe — at least to some degree, not really through emergency responses but just through the general way that the Hormuz shock played out — Europe demonstrated or some European countries demonstrated that they can be much more independent of global hydrocarbon resources than they have been. Europe is not a major oil producing area. It has some, but not a lot. It’s not a major gas producing area anymore. It’s essentially a very resource poor economy relative to the size of its GDP, relative to its population. But it is an economy that increasingly relies on renewable energy. And those countries that have gone especially far in relying on renewables weathered this really well. That’s the lesson of Spain’s ability to ride through this with very little rise in electricity costs compared with some other countries. Italy, which has very little in the way of renewables and is very heavily reliant on natural gas for electricity generation, Italy did much worse.But Spain has given an illustration of how the renewable energy revolution — solar plus batteries is what really runs Spain now — has made Europe more independent and can make it more independent still in a world economy where control of natural resources used to be really critical and it’s becoming increasingly less critical.So that’s actually a point in Europe’s favor. That’s one piece Another piece of this is that Europe has always, in my lifetime, literally, and from a bit before my lifetime, Europe has always been far less of a global power player than you would expect given its sheer economic weight.Now that’s partly because Europe doesn’t exist as a political entity. though it’s more of one than it used to be; the common market has gradually turned into something more than that and Europe is able in some important ways to operate as one and is finding ad hoc ways of cooperating more. But it was always in a secondary position very much — or tertiary position given the rise of China — largely because the United States in addition to having a big economy was overwhelmingly the dominant military force.Now until just the other day there was never a question that the United States would use its military force against Europe; but Europe depended on the United States. Europe’s defense, its security, all depended on the United States. Okay, now where are we? The United States is quite simply just less credible as a security guarantor, not just because of crazy stuff where we threaten Denmark over Greenland, and not just because we’re erratic all the time, but because we’ve just demonstrated that our military capability is a lot less than we thought it was. The United States could not batter Iran into doing what it wanted. It could not keep the Strait of Hormuz open. So U.S. military preeminence is a lot less intimidating, also a lot less reassuring if you thought you had America on your good side than it used to be. And on the other hand the prospect that Europe might be able to defend itself, achieve its own security without the United States, looks a lot stronger than it did not very long ago. And that’s not just because of the war in Iran but also because of the war in Ukraine. Now, there are many, many horrifying things that have happened under Trump. One of the ones that is particularly horrifying to some of us is the abandonment of Ukraine, the clear tilt towards siding with Putin in his attempt to destroy a democratic nation. The United States basically stopped giving any aid to Ukraine at all. almost as soon as Trump took office. U.S. aid of all kinds, but especially, of course, military aid, is all gone. But a funny thing has happened. Ukraine is still standing. If anything, the war seems to be tilting in its direction. Now, that reflects partly the fact that Europe did step up. particularly with economic aid: Europe has filled the gap, pretty much, that the United States left so the flow of money to Ukraine continues.But it’s also because war has changed. To the extent that the United States appeared to be essential it wasn’t just the money — we knew that Europe could come up with some money — but it appeared that what would what How could Ukraine defend itself without U.S. weapons?Well, it turns out that in this age of drone warfare that Ukraine can mostly defend itself. Actually, what they can’t really stop is Russian missiles that destroy civilian targets, which is horrifying, but it doesn’t appear to really work in terms of altering the military balance. And Ukraine has developed its own suite of weapons, and quite aside from the fact that Ukraine is hanging in there, this says that one of the sources of perceived US superpower status— super duper power? versus Europe is a mere superpower? — was that, well, we had the weapons, that we had the technology, that even if Europe could come up with the money, they needed U.S. weapons to be effective, as did Ukraine. And if the United States cut off the flow of weapons, what could you do? You really could not stand without all of those sophisticated, high-tech weapons that only the United States knew how to produce. Well, those weapons are kind of looking obsolete right now. Not entirely, but we just saw Iran do a lot of damage with drones that the United States didn’t appear prepared to stop. And the United States, with all of its super-duper weapons, was not able to suppress them.We had the spectacle of million-dollar patriots shooting down $30,000 Shaheds. This is not a good look. And Ukraine has become a major arms producer ,has become in many ways the expert in this new age of drone warfare. The Europeans are picking up some of that, and there’s a lot of new cooperation on weapons with Ukraine.But maybe the most important thing to say is that, well, that special U.S. advantage, because we had the weapons and no one else did, it’s not much of an advantage now that it appears that those weapons are largely obsolete. Not totally, of course. The Ukrainians would really love to get more Patriot missiles to stop some of those Russian missiles that are destroying 11th century churches and so on. But the balance has shifted in a way that means that the United States is not indispensable at any level. We’re not indispensable financially, and we’re not even indispensable militarily. It’s like we have the world’s best cavalry in an age of machine guns. What good does that do? Okay the Chinese presumably have immense capacity. Chinese dominance of manufacturing means that on almost any dimension China is the super super duper power, they’re really way out in front. But there’s much more parity between between Europe and the United States than there was because the United States doesn’t really have economic dominance and we don’t have military dominance anymore. We dominated an age of warfare that now appears to be behind us. So where does Europe stand here?In a rational world, the rise of China and the coordinated, concerted, efforts of the United States and Europe to deal with that rise would be the central story of geopolitics in the year 2026. Unfortunately, things are not rational. And so we have a belligerent, erratic United States with Europe largely on its own.But Europe being on its own is not nearly as impossible to imagine as it used to be. This is a world that has tilted towards China. That’s probably the biggest story. But it is also, in effect, tilted towards Europe because it’s tilted away from us here in the United States. Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

I last spoke with Azeem, the proprietor of Exponential View, 18 months ago — ancient history on this subject. So we revisited the state of AI. .TRANSCRIPT: Paul Krugman in Conversation with Azeem Azhar(recorded 6/12/26)Paul Krugman: Hi everyone. Paul Krugman back on my usual schedule of recording interviews. And today I’m talking with Azeem Azhar, who I spoke to in January 2025, basically centuries ago in AI time. And with AI on everybody’s mind, I thought it would be good to revisit. I should say Azeem is an independent researcher and founder of Exponential View, which is one of the top tech Substacks out there.So hi, welcome to another conversation.Azeem Azhar: Yeah, thank you, Paul. And it has been eighteen months, also known as one and a half centuries in AI time since we spoke.Krugman: Yeah. Let me ask sort of the dumbest question: what is this thing called AI? How does it do what it does? I mean, even skeptics have to admit that it’s really impressive how it’s sort of leapt over all of the previous barriers. How is this happening?Azhar: You know, I think we’re still figuring it out. I think of AI ultimately as a machine that does certain things, and it’s been built by passing first millions, then billions, then tens of billions, hundreds of billions of trillions of words of human output through a neural network to give it some sense of how humans have thought about the world. And because it operates at dimensions well beyond the form of space and time, it seems to be able to find relationships between quite complex concepts. And I think we’ve all had that experience, whether we’ve been using Chat GPT or Claude over the last two or three years, that it seems to be able to recognize things that are quite deeply related that don’t immediately spring to mind.And in the last year and a half or so, the labs have started to train the AI models not just on words in books, but actually on tasks, like, “what is the set of things that you do to write a piece of code that does something?” “What is a set of things you do to use a piece of software in an enterprise?” And they’ve tried to train those models on those particular tasks. Essentially it’s aping what we do, and they use various mathematical tools like reinforcement learning where the model notionally gets a reward. Of course it’s not a reward the way you and I think of it because it’s a machine.Paul Krugman: Right.Azhar: And so that’s what it is. It’s sort of reflecting back, but also I think discovering some really deep relationships in the world that we might not spot, you know, prima facie as humans.Paul Krugman: Brad Delong calls it “a vast stew of linear algebra,” which makes some sense to me because I think that Pagerank with Google was the last thing I actually understood. And that’s the eigenvector with the largest eigenvalue. Not that anybody needs to know that, but this is like a million times bigger, right?Azhar: That’s basically it. Yeah.Krugman: But it’s sort of not what artificial intelligence was supposed to be, right?Azhar: No, not at all. I mean, I sometimes go back and look at the TV series of the seventies that I grew up with as a child, and they’ll always have an AI in the spaceship. Space 1999 had an AI you could talk to. And it was very precise, it was very clipped, and it did things and got things right. And there was a sense that you could trust it. But you’d never think to say, as I sometimes do now, you know, “Find me five analogies to help make this point.” I use it as a brainstorming partner, or I give it tracts of my book, the book that I’m writing, and say, you know, “How would Paul Krugman criticize this argument?” And I get suggestions that I then work through by hand? I don’t think we really imagined it would look like that.Krugman: Yeah. In sci-fi it would talk in a monotone and would be relentlessly logical. And in fact these models are unpredictable, they’re sometimes temperamental, they’re not reliable. That’s probably one of the big problems. It’s not at all what we imagined.Azhar: It’s not at all and this point about reliability is so complex. A couple of months back, one of the versions of Anthropic’s Claude came out and I found it so sycophantic that it became unhelpful because I like these things to help me on hard problems and to challenge me. So I switched back to Chat GPT, which has always been a little bit less friendly. And what’s going on there, Paul, is that because we don’t really have a good theory about how to build these. They are developed almost like in a petri dish and nudged in particular directions so they take the shape that we expect them to take. And to use an economist term, they improve non-monotonically with every release. So you’ll see the latest release of an Anthropic model, and there are maybe twenty or thirty public benchmarks that they’re measured against, like how well they summarize text and how well they write software code. And the next version of the model won’t necessarily be better at everything than the previous version, because you lose something in order to get it. And that’s the complexity that the labs are wrestling with.Krugman: Wow. Okay. Second naive question. I don’t think I’m a Luddite. I’ve always been happy to adopt technologies, but maybe I’m incurious on some of these things. I tend to pick up things like mathematical techniques, as needed, because I see something that could be useful. Now, I’m using NotebookLM to extract tables from PDFs, that sort of thing. But what should I be doing? I have friends who are using Claude a lot, but I can’t quite figure out what particularly agentic AI should be doing for me.Azhar: You know, I’m really sympathetic to that because I have the same issue. These tools have been developed by software developers in a really particular part of the world, which is Silicon Valley, where the culture really revolves around the art of the programmer. And so if you have a programmer’s day and you think in coding terms and you have programming workflows, it becomes really obvious what you do with a really advanced AI tool. I do a lot of research, some of it qualitative, some of it quantitative, and in such a world, those workflows don’t match the way that I think through problems. And so the way that I get around this is that I do look at things on Twitter or X as it’s called because people are sharing tips. And I often just ask the models, you know, “What could I do with you given that I’m trying to do this thing? I’m trying to solve this problem.” And it will come back and give me a suggestion.And I have had some success with agents. So I have an agent called R. Mini Arnold. So R is a play Isaac Asimov’s robots. They’re all called R. Arnold is after the good Terminator in Terminator 2, played by Arnold Schwarzenegger, who protects humanity. And R. Mini Arnold is available on my WhatsApp and it’s available on email.Krugman: Okay.Azhar: And it has access to a whole set of resources. It can browse the web, it can access LinkedIn, it can access Twitter, it can look at my library of PDFs of research that I’ve downloaded. And I can throw tasks to it a little bit like I would say a pretty decent but slightly temperamental graduate student. So sometimes it just disappears for six or seven hours at a time. And one of the differences between using an agent like that and using Claude is that R. Mini Arnold has a lot of my life’s context. It knows the music I like, it knows the book I’m working on, it knows the investments I’m making, it knows the essays I’m doing, it’s got the calendar of speeches that I’m about to give. And so when it goes off and does a task, it tries to figure out what in my world is this going to be relevant to and where can I draw threads from? And when it works, it is really sublime and it does feel a little bit like science fiction.But I would say it’s incredibly brittle. I mean there’s breaks every four or five days.A specific example was, I was thinking about the Paul David’s research about why electrification took the time it took. And I wanted to understand what were the determinations of determinants of that thirty-five year lag from Pearl Street generation to, you know, productivity growth. What could the levers be? And so I threw that into R. Mini Arnold and it set up a team of sub agents which had personalities of key economists and was able to go off and do research the way the AIs do, but also research on all the academic papers that I have downloaded in the past.I have access to JSTOR, I’m allowed to download a hundred PDFs a month. It can look at all of those and start to compile an answer in a way that perhaps a Chat GPT can’t. And it knows the context of my book and it knows the context of the essay I wrote. So what then comes back is something a little bit more structured that I can then play with. It’s a marginal improvement on doing this on Chat GPT. I’m sure you could probably figure out how to do it. But it’s quick. I use it on my iPhone. I often do this when I’m walking through the airport and I want to solve this and have this result when I’m sitting on the plane. I’ll fire that query out and it goes back and goes out and sorts that out for me.Krugman: Okay, I guess I’m getting it. But obviously you and I are not typical. The people who are using AI the most are going to be middle managers, business people, etc. And I find myself thinking about what I think of as the homemade pasta problem.Azhar: Mm.Krugman: You’re probably too young for this, but there was a time when I when young and we were using stone axes for computing, and there was a big fad of making your own pasta. Little pasta machines were everywhere. And then at a certain point there was kind of a collective, “What the hell are we doing? You know, store bought pasta is actually better. The Italians don’t do this.” And I have to think that for most tasks, the range of agents can’t be that wide. But why wouldn’t they sell that kind of thing off-the-shelf, as it were?Azhar: Yeah, well I think it’s different for an independent person or a small business or a middle manager in a big company. I would imagine that you will start to see people selling specific agents that solve your marketing problem. If you have a barber’s shop and you’ve got four chairs and maybe 30 people a day coming through. Right now what you do is, you go to ChatGPT and you help it write your collateral for your website. That feels like it’s an interim step to somebody delivering the actual finished product. Why haven’t we seen it? I think we haven’t seen it yet because the terrain is still big enough.Beyond Anthropic and OpenAI, there’s a lot of other companies building agents that are these end-to-end workflows for businesses. They still believe that the prize for them is to build the generic platform that is the tool for all tools. Because if you get that right, you have a much, much bigger business than if you’re just a vertical application. And I think we’re only a year or two into these entrepreneurs building such businesses. I think as some of them succeed and some fail, the ones that are not able to succeed in the general space will start to verticalize, which is what we saw in the advent of the internet. We saw it in software as well.But I think within a big company it’s a different set of questions because you have far fewer degrees of freedom as a marketing manager in a large company than you do if you own your own barbershop. You have all these rules, you have all these other teams you have to interface with, you are held to the priorities and the plans of the company as a whole. And in that instance, I think, it’s much harder to see how you use AI to really change the way you work.Krugman: Yeah, I mean, again we’re talking about ancient history here, but you know, everybody still uses Excel, even though it has always been horrible. But the constraints of corporate life mean that everybody has to use Excel. So that means maybe we’ll see quite a lot less coding a few years down the pike because the people will just be able to purchase whatever it is they need. I don’t know.Azhar: I think there’s a balance. You hear people proselytizing heavily, saying, “I think this technology is going to be impressive and have a significant impact.” But when people pitch this, they forget that there are other actors in the market who might respond to what’s going on. Right now, if you’re a large company, you want to be building as much as you can because what you can buy isn’t right for the market. If you think about Henry Ford putting together the Highland Park plant, he couldn’t go to a supply chain and buy what he needed because nobody was thinking in those terms. I think we are slightly at that stage for large corporates now. Whether we’ll be there in five years, I don’t know.The question we have to consider is where the value will reside: between having your own capabilities to design software for your processes, or handing that over to another company designing software for a hundred businesses like yours. Historically, it has made more sense to hand it over to another company, but the cost curves may have changed sufficiently that you’d rather have the nuance and control to do whatever ‘vibe coding’ becomes in 2030.Krugman: I know with healthcare software, organizations like the VA that built their own have done much better than the ones who tried to buy it from Microsoft. So yeah, it might be a story that makes sense. And actually, since we’re talking about going for the models versus something much more specific, how do you think about the Chinese versus the big US AI firms?Azhar: I’ve just spent eight days in China and I was really fortunate. I got to speak to developers and engineers and management from about a dozen of the Chinese labs. In many cases they hosted us in their offices. The main thing the Chinese companies say about the US firms, is that Claude code is brilliant and Claude is the best model that is out there and they really couldn’t get enough of it. The term is, they’re Claude-pilled. They talk about the constraints on getting access to computational power but just in a way that’s a fact of life. I mean there’s no sort of commentary on it other than it’s hard. They have to figure out how to get around that and how to build a culture of efficiency when you don’t have as much [computational power] and I think they have built a culture of efficiency really, really well. I think it’s going to help them over the longer term. They don’t really talk about competition with US labs the way the US talks about competition with China. But they do see themselves competing with each other.And as you know, that’s what the Chinese economy is. It’s mayors in different cities who almost act as venture capitalists who compete tooth and nail with each other to become the electric vehicle hub or the solar hub or the AI hub of the nation. And what I would say is, the models are really, really capable. They’re very efficient, which is why they’re so cheap to run, which makes them very competitive for a whole range of tasks. But at the margin, it’s instructive to note that everyone was using Claude for coding as opposed to the cheaper Chinese version.Krugman: That’s interesting. So you can imagine a future where a lot of businesses are actually using these less comprehensive but much cheaper models. I think what I’m gathering from you and from other people is that a lot of entrepreneurs in the US are still dreaming of the uber-model that solves all problems but that probably is not going the way it all goes. That in the end we’re gonna end up with a lot of specialized models, but also the uber-models will still have a role.Azhar: Yeah, it never made sense to me that you’d have a single model that would do everything because if the single model is going to solve the Riemann hypothesis, it’s gonna require a lot of resources. And if all you need to do is get it to root a bill to the finance department, it seems a bit silly to ask Einstein to come and do that for you. We’ve had segmentation of markets for a long time and it’s like with airlines. There’s a reason why not every seat on an airline is first class. Some passengers don’t want it, don’t need it, won’t want to pay for it. So I do think that the ecology looks like a whole array of much, much cheaper models that are serving by volume lots of corporate needs, and then having more sophisticated, complex models for the more complex tasks. I think you’re already starting to see this.I don’t see it, by the way, as a shock to the industry. I just think this is what happens as an industry matures. You know, you start with one size fits all, then you start to segment your customer needs and you start to serve them in the most profitable way you possibly can. And that just feels to me like the way that the markets have matured.Krugman:Okay. Let’s move to more macro considerations. People have been worrying about a bubble. A lot of us still remember the nineties quite vividly and think about all of that. But you just aren’t seeing the bubble. You wanna talk about that?Azhar: I remember what it was like in the nineties. I lived through that one and also the housing bubble, which frankly was far, far worse and much more terrifying. I have a really simple mantra here, which is that honest customer revenues tend to be the engine that gets you through this, right? You know, what caused the problems with the US railroads in the 1870s and 1880s? It was that the revenues didn’t materialize because the tracks were being laid in places where there were no towns. That was a problem. The same was true in the dot-com era. My team and I realized last year that it’s very hard to get good quality data on how much was actually being spent by American businesses and consumers on AI. So we’ve spent several months building systems and gathering data to give a deduplicated view of what that number is. And just to give you a sneak preview, is $150 billion per annum, annualized at the end of May 2026, and about 90 billion dollars in the previous 12 months, from May ‘25 to May ‘26. So you can see it’s growing, and those are deduplicated numbers.So if you spend a dollar with OpenAI, and they have to pay Microsoft 60 cents to run the servers, we only count that as a dollar. We don’t count it as, you know, $1.60. It’s a much faster revenue growth rate than mobile or the internet. It’s also a small number because the US is a $32 trillion economy. And I think the thing is that at that level of spend, you are able to roughly cover the depreciation on the enormous capital expenditures that have gone into AI just this past year. But next year or the year after, you have to double your revenues again and again in order to cover these increasing commitments.The thing that often pricks a bubble is when financing starts to get a bit smelly. That was clearly the case in the global financial crisis, where synthetic collateralized obligations were magnifying the risk on subprime mortgages—it was all “smelly finance.” In the dot-com bubble, the dot-coms themselves didn’t really have much smell about them. There was a lot of disbelief, but the telecoms clearly had issues with their internal revenue generation.So the other thing that we look at is how bad, poor, or strong or robust is the funding quality. And that funding quality measure is definitely getting worse. It’s worse now than it was nine months ago. But it doesn’t seem from the numbers to be at the level that it has been historically when these things have imploded. Nor does it seem to be the type of exposure that is really systemic, which is what we saw in the global financial crisis. There are companies like Oracle and Coreweave whose debt looks very risky, and it’s harder and harder for them perhaps to raise money, although Oracle just did. But it doesn’t feel like it’s systemic.You know, when the the global financial crisis popped, no one knew who was in trouble, whereas now you’d be able to isolate it with a single company or a single firm. So at the moment we feel that this is still a demand-led boom, that funding quality has definitely gotten worse, but not so bad that I would say that there is an imminent problem on the horizon.Krugman: So at this point, you’re saying that roughly speaking, final demand for this is about half a percent of GDP. What share are AI-related stocks in market value? It has to be substantially larger than that.Azhar: They’re about forty percent of the S&P 500 right now.Krugman: That’s a huge mismatch. Revenues are not the same as profits, but you’re talking about what is still a relatively small business relative to this immense economy, yet it dominates the financial markets. That would be at least a possible source of alarm.Azhar: Let’s dig into that, because a stock price is a reflection of the expected future value aggregated across the market. Forty percent feels high, but if you look at the measure of earnings, these companies actually have a much higher proportion of earnings and earnings growth.If you look at the US stock market in 1900, after the railway calamities of the mid-to-late 19th century, railroad stocks were sixty percent of the capitalization of the US market. We had worked our way through the busts by that point. There’s a fantastic piece of academic work by an American finance professor named Bessenbinder. He looked at the stock returns of 23,000 US stocks from the 1900s through 2022. Those returns are highly concentrated. About two-thirds are concentrated in roughly 30 companies. Those companies are oil, electricity, or car companies—the general-purpose technologies at the start of the 20th century—or they are the IT companies like Apple and Nvidia. The only exceptions were Walmart, a couple of healthcare businesses like Pfizer, and JP Morgan.Historically, you get this concentration of a number of winners when you have a new general-purpose technology, and that is showing up today. I don’t feel we’re overly concentrated from the perspective of risk, and the price does not feel totally out of whack compared to where we were during the dot-com era.Krugman: One last devil’s advocate question. I keep thinking of the California gold rush. If you had looked at the revenue and spending on gold-rush-related businesses as a whole, it probably looked solid. But the trouble is it wasn’t the gold; it was the picks, shovels, blue jeans, women and whiskey that were the revenue streams. Is that a fair question to ask about AI right now?Azhar: It’s a great question to ask. The question is what determines that $150 billion annualized demand? We see that just under 30% of the S&P 500 have pointed to a generative AI project with a quantifiable result in their earnings calls. They are under pressure to say they do this, so maybe that’s what’s going on. But when I talk to executives, like 30 finance businesses in New York, they all plan to spend more next year, even though not a single one could point to even a 10 basis point improvement in their business from the investments made so far.Krugman: Right.Azhar: When we break out that $90 billion, $60 billion of it is in the US. That’s a lot of money for a single company, but spread across thousands of firms, it’s still at the experimental stage. We should consider whether these executives are learning by doing. The messages I get vary from those having success in the tens of millions who want to reach hundreds of millions, to those finding it harder but persisting. We’re slightly beyond pure picks and shovels, but in Paul David’s work, it took 50% of American companies getting electrified before the productivity rise. We’re a long way from that.Krugman: Headlines flashed about a KPMG study with case studies on the usefulness of AI that turned out to be AI hallucinations. It’s a wonderful thing.Azhar: It is brilliant. One thing that is quite challenging is that the market has talked a lot about bottlenecks. We saw this with railroads when the US couldn’t make enough steel. There are these bottlenecks, and there’s a lot of emphasis on power and getting electricity to the system.There’s more demand than supply capacity for AI right now, but there’s a question of whether there’s enough capital. We may see another few trillion dollars of intention from tech companies to build infrastructure to 2030, which starts to rival the new issuance of the US Treasury at $2 trillion a year. I’m wondering if this capital constraint is going to be an issue or if the market knows how to clear it.Krugman: Ordinarily, we’d expect to see that in prices. Real interest rates are well off their pre-COVID lows. They are higher now, but still substantially lower than at the peak of the nineties tech boom, when they were around four percent. They’re more like two now.It’s surprising, given the AI boom and massive budget deficits, that rates aren’t even higher. Whether this is an actual constraint, Nvidia is not the US Treasury. They need risk-tolerant capital. The possibility that these firms may not be able to raise enough money is something we need to think about.Azhar: Yeah. On that Nvidia point, I saw that credit default swaps on five-year Nvidia bonds—the cost of insurance against default—are currently lower than US Treasuries.Krugman: I saw that, and it strikes me as completely crazy. If you think the US government is not reliable, you shouldn’t be investing in chip stocks; you should be investing in canned goods for your bomb shelter. But anyway.Azhar: Are you telling me that markets aren’t perfectly rational, Paul?Krugman: Good heavens, I can’t say that; they’d take away my economist card. We’re recording this on SpaceX Day, and I’ve been wondering if there are limited pools of capital for cutting-edge investments. I wonder whether Elon Musk is diverting capital that AI might need. A whole lot of meme money is pouring into SpaceX right now. Is that something I should be thinking about? I mean, he’s got what everybody tells me is a crud AI product in Grok, and yet…Azeem: Musk showed his willingness to adapt; his AI product is now being subsidiarized using his capacity to serve customers like Anthropic. He has an incredible following, but people who have worked with him say his ability to relentlessly focus and optimize sets him apart. His first-principles thinking has brought down the cost of space launches faster than anyone in history. He pushes the rate of learning aggressively. For all the challenges and his mercurial behavior elsewhere, that’s generally a good thing because technology has brought down the cost of inputs significantly.We’re going to be much further ahead in space than we would have been if SpaceX had not been successful. It raises questions about how to govern what used to be a commons, but there is a definite benefit from coming down that learning curve so quickly.Krugman: That’s fair. The one time I looked at Musk’s activities and thought he was really onto something was when I realized he diagnosed that the cost of space launches is really the rocket, not the fuel, and recovering it makes all the difference. Being able to make it happen is a real productivity thing.This is all moving so fast that we don’t have time for the technical productivity issues we had in the past. It’s feeling like a Solow moment where people say, “I see the technology everywhere but in the productivity statistics.” Do you want to talk about that?Azhar: It comes up all the time. I wonder if we need things to happen more quickly than we used to. We aren’t seeing it in the numbers yet. Erik Brynjolfsson at Stanford says he thinks it is showing up in the aggregate numbers. How quickly should we expect a technology like this to show up? At $90 billion a year, that’s not much of US GDP. These are early stages where companies are learning. The first $100 million you might spend on AI is about learning, and we’re in that mistake-making phase.The model Paul David and William Devine talked about in electricity is helpful. In the first phases, you’re retrofitting your capital stock and processes with the new technology. It’s not until you depreciate existing capital and change processes—like Ford did at Highland Park—that you see productivity benefits. To put numbers to that, what would we expect to see in the Ford equivalent of Highland Park in terms of output?Krugman: Yeah.Azhar: I thought we might see what happens to revenues per employee in an AI-native firm. Across high-end companies like McKinsey, it’s about $400,000. For Meta or Google, it’s about two to two and a half million dollars. In AI-native firms like Mercor, that number is closer to seven million dollars per employee. For Anthropic, it’s close to ten million. You can measure the enormous commercial productivity of a single employee if a firm is AI-native. We’re talking about a handful of firms, but we can pick up the shape of what’s possible for the productivity of a single employee. It may be hard, it may take time, but it’s possible.Krugman: What would those numbers look like per dollar of invested capital? One worry is that this is an enormously capital-intensive business that replaces labor. The oil refineries of New Jersey have enormous revenue per employee because there are no workers, just monstrous capital installations. Is that a factor?Azhar: Anthropic has raised in the tens of billions rather than hundreds of billions and had a profitable quarter ahead of schedule. What we don’t know is how much of that capital goes into developing the next model versus monetizing previous generations. Their IPO in the next six to nine months will tell us.Chinese companies are using much less capital to build models that are nearly as good. So I think the harder part of your question is that if every model that OpenAI or Anthropic costs ten times as much to deploy and develop, but lasts only a couple of years before it’s defunct because of competition, what needs to be true for that to be sustainable for more than a year or two? To me, that is a really tricky question as well.Krugman: You’ve cited intermediate measures. Rather than revenue, we look at generated lines of code, which has exploded, versus actual usable applications, which hasn’t. Does that tell us anything?Azhar: Lines of code is an odd measure. We’ve made it much cheaper to write code, so less determined people are writing it now. It’s unsurprising the increase hasn’t been met by proportional productivity. Data suggests we’re getting more high-quality code, but also a lot of useless waste. This isn’t the first time a useful input in the economy generated waste. Think of a barrel of oil: we count the whole value in GDP, but two-thirds is thrown away as waste heat. Only one-third is useful energy. Sloppy lines of code are a similar form of waste we’ve been happy to tolerate in other sectors for a century.Krugman: A weird analogy is when widespread word processing came in. Books started getting longer. It was so easy for authors to turn out hundreds of pages. What might have been a two-volume series became five.Azhar: On that front, we’re at an enlightenment moment. In 18th-century France, the battle was over who gets to write and express their story. Men and women produced remarkable works with quill pens that encapsulated a world.Krugman: Right.Azhar: Is it worse that we allow for more expression? We are worse off when that connects to an algorithmic recommendation system that drives constant slop at us. But we aren’t inevitably worse off because we’re giving access to many more people.In reducing costs of access, we might find amazing people. In breaking down silos of knowledge, we might find connections—perhaps something in battery chemistry that is useful in cardiology. We don’t know because we’ve never been able to get those experts to talk. I look at each opportunity discreetly.Krugman: There is a potential book here: The Upside of Slop. This is an unrecognizable scene from eighteen months ago. Wow.Azhar: We could get ChatGPT to write it.Krugman: I started my career writing papers longhand on yellow legal pads. Amazing change.Azhar: I still write everything with a fountain pen. I’m writing my new book longhand and most of my research is too. The computer is turned off because AI does all the boring stuff like PowerPoint and emails, giving me time to apply my brain to things I want to think about.I’d be happy to continue this conversation in a few months. Thank you for inviting me.Krugman: Thanks so much. Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

Hi everybody. I’ve been having an extremely busy week, so no two talking heads conversation this week. Just my head talking alone for a relatively short time.Hi, I’m Paul Krugman. I’m winding down some travel, and I’ve been meeting all sorts of people face to face, so virtual interactions are down. So just to give you some kind of Saturday video, I thought I would talk a little bit about latest economic news, markets — things that I don’t normally weigh in very much because that kind of market commentary is usually something that is best done by business economists who are focusing on the day-to-day stuff talking to market participants. But I think that the latest stuff is interesting enough to warrant some discussion and maybe a way to think about where we are economically right now.So okay, if you’re paying attention to this stuff you probably know that yesterday was a job report day. The report was unusually strong, certainly stronger than almost any of the professional forecasters expected, 172,000 jobs.Predictably, Trump first boasted about this with a lot of talk about how you know we didn’t have this kind of prosperity under Joe Biden. It is kind of odd given how well things are supposedly going how much Trump and his people talk about Biden. If it was really that much better would you need to be constantly comparing yourself and making claims about how much better you’re doing?For what it’s worth you know how often during his 48 months in the White House did Biden preside over job reports that were as good as yesterday’s in terms of job creation? The answer is 37 times.Now, there are reasons why the rapid job growth of the early Biden years, which was coming out of the COVID slump, can’t be replicated. And the fact that immigration is way down means that a normal jobs report is going to be a lower number.But still this was unexpectedly high job growth but not really something that should alter your fundamental view about how the economy works, although the near-term outlook looks stronger than you might have thought.One thing I should say, since there are some people wondering, can we trust these numbers? And particularly pointing out that the unemployment rate did not fall, even though we had a unexpectedly big job creation number and wondering how does that add up, are these books being cooked? The answer is no. You’re not helping by saying that.I’m not saying that the books might not be cooked at some time in the future, but we will know. It will be obvious that this is happening. And it would basically be impossible to do it without there being lots of warning bells, without there being lots of whistleblowers.So far, the Bureau of Labor Statistics is still apolitical, professional — under-resourced, which is becoming a problem — but these are the best numbers they could do.If you’re puzzled by how we can have strong job growth and no change in the unemployment rate, the answer is that these are two different surveys. The unemployment rate is based on a survey of households. The job creation number is based on a survey of employers. Those numbers don’t have to match up. I mean, in an ideal world, they would always tell the same story, but there’s statistical noise, there’s sampling error, there’s just conceptual differences.So this kind of discrepancy is not that unusual. And what it really tells you is, well, is the economy, is the labor market really sort of flat, which is what the unemployment numbers suggest, or are we seeing at least a mini boom in employment, which is what thenonfarm payroll numbers suggest? And the answer is who knows? Time will tell. Over the course of a year there’s not usually a significant discrepancy in the stories these numbers tell; month by month, well, it’s noisy and you shouldn’t overreact.Okay trying to make sense of what is going on — why is the labor market as strong as it appears to be? One important point about the economy right now is that there are three big forces that are hitting us. It would be really great from the point of view of professional economists if just one thing would happen at a time. But unfortunately, that’s not how it works. So there are three things happening. First, we are still feeling the effects of Trump’s erratic tariff policy, which has had a depressing effect on employment — not so much the tariffs themselves as the uncertainty. It’s very hard for businesses to make plans, very risky for them to sink money into new ventures when they have no idea what the tariff regime will be a few months down the road. But that uncertainty probably did a one-time hit to employment which is mostly probably behind us because yeah we have crazy erratic trade policy, but that’s now just a piece of the landscape which affects the level of employment, maybe, but not the rate of growth. The second thing is AI. So we have this enormous boom in spending on data centers, a large surge in investment, big rise in stock prices because of hopes about what AI might return. There are not that many people who benefit from high stock prices, but these are people with a lot of money and a lot of spending power. And if they go out and spend more, that boosts the economy. So that’s a sort of force that operates in opposition to the effects of the tariffs.And possibly the AI-driven spending is coming on now while the tariff effect is sort of closing out.About oil: For what it’s worth, prediction markets are by and large evil things, but they do give you a quick way of summarizing conventional wisdom. And just about a week ago,Kalshi said that the probability that the Strait of Hormuz would be open by August 1st was 60%. It’s now 26%. So people have justifiably gotten very skeptical of White House pronouncements that this is just about over. They should have been more skeptical before.But anyway, it just does not look like it’s going to open. And there’s a still huge remaining uncertainty about what does this imply? Through all of this there’s been a dichotomy between people in financial markets — including people in the futures market for oil who are presumably more professional, less vibes driven than a lot of investors — and what people who actually study the physical market for oil have to say.And right now futures prices are way up from where they were before the war, but they’re still under $100. Yet the oil industry people are basically hair on fire, saying, we’ve been meeting the loss of supply from the closure of the strait by drawing down inventories and the inventories are very close to critical critically low levels — there’s a certain amount you need to just sort of function — and there were a lot of warnings that really bad things would happen if the strait wasn’t reopened by June 1st. Well guess what here we are, it’s June 6th, D-Day, and the strait is not open. So is there a really severe oil crunch just a few weeks down the pike, or is it kind of manageable?So are we going to be hovering around current oil prices? I still find the physical oil argument quite persuasive, but I do wonder, again, it’s not like there are a lot of meme stock investors speculating in oil futures. That’s not a market that you would expect to behighly emotional. We know that there are insider traders who seem to know what Donald Trump is going to do a few minutes before he does it, who are in the market, but they’re probably not enough to be seriously, on a sustained basis, distorting the price. So I don’t know what’s happening on the oil scene except that it is a source of worry.Other objective economic facts: that jobs report also showed wage growth slowing, which it has been doing for a while, at the same time as inflation has been accelerating. Inflation was first pushed up by the tariffs, and now has been pushed up further by oil prices and prices of other goods, fertilizer, helium, that were transiting the Strait of Hormuz. That hit to prices is not all the way through the system. There’s a lot of effects, particularly from diesel prices and also fertilizer, that will show up over time in higher prices of goods that involve using these hydrocarbon-based resources to operate. So inflation is likely to stay elevated for a while. With wage growth slowing down, we are almost surely looking at least another couple of months of falling real wages, which is not a good thing.I’m a little skeptical of all the K-shaped economy stories — up at the top and down at the bottom. A lot of that is sort of going beyond what the data really say. But it is definitely true that people who earn their income are being hit by inflation and not being compensated with higher wages, while people who own lots of stocks have been doing much, much better. So that’s a real bifurcation.Of course, people who own lots of stocks are not feeling as good as they did a week ago. We’ve had a significant fall in the stock market and then a real tumble yesterday, more than 4% on the NASDAQ, somewhat less on the other indices, but still significant decline in stocks. The President of the United States went on a rage tweeting or whatever rage truth socialing spree sand said good jobs report should send stocks should go up not down. He somehow or other managed to find ways to contrast himself with Biden and make a lot of accusations against industry people who under-forecast this jobs number as suffering from Trump derangement syndrome.Actually, a quick point there about conspiracy theorizing. I know people who have to do these NFP, non-farm payroll projections, and they are, whatever their personal views, their job depends on being as correct as possible in the forecast. Every month, they’re evaluated. They have a story. They have a number. Their prediction will be wrong. But there’s always a question, were you better or worse than other forecasters? They do not have any space to indulge their political views.They will get it wrong. This happens all the time. The economy is a complicated thing. And even with the best will in the world even with the best information in the world, you are going to get it wrong. The idea that there’s a special negativity of economic forecasters towards Trump is ridiculous if you were awake during the last five years. Many of us still remember when Bloomberg put the odds of recession, this was in 2022, put the odds of recession over the next year at 100%. There was no recession.I don’t think I ever suggested that the professional forecasting of the economy was politicized. And I don’t think it was politicized either for or against Biden, and it isn’t politicized for or against Trump. There was a fundamental misconception, I think, behind those recession forecasts. But that is not a case of politicization.Anyway, there’s certainly no call for Trump to see himself as a victim. So what is happening? Trump professed to be baffled that a good jobs number should make stocks go down. But of course, it’s actually quite straightforward. What’s happening here is that with the combination of elevated inflation, now largely driven by the effects of Iran, and a job market that is holding up — that is not, in fact, falling off a cliff, if anything, appears to be accelerating — there is no case for cutting interest rates. A few months ago it seemedplausible that there would be some reduction in interest rates, that the Fed would have a rate cut or two this year. Now the chance of a rate cut, according to the market implied probability uh is around one percent. So there’s essentially no chance that rates will be cut and last I saw the market implied probability that rates will actually be increased is about 70 percent. Not big rate hikes but the Fed is probably going to find itself wanting to leanagainst potential inflation, against the possibility that inflation might get entrenched in the economy which is always their great concern. That’s not going to lead to drastic action but by any historical criteria there are is no case for cutting rates and there’s starting to be a reasonable case for increasing rates. Lots of stuff can happen but probably not soon so your expectation about what’s going to happen to the fed funds rate which is a very short term rate, actually literally overnight, has risen substantially that in turn leads to higher rates on longer term stuff which is what matters for economic activity. And that rise in interest rates hurts stocks. There’s always a couple of different ways to say this, but should you put your money in stocks or in bonds, well, if interest rates are higher, people are less inclined to put in stocks or what is really an equivalent thing, since the price of a stock depends upon expectations of profits in the future, if interest rates are higher those future profits are discounted more which means that the price of stocks should fall.And consistent with that story, the biggest falls in yesterday’s action were in stocks whose value depends much more on profits, hoped for profits sometime well into the future. So the NASDAQ fell 4%. The S&P, which is kind of a mixture of growth stocks and stocks that are driven more by current earnings fell less than that. The Dow, which is even more established companies who already have their profit flows fell less. So this was very clearly interest rates are going to go up because the economy is holding up while inflation is a little worrying and the Fed is not going to cut rates and may well raise rates so of course stocks are down. Nothing odd about that, nothing perverse. All that we learn is that the President of the United States doesn’t understand any of this and he just thinks that he should get interest rate cuts as a gold star for his incredible efforts.The interesting plot here is what does this do to Kevin Warsh, the new chairman of the Fed? Warsh was installed by Trump as somebody who Trump believes will do his will, that he will cut interest rates because Trump says we should cut interest rates and that he will find ways to justify it. And Warsh has been gesturing in that direction, calling upon the Fed to use different measures of inflation that look more benign than the standard measures. That’s an interesting debate, but it’s just so obviously motivated reasoning. It clearly says pick the inflation measures that show the lowest inflation so that we can make a better case for interest rate cuts, which is what Donald Trump wants. It’s clear that this is not a serious intellectual argument.But I think he has basically no chance of getting those rate cuts. Again, the Fed is not a dictatorship, it’s not even like a corporation where the CEO gets to make bigdecisions on his own. The Fed’s interest rate policy is set by a committee — the federal open market committee — which is a mixture of long-serving members of the federal reserve board and presidents of regional feds. Basically it’s not answerable to Donald trump it’s answerable in the long run to elected politicians, but that’s quite a long-run thing. And outside of Trump’s creatures, there is zero support for interest rate cuts on the Fed board now, as there should be none. The logic of an economy where employment still seems to be plugging along and inflation is high is not one in which there’s any rational argument for cutting interest rates.So what does Warsh do? Does he act like a professional central banker, in which case he will incur enormous rage from the White House, or does he advocate for stuff that he knows, he’s not stupid, and that everybody else, that all of his colleagues know is really, really bad policy, and then just keep losing votes at the FOMC, thereby becoming the least respected, least influential Fed chairman in history. and I don’t know which way that goes but pass the popcorn.I hope that I’ve been clear in the past in warning people against expecting instant gratification in people who are opposed to Trump in expecting instant gratification I’ve been I’ve made that mistake myself as well but if you want the fact that Trump is doing terrible things, which he is, to cause a severe recession now or a month from now or six months from now, well, unfortunately economics is not a morality play. The wages of bad behavior take much much longer and are much more diffuse. There’s all kinds of things happening out there so the idea that you could expect catastrophe just because you have catastrophically bad leadership is true in warfare as we’re seeing in Iran, it’s true maybe at the level of corporate competition. But something like the US economy is a lot less sensitive especially in the short run to the quality of leadership at the top of the United States because the US government influences the economy but doesn’t run it so this is not going to be the kind of spectacular flame out that many people would like for political reasons to see. So on we go.For what it’s worth, I don’t see anything that’s happening now that will turn around the public’s extremely negative view of the economy. Most people don’t care what the job number is, as they shouldn’t. It’s not something that affects their lives directly. The perceived state of things is that although we don’t have high unemployment,jobs are hard to find and prices are rising and they’re rising faster than wages. That’s not an ideological point, that’s just a fact. So people are going to stay negative and I guess have some sense that we have crazy erratic leadership. And loud proclamations that this is thehottest economy ever and it’s great and it’s wonderful are almost truly counterproductive politically. This is a time when Trump could really take some lessons from Bill Clinton and say that he feels our pain, which would be a lie. He doesn’t, but he can’t even pretend that he does.And so this is going to continue to be a very negative economic situation. The one thing that I think Trump thought he had was the stock market, which is again not that relevant to many people but statistically appears to have some impact on consumer sentiment so naturally he’s enraged that stocks went down after yesterday’s pretty good jobs report.So I do think that we’re looking at a situation where it’s hard to explain why people are quite as negative on the economy as they are, except that it they have a kind of cumulative feeling that the system is rigged and that the people in charge are not on their side, which at this point is very much true.So this is very unlikely to turn around, certainly very unlikely since everything is political, very unlikely to turn around before the midterm elections.I think that was a happy note. Anyway, take care and I’ll be back to my regular format of interviews and everything else in a few days. Bye. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

Chad Bown and Soumaya Keynes have a terrific new book with that title — a breezy survey of our chaotic new world of international economics, couched as advice for nations trying to get the upper hand. The book is here. I spoke with them last week about their book and the world in general. Fun stuff in a slightly grim way, and I hope we kept the acronym level tolerable. Transcript provided by the Financial Times, lightly edited to remove the ums and ahs. uTRANSCRIPT​Paul K: Hi everybody. I’m Paul Krugman, professor at the City University of New York, and an independent newsletter writer on Substack. You might have noticed that I’m not Soumaya Keynes, host of The Economics Show podcast. I’m here with Soumaya, as well as her longtime collaborator, Chad Bown, who is a senior fellow at the Peterson Institute for International Economics, formerly chief economist at the US State Department. Together, these two have just written a book called ‘How to Win a Trade War’, and today we’re going to be asking just that. How do you win a trade war? Soumaya, Chad, hi.Chad Bown: Hi, Paul!Soumaya: Hi!Paul K: So maybe I can start by asking a slightly funny question, which is, who are you? I know you’re Chad and Soumaya, but when we talk about how to win a trade war, who is this? You know, who’s the audience? Presumably not actually Donald Trump. It’s probably not Xi Jinping. I mean, everybody should read it, but who do you think might, in some sense, read it or at least be briefed on people who’ve read it?Soumaya: Well look, if Donald Trump wants to read the book, then we are very willing to sign a copy. We’ll hand deliver it however he wants. The conceit of the book is that you, the reader, are really interested in fighting a trade war, right? And we are the two nerdy kind of reluctant guides saying, “Uh, if you really want to do it, then, you know, we’ll give you the evidence that you need. We’ll tell you everything there is to know,” You know, it’s not easy to fight and win a trade war. Um, and so, you know, at least arm yourself with the evidence of what’s happened in the past, what works, what doesn’t work. We kind of acknowledge that most readers may come to this not actually wanting to fight a trade war, right?Um, so the point is it’s for... You know, it’s to help people understand, how to navigate this world of economic conflict as I feel like, you know, many people have become unwilling participants in these massive, massive geopolitical conflicts. It can be a bit bewildering. So the book is really supposed to be for everyone, right? To understand how we got here and where we go next.Paul K: Okay. Because yeah, I found myself thinking that it was easier somehow to follow the line of argument is to think of myself yeah, still a little bit of delusions of grandeur, but imagine myself to be Mark Carney, Prime Minister of Canada, or to imagine myself as Ursula von der Leyen, uh, uh, making policy for the EU.But basically, you’ve got these two powers. We’ve got the United States, which is basically Donald Trump, and we’ve got China, which is a little bit more of an institutional thing. But they are certainly waging something that they consider trade wars.Let’s talk a little bit about, how did we get here? How did we get to this point? I think, if we were holding this conversation around ten years ago, it mostly would have been, “Well, we’re economists. We understand free trade is great.” Uh, maybe fifteen years ago, even more so.And, so you know, the answer is just, “Don’t do this, free trade.” So I think all three of us probably have had some visions on the road to Damascus about why that isn’t an adequate approach. Anybody want to start off on that?Chad Bown: Maybe I’ll take a stab first. Um, so I guess to answer the question, we have to talk about what trade war we could or should be fighting because there are, I think, arguably multiple trade wars happening right now. You’ve got President Trump doing a lot of things. Um, but beneath, behind that, there’s another really big trade war that’s happening, and that’s the one having to do with China.So let me start there. Um, I would say, and it’s not as if I noticed this at the time, but say in 2015, when China rolled out its Made in China 2025 strategy, industrial policy that said, you know, we’re gonna have these market share targets to dominate certain important sectors of the future, that was kind of a sign that China was thinking about things differently than I think other, other, traditional, the United States and others had been.And then you fast-forward a couple of years with, Xi Jinping and his “dual circulation” strategy more clearly articulating the idea that China did not want to be interdependent with the rest of the world. It wanted the rest of the world to be dependent on China for their supply chain, so the United States to be dependent on China for sourcing stuff, but China to not have dependencies on the rest of the world.When you start to think about a functioning trading system, as we’ve lived in for the post-war period since the, the late 1940s, it requires rules, all those things, but it also fundamentally requires a willingness to be interdependent, right? And to trust that I’m gonna export to you, you’re gonna import to me, and, and yeah, there’ll be sometimes some frictions, but by and large, that will be okay.And China was saying, “No, we wanna have an asymmetric relationship, we wanna do what we wanna do, but we’re not all that interested in what you wanna do.” So for me, it was kind of seeing those things that really made me think that, ah, the world has changed. We’re in some sort of trade war, and really China is the part that’s driving this.Soumaya: So my journey, I think, um, you know, there was an important moment for me in the first Trump administration, right? And so, you know, Trump, ran onto the scene, during his first term and started throwing tariffs at China predominantly. And you know, Chad and I had this podcast about trade, and we were the loudest voices saying, you know, “What are you doing? You gotta play by the rules, why not try to use the rule book to solve these underlying structural problems that we have with China?” Um, and you know, I was covering trade full-time at that time, and, you know, something that was happening behind the scenes, um, was that there were efforts to try and get some kind of coordinated plan to save the rules-based system, to try and solve some of the structural problems between China and the US by writing new rules.So you had these trilateral discussions between the US, Japan, and the EU, and the idea was, okay, well why don’t we just write out the way in which we want China to behave, limits on subsidies, um, you know, new, new ways of protecting ourself against China’s subsidies. And the idea was, you know, they would agree on that common plan, then they might go to China and say, “Hey, look, we’ve got some new rules. You sign up to these, and look, President Trump will drop his tariffs.” That was the hope of some involved in that process. It certainly wasn’t Donald Trump’s plan. And I think, you know, a very fundamental way in which I have moved on from that is I just don’t believe that the solution to these problems lies in a new set of common rules that everyone is going to sign up to, right?In fact, the Trump administration did go to the Chinese government with a list of requirements or requests in terms of, you know, China’s subsidy behavior, and the Chinese, you know, shredded it, right? They weren’t gonna change their system. and that’s really the backdrop to where we are today, which is, you know, the Trump administration, I think, pretty much most everyone else, has given up on the idea that the rules are gonna save us.And that is kind of scary. It’s a bit, you know... It means that we can’t rely on the rule book to predict what’s going to happen next. It’s a much more chaotic power-based world, and we’re kind of feeling our way through.Paul K: Yeah. Yeah, for what it’s worth, I, I’ve had sort of two moments of revelation about trade. One of them, which seemed terribly relevant but maybe a little less so now, was the work early 2010s on the China shock, where we started to realize that, hey, you know, the problems of adjustment and dislocation that come from rapid globalization are a lot bigger than… you know, economists have always understood that there were distributional issues, but they’re a lot bigger. And that, that was, that was revelatory and a bit of a shock. Um, but I think it’s actually not the core of the story now. And, and for me, the, the revelation was, um... It’s a little odd, but I’m gonna give you this, uh, really offbeat point at which I realized that we’re not getting this back, which was actually when Russia invaded Ukraine, when we realized, hey, this rules-based order, not just about trade, but everything.We, sort of had taken it for granted that, all of the old stuff, all of the old demons had been banished. That we weren’t gonna have outright war in Europe. We weren’t gonna have countries just plain exploiting their power over trade for geopolitical gain. And, we now realize, I think I realized that, hey, all of that, all the things that we thought were fundamentals about the twenty-first century economy were actually basically dependent upon a benevolent hegemon. Not totally benevolent, not totally hegemonic, but still a lot of it depended upon basically the United States, which enforced the rules and obeyed its own rules for the most part. And, well, we’re not in that world anymore, not in Kansas anymore, among other places. So it’s-- now it’s a much tougher world out thereSoumaya: Can I just add that I think economists have been on a sort of journey as well, right? Um, you know, and, and, and, you know, starting point, the starting point being, you know, your, your theory, right? We thought that one of the benefits of trade was, you know, agglomeration, right?You know, huge efficiencies, huge economies of scale, that, you know, created these gains from trade and what we’ve seen now, I think, is that those agglomeration benefits are real, but in a world where we’re not friends with everyone and we don’t trust everything, they come with risk.Where do you feel like economics has, has, has gone?Paul K: Well yeah. I mean, it’s interesting. In some ways, the models were already there, and we understood that there are big advantages to agglomeration, although I think they’ve turned out to be bigger than we realized. And they, they really do... You know, I’ve been on my own little journey here about Europe versus the United States, and an astonishing amount is driven by, loosely speaking, the fact that Silicon Valley is on the US side of the Atlantic, right?It’s just that there are some agglomerations that color all of the numbers. But in a world of open markets, agglomeration rules. Texas doesn’t obsess about the fact that California controls a lot of the IT sector. Why should Europe obsess about the fact that the United States controls a lot of it? But that was not the world that we’re living in now, where these things become very real. So the whole, Everything changes once you stop assuming that it doesn’t fundamtelly matter where stuff is produced. We’re talking a lot about high tech, but, if we talk about Chinese manufacturing ... It’s not just that China is good at a lot of stuff. China has a whole industrial ecosystem that gives them tremendous amounts of leverage in the world. I mean, China isn’t the only place that has rare earth deposits, but it’s the only place that has the industrial ecosystem that can process them at this point. And so that altogether, that creates a world where Section 232 and I think Article XXI of the GATT on national security -- I’m always testing my acronyms and numbers, uh, knowledge. But anyway, I thought if you’d asked me fifteen years ago, I would have said, “Well, all this national security stuff, that’s just an excuse. National security is the last refuge of the scoundrel.” But actually not now.Soumaya: YepPaul K: So okay. Any other sort of revelations beyond the fact that, that it, it’s a scary world with nasty people in it?Soumaya: So I have one which is, you know, you mentioned the, the China shock literature, right?Paul K: YeahSoumaya: So this is this collection of papers showing the effects of, of, of imports from China.Paul K: RightSoumaya: And one paper that I thought was super interesting that came up as we were researching this book was, um, was about what happened in Canada, right?When, when there was liberalization as part of, um,Paul K: Oh Yeah,Soumaya: Was it NAFTA or was itChad Bown: CUSFTA.Soumaya: CUSFTA?Soumaya: Yeah, so the predecessor, to, to NAFTA. Um, and actually, you know, this, this research found that, that the effects when, were really quite dissimilar from those China shock effects. People were able to adjust. There were export opportunities created by that trade deal.People moved into those, those other industries. There’s also research looking at, um, you know, uh, liberalization and populism in, in Europe, right? And there seems to be this relationship between places that have stronger social safety nets, um, and the switch to right-wing parties. Um, and so, you know, I think one, one point that, that I would want to make is, you know, it’s important not to go to over-interpret what’s going on now and to kind of see it as this idea that, you know, all trade liberalization, you know, has losers and, and there’s just nothing we can do to, to address those, right?There are cases where actually import liberalization, you know, we, we could cope okay with it, and economies adjusted and social safety nets worked. So I think it’s, you know, it’s important not to kind of over-correct after some of those instances where there was, you know, real pain in the past.Paul K: I’m trying to remember how much in the book you really talk about the political economy of these-- the protectionist backlash. ‘Cause that is actually-- not as, you know, there was a simple story, “Oh, trade produces lots of losers, and now the public won’t have it.” And that’s not actually the story as far as I can make out. what did you say? I’m trying to remember the actual way you put it. Soumaya: Chad do you remember, or shall I?Chad Bown: No. Yeah. I mean, I-- Well, I mean, the, the story is that it’s complicated,right?Paul K: YeahChad Bown: And voters don’t, you know, kind of respond as cleanly as, you know, one might expect to what the economic implications are for them, right? And so one of the more recent China shock papers, in fact, has looked at the longer run impacts of the China shock and the reapplication of the tariffs in the first Trump administration, and has found that they didn’t really do the job of, you know, helping workers in those regions, right?Didn’t improve employment or anything like that. But it did help President Trump’s party, in subsequent elections, right?So there is maybe something to the idea that, well, okay, he may not be helping me, uh, you know, get a better job or, or my employment process, at least he’s fighting on my behalf, right?And so what that means is it’s really messy to draw these links between all of this stuff in the political economy context.Paul K: Okay, I didn’t know that. I somehow missed that. I know you did mention it, but it’s not so much if you look at kind of the vector of, of real wage changes or whatever, of employment changes, that that’s not, not really the story. It’s more about attitudes, sense of whether you’re led by somebody who’s standing up to foreigners. I think in the end, the protectionism in the U.S. and I think in Europe is not really a, a mass public groundswell. There are parties who exploit it, but it’s not really this sort of simple deterministic, you know, losers fight back, and this is why we have a problem.A lot of it more has to do with, again, the, the complexities of the political process.Soumaya: Yeah, and so you can see this in, in, you know, both what’s going on in the US and, and also the EU. So if you think about what Trump did, right, he, he had to do this by using and arguably abusing, um, you know, arcane bits of US law, uh, because he didn’t have the support of Congress to, to apply these tariffs, right?And so he kind of ran roughshod over the, the democratic process there. Um, uh, you know, in obviously in the case of IEEPA, that turned out to be overturned by the Supreme Court. and, you know, during the first Trump administration, companies were complaining quite a lot. I think during the second, those complaints were a little quieter. That’s probably some combination of, you know, worrying about retribution, but also maybe in some cases they adapted, right? And so I think one lesson of that episode could be that you may not have the constituents for protection at the beginning, um, but you could, you could develop those constituents if that protection is there for long enough. And then the contrast is with, is with what’s going on in Europe right now, right? There’s a huge discussion about whether the EU should essentially do more of what the US is doing and protect itself. And it’s just extraordinarily difficult, even though you’ve got these really acute problems, right?German exporters being, you know, crushed in, in, in third markets. You know, the car industry really struggling to cope with that Chinese competition. and even then, right, even in the face of these really extreme Chinese export trends, even then it’s really, really difficult to get a consensus, right?And so, it’s a question of, you know, can Europe ever act as decisively as the Trump administration? Maybe there’s a middle ground between kind of hopeless inaction and kind of maybe overaction? But yeah, that just speaks to that issue.Paul K: Okay, we could go on. I actually just say quickly, the importance of institutional details, including the details of legislation that people wrote ago, uh, that were not intended for the purposes to which it’s being applied. It’s, it’s amazing. I mean, the fact that, that, uh, that Section 121 is written the way it, it is, and that IEEPA is written the way it is, suddenly turned out to be you know, the fate of the world is hinging on more or less accidental wording of decades-old legislation. It’s kind of amazing.Soumaya: I was outraged when I, an economist, was the economics correspondent of The Economist magazine, started covering trade. I thought this was gonna be all about, you know, big intellectual battles of which model worked best, and actually, I essentially became a lawyer, um, working out, you know, what, what does the Section 301 statute mean?What’s 232? How is this compatible with the World Trade Organization rules? You know, it’s, it, you, you get stuck in the legalese quite quickly, but as you say, these, these details really, really matter. Apologies for all of the lawyers. I’m not actually a lawyer. Paul K: I knew somebody who taught a trade policy course long ago, but she would return term papers with, uh, just right at the top, a Y-H-T-M-A-A-I-Y-P, which was, “You have too many acronyms and abbreviations in your paper.” anyway, So, you know, so if we’re talking about Europe responding, taking the extreme constraints on European action, you know, how would you go to the Berlaymont in Brussels, and, and you’re gonna tell the European Commission, “Here’s, here’s what you should do in response to,” I think you said that America is a pirate and China is a warship, but anyway, they have these two quite different but also, but very seriously threatening, aggressive trade policy partners.Two of the world’s three economic superpowers are not behaving the way they used to, and the most obvious case is, okay, you’re the, you’re sort of running the third power. What, what should you be doing?Chad Bown: Well, um, engaging, right? And I think, uh, you know, as Soumaya indicated, Europe has been a little bit slow, uh, to engage in the, you know, are we willing to, “can we fight a trade war?” question. But they do seem to be there now. One of the really interesting lines for Europe at the moment is this issue of electric vehicles and the automotive sector.Um, and what’s fascinating is, is, is the following: they’re essentially trying to see if they can learn from the Chinese model to encourage Chinese firms to build cars in Europe, right? So what was the Chinese model? The Chinese model was forced technology transfer. What made them successful at the time, or partly what made them successful was, you know, back in the early 2000s, there were a lot of Western automakers the United States, Japan, Korea, Europe, that all wanted access to China’s 1.4 billion potential drivers, right?And China had high tariffs at the time, so exporting into China was really hard. China said, “We want you to build those cars here, and not only do we want you to build those cars here, but we want you to form joint ventures with local Chinese firms, and then teach them effectively, uh, how to make cars themselves,” right?And partly, and they were successful. And part of the reason why they were successful, you know, we think, is there were lots and lots of these Western automakers competing against each other, all seeking to get access to that Chinese market. So you fast-forward today, and you say, well, okay, can Europe do the same thing, um, with respect to the Chinese technological leaders today in, in battery electric vehicles?And while there may be, you know, at the moment, lots and lots and lots of EV manufacturers in China, um, BYD is the dominant one. Um, and behind that is the battery makers, which are BYD and CATL, right? And to, to sort of thwart that possibility, right, the idea that, well, maybe Europe could exploit, you know, divisions amongst Chinese firms and negotiate to get them to come into Europe, partner with German automakers, teach them how to make battery electric vehicles better, locate production here, create lots of jobs, the Chinese government has already set up a system of licensing for its technology and saying, “No, BYD, CATL, you know, these companies, you’re not allowed to just go out and negotiate with the Europeans.We’re gonna be the one. The Chinese government is gonna be the one controlling access to that technology from foreigners, right?” So on one hand, you have the Europeans maybe seeking to learn from the Chinese model, and the other hand, you know, the, the Chinese already going a step beyond and saying, “Yeah, we’re not gonna let you learn from our model and, and get those jobs there in, in Europe.Here’s how we’re gonna thwart those kinds of things.”Paul K: Wow. And that’s really instructive because, you know, all of us spent years learning about why government intervention in trade is almost always a bad thing and how, um, uh, letting people buy wherever they want and not, not, certainly not blocking possible profitable opportunities is, is clearly going to hurt your country.And now we’re sort of saying, “Oh, you know, this dirigiste, overall control.” And in this case, it’s not just geopolitical. It’s, well, you know, China can preserve effectively its technology advantage, even though it’s not fancy technology. And because, because they can close off the technology transfer. So but you’re, you’re saying that basically, as I understand, that at least the EU, presumably Mark Carney’s middle powers need to be at least a little bit more like the Chinese.Chad Bown: I think that’s right. I mean, I think, you know, one of the lessons that we took away from the book is we all need to learn a lot from each other, from the other players. But especially, you know, I think in the Western system we need to learn from China. That does not mean we need to adopt the Chinese model, right?And so please don’t get me wrong But there are elements of what China does when it does industrial policy, when it does, in that earlier example, the transfer of technology, that if you wanna have those similar kind of outcomes be successful, you really do need to see what it was about the Chinese system that allowed them to be successful in those instances.You may not be able to replicate it, right? So you need to, you need to learn those kinds of lessons as well. But yes, learn important lessons from China.Paul K: So, I mean, EVs in Europe, I mean, the United States has decided that we’re going to have coal-burning cars or something. But, um, EVs in Europe, there is a question, should they even be trying? Shouldn’t they, say “Okay, if the Chinese are gonna sell you cheap vehicles, why not just drive cheap electric vehicles and, uh, work on your European, uh, comparative advantage, whatever that may be?”Soumaya: I mean, this is actually a, a debate in the US, right? You’ve got some saying, you know, “Why won’t you let me buy a cheap EV? These, these things are…Paul K: RightSoumaya: …karaoke bars on wheels. I want a, I want a piece of that equipment.” Um, and you know, the arguments against are in-- you know, include one, this is actually an area where Chad and I had quite heated debate as we were writing the book, as Chad was much more in favor of banning things than, than I was. Um, and you know, that relates to some of the security risks around, you know, having Chinese software run some of these vehicles, the risks of surveillance, even being able to turn off the car remotely. Um, Chad was more gung ho about banning vehicles because of that concern than, than I was.I wanted, you know… Surely it’s possible to come up with some kind of technical test, um, because, if we start banning cars on that basis, then, you know, what about smartphones, right? Last time I checked, there was quite a lot of electronic equipment that was made in China that could, in theory, carry the same risks.So are we, are we really gonna be inconsistent? So there’s the security piece of that. There’s also just the political economy piece of that, right? Which is that, you know, the, the car industry is massively important in Europe. The political consequences of letting all of those smaller companies just shut down would be potentially devastating. And then third, there’s a kind of bigger argument about industrial capacity. When we don’t trust each other, is it really wise to be cutting manufacturing, or accepting the loss of manufacturing? Could there be some connection to innovation? The evidence on this isn’t as concrete as we’d like. But you know, is there something? Do the folks who worry about manufacturing having some kind of national security advantage, do they have a point, right? In some kind of heated conflict, do you actually need the capacity to scale up quickly? So actually having that industrial might is important.Now, that doesn’t mean manufacturing jobs, but you know, I’m talking about overall manufacturing.Paul K: You wrote the book obviously before the Iran war, and, but you do talk about supply chains and the threat of cutoffs, and that now seems immensely more real. I mean, how much does that change the way we think about, about trade wars?Chad Bown: So I think, Iran and, and Strait of Hormuz, right? Obviously, from Iran’s perspective, the war, the physical war, the military aspects of it have to be absolutely devastating. But at the same time, they have been able to weaponize through their export restrictions, you know, imposed on not allowing things through the Strait of Hormuz, in a way that is, you know, orders of magnitude bigger than the size of their economy would otherwise suggest, right?And so that’s part of the new world in which we live. Sometimes you have those kinds of supply chain disruptions, um, that can come up, um, by, you know, not recognizing just how serious those choke points are. I think there were a lot of folks that probably did recognize how serious those potential choke points were.But as we have seen, through what’s happened since February, the world is now, you know, facing the consequences of, of those actions.Soumaya: So just building on that, I think what we’ve seen so far with the Strait of Hormuz is that some of those disruptions haven’t hit yet, and that’s because companies have been doing, you know, one of the policies we, we discuss in the book, which is stockpiling, right? So we’ve had inventories, and they’ve been running them down. When the crisis first started, uh, you know, folks were asking how bad could this get? And the response was, “Well, as long as it doesn’t last for very long, it’ll be okay,” right? Because there are those buffers. And so, you know, the crisis, I think, highlights the importance of having those buffers, but also I think that, you know, there is a point about substitution. So, so, um, if you think about the drop in oil flowing out of the, the Strait of Hormuz, a third of that has been made up with oil flowing out through other ports, right? And so one of, one of the lessons here is that, you know, when thinking about your vulnerabilities, actually there’s always some slack in the system.There are always some, some opportunities for substitution. They may not be, you know, fast, it may not be easy, but actually one of the lessons from history in extreme situations is that we tend to be a bit more adaptable than we sometimes fear. That said, obviously if this disruption goes on, there’s pain being felt, right?We shouldn’t then swing too far in the other direction and say, “Oh, well, there’s no point in applying export controls because we can always adapt away.” That’s not true. As we are seeing now in, in, you know, some of the, the poorer countries who are on the front end of this, and as we will be seeing later these weapons are pretty, are pretty impactful and pretty dangerous.Paul K: What struck me though, I mean, the Strait of Hormuz is a, it’s a, it’s a physical choke point, which is helpful for illustrating the concept, but it turns out there are all of these de facto choke points like rare earths, like, well, semiconductors. I mean, it’s not that so much stuff passes through the Strait of Taiwan, it’s the fact that basically everything runs on chips made in this island. So yeah. And you do talk about this. I mean, right there, there is definitely a case for policies that even at some cost make sure that critical stuff is made in some quantity in places that are, are less subject to this kind of disruption. Gosh, for many years I was co-author of the bestselling international economics textbook. I don’t think we mentioned supply chains, export controls, any of that. I probably haven’t yet. I’d probably have to get that in the next edition. But anyway,Soumaya: No don’t worry, you don’t have to. You can just assign our book as the top-up, and then it’ll be fine.Paul K: That’s right No, definitely. Y-H-S-T-M-A-A-I-Y-P. No, you’re actually very good. I’m not doing the acronyms and, and, and the numbers, but it is something. Actually, I’ll give a quick quiz. Uh, do you know the answer? You probably do, but the, um, you know, all these numbered trade things, what act are they numbers from?Soumaya: 74? 1974?Paul K: Well, the answer is they’re from several different acts.Soumaya: Ok well that was a trick question!Paul K: So it’s really horrible that we, we’ve got a 122 and a 232 and, and they’re not from the same law, so it’s totally obscure. But anyway.Soumaya: Should we wrap up here?Paul K: Let me just ask last question, then I’ll let you go. Do you have a view-- how does this pan out? You’ve given some, some good advice to people who are not Donald Trump, effectively. I mean, maybe Trump would benefit from, but he’s not going to read it. And probably not Xi Jinping, but how do you think this shakes out? It’s, you know, it’s possible that, that Mark Carney and his middle powers or Ursula von der Leyen and the EU leadership will in fact think about these issues and, and quite possibly read your book, as they should. Um, what does the world look like in five years?Soumaya: Okay. well look, I’m gonna be real. Um, I don’t think there’s gonna be some grand bargain, um, in the next five years, right? Which goes back to my point earlier about the rules aren’t gonna save us. And that underpinned the stability that we had for so long, right? That’s really the only outcome that would reduce the chaos, right?And so without that, we’re kind of in this messy world where everyone is gonna be following this rule book that we’ve laid out. Everyone’s gonna be trying to stockpile, to subsidize, to, to look to see what everyone else is doing, to see what lessons they can learn. that’s gonna be, you know, pretty chaotic, I think, the chances are that there’s gonna be misinterpretation of, of what’s happening.So just, you know, take an example, stockpiling is one of the main tools that, that countries are now deploying to try to protect themselves against, you know, weaponized shortages. but you know, there was a hearing too long ago where, where one of the US committee was quizzing experts on, on whether stockpiling was a sign that a country was about to attack, right?You’ve got China building up massive stockpiles. What if that breeds suspicion, um, that there’s some kind of military preparation? And what if Western stockpiling breeds that suspicion on the other side, right? So you have this real risk of these awful self-fulfilling dynamics. so, you know, do all the nice things, right?Communicate, try to coordinate with your friends, engage, be as transparent as you can, um, put in the effort, spend the money, subsidize, stockpile, do all of the things that are hard. but you know, you’re gonna have to put in, put in the effort and be consistent about it, because the dynamics are such that in a trade war, your adversary is gonna be taking advantage of any moment of weakness to, to try to strengthen their position.Chad Bown: And I would say for me,, the only things I would add to that is, you know, to build upon the, please work with your partners and allies, right? It doesn’t make a whole lot of sense to be fighting with them distracting them away from the really hard task at hand of fighting the real trade war that needs to be fought, which is dealing with these challenges with China.And, every ounce of time that Europe or Canada or Japan or Korea has to deal with American tariffs, demands for, you know, invest here in my energy sector or something like that, instead of focusing on how do we most quickly, at lowest cost possible to deal with the affordability concerns, diversify some of these supply chains away from China while China is actively trying to prevent us from diversifying those supply chains away from us.We need to do that kind of thing together. So focus on the trade wars that need to be fought, and let’s put the other trade wars to the side.Paul K: Okay. That’s actually interesting because we’re basically saying that the, if not full on conflict, that trade war with China is basically gonna happen, at least a cold trade war. And that if only the United States would stop doing what it’s doing, that we could actually form an effective or might be able to form an effective precautionary bloc against it, which is optimistic. I guess that means, particularly if we get some better management back on the home front, we might actually be able to resolve this not too badly. That’s, that’s what passes for wild optimism in the year 2026. We’re all optimists now. This is, this great, sunny, uplands awaitPaul K: All right. Well, Soumaya, Chad, thanks so much, thanks for the book, which is tremendously enlightening, and thanks for the not totally dire analysis at the end. Let’s, let’s, uh, hope for the best, and the best way to make it work is for everybody to read the bookChad Bown: Thanks, PaulSoumaya: Great advice. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For more videos, visit my YouTube channel.I’m away but alas staying in touch with political news at home, and thought I would check in with one of the best public opinion quants about where we stand right now …TRANSCRIPT: Paul Krugman in Conversation with G. Elliott Morris(recorded 5/13/26)Paul Krugman: Hi everyone. Returning today to G. Elliott Morris, my favorite polling and public opinion analyst. We’ve had an eventful time with redistricting and there’s a lot of stuff going on, so we’ll see where this goes. The big news is, of course, the Court leaving Democrats stunned by overruling the referendum with Virginia redistricting, which now gives Republicans a substantial lead. You’ve been doing some analysis. How should we think about how this changes November?G. Elliott Morris: Yeah. Big picture is: as long as Democrats are still winning the popular vote by four points, they’re still taking back the House of Representatives. A lot has changed over the last three weeks. First, the Supreme Court has invalidated section two of the Voting Rights Act. This was the portion of the law that prevented state legislatures or other state bodies from diluting the power of black voters.Krugman: Right.Morris: This, of course, matters for our partisan calculations, because black representatives in the South tend to be Democrats. Now the Supreme Court has said states can divvy up their votes. Republican-led states in the South, including Tennessee, Alabama, and Louisiana, have since passed, or are about to pass, maps that will take away three Democrats at least, and potentially five. So that is quite a few seats. On top of that, there has been other redistricting news. Virginia voters had passed a constitutional amendment to adopt a Democratic gerrymander that has been struck down. So Democrats in Virginia are going back to their old map, and they will lose two seats because of that—two seats that they would have otherwise gained. So, if you’re catching up on the math here, that’s three seats lost from the Democrats. It would have only been one; now it’s three.But then we have redistricting in Texas, Florida, North Carolina, Ohio, and Missouri. If you add up all of those Republican states, they have taken away about 13 seats from the Democrats, and Democrats have gained only five or so out of California, the only state they have really redistricted. If you add up all this, then Democrats are down about six seats from the gerrymandering wars that Donald Trump started last year. And that could be potentially decisive in a close race.Krugman: My very informal impression was that prior to all of this stuff, the kind of Republican bias of the voting was largely gone, and that the House majorities tended to more or less reflect the popular vote. But now we’re in a situation where we’re back with probably the biggest ever Republican lean there.Morris: Yeah. So the 2024 congressional map was technically still biased toward the Republicans. If in a perfectly average year with perfectly average candidates—and that is the big “if”—if 2024 had been rerun, we would have expected Democrats to lose the majority of seats, even if they had won the popular vote by about a point. The big benefit in 2024 was that recruitment by Democrats in close seats was really, really good. So they beat expectations. But if you rerun it, it still would have been slightly biased towards Republicans. Now we’re at around a Republican bias of four points, which is close to the bias right after the 2010 redistricting. What happened in 2012? So this is pretty bad. We’re getting to the point where the structural bias in basically every electoral institution at the federal level is significantly overweighting Republican votes, just by the fact of where they live or who’s in charge of drawing the maps.Krugman: A few weeks ago, I talked with Kim Lane Scheppele, my old friend from Princeton, about Hungary. And, you know, a lot of what Orbán did was, in fact, basically whatever the Hungarian word for gerrymandering is, but on a heroic scale. She said that they basically weighted rural voters by about 3 to 1 over urban voters. But of course, that was overtopped by a huge wave election. And you would still think that the most likely scenario, given the current polling, is probably still that the Democrats are going to probably crest.Morris: I think the 2026 election will be significantly pro-Democratic, and that the gerrymandering won’t matter. It won’t matter in terms of who wins the majority of the seats. Democrats will still be down six seats, at least, from where they should be. But if they’re gaining twelve, then, you know, they’re still managing to recapture the House because it was so close last time. Republicans only had three extra seats at the last election. So it’s a pretty easy wave election for the Democrats. But they’ll still be down seats, like they’re still deprived of representation in the South. And more importantly, in 2028, when we’re not expecting Democrats to have such a large wave—unless the country comes to its senses. I know you talk a lot about tariffs here. That’s a big example. Then we’re expecting a much closer election. And in that 2028 scenario, this gerrymandering could give Republicans the majority, even if Democrats win the popular vote.Krugman: Just a quick, amateur question on this stuff: to what extent is there the possibility of a “dummy-mander”? I was just thinking about the Hispanic vote—that the Republicans may have drawn these districts on the belief that the 2024 Hispanic vote was going to remain. And they seem to have really lost that, at least if the polling is at all right. Does this mean there’s a possibility that the Republicans have essentially diluted their own support in order to wipe out Democratic districts, and that they’ve opened the possibility of losing a lot of normally red seats?Morris: So, it’s a great question. I’ve done some math on this. My own simulations of election outcomes, where I assume rationality. But Republicans basically went after five districts in Texas. Maybe two or three of those are highly susceptible to a dummy-mander. In which case, if you do the math and Latinos move 20 points toward the Democrats, and everyone else only moves ten points to the Democrats—assuming Latinos are moving twice as much as everyone else, which is pretty close to what happened in the 2025 elections—then Republicans only gain two seats out of Texas, but they’re still gaining seats. So there is a possibility that they have drawn themselves too thin in the case of a big Latino backlash. But they’re just subtracting some seats that they could have otherwise gained. So it’s not the fact that they’re going to lose overall in terms of the overall gerrymandering. In other words, they’re still coming out ahead.Krugman: Okay, that’s slightly depressing, but I’ll take it. I find myself wondering: if we really have a very clear, massive, public backlash against Republicans, but these maneuvers keep them in control of the House, how much damage does this do to legitimacy and feelings about the government?Morris: I don’t know how much worse feelings of legitimacy or approval of the government could get. I mean, approval of Congress is 20%, SCOTUS is 20%, and Trump’s approval rating is 35%—only by virtue of that question being really partisan-polarized. If you actually ask Americans how they approve of Donald Trump’s handling of stuff like prices and tariffs, then it’s closer to 25%. So, it would be very striking to have lower confidence in the US government to solve the problems of everyday people. Basically, this might make an impact on how Americans view the functioning of their democracy or what have you. And actually, from my point of view, that type of education could be useful for stuff like electoral reform or proportional representation. But we don’t have to get into that for now. But it’s pretty bad out there. It’s pretty bleak out there, Paul.Krugman: The unpopularity of Donald Trump is really extraordinary, and the unpopularity of the policies. Things have really gone downhill. Things were really going downhill, I think, even before the Iran war.Morris: Yeah. If I’m telling the story of the Trump administration, I’m looking at five main events besides his inauguration, which is itself a sort of negative signal to the American people. I’m looking at the Liberation Day tariffs in April of last year, which caused a drop in Donald Trump’s approval rating and then mostly trickled along, slightly dipping as every day people are realizing what the administration is doing. They tend to react negatively to the president regardless of what he does. This was true for Biden as well, by the way. It’s just a sort of weird factor of political psychology here. And then the next event I’m looking at is a sort of confluence of immigration events that happened from May to June of 2025. So you have the deportation of Kilmar Abrego Garcia. Donald Trump sends the National Guard to LA and to Chicago. And this creates a lot of negative press attention for him. And you see his approval rating on the economy and deportations overall drop again by about 5 or 10 points. And then he trickles around; he’s losing support. And then over the next six months, really not much happens in his approval rating. And then the government shutdown happens, and a lot of Americans come around to the news that Donald Trump has basically defunded a lot of Medicaid and premiums are going to increase. That, of course, sets in in January of this year. And then I would be looking at the Iran war. You would also want to add the killings in Minnesota as well. That was a big signal to Americans about the negative outcomes of Trump’s deportation agenda and militarization of U.S. cities, essentially. So those events are about immigration and prices. The health care thing is still kind of a price anxiety. And you can see his approval rating dropping. His approval rating was positive when he started. He’s at -25 or so now in our polling; he’s closer to -30. So it is worth emphasizing: very few people like Donald Trump. If you walk down the average American street, you will encounter between three out of ten or four out of ten people who actively support what he is doing. And that’s very low for a president of the United States historically, and in absolute terms, it is just worth emphasizing that people do not like this period.Krugman: Yeah, I had forgotten that he did have a positive approval briefly.Morris: He did have a bit of a honeymoon when he started. But it really deflated very fast.Krugman: And it’s extraordinary, actually. It feels like much longer ago than it was.Morris: There seems to be an awful lot of enabling of Donald Trump on the part of congressional Republicans. A lot more than you would expect based on his approval ratings overall and his approval ratings in their districts. Now, in my opinion Trump reacts to public opinion only from a narcissistic point of view. He shares the polls when they’re good and he calls them fake news when they’re bad. He’s constantly talking about how much the public loves him. That is the type of thing a narcissist would do. But in terms of reining in political actions from the White House, I do think we’ve seen rather little evidence that the polls are meaningfully moving him.Now, there are a couple of cases. The big one is the retreat from Minneapolis after the killing of Rene Goode and Alex Pretti there. There was a dramatic increase in support for abolishing ICE and a dramatic decrease in approval ratings for ICE and the president’s immigration and deportations agenda right after that. So it seemed to matter in terms of public opinion. But look, I think we’re in an environment where most legislators, especially on the right, are insulated from general electorate opinions, especially the opinions of the average person who might not turn out to vote. And that is enabling an awful lot of bad behavior on the part of the president. And partisanship is really an overwhelming force for bad on the right, given the president’s proclivities. So I think you are right here to say, you know, the polls are the polls. And it is important to say that people don’t like this. But Trump is not necessarily the type of actor you would expect given that information.Krugman: I just wonder, because the papers are full almost every day with some scandalous or just outrageous behavior. Kash Patel’s personal brand of bourbon and all of that stuff. But one of the things I learned from you about swing voters, and you have a very straightforward definition of being badly or poorly informed, which is just: do they know who controls Congress? But I wonder whether any of this stuff even reaches a lot of voters.Morris: Yeah, I doubt the average person knows about the Kash Patel whiskey—the “cash money” whiskey. By the way—I’m a big fan of whiskey, and that seems like a real betrayal to all the whiskey fans. Yeah, there’s a problem here, which is that most legislators just really don’t care what the public thinks, including in their district and including overall. And really, nowhere is that clearer than in the Republican Party when Donald Trump is passing tariffs that will cause inflation or asking for $1 billion for his ballroom, etc. And the voters who aren’t really paying attention to the news might not hear about that stuff, but it doesn’t mean it doesn’t matter. And they are getting signals of the president’s incompetence from stuff like gas prices going up. And just a general news environment being bad about the President of the United States. So some of this does filter through to them.Krugman: Okay. Let’s go on to the vibecession. There’s a lot of payoff in the economics and business punditry world for turns of phrase. And Kyla Scanlon with the vibecession, as I think she said.Morris: Yeah, she should get a Nobel Prize for vibecession.Krugman: Yeah, she’s set for life on just that one term, although she’s actually very good on other things. But it is quite amazing, right? Just before we recorded this, the latest survey of household economic dynamics from the Fed came out, and so even leaving aside the approval ratings and so on, public views about how they’re doing—most people still say we’re doing okay—but the views about the state of the economy have just fallen off a cliff. As we might expect, people are incredibly negative. The first question is: do we think that, in some sense, people are more negative than the reality? But do you have a different take on that?Morris: I will just respond directly to the last thing, which is yes, there is a vibecession. The vibes are still lower than you would expect. Even fundamental indicators and even this one that Jared Bernstein has proposed—that I’ve sort of back-tested in some modeling: the excess inflation number. Even if you account for excess inflation, or just price levels being higher than people expect, consumer sentiment as measured by the University of Michigan is still about 10 to 15 index points lower than you would expect. So there is still some level of anxiety out there that is breaking from our historical understanding of economic anxiety.Krugman: Okay. So you think that there is, in fact, still a mystery component, at least based on the consumer confidence index.Morris: Yeah, I guess the other way to say it is that those historical models that predict consumer sentiment are still missing something. Maybe they’re missing that people are reacting more to inflation now than unemployment or other structural variables than they were in the past. And you have to find some way to account for that. I mean, I’ve tried every way possible. Even if you P-hack it, you really can’t get there.Krugman: People may not know, but P-hacking is essentially playing with variables until you get something that is statistically significant.Morris: Except that it isn’t really, because we’ve tried all the alternatives to find the thing that seems to work. By random chance, you would have arrived at an answer. But what I’m saying here is, even by random chance, you cannot arrive at a prediction of consumer sentiment that is perfect. There’s some fundamental break around two years ago in the vibes about the economy. And it’s lower even if you account for stuff like excess prices. And that’s got to be an important part of our story.There’s a subset of internet commentators, mainly on Bluesky, who insist that the economy is actually good and the vibes are just wrong for no reason. I don’t think that is right, but I wouldn’t go so far as to say there’s no vibecession. I think it’s somewhere in the middle.Krugman: Okay, so I guess there should have been a break two years ago. But you think that things are worse now relative to the fundamentals than they were in 2023?Morris: Yes. If you predict consumer sentiment with excess inflation via the S&P 500, economic growth, and such—you can get a very good prediction—almost perfect out-of-sample until December 2024 or January 2025.Krugman: Which is an awfully convenient result if you are focusing on Trump-related sources of economic pressure.Morris: But it also is around the time when the president started passing inflationary policies. So it could just be that people, after January 2025, were hyper-aware of inflationary policies like tariffs, or just the “horse in the hospital” aspect of this presidency. Maybe they’re mapping that onto their economic sentiment. I am still searching for answers for the last year or so. But if you include excess prices in your model of consumer sentiment, this basically fixes, I think, the original vibecession aspect through the end of 2024. But now we’re in a sort of different vibecession environment, perhaps related to Trump. I’m not sure.Krugman: Okay, so “Vibecession II,” which is to go along with “Trump II.” So, you really are saying there is basically a “Vibecession II,” which is interesting, and that there’s something that goes beyond all the solutions that we’ve tried to find to explain why people were so depressed in 2024. Now, even with all of that, something else has happened now.Morris: Yeah. I think I can explain the vibecession of 2022, 2023, and 2024 very well as an excess price shock.Krugman: Alright.Morris: I don’t think we have a good explanation, economically or otherwise, for the 2025-2026 vibe session—”Vibcession 2: Electric Boogaloo.”Krugman: Yeah. Well, of course, people are feeling really bad because we have crazy tariffs, we have cuts to health care. And you know Trump is so terrible. So, of course, people are feeling something terrible. But I don’t think that’s what’s going on in the minds of the average American. So, there is something going on there.Morris: If I were putting on my political scientist—maybe political psychologist—hat, it is very possible that the amount of coverage about the Biden economy in derogatory terms, and inflation and the blame of the president for inflation in 2022 and 2023, caused voters to think about the president more and then think about the direction of the national economy. And therefore, if that is true, then getting a figure like Trump into office would cause a pretty negative backlash in overall economic sentiment, even if it’s not causing this negative backlash in their personal financial situation, as you know.Krugman: Yeah. I mean, it probably doesn’t matter for the public views, but in my view, Biden bore very little responsibility for that inflation. It was supply chain disruptions in the aftermath of COVID, and European Union inflation was basically identical to U.S. inflation. But this time around, you really have to say, well, the 3.8% inflation that we just got is—Morris: Yeah, you could definitely put a “Trump-flation” label on it, at least for the time being. Jerome Powell said so. “Daddy” said so. So you gotta listen.Krugman: Yeah. No, it’s pretty amazing. So for listeners, in all of these discussions, economists like to talk about inflation, which is the rate at which prices are rising. And the conventional approach to understand consumer sentiment is to talk about inflation and then unemployment and maybe some other things as well. But if you talk to actual people, they talk a lot about what things cost. And so there’s this argument that says people are upset because even though inflation came way down from its peak in 2022, prices didn’t. The level of prices leveled off rather than coming down. But this split raises a lot of problems. So why don’t we talk about the excess inflation?Morris: So, this work is based on the theory that voters react negatively to a shock in prices, or really a shock in inflation. Especially if inflation had been low for some amount of time—20 or 30 years in the most recent case. To measure excess prices, I’ve built on economist Jared Bernstein‘s work. So our model for this is to predict what prices would have been today using inflation from the last 20 years or so. And then we measure the residual between actual nominal prices and the prediction of prices. And at least in my work, when I say “prices,” I mean the index price of vehicles, shelter, and of food. But the results are actually the same if you use PCE.Krugman: Personal Consumption Expenditure, as the Federal Reserve calls it.Morris: Which is like the CPI, Consumer Price Index, but it’s arguably a little bit better, and the Federal Reserve relies on the PCE.Krugman: Yeah.Morris: So it really doesn’t matter what goods you’re looking at. Today, prices are about 15% higher than they would have been given 2% inflation over the last six years or so, basically since COVID. And if you add that variable to some model of consumer sentiment that has traditional measures of economic activity like inflation, the S&P 500, and unemployment, then you do get a much better prediction of consumer sentiment over time, including in the 1970s when the change in the price level was even worse than it was over COVID.Krugman: There’s what I think of as the “Morning in America” problem. You may think people are upset now because things cost a lot more than they did before COVID, but, well, that was also true in 1984 under Ronald Reagan. It turns out that the increase in consumer prices in Ronald Reagan’s first term was almost identical in percentage terms to the increase in prices under Biden. But of course, Ronald Reagan ran as a triumphant rescuer of the U.S. economy. “It’s morning in America”. And Biden was deeply unpopular. And the explanation, which I think all of us working on this have come to, is that at the beginning of the 1980s, people were expecting lots more inflation. And at the beginning of 2021, they were not. And that’s kind of what you’re measuring.Morris: Yeah. And this isn’t just me talking, either. If you look at the political scientists’ voter psychology work on what they call “retrospective economic perceptions” and predict those ratings based on changes in economic indicators, then inflation causes a much more negative impact on economic evaluations after a period of what they call “good times” when inflation is low. So psychologically, this works, too. If people are primed to see increases in prices of 10-15% for a decade and then they see it again, they react less negatively than they do in, say, your COVID-era price spike after 30 years of low inflation.Krugman: Yeah. Although what is kind of interesting—and I know that you’ve been doing statistical modeling and I’m just pulling stuff out of my—Morris: Well, I’m not an economist and I don’t have a Nobel laureate.Krugman: Well, yeah, but that was a long time ago. But anyway, in the mid-’70s, people were still completely shocked. I mean, I’m also an old guy, and I remember the ‘70s, and we were all really, really shocked. And yet, consumer sentiment, even in the Ford administration, was not as negative as it has been lately. And still, times were really good in the ‘60s and up through about ‘73. I’m still kind of shocked at just how bad perceptions are now. But your models seem to track the ‘70s okay.Morris: They do. Yeah. And they do because of this adjustment for the good times versus the bad times. So if you take our excess price measure, which again is just the percent difference between expected prices and actual prices in nominal terms, and you adjust for the average inflation in the CPI over the last decade, then you essentially decrease the excess price measure for the ‘70s and hold it about constant for the post-COVID period, mainly 2023 being the peak. And you get a much better fit in the model. So this is built on our voter psychological theory that people react more negatively to higher prices after a period of good times than bad times. So things are being triangulated here in our overall story of the impact of excess prices, even if, as I said at the beginning, this isn’t a complete explanation for the vibe session here in 2026, which is somewhat different somehow.Krugman: Just an interjection—I’m a garrulous old guy here—but I associate stagflation with the taste of Hamburger Helper because I was working summers as an undergraduate as a research assistant, and my friends and I, in our dreadful shared apartment, were using a lot of Hamburger Helper because we didn’t know how to cook. And also meat was really expensive, or seemed so at the time. So, yeah. But it’s interesting that people were not as depressed. And I think that maybe they had already kind of internalized that the economy can be tough or something.Morris: That’s, in effect, what we’re saying here. They weren’t as surprised. They’d internalized high prices as something that could happen in their lifetimes. You know, I was but a twinkle in my daddy’s eye in 1970. But you can do a lot worse than Hamburger Helper. Hamburger Helper is a good staple food for your working-class person.Krugman: Well, I had some roommates who insisted on soybeans with everything, and that I could have done without. But anyway, it was the ‘70s.So this question of what do we think are the prices that people expected—and you’ve been basically fitting a trend to recent price movements, right? And projecting forward? I think you’re using something like the average inflation rate over the past five years to project forward? Or how are you getting that?Morris: For excess prices? I mean, it’s the trend in prices. So that is mathematically equivalent to the average inflation from the 15 years prior to whatever date you are predicting on. 15 years prior to the five years prior. So the idea is that people have formed their expectations for inflation over some period of the last ten years on average.Krugman: So, we have direct measures, supposedly, of what inflation people expect. There are surveys. There’s University of Michigan. And some surveys, but especially University of Michigan, do ask people what they expect the inflation rate to be over the next 5 to 10 years, which kind of gives you a medium-term expected inflation. And you can get an implied inflation forecast out of the bond market—the TIPS spread, the break-even inflation, whatever jargony stuff. But there is an implied inflation forecast. So those are not necessarily congruent with lagged—Morris: Just the excess price measure.Krugman: Yeah. So here’s my question: let’s say consumer expectations of inflation over the next five years are somewhat elevated now. They’re higher than they were. This is not, I think, the way it comes out in your analysis, but I would have thought that would make it easier to end the excess price stuff. Because if you want to have prices lower than what people are expecting, given that they’re expecting higher inflation at this point, then they’ll be pleasantly surprised if we only have 2% inflation. But I think that is not how you’re seeing it, right?Morris: No, I’m not using the survey measure of what you would expect your inflation to be over the next five years.Krugman: So what you’re doing is sort of saying that people’s expectation of inflation is something like inflation over the last five or ten years. And you have actually used the expected inflation of the survey, which says, “What if inflation is actually that high, and then it’s going to be really bad ?” But I would have turned that around and said, “Well, people are already expecting pretty high inflation, so they’ll be pleasantly surprised if it’s lower than that. And that should make it easier to get back to a price level that people find acceptable.” But I don’t know if I’m making sense.Morris: Yeah, you’re making some sense. But we are not using a psychological measure of excessive prices, and that is different from a survey measure. We are using an actual mechanical level of excess prices from the residual of the trend. So one way to reconcile the fact that the objective measure of excess prices, rather than the survey-based measure, is more explanatory—you could say people are bad at predicting prices in the future, just in general, which would be true. Or that the survey isn’t picking up on anxiety about the price level with that variable as well as you would expect. And one thing to mention here is that the University of Michigan’s measure of what I’ve called “price anxiety”—which is just the percent of people who have a bad opinion of the economy—the percent of those people who attribute it to worse personal finances is at an all-time high. And it surged in 2021 and 2022 and stayed there; it never came back down. Which is similar, you’ll notice, to the trend on consumer sentiment through the University of Michigan. I don’t have the Conference Board data in front of me or memorized.So it is possible that people are bad at predicting what prices should be. One idea would be if we took the expected change in prices over the next year and divided it by average CPI—overall inflation—over the ten-year period preceding. I wonder if that number would be at an all-time high. That’s a very easy check after the fact. I bet it would be near an all-time high.Krugman: Probably getting too meta, but what we’re trying to predict is a variable that is consumer sentiment, which is not a behavioral thing. It’s like asking, how do people answer a questionnaire? And this is a question: should we also be using questionnaire-type answers to predict it? Obviously, at some level we’re interested in objective economic stuff, but I wonder whether we should inherently prefer the objective economic stuff as a way of predicting. I’m not making a whole lot of sense here but—Morris: No, this is making sense to me because I spend a lot of my time thinking about the difference between our perceptions of objective reality and these survey-based measures which, for whatever reason, can deviate from that. And my argument would be that we should be using the survey-based measurement of anxiety in addition to our “economic fundamentals”—our structural variables—because our models and our job as modelers is fallible. And we can’t rely on the people when they tell us in surveys that they are anxious for whatever reason, instead of pouring cold water on it because our models don’t line up.Maybe this is just my opinion, but you are right. Of course, we want to know how people are reacting to objective conditions on the ground. And the only way we can really do that is by looking at the match between executive positions lying around and some other outcome variable. So, I’m acknowledging it’s tricky. There’s no clear answer, I guess.Krugman: So, two questions left. S&P 500, and again, if people don’t know, that is the broad index of the stock market—that really shows up as something that explains how people feel.Morris: Yeah, the annual change in the S&P 500 is pretty direct to consumer sentiment, even after controlling for stuff like your annual change in CPI, PCE, etc.Krugman: So that’s really kind of interesting, because the vast majority of Americans own very little stock, so the impact of the S&P 500 on most people’s economic position is really kind of small. I’m wondering whether that’s more like a signal. People like me are always saying the stock market is not the economy. But it’s not clear that’s how people see it.Morris: Yeah. The S&P 500 impacts media coverage quite a lot. And in our models, we try to control for negative media sentiment. But again, our empirical analysis of media sentiment is often different from how people are interpreting this. So I tend to really land on one answer here, which is, if you look at the polling on price anxiety—the percent of people who are saying their situation is worse because of personal finance issues—that’s at an all-time high. And if you trust the people, that is pretty explanatory of consumer sentiment on its own. But it requires some hurdles to get there.Chart 7A in the University of Michigan shows the percent of people whose finances are worse and who say personal finances is the reason why.Krugman: Yeah. So I mean, at some level, if our numbers say that personal finances are actually better, but people say they’re worse, at some level, customers are always right.Morris: Yeah. Exactly. But that leaves us at a loss for an explanation. It does leave us putting our shoulders up.Krugman: Last thing. And again, I’m just throwing stuff out there because I’m puzzling over this stuff myself. So a lot of these issues are in some ways harking back. I still always think that “Morning in America” in 1984 is in many ways a crucible for making sense of all this stuff. But 1984 as a year was closer to the end of World War II than it is to today. And it was a very, very different country then. And I always wonder, are we trying to get a model that fits a society that has changed immeasurably over time?Morris: Yeah, absolutely. I mean, so much of the vibe session discourse—not necessarily Kyla Scanlon, but I believe Nate Silver wrote this article for the New York Times Opinion Page that was about how the consumer sentiment index broke down. This was after The Economist had done something similar, I believe. Much of the discussion of that was based on the idea that you could build a model of consumer sentiment historically. And now it’s breaking down. And one conclusion from that is that people aren’t thinking about the economy rationally anymore. But another conclusion is that they’re thinking about the economy differently than they have been previously. And that seems entirely legitimate to me. And if that is the case, then we should be looking at the polling data and the perceptions data more and the fundamentals indicator less to explain consumer sentiment.Krugman: Okay, but the big news to me is that we really are seeing sort of a second downward leg in the vibecession.Morris: “Vibecession 2.0,” yeah.Krugman: Which is really quite remarkable. It’s going to matter enormously in many ways, obviously in the elections. So that’s news to me and actually worth highlighting.Morris: Well, now you have a headline.Krugman: Now I do. Hey, gotta feed the beast on Substack, as you know.Morris: Yeah. Right. Well, look, in terms of consequences, and maybe to go back to where we started: Donald Trump’s approval rating on prices is like 30% or less, and from 70%—it’s down -40 or so. And that was the last time I looked at this, which was a week and a half or two weeks ago. And he’s been losing ground very fast. That is congruent with an electorate that is very upset about prices, even if the objective data don’t explain why to us. So there’s some triangulation of the anxiety in terms of evaluations of the president. And if that number stays as low as it is, then we should expect the type of rout in the midterms that is large enough to overcome, basically, effectively, the Republican cheating through gerrymandering over the last decade or so. That might be where I would leave it.Krugman: Yeah. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

TranscriptWhat’s good for Elon Musk is not necessarily good for America. In fact, it may go the other way around. So why did Donald Trump take Musk and a bunch of other top executives to China with him? Hi, Paul Krugman, again from a cafe, a little noisy behind me, but I hope it’ll be tolerable.So Donald Trump has gone to Beijing. I wrote something about it earlier today, about the economics and about the generally pathetic state of the United States in geopolitics right now. But I want to focus for this video on the remarkable decision of Trump to bring a bunch of wealthy executives, in the case of some of them, like Musk, extremely wealthy executives, with him on a trip that is supposed to be something about serving the interests of the United States. America’s corporations are not America. They really have very distinctive differences in interest from those of the general public. You may have heard the old line that what’s good for General Motors is good for America. That’s not exactly what the CEO of General Motors said. What he said is that what’s good for America is good for General Motors and vice versa. But in any case he said that a very very long time ago, when corporations’ role in American life was not what it is now. General Motors at the time was a “stakeholder” corporation. That is, it did not see itself as solely serving the interests of stockholders. It viewed itself as having multiple groups that had a stake in the company.There was the workers who were represented by a powerful union. There were customers who were considered to be part of the story. They played a role in the wider community.Today corporations ruthlessly maximize value for stockholders, unless they do it for the founder who is considered to be the owner. (It’s not entirely clear that Tesla is run in the interest of Tesla stockholders. To a large extent, it’s run just in Elon Musk’s interest, but it’s certainly not run in the interest of U.S. workers or U.S. national security or anything like that.)Why then should we care? It’s probably worth knowing that to the extent that corporations are run in the interest of their stockholders, the stockholders of an “American” corporation are by no means necessarily American. We think that something like 40% of US equities are owned by foreigners. So anything that enhances the profits of corporations, you should think of 40 cents on the dollar of that gain actually going to other countries. And among Americans, stock ownership in the United States is extremely concentrated in the hands of the top 10% of the population, a large fraction just in the hands of the 1% or less. and most Americans have very little stake in stock prices. They may have some stake in the success of business in the United States, but that doesn’t have to be what we consider American corporations. It’s not really right to think of Tesla or NVIDIA, whose Jensen Huang also went to China, as being somehow America going to China. These are corporations that serve stockholders around the world, serve some tech bros who have a special control over them. What they want is profits . What they want is access to the Chinese market, including being able to sell China stuff that from the US national point of view maybe we shouldn’t be allowing them to sell — you know, highly sophisticated equipment that on national security grounds we should actually try to restrict the access of fundamentally unfriendly powers.Anyway, we know that’s what’s good for Nvidia is definitely not good for America. What’s good for Elon Musk is more problematic but there’s very little reason to think that any business advantages that Tesla might gain out of this, or xAI, or whatever whatever enterprise is he’s hoping will realize some gain, that this is going to redound significantly to the benefit of US workers.T,o the extent that it benefit redounds the benefit of these guys the people who are on the plane, why should we care? An extra billion dollars in the hands of Elon Musk or Jensen Huang doesn’t do anything for the great majority of Americans.And yeah, it does something for them, but not very much, right? When you have that much money, a billion here, a billion there, and what’s the difference? So this is a really peculiar group to be taking. unless you try to think about what does Donald Trump want? Well, from Trump’s point of view, his son Eric, who runs the family business, was on the plane. They claim it’s just it’s just a family thing — yeah, right. He might as well have been walking around Beijing with a sign that says — in block capitals, of course, this is Trump — BRIBE ME. That’s very clearly what that’s about and as for the rest, well, you know, these corporations are in a way Trump’s base or at least they gave him a lot of money both in campaign funds and directly in one way or another.I’m still wondering, by the way, why do we need a billion dollars for that ballroom? I thought the corporations were were paying for the ballroom by bribing Trump. But maybe I don’t know where that money is going. Anywa,y whatever the story, these are not U.S. national interests being represented here. The whole visit — aside from the fact that it’s humiliating, that it’s really a pathetic display of U.S. weakness and Chinese strength — the whole visit is also yet another spectacular example of the corruption that now pervades everything about U.S. governance. And we should be angry. We should be outraged. We certainly shouldn’t allow Trump and company to spin whatever comes out of this as a victory. We mostly defeated ourselves here, but we certainly aren’t getting anything for us. Maybe something for Elon Musk comes out of this, but there’s nothing for the rest of us coming out of this essentially tributary visit to China.Take care Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

TranscriptThe super rich are different from you and me. They are pettier and more self-centered than most of us can easily imagine. Hi, Paul Krugman here. This video is partly me trying to show that yes indeed I am on vacation, sort of, although on my laptop too much of the time.But anyway, I’m at least working on the laptop sitting in cafes. But I also wanted to do a follow-up on a post earlier this week in which I talked about Jeff Bezos feeling now that he needs to sell his ostentatious, bad taste yacht because people are paying attention to the ostentatiousness and the bad taste — which is, kind of, what did he expect. But it is news that rich people are feeling some of the heat, that some of the backlash is starting to get to them. Today I want to talk about a story that’s a couple of days old but is more along the same lines and has some other resonance I think is worth talking about. So, Ken Griffin is a hedge fund billionaire. was a big Trump supporter, although not a reliable one, and he happens to be the owner of the most expensive apartment ever purchased in America, at least as far as we know, a $200-something million place on Central Park South. Zoran Mandani, New York’s very interesting mayor, has called for a pied-à-terre tax, a tax on luxury residences exceeding $5 million that are owned by people who are not residents of New York, who are therefore not paying New York City income taxes. It’s a wealth tax, but a limited one. It would definitely raise some money, but of course has got people irked. And he put out a video which featured a shot of the building in which Ken Griffin has his apartment. Griffin went wild. He said this is a personal attack on me, it’s putting me at risk. He even compared himself to Donald Trump facing assassination attempts and just in general went wild, as if this was the most evil horrible thing ever. First of all the sheer again self-centeredness and pettiness is kind of amazing. Griffin has also threatened — I’ve actually written about him before when he made a big splash of moving his firm from Chicago to Miami and then fairly soon started renting a lot of space in Manhattan because it turned out that New York was a better place to do the hedge fund business. Now he’s saying he’s going to pull out of or threatening to pull out of New York because of this.You know, Griffin has investors. They should care about him locating his operations where it makes sense as a business proposition, not about where he feels like pulling them out of personal spite. His feeling that Mamdani dissed him is not a reason to to move his business to a place where it can’t be done as well. so that’s kind of a bad thing in and of itself, but also again the self-centeredness is quite amazing. But this apparently is what great wealth does to people. F. Scott Fitzgerald said that they’re careless people, but there’s more than. They’re people who put their minor discomforts on a level with matters of life and death for normal human beings. Let me also say something that is not terribly rigorous but still substantive. I do not understand why someone with that much money would want to have a residence in Manhattan. Certainly why they would want to live in Manhattan, which Griffin sort of presumably does only part-time. New York City is not at this point a city for the working class or or the middle class. It’s expensive. Things cost a lot. Real estate costs an awful lot. I saw a an article in a local West Side publication saying that the Upper West Side is a haven for independent minds. My immediate thought was, yeah, independent minds who can afford to pay $1,700 a square foot. But it is a paradise basically for the 5%. The city has never been safer. It has never offered a greater diversity of cuisine, of culture. It’s a great place. Not quite the same as places with cafes where you can sit for hours and no one will bother you; they’re kind of scarce in New York. But anyway but it’s great for the affluent.But if you’re super rich, if you spend your time being driven around in a car with tinted windows, if you don’t go anywhere without an entourage and probably at the upper limits of wealth with bodyguards, then you lose the whole the life of the streets.New York is a place to to wander around. It’s a place to try out an ethnic restaurant that you haven’t been in before. (Everything in New York is an ethnic restaurant.) Basically, the random happenstances of life are a big part of what makes the city worth living in. I knew somebody who had an upper floor apartment on Central Park South. It wasn’t his. He had a position at an institution where the apartment came with the job. And his family actually hated it despite the vast panoramic view of Central Park because there was no neighborhood. Many of the apartments were vacant most of the time because they were owned by oligarchs, princelings, and sheikhs. People didn’t support local stores, didn’t support any of the things that make urban life worth living.So I’m not even sure what the point is if all you’re going to do is be chauffeured around, if you’re going to eat only at see-and-be-seen high-profile restaurants. I used to say you might as well be living in Dubai. Well, New York has the advantage of not being hit by cruise missiles currently. But still, what is the point? But anyway, there it is. And the extent to which America’s oligarchs put their personal foibles, their pettiness, their small senses of discomfort or lack thereof on a par with major issues is a huge source of evil right now. Elon Musk, who doesn’t feel that people give him enough credit, got to take his personal obsessions to the Trump administration and played them out in DOGE cuts. Among other things, the current estimate is that his destruction of USAID has killed 600,000 people, mostly children, so far. This is awesome. I have to say, if displaying Ken Griffin’s apartment building helps win support for a progressive agenda, fine. Griffin and people like him should look at themselves in the mirror and ask, who are we? What are we doing with our lives? Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

Jared Bernstein, former top Biden economist and all-round economic expert, and I bat around the puzzle of persistent negative economic sentiment. Recorded Wednesday.. . .TRANSCRIPT: Paul Krugman in Conversation with Jared Bernstein(recorded 4/22/26)Paul Krugman: Hi everyone. This week I’ve got Jared Bernstein with me for a talk about economic vibes. We had planned and hoped to have G. Elliott Morris in on the conversation, but he came down sick. So it’s just going to be two economists talking about why people are still so negative about the economy. Clearly this is very important for lots of purposes, but also just kind of interesting. So, hi Jared. Maybe you should lead off by explaining why it’s so compelling and then I’ll chime in. We’ve both done work on this, but you’ve done more.Jared Bernstein: Yeah, well, to me, it’s personal because I was in the White House—in the Biden administration’s Council of Economic Advisers, as you know—during this period when what began to be called the vibecession arose. I associate that term with Kyla Scanlon. This was a situation where we were posting some good strong macroeconomic numbers. GDP was strong. It was above trend. We got back to full employment very quickly after the pandemic-induced recession. But there was a big spike in inflation. As that spike came down, we were rolling down the other side of inflation mountain in the second half of 2022, we thought that was a pretty good development, given how upset people were. But consumer sentiment, consumer confidence, people’s feeling about the economy—these vibes—just kept getting worse. And it seemed to me at the time that that shock, not just to inflation, but to the level of prices—how much prices went up—was more important than most economists were realizing. As you well know, people in our field think a lot about inflation and inflationary shocks. We think less about the level of prices and sort of take that as a given. So that struck me as quite important at the time. And I began to look into it in ways I’m sure we’ll get into.Krugman: I mean, what was striking about it was that historically, there’s a pretty good relationship between consumer sentiment and macroeconomics. And way back they called it the misery index, which is the inflation rate plus the unemployment rate. It was designed by Arthur Okun, and it did a pretty good job. And then you added a little more sophisticated version of that, and it has historically done a pretty good job of tracking sentiment. But after 2022, even by these measures that had worked before, it looked like an economy that should have had people feeling a lot happier, but they weren’t. But let’s talk a little bit about price level because what always struck me, even from the beginning, was a question about: what period of inflation are we talking about? You know, why should it be the one-year rate of inflation that enters into the misery index as opposed to a two-year, or three-year, or four-year? That’s how we kind of started. In your recent work, you started by saying, “well, maybe with inflation over a longer period,” but this kind of morphed into this price level issue. So why don’t you tell me about that?Bernstein: So, a couple of things to amplify points you were just making. My coauthor on a recent paper, Daniel Posthumus, and I made a model of consumer sentiment. And this works both on the Michigan version and on the Conference Board version.Krugman: By the way, people should know that U. Michigan is the longest-standing regular survey of how people feel. But the Conference Board—I don’t know how far back they go.Bernstein: It actually goes back to ‘62, and U. Michigan goes back to ‘52. But that’s kind of relevant for what I was about to say. So we built a model to predict the sentiment or confidence indices. We used the stock market returns, real consumer spending, inflation, and unemployment. Very simple. And we ran it from 1990 to 2019. It then predicts very well what the index does all the way back to the 1950s. So even though we ran it from ‘90 to 2019, it tracks the index very well. And then as you said, it breaks down in 2019. And as you well know, the ‘20, ’21, ‘22 inflation shock wasn’t the first inflation shock in our history. But it was the first one in this series where you see this big gap between how people should feel based on those variables, those predictors, and how they do feel.And I do want to get this down early on: that’s a pretty complicated thing to explain—how people feel about the economy. You know, you ask ten economists what “vibes” mean, or pollsters, whatever; they’ll tell you ten different things. But I think what happened to prices is very important. But I want to be clear— and you’ve underscored this in some of your recent work— it’s not the only thing. So, there’s that.I guess one other thing I’ll say: I have a particular set of experiences. I used to go out on WHNL, which stands for White House, North Lawn, and that’s where we used to go and talk to the cameras about how things were going. And no matter where we started, no matter what we were talking about, like a good unemployment report: “We just had 250,000 payroll jobs.” You know, “productivity is up, GDP inflation’s way down.” “Groceries had a 12% inflation rate. Now they have a 1.5% rate.” These are the things we were talking about out on WHNL, and it always got back to [the press saying], “Why do people feel so bad about the economy? They’re telling us things are too expensive. What are you going to do about that?” So that really got into my head.Krugman: So your story is one that I have largely gone with. You did the hard work on the econometrics, which I have not, but again— you or I would say, “Look, inflation is way down.” They said, “What do you mean? Things cost so much more than they did in 2019.” And so you kind of introduced this “excess price level” as a story, which is very widespread. But why not that as opposed to just inflation over a longer period, or is there really a better story there?Bernstein: Yeah. So, they’re quite similar. Inflation over a longer period is basically asking the question: how much did the level of prices go up over this period? So you raise a fair point. Most of what we talk about on inflation day is the change in the monthly inflation rate or, maybe, the yearly rate. But I think in some senses we’re circling around the same thing, which is people’s memory about prices. And that’s key to this research. It’s something I hadn’t thought enough about but I’ve more recently been kind of obsessed with, which is people’s memory of what things used to cost. And this gets you down an interesting set of questions.So if that were the only thing in play here, everybody—including me and you—would be walking around totally depressed all the time because when I started driving, gas cost $0.60 a gallon. And, you know, right now it’s a $4 national average, but this increase from $0.60 to where it is now or any other price you want to focus on—that’s salient to the consumer market basket. It tends to go up very gradually. When you have a shock, like we did in ‘21, ’22, people have this set of prices still emblazoned in their head. I used to call it the “personal price vector,” which is this idea that we walk around knowing what the things we buy kind of cost. And when that gets shocked, you know, it’s really quite upsetting to folks, and it takes a while for them to acclimate. The question is, what do we mean by “a while”? And I’m still wrestling with that question.Krugman: Yeah, I think there has to be a statute of limitations there somewhere. I mean, people aren’t pining for the days of 15-cent McDonald’s hamburgers. I started driving a lot earlier than you did. So, I don’t remember what gas cost, but I do remember a quarter to go to the movies. But obviously, at some point, people stop remembering. I’m probably going to get all nonlinear here, but I mean, we’re now five years on from the big price shocks from Covid. Admittedly, I am more affluent than most of the population, but I don’t remember what ground beef or eggs cost in April 2021, but I’m not sure that many people really do. So how is it that we are still feeling this?Bernstein: Yeah. So this is something I think about a lot. And I think the answer is that it’s not just that we had that one shock—one and done, done and dusted. It’s that we’ve actually had a series of shocks and that people haven’t had time. A lot of this comes under the rubric of Trumpian chaos or, put differently, horrible crap that the Trump administration has thrown at the economy. You know, just really bad economic policy that has continued to fuel the shock that consumers have been experiencing. So, again, if it was one and done, I think people would be feeling better. But you get the Trump tariffs—that’s the big shock to prices. Now granted, we only import 11% of our GDP in goods. But walk down the aisles of Target and Walmart, and you’ll see a lot of those imports. So that’s in play. And now we have the shock of the war. I think there are some other factors in play. Social media amplifies this stuff in a way that it hasn’t in the past.And, you know, actually, while I take your point about remembering what things cost—from talking to a few people, looking at some polling— actually, people do still remember at least what eggs cost, which was around $2 a dozen, or $1.50 a dozen. Although it’s not that far from that now, it’s closer to $2.50 or $3, depending on what kind of sale you can get. It wasn’t that long ago that it was four and five because of avian flu. So there’s been a lot of other shocks to prices in the interim. And I think that’s played an amplification role.Krugman: Let me just say, people hate inflation. I mean, there’s a widespread view among economists—which, if you are not sufficiently cautious and laying it out, can sound condescending—but if you have a big increase in prices, but also a big increase in wages—which is kind of what happened during the Biden years—people should be saying, “Oh, I’m okay. My real income has kept up.” But they don’t. They think that they earned the wages and that the prices were done to them. Are you okay with that view, or do you think there’s something more going on here?Bernstein: I think that view is correct. And that goes way back to research from many decades ago and has recently been updated by Stefanie Stantcheva, who shows precisely that people, right or wrong, kind of understandably feel like: “If I get a raise, it’s because of my hard work and I deserve it. If something happens to the price, that’s not me. That’s something somebody else did.” And in a world of politically intense partisanship and vicious social media, that “someone” became Biden. So, you get, “I got my raise, but Biden did this to my price.” And so I do think that plays out in both political and economic spheres.Krugman: Something that I think I was quite wrong about was I thought that the bad vibes would kind of alleviate, or diminish, with the new president, much as I thought that there was a strong element of partisanship in moving those numbers, and that has not happened; if anything, it’s the reverse. And just a few hours before we had this conversation, I posted something about that. But what’s your view on that?Bernstein: I have a strong view on this. And you captured it in your graphic this morning. I think that what’s happening to Trump—and this is not rocket science, by the way; if Elliott was here, he’d have more authoritative points on this, but I’m pretty sure I’m right. I think there are three groups in the electorate. There is the Never Trumpers, the Always Trumpers, and then this really key group in the middle that’s pretty dispositive in terms of which way they swing and it’s dispositive in terms of determining election outcomes. Some people call them “persuadables.” What I think of them, at least in the context of our conversation, are people who believed Trump when he said, “I’m going to lower prices on day one.” But these are folks, according to my theory which we’ve talked about so far—these are people walking around saying, “Damn it, I want my old prices back. I want my old interest rates back. I want my old mortgage rates back. And this guy not only is saying that he’s going to give them to me, but actually, the last time he was president, prices were lower and interest rates were lower. So let’s put him back and, you know, maybe we’ll get back there.” So they rolled the dice and they bet on the wrong pony. Whoops, I mixed the metaphor. But you get what I’m saying.And now they understand that they’ve bet on the wrong guy and that their prices are right back to where they were. And in fact, inflation, if anything, has accelerated because of decisions Trump’s made. It’s not just that he’s ignored affordability or called it a hoax; it’s that he’s pushed hard in the wrong direction on these things. And this key middle group—which I think is behind some of the numbers you posted this morning—is very disenchanted by what they’ve seen.Krugman: Yeah. Again, it’s hard to talk about this stuff without seeming condescending, but the people who swung to Trump in 2024 and swung hard against him now are disproportionately low-information, which—you know—that’s not a pejorative. It’s just a description there. He defines it as people who don’t know which party controls Congress. And I guess the argument is that they may well have actually kind of believed Trump, or at least either believed Trump’s promises, or just remembered that they were feeling pretty good in 2019.Bernstein: I also want to be very careful not to sort of criticize anybody for being what looks gullible to an economist, because economists know that the only thing that really brings the price level down—meaning broad price deflation—is a deep recession, and nobody wants that. But people are getting jammed with all kinds of signals about how “I’m going to make your life better for you.” And I don’t think the media has distinguished themselves in helping people sort this out. So, you know, why not throw the dice and make a bet on someone who you think is going to do that kind of magic for you?The problem that a lot of people face—the group that we’re talking about— is nobody ever seems to really help them enough. So that is a very important part of the agenda—what I call the affordability agenda—that I think we need to be working on and delivering on, you know, sooner than later.Krugman: So, this is me being probably more partisan than you, despite the fact that you were actually in the administration, but I would have said that Biden did a lot to help people, that there were a lot of aid programs. I remember how worried people were about long-term economic scarring from Covid, and instead, we had this roaring recovery. And yet it didn’t seem to penetrate. People didn’t seem to give it any credit.Bernstein: Well, the roaring recovery was real. I mean, you’ve been writing about this. I know we both admire Arindrajit Dube’s recent book, which is really a great documentation of the wage impacts back then. We wrote a chapter much like what Arin is saying in one of our economic reports for the President, where we documented the benefits of such low unemployment to folks. So, yeah, it’s true that we definitely were delivering some things that improve living standards, but some of them, based on just the political hurly-burly of the time, didn’t last long enough.So the child tax credit was hugely important and took child poverty down to historically low rates. Cut it in half. And that was amazing. And by the way, it also underscores the point that whatever the child poverty rate is or the poverty rate in general, that’s a policy choice. And Biden chose to make it a lot lower. I thought it was the right policy choice. But, you know, it wasn’t okay with Joe Manchin, and so it went back up when that program ended.And then when it comes to a lot of the investments, like building our industrial policy, building new computer fabrication plants, and investing in clean energy, that stuff takes a long time to pay off, and folks don’t really see that. And then when it comes to affordability, people were concerned with housing prices, healthcare, childcare, and the price of energy, which you highlighted this morning. And those were areas where we tried but weren’t able to do enough.Krugman: The consumer price index— the standard measures of price level—do not include interest rates. I mean, the way we measure housing prices is by either rents or an estimate of what your house would rent for if it were rented; “owner’s equivalent rent.” And when I look at different things, one thing that really does stand out, the one thing where prices have effectively risen a lot more than wages, is in fact the mortgage payments. So how much do you think...? I mean, there was a paper by Larry Summers—though that doesn’t discredit the work— saying that was a big part. What’s your view on that?Bernstein: I think that that is true. I mean, I think the point of that paper and my reference earlier to interest rates and mortgage rates is that this is the price of money. So it’s prices again. You know, “I want my old prices back.” Well, what’s the interest rate? It’s the price of borrowing. And so, yeah, I think that’s in play. But I think where that rubber meets the road is definitely in housing costs. Housing costs really went up very quickly over this period. And a very big part of this sentiment that we’re talking about—and this has been documented—is a lot of young people feeling like they’ll never be able to afford to buy a house. Which is very pervasive. That sentiment and that truth is very pervasive. And how do many young people start building wealth? Through home equity, through buying a home. So that’s a source of a lot of upsetness.But it’s the rental side of the equation that was really giving folks a lot of problems back in the period when these negative vibes started to percolate—and still do. If you look at the numbers, the share of income that people are paying on rent, it’s 30, 40, 50% in some cases. And that makes it really hard to get by. So I think both the interest rate and housing costs are part of this puzzle. Absolutely.Krugman: It’s one of those things, because if you look at rents, rents really shot up in ‘21, ’22 and then they really sort of flatlined after that. And I’m not sure that, at this point, rents are any higher relative to 2020 and before. Maybe I’m wrong about that, but I thought rents were actually not looking like that big a problem now.Bernstein: Yeah, at least in terms of inflation. The shelter, or the housing component of the CPI is back to where it was pre-pandemic. So again, this is a level thing. So, this gets back to something we said before. I would go out to talk to the TV cameras, and I’d say, “Inflation was 9-10%. Now it’s 2%.” And people would kind of hear: “Ok, so the prices that I already don’t like—they’re not falling. They’re going up more slowly. And you want me to stand up and applaud for that?” And I think that dynamic has been in play in rental markets as well.Krugman: I think that was an old John Kenneth Galbraith line where he said: “When people say inflation has fallen, they’re saying that things are getting worse more slowly.” Which is not really right, but on the other hand, it gets at this.Bernstein: I would say that’s “not really right,” but just what you said. And I have this theory that I’m working on with some folks. I don’t want to lean too far into something that I haven’t empirically really fleshed out yet. But I think there’s something that goes on in this space when you have a shock to the price level. When instead of gradual movements in something people care about, if something’s getting bad, I guess it’s the boiling frog story. If something’s getting kind of bad, really slowly, you can learn to live with it. You can adapt. And if your income and wages are kind of going up at around the same rate, then you’re not really the boiling frog. You’re pretty comfortable and you’re getting along, or you’re pretty uncomfortable.You know, you made an important point this morning: a lot of people are just always having a tough time. So you’re either doing okay or you’re doing badly. But at least it’s not a shock. You’re used to what you’ve been experiencing. And I think the interaction of a shock that’s that sharp, that quick, when you’ve had two decades of really low inflation—and this gets into the ‘70s story, which we should probably get into a little bit—that’s really a cluster mess for people’s thinking.Krugman: Yeah. You did your estimates starting in 1990. So it’s really three decades. I mean, basically, Paul Volcker brought inflation way down in the ‘80s. But we used to think there was low inflation when it was 4%; but by the time he was finished, it got down to around 2% and stayed there for a long, long time. So only old codgers like me even remember a high inflation environment until what happened in ‘21, ’22. So, yeah. The shock aspect, I think, was really clear.Bernstein: But, you know, first of all, I sat in gas lines in the ‘70s, so... A lot of our conversation, Paul, is two old boomers saying, “Well, I remember when things used to...”Krugman: Yeah.Bernstein: But you asked a good question in some correspondence we had, which was, “Why didn’t we have this kind of vibe shock when we had the late ‘70s, early ‘80s inflation shock? Because that was also a big shock.” And, again, that was when people like me were sitting in gas lines, which is pretty uncomfortable and unfamiliar an experience to most Americans. And you just didn’t see the kind of vibes gap that we see in the data now. And I think one of the reasons is because we hadn’t had 20 years with inflation. It was just very quiescent. Inflation below the Fed’s target of 2% for many of those years where we just didn’t have to think about it. We actually had a cascading series of shocks back then. So, I think the way we put it in the paper is that when people have been living with good weather for 20 years, a hurricane is way more upsetting to them than if they’re sort of used to storms.Krugman: Yeah. And it turns out that the increase in the price level under Reagan’s first term and under Biden were actually shockingly identical. I mean, within fractions of a percentage point, equal. And yet, Reagan runs on “Morning in America,” and with Biden, everybody thinks, “I want the good old days of Trump back.” And that might just be stormy weather. Also, it’s just that people came into the Reagan era expecting [some inflation]. The U. Michigan median expected inflation over the next five years was, I guess, 7.4% or something when Reagan took office.Bernstein: Right. When you start, it sets off a path dependency that you kind of have to live with. But, Paul, I actually wanted to ask you something about this, which is a little more forward-looking. This gets into some nerdy economic stuff that’s less about the vibes and more about inflation and those dynamics. It gets into the Federal Reserve a little bit, which is topical given that, you know, Kevin Warsh is in the news this week. And Chris Waller, one of the Fed governors, gave a speech that I thought was quite articulate on this point. There is some thinking now that because we’ve had this series of shocks—of course the pandemic, but then, you know, the war in Ukraine, which, by the way, was another energy shock. And now the war in Iran, which is yet another energy shock. And the tariffs, which is another price shock. Because we’ve had all these kinds of repetitive upward pressure on prices, the inflationary anchor— which I’ll let you explain— is at risk of getting dislodged. And that is something that I do worry a bit about. Could you talk about that? But also, you know, maybe clarify what the hell we’re talking about?Krugman: Yeah. I think you probably have the same underlying model, although I think I may express it a little differently. But when we think about inflation—I guess one way to say this is that inflation is a process of leapfrogging—that a firm sets its prices, and then another firm sets its prices overlapping a bit, and then the next one and so on. And what prices are you going to set? Because you don’t change your prices every day, at least in most things. It’s partly catching up with price increases that have happened before, and it’s partly getting ahead of price increases that will happen. So you’re concerned about the prices that your suppliers will charge. You’re concerned about the prices that your competitors charge; it tells you how much you can get away with. We usually put this as expected inflation. But it’s actually both past inflation and expected future inflation that enter into determining what the current rate of inflation is. And the great, big story that we tend to have is that inflation, if you have a bout of it—even if you have a spike in prices because of something like Russia invaded Ukraine or the United States bombing Iran— it’s not as big a problem if it doesn’t get built into people’s expectations about future inflation.But we’re always concerned that expectations will get un-anchored or that people will start to do what we think happened in the ‘70s. That people started to build expectations of future inflation into their pricing, and that that was extremely— you know, extremely costly to get rid of it. The severity of the ‘79 to ’82 slump was comparable to the global financial crisis. And the question, obviously, is: are we doing badly enough for that to happen? And, actually, I’d say there’s two forward-looking questions. I mean, we had a great experience, right? That’s part of what I want to get at. In terms of the things that macro economists were worried about, the ‘21-’22 inflation spike turned out to be kind of... everything worked out fine and expectations didn’t get un-anchored; the inflation was transitory, although transitory turns out to be longer than we thought. Slow, but in the end, the definition really should be functional by the time period. And in the sense that we did not need to go through an extended 1980s-style slump to bring inflation down. That was what we had all hoped for. But can we count on that happening again? And that’s the question. I mean, how much do you worry?Waller, by the way, was a big dove. He was one of the people who basically kind of went after people who were predicting many years of high unemployment, saying, “No. You’re wrong.”Bernstein: Yeah. So people who are interested in what we’re talking about should go read the speech that Waller gave late last week. It’s very clear and, I thought, incisive on these issues. So I’m worried, Paul, and I’m a historical dove. And when it comes to full employment and inflation balancing the Fed’s mandate. I’ve long worried about the full employment side of the coin. And now I’m worried a little bit more about the inflationary pressure side of the coin. Now, that may be because of my own PTSD from when I was going through this in the administration. But, you know, the Fed has been above its target for five years. That’s a long time. And inflation seems kind of stuck around where it is now.Krugman: Look, if the target were 3% instead of 2%, the world would be fine. Obviously, wages and incomes would have to catch up to that. But I think that would happen on average. It’s a big statement.Bernstein: Yeah. But if the Fed can’t get back to its target in a climate with a reckless and unchecked person in the White House whose instincts are highly inflationary—as is true of all authoritarians, regardless of what country they preside over— yeah, I’m worried about it. I’m worried about the anchor.Krugman: I have turned a little more hawkish than I used to be. I used to be very critical of the 2% inflation target, which in many ways I thought was too low. And if we consult the history of how we ended up with 2%, it’s kind of weird and also kind of funny. I mean, it’s one of the few major things that you can really blame on New Zealand because they were the first to do it. But you know, there were a lot of arguments, particularly during the long slump after the global financial crisis, saying that 2% was too low. But now we kind of say: well, 2% is low enough that people just stopped thinking about inflation and 3% is starting to draw concern. We used to say 4% makes sense, and now I’m not sure that would be okay. And that credibility—the ability to get over the inflation shock, the supply chain, and Ukraine shock— I think had a lot to do with the fact that people really did not expect higher inflation on a sustained basis. I’m worried now that losing 2% unintentionally might be a serious problem.Bernstein: Yeah, I share that concern. But let me ask you a question. And I should speak to this, too. But I want you to go first, which is: so we’ve talked a lot about what we think are driving these negative vibes. What do you think we should be doing about it? What is the right path? What is the best path forward to realign vibes with where they were pre-pandemic, at least?Krugman: That’s a really good question. And a part of the answer is: what do you mean “WE,” white man? You know, who is “we” that should be doing what? Well, certainly not me. And at this point, not you unfortunately either.Bernstein: No, that’s not correct. I’m very ensconced in policy efforts, which I’ll talk about in a minute, but you go ahead.Krugman: All right. But, you know, a big part of the answer lies with the Federal Reserve. But also, there’s a very good chance that Congress will be in different hands in a few months and that the White House will be in different hands in 2029. But I mean: “don’t do stupid stuff” would be a good start.Bernstein: That’d be a great start.Krugman: Don’t launch unnecessary wars. Don’t politicize the Fed. But I do worry. I mean, we’re in the middle of an ongoing discussion in which you and Elliott have been making the point that it is about price levels. And then there’s a lot of people saying, “Does this mean that the vibes are going to be negative for the foreseeable future?” Are we in, among other things, for a political universe in which every president, of whatever party, has a disgruntled public because prices are too high, and so it’s always “throw the bums out” every four years? And I don’t know. I think this is one of the things that actually hinges a lot on what we think really is driving the vibes. And when is the statute of limitations on the price level that people expect? But it is a real concern.Bernstein: Yeah. I mean, it’s funny. I myself framed this as like, the goal is getting vibes back to some level that they used to ride at. Really, the goal is much more a political economy goal, at least in my head, which is to help people be able to make ends meet in an economy that’s been growing at a good clip for a long time. I mean, we’re actually quite productive. We have good GDP growth. Even the unemployment rate is pretty low, even if job creation has been just about zero.A lot of people justly feel—and this is not just a low-information sentiment—a lot of people justly feel like they’re just not getting their fair slice of the pie that they’re helping to bake. And so we have to reconnect their living standards to the growth in the overall economy. You said something decades ago that’s always stuck with me, which is: for way too many people, economic growth is a spectator sport, not a participatory sport. So what’s the linkage there? To me, it’s the affordability agenda. And this is what I’m working on at the Center for American Progress and at the Stanford Institute for Economic Policy Research, which is crafting an agenda—a policy agenda—and getting politicians interested in it (which is another part of the problem) that will help correct market failures and flaws in key areas of the household budget: health care policy—something you’re very familiar with. Child care. We have great plans in that space. Housing— we’ve already put out a plan that’s been quite positively viewed in that area. We have a great plan coming out on electricity prices. We tried to do a thing on groceries. That’s a lot harder because it really is pretty much a market good. But that’s the agenda. And I don’t think that people necessarily have to understand all the fine points on the policies. But you got to deliver and, you know, that’s a really heavy political lift. But I think that’s the connection that needs to be made.Krugman: Yeah. I mean, I would say also that you have to be seen as trying to deliver that. That’s really kind of important.Bernstein: Yeah, gotta get caught trying.Krugman: Although there was sort of this question: were you and your colleagues bad salesmen?Bernstein: Yes.Krugman: Well, “could you have done something different?” is the question. I’m sitting right now in the heart of the communist, anarchist, Islamic world revolution, or whatever. You know, with the Mamdani administration in New York, which has very limited ability to affect these issues.Bernstein: Right. Although the area where he does have more impact probably is housing affordability because that is a lot of local policy. But at least 100 days in, he’s been spectacularly successful and visibly trying to do something. I think Mamdani is exhibit A of what I’m talking about. He ran on affordability. And, you know, you can call it sidewalk socialism, but he’s filling potholes as well as delivering child care and working on housing. He is, I think, a model for exactly what I’m talking about. And look, yes, his powers are limited given where he sits. But however many months in, it’s working. Now, it’s way too soon to make any kind of a judgment. And by the way, yes, Mamdani is the most visible example of the model I just described in action, but it’s working as well or better than I could have hoped, at least thus far. But here in Virginia, we have a centrist governor named Abigail Spanberger, and there’s Governor Mikie Sherrill in New Jersey— both centrist Democrats running on similar policies. So this is not just a socialist thing.Krugman: I know. It’s just, New York is sui generis on every level.Bernstein: Including pizza and bagels, but that’s a different discussion.Krugman: Well, it’s even more that I think it’s a lot easier to find Eritrean food, which I had here with friends the other day. But anyway, one of the things that worries me about this whole vibes episode is—aside from the political economy and all of that— it’s: what do we do in the next economic crisis? Because what strikes me is that when the supply chain issues became clear, when it became obvious that some things had been disrupted and that demand was really a very different mix from before, and that you started to see those container ships steaming back and forth, waiting for a berth and all of that, there was going to be a large and inflationary shock coming from that and that the right policy—assuming that you could keep inflation expectations anchored— was, in fact, to accommodate; to have a burst of inflation and then stabilize after that; that a one-time rise in the price level was actually exactly what the optimal policy model said you should allow. And it did happen and people hated it. And now I’m worried that we will do something stupid next time. Is that your concern as well?Bernstein: Yes, but first of all, the concern about whether we will do something stupid is bearing out in real time. But I guess the way I would frame your question is: has Keynesian stimulus in a recession been discredited by what just happened? And I very much obviously hope that’s not the case. The supply shock, or what you described as the supply chain snarl-up part of the pandemic, was very sui generis, of course, and was a function of a 100-year virus. So that’s a lesson we don’t want to over-learn.Adding to my worries about this is the reality that our fiscal outlook is actually as bad as it’s ever been, at least in my lifetime. Even though the kind of fiscal interventions we’re talking about—the Keynesian kinds of interventions we’re talking about—you’ll actually be fiscally worse off if you don’t do them than if you do do them because you’ll end up with worse GDP outcomes. But there will be those who will point to the debt and say, “We can’t do anything. Look at the magnitude of the debt.” So, yes, I’m very worried about that. And my only solace is that one definition of a Keynesian is a Republican in a recession. They all get very stimulative-oriented pretty quickly in that situation. So maybe just the power of a rising unemployment rate and its populist impact will drive better policy in that regard. But it’s a concern.Krugman: Yeah. I would have said that Covid and Ukraine were unique events. Except now there’s Hormuz and you start Googling choke points and it’s not hard to think that maybe it’s not that unique an event right now.Bernstein: I agree with you. And I do think that one of the things I’m trying to do—and I think you’re trying to do this in some of your work—is to just remind people what good economic policy looks like. It wasn’t that long ago, as you’ve said in numerous posts and in this conversation, where we applied a lot of economic thinking in the Biden years. And if you take away everything we’ve been talking about for the last hour—which is the negative vibes around the inflation and the price level—I think you’d have a good example of really pretty effective policymaking that helped not only increase the economy’s growth in its capacity, but delivered those bigger slices to folks who are helping to bake the pie and, in many ways, are the most economically vulnerable people. Whether it was the advantages to the poverty rate, whether it was lowering the uninsured rate, or whether it was simply helping to maintain a strong enough labor market that wage gains reached the bottom of the scale. So I guess my point is: we know how to do this, or at least we have an idea. We just have to really fight hard for the politics to get back there.I guess the last point I’ll make on this—and we’ve talked about this as well— resistance is not futile, and people want something different than what they’re getting. That seems very clear.Krugman: Yeah. And I wonder. A year ago we probably would have said: “Look, the Biden team by and large did good stuff, responded very well to the Covid crisis, and got totally savaged politically for their success.” And that meant that we might be taking all the wrong lessons. I have to say that one small silver lining to all of the crazy stuff now happening is that it does seem to be gradually making people think better of the previous experience and kind of understand a little bit. I’m not sure. I think the public is actually probably ahead of the political universe there... but I don’t know. Do you feel that people are more appreciative of what you all did now than they were before?Bernstein: Well, it’s a good question. I run in circles that are maybe somewhat similar or adjacent to ones you do. And what I get a lot of, from at least the people I talk to, is, “You guys did a great job, and your messaging was terrible.” And, you know, we sort of referenced that a few minutes ago. I will agree that our messaging was far from optimal in that a lot of times we were talking past people. But I think there’s a difference between talking past people and lying to people. We were honest. But I don’t think there was some magic set of words we could have said that would have made things all that much different. And I think you made a similar comment a while ago.So I do think that sentiment—“You did a good job, but you didn’t convey it”—is live. I don’t know what people are feeling. I think if you go out and poll people again—as Elliott would know—at this point, they might be saying Biden was better than Trump because Trump has turned out to be such a mess. But they didn’t agree with where Biden was—and they probably wouldn’t agree with where you and I are—on the economics.At some level, vibes are a function of people’s faith in the government to actually have their back, to get behind them and lastingly help them. And it’s been a long time in the Trump years— Okay, it’s actually been a little over a year, but it feels like decades since that’s been the case. Joe Biden and his administration—which I was proud to be a part of— certainly worked hard to do that. And we can have good debates about how far we got. But we were trying and at this point, we have a government that’s not trying at all. And in fact, when it’s not self-dealing, it’s pushing in the other direction. So I don’t think it’s that heavy a lift to get back to a point where we’re trying to rebuild people’s faith in a government that actually does useful things for them. And that, to me, is a north star.Krugman: Good place to end. Thanks for talking with me.Bernstein: Thank you, Paul. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

TranscriptWhen you’re losing a war, but it’s not an existential defeat, your country, your government can continue pretty much as before. Aside from the humiliation, there’s a well-established technique, which is to declare victory and pull out. But it appears that Trump can’t even pull that off. Hi, Paul Krugman with a Saturday update on the situation in the Strait of Hormuz and all of that. It’s been clear for a while that the United States has basically lost this war. The goal was to achieve regime change, possibly to take Iran’s uranium. Neither of those is going to happen. The Iranian regime is harder line than it was before. Iran has ended up strengthened because it’s demonstrated its ability to shut off traffic through the Strait of Hormuz. No way the United States, even under current management, is going to commit ground troops to attempt to really do in Iran’s nuclear program on a sustained basis. So the indicated strategy was to essentially give up, but claim that something wonderful was accomplished, and that’s certainly something that Trump is good at doing. But he hasn’t been able to pull that off, I think because he himself is incapable of facing reality. So the Iranians said that they are willing to allow free passage of shipping through the strait, by which it turns out they mean basically passage that stays close to the Iranian coast and pays a toll along the way. Well, what’s our alternative to that? What is it that we want to get? The United States has started imposing a blockade on Iran, which hurts the Iranians. It does give them a reason to seek a deal, but only if they get something out of it. So if allowing ships to start carrying oil and LNG and fertilizer and helium out of the Gulf allows them to sell their own oil again and to import food, which apparently is an important issue for Iran, then that’s a deal that can be done. It will, in practice, be a strategic defeat for the United States, but something that the Trump administration could try to spin as a victory.But in order to get that, you have to actually deliver on that deal. You can claim that you’re winning and that they’re surrendering, not us, but you have to actually deliver on the deal. What Trump tried to do was to say, great, they’re opening up the strait, but meanwhile, we’re going to continue our blockade. And also, they have promised that we can have the uranium, which they had not. That doesn’t work. It’s just basic logic. Why would the Iranians agree to a deal if they don’t get a lifting of the US embargo, don’t get their ability to sell oil and their ability to import food back? If that’s what’s going to happen, then you might as well keep the strait blocked. So what was this supposed to be? What was the idea? What was the thinking? Well, as best I can tell, and this is all speculation now, I don’t think that Trump has taken on board, maybe he’s emotionally incapable of taking on board the reality that he screwed up, that he took us to war and lost, that he, in his mind, still thinks that America has the upper hand and that the Iranians are cowering in fear over the might of the U.S. military, and that he doesn’t need to make any concessions,Does he really believe that? Do we even know? Is really believing a thing that makes sense in his case? Probably not. But to some extent, he is at least incapable of accepting as a basic proposition, never mind in public, but at least in terms of actual policymaking, accepting as a proposition that, well, the U.S. just found the limits to its power, and they turn out to be closer to our goal than they are to the Iranians’ goal. So we basically have to cut our losses by making a deal that leaves the Iranians with some stuff that they didn’t have before. He can’t seem to do that. But if he doesn’t do that, then the Strait of Hormuz will remain closed. In fact, it’s more closed than before because the Iranians are not managing to export oil, which is new. They were exporting oil before, and now that little bit of supply to the world market has been cut off. It’s about 2% of world oil supply. Not huge, but in a very tight oil market, it is significant. And I have no idea where it goes from here. Once again, we’re in a situation of total uncertainty. Now, I might be willing to say, maybe I’m misunderstanding, maybe the United States does have, in some sense, more leverage. But, you know, we do have markets. The futures markets are closed for the weekend. So let’s see what happens when they reopen Sunday night. But the prediction markets are open, and for all the problems with the prediction markets, they show very clearly that the perceived probability that the strait would reopen by June 1st spiked last week and is now back basically to where it started. All of a sudden, we’re down to a 30% or so probability of getting the strait open anytime soon, which looks about right. Maybe that’s even a bit high. But, my God, like I said, we are led by people who not only can’t plan a war right, they can’t even successfully execute a surrender. And that’s a really bad omen, not just for the Iran conflict, but for everything else. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

No time for a regular post today, so here’s a video.TranscriptWhen Donald Trump took us to war with Iran, he dismissed warnings from the experts, from the military, from the intelligence community, saying that this was a highly risky proposition. Now he wants to bring that same level of clarity and judgment to monetary policy, and we should all be very afraid. Hi, Paul Krugman here. Today, I’m going to do a video rather than a proper post because I just have too much stuff going on. I’ve been too busy to actually do the charts and quantitative analysis that would be involved in actually writing a post about this stuff. I’m recording this on Wednesday afternoon.The news to which I’m reacting is that in the midst of everything else that’s going on, Trump is doubling down on his attempt to turn the Federal Reserve into a personalized institution that will do what he wants, and never mind the fact that it’s set up to have substantial independence, never mind the fact that there’s a long tradition of respecting the Fed’s independence. Trump thinks that he should be, as George Bush would say, the decider on monetary policy. This would be a bad thing even if Trump was somebody who generally had good judgment. Monetary policy, what the Fed does — control of short-term interest rates, control of the money supply— monetary policy is technical. Doing it right does require that you know quite a lot about what’s going on. It’s something that you really do want, technocrats at least having a strong role in the decision-making process. And in fact we generally leave it up to technocrats.Part of the reason for doing that is it’s too easy. It doesn’t require legislation to change interest rates. It just requires a phone call to the open market desk in New York City. So it’s really easy for a president who wants to rev up the economy, wants to juice things up before an election or just plain has crackpot economic ideas, it’s just too easy for a president to do a lot of damage. So we put layers of insulation. Members of the Federal Reserve Board are appointed for long terms. The whole setup is one that is designed to at least take some time. It doesn’t allow a madman in the Oval Office to muck with monetary policy. It’s especially bad if the guy in the Oval Office is somebody like Trump, who is impulsive, very much short-term reward-centered, and, of course, doesn’t read, doesn’t study, doesn’t listen to experts. And we know that Trump has a bee in his bonnet, that interest rates should be drastically lower than they are now, which is simply not supported by any of the facts about what’s happening to the economy. Inflation is running hotter than it should be. The Fed has a target of 2 percent inflation on the PCE price index. It’s actually running at around 3.That’s not good conditions for a rate cut. The economy doesn’t need a rate cut, at least it doesn’t appear to right now. We’re not in a recession. So technocrats at the Federal Reserve will not actually deliver the rate cuts Trump wants unless he’s able to exert personal control.Now, the way he’s been trying to do that is itself outrageous. His minions at the Justice Department have tried to force Lisa Cook off the Federal Reserve Board based on totally spurious charges about her mortgage applications long before she was at the Fed. And they’re trying to force Powell out over allegations of cost overruns in Federal Reserve construction projects. This is crazy stuff, and nobody takes it seriously. Nobody thinks those are genuine charges. This is all about trying to use the mechanisms of the Justice Department to intimidate monetary policy makers and turn them into instruments of the presidential will.The presidential will here, aside from being utterly self-centered, is also deeply uninformed. If you read what Trump has had to say about monetary policy, it’s clear that he doesn’t think of interest rates as a tool to manage the economy, as a tool to control inflation, and so on. He thinks of low interest rates as a gold star that you get if we have a great economy. So he keeps on saying that it’s a wonderful golden age, the economy is terrific, none of which is actually true. It’s not a golden age. Inflation is running high.None of that is true, but in any case, that’s not how it works. Monetary policy is not a reward for good behavior. It’s not a reward for achievement. It’s something that is a tool for keeping the economy on an even keel. If he does get his way, this will be bad. The Federal Reserve has credibility, the fact that people making decisions, particularly decisions about pricing, believe that the Fed will keep the economy on an even keel, that it will not allow inflation to remain stubbornly too high. It did allow some inflation for 21-22, which was arguably the right thing to do to allow some, but it quickly took the steps needed to bring it back down again. And that credibility, the fact that people believed that the Fed would do the right thing actually helped it to do the right thing, allowed us to have “immaculate disinflation,” a big fall in the inflation rate without a big rise in the unemployment rate.If Trump gets his way, that will all be gone. The credibility of the Federal Reserve will be shot. Now, I don’t think he’ll get his way there. I don’t think he will get his way on monetary policy. But he might. And more than that, what the fight over the Fed is telling us is that Trump has learned nothing. You would think that the debacle in Iran would lead to some loss of self-confidence, some dent in the arrogant ignorance, the belief that just because the intelligence agencies and the generals and the admirals say that this is very risky and what about the Strait of Hormuz, never mind, I know this will be a quick, easy war. And apparently the fact that it hasn’t turned out that way hasn’t led to any questioning of his own impeccable, perfect judgment. So the attack on the Fed is a bad thing in itself, and it’s also a symptom of “this is not a guy who should be in the White House.”And the fact that he still commands so much deference from his own party and so much timidity on the part of people who should be standing up to him really makes me worried about the future of America and the world. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe