JVL (5:22)

I mean, and this, it just seems so obvious as to not even worth saying, but I'll do it anyway. How can anyone make plans or decisions, right? If you, if you are the operator of a cargo ship, you know, sitting off of the Port of Los Angeles, do you dock today or do you wait a week? Right? Because it depends on what rate your cargo is going to be tariffed at or if you are this Idea that we're going to build more manufacturing plants in America. Well, who's going to spend money to stand up a factory when nobody has any idea what policy is going to be week to week?

Paul Krugman (6:06)

Yeah. If you're thinking about building a factory, well, whether that factory is worth doing depends upon, you know, not just the tariff, how much protection you're going to get from import competition, but how high is the tariff going to be on the inputs that you use. Because in the modern world manufacturing is a process that takes place across the globe. Certainly it takes place across North America. So if you were depending upon components from a suppliers or your own factories in Mexico or Canada, you want to know what the tariffs are going to be on those components. And at this point you'd have no idea. And it's all, I mean I'm not sure that there are any ships sitting off the ports in Long beach waiting to decide whether to dock, but I am hearing reports that ships are being held back in Shanghai while they wait for the situation to clarify. So this is real, this is like the COVID you know, post Covid, remember the ships steering back and forth. We're doing that but this time it's not people because there's a global catastrophe. It's self inflicted. And one thing actually I have not seen enough about, these are really complex tariffs that differ from country to country and product to product. And you know, who's going to enforce, who's going to make the paper, who's going to do the paperwork? We don't have a custom service that's designed to do that. So we don't actually have the ships may be ending, may be steaming back and forth because the, we don't have the customs officials to process it. I mean there are already some issues that the software that's supposed to provide exemptions is not working because it's stood up in zero time. So this is crazy, crazy stuff designed clearly by people who had no idea, hadn't thought it through at all. It's just the President said let's do this and they have no idea how to make it work.

JVL (7:59)

So we, we seem to have been getting warning signs for at least the last four to six weeks from like the regional Fed governors and various consumer surveys. I think there's one out today of manufacturer surveys and confidence and. Right. It does. The signals seem to be that the people who are the actual economic actors are really freaked out.

Paul Krugman (8:27)

Yes, yeah, yes. Freaked out is, is, is definitely the word. It's, it's a nobody people's I mean, nobody knows what's going to happen, but they are presumably hearing from businesses that they are just have no, they think things are going to be really bad. There's clearly a, a drop off in, you know, deal deals and commitments are just being put on ice because nobody knows what's going to happen. And that means that, that the outlook. Yeah, this was the Empire State survey that came out today, I think, and it was, you know, it's. Any one survey may have its quirks, but we're getting an overwhelming picture of business grinding to a halt because they have no idea what the ground rules are.

JVL (9:24)

So can you talk me through a little bit? I mean, let's step back and do just a broader discussion about tariffs. One of the frustrations I've had over the last few weeks is a number of Democratic politicians deciding this is the moment to have a deeply nuanced conversation about tariffs and how some tariffs are good and they really like Gretchen Whitmer going to the Oval Office. What? Well, you know, can you talk a little bit about the US History of tariffs? You had a post on this the other day and like what we're doing now, where it stands sort of relative to US History so people can understand what a big outlier it is.

Paul Krugman (10:04)

Yeah. So we had US tariffs peaked around 1933, and they were brought down gradually. And it wasn't that the United States just said we believe in free trade and we're just going to plow ahead with free trade and ignore what other countries are doing. It was, I mentioned the Reciprocal Trade agreements Act of 1933, which said that we are going 34, I guess, anyway, but never mind. We made deals. We brought down our tariffs in return for tariff reductions by other countries. So it was always when Trump says we're going to have reciprocity, well, reciprocity is how we got to where we are. We negotiated lower tariffs around the world. We cut our tariffs only in return for tariff reductions by other countries. And so as of three months ago, we were in a world where tariffs were low. Not just US Tariffs on the rest of the world, but foreign tariffs on US Goods. It was the European Union. I like to use that as a, that they're almost as big an economy as we are. And they are sort of the, the big kahuna. Aside from China, which is a somewhat different story in the European Union, the average European Union tariff on U.S. products is 1.7%. The average U.S. tariff on European products, about 1.4%. I mean, basically, we have virtually free trade across the Atlantic, which makes you question, you know, what is this all about? I see some of the people are asking, what are we negotiating for? That's a really good question because, I mean, if we're going to demand concessions from Europe, what are they supposed to concede, considering that they actually don't have significant tariffs on US Products? There are a few, you know, there's chlorinated chicken, but on the other hand, there's US Tariffs on light trucks, but those are a marginal. The real story is that we have near free trade with other advanced countries. There is, there's nothing for them to concede. And so I've just been reading some stories late today about European, you know, they're trying to negotiate with the United States, and they basically said, we can't negotiate because we have no idea what the Americans want. And that's a hell of a situation to be in where the United States is following radical policies and shouting, and yet nobody can figure out what they're supposed to do to satisfy Trump and the people around him.

JVL (12:36)

Do you. Is your read on this that there is some master plan, or is it just idiocy and theology? I mean, what do you think? Is there an end game, no mosaic.

Paul Krugman (12:49)

Then stupidity is the phrase that actually my, can I say my wife came up with that. But that's about right. No, look at the people. If you ask, if you think there's a master plan, you might want to find out, find some master planners who are supposedly doing this. And if we actually look at the people around Trump, well, I mean, he's got this Peter Navarro, who should be a comical figure. I mean, this is a guy who, who in his book cited a, a, an expert named Ron Vera, who didn't exist, was just an anagram of his own name. I mean, these are, you know, he would be a clown, except that he's got enormous power under this administration. He found some other people that, that all of the people in the Trump administration or all the people advising, supposedly advising it, were recruited because they had said something that seemed to agree with what Trump had already said. There is no experts coming in from outside. There's no experts. The funny thing about economics is that there are a fair number of rates right of center, economists who are not idiots, they are not wanted. They're completely shut out of this. This is all just sycophants, people who are willing to echo Trump's ravings. And so there is no plan. We know that the big tariff announcement on April 2, the plan, which was very detailed Was apparently settled on about three hours before he went live and was devised by this idiot formula. And as everybody likes to talk about, include a 10% tariff on the herd and McDonald Islands, which have nothing but penguins. So we've got a 10% tariff on exports by penguins. And you know, it's hard to. People keep on thinking that the world's greatest nation, economic and military superpower, that there must be something, there must be a plan down there. But you know, there must be a pony in there under the, under the pile of manure. What can I say? There's nothing there.

JVL (15:01)

Will the bond market save us? I had a brief like 72 hours where I thought to myself, well, maybe the bond market is going to show so much risk that I don't know, the Canadians and the Chinese who both hold a whole lot of treasury bills will start selling off and drive down prices in the next auction, which is. When is it? Next month maybe.

Paul Krugman (15:26)

Yeah.

JVL (15:27)

And put pressure on the administration to change. No. Am I crazy? Talk to me about the bond market.

Paul Krugman (15:32)

Well, yeah. So bonds are pretty. Have been. I mean, there's the stock market and the stock market, as several friends of mine have said, is behaving like a battered spouse. Keeps on taking every sign of sanity as oh, and he's going to get better and it doesn't. So that's a yo yo. But it's. And it'll take, probably take a long time before that market concedes. But the. And the bond markets, I mean, the. Yeah, I mean we, we have a. Something that's happened. What's happening in bonds and currency markets, which you have, your tariffs normally strengthen your currency because you're spending less on imports, but in this case the dollar has fallen. And we also have recession fears which normally cause interest rates to fall, but instead interest rates have risen and the dollar falling with higher interest rates is. All of this is not what you expect to see in an advanced country, let alone the world's reserve currency country. This looks like a developing country. This looks like Argentina or Brazil or Indonesia during the Asian financial crisis. Now it's much smaller. The movements are not. We're not talking, we're Talking about a 5% decline in the dollar and we're not Indonesia with an 80% decline in the rupiah. So the scale is much smaller, but qualitatively we already look like a developing country where the markets have lost faith. But there's probably a lot more to go. And once you start to look under, look at the details. So there's been Rising interest rates on 10 year treasury bills. In the face of this, which is unheard of, this doesn't happen to the United States. But there's much worse going on. If you start to look at more, at less liquid markets at places, you start to look at spreads on corporate bonds. You start to look, I was going.

JVL (17:39)

To say the corporate bond market. Right.

Paul Krugman (17:41)

Corporate bond market is really. Yeah. People in general, two things. One is that people are starting to behave like the United States is not a trustworthy place to put your money, which it isn't. And also they were getting a lot of stress because. And this is where I even need three Tylenols to try and track this stuff. But the financial markets these days are, they're really complex. They're based on a lot of arrangements that are much more fragile than they look at first. The hedge funds are taking on huge positions with enormous leverage. And it doesn't take a whole lot to start to cause a really big stress. And we're starting to see that there's a lot of gargoyle. We're starting to see for the United States something that looks kind of like the Liz Truss moment in Britain back in 2022 when people were absolutely shocked at the sudden rise in interest rates on really long term British government bonds. It turned out that there were weird stuff. There was financial stress involving pension funds which turned out to be a really big player and to be surprisingly exposed financially. So we're probably seeing stuff like that. But it's still early stages. This does look like there are real tremors going on in the financial markets, but we don't know how bad it gets. And I, at least when not busy writing my substack, I've been spending a lot of time trying to understand the plumbing of the financial system and boy, is that intricate.

JVL (19:28)

Can you give me a low median and high variance scenario for what, what the economic world looks like over the next 12 months?

Paul Krugman (19:36)

Okay. Low scenario is that Trump sort of stabilizes on 10% tariffs on everybody and whatever's going on with China and actually finds some way to reduce the China stuff to the point where it does not, it's not hugely disruptive, in which case it's bad. But I mean even that is, you know, this, the low end of, of the damage is the high end of anybody's estimates before the election.

JVL (20:05)

Right.

Paul Krugman (20:05)

So but that's a, we get a, a 2% bump in consumer prices for the next year and then things kind of settle down there. We never recover fully. People never will. We would you Know, once we've lost the world's trust, which we have, you don't get that back, certainly don't get that back until Trump himself is a distant memory. But that, you know, we stumble along and it's not catastrophic. And high tariffs don't necessarily mean high unemployment. So, you know, maybe people are hurt, but it's not too bad. The medium is that it's much worse than that, that the uncertainty leads to a lot more inflation, leads to a recession. I think the low one is that we have a lot of tremors, but no recession. The medium scenario is we do have a recession, which is a really different recession from what any in the past. I don't think we've ever had a recession generated by tariff uncertainty.

JVL (21:04)

But that man made, our first man made recession, right?

Paul Krugman (21:08)

Yeah. I mean, all recesses are in some sense man made, but one man made. This is the first time some people are talking a recession of choice.

JVL (21:15)

Remember war? Recession of choice.

Paul Krugman (21:18)

Well, recession of choice, but of choice stupidity. Because this is. But yes, it is a real. I mean, this is in US History. And maybe as some people say, well, what about Andrew Jackson and the panic of 1837? I think that kind of makes the point. If you have to reach back to Andrew Jackson, then this is uniquely horrible. That's actually my central scenario. I think we will. If you ask me to make a guess, I would say we will have a significant, but though not catastrophic recession brought on just by the sheer craziness. The worst. I mean, the downside is so enormous, we could have a real financial implosion. It could be global. So that we start to talk about things like, well, in previous crises, the United States has activated the swap lines and provided dollars to people. It's not clear that would happen or that the rest of the world would be willing to use them if we, if we offered them. And then I am really worried about the China factor. The we, the Trump, Trump and people around him fundamentally misunderstand international trade. The purpose of international trade is not to sell stuff. The purpose of international trade is to be able to get stuff. And we already have the Chinese cutting off rare earths and batteries. And so we could be seeing a lot of supply disruptions coming on that are really catastrophic for the economy. And I'm particularly. The ultra nightmare scenario is if trade war devolves into war. War. I mean, if you want to think what could really be catastrophic, it would be a war over Taiwan, which supplies an enormous fraction of the world's semiconductors. And the Chinese haven't done that. Partly because what they learned, I hope, from Ukraine is that short, victorious wars often turn out not to be that, but also that they wanted to keep access to world markets. But with the United States imposing 130% tariffs on them, what exactly is the reason for them not to go for it? So the downsides are incredible. And all of this, you know, gratuitous, all of this because we have one, one guy who wants to put on a dominance display.

JVL (23:51)

I am worried, not short term, but medium and long term about the dollar as the world's reserve currency. Is that baseless? Is it, I mean, is it true? Is it the case that the truth is nothing else could. The Euro is never going to be the world's reserve currency. The renminbi is never going to be the world's reserve currency.

Paul Krugman (24:09)

Okay, so the importance of the advantages of the United States of owning the world's reserve currency is that they're greatly overstated. It's one of those things where the people who have actually put in homework, like me, tend to think that the advantage to the United States of being in this position is not all that great. We get a little bit of advantage, slightly lower borrowing costs. The world holds something like a trillion dollars in paper currency out there, which is like a zero interest loan to America. But, but that's not. In a way, the point is not. And the, the big risk is not that the euro or the renminbi could replace the dollar. The big risk is that nothing does that. The, that the. The whole world's financial architecture is built on a foundation of US of dollars as the transaction currency and US treasury bills as the ultimate safe asset that's used as collateral. If we lose that, then the whole world, that's like throwing sand in the gears of the whole world economy. So I mean, we should be so lucky as to have the Euro take our place if we screw this up. But we probably wouldn't. What would actually happen is that nothing takes our place. And so we are, we're in. The whole world economy works a lot less well and financial crises get bigger and longer and yeah, that sort. The risks that we're running, we're risking the whole system that we've built up over the past three generations.

JVL (25:46)

All right, I want to switch gears. The Financial Times is not Ramparts magazine. It is not Mother Jones. And yet today they had a piece, the headline of which is America is already halfway to being a police State. This is because of the meeting yesterday with Naib Bukele and Donald Trump. In the White House in which Bukele refused to repatriate Kilmore Abrego Garcia. Trump seemed to be happy with that. And then Trump talked about sending American citizens to the prisons that the gulags that he's requesting Bukele build. I guess so I'm curious as to your thoughts on this, even though it is outside of your brief, but you are an important person. I think it's good for people to say what they think on this. But the second half of the question I have for you is that a lot of people in my world of politics have assumed that if we get bad economic outcomes in America, that hurts Trump politically. And I basically assume that as well. But there's part of me that wonders, well, I don't know, Trump is a talented demagogue who is good at blaming people for things and maybe that provides him pretext to seize emergency powers or even further expand his, his hold over the executive branch of the government. I don't know. So I, I, I just wanted to sort of present this to you on a platter and say what, Paul Krugman, what do you think of these two things?

Paul Krugman (27:18)

No, I, I'm terrified. I mean the, this is, this is complete dictatorial power has been seized. Now how broadly it can be applied, how far can Trump go? If, you know, to put a point on it, if I'm outside the United States at the moment, if, when I land back at Newark Airport, might IBC is the detained. And you say, well, that can't happen. Well, why not?

JVL (27:50)

Why not? There is no limiting principle.

Paul Krugman (27:53)

That's right. We're seeing this happen to all kinds of people who are, and Trump has said that he wants to go after homegrown people. And the definition, I mean, if you look at the demand letter that was presented to Harvard, it basically said we demand your abject surrender, that we want to be able to determine what's taught in the courses. We want to be able to tell you who to hire there. So how is that not full on dictatorship? Now, whether he can pull that off, we don't know. But, but it does make you wonder. I mean, right now, if you had to make a bet, you would say that the Democrats will have a sweep in the 2026 midterms. But will we have 2026 midterms or will they be remotely fair? Will there be, will the, the we have emergency powers, Will people demonstrating be fired on? You know, if you say every time anybody who said that, oh, that won't happen, everybody who's been savvy and smart and said, oh, you know, don't be, don't freak out, has been wrong and everybody who has freaked out has been right. So why think that that stops at any particular point? And that's a. I mean, it is terrifying. I mean, I, I've been talking about what are, what are the chances that, I mean, I, in the end, I don't think this is what happens to America in the long run. But how do we get from here back to someplace decent? And it may be a color revolution. I mean, you know, I, I pay attention to these things a lot. I mean, and you know, that, that somehow or other the idea that the normal workings of politics will bring us back to the center. I don't think that politics is normal and may never be normal again.

JVL (29:50)

Yeah, I was going to close with something light, but I'm not going to do that because this stuff is too serious. Maybe I'll try to beg you to come back on the show some other time and talk about interstellar economics, but I want to pull on this thread a little bit because this is one of my hobby horses at the Bulwark is that Trump is both pathogen and symptom and that the, but the underlying problem is the American people. The underlying problem is that the people have developed new preferences and preferences, maybe not new, but because, you know, the subjugation of African Americans was a long held preference in America, but a preference for authoritarianism and illiberalism, which didn't exist over the last last 40 years or 20 years in as broadly as it is held. And what I come to is, is the revealed preferences shown by the 70 plus million people who voted for Trump as that number increased from 2016 to 2020 to 2024, despite the fact that those elections took place in wildly different contexts.

Paul Krugman (30:57)

Yeah.

JVL (30:58)

And like, I don't know, like, does this worry you that like, people, people have just gotten a taste for this? Not everybody. Right. But a big enough percentage of the population has gotten a taste for this, that this is what they want to some degree.

Paul Krugman (31:13)

I'm a little bit less, my take on this would be that, that probably half or a little bit more than half of the people who voted for Trump wanted this, that this is what they were voting for. But a lot of people voted for Trump thinking that they were voting for lower grocery prices. And that's, you know, really, you can say, well, that's really upsetting and stupid, but not allowed to say, I guess. But, you know, that's horrifying. But, but There was a lot of people just not believing, not believing that he was who he said he was. And look, it's not just, it's not just the regular. It's not just guys in red caps and diners, Wall Street, Silicon Valley. They're absolutely shocked, shocked to discover that what you knew, what I knew is actually the reality. They managed to convince themselves that somehow this was going to be just kind of benign, good for, good for them, and they would be allowed to say bad words in public and that they would not face regulation. And our. Now, you know, they're having this horrible realization that I'm not sure if they're willing to admit it to themselves, but willing to. They're having this horrible realization that all of the people warning about the threat to democracy were completely right. And I don't know what, what you can say. I mean, the. I, I'm not sure that the voters have really changed my. There's always been 25, 30% of the electorate has always been fundamentally authoritarian. That's always been a tendency, and that's true in every country. 25, 30% of the French electorate, 25, 30% of the Danish electorate, even the Canadian electorate. Canada was all set to put a chompy guy in power. It might still happen, but it seems unlikely given the polls there. But they were only saved by the example of Trump south of the border. So I actually do think maybe I'm romanticizing, but I think that the people are not that bad, put it that way, the authoritarian impulse, there's a lot of voters behind it, but they're not a majority, not that close to majority. The fact that they didn't understand what they were voting for, that does fall on elites. There's been an enormous elite failure and is not obviously Wall Street, Silicon Valley, but also look at all of the not hard right media figures, political figures who were busy going on about, oh, you know, Biden's old, when they should have been saying, oh, my God, democracy is in danger, you know. And so I think in some ways we need to ask what it is that made elites so blind to the possibility of what we're now seeing.

JVL (34:15)

Yeah, well, first we have to fend off the authoritarian attempt. Paul Krugman, thank you so much for being so generous with your time. By chance, if you are watching this and you are not signed up for Paul's Substack, go do it right now. There's no cutesy name, just Paul Krugman at Substack, you will find it this, especially in a moment of economic turbulence, Paul, will make you smarter on all of this stuff. So go sign up for it. Paul, thank you very much for being with us. Thank you for doing the work you do.

Paul Krugman (34:43)

Thank you for having me on.