Kimberly Klausing (5:49)

Happy to be here.

Ezra Klein (5:50)

So, let me just begin at the simplest possible level. What is a tariff?

Kimberly Klausing (5:55)

So a tariff is a tax, simply put, and it's a tax that is assigned to imports. So you might expect it to make all the imported goods more expensive. And that's what it does. It also raises prices more generally in the economy because goods that compete with imports get more expensive too, because their competition's price went up.

Ezra Klein (6:16)

How does it raise money? Where is that money collected and by whom?

Kimberly Klausing (6:20)

Yeah, when a good crosses a border, the customs agents collect the tariff from the importer. That raises important questions about who truly pays for the tariff or who is burdened by the tariff. There's been a lot of recent economic work on the tariffs of the first Trump administration, where it was concluded that roughly all of the tariff burden fell on U.S. buyers of imports. But Trump at times has asserted that foreigners will pay for the tariff. There's some evidence that that could happen, but we haven't seen it in prior waves of Trump tariffs.

Ezra Klein (6:59)

If the tariffs, the 25% tariffs on Canada and Mexico, the 10% added tariff on China holds what does to the average American family year, but also how much money does it raise?

Kimberly Klausing (7:11)

Yes, so the average American family would have a cost increase of about $1,200 by our calculations, from a 10% increase in Chinese tariffs and the two 25% tariffs on Canada and Mexico, with the carve out for Canadian energy at a lower 10% rate. That was our estimate. That doesn't include the latest 10% increase on China. It also doesn't importantly include the fact that competitor goods get more expensive. When other analysts have folded those in, they get a number that's closer to $2,000. So that's a lot of higher costs for American households in terms of revenue. I get that this is more than one and a half trillion dollars over 10 years. So we might think of it as about $150 billion a year. That's a static estimate. And what I mean by that is that doesn't include negative effects on economic growth, and that's because it was a relatively simplistic method. I think it's very important to include those negative effects on growth, because when the economy shrinks, that means that people are paying less payroll tax, less income tax. Shrinking tax bases in other sectors of the economy can offset a lot of the benefits of that revenue. It also doesn't include the costs of compensating those who are hurt by retaliation. We saw in the first round of Trump tariffs that he spent a lot of the revenues that were coming in, effectively bribing farmers for their losses, saying, like, oh, I'm sorry you lost these markets that you were planning to sell into China. So have this welfare payment instead of effectively mailing checks, instead of letting them sell their goods. One, farmers don't really like that substitute. They'd much rather sell their product in the world market. But two, it's very costly, and in some years, he was spending a majority of the tariff revenues on these compensation payments. So this is hardly a helpful fiscal solution given its harmful effects on growth and given the costs of retaliation.

Ezra Klein (9:30)

I always hear a lot of different explanations of why we're doing tariffs and what they're supposed to supposed to achieve. And there are two that feel a little bit different to me. One is that it's going to raise us a lot of money. Right. It is a tax we are placing on foreigners. And the other is that it will be this incredible lever we will use to make everybody make everything in America, because we're a huge market and people don't want to pay the tariffs to access our market. But I guess, of course, if we're going to raise all this money through tariffs, then if everybody comes here, it doesn't work. How do you disentangle those two rationales that President Trump has been using?

Kimberly Klausing (10:14)

Yes, I think you point to a really important contradiction. And there's a third rationale which is also contradictory, which is at times he will argue that he's not really a high tariff person, but he's trying to negotiate changes in behavior. And if you get those changes in behavior and you reward them with no tariff. Right. Then you get no revenue and no domestic production as a result. But let's focus on the two that you mentioned. If you want more domestic manufacturing and you think that the response of firms and consumers to the tariffs will ultimately lead to more American production, then that does imply a shrinkage of imports. And we think in general that when you tax something, you get less of it. So it's possible that you could have a bit of both, but they're at the expense of each other. As you tax the imports, they shrink. So there's a little bit less revenue, but there's still some revenue on the remaining imports. At the same time, domestic production expands, but there's limits to how many things we can make in this economy. So you can't really displace all imports at the same time. So it's reasonable to think you'd get some of each. When we look at those two mechanisms.

Ezra Klein (11:21)

Is the idea that you could layer significant tariffs on imports from all these other countries and radically increase the proportion of goods we make here in America true?

Kimberly Klausing (11:36)

I don't think so. And I have strong reasons for my skepticism based on the prior literature on tariffs and the experiments that we've done in the past. So if you look at the prior waves of Trump tariffs, really careful analysis has looked at the industries that were most protected by those tariffs and asked the question, did we see more employment growth as a result of those tariffs? And the answer is often that you can't find it in the data. It's kind of an indiscernible amount of additional employment. But even when you find tiny bits, and sometimes people can point to maybe a thousand steel jobs, you tend to see reductions in employment in other parts of the economy. And this occurs for two reasons. One, majority of our imports are actually intermediate products. So an example would be steel and aluminum, two goods that, you know, presidents from both parties have been fond to put tariffs on. But when you tariff steel, right, that makes any good that uses steel more difficult to produce in the United States. So an example would be cutlery. Producers would then find that their costs are higher relative to their competitors abroad. So that's going to hurt production of any goods that use imported intermediates. And almost all of our goods use imported intermediate goods. So that hurts the U.S. production process. But there's a second important angle here too, which is that when we tariff foreign countries, their typical response, rational or not, is to retaliate by putting tariffs on us in response as a way of punishing the United States for its policies and hopefully getting the attention of the president by concentrating pain from the exporters. So we've seen, for instance, China retaliate against American agricultural products. And the hope of the Chinese is presumably, presumably that the farmers are upset and that that puts pressure on Trump to withdraw the tariffs. We've seen Canada threaten to tariff a number of our industries as well, and they've started doing that. Mexico is planning to roll out some retaliation too. So all of that hurts our exporters. Even beyond the hurt I already mentioned, which is the fact that their imported intermediate goods are more expensive, they're also facing shrinking markets for their goods abroad. So when economists have looked at these effects altogether, they've often found that tariffs actually destroy more jobs than they create. And so this isn't really a sensible policy if you're really, truly interested in helping the American middle class workers.

Ezra Klein (14:13)

This is a point my friend Matt Iglesias has made. But it's been ringing in my head, which is that tariffs and this kind of protectionist, mercantilist, and I would say reality TVist economic policy has this bias towards announcements you can see, and then this cost of things you never hear about. So Apple comes and says, oh, Mr. Trump, we don't want to be tariffed by you. You're doing such a great job. We're going to locate more of our investment in the U.S. please don't tariff our other goods. And maybe they both get a presidential pat on the back and they get some tariff exemptions and they locate a factory here. But then there are the companies that are small, do not have a line to the White House, cannot make a big announcement that Donald Trump will be part of, and they're just disadvantaged and can never grow. How do you think about that dynamic? Because tariffs are spectacular and they're clear. And then you get these sort of TikTok of announcements coming out of the White House of look, see, they work. Look at this, look at that, look at the other thing. And then there's obviously no presidential press release about the factories or goods that they ended up destroying.

Kimberly Klausing (15:29)

Yes, I think you point to a really important feature of tariff policy, which is it's inherently a bit non transparent, and it's also inherently subject to political dysfunction and the concentration of power in the hands of the executive. So in the case of non transparency, you see that many of the costs are pretty diffuse. Like every consumer might pay a little more for their lumber at the lumber yard or their avocados at the grocery, grocery store, their cars when they go and buy their cars. But they won't necessarily know to blame the tariffs, whereas the beneficiaries of the tariffs may feel that they can pinpoint where that benefit is coming from. So if the steel plant doesn't close, they can thank the tariff in response. I think there's limits to that transparency argument because certainly firms like Ford and GM, as examples, recognize that these tariffs on Canada and Mexico will be deeply disruptive to their business model. And the same is true for farmers, for Boeing, for a lot of US Companies. So that gets to some of these other points about political dysfunction, which is that because tariffs are levied by the executive rather than Congress, the Trump administration will have more control over who pays, where they're assigned, which industries, which countries, which firms get exceptions. So it puts the executive branch in a position of control and a position to hand out favors and punishments as they see fit, both at home and abroad. And I think those elements are quite attractive to this particular administration, who's shown that they really, in a number of areas, are eager to punish those that they feel are not aligned with their interests and reward those that they feel are aligned with their interests. And so I think that's a key component of why President Trump is so drawn to tariffs.

Ezra Klein (17:35)

Yeah, I have a big concern. This is not a economic policy. This is a tool for corruption and patronage.

Kimberly Klausing (17:41)

Yes, I think that's a very legitimate concern.

Ezra Klein (17:44)

So I want to think through this in a couple specific cases, they're doing pretty broad tariffs, although only so far on specific countries. But so we import a lot of food from Mexico. We import avocados and raspberries and strawberries. So that's all going to get more expensive. We also import a lot of potash, which is a fertilizer, functionally a potassium solution, to grow food. And we get 80% of that from Canada. So on the one hand, I guess you could say, well, we're going to tariff Mexican food imports because we want more of that to come from American farmers, but we're also going to raise the price of the thing American farmers need to grow food. And even if you weren't doing that, it takes time to plant new crops. Right. It takes time for those crops to produce fruit and produce vegetables. So it's not like we can substitute from Mexican avocados to American avocados in a month.

Kimberly Klausing (18:49)

That's right.

Ezra Klein (18:50)

Yeah. It's almost quite like it just doesn't make any fucking sense.

Kimberly Klausing (18:54)

Yes, that's very accurate as well. So if you think about this policy, I think it's very analogous to a supply shock. We could view it like the oil price shocks of the 1970s, or if that's too back in time for people to remember, you could think of it as sort of like a Covid supply shock. I think what you mentioned with your farmer example is exactly right. You know, the producers in the United States will be trying to produce more, but there's limits to what they can do when their imported intermediate goods are getting more expensive, when workers are more scarce, particularly in a. An economy that's already a full employment economy, but one where the administration is aggressively trying to reduce the labor supply through deportation. So there's going to be very much limits to how much they can respond to those price signals. So when you go to the store and you try to buy avocados or lumber, it's not like we can suddenly grow more trees in Oregon to cut down for lumber or more avocados in California in an instant. Those goods are going to be more expensive and cars are going to be more expensive because parts have to cross the border many times the price shocks are going to be very real. When you're simultaneously reducing the ability to supply products and increasing the costs of supplying them, you're going to get pressures on the economy that feels stagflationary. And what that means is that central banks and other macroeconomic policymakers won't really know whether to worry about the fact that prices are rising or the facts that the policy is recessionary. If if prices are rising, the normal thing for the central bank to do would be to raise interest rates so that that reduces the inflationary pressure. But this is also a recessionary policy, which is going to shrink the economy, and so you'd want to expand the money supply, which would increase inflationary pressures. So it's a deeply troubling policy that could cause a lot of pain if it isn't reversed very swiftly.

Ezra Klein (21:16)

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Ezra Klein (22:31)

I keep hearing this point about car parts crossing the border many times. Can you give me an example of that and how the tariff stacks?

Kimberly Klausing (22:41)

Yes. So if you look at I don't know if you've bought a car lately, but I did at one point.

Ezra Klein (22:47)

I live in New York City. It is the best part of living in New York City that I did not have to buy a car lately.

Kimberly Klausing (22:52)

Yeah, I don't actually. I live in Los Angeles and I don't have a car here, which is fine. But if you look at a car, a tag, it'll tell you all the countries that the car is made in some instances. And you can see that the typical car is made in many countries. But in North America, we've had free trade in car parts since 1964 with Canada and since 1994 with Canada and Mexico. So we have this deeply integrated auto production process. And so that means that not only are we maybe buying some parts from Canada and some parts from Mexico, but the process of making the part itself, each part has parts, and those parts, parts will cross the border and then something will get added to it, and then that resulting product will cross the border and something is added to it, and then it crosses the border again. And so you can have something crisscross the border a multitude of times and every time there will be a tariff. You might think, well, we could apply tariffs in a similar way to the way that other countries apply value added taxes and just tax the incremental of value. But that's not how tariffs work. It would be too bureaucratically difficult to track each auto part and say, well, how much value did you add in your country this time? And that's part of why free trade is so attractive. You can do this integrated production across North America without having to face bureaucratic hurdles every time something crosses a border. So because of that difficulty associated with tracking, there's not going to be a way to avoid this sort of cascading protection effect where you think you're tariffing something once, but really because it's embedded in this international production process, it's getting hit by the same tax multiple times. I really do think that in the case of the North American auto industry, this could be the end of it because it's going to just be so much.

Ezra Klein (24:48)

I don't know, Kim, because I heard Donald Trump say that he spoke to the big three automakers and they were super thrilled.

Kimberly Klausing (24:54)

Yeah, that's not the message that I've been hearing from them. You know, like when you kind of look, look into the news stories in more detail, you see a lot of grave concern about this. And it's not even the Big three alone. It's like we also have a lot of cars that may have Japanese or Korean labels, but that are manufactured in part in North America because of the advantages of the formerly nafta, now relabeled as USMCA agreement. So when we compare making a car in North America with this cascading protection effect we just described to making one in Asia or Europe, where you don't have a lot of tariffs that are impeding production, I think it Just will make a lot more sense to make the entire thing somewhere else and just pay the tariff once.

Ezra Klein (25:41)

Okay, I want to put a pin in usmca, because I want to come back to that in a second. But what you just said, it'll make sense to make the car somewhere else. This seems like a way in which once you start laying down tariffs, there is no end to it. Let's say that you are Ford and you have a auto plant in Dearborn, Michigan. And that auto plant has a lot of trade back and forth over the American border with Canadian and Mexican suppliers. So you now have this problem. We were just talking about where things are going back and forth and getting tariffs placed on them. The steel you're importing has tariffs placed on it, et cetera. Now, you're BMW and you have a plant in Germany. You have none of that problem. Your intermediate goods do not have their costs rising because of Donald Trump's tariffs. Now, obviously, at some point, somebody's going to point this out to Donald Trump. And so the clear thing to do from his perspective is going to be to impose tariffs on all European or for that matter, Asian or anybody automakers, because it would be an insane outcome of your policy to have tariffed people making cars in the US but not people making cars in Europe or South Korea. But then you're just raising the price of cars relentlessly for American consumers.

Kimberly Klausing (27:01)

That's right. And you're also probably siloing the American car market in a way that will make our cars much more expensive for what we're getting as Americans, relative to the competitive markets offshore. He's announced additional rounds of tariffs that are coming April 2, supposedly. So you might view this as, in a way, a coherent strategy in that he's just starting with the countries that are most vulnerable as a demonstration effect, and then he's going to move on to other countries because we might think Canada and Mexico would be more willing to give us things because they're more dependent on the US Economy. So if you buy this negotiating motive, then maybe starting with them is smart. But you're absolutely right that it doesn't really work. It's a deeply harmful policy. And if you really believe in it, it does lead to the need to expand it and expand it and expand it, and maybe even to raise the tariffs themselves, because you realize that even with 25% protection, you can't make a car in the United States that's gonna beat the ones that you can make in Asia or Europe. So I think it's you know, it's hard to just use words like dumb, but like, this does feel like a deeply misguided approach to.

Ezra Klein (28:28)

I would like to use the word dumb, actually, because I don't have the sort of elevated Peterson Institute for International Economics tone.

Kimberly Klausing (28:35)

Yeah, fair.

Ezra Klein (28:36)

I'm also confused. So if you said what were things that Donald Trump appeared proud of having done in his first term, you might say, well, he said that NAFTA was the worst trade deal ever signed by any country ever. And then he renegotiated it in the usmca, which is United States, Mexico, Canada Agreement. And when he signed that, he said it was a terrific deal for all of us. So the major trade deal Trump did in his first term, and he said at his speech the other night that his first term was great. And an amazing four years for America was this trade deal with, with Mexico and Canada, which then he bragged about being great. It has not been renegotiated since then, to my knowledge. So now he's come into office and the first major tariff project is to impose huge tariffs on Canada and Mexico. Who had. He just. Sorry, it's like I'm glitching out. He just negotiated a trade deal with that he said was great. And he's starting with them. Not even ending with them. He is starting with them. I don't understand why. I don't see what's going on here.

Kimberly Klausing (29:44)

Yeah, it really defies explanation. And I think most observers looking at this episode are just simply flummoxed. It makes no sense to think of harming our closest allies and friends with tariffs and threats at the same time that we're talking about relieving Russia of some of their sanctions. And it's just confusing. You might almost think that the goal is to weaken America's position in the world. And if you were going to do that, this would be a good starting point. You know, I'm not convinced that that's the underlying goal. If I were trying to explain the underlying goal, I might be tempted to say that it's about distraction, that some of this is an attempt to either rebrand in a way that lets Trump claim victories even when they're illusory. And we saw this a little bit with the Columbia situation, where there was this brief ratcheting up of rhetoric and a threatened trade war. And then Colombia made minimal to non existent concessions, and then Trump declared success and backed down. And we saw that a little bit around the Groundhog Day start of this trade war, where it seemed like Canada and Mexico made limited concessions and then backed down, but yet he seems to still be coming back to this tool. It's possible that if the Commerce Secretary is right, he was on the television saying that, oh, these are going to be really short lived. This will be yet another attempt to rebrand where he'll do something that looks deeply harmful for a few days and claim some really big victory. And ultimately, if they do that, if.

Ezra Klein (31:33)

This is what the tariffs are, they are these momentary, bullying negotiating ploys, then the other thing that Donald Trump and his allies keep saying about them, which is that they are going to lead to a massive insourcing of manufacturing facilities and lead to a lot of new revenue, cannot be true. Because the only ways that those things could be true, and his people do say that, and they will tell you that off the record, and he says that in public, the only way that could be true is if they were sustained and steady so that all of these companies that are running complex global supply chains come to the view that they're going to make 5 and 10 year investments on the assumption that this will remain true. And it will be better to assume the continuation of these tariffs than assume that they will go away. Because it's going to be much, much, much, much, much to move parts of your supply chain that are in Thailand and Denmark and Brazil into Missouri and Arkansas and Texas than to simply wait a year or wait a month until Trump changes his mind on the tariffs. You can have them be negotiating tools that you pick up in a month, or you could try to create a durable change in the structure of the US Economy and the manufacturing chain, but you can't do both of those things.

Kimberly Klausing (32:57)

I agree entirely. I mean, I think it's completely incoherent, the number of things that they're claiming that tariffs are trying to do. And we see in all sorts of real world indicators that it's already creating a lot of damage. Even the incoherence, right. Investor uncertainty is rising. There's more stock market volatility, there's consumer confidence is falling. We've got all these markers that indicate that this is quite bad for the economy. I think the one thing that we haven't talked about yet that is probably tightly related to this too, is the other big achievement of the first Trump administration was a big package of tax cuts that mostly benefited corporate shareholders and those at the top of the distribution. He's desperately wants to extend these tax cuts. He needs to claim that there's some revenue from something. Right? So he's going to claim that he's collecting all this tariff revenue on foreigners to help make the rhetorical case for the tax. I think that's another really important part of this. And it's a part that requires the public to not fully understand that tariffs are a tax increase and in fact, a tax increase that falls disproportionately on poor and middle class Americans, not on those at the top. Right. And you can't really run a campaign where you're like, I want to cut taxes for rich people and raise them on the poor. So instead it's all of this smoke and mirrors distraction about foreigners are taking advantage of us. We need to remedy that. We're going to have, have a great American economy again because we're going to levy these fancy tools where they will pay and we will industrialize. And it's kind of a story that if you don't know any economics and you haven't stopped to think about it, it sort of sounds appealing. Right? And the more people who buy that story, the more he can do this fiscal switch and have an excuse for the tax cuts. And I think that's part of what's motivating this that we haven't really dug into yet.

Oracle AI (34:54)

Yet.

Ezra Klein (34:54)

So let's dig into it. You had a line in an opinion piece you did for the Times a few weeks ago. You wrote, a better way to think about tariffs is a key tool to achieve the core of Mr. Trump's economic agenda. He wants to shift the tax burden away from the well off and toward the poor and middle class while consolidating his power. So explain that in some more detail. If they pass the tax cuts that they seem to be developing, and if Trump keeps layering tariffs down on the economy, and he keeps them, let's say in this scenario, right, he doesn't just lift all the tariffs next week, how will that shift the tax burden?

Kimberly Klausing (35:36)

Yeah. So there's two parts to that. First is thinking about who pays for tariffs, and the second is thinking about which tax cuts. So let's start with who pays for tariffs. Tariffs are, simply put, a consumption tax. So they're going to fall on those that are consuming either the imported goods goods or the goods that are competing with the imported goods. What they don't fall on is savings. Right. If I save a big chunk of my income each year, that savings isn't affected by the tariff. And further, I can hope that by the time I get around to consuming my savings in my retirement, the tariffs are history by then and I can buy it at normal prices. So it's Falling really on the consumers. And one thing that we know about consumption as a share of income is that it's much higher if you're poor middle class than if you're rich. The poorest Americans might even consume more than they're earning. But all the way through the middle class people are consuming almost all of their earnings. And it's only at the top part of the distribution, where people have a lot of room to save and where we see a lot of savings in the top quintile or so. So what that means is a consumption tax is disproportionately falling on those bottom four quintiles and not falling as much on the top top. Compare that to the Trump tax cuts of his first term or the extensions that are being contemplated now to those same tax cuts and you see the opposite pattern. It is true that there are tax cuts throughout the income distribution, but they're quite small for typical Americans. So if you look at the median household, the Trump tax extensions that have been promised by Congress might save them $1,000 over a year relative to a situation where those tax cuts expire. But if you look at the top 1%, the Trump tax cuts get them $70,000. So it's not just that the rich have more income and therefore get more benefit from this. They get a bigger benefit as a share of their income. So when you look at those two together, which we've analyzed in some recent work, you see that for the vast majority of households, the tariff cost increase actually outweighs the tax cut benefit they would hope to get from the Trump administration. But for those at the top, it's flipped. They get a huge tax cut, but the cost of the tariffs isn't that big of a deal. So it's a really unfortunate fiscal switch. And it's kind of ironic, really, because if you think about Trump's marketing, it's really that he's a populist president, that he and J.D. vance and those around him are trying to help ordinary non elite Americans who may not have a college education, who may have suffered from feeling left behind from some of the prior policies, but they're suggesting in response, well, we're going to give you a more aggressive tax code. We're going to cut Medicaid, we're going to cut basic government services. So it feels very much like, like snake oil.

Ezra Klein (38:42)

So literally, while we are talking, it is now being reported that the tariff on car goods from Mexico and Canada will be delayed by a month. Now, delayed doesn't mean it will end maybe it's only going to wait until you can put it on Europe, too, so you don't have a distortion between the European and North American markets. But I think this gets to something else, which is there is a separate cost of uncertainty in the economy. I'll say something that has been surprising to me is that Donald Trump took office. He is promising huge tax cuts for rich people and corporations. He is promising deregulation across the economy. And what we're getting from that is a drop in consumer sentiment. We're getting an increase in inflation expectations. We're seeing the stock market losing all of its gains since when he came in. At least at the moment we are speaking, we're not seeing a lot of intense optimism from markets or corporate America. And one of the things I keep hearing is that he's just making things too uncertain. If you're thinking about, well, should I invest in X or Y or Z in America or for that matter, somewhere else for a year from now or three years from now, well, maybe I'll just wait a little bit, because it's very hard to know what's going to be under a tariff threat, what's not going to be under a tariff threat, where I should put the money. And that plus the amount of gutting of the federal workforce, which is a pretty significant amount of pushing people out of work. How do you think about the role that uncertainty is now playing as a force retarding economic growth?

Kimberly Klausing (40:29)

I think you point to something incredibly important here. One of the things that Trump said in his speech before Congress was that he wanted to expand expensing, which is a preferential way, that our tax code favors investment. And the reason he wants to expand expensing is because there's evidence that suggests that increases investment and investment is good for economic growth. But imagine you're a firm that's thinking about, well, do I want to invest plant and equipment in America? Do I want to invest it offshore? Do I want to invest it at all? What do I think is going to happen in the future? Future? I don't think we've had a moment of higher uncertainty since at least 2008 than we have right now. Given all of the variables associated with Trumpian economic policy, this includes not just the tariff threats, which are substantial, but the deportation threats, which affect the ability to make things in America, the doge efforts to cut the government. I think we're about to have a lesson in a lot of the things that the government does that we all rely on. If you move too fast and you Break too much, you start to see that government actually plays an important and helpful role in enabling businesses to be successful in the economy and creating a climate of stability and certainty. And that if you gut core government functions, that makes a lot of people worry. They worry about, well, what if I don't get my Social Security check, because that's missing, or what if the reimbursement to my hospital doesn't come through? And those kinds of underlying motivations can really drive up fear and reduce confidence in the economy. And there's also a lot of research that suggests that institutional strength, which are things like, do you trust the institutions will work? Do you think the rule of law is reliable? Do you think that the playbooks that you've kind of relied on to do your business are going to look similar next year? Is they do today. Those sort of institutional markers are also eroding. We've seen examples like the Trump administration challenging the independence of federal statistics recently, challenging the independence of the central bank recently. Those types of things make us wonder, do we even trust the statistics? Do we even know that the central bank is immune from these purges? So there's a lot of, of reason for concern out there, and it's definitely going to have a dampening effect on the economy, and I think we'll be very lucky if we escape a recession in the near term.

Ezra Klein (43:13)

I saw the Trump administration saying that they wanted to create a new measure of GDP that we would use that cuts out government spending and economic activity. What would be the rationale for that and what did you think of it?

Kimberly Klausing (43:30)

So to some extent, that's completely untroubling in that we already have that exact data available at the Bureau of Economic Analysis, and anyone who wants to take GDP growth, subtract government consumption from that, and get to the desired statistics. So you might say, oh, well, feel free to subtract. What I think is more troubling is the tone and character with which that statement was made. They were like, we don't think the current statistics are really capturing the wonderful things we're going to do. And we think we need new statistics, new methods. Right. At the same time that they're literally disbanding groups of experts, some of whom I know well, who serve on these advisory committees, outside advisory committees, at no reward to themselves to improve federal statistics. Right. So we're getting rid of people who understand federal statistics and how to improve them. We're expressing discontent with the current, current statistics. It makes one worry about things that you tend to see abroad where authoritarian Regimes will deliberately doctor the numbers to improve perceptions of their economic performance. And I'm not saying they're doing that now, I don't think they are. But I do worry that they're sort of laying groundwork for that with some of these statements and with some of their actions, including the disbanding of these committees.

Ezra Klein (44:56)

I sure as hell worry that when I watch them disbanding the statistical groups and coming up with alternative measures, that we're about to get some monkeying around with them. Particularly given that Donald Trump is an incredibly enthusiastic liar who lies about everything from his electoral victories to the nature of the economy at all times. The other thing, though, about that, which I just thought was strange, let's take it neutral, face value value. As you note, this number already exists and you can already find it. But let's say they want to start highlighting it, publishing it, I guess that's fine, except that it's weird because economic activity associated with government is still real activity. And so if you want to know what is happening in the economy, whether or not the government is spending money and on what is meaningful, people actually really do get jobs from that. It really does create demand. If we were having a war and there was a lot of government spending on defense, I think it'd be really weird to try to measure GDP without that in it. I worry sometimes that the first people that the Trumpest right fools are themselves that. But if you are publishing a BS statistic that is trying to hide the places where you're damaging the economy and you are persuading yourself of that number, but the economy is still exactly as damaged and people are still exactly as upset. Because I think a lot of the anger comes from people being genuinely out of work and people seeing harm in their community. And it's not only that this government agency closed, but also there was a coffee shop near it that made coffee for those government workers and on and on and on down the line. It just seems that when you rob yourself of information, it makes it harder for you to make good decisions too.

Kimberly Klausing (46:54)

Yes, I agree wholeheartedly. And the social value of government is real. There's a reason we have civilized society and things like courts and air traffic controllers and, and people who enforce laws, national defense, all of these things are important. And if you say that they're not, you're messing up the signal that you're getting yourself about what's going on with the government. But you're also sort of expressing a value system that says that the only thing that really matters is what each of us is consuming privately without even acknowledging that our private consumption is very much tied to the enabling institutions of government. Right. If I have a car, but I can't drive down a street, the car isn't very useful. If I have a plane ticket but no one's in the air traffic control tower, that plane ticket is less desirable to have. Just example after example. There are many important complementarities between what the private sector is doing and what a well functioning government is doing. And I think one of the things that deeply concerns me is I'm not sure they're interested in a well functioning government. Right. If you were, you would do something more like reinventing government. That sort of Clinton era Al Gore led effort to streamline government in a thoughtful way that involved actual information of experts and government officials. That was a highly successful way to pare back regulation and to reduce workforce in areas where it wasn't needed. But it was a thoughtful, deliberative, slow process. What's happening now is, is at risk of losing the best federal employees through the fact that they're just kind of willy nilly letting people go. And those who are most easily able to find new jobs are the ones who are going to find this environment most conducive to leaving it. And they're not paying attention to knock on effects that the rest of the economy. And the announcement the other day that they're working on paring back the Internal Revenue Service to half its prior level would basically be making our tax system a tax on kindness. Because anyone who wanted to avoid taxes wouldn't fear that much about getting caught. If the price of tax evasion is zero, there's no chance that you're going to get caught. Right? So then it becomes just a tax on honesty. And I'm not sure we want a tax system that it penalizes the people who are honest.

Ezra Klein (49:26)

It reminds me that in one of the various you should leave the government emails that Musk sent out to employees, they basically said, look, we want you to go to the private sector where you will be more productive and create real things. And so from one perspective you might say it's very bad for government efficiency if we drive the best people out of the government. And I think from their perspective, which sees the government as waste, as obstruction, as nothing but red tape and wokeness and a nonprofit industrial complex and so on, it's not because it isn't that if what you're doing is selecting for the best people and driving them out of government, that means you're putting all these good people into the private sector. And the private sector is where real productivity gains happen and where real things are made. And so I think if you take them seriously, from their perspective, this is a feature, not a bug, that it should actually show up over time and increase gdp. I have spoken to people who work, let's call it adjacent to the federal government, and one thing they tell me is they're getting incredible applications. I mean, they're just getting really, really amazing people applying because these people don't want to work in the government now. And if Elon Musk is going to fire a third or half of the government, they better get out before all the jobs somebody like them could take are filled. But it's a real hell of a gamble to say that you're not going to lose anything significant by driving excellent people out of the Department of Energy or the Census Bureau or the Department of Labor. I think it really does reflect a view that government does not create things that are of value. View.

Kimberly Klausing (51:14)

Yes. And a view that perpetuates itself because then the government that's left is overburdened and less competent than the government you started with. So that might just fuel even more of this mentality that the government isn't operating efficiently when you're trying to create the circumstances where they can't operate efficiently. And I also think it neglects the fact that not all of these skill sets are are super substitutable. Right. Imagine you're a Consumer Financial Protection Bureau employee and you've all been let go at once. It's not clear that all of those would swap naturally into private banking or something. It's also going to create a lot of disruption in people's lives and in some instances that's going to be harmful as well to the the businesses that Trump would like to succeed. Having an adequate regulatory framework is part of what makes businesses function well, because people feel like they can trust them if they think every shop is actually potentially a con. Right Then they're, you know, it reduces our confidence in the strengths of our institutions and businesses.

Ezra Klein (52:50)

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Ezra Klein (53:24)

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Ezra Klein (54:04)

We've been sort of focused so far on the more narrow policies here, but there's a broader worldview at work. And that worldview is that over these decades, as America has opened up to the world, as we've brought down tariffs, Right? Tariffs are a lot lower in America today than they were in the 19th century or the early 20th century. As we've opened up to China, as we have integrated our auto industry with Canada and Mexico, then America's been incredibly ripped off that other countries often place higher tariffs on us than we do on them, that this trade has been bad for America, not good, and that it's sort of been a plot of a globalized elite and that Trump is coming in and reversing it. And I think, particularly as you've seen, even Democrats turn on some of the politics of free trade, you don't really have a counterweight in this argument. But years ago you wrote a book called Open, which is more making the case for this kind of system. So what is your answer to that? Your answer to the view that actually we have been ripped off, and yes, we got cheaper consumer goods, cheaper cars, but that came at the expense of good jobs, of manufacturing jobs, of robust supply chains. And this is, yeah, maybe this will be painful. There'll be a little disturbance, as Trump put it, but it's necessary because the equilibrium we ended up in was bad for America. And even if it's painful to change it, we need to.

Kimberly Klausing (55:39)

I think that's a truly excellent question. It really gets at the heart of this entire debate. So let's start with a recognition that there are a lot of Americans who feel economically insecure and disappointed with the economy the way it and I think that's very easy to support with data. I think there's a lot of evidence that economic inequality has increased over the last four decades, that wage growth has been disappointing compared to historic norms. And as much as the economy as a whole has succeeded relative to other countries, and even in terms of delivering living standards that far exceed those of prior centuries, those types of harms have left a lot of people feeling unhapp happy. So that leads to, I guess, two follow up questions. One is, is that set of harms that I just described due to global elitism, free trade agreements and the like. And a second question is, would restricting trade and putting up new immigration barriers help that harm? So let's take those two questions one at a time. First, I think there's very little evidence that trade agreements and China's entry into the WTO and things that we might loosely describe as a globally elite liberalization are responsible for the full force of those trends that I just described. And in a way, there's too many determinants to fully unpack what share of responsibility trade or immigration or global capitalism had. But there's, there's other factors that are really important that are happening at the same time. One is technological change, which has really shifted our economy away from demanding certain types of labor that can now be done more easily by computers, digitalization and robots. That has really changed the structure of our economy in super important ways. And you don't hear us say, well, the next answer should be we should all throw away our computers. Because we realize there's a lot of gains from technological change too. But it's had big harmful effects on people lower in the income distribution who've seen less demand for their skills. So that's one element. But there's also other things happening. Market power has been increasing dramatically over the last generation. We've seen big increases in concentration of how much of our economy is in the hands of just a few firms. We've seen a big decline in unionization, seen changes in labor laws, changes in regulations, changes in tax codes, all of which have turbocharged some of the effects that I just described. So I think it's wrongheaded to lay this all at the ground of trade. And you can tell that in part by looking at the data. Like some really nice studies of the China shock have pointed out that it might have cost somewhere between 1 and 3 million jobs over a decade, which sounds like a lot until you realize that the U.S. economy loses about 8 million jobs in many quarters, often between 6 and 8 million jobs. And that job loss also gets created in other sectors of the economy. It's not like we're constantly losing that many jobs. But there's a process of capitalist creative destruction that generates a lot of disruption in our economy. And it's not all due to the Chinese. A lot of it is due to other forces. So I think the diagnosis is in part part wrong. But let's give them the benefit of the doubt and say, okay, well, trade still had an important causal factor. Shouldn't we restrict trade? And that's the next question. The answer that I reached in that book open, and that I think is fundamentally important to realize now is that just because you've had some disruption in the past, it doesn't mean that more disruption is going to help. So imagine tariffs on Canada and Mexico. That's disrupting a lot of people's jobs and lives, that's shrinking entire sectors of the economy, and it's creating new havoc that will probably add insult to injury for those very same workers that Trump and his allies pretend to be concerned about. Right? So the remedies are often adding insult to injury. Not only do you see the job disruption, but you see costs higher at the store. You see a aggressive sales tax being put in place of a progressive income tax. So the cures really aren't cures. That doesn't mean that there aren't things that we can do to help those at the bottom of the distribution. And I have a lot of ideas, including a more progressive tax tax system, more investments in infrastructure, more investments in community colleges, and some of the things that you no doubt raise in your forthcoming book I think are really important too. But I don't think trade barriers and immigration restrictions are going to do one bit to help this set of left behind people. Unfortunately.

Ezra Klein (60:40)

I think it's a good place to end. As our final question, what are three books you'd recommend to the audience?

Kimberly Klausing (60:45)

Well, let me start by noting that I'm really looking forward to your forthcoming book Abundance, which I think will really speak to key issues of our time. But for my three book recommendations, I'm going to recommend a few that I found influential in my own life. The first is the Undoing Project by Michael Lewis. This book describes the friendship between Kahneman and Tversky, two researchers who've made foundational contributions to the field of behavioral economics. The book is compelling, not just really for the substantive insights that the book book delves into, but really more about being just a lovely story of the two main characters, their friendship, their research collaboration, and most of all, the simple joy that comes from better understanding when you're doing good research. A second is Mountains Beyond Mountains by Tracy Kidder. This tells the story of Paul Farmer, who founded Partners in Health, which is a global nonprofit that works on expanding healthcare access in places like Haiti and Rwanda. It's an incredibly interesting and thoughtful book that I've found deeply inspiring about the role that any single person can play in making the world a better place. And I think it's helpful for all of us in sort of thinking a bit now about how we might push a little in that direction, either through philanthropy or our own actions. And the 30 is an oldie but a goodie the Worldly Philosophers by Robert Heilbronner. It tells the story of the origins of economics through the lives and ideas of the field's founding fathers, including some we've all heard of, like Smith and Marx and Keynes, but also some we have heard less about, like Alfred Marshall. It's not in this book, but one quote I like from Marshall about what economics does, and it's really influenced how I think about economics, is that he notes that the dominant aim of economics is to contribute to a solution of social problems, and the economics really has a strength in enabling our common sense to go further than it would otherwise in solving those social problems. And I think the work that economists have done around international trade issues, much of which we discussed today, really demonstrates that ideal nicely.

Ezra Klein (63:00)

Kimberly Klausing, thank you very much.

Kimberly Klausing (63:02)

Thanks so much for having me on the show. I've really enjoyed our conversation.

Ezra Klein (63:22)

This episode of the Azer Clanjo is produced by Roland Hu, Fact Checking by Michelle Harris, mixing by Isaac Jones with Avim Shapiro and Amin Sohota. Our supervising editor is Claire Gordon. The show's production team also includes Elias Iswith Chris, Kristin lin and Jack McCordick. We Virtual Music by Pat McCusker Audience Strategy by Christina Semielewski and Shannon Busta. The executive producer of New York Times Opinion Audio is Andrew Strasser and special thanks to Pat McCusker.

Ezra Klein (64:02)

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