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- [00:00]
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When you finally find your thing, you want the whole world to know about that thing. So you use a thing called canva to make it an even bigger and better thing. Whether you want to create flyers for that thing, make presentations for that thing, or design merch for that thing. You can do anything so people can see your thing, feel your thing, love your thing. The next thing you know, it's a thing. Canva, the thing that makes anything a thing. We're clearly a lot richer as a planet. We're richer as industrial countries because we don't try to do everything for ourselves and we trade. And in some ways that's the important thing to understand. I would add that there's a special reason that I at least am especially fond of a relatively open world trading system, which is that it works for poor countries.
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And now the good fight with Jasia Monk. My guest today is none other than Paul Krugman. Paul is of course a winner of the Nobel Prize in Economics. In fact, Wikipedia informs me that he was the sole winner of a Nobel Prize in economics in 2008, which I think is the true distinction. He was a longtime columnist for the New York Times for about a quarter of a century and he has recently moved his writing to substack, so he is now a fellow substacker and he is a distinguished professor of economics at the Graduate center of the City University of New York. Paul and I had a conversation, really about the breadth of his academic and journalistic interests. I went all the way back to his new theory of trade and asked him to help me understand the what contribution he was making and trying to understand why similar countries sometimes trade with each other and why some regions specialize so much in particular forms of economic activity. We talked about currency crises, whether they are always rational responses to underlying market signals, or whether they can be based on self fulfilling prophecies. And what all of that has to do with the euro. Was the introduction of the euro a mistake in the first place? Did Europe ultimately master the euro crisis in a responsible way? Is there a risk that the euro crisis will start up again at the next economic recession? And what can Europe do to go back to the technology and the productivity frontier, to actually compete with leading countries around the world. We of course talked about the current trade war about quote, unquote, liberation Day, whether the risk from that has subsided now that Trump has pressed pause on the enormous global tariffs he was going to impose, or whether even as we are waiting for what ultimately happens, even as those tariffs are mostly suspended, the uncertainty is creating serious economic risks. We talked about artificial intelligence trying to make sense. We whether the AI revolution is going to be similar to other technological disruptions, costing a lot of people their jobs, but creating new fields of human endeavor and ensuring that there'll still be a need for humans in the workforce, or whether this is actually the end of human employment, a much bigger technological disruption than we've experienced so far. And finally, we talk about why Paul left the New York Times in some amount of frustration with the editorial practices there, and joined Substack and what that means for the future of journalism more broadly. To listen to those last two parts of the conversation about artificial intelligence and the future of the workplace, as well as about the New York Times substack and the future of journalism, you will need to become a paying subscriber. So please go to yashamung.substack.com thegoodfight and support the work we do here, that is yashamung.substack dot com the good fight. Paul Krugman, welcome to the podcast.
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A
Good to be on.
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B
So I have many questions I want to ask you, including about the crazy speed and rate of news that we're still getting at the moment and what is going right now with the Trump administration and the tariffs and so on. But I actually want to make sure that I understand a little bit better the breadth of your academic contributions as well. And of course, while you're writing a lot about Trump and trade at the moment, you also started off writing a lot about trade. As I understand it, there was a couple of basic puzzles that economists hadn't really solved about international trade, like the question of why relatively similar countries ended up still trading a lot with each other, even perhaps they didn't have that many comparative advantages relative to each other on more classical theory, or why it is that some regions really specialize in particular kind of industries beyond what, say, the resource endowments might have suggested. Help us explain a little bit what explains those puzzles and how that was an important contribution to economics at the time when you were making it.
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A
Okay, so it's interesting because I think I understand a lot better what I was doing 45 years ago than I did at the time. But all right, I like to think, and I've written a bit in various places, trade between countries is at a fundamental level, a lot like trade between individuals. Why do two people do different things? And one answer is that they're different. Some people are better with their hands, some people become doctors, others can't stand the sight of blood. And that sort of thing. So people trade do different things because they're different. But people also do different things because mastering a skill takes time. There are advantages to specializing. And even if people were otherwise identical, you'd expect them to sort themselves out into different areas. International trade theory, from really the beginnings, which is early 19th century up until about 1980, almost entirely focused on the country's trade because they're different. That's the theory of comparative advantage. And we have some models and it's a very insightful, powerful theory, tells you a lot. But there was very, very little attention given to the country's trade because there are inherent advantages to specialization because there are increasing returns in production. So that if you don't want to have a small country doesn't want to produce its own automobiles because you have to produce something like two or three hundred thousand cars in an assembly plant to have an efficient scale. And also you have industrial clusters where a bunch of people related activities create advantages. And those were sort of. I'd say they're sort of obvious, you can see them out there in the world, but we actually didn't see them in the academic literature, which was kind of a blind spot. Which was a blind spot because people didn't know how to think about it. Clearly economics is built very much around stylized mathematical models which I am in favor of. It's nothing quite like trying to. It doesn't have to be equations, but often it is. But at least a very, very clear model is a tremendous way of clarifying your thinking. It's amazing what silly things you can say if you haven't got that as a basis.
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B
If I can take you down on a brief tangent, explain that to us because I think that's one of the things that a lot of people, when they for example, take one class in economics as an undergrad encounter and sometimes have a kind of revulsion towards they see this model. You can model what romantic partners people choose in the style of an economist by looking at all kinds of different things. And they think, well, this is just such an oversimplification of a world, this kind of model driven or in a slightly different context, rational choice driven way of understanding. Legislators are just going to do whatever behavior maximizes the chances of getting reelected. A kind of way of using a somewhat economistic model in the context of political science. And they say, well, but actually human beings are complex and these models miss out all of those things. And so isn't that anti humanistic? Isn't that positivistic, Isn't that leading Us astray from all the things that actually make life interesting and so on. So I would love to hear from you a good defense of why is it that, yes, these models miss some things. The point of them is the simplicity, but actually they nevertheless reveal whether you've understood the basic logic of a situation. And therefore they're really useful exercises. Explain to us exactly what the value of those models are.
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Okay. Yeah. I mean, economics, almost the true definition of economics is that it's about the stuff that's not interesting. It's not about love, it's not about hate, it's not about the deeper motivations. Edwardian economist Alfred Marshall said it's about the ordinary business of life. It focuses on the prosaic stuff. Of course, that's not the only thing that matters. But it does matter in the end. When you're talking about kitchen table issues, that stuff matters a lot. It's the backdrop to all the other more interesting things that human beings do and people's motivations in that sort of arena. When people's motivations when making and spending money tend to be relatively simple, they're not quite as simple as economists like to assume. But that's not because economists are naive. It's because you're looking for clarity. And strategic simplification is the way you get there. And it very often gives you. You get really surprising insights that you would miss if you just think about your personal experience or you think about. A kind of intuitionist story about how things work. Because there are often principles which are kind of invisible. So my favorite, too far to go into it, but the Ricardian theory of land rent. What determines what people who actually do the farming earn versus the people who own the land? The answer, which really pretty much works, is that what farmers get is equal to what a farmer can produce on the worst land. Because the farmer. The worst land. If a farmer demands. Well, if a landlord tries to pay a farmer less than he could get on the worst land, then the farmer will go off and cultivate some bad land. And if a farmer demands more than he could get on the worst land, then the landlord could hire somebody who is working lousy land. And so this is something that's just not obvious to anybody sitting there. But that's actually how it works. So you get these simplistic. Yeah, you assume that people are rational and makes. Sometimes that really breaks down. Sometimes it's a. Sometimes people behave in ways that a simplistic depiction of their motivations doesn't work. Sometimes markets don't actually reach an equilibrium. But much of the time it's a really good guide. And there's nothing like little models to clarify your thoughts. And then you can work away from. You can talk about the deviations from that, but the tremendous advantage of doing that. And yeah, when we teach economics, we do a lot of here's a bunch of little models that you need to learn. And it does feel. It's kind of like the required figures in Olympic skating. Right. Nobody cares. And yet it sort of has to be done. Or at least I'm not sure that every undergraduate who takes economics should be taught that. But everyone who intends to go on for a career needs to know that stuff, because it's the kind of the basics.
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B
What do you think every informed citizen should know from economics? And we will get back to what you were talking about, but I think it was a really interesting tangent. I mean, what do you think is helpfully illuminated in the broader world by having that kind of tool available to you, that you can think about the world in terms of these kinds of models? And what are the specific insights from Economics 101 that you think society really hasn't incorporated? And perhaps on the other side, where do you think the dangers lie? Where do you think a little knowledge is a dangerous thing? If you take econ 101 and you sort of believe its insight a little too much or you misunderstand them a little bit in a way that may be common, you may end up making real blunders in your understanding of the world.
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A
Yeah. So I mean, supply and demand, it's a model. It's not a law, it's a model. It's a simplified depiction of how things work. But it's really important. It is important to understand that a market economy wants to go someplace and that that's pretty much how we coordinate much stuff, and you defy it at your peril. If the president of the United States tries to order supermarkets to charge lower prices, that's probably going to lead to a lot of problems. But at the same time, I think people should know that it's a mechanism. It's how stuff works. It's not justice. So understanding that the fact that something is the price that the market assigns to something doesn't say that the people getting that price are getting their justice desserts. It has nothing at all to do with morality. And there's a lot of things. I think the first thing is to understand that markets are important and can't easily be defied. But then the second thing is to understand that they don't do everything, that supply and demand is not going to keep your neighborhood safe from criminals. Supply and demand is not going to control pollution because there's no incentive for people to do that. Understanding how markets work, why they work, why you want to give them some respect, but also not deify them and say, okay, let's look at the places where markets actually don't do it and intervene. That's probably most of it. I could go on. The government is not a household. We have endless discussions about government deficits and debt, much of which is based upon thinking about the government as being just like you and me, which it is not. I mean, among other things, government doesn't have to turn a profit and the government doesn't have a known date of death. And that kind of changes things a lot. I'm not sure that if it was. And by the way, if I had to summarize the principles of economics, the ones that really matter is that $20 bills don't lie on the sidewalk for very long. People will take advantage of opportunities and every sale is also a purchase. Stuff adds up. And it's amazing how much discourse of allegedly practical people just doesn't take account of the fact that things have to add up.
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B
It's interesting. There's this big question about whether economics is efficient, and you've contributed to that in a number of ways that I want to get to as well. But that metaphor of a $20 bill on actually expresses the common sense answer to whether or not markets are efficient pretty well, which is to say they're not always perfectly efficient. If you're walking down the street and you see a $20 bill, you shouldn't assume that it must be a fake dollar bill, because if it was a real $20 bill, somebody else would already have picked it up. But at the same time, they're also somewhat efficient in the sense that unless there's very strange extenuating circumstances, at some point somebody is going to pick up those $20 and those two things aren't mutually exclusive.
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A
Yeah, a lot of what being a good economist or a good policymaker who applies economics is being able to hold contradictory views in your minds. Markets are impressive. There's a lot of obvious opportunities for self improvement don't usually get ignored. But on the other hand, it is not the Holy Writ, the market is not God, and you need to be prepared to step in. And people really have a hard time striking that balance.
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B
So let's get back after this really interesting big tangent to the question of Trade. So you were explaining to us that it might be puzzling, for example, to think why might Italy and Spain, but have somewhat similar natural resource endowments, still be trading olive oil to each other?
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A
But if you ask the question, why are cars shipped back and forth among European countries? Why is most of European hyphen hands in London? Which is not because people in Britain are especially good with money. Those are things that really are clearly about the advantages of large scale production or the advantages of concentrating an industry in a particular place. And that's easy to say, or it's easy to say. Now, I can explain what that's all about in plain English pretty easily. I think it's not that hard to tell the story. And yet if you were to go, as I went with some of my early papers on this in 1978, 1979, I was running into a lot of incomprehension. People had no idea what I was driving at. And the reason was that it was for weird reasons. It was hard to do simple models of this stuff that it was really hard to.
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B
Do.
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A
If you tried to do a mathematical model or even just a informal but clear verbal discussion of what's the role of London as a financial center and how does that play into international trade? Or why do cars go back and forth between France and Germany? It quickly got awkward. People got into these sort of intricate case A, case B and so on. And what happened circa 1980, little bit, there were actually several people wrote the same paper simultaneously and independently. We had somehow or other reached a certain point in the development of the field. It was like hard science, actually. Kelvin Lancaster and Victor Norman and I basically wrote the same paper independent of each other. And what I now realize is that the secret to it there was some stuff about markets, perfect competition and this kind of trade don't go together. And you needed ways to think about imperfect competition, monopolistic competition. And we had a new literature, industrial organization that gave us better ways to do that. But the really important thing was to back up and say, what is the question? If you want to ask the question, why is London the financial center? That's actually, there's a lot of detail in history, but if you ask the question, why is there a financial center sort of back up to the system level, why do different countries produce different things? And to some extent how much trade is there without trying to predict who produces exactly what? That turns out to be a way easier, cleaner question to answer.
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B
And it might have a much more systematic answer. Right. Presumably, for example, it might depend on contingencies about which government was in place, at what time, what kind of incentives existed, some great financier who happened to move to one city or another, which all help to explain why the financial center of Europe ended up being London rather than Paris or rather than some other city. But what you're saying is that the fact that a financial center would emerge is not perhaps fully predetermined, but rendered very likely by basic facts about how useful it is if you're in finance to be down the road from somebody who can give you a lot of money, from somebody who has already got a lot of experience in finance, who you can hire into various kinds of roles and so on and so forth.
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Yeah, when you do economic geography, which is closely trade between regions within a country is basically the same logic as trade between countries. The smaller scale industrial specializations often have adorable origin stories. Most US carpet production is still near Dalton, Georgia. If you trace that, we happen to know that story. It all goes back to a teenage girl who made a tufted bedspread as a wedding gift in 1896, and that created a local craft industry which then turned out to be the basis of a. Of a new method of carpet. But no textbook model is going to tell you that Katherine Evans was going to make a bedspread back in the 1890s. But it can tell you that there are reasons why carpet production is going to be someplace and not spread evenly across the country. So that was the big. It sounds trivial now, now that we have the models. One of the things the models do is they give you a language, a language to discuss stuff and then also a statistical framework that you can use to analyze the data, but you need to analyze the data the right way in terms of these sort of systemic issues rather than local. And a lot of this is kind of a. It sounds obvious in retrospect, but it really, really wasn't back then.
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B
What do you think this teaches people who want to make a contribution to academic research? Let's imagine somebody listening who's a PhD student economics, or somebody listening who's a PhD student in political science or sociology or history or English or the hard sciences. Is it the case that often the biggest contributions come from recognizing the anomaly in your field, recognizing the thing that your academic field currently can't explain that obviously is out there and really going back to basics and trying to figure out how to answer that question. Do you think it usually comes from having new tools available to you, drawing on your own work, but also of what you've seen of other important contributions to your field over the course of the decades that you've been very actively engaged with it. What kind of question do you think is most generative and if somebody is searching for where to fruitfully spend five or eight or 10 years of their intellectual effort on trying to make a contribution, how should they think about going about doing that?
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A
Okay, I will repeat one piece of advice that I got from Rudy Dornbusch who was my prime advisor. The late Rudy Dornbush, great international macroeconomist and also a really interesting person. When I was trying to figure out what to write about PhD thesis about his advice was for the next couple of months, do not read the journals, do not read academic papers. Go out there and read the Economist, the Financial Times, the Bloomberg. Look at the world and see what there is out there in the world that bothers you because it doesn't seem to fit the models. Doesn't seem to fit. Doing a further twiddle on an existing literature is not a good use of your time. So observe the world. That was one and that was terrifically good advice. The advice I give to people and I hope this. I'm not sure everyone will get this, but mine was I have some rules, but one of them is listen to the Gentiles, which means obviously my own background. But what I mean by that is
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B
I really want to know what that means. I'm trying to figure out. Normally when I have a very thoughtful guest and they say something, I sort of can imagine what comes next. I have no idea what comes next. So please tell us why should we listen to dentals?
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A
Paul, listen to people who do not speak your analytical language, do not use the same techniques you do. Basically people who are a little bit off kilter but are. Are interesting. And so it turns out in international trade there was a kind of a counterculture in international trade. There were a lot of people who said I don't believe these comparative advantage models or I don't fully believe them. And I look at world trade and I see all kinds of stuff. People, countries tend to export things for which they have strong domestic demand. And just a lot of countries that look the same doing a lot of trade with each other. And they tended to be dismissed by a lot of economists because they clearly had an imperfect perfect understanding of comparative advantage. They didn't understand the standard economic models all that well. So why listen to them? And the answer is, well, yeah, but maybe the fact that they're not in our intellectual clique or in our intellectual Sect, if you like, that's closer to the Gentiles thing may mean that they're seeing things that we aren't. And that was even more true in economic geography. Economic geography is a field which is mostly not standard economists. There are people who are a lot of focus on urban planning, regional science, whatever. And there's a lot more overlap between those fields now. But that's because me and my friends kind of integrated the two 30 years ago. the time, there was this whole body of even empirical work, even statistical work that was kind of divorced from economics the way it's done in graduate, graduate departments. And it was waiting there. Pay attention. So these days, whenever I look at something, some area of economics that is, or just some area of stuff going on in the world that doesn't seem to fit very well, what we do in PhD programs, I say, maybe I'll read some of that stuff, talk to people. There may be something really important that you're missing. And it is, and it's still the advice to aspiring students is look at the world, listen to people. The last 10 NDER working papers are probably not where you're going to get good ideas.
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B
And part of it, I think, is that the academic literature gets into moods or gets into fashions, gets into a particular constrained way of seeing the world through the methodologies, through the models that are particularly fashionable at a particular time. And normally they do that because those methodologies and those models do offer helpful insights. But even in offering helpful insights in one way, they then kind of help to obscure things in another way. I mean, when I'm thinking about one of the areas where I made a modest contribution in political science, it's that as a graduate student and in my comparative politics field seminar, I was taught by very distinguished scholars that democracies in certain countries are safe. That you can look at poor countries without much democratic history, like Nigeria, and their democracy might fail. You can look at some rich dictatorships and their dictatorships will be stable. But you look at Germany or France or the United States, and we know those democracies are safe. And there was a theory about the kind of science that these stable democracies were supposed to have. And I sort of looked out at the world and say, well, is it true that those science are actually happening in the world at the moment? Right. Is it true that traditional political parties seem to have a lot of legitimacy and people seem to be pretty enthusiastic about them? Is it true that there seems to be a very small number of people who's deeply unhappy not just with a particular prime minister or president, but with the political system as a whole. And I was no longer sure about that. And so that sort of pushed me towards using data that had been out there for a very long time with my colleague Robert Dufour of the World Value Survey, looking at questions that have been asked for 30 years, 50 years, and saying, hang on a second, perhaps that data tells us something that really goes against the theory. One way you did that, beyond the things about trade that you talked about, is currency crises. Right. And there is an assumption, we go back a little bit to this theme about whether markets are efficient or not, that well, if a country is entering a currency crisis, presumably it is because there's fundamental things wrong with its economy, because it just is spending way more money, is profligate, is not raising the taxes it needs. And suddenly people in the financial markets realize this is not sustainable. At some point this country is not going to be able to repay its debt or it's not going to be able to keep up fixed currency rates that may be in place. And therefore there's a sudden swing perhaps, but a sudden swing that really has rational reasons. And you seem to suggest that sometimes when a country enters a currency crisis, there aren't really sort of fundamental economic reasons why that ends up happening.
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A
Yeah, it's actually interesting because there was a debate over whether currency crises can basically come out of thin air. And I was on the wrong side of that debate for a while. My first, like I say, I indented currency CR itself, but the academic field, but the ones I invented were fundamentals driven. And other people said, yeah, but there's a lot of self fulfilling prophecy going on there as well. And I was resistant to that for a few years and then eventually concluded Maury Opsfeld is right and I'm wrong, which by the way is also an important thing. Being able to admit that you are wrong is kind of really important to doing research, but then going on to it and then once you start to look at that, you start to say, well, okay, there are characteristics, there are things that make you vulnerable to a crisis. They don't guarantee may never happen, but there are some preconditions and you really want to look at them. And it's. So if you want, now we're asking right now, could the United States experience an emerging market style crisis? Now there's one big reason that we're not exposed, which is that our external debt is in our own currency. That kind of matters. But there's a lot of other things. How much of the fact that we haven't had one reflects either things that just good luck or things that are no longer true. And so you do want to question these things. I also want to say that there's a real problem in academia, which is that the easy route to getting a paper published is to do a minor technical extension on an existing field. And that's great. And if you're purely a careerist and you want to get yourself an appointment, a tenured appointment somewhere, fine. But no one will remember what you did 10, 15 years later. The fastest reaction I ever had to positive lots of people citing was a paper I wrote on exchange rate target zones. Never mind. And it was clever. I had fun writing it. I think it was neat, but was not really important. But it did give people an opportunity to start using stochastic calculus in international finance and. And publication lags in economics are terrible. Nobody reads the journals for information. They're just for purpose of getting tenure. Everything happens in working papers. And so by the time the thing actually got published, I had to include a section on subsequent research because there were well over 100 derivative papers based on that first thing, almost none of which really added anything to it. So yeah, if you want to be. I'm not sure if you want tenure someplace, maybe that's what you want to do. But if you want to actually do something important, question the assumptions, question the trends, and stay away from whatever everybody else is writing about right now.
- [35:15]
B
Some follow the noise, Bloomberg follows the money. Whether it's the funds fueling AI or crypto's trillion dollar swings, there's a money side to every story.
- [35:25]
A
Get the money side of the story. Subscribe now@bloomberg.com
- [35:33]
B
to move back a little bit into substantive questions of economics. One of the things that's interesting in pointing out the currency crises sometimes don't come from the fundamentals is that it might give a different view about how to think about metrics like debt to GDP and so on. Right. If you think this is a relatively mechanistic process by which once the fundamentals just point in the danger zone, then the currency crisis is going to happen. You're going to focus very fundamentally on how much debt is a country incurring, et cetera. If you think that it's really about more complicated dynamics, it complicates how you analyze those kind of currency crisis. You've obviously written very extensively about the euro Crisis for about 10 years while it was going on. So I'd love to hear your thoughts about the euro Crisis in retrospect and about where Europe is left with. But to do that, I want to go back to the starting point, which is, was the euro a bad idea to begin with? I know that there's a number of economists who are quite critical about the single currency, which was an admirable political project. It was part of trying to build with European unity right at the beginning. Were those people right at the time? Are they just right? With the benefit of hindsight, do you think they were wrong all along? The euro is in fact an important project. It's just that it wasn't done in the right way. Take us back to the debate among leading economists at the time when the euro was being conceived and then introduced over the course of the 1990s, and then introduced in the very late 1990s.
- [37:09]
A
We have a very conceptually clear, though quantitatively very elusive story about when should countries share a currency? The advantage is obvious. Business is easier, transactions are easier. It's a very convenient thing. I would really hate if I had to acquire a different currency if I go visit family in Queens now. But on the other hand, we know that economic shocks hit countries and they don't hit them equally. There's asymmetric shocks. If something goes bad, if everybody loves Spanish real estate and then suddenly decides they hate it, then what? And if the country has its own currency, there are ways to adjust specific that there were lot of big flows of money in Europe before the euro crisis hit. The countries that had been recipients of big inflows really needed after that to go back to manufacturing stuff, doing other things. They needed to get their costs and prices down. And if you're looking at Spain, that took five years of extremely high unemployment and great suffering to make the adjustment. If you look at Iceland, Iceland, which tiny but still Iceland, which retained its own currency, Iceland made that adjustment in
- [38:46]
B
a day just to make clear to people who are not economists. And I'm going to try and explain this, and you'll correct me where I go wrong, since I'm not an economist. So the idea here, I believe, is that if you have your own currency and the exchange rate is flexible, then the exchange rate just goes down. And so if you're earning 10,000 pesos today, you're still going to be earning 10,000 pesos tomorrow. There's no adjustment of your contract needed. But since the value of the pesos has gone down, suddenly it becomes much cheaper to employ people in this country or to go visit this country as a tourist. If it's a country that has a lot of tourism to buy real estate in that country. And so effectively, you are stimulating production, you're stimulating economic activity because there's this natural devaluation. Now, in principle, you could do the same if you have an enforced stable currency rate because it's part of a broader currency. You could still say, well, we're going to cut wages, sellers are going to go down with the cost of the housing, et cetera. But there's just obstacles to doing that. It's much harder to persuade your employees to take a pay cut when it's in the same currency. Is that the difference or where does the differential lie? Why can't this happen if you're part of the same currency zone?
- [39:59]
A
Yeah, when the markets decided, oops, we've been pouring too much money into peripheral countries in Europe. These countries really needed to get their wages down by some something like 20 or 25% relative to wages in Germany. Without that, they couldn't be competitive. And how do you do that? Well, Spanish employers could have gone to their employees and said, look, things have changed. We need to cut your wages 25%. That just doesn't happen. Trying to explain why it doesn't happen is an interesting thing. And, and that's one of those cases where you really want to just talk to people, but it doesn't happen. It never has, never will. So they had to have just years and years of high unemployment, which meant low bargaining power for workers and gradual cuts in wages. They didn't even cut wages. They just stopped them from rising while they continued to rise. In Germany, Iceland was pretty much in the same situation, even though it's a very different country. But Iceland wages, people's wage contracts were in Icelandic kroner. All they did was they allowed the kroner to fall 25% against the euro. And they got that wage adjustment painlessly and instantly. There's a trade off. There's a convenience to sharing a currency. There's a cost that you lose. An important mechanism for adjustment. If you have a common currency, this cost can be offset if you have highly mobile laborers where it can move to where the jobs are. It can be offset if you have fiscal integration so that regions that are being hit hard are at least partially compensated by paying less in taxes to the center and receiving more aid. Florida had a big housing bust, but got a lot of compensation from Washington. If you looked at those things and you looked at Europe, it really did not look like an optimum currency area. There were limited labor mobility, essentially zero fiscal integration. So the Cost of adjustment were high. And yes, there are benefits from. It's convenient. I've been traveling around Europe lately and having a single currency is really helpful, but it did not look like a good case and still doesn't. I think there's a pretty good argument that the Euro still looks like a mistake. It has probably caused a lot of suffering and damage. But there's a very big difference between saying that the euro, that you shouldn't have entered the euro and saying that you should leave it. Again, I've been calling it, it's a Roche Motel, you can get in but you can't get out. The cost of trying to leave the euro, the disruption, just the problem of reprogramming all the computers is just so huge that realistically we've got it, it was probably a mistake, but there you are. Now, if there's a country that is still considering whether to join, in most cases, I would say no, don't do this yet. It was really not a good idea. But in terms of should Portugal try to leave the Euro, no, it was not a great idea. Spain probably even less of a good idea because Spain is a big country. So there it is. And what can you say? And by the way, this was not that economists gave European politicians bad advice. I was part of some of those discussions. There was a big report on the case for single currency from the European Commission and originally they had a chapter on costs and benefits of a single currency currency. And the economists were told to go back and rewrite it to be a chapter on the benefits of a single currency.
- [44:13]
B
So the economists, and I know that some well known economists were just arguing against the introduction of the euro at the time, right?
- [44:19]
A
By and large, actually Anglo Saxon economists were against it. Americans particularly, we said, okay, we have a single currency area in North America, we know what it looks like. Europe doesn't look anything like that. Really. This is not a good idea. But, but the political, and I understand the political appeal of the project was so great that the politicians did not want to hear no for an answer.
- [44:42]
B
So Europe enters this currency zone even though some economists warn that it's a bad idea. And one of the reasons why it's a bad idea is that it doesn't have a lot of labor mobility. Obviously, unlike the United States, the Eurozone does not have a common language. There's lots of people who speak English who might be able to go live in another country. But the cultural barriers to moving Spain to Germany or vice versa are much bigger than the cultural barriers, than moving From New York to California or vice versa. The other important reason is that it doesn't have the degree of fiscal integration that a country like the United States does. So we get into the euro crisis and explain to us both what the structural problems are that made it so hard to get out of that and then why you thought that as I understand it, the right solution to this is to make it look more like an optimum currency zone. And while we can't abolish the fact that people in Spain speak Spanish and people in Germany speak German, what we can do is to increase the extent of fiscal integration in the Eurozone.
- [45:45]
A
So yeah, there's all of this and fiscal integration is long. It's a big political project and it's going to take time. But one thing that really I didn't think of is the importance of a sort of financial out that a country that has its own currency, one thing it never does is run out of money of its own money. It may have problems if it prints too much and so on, but it doesn't literally run out of cash. It turns out that a euro area country can, the government can simply not have the euros to pay its debt as it comes due. There was one of the most influential papers in economic history, I think was by the Belgian economist Paul de Grau who looked at it. He said these debtor countries, yeah, they have debt problems, they have adjustment problems, but the markets are treating them much worse than those fundamentals say they should. And that I think De Grau said, I think that we're looking at a self fulfilling crisis of confidence that people are running from these countries because they're afraid that they'll be forced into default and I'll lose my money. And they were being forced into default because they were running out of money. And that what you really just needed was somebody to say no, they will not be allowed to run out of cash. About a year after De Gras wrote that paper, Mario Draghi said, I think he did read de Grau, Mario Draghi said three words, whatever it takes, that the ecb, the European Central bank will in fact provide cash if necessary. He actually didn't have the authority at that point to do it, but he got it a little bit later and the euro crisis largely evaporated. This was a case really of self fulfilling prophecies. Now I don't think this is a case of irrationality. This was simply a case where the logic of the situation created the possibility of self fulfilling crisis. And, and just amazing that just saying the right Words suddenly made things much better. And so the euro situation was a mistake. I think they'd be better off without. But it does not look acute. And I think at this point most of the euro area countries are doing okay.
- [48:14]
B
So to what extent is the crisis now solved? Do you feel that the structural problems that the Euro had all along have actually been fully remedied? Or are they sort of waiting in the background to reemerge at the time of the next recession, at the time of the next serious economic crisis?
- [48:33]
A
It would take something considerably worse than anything I see on the horizon to recreate a full scale euro crisis. What happened back in 2010 was both the fundamental inappropriateness of the single currency, but also the Europhoria. Those first seven, eight years after the Euro was introduced, everyone went wild and said everything is fine. Spanish bonds are just as good as German bonds. Let's all. And a lot of irresponsible. German Landesbanken lending money wholesale to Spanish cajas that were making irresponsible real estate loans. And that was a crisis created by the excessive confidence in the Euro itself. And I don't think that's going to happen again for a while. Someday something will happen and we may once again say why do these countries have a common currency? But probably we're not looking at anything remotely as bad as what went down 15 years ago.
- [49:47]
B
One of the things that I've been struck by is the extent of economic divergence between Europe and the United States. I briefly mentioned this your show when you generally had me on and got a number of emails saying that surely isn't true. Surely Europe is not significantly poorer than America today. But it seems to me that all of the relevant economic data really do show that. And there's a sort of larger question whether the United States has actually defended its share of global GDP to a remarkable degree, given both the rapid population growth in some parts of the country, but more to the point for very rapid economic growth in places like China. But Europe's share of global GDP has really quite rapidly declined over the last 25, 30 years. So what is needed in Europe in order to fix that? I know that part of your answer is more investment and probably implementing something broadly along the lines of what Mario Draghi has now put forward, Madragi report, et cetera. My question is whether that's enough. How it is that Europe can actually get back to the technology frontier, how it is that Europe can become a player again in some of the industries of the future, whether it's tax in AI, whether that's electric cars, whether that's other areas where the content just doesn't feel like it's a player anymore. Is that just a question of investment or are the deeper structural problems that Europe needs to address?
- [51:06]
A
Some of it is, I think in a way it's almost not quite an illusion. But a lot of the US advantage in GDP per capita and productivity comes really from a handful of clusters. It's Silicon Valley and to a limited extent Seattle and then Wall street, these extremely high value industrial clusters which first of all, if you ask what is it about America that means that we have them. A lot of it is just that there has to be a Silicon Valley somewhere and for historical reasons it's in America. There has to be a Wall street somewhere. And it just happens for histor to be in America. And if you take those out, the US advantage over Europe is not nearly as large. It's not clear how much the success of those regions redounds to the benefit of most people in the United States. It depends on what you look at. But I think part of the quality of life consists in not being dead. And US life expectancy is way below us. So there's some of that. Then also it is true that we have become a technology. Technology has really been the cutting edge. The United States has been a much better place to do cutting edge technology because of partly our university system. Universities are US higher education, which has been just more flexible and more forward looking and less tied down. Let's not talk about Germany is better than it was, but still, my God, the hierarchical nature of German academic life. And also that the United States has been an open society. There is no place, as you yourself, I'm sure can attest, there has been no place on earth where some talented person from one country can, can come and feel welcomed and comfortable. And America's had a big advantage over Europe in those things. Someone once said, and I need to watch time here. Someone once said that during the 1930s and after when there was a lot of refugee scientists, that to some extent Britain took in those scientists out of a sense of obligation and America took in those scientists out of a sense of opportunity. America was a welcoming place for technology science. And that in turn provided the basis for a lot of what we've done. Now how do you cure that difference between Europe and the United States? Well, Europe should level up, but the United States seems to be in the process of leveling down. There is really a huge opportunity for Europe in the sense that America has become becoming intolerant and anti intellectual. And the thing about Europe is there is this tendency because the GDP numbers have lagged a bit and the most famous technology companies tend not to be European, to discount it, but spend a little time walking around Europe, being in Europe, and these are still extremely competent, extremely. There's a lot of potential in Europe and I think that it really wouldn't be that hard to turn it around. This does not look to me, and of course I'm an outsider, but does not look to me like there's a deep seated malaise that can't be cured. There's a lot of potential, but something has to be done.
- [55:12]
B
So we've been talking about an economic crisis that happened Primarily in the 2010s in Europe for the last little while. There is a potential economic crisis happening in the United States today. At this point, about two months ago, as we're recording, Donald Trump announced, quote, unquote Liberation Day. It certainly liberated the markets of a good amount of stock valuation. He since seemingly walked back back some of those tariff announcements and remarkably, the markets are back up to roughly where they were at the beginning of the year. Tell us first of all how we should think about trade. You're somebody who has been more critical of free trade than a lot of other leading economists throughout your career, but also does believe in the importance of trade and globalization. So tell us about what the basic case for traders and how that has held up over the course of the last decades.
- [56:04]
A
Okay. I mean, at a fundamental level, the reason why we should engage in international trade is the reason we shouldn't be raising our own chickens. Right. Self sufficiency is costly, and it's costly for two reasons. One, you probably do some stuff that you're not especially good at, and it pays to concentrate on things you do relatively well and let other people do things they do relatively. And the other is there are just advantages in not trying to do everything. Being a jack of all trades and a master of none is not great. And it's better to have everyone from your heart surgeon to your plumber be someone who has specialized in the field and really learned it. And the same is true for countries. It makes sense for countries to concentrate on doing things for which they are particularly well suited, either through climate or resources or just plain those mysterious things that make countries especially competent at something or other. It also makes sense to concentrate on a limited number of stuff so that you can get economies of scale, so you can get increasing returns. That's the basic case for trade. And it's as valid as it ever was. And we're clearly a lot richer as a planet. We're richer as industrial countries because we don't try to do everything for ourselves and we trade. In some ways that's the important thing to understand. I would add that there's a special reason that I at least am especially fond of a relatively open world trading system, which is that it works for poor countries. When I was entering graduate school, choice of fields, clearly the most important thing in terms of the welfare of the world was development economics. What can we do to make poor countries less poor? But I didn't do it because it was too depressing a subject. This is the mid-1970s, and in the mid-1970s development economics was basically non development economics economics. Nobody had really managed to make that transition. You asked for a developing country that had become a full advanced country and you basically got Meiji Japan. And there were sort of no later examples. But then that all changed and we now have a lot of success stories. By no means all or even most of the developing world, but a number of success stories. China of course, being an immense one. But before that we had South Korea, we had Taiwan, we had a number of countries that really went up the scale. And all of them involved exports, all of them involved open economies. I like to use the example of Bangladesh, which is not still a desperately poor country, but it was a country that was right on the edge of a Malthusian crisis crisis of just plain starvation through overpopulation. And now it's about four times as rich as it was then, which still leaves it very poor. And how did they do that? Well, it's not a race in line with me, but they're not a banana republic, they're a pajama republic. They export clothing and that apparel industry which depends upon low wages.
- [59:39]
B
A banana republic republic.
- [59:41]
A
Well, yes, that's right, the banana republic Republic. It's garment industry. Actually, near my office there's a multiple life size statue of a garment worker, a man with a yarmulke hunched over a sewing machine. Because as it happens, Cuny Grad center is in the middle of what used to be the garment district. We don't have a garment district in New York. And that's a good thing because those are very labor intensive, low productivity jobs. It makes a whole lot of sense to have those done in Bangladesh where they desperately, desperately need that opportunity and have the United States concentrate on different stuff. So that's all the good stuff about trade. There are shadows. Trade, like any form of economic change, creates losers. And this is not something that runs counter to orthodox economic theory. A lot of ways modern. Well, the modern theory of international trade, not the, not the new trade theory, which is where I came in. But the old new trade theory begins with a 1941 paper by Paul Samuelson saying, hey, trade actually can cause large groups of people to suffer economic losses. Stolper Samuelson model We know that there are these downsides, but they're not unique to trade. They happen for technological change. We may talk about AI a bit later and we can talk about that. The right way to deal with them is to try to, so far as possible, protect people from the losses. But trade is a good thing and we will miss it when it's gone
- [61:33]
B
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- [61:46]
A
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- [62:28]
B
Why wait? Ask your doctor. Visit botoxchronicmigraine.com or call 1-844botox to learn more. Yeah, one of the things that strikes me is that I went to university in the early 2000s and that was was in the aftermath of a big protest against the WTO in Seattle, of the big protests at G7 meetings and so on. And the argument that the left was making at the time was that world trade is bad because it's going to impoverish these countries. It is a way for the United States and other rich countries to extract all of this value from countries like Bangladesh and India and China and keep them in hange and in penny. And it's interesting that the arguments against trade has even on the left completely shifted because as you're saying, Bangladesh and India have made significant economic progress. China and some other countries have made enormous economic progress over the course of those decades. And it just turns out that those who thought that this world trade would somehow keep those countries impoverished have turned out to be very badly wrong. Now, on the flip side of this, in part because of the success of these countries, we have a bunch of problems that weren't fully anticipated. As you're pointing out, economists knew that there would be losers. And perhaps there were some clever papers in the 1990s and early 2000s predicting that some of those losers might be in places like Michigan among auto workers or steel workers, et cetera. But neither the full economic scale of that, I think, was widely appreciated, nor the political impact, nor the way in which that might undermine some of the basic trust in the political system in the ways that it has across native working classes, not just in the United States, but in much of Western Europe and elsewhere as well. It strikes me that often the problem when predictions go wrong is not necessarily that you don't know that something might happen, it's that you misappreciate the scale and the significance of it. And that can come, I think, in part from people being disciplinary masters who don't look beyond their discipline discipline overall, in economic terms, the United States have done very well for the last decades. And economists were probably right to say that yes, there would be losers, we should do something to compensate them, which in theory we can, and it's worth a trade. But perhaps we neither quite appreciated the political difficulty of actually finding effective ways to compensate for losers. For things like the loss of a job. You can't do that with transfer payments very easily and in the event it wasn't fully done done. And they may not have appreciated what kind of political ramifications that would have, in part because they're economists rather than political scientists. Do you think that's a fair analysis or how would you grade the economic profession on its approach to free trade in those years?
- [65:13]
A
Okay, the first thing is that there were some actual economic blind spots even before we get to the interdisciplinary stuff. And I blame myself. In part, we did a lot of. I spent a lot of time, I wrote multiple papers and read hundreds of papers on distributional impacts of rising trade that took seriously and said, okay, there are some real issues here, but we pretty much completely missed the localized impacts. We thought about what's the impact on non college educated workers as a group. Group. We didn't think about what does this do to the furniture industry in the North Carolina Piedmont? There were a lot of just rapid increases in trade, undermined particular communities in ways that really were not in the models and should have been, because I, of all people, having worked on economic geography, should have been thinking about that. And it really took a landmark paper by Doran, Otor and Hanson, Hanson being one of my students, about the China shock that said, hey, the story there is really what it does to communities, not what it does to the aggregates. So that was an economic failure. On the politics, Economists have long argued that because trade increases a country's real income, that the winners can compensate the losers and everybody will end up better off. But it never actually happens. We never actually do that. And this is where we really should have been talking to the political scientists and asking, why does this never happen and what happens politically from the fact that it never happens? And so I think that was a blind spot. But it's also. I mean, I think we did fail there, but a lot of what. And maybe this is something. I'm not sure if this is even the political scientists. Somebody should say that we have damaging. We have economic change that makes the country richer but hurts some people all the time. Look at what's happening with AI right now. I mean, we may want to talk about this. I'm completely uncertain about how big AI will eventually turn out to be. But there's no question that if you took the advice learn to code, boy, you made a big mistake. Because it turns out that one of the things AI is pretty good at is coding. And coding. Jobs are disappearing. Narrower specialties. Translation, jobs are disappearing. That doesn't mean that this is not a good thing for the economy. But hey, there are big losers. Now. The question is, why is the political backlash against job displacement from imports so much greater than the political backlash against job displacement from new technologies? Coal mining. What happened to coal mining? Actually, that's not mostly a trade issue, but in this case, people get furious with environmentalists. But environmentalism didn't kill coal mining. Technology killed coal mining because instead of digging for coal, we just blow the tops off mountains. But people don't seem to get riled up about that the same way they do about trade.
- [68:57]
B
Yeah, and in defense of the economists, if an economist had gone to a political scientist in 2000 and said, hey, we are anticipating these bad losses in places like Michigan, do you think you're going to be able to compensate them? Probably political scientists would have said, no, that's going to be pretty hard. And Perhaps even if you compensate them for transfer payments, 2,000 bucks in your bank account because of state largesse doesn't give people the same dignity and self worth as $2,000 that they've earned through a job. So you're not going to fully compensate. And then if economists said, okay, and what do you think the political consequences of that are going to be? Well, perhaps there's a little bit of an increase in protest votes, perhaps there's going to be some anger, perhaps they're going to move to the last front of the economy and some more socialist flavored candidates might become a little bit stronger. I doubt that a political scientist in 2000 would have predicted the extent of the populist surge. And that relates more broadly to my feeling that 2008 was a very bad year for economists because they really, by and large had not foreseen the global economic crisis. And that point has been made a number of times. You may agree or disagree with it. I don't know, Paul, But I would argue that 2016 was a similar annus rebilis for political scientists. Because if you'd think that economists should be able to foresee a recession like 2008, well, political scientists should be able to foresee a seismic year in which Britain votes to leave the European Union and the United States elect Donald Trump. And political scientists did not foresee that anymore than economists foresaw the crisis in 2008.
- [70:34]
A
Yeah, let me say a word about 2008. Actually. I didn't feel, I mean, maybe other. I didn't feel that there was a huge failure of economics there, even though there was a massive crisis nobody predicted. But within days after the fall of Leon, everybody was going around saying, oh, we've seen this kind of thing before. People were wandering around the halls of the National Bureau of Economic Research muttering, diamond Dyvic, diamond Dyvic, which is the classic model of bank runs. And what we failed was not to understand. I mean, there were a lot of things. There was way too much stress on the efficiency of markets and so on. But the biggest thing that happened there was that a failure to keep up with institutions. We knew that banks were pretty well protected as they were and had failed to appreciate that the most banking in America by the year 2008 was undertaken by things that weren't called banks and weren't regulated like banks, shadow banks. And it was that kind of more of a failing to keep up with the changing institutional structure than a fundamental flaw in the theory after that, that everything that happened after 2008 in terms of impacts of fiscal and monetary policy was right according to the Textbook by about 2011 I was saying the world is a mess, but gee, it turns out that the models work. But yeah, in any case, the story definitely we all have blind spots. And can I say social science is the world is a very complicated place and you're always going to be the predictable. Bad things usually actually don't happen because if they're that predictable, somebody does something about them and there's always something going on in the world that you were not paying attention to and it zaps you.
- [72:41]
B
I mean, that may be a problem more broadly of the kind of social science that we now prize and value. Right. I get your point that some of the underlying models ended up being vindicated after 2008. But of course the fundamental point of a model is to be able to predict something. And if you're not able to predict 2008 because you're not keeping up with those changes, that's still a problem. I mean, in the context of political science, I think about this as what is now priced are these kind of mid range laws of the social world world. And that's because they have a kind of scientific air to them. But I wonder how helpful and action guiding it is to know those kind of mid range laws of a social world. So to give you one famous example, there is a very thorough paper that I think very convincingly shows that mountains and mountain ranges tend to favor civil war. Now that sounds abstruse to people who don't know much about military technology at first, but you go back through history and the partisans in World War II were often in mountain mountains. You look at countries like Afghanistan and they tend to be very mountainous. And there's a reason for that. In the plains, a central army with tanks can control territory pretty well. In the mountains that is much harder. And so it's easier to sustain insurgencies and rebel activity in the mountains. And so therefore it's much harder to pacify mountainous areas. I think as an observation about the social world this is right now the problem is is if you're in Afghanistan and you're trying to figure out how do we avoid falling into the next civil war? This doesn't help you because A, you already know that your country is prone to civil war, right? I mean, if you've lived anytime the last 50 years, you already know that. And B, it's not very action guiding, what are you going to do? Blow up all the mountains and flatten the country? That's not going to happen. And so I wonder whether the problem here is that is not that, that we're bad at creating those mid range laws of the social world. Perhaps better in economics than political science, all in all, I would guess. But I think there's some mid range laws of a political world that political scientists, I think, have uncovered pretty convincingly. The problem is that they may just not be as insightful about the world in terms of adding genuinely new things to a particular situation, and certainly not as action guiding as we would like them to be.
- [74:59]
A
Well, economics is a bit of a different story, actually. That's a whole lot I could say and probably shouldn't. But the models, the relevant models, which are kind of, again, middlebrow models, high theory was absolutely of no use whatsoever after the financial crisis. It's basically of no use whatsoever right now. And one of the problems we have that the academic career goes to doing stuff that is very intricate and almost certainly of no practical use. But the mid range stuff, the kind of stuff that's done not so much by people getting tenure at Harvard as by staff people at the Federal Reserve, was extremely useful as a guide to what you should be doing and was by and large ignored by policymakers. There were some innovative, creative, unorthodox analyses of fiscal and monetary policy. In 2010, 2011 that had a large impact on policymakers and also happened to have been completely wrong. The conventional standard models worked fine and it was the people coming up with novel reasons why slashing government spending in a recession would actually increase employment. Very clever, very ingenious, very popular in Washington and Brussels, totally misleading. Those were the things that actually had an impact.
- [76:37]
B
So part of the problem may simply be about the last step of translating academic insights into policy. And of course, that is a broader question right now. The idea that, that it makes sense to go and work in a think tank and answer some complicated technical question and then trust on the mechanisms of knowledge transmission, to think that somehow the Donald J. Trump administration is then faithfully going to implement those technocratic insights is definitely unrealistic. Which brings us back to the tariffs right now. I'll ask you two questions about them. The first is what would the impact be if, if after this 90 day pause that we're in the middle of, Trump fails to reach agreements and deals with most of the countries that they are supposedly negotiating with, doesn't want to lose face and say, all right, I'm putting the tariffs back up and we go back to something like what the United States announced on Liberation Day. And the second Question is, how likely do you think that is? Are we actually going to. To go towards that world in which global trade is very significantly curtailed, or do you think in the end the forces inveighing on Trump do not risk another significant loss of value in the stock markets, risk a recession, which would also be very politically damaging to him. I assume his rich friends calling him up saying, don't do this to us, perhaps his broader inexorable forces of a world world. Do you think in the end, globalization is not something we can get out of and Liberation Day will enter the history books as a weird footnote, or do you think that there is a significant risk that we are seeing the beginning of the unraveling of a global trading order?
- [78:20]
A
Oh, I think. Well, let me back that up and just say that if you take the tariffs that are currently in effect as we record this, which is the tariff on China has come down to 30%, which is still immense, and we have tariffs of 10% pretty much on everyone else, plus some selected other stuff. And that's according to people who've tried to crunch through that. We have an average tariff rate of something like 17%. It was less than 3% when Trump took office. So we're still in a highly protectionist environment by we no longer have the highest tariffs in 100 years. We merely have the highest tariffs in 90 years. And that's a big deal. So I've been. One of the things about writing even for Substack, definitely for the Times, but writing for Substack is that there's a tremendous amount of work that never, never sees the light of date because it's all going on homework that I felt I had to do. I've been sifting through estimates of the impact of costs, whether tariffs or transportation costs on trade. And there's a fair bit of literature on that. And plugging in the sort of consensus estimates say that the tariffs that we have right now will, in the long run, cut overall U.S. trade, trade by half. We're talking about the U.S. economy going to half as open as it is now, really going back to a 1950s level of trade, cutting trade with China by 2/3. So this is not what we're looking at right now is already a blow to globalization that would have been inconceivable in the past. It's also, and this is one of these things where the, the practicalities matter a lot. So the Liberation Day tariffs were different for every country. There was a bunch that were getting 10, but overall it was different for every country. And it was. They put on tariffs on everybody. They put on tariffs on the Herd and McDonald Islands, which are inhabited only by penguins. But. But sometimes the simple practicalities matter. Who is going to implement these tariffs? Who is going to. Where is the staff? Assuming that they're not going to open the shipping containers and look at what's inside, but they are at least going to look at the invoices. We don't have the staff for that. Take us years to stand up a force at Customs and Border Protection to do that. There's tremendous opportunities also for arbitrage. The Liberation day tariffs were 20% on the European Union, but only 10% on the U.K. it's right there, and it's essentially an open border. There are even little things, the tariffs on Canada, which are kind of. We're not quite clear where they stand now, but the USMCA compliant goods are exempt from the tariffs. The USMCA is NAFTA with some extra semicolons in it. So Trump could name it after himself. But what does that mean? I've gone to the trade experts on this, the trade law expert, which is very different from a trade theory expert, and they say nobody knows. They're making it up as they go along. We're just heading for, aside from everything else, just a tremendous snafu. We're talking probably about a lot of shipping containers piling up at the ports while they try to find somebody who can pass judgment on what's the appropriate tariff rate.
- [82:42]
B
I guess the danger of this falls into at least two categories, I assume. One is just that this is a drag on economic growth and productivity, that there's benefits from trade that are curtailed by the imposition of tariffs. And that's going to happen if those tariffs are put in place. The second, I guess, is a risk of economic recession, of a run on the financial system if we have a very significant drop of stock value, again of a dynamic that you can't get out of. How serious do you think that risk is? If Trump came back at the end of his 90 days and said, all right, I have a deal with Ireland and I have a deal with Argentina, and that's it. Everybody else is back to the territory tariffs that they had previously, how big a risk do you think there is of that creating just an economic crisis that he then can't get out of the next time by saying, 20 days later, oh, you know what? I've changed my mind again. I'm hitting pause for another 180 days.
- [83:42]
A
Tariffs per se, don't necessarily cause recessions or high unemployment. I like to look at UK in the 1950s was still a very protectionist, still had about 25% average tariff tariffs. There were a lot of exchange controls. The UK Britain in the 50s was not a fully open economy. It still had a lot of legacy wartime controls in place. It also had full employment. There was virtually zero unemployment in Britain. So you can have a protectionist nation that still basically has jobs for everybody. They're not as productive as they should be, but that's okay. What causes the risk of a crisis is the uncertainty, is the fact that nobody knows. I mean, as we say, 90 days from now, something is going to happen. Either Trump is going to say, well back to Liberation Day, or he's going to say, I declare victory and we're going back to 10% tariffs, maybe even 3% tariffs, which is what we used to have. Which of those is going to happen? Well, I don't know. But more important, businesses don't know. How is a business going to make plans, how's a business going to make investments when you have absolutely no idea what the international economic policy regime is going to be? And by the way, I think there's other stuff going on as well because we're getting a lot of the other big Trump policy is deportation. And we're having a lot of deportation theater with masked agents snatching people off the street. But the actual migrant labor force is still growing. Does that continue or do they get serious about that? Are they just waiting to construct the camps to hold people? So between all of the policy uncertainties, I think the chance that a lot of economic activity just free freezes while people wait for clarity, that may never come, it remains quite high.
- [85:46]
B
Answer the Steelman case for tariffs. Right. So as I understand it, the best case for some level of tariffs is twofold. It's first of all to say that, hey, back then when we're criticizing the WTO for impoverishing countries like China, we were wrong. In fact, China has become tremendously more affluent than it was. It now dominates industrial production in a lot of areas. And part of that is because of subsidies from the state. And this is a significant national security concern in many industries and it is making it impossible for lots of Americans to find jobs. We should be doing something to cater for the population in the United States that perhaps is more gifted with their hands than sitting at a desk in writing emails or whatever else white collar work tends to involve in nowadays in terms of the well being of our people and perhaps our political stability. We should aim to have a good number of manufacturing jobs in the country. And so perhaps the ration day is the wrong way to go about it, but actually some kind of real change from the very open economy we had is called for. We need to make sure that we have real manufacturing bases in the United States. States both for reasons of national security and for those reasons of, let's say political economy. What is your response to that line of argument?
- [87:11]
A
I'm actually I support a sophisticated, limited, nationalistic, pro manufacturing policy. We should be at least reasonably self sufficient in strategically critical products. Products. We should try to promote employment to some extent. The truth is, if you do the math, there's no way we're going to get back to anything like the number of manufacturing jobs we used to have. But we could have a few more and more important, we could have more in the right places. I'm for or a place based policy that tries to help. We have a serious problem of left behind regions in America and you can tie that all to other goals like fighting climate change, where just given the politics of it, a policy that relies on carrots rather than sticks, that subsidizes green energy rather than tries to tell people to pay a price for emissions is just a lot more politically feasible. And that can be linked in with the other stuff. You can try and promote green energy in left behind regions that need the jobs. But what I'm describing, first of all, it's not tariff policy, industrial policy. It's not about in fact, tariff policy can be counterproductive. You try and put on tariffs to promote green energy and you actually make some of the components of green energy more expensive and actually inhibit it. And it also produces collateral damage to consumers and to downstream industries and so on. So it's really subsidies rather than tariffs. Can I come up with an example of such a policy? Well, yeah, that's what the Biden administration was trying to do. It should have been much bigger than it was. The original Biden build back better looked a lot like what I would be advocating and it was quite nationalistic. It had a lot of Buy American components. It was for political reasons mainly and to some extent the health Left behind regions. But we were going to try and do this stuff and we got complaints. The Koreans who have a free trade agreement with the United States said hey, this is in violation of the fta. And you know, they were right.
- [89:45]
B
And I know from commitment with some European leaders that they remain very upset about the buy American components of the iia and they felt that that was part of a broader American turn away from the world.
- [89:58]
A
I was willing to live with that. And certainly on the national security stuff, that's actually, there's a clause in the GATT. I think it's Article 22 that basically says, if national security is at stake, forget everything else we said, you can do what you feel you need to do. And on the other stuff, well, I used to say friends of mine who are much more unambiguously globalist than I am would complain about this. And I would say, well, look, do you want us to be sitting here 20 years from now saying, well, we cooked the planet, but at least we adhere to the rules of the World Trade Organization. So to a certain extent, you have to make some compromises. But what we're actually doing, Trump is actually scrapping those policies. He's actually scrapping the stuff that was really relevant to national security. He's definitely scrapping anything that was good for climate change and pretty much scrapping anything that was helping left behind regions and instead responding with this broad tariff stuff that is very unlikely to do very much to help either the people or the places that need help.
- [91:12]
B
Thank you so much for listening to this episode of the Good Fight. In the rest of this conversation, Paul and I talk about artificial intelligence. Just how disruptive is AI going to be to the workplace? A lot of people in coding and computer programming have already lost their job. Is that the big beginning of a mass loss of jobs across industries? Is this going to be different from earlier technological innovations in just putting a lot of humans out of work without any new fields into which they can go? Or is this merely the latest technological disruption, one that will still allow humans to find a lot of other forms of employment? And should we think about AI as truly intelligent? Or is. Is it, as Paul suggests at some points, just a glorified form, very glorified form of autocorrect? And finally, we talk about journalism. Paul left the New York Times After 25 years, 24 years as a columnist there in some amount of frustration about feeling that he couldn't really have his own voice to the extent that he wanted. And he joined Substack. IR asked him about why he left the New York Times and whether he has any regrets about his move. To listen to those parts of the conversation to support the work we do here, please go to jaschamonk.substack.com and today you are getting 25% off for your first year of subscription, meaning this is about a coffee a week. If you go to jasamunk.substack.com the thank you so much for listening to the Good Fight. Lots of listeners have been spreading the word about this show. If you two have been enjoying the podcast, please be like them. Rate the show on itunes, tell your friends all about it, share it on Facebook or Twitter. And finally, please mail suggestions for great guests or comments about the show to goodfightpodmail.com that's good fight. Fightpodmail.com
- [93:18]
A
this recording carries a Creative Commons 4.0 International License. Thanks to Silent Partner for their song Chess Pieces.