So, scale one to 10, how liberated are

you feeling right now?

I am feeling pretty unliberated. I'm not

excited about my freedom from lower

prices, from a stable stock market, from

an economic policy that makes sense.

But, we had Donald Trump's liberation

day anyway, where he put forward a huge

package of tariffs, bigger than was

expected, and also more confusing than

was expected.

Uh

if you look at Switzerland, 61% to 31%.

Indonesia, Malaysia, Cambodia, oh look

at Cambodia and Brazil. 10%, 10%,

Bangladesh

is 74%. Very simple, can't get any

simpler than that.

When I saw them, it was pretty obvious

to me who I wanted to talk to about

this.

Paul Krugman was a columnist, a

colleague of mine here at The New York

Times for 25 years. He is a Nobel Prize

winning economist who has specialized in

trade over his career, and he's now

writing an absolutely excellent Substack

under his name. If you've not been

reading it, I really suggest that you

do.

And he's kind enough to come on the show

and walk us through his thoughts on one

of the most tumultuous days of economic

policymaking in American history.

Paul Krugman, welcome back to the show.

Hi, good to be on again.

So, let's just start with what Donald

Trump actually announced on liberation

day.

Wow, I think most people thought it was

going to be some kind of

across-the-board tariff, uh the same on

everybody, or maybe two or three

different types of tariffs. Instead, he

announced this whole complicated uh

different tariff for every country, um

at levels much higher than the smart

money, or the money that thought it was

smart was betting. Something like 23%

average tariff now, which is huge. It's

higher than US tariffs after

Smoot-Hawley was passed, and

um

trade is a much bigger part of the

economy now than it was in 1930. So,

this is the biggest trade shock in

history.

How does the tariff, country by country,

seem to have been calculated?

Okay, uh that was interesting cuz on on

the first thing was, where the hell,

sorry, but yeah, where the heck are they

getting these numbers?

number. We we put the little explicit

tag on

but where is this coming from? And in

the Rose Garden speech, Trump said, this

is all based on you know, we've examined

the the barriers the countries are are

putting up, and this is our calculation

of their tariffs plus other things that

count as tariffs. So, then we were

trying to figure out what where is that

coming from? And uh that's a

I mean, it it wasn't inherently

plausible.

Right? It Who who would be doing that?

Careful assessment of other countries'

trade policies, country by country.

That's a massive undertaking. And uh it

seemed impossible that, you know,

basically impossible that they could

have done that. And it turned out that

they basically took um

each country's

trade balance with the United States,

the bilateral trade deficit that we have

with them, divided by the amount of

their imports, and that we said was

their

de facto tariff rate, and then they cut

it in half. So, it was this kind of

weird calculation, not grounded in any,

you know, in anything that that um

that uh back in the days when I used to

teach trade courses that I would ever

put in, but they they came up with this

uh sort of uh out of the blue uh

calculation method that is country by

country, and it's uh um

it's

certainly original. I guess you could

say that.

The the implication of it is that you

you can understand why you might say a

tariff on America is bad. That's locking

up uh the the goods that might flow into

another country or a service that might

flow into another country. But what

they're saying is something subtly

different, which is that

if we have a trade deficit with anybody,

that is bad, and it should be treated as

evidence of market discrimination,

or at least something we want to fix.

So,

uh this gets us, as you'd like to say,

wonkish, but what is a trade deficit?

What is a a trade balance?

And is it a bad thing when we have one

with someone else?

Okay. So, yeah, we we sell, you know, we

every country has stuff that it sells to

other countries, has stuff that it buys

from other countries.

The trade balance

with any particular country is what we

buy from them

uh

minus what what we sell to them.

There's no particular reason to think

that

these numbers should be balanced country

by country. All kinds of things can go

wrong. So, it it's it's there's a whole

the you know, the discussion

there's a whole literature in the

research on

what explains bilateral trade

imbalances, but nothing that says that

they are ipso facto evidence of of foul

play, which is what the Trump people

seem to believe. US trade policy has

been based upon reciprocity. Uh the you

know, the legal basis for all of these

trade agreements that we've had these

past 90 years is the Reciprocal Trade

Agreements Act of 1934,

which is FDR establishing a system where

the United States would negotiate that

we will cut our tariffs if other

countries cut their tariffs. Um and for

the most part, there are a few

exceptions, a few countries that

actually do have substantially higher

tariffs than we do, but other advanced

countries

actually like us have very low tariffs.

So, it was really kind of strange that

that was the claimed

policy, because that was you know, if

that was the policy, then there was

nothing to do, cuz we'd already done it.

And then they have this other thing

which basically says if you are,

you know, running a trade surplus with

us, um,

then we're going to take that as

evidence of bad behavior anyway. We're

going to We're going to try and we're

going to kick at you if you do that. And

that's a That wasn't that all,

at least in the

in the selling of this policy what they

were what they said they were going to

do.

One of the things flying around social

media has been that

if you went and you asked the various

leading AI programs, ChatGPT and and and

Gemini and and Claude, and you said,

"What's a pretty simple way to calculate

tariffs on all other countries?"

It will offer you the basically this

calculation that you used.

And I think that raises two questions,

which is one, did we just have

a a global economic crisis created by

some doyen turns asking ChatGPT how to

calculate, uh, tariffs?

But two, if that's what these systems

trained on the inhaled output, I guess,

of all economists writing online say you

should do, is there something to it? Is

there some steel man case that this is a

pretty straightforward simple way to

think about tariffs on other countries

that the liberals are missing as we sort

of point out differences between, you

know, words and and policies here.

Yeah, so I mean the, you know,

Terminator whatever it would be

Terminator 7, the movie with the, um,

actually uh, Skynet doesn't bother

starting a nuclear war, it just gives

bad tariff advice. So, um, the, uh, uh,

so,

look, it

This is part of the problem in general

with what we're calling AI, with large

language models, is that they pick up

what's out there without in necessarily

being able to discriminate what's

sensible and what is not. There's

certainly no paper, uh, I would imagine

in any economics journal saying, "Do

this." So, but maybe some people out

there are saying something like this,

but it it really is not

uh

it's not something you would recommend

if you know anything about how trade

works, which ChatGPT does not. And so it

it really is kind of weird that that it

would come up with this. Um

and by uh

putting different tariffs on for

different countries, you create an

immediate problem. So, we just put a

much higher tariff on

goods from the European Union than from

Britain.

So, if something from the European Union

uh

crosses the English Channel, spends 5

minutes in an English port, and then

heads for America, is that a British

good or is that a European good? You

would have to have what we call rules of

origin, which are very onerous. There's

a the amount of of paperwork involved in

enforcing rules of origin is huge. So,

this is a

Anyone who knew anything about trade

would say, "Wait, you know, wildly

different tariff rates on seemingly

similar countries

is a big, big problem. Probably a lot of

EU goods transship through Northern

Ireland to get the lower tariff rate

that applies to Great Britain." And, you

know, it's crazy. Um so, this is just a

very

This this recommendation,

you know, if it really is coming from

large language models from AI, uh this

is a kind of is more of a cautionary

tale about AI than it is a something

about economics.

How are markets responding and what do

you take from their response? One one

thing that I have thought is when you

listen to their

justifications, they'll say things like,

"Well, we're trying to rebuild American

manufacturing. We've shipped American

manufacturing overseas." And then I'll

go look at an index of stocks that

reflect American manufacturing

companies, which I guess in theory are

meant to benefit here,

and they don't look like they're doing

well to me. Um if you look at BYD, the

big Chinese electric vehicle car

company, they are way up since Trump's

inauguration. They've gone from around

70 to around $96 per share. Tesla's way

down. There's a lot of reasons for that.

I'm not an efficient markets guy. I

don't think markets in absorb all

information.

But you would expect them, I think, if

they believe this was going to grow the

US economy dramatically, to favor some

US stocks that they thought were going

to grow dramatically. I'm not seeing

anything like it.

Yeah, it's almost as if the markets

actually think that the economic

textbooks are right and this kind of

protectionism is a really bad idea. Um,

and specifically, I mean, there there

are multiple reasons why this whole

notion that tariffs are going to restore

US manufacturing are wrong. But one of

them is that, you know, we we've had now

decades of integrating American

manufacturing with other countries.

Particularly, you know, there is no US

auto industry. There's a North American

auto industry, which is sprawled across

Canada, Mexico, and the United States.

And when you say, "Okay, we're going to

not going to allow the components

factory here to send goods over to the

assembly factory there," um, you're

raising the cost the whole thing

enormously. You're creating huge

disruption. So it ends up being

bad for the US auto industry, you know,

for for for those auto plants. And

there's, you know, there are other

There are layers and layers of wrongness

here. But the most immediate one is

right away, this is actually disruptive

to US manufacturing, not a support for

it.

How should other countries respond? I

mean, I've seen economists arguing they

should do nothing because to place down

further tariffs only hurts them as well.

I've heard them say

they should do specific foreign

defensive tariffing that, you know, hurt

things that are important to the US,

maybe Tesla.

Um, I've heard people say, "No, they

should go all out because you're trying

to create a equilibrium where the US

can't bully everyone." If If these heads

of state were coming to you and saying,

you know, what should we do, Paul? What

would you tell them?

Yeah. So, there's an old argument that

says you should not respond. That it's

cuz other countries have rocky coasts,

should we block up our own harbors?

That's the way it's sometimes put. And

in straight economics 101, that is

mostly right.

Um

but

uh first of all, there is still some

hope of swaying

Trump from this course. And then, look,

other countries, this is a problem

Americans really have. We tend to not

think of other countries as real.

Uh but they are. They have They're real.

They have their own national identity.

They have their pride. Economists have a

standard arguments for free trade, which

does say you should always do free trade

regardless. That has never worked

politically.

And we did not yet to our world of

relatively free trade through by

convincing politicians to read David

Ricardo. We got to a world of relatively

free trade by actually exactly the thing

that Trump is trying to do by

reciprocity. I would not advise

Mark Carney, the Canadian Prime

Minister, you know, I could imagine I

actually do know him.

For once, I actually know somebody with

who is is is actually governed a

country. And

I would not advise Carney to turn the

other cheek towards US tariffs. Even

though on a straight cost-benefit

position, that might make sense, because

you have to respond to that. You have to

do something that

that is

appeals to Canadian national pride,

which very much exists. So, I I would

say that

that there's a pretty good case for

retaliatory stuff. Yeah, if you can

target it, you can go after Tesla, that

might help. But

for retaliatory stuff, partly just to

uh

get some help of of changing US policy.

And And

with some hope of um

at least

offering some satisfaction to national

uh national concerns.

How bad can this tit-for-tat get? How

likely at this point do you think

a US recession is How likely do you

think a global recession is kicked off

by this trade war?

Okay, now there's a funny thing here,

which is that ordinarily

I would say that well, tariffs are bad,

they don't cause recessions.

You you it may make the economy less

efficient. You turn to higher cost

domestic sources for stuff instead of

lower cost foreign sources, and

foreigners turn away from the stuff that

you can produce cheaply. So, that's just

but that's a

that's that's a reduction in the

economy's efficiency, not a shortfall in

demand.

Um what's unique about this situation is

that

the protectionism is unpredictable and

unstable.

Uh and it's that uncertainty

that is the recessionary force.

If you were

a manufacturing company in the United

States, uh and your next investment is

going to be what? Let's say a a

components plant or something. And well,

should you put that components plant in

Mexico

where it's cheaper? Well, not if there's

a 25% tariff.

But should you put it in the United

States where it's more expensive? Well,

what if the tariff comes off?

And so, either way you run a substantial

risk of just having stranded

investments, and that's happening across

the board. So, this is uh the

instability of policy, the fact that

nobody knows what's coming next uh is I

think makes a you know, a

it makes a recession certainly a whole

lot more likely.

I I feel like you're going to remember

this with some of the same anger that I

remember it. But I remember in the years

after the Great Recession

when Washington wanted to turn to

austerity, when you still had high

unemployment and what you began hearing

from the Republican Party

and lord how many words I spilled trying

to rebut this was oh, the the future

deficits were creating so much economic

uncertainty.

The corporations couldn't possibly

invest and the way to unlock the economy

again was to, you know, cut spending,

you know, maybe for you know, you more

of the centrist side raise taxes. And it

was that certainty about future path of

government fiscal policy that was needed

for corporations to hire again. That

turned out to be and was obviously at

the time not true.

But now you have that same party

creating a level of like such genuine

uncertainty. I can't imagine being a

company right now trying to decide where

to place a factory or whether not to

make investments. Nobody even believes

these tariffs are going to be the same

in a year as best I can tell as they are

right now.

And so I don't know. There there's this

argument I think got a little bit

discredited cuz it was used in such bad

faith. And then all of a sudden the same

people who made it in many cases

are at least accepting or promoting this

tariff policy which has created a like a

genuinely unfathomable to me level of

economic uncertainty.

Yeah, and the arguments were very much

in bad faith in the aftermath of the

Great Recession. It was it was just a

an excuse for somehow saying that this

fiscal austerity that Republicans in

Congress are forcing is not the cause of

slow recovery. It's all because of Obama

and uncertainty and whatever. And that

was a

um and yeah, I I became, you know,

viscerally

uh

hostile to anyone invoking uncertainty.

But then along comes this which is like

nothing we've ever seen before. That's a

very Trumpian phrase like you've never

seen before. Um but I can't recall

uh I don't think there is any case in

American history

uh short of, you know, the onset of

World War II or something, where there's

been so much uh

uncertainty about what

really important policy will be even

like next week, let alone over the next

couple of years. You you could We could

imagine if Trump had

I think probably too late to fix it now,

but if he had conventionally said, "We

will now have 20% tariffs on everybody

from now on."

Um that might have been absorbed with

some the businesses would start to

invest on that basis and yeah, we pay a

price, but those

stable protectionism

is a bad thing, but it's probably less

does less damage than many people

imagine. It's one of those things where

the more you know about it, the less it

worries you.

Um but unstable protectionism coupled

with all the other instabilities out

there

in policy. You know, how many how many

programs is Donald is going to acts? How

many federal workers going to be laid

off? What's going to happen to

to Medicaid?

That all creates an environment that's

really bad for business.

One thing I am getting asked by a lot of

people in my life is should I buy the

dip? And I know you don't offer

investing advice, but but I think the

intuition is that like the stock market

goes like down at times, up at times,

but it always just kind of be keeps its

march upward over time. And you know,

how bad can this really get? It's just a

a kind of spat over tariffs. He's going

to back off.

Do you look at the market correction

here and say, "Well, this is as bad as

it can get. We're probably at the bottom

of this." Or do you look at the history

here and say, "No, you have no idea how

bad something like this can get."

I think I mean

I mean God knows. I mean the the

I mean the 1930s scenario is is always

there.

Um

I guess my concern would be first of all

that yeah, we we're really in in

in completely new space in terms of

policy. There's not never been anything

like this craziness

in in US history. And so that would make

you worry. And then there are other

things. I mean, how much

We've had an incredible boom in

tech stocks and AI and so on. And

I have been, you know, in this in the

punditing business

since the

since the '90s dot-com bubble. So I do

worry that that these things can be big

and they can and

they can lead to years of painful

losses.

So the Trump administration can see all

this. They know markets are crashing. In

his first term Trump was considered to

be very sensitive to market reaction.

They know that various indicators of a

future recession, forecasts, and this

and that are beginning to blink more

red.

They are choosing to take on this pain.

This is completely optional.

Why do you think they think they are

doing it? Or if they is not the right

unit here, why do you think Donald Trump

thinks he is doing it?

Okay. It's always a question, what does

Donald Trump actually know?

I mean, here's a guy who goes out around

saying that his approval rating is in

the 70s.

So yes, I mean, I'm sure that Scott

Bessent at Treasury knows that those

indicators are all flashing

yellow or red. Um does Trump know it?

Uh is there anybody who's

brave enough to go in and say, "Mr.

President, this is really working out

badly?"

But he knows the markets. He he can see

the stock market.

Well, but he may think that they just

don't understand the the brilliance of

his policy.

Okay, so what what do you think he

thinks they don't understand? What is to

him

the brilliance of his policy?

I think he's got this very crude

uh view that whenever somebody sells

more to us than we buy from them that

that they're taking advantage and he's

going to end that and people will see

that he was smarter than everybody else

all along.

So, I mean I there's no indication that

there's any deeper agenda, any deeper

thought. I mean if if nothing else,

anyone who thought that there was a

bigger agenda,

that there was some subtle reasoning

going on here, the shape of those

tariffs that were announced yesterday

should tell you that no, it's it's just

uh

Donald Trump doesn't like trade deficits

and he thinks that tariffs can cure

them.

I I know too there's a

a deep contradiction in the way it's

been getting justified from two sides of

the administration or maybe the

Republican Party. So, one which you'll

hear

is that this is about reindustrializing

America.

And to do that, if you believe tariffs

could do that, which I don't really, but

but let's put that aside for a minute,

if you believe they could do that, what

you need is a highly stable tariff

regime.

And then there's another justification

you're hearing, John Thune, the the

Senate Majority Leader says something

like this, which is that these are all a

negotiating tool to get a better deal

out of other countries. This is more of

the sort of reciprocity argument. It's

also the he lays down tariffs and he

gets something on, you know, fentanyl

trafficking enforcement, um gets

something on immigration.

But if these are all negotiating tools,

then they're not a stable cost structure

that companies can use to decide if

they're going to reinvest in in America.

And then I guess there's this third one,

which is that the tariffs are going to

raise money so they can cut income taxes

or pay for Donald Trump's tax cuts. Uh

and the Treasury Secretary said the

money would be used to get rid of the

tax on tips and social security. So,

really this is a tax cut for the working

class. And again, in that case then they

have to stay on and be at a pretty high

level if they're going to finance that.

So, these are

these are contradictory policies that

require different tariff regimes, but

I'm seeing them sort of all invoked

basically constantly.

Yeah, I think what you need to bear in

mind is that the the starting point for

all of this is Donald Trump wants

tariffs.

And then and

people around him are going to give him

those tariffs. And then everything else

is kind of back filling, trying to

rationalize what they're doing. And

there's no reason to believe that any of

this is actually motivating what they're

doing. This is just who they are and

what they want to do.

So, I don't I mean, I yes, there there

are multiple layers of internal

contradictions in what we're hearing

from the Trump administration and its

supporters, but

not clear that any of that is is real.

That's just all

problems with the stories they're

telling, but the the fundamental policy

is we're going to slap on a lot of

tariffs.

Is it possible in any tariff regime to

do the reindustrialization

of manufacturing

that I think is the most emotionally

resonant of their arguments?

There are two levels to that. One is

can tariffs

really reduce the trade deficit a lot?

And the answer is

it's really hard. There's a lot of stuff

offsetting forces, so that even

lots of tariffs won't do much to reduce

the trade deficit, but if you put them

high enough,

if you basically shut off international

trade, then yeah, you can't run a trade

deficit if you can't trade. So, there's

a there's a

a bit of a story there.

But then there's the second level, which

is even if we eliminated the trade

deficit,

would we really reindustrialize or you

know, would we reindustrialize to an

extent that you would notice? Germany

runs enormous trade surpluses.

And even Germany has seen a lot a large

decline in manufacturing as a total as

the share of total employment. So, if we

were to raise somehow raise ourself to

German levels

of manufacturing, people would still say

what happened to the industrial nation

we used to be. And then there's a

calculation which I probably I won't

inflict on our listeners here, but the

but if you try and figure out how much

um additional manufacturing we get if we

could somehow eliminate the trade

deficit, yeah, it's significant, but it

would be get us like from 10% of of

employment to maybe 12 and 1/2% of

employment, but not back to the 30% of

the employment that used to be once upon

a time. And you know, basically the

decline in manufacturing employment is

mostly driven by automation and

productivity growth, not by the trade

deficit.

Well, well, that gets to though, there

there two things you might want to

restore in manufacturing. One, which I

think you hear a lot of in politics, is

manufacturing jobs. You want to go back

to the economy of 1965 or something.

Yeah.

The other is that what you want to

restore is manufacturing capacity. Um

my colleague, your former colleague Tom

Friedman, was just in in in China and

was really astonished at the kind of

campuses that Huawei is building, the

speed with which phone companies are

like becoming car companies. And

basically everybody I know who goes to

China or writes seriously about their

manufacturing sector will now tell you

that what they're doing is not just

low-wage labor leading to um cheap

manufactured consumer goods, that they

have now have incredible levels of

supply chain uh expertise that allow

them to do things we maybe can't at a

speed we certainly can't.

And that that in terms of, you know, the

balance of of of geopolitical power is a

very dangerous thing for us in the long

run. And so, very high costs are worth

paying

to rebuild that capacity even if it's

all automated, right? Because you do not

want to be so dependent and for the

world to be so dependent on on Chinese

manufacturing. What do you think of that

argument?

I mean,

it's fine as a you know, as a principle.

And you know, international trade is

governed by something called the General

Agreement on Tariffs and Trade.

And uh it which goes back to the 40s and

Article 21 basically says forget about

everything else we said here. If your

national security is at risk, do

whatever you feel you have to do. Now,

we can ask whether it being so dependent

on semiconductors from Taiwan

was wise and I actually think probably

not and you given given the world

Although those are exempted from the

tariffs.

Yeah, because they would they would be

such a huge cost you know there so there

is so just obvious how much it would it

would it would raise costs but in fact

we we should

well, we have the the Chips Act which is

supposed to

make us more among other things more

independent on semiconductors and but

Trump says that's terrible. If you were

asking what does our national security

oriented industrial policy that tries to

keep production of strategically

important stuff in the United States

look like it looks

like the Chips Act. It looks like what

the Biden people were trying to do. Now,

probably bigger than that and in an

ideal world we'd be doing

substantially more but that's how you do

it. The the idea you putting high

tariffs on imports of clothing from

Bangladesh

is exactly what you shouldn't be doing.

That's the kind of thing that is

disruptive, raises the cost of living

for American consumers, does nothing to

make us more secure. There is a national

security rationale for

domestic production but also for friend

shoring and for near shoring because

stuff that's close by is a lot easier to

secure.

Um if that's what we were going to do

then we would not be levying tariffs on

Vietnam and Bangladesh and we wouldn't

certainly not be putting tariffs on

Canada and Mexico.

So, if one of the things you're trying

to do is as a national security play

make our sort of supply chains more

robust from China, it seems you wouldn't

want to be

tariffing our friends and allies in a

way that pushes them to pull away from

us and integrate more and move into sort

of common economic defense with China.

Yeah, I mean, again, if you go back to

the

you know, how did we end up with the

trading system that Trump is now

demolishing? It was actually it was

partly about economic efficiency, but it

was also very much about a kind of

enlightened broad view of national

security. Go back all the way to

uh Cordell Hull,

uh FDR's Secretary of State. He He

viewed enhanced economic linkages across

the free world as a way to draw us

closer together, as a way to make to

create greater solidarity among

democracies against the at that point

the threat of of Stalinism and

uh

so, this is

what we're doing is is tearing up

partially in the name of national

security a policy that was actually

partially intended precisely to enhance

national security. Um

no question that that the that the US is

alienating its its allies or its

erstwhile allies by doing all of this

and in some cases making it they're

making common cause with our potential

enemies.

I mean, this policy does look to me like

what happens when nobody will tell the

king no.

Yeah.

And and and worse than that maybe that

when the king begins to favor

the people who he knows aren't

suppressing the no.

Right? That that there there are people

in any room who you can kind of tell

don't really agree with you and are

trying to uh

uh

humor you.

And then there's, you know, the intern

the the the mid-level person who you can

tell is really into what you want to do

and and maybe you charge them with it.

This just doesn't feel to me like a

constructed

policy. And it's hard because I think

that like our tools are usually to try

to track back the policy rationale, but

there's there too many policy

rationales. None of them actually fit.

Well, we have even we have some direct

evidence that that's what's happened. I

mean, Peter Navarro, who is sort of

Trump's trade czar, I don't know if he's

still called that, but effectively

um

at least according to some of the

reporting,

he was recruited cuz they basically said

Jared Kushner had to search through

Amazon to find somebody who'd written

books hostile to China.

Right? They They They actually looked

for people

who were would would would tell the king

what he wanted to hear.

Um one of one of the stories I find

really interesting, there's this you

know, about I'm sure about

listeners probably don't, Bob

Lighthizer,

who is this long-time, yeah, contrarian

protectionist voice in Washington, and

uh generally regarded as kind of a

and my my friends as that sort of dark

satanic force in the trade policy

debate, but but is respected cuz he

clearly knows his stuff. And people had

sort of assumed that he would play a big

role in this administration. And he was

passed over. And almost for sure, that's

because he is independent. He this he is

his own man. He didn't come to this be

out of fealty to Donald Trump. He uh

and so he might actually say to the

king, "No, no, that not not not tariffs

on Bangladesh." And so um

this is clearly

this is a kind of courtier-driven

catering to And Donald Trump has been

like

you know, has has had this thing about

tariffs going back 40 years. So,

here we are. Uh

the idea that there's some master plan

or some deeper strategy, it just

tortures

uh it requires torturous ignoring of

what's very clearly happening.

Well, one of my broader views about this

administration, I keep meaning to write

a piece about this, is that you can

really tell the story of Trump 1 and

Trump 2

by which is the other most powerful

member of the family. And in Trump one,

it's Jared Kushner.

Yeah.

And Kushner brings in very mainstream

people. Your Gary Cohns, you know, is a

Goldman Sachs uh president. Your H.R.

McMasters.

People who act as

inhibitors of the very disinhibited

Donald Trump. And in Trump two, it's not

Jared Kushner, it's Don Jr.

Who's been marinating in the fever

swamps of MAGA in the interim years. Who

helped bring in people like J.D. Vance.

Who, you know, said like the the the

real intention of Trump's second term

was we'll vet everybody to make sure

there's nobody's going to stand in his

way. Um Elon Musk and and Russ Vought

are sort of out there trying to

traumatize the federal bureaucracy,

destroy any deep state resistance, or

frankly just any deep state capacity.

And so you have people around Trump now

who are accelerants, not inhibitors. And

this is what you get when you get a

bunch of people telling Trump, "No, no,

no, go further, right? You're right.

You've always been right. You were saved

from an assassin's bullet by God to make

this country great again. Follow your

instincts. Don't listen to the markets,

the naysayers, the critics, the media.

They don't know anything." Like if we've

learned anything, it's that your

judgment is right.

Yeah. I mean,

there was a moment a day or so ago, I

guess, when

uh Ron Johns Not Ron Johnson. Ron Ron

Johnson. Mike Mike uh Johnson uh the

speaker of the house uh was asked about

how

how this tariff thing is going to work.

And he said, "We must trust the

president's instincts."

And I was like,

"This is America?"

You know, we're not supposed to believe

in the mysterious god-like uh

divination powers of the leader. There

There's an essay by by John Maynard

Keynes in which he says uh that uh

economics, although no one will believe

it, is a difficult technical subject.

And, you know, the uh

uh

Trump doesn't presumably doesn't

understand how feedback from your

economic policies can come back and bite

you on the rear. Uh

and uh

left to himself, he just thinks I I know

this. I'm a businessman, and I'm I've

and God's God backs me. And so you get

these without somebody who can say no to

him, and

everybody who say no is gone.

Uh then he's going to do

very strange stuff.

So behind all this, there is there has

been a set of theories that have taken

root that are not well expressed in the

tariffs, but I think have become

increasingly influential

in Washington

in in the media. You know, I hear talk

of this Mar-a-Lago accord.

And they have a lot to do with this idea

of the dollar and whether or not having

the dollar as a world's reserve currency

has led to the deindustrialization of

America. And so when I hear then people

in the Trump administration begin to

say, "Well, what we're doing here is a

fundamental realignment of the global

financial system."

While it may all start with Donald

Trump's intuitions, I think it's made a

lot of them very ambitious. Uh this idea

that maybe they can be part of the next

Bretton Woods, that that there's

something you can do here.

Can you talk through for people who are

confused by it, what is the role of the

dollar here? How should we understand

the the relationship between the dollar

being the world's reserve currency

and America losing some of its

manufacturing base, if there is one?

Okay.

This is By the way, this is a topic that

uh

is

there's tremendous amount of mysticism

about it, and

uh

you wouldn't believe how hard it was for

me to write a Substack post about the

uh about this the role of the dollar

um because I kept on wanting to stuff

too much too many things into it, and

and basically had my uh my

editor-in-chief, otherwise known as my

wife, um saying, "No, no, there's too

many charts and too many tables."

Um,

so, okay.

Uh, look, the dollar is

very special. A lot of international

commerce is conducted in dollars, even

between countries, you know, even even

trade between non-US countries. A lot of

a lot of international lending and

borrowing is in dollars.

Um, and one of the things is that

countries that want to hold a stockpile

of foreign currency

to be able to intervene in the markets

in times of need, a lot of that,

something like 60% of those stockpiles

are held in dollars. And that's the or

dollar dollar assets. So, that's the

dollar as a reserve currency.

Um,

the United States also attracts a lot of

inflow of foreign capital.

And they we have a trade deficit as the

counterpart of that. The balance of

payments always balances. So, the fact

that that we sell more assets than we

buy has as its counterpart that we buy

more goods than we sell. That's the sort

of has to be. The arithmetic tells you

that must be true.

Um,

how much of

that capital inflow is

caused by the special role of the

dollar?

And the answer

most of us, most of the of us who do

follow these things is a little but not

much. The idea that the trade deficit

sort of a one-to-one relationship with

the dollar's role as reserve currency is

much much weaker. It's maybe a fraction

of the story, but it's really not the

main story. The main story is that

America is a

has been an attractive place to invest.

And that's why we have a trade deficit.

Foreigners want to Foreign companies

want to build uh, plants in the United

States. Foreign investors want to buy US

stocks. And that's what That's the main

reason we have That keeps the dollar

strong and makes means that we have a

trade deficit. Um, but the idea that you

can do a sort of

magic fix, that you can somehow tell

foreign countries to not

stockpile so many dollars and that will

re-industrialize America is very

appealing because it's it feels it's I

think it's partly that

it it feels important that the one of

the I I have quoted

multiple occasions my old teacher

Charles Kindleberger who said anyone who

spends too much time thinking about

international money goes a bit mad. Um

it is it sounds important it sounds

uh sophisticated and it's also kind of

antiseptic.

If we could just have a international

monetary conference and that will solve

the problem of US de-industrialization.

That sounds a lot easier than having to

muck around with industrial policy and

all of that. So it's it's a very

appealing

prospect to a lot of people but it's

it's not realistic. It's it there's no

we could undermine the dollar's role as

a reserve currency. We may be doing that

as we speak because of who wants to hold

a you know, an unreliable erratic

country's currency as as as a reserve.

But that's not going to solve

anything any other major problems.

When I try to

dive into MAGA world's thinking here

something that that I tend to hear

is a somewhat contradictory

relationship or a troubled relationship

to American power.

And so on the one hand they want America

to be stronger, more feared, more

dominant.

And on the other hand there's a a broad

view

that we have overextended ourselves and

on the one hand financially we've made

the dollar the reserve currency. We've

allowed all these other countries to you

know, um

buy our assets and and and buy our money

even as the our industrial base flowed

out. And then on the military side this

idea that we have these bases all over

the world. We have all these troops in

Europe. You know, we're part of NATO.

We're spending more, you know, as a

percentage of GDP than some of these

other countries. And that too is part of

why we can no longer take care of our

people. And so, on the one hand, there's

this feeling that well, for America to

be stronger,

it can't be operating this global

umbrella

of financial and military protection.

But then do you say, "Well, do you want

the dollar to not be the reserve

currency?" And they say, "No, no, no,

no, we we definitely want to keep it the

reserve currency. Do you want America's

military to be weaker? Do you want

people to not, you know, be tied to us

in the way they are now?" No, we

actually want more leverage over them.

There's something here that I think is

very strange and very unresolved between

this in this movement that wants

both more dominance and

somehow at the same time to pull back

from the actual architecture

of that dominance and leverage.

Yeah, I would say, you know, America,

the Pax Americana, you know, we have

been a kind of imperial power. Some

people say more than a kind of, but

we've been an imperial power in in many

ways since the end of World War II. But

it's a very strange

it's not like any previous empire. The

Pax Americana, you know, starts with the

Marshall Plan. Instead of

plundering our defeated enemies, we

rebuild them. And then we build a system

of alliances and

um we have NATO, we have the

international economic institutions like

the International Monetary Fund, which

are all

you know, they do actually kind of

reflect US interests, but at least on

paper, they're we're at most first among

equals. So, we don't we we we are a uh

a polite, uh

low-key, relatively generous imperial

power.

Uh that is a very hard role

for many people to understand. It's sort

of uh

the take you know Greenland. Uh

Yeah, Greenland it's there are stories

of the which Greenland could become

strategically important. It's a

territory of Denmark which is an ally

under NATO. So we actually have the

right and the ability to maintain

military bases there. It doesn't have to

be US territory. That's a little too

hard for a lot of people to wrap their

minds around. They want us to be

at they on the one hand don't want us to

be spending resources supporting our

allies. On the other hand they want us

to be exercising power but they want

something that's a

that's more direct. They want us to be a

lot more like a traditional imperial

power

which is foolish. I mean the we

the thing that we built the thing that

that

the um

the old US establishment built after

World War II with this

soft

soft imperial status and

was was a pretty good one. We we were

able to build a world that

was comfortable for us to live in

without bloodshed without

without um

a lot of the the downsides of empire but

it's it is subtle and it

subtle is not something that MAGA does.

I've wondered a bit if we're not going

to see Republicans

begin to grow

a bit of spine here. So I was surprised

to see Chuck Grassley and Maria Cantwell

Chuck Grassley being a

Republican in the Senate come out with a

bill to restore congressional authority

on tariffs then Mitch McConnell tweeted

as I have always warned tariffs are bad

policy and trade wars with our partners

hurt working people most. Tariffs drive

up the cost of goods and services. They

are tax on everyday working Americans.

Preserving the long term prosperity of

the American industry and workers

requires working with our allies not

against them.

Now that's not what we're hearing from

most Republicans but it's a it seems to

me like an early signal probably after

Republicans lost that Supreme Court uh

fight in Wisconsin election in Wisconsin

that you know as the economy suffers

here they may not be all that excited

about standing by him.

Well, the problem is

that the thing about everybody you

mentioned is they're all very old

and don't have much of a a future

political career just because they're

they're very old and uh uh

anyone who I mean many people have

over the years

uh over this past decade

I

kept on waiting for the Republican

grown-ups to stand up against Donald

Trump. And anybody who's made that bet

has been very very badly wrong again and

again. So I don't think you should count

on that. I it seems to me much more

likely that when in the end these guys

will cave as they always have.

Okay then and Mike Johnson and John

Thune control their respective chambers

and if they break with Trump that will

be the end of their leadership.

Yeah yeah. No that I mean that in both

cases it's it's hanging by thread. And

look we've we've seen this that that

anyone uh

uh who

Donald Trump certainly has will retain

until until the the end of his days will

retain the ability to destroy the career

of any Republican who opposes him.

We've been talking here about the MAGA

case against the sort of global trade

regime.

And I think it's pretty easy to pick it

apart because the policies don't make

sense and they're not going to work and

the arguments are contradictory and and

as you've said a couple times on your on

your Substack

this is a case where

Donald Trump has an intuition

and all these people are coming behind

him to try to apply theory to it.

Yeah.

And but but there is been a wide there

has been

disillusionment with the global trade

regime. Jake Sullivan, the the National

Security Advisor for Joe Biden, said

that the postulate that deep trade

liberalization would help America export

goods, not jobs and capacity, was a

promise made but not kept.

Is there a version of the critique

against the trading regimes we have,

an argument for tariffs, maybe truly

reciprocal tariffs, so that you buy?

I don't really

I don't really buy a tariff argument.

And you know, again, it it's really

important to understand that we have

reciprocal tariffs. Yeah, we have a free

trade agreement with Canada and Mexico,

like as we just ripped it up.

That that Donald Trump negotiated.

That Donald Trump negotiated

and he took an existing agreement and

and changed a few semicolons and they

called it his agreement. Um, but we have

a

You know,

Europe has very low tariffs on our

exports just as we have very low tariffs

on their exports as well. So, we we

actually have a reciprocal trading

regime. We do have persistent trade

deficits.

Um, which

are

not a

in a lot of ways you could say that

they're actually a reflection of US

strength.

Money flows to the United States, you

know, over the past

uh, 25 years, as the US has had

persistent large trading trade deficits,

we've also had

much faster productivity growth than

other advanced countries. We've really

pulled away from

uh, from Europe in particular. We have

better demography. Uh, because we have

somewhat higher fertility, but also

immigration, which has meant that our

economy has grown a lot faster. The US

is a has actually, though we

uh, we have basically maintained our

share of world GDP despite the growth of

China, because we've we've grown so much

faster than the rest of the advanced

world. So, you if you just looked at the

XR performance, we're doing fine.

Um now, there is a question of

wages of ordinary workers uh have not

grown as much as we'd like. We've had

rising income inequality, and that's

some of that some of that is due to

imports. And and you know, that's that

actually is trade economics 101 that

that trade can have effects on income

distribution. So, yeah, there's

something there, but the idea that

uh

it it's again comes down to this um

talking about globalization sounds

like it's must be it's it's a

sophisticated, it's important, it's

global.

Uh you know, I I

when I was much younger, my parents got

me a sweatshirt that that said global

schmlobal on it. And they asked if they

I asked why, they said, "Well, you're

always going off to some conference, and

when we ask you what it's about, they

you say global schmlobal." So, you know,

global schmlobal is a very appealing

story. People like to talk about it. Um

it's probably

sort of

well behind more mundane things like

productivity growth and

um and for that matter, labor policy uh

in terms of of causing inequality. But

yeah, the they're

Look, if um

I think I can tell this story.

I think you can do whatever it is.

Yeah, I was at

Just us here.

I was I was visiting in Oxford

uh

um back um about 10 years ago. And uh

and uh it's extremely rude to step out

of a dinner party in Oxford to take a

phone call

unless the phone call is from the

president of the United States

complaining about the op-ed you just

wrote.

Uh cuz I I I came out against TPP, which

Obama was was advocating, and I I just

said I don't I don't think this is a

really good idea, and I think it's

particularly you really shouldn't be

spending political capital on this. And

so, you know, a lot of us had we're

feeling uneasy that that the sort of

uncritical pro-globalization argument

had gone too far.

So, um

the yeah, to to say we need to step back

and and we did. I mean, they again, the

Biden administration had some

significant nationalistic

uh economic policies, but that's a it's

a far cry between saying, "Yeah, we do

need to think a little bit more about uh

buy American. We need to think both both

national security to some extent worker

uh

concerns." And but there's a world of

difference between that and you know,

what we're getting now.

I think that's a good place to end then.

Uh always our final question as a

veteran of the show, you know it. Uh

what are three books you'd recommend to

the audience?

Okay. Well, I just read

it's it's been out for a while, but I

just read it had a discussion Zach

Carter's

uh The Price of Peace, uh which is about

John Maynard Keynes and his his role in

in the world and then beyond. Fantastic

book.

Um

the uh

my friend the uh

uh

uh fund manager Barry Ritholtz has a

great book called How Not to Invest,

which I believe it or not is is

interesting even if you aren't in in

investing. He's just he's just uh

really a lot of fun.

Um and

Oh, yeah. I'm just reading the latest

book by Phillips O'Brien. He's a

military historian and uh he has a new

book called War and Peace. And he is

always

uh

fantastic

heterodox. He's pretty scathing actually

about even about Biden administration

policy, but anyway, he's he it it's a

really interesting book.

Paul Krugman, thank you very much.

Thank you.

Ooh.

Ooh.