Paul Krugman Podcast

For all my interviews and more, subscribe on YouTube.I’m spending a lot of time thinking about high interest rates, both for obvious reasons and because I’m reconsidering some of my own long-held views. So I thought I’d have a long talk with someone who has really studied these issues and now, I believe, may have been more right than I was. This may be even wonkier than usual, but trust me, it’s important.. . .TRANSCRIPT: Paul Krugman in Conversation with Ricardo Caballero(recorded 8/25/26)Paul Krugman: I’m talking today with a very, very serious economist, Ricardo Caballero, who is one of the most important macroeconomic thinkers of modern times. I was going to say of my generation, but actually, I’m an older generation—but of the currently, still vital creative generation. We’ve had discussions about a lot of events over the past 25 years that have involved some disputes that I hope we can get into in a way that people understand. And recent events, including the rise in long-term interest rates, have really brought all of those issues to the fore. So I thought I’d talk with Ricardo, who is the Ford International Professor of Economics at MIT, a position I once held. But anyway, hi.Ricardo Caballero: Hi, Paul. So wonderful to see you again. We still miss you at MIT.Krugman: Well, I miss the days when actually getting at the truth was what mattered, as opposed to dealing with all of the obvious lies. But anyway, I guess there are different stages in one’s life. But so, I will want to get into recent events. But one thing that really struck me is that there’s this long-running discussion basically around interest rates and international movements of capital where there are kind of, as I see it, two rival ways of thinking about it. It could be some of both—but one was about returns to capital and investment opportunities, and one was about people looking for safety and security in assets. And for the most part, I was on one side of that and you were on the other. And I’m starting to think that you were probably right. So, first off, how would you portray this discussion? And maybe we can go back and forth.Caballero: I don’t know whether they’re really different views because, you know, my view at least was always, when I say “a shortage of a store-of-value,” if you will, investment opportunities create those store-of-value opportunities and so on. So I never saw it as very contradictory. I thought there was an imbalance: lots of needs for savings, in particular in a very specific kind of saving—safe saving. And the productive structure wasn’t able to generate enough assets, especially safe assets. And that’s, I think, what led to the sort of “shortage of safe assets” type of literature, and that naturally depresses safe interest rates. If you look at the return on capital, actually, it was fairly stable. It was all absorbed by the opportunity risk premium, if you will. And so you can see returns both on safe and risky capital sort of declining in tandem since 2000, or earlier than that. And then somewhere around 2000, you can see that the safe interest rate keeps coming down, while the return to capital is sort of paralyzed. And what starts widening is the equity risk premium.Krugman: So let me just break in here. A kind of crude, simplistic view—probably my view at a certain point—was that there’s capital and then there are returns on capital. And when we start to see interest rates get really low circa 2000, that’s telling you that returns to capital are going down. And if we see a lot of money coming to the United States, it’s because, well, America had faster population growth than other rich countries, and we were leading the technology revolution. But you’re saying there’s a really big difference between buying stock—corporate investment—and buying U.S. government debt, which is safe. And that the United States was sort of better than the rest of the world at supplying these safe assets.Caballero: Absolutely.Krugman: And just going way back—the financial crisis, which seems to me like yesterday, but was in fact almost 20 years ago—involved all of these exotic financial instruments, the asset-backed mortgage-backed securities, which you interpreted as a response, to a large extent; not just fraudulent, but a response to a real demand. Right?Caballero: Absolutely. I thought there was a shortage of ultra-safe assets. So financial engineering got to work and they created sort of “synthetic safe assets.” Now, they were safe assets from the point of view of idiosyncratic shocks, but they weren’t from the point of view of systemic shocks. And to me, that was quite important in generating the financial crisis.Krugman: Yeah. And so idiosyncratic shocks are like, well, okay: a particular housing development turns out to be a bust, but a collapse of the entire housing bubble is... And so fancy math was used to create assets that were supposedly safe because you were pooling all this stuff. And so, in your view, it wasn’t just that you had evil, fraudulent financial types—though that too—but that they were responding. There basically just weren’t enough Treasury bills and stuff like that out there.Caballero: I mean, they realized there was a spread to be earned by creating these assets, and then there were regulatory failures that allowed them to hold them on their own balance sheets. And I think that’s when the really toxic mixture was developed, because you had these very low-capital-charge assets which weren’t really safe. But you’re right, it was this spread that sort of created the opportunity and then the regulatory arbitrage, if you will, that brought them into the balance sheets.Krugman: Okay. I’m going to be self-indulgent and tell you a quick story. Robin and I bought our New York apartment in early 2009, which turns out to have been perfect timing, although that was purely an accident. We had come into a slug of money courtesy of the Swedes. But as we were looking at places and I was looking at the bookshelves of people who were selling their apartments, and a whole lot of them had books on the Gaussian copula and stuff like that, which, as you know, was a technique that was used to justify the claim that these synthetic assets were safe. And so we were clearly getting a preview: there were a lot of apartments on sale from Wall Street quants who’d been fired because everything was about to fall apart.And so, in some sense, the setting for the financial crisis was that people wanted safe assets, and excessively clever guys on Wall Street invented seemingly safe assets. But then everything went to hell, and we had the financial crisis. And then we had this long period of really, really low interest rates. And your story would be basically, as I understood it, that all of these fake safe assets had been revealed as fake, and now there was a sort of piling into Treasury bills, piling into actually safe assets.Caballero: Indeed, and also partly the supply of sovereign safe assets—Italian bonds and the like—those also went away. And so we had a massive shortage.Krugman: Okay. Now, there was an alternative story. And believe it or not, listeners, we are going to get to where we are now as a result. But there was an alternative story that I guess Larry Summers came out with at first, but I actually had been toying with the same thing, which was that what was actually happening was a real lack of investment opportunities. This was the “secular stagnation” view.Caballero: You know, we were both at that conference. It was IMF, I think, and you may not remember, but that’s when Larry sort of came up with this theory. And you may not remember, but I stood up and I said, “Look, I buy a part of that story. But what you’re missing is that the return on capital hasn’t declined nearly as much as the safe interest rate.” And that’s what I was describing before—the equity risk premium increased enormously. But the return to capital, regardless of whether you measure it with national accounts or return on financial investment, did not decline nearly as much.Krugman: That’s right. So, national accounts being corporate profits divided by the value of corporate assets. And there really wasn’t a big decline in the profit rate.Caballero: Of course, in the recession itself, it did. But I’m saying afterwards it recovered.Krugman: Yeah. By like 2015, the recession is over and basically the interest rate on federal debt is lower than the rate of inflation. And so it’s basically free money for governments to borrow. One interpretation of that is, well, population growth has slowed and technology is maybe not as exciting as we thought it was going to be, and so there weren’t these opportunities. And you were saying that the numbers never supported that.Caballero: I don’t think so. I mean, elements of these stories are obviously correct, but I mean, there’s like 400 or 500 basis points that really came from widening in the equity risk premium.Krugman: By the way, the equity risk premium is when stocks historically pay a higher rate of return than bonds—certainly more than government bonds. And it’s always been a little bit of a puzzle why it’s so large.Caballero: Not for long, though.Krugman: Yeah.Caballero: Not so much now.Krugman: But it was more that people trusted the U.S. government and didn’t quite exactly trust corporate investments. And so that’s why the government was able to borrow so cheaply.Caballero: I think so. And also the demographic cycle helped on that dimension because, you know, older people tend to demand safer assets. So that’s also changing that composition.Krugman: Yeah. I wasn’t even thinking about that. So I have to say, I think we were kind of, in some ways, living in a fool’s paradise where governments can borrow essentially for free—certainly the U.S. government could borrow essentially for free.The case that a lot of us used to justify secular stagnation—and for some reason, the words here are all completely meaningless to a normal human being—but to justify this idea that we just had low returns, a lot of us talked about Japan. Have you spent time on the Japanese story?Caballero: I wrote a paper on Zombie Lending.Krugman: Oh, yes you did. Why don’t you tell us about that? Because that’s also an interesting thing that was a consequence.Caballero: That was a consequence. I mean, essentially, in Argentina, if you have a financial crisis, you just blow up. But in Japan, they had the resources to essentially keep banks alive and the like. And so that led to a process of evergreening loans. And we show that that reduced productivity growth. So it did have a real impact eventually.But there were other things at play in Japan as well. They had a massive financial crisis which certainly took away their mojo. It took many years, and then they responded. The fiscal policy sort of reacted too soon to the incipient recovery. So they fumbled on multiple occasions.Krugman: Yeah. And the story that we used was that, you know, the collapse of fertility happened there first. So there was a shortage of Japanese, which should have reduced returns on investment and maybe led to low interest rates, but maybe that wasn’t even the story for Japan.Caballero: I mean, I think it is part of the story, definitely. I mean, they certainly experienced a very acute demographic cycle. They were not very inclined to allow massive migration. So they had all the ingredients; there is no doubt. But on top of that, you had the financial crisis and this supporting of sort of zombie loans. And so they did terrible things to the productivity environment.Krugman: Given all of that, you might think that Japan would have fallen way behind on productivity. And they have lower productivity than we do, but not...Caballero: Well, labor, because they have lots of capital.Krugman: True. Okay. So this is a vision of kind of the history of the past 25 years as a search for perceived safety, investments where you can’t go wrong, and an abortive attempt to cater to that demand by providing a lot of clever things that looked safe, but weren’t really. And then a collapse of that. And then you enter this long period, because the financial crisis is 2008 and interest rates are still very low, at least as of just three years ago. And now all of a sudden, or so it seems, that’s gone away. So, what do you think happened? We kind of had a glut of safe assets instead of a shortage. What do you think happened there?Caballero: Well, I think it’s a combination of things. I think that first, there’s the COVID shock for sure, that affected the supply of assets all around the world. So now we have a lot more competition than we used to have as well. That’s one aspect. Second, it brought sort of the inflation monster into play. And that also complicated the life of bonds. And then markets became very bullish. So the equity risk premium we’re talking about essentially went away.So, to me, a lot of the movement that we have seen is really the equity risk premium up and down. The question is whether it’s structural or temporary. We also saw a compression of the equity risk premiums right before the dot-com bubble. And so the burst of the bubble also led to lower interest rates. So, in struggling with this, the question becomes: How much of this is structural versus how much of this is just some temporary phenomenon or not? So that’s one issue. That’s sort of the financial issue.And then the second one, which is not unrelated to this issue of the compression in the equity risk premium, is the AI boom. I mean, this is a massive investment and wealth boom, which is very important. So the wealth boom has boosted aggregate demand and that has increased equilibrium interest rates. We talk about the K-shaped economy; I call it financial Dutch disease. We have this enormous amount of wealth creation and therefore the interest rates have to be high. And then anything that is affected by high interest rates is struggling.Krugman: By the way, people won’t know this, but Dutch disease is a very long ago story, but it stuck. This was when the Netherlands discovered natural gas, and suddenly they were selling lots of natural gas, which made the—I guess they still had the guilder then. They still had their own currency. So this made the guilder strong, which actually was kind of devastating for Dutch manufacturing because they weren’t competitive anymore. And so this is a case where good news is actually bad news for large parts of the economy. And actually, I happen to know, the Dutch stopped pumping out the gas a few years back because the land, which was already below sea level, is subsiding further. But we still use that term.So you’re saying when people think the second coming of wealth has arrived because of a new technology, they pile into that, and then they’re not so interested in parking their money in safe government bonds.Caballero: Indeed, yeah. I mean, even without the secondary effect, you still get a boost in aggregate demand that comes from the wealth. Before the productivity of the AI boom arrives, you get the demand. You don’t get the productivity. That requires higher interest rates.Krugman: That’s right. That was very much the opposite, by the way, of what Kevin Warsh has been trying to argue. He’s been saying, “Well, because of AI, interest rates can come down because it’s anti-inflationary.” But the problem is, if the anti-inflationary stuff arrives, that may yet be some years down the pike. And meanwhile all the spending and the wealth that’s driving the stock market valuation... In a way, you’re saying that a lot of what’s happening should be good news, right? We have this technology, which is pretty impressive.Caballero: Yeah, it’s extremely impressive. Yeah, I wrote a little paper. It’s called Speculative Growth and the AI “Bubble.” I’m very optimistic about this technology. Now, whether I’m optimistic about the current valuations, that’s another story. But I’m optimistic about the technology. And I think there’s a good future ahead. But the good future, to get there at a reasonable speed, I think we do need a little bit of bubbly markets. And that’s the nature of the story. But it’s a fragile story because, you know, bubbles are fragile.Krugman: Yeah. And by the way, I don’t know if you saw this, but Stan Druckenmiller, sort of George Soros’s right-hand man and also Scott Bessent’s mentor, published an opinion piece in the Financial Times about how Bessent is all wrong to believe he can bring down long-term interest rates with his little bits of financial engineering, which was an interesting piece and interesting given the source and all that, but it appears, based upon the detectors, to have been entirely written by AI.Caballero: I see!Krugman: It seems Druckenmiller knew what he wanted to say, but couldn’t be bothered to actually write it. So he actually told Claude to write it.Caballero: I’m sure he wanted to blame somebody if it didn’t work well.Krugman: Now, it’s good news, we think. There’s this technology, which is amazing. It really is. I have to say, I’m using it for pretty nerdy stuff like, “Here’s this published table, but it’s a PDF. Can you please convert it into an Excel spreadsheet for me?” You know, that kind of thing. But it’s amazing how much time that saves.But it’s actually having this effect, where suddenly interest rates on federal borrowing are way up. Again, this is going to be a lot of nerdy questions because I’m really trying to scope this out, and I can’t think of a better person to talk to about it. It’s also true that a lot of interest rates beyond that and government debt are also up. Right? So does that make sense? If it’s a search for safety, should we be seeing home mortgage rates also going up by the same or similar amounts? Maybe they are.Caballero: They are in the sense that spreads are being compressed at the moment. So that’s consistent with the fact that there isn’t a lot of concern with risk. And so all the spreads are coming down. That sometimes has to do with “reach for yield” type phenomena. It’s pretty standard. The benchmark rate, which is the Treasury rate, tends to move more than the other ones outside of a financial crisis. But the spreads are being compressed. And mortgage rates are, in fact, rising—not one-to-one, but they are rising.Krugman: Okay. But it’s not one-to-one.Caballero: No. I haven’t checked, but I suspect mortgage rates are not rising one-to-one. But corporate spreads are being compressed.Krugman: Yeah, and that’s actually kind of how you are measuring. Explain to me, because I didn’t quite get it: You have quite a new paper on basically the elimination of the safety premium on U.S. government debt. How did you go about measuring that?Caballero: It’s a combination of things. I mean, the concept I have in the paper is one of the marginal costs of debt issuance. And that has two components. One is the spread, which we’ll discuss—the spread relative to a safe interest rate; think of it as the front-end monetary policy rate. And another one is the cost of rolling over the old debt at the new higher premium.So, my estimate is that these costs have increased by about 110 basis points, of which 50 basis points are the result of an increase in the premium—the spread—and 60 basis points is a result of these rollover costs. And the rollover costs come from the fact that now we have so much more debt that every time you get a little bit more of a spread, eventually when you end up rolling over all the old debt, that is going to cost you a lot more from the point of view of the fiscal deficit.Now, the most commonly understood term is the spread, the premium component. And that has two components. One is the rollover premium, if you will. That one I measured by the Treasury basis trade, essentially. You can probably explain it better than I can.Krugman: Yeah, I’m not sure I can do that either. But it’s essentially from how much more a Treasury bond pays over a swap that doesn’t use the same amount of balance sheet. And we call that the convenience yield, that Treasury bonds would actually sell at a higher price than the implicit price in a swap of corresponding maturity. And the swap is a swap on corporate debt, right?Caballero: No, no, no. It’s on safe interest rates. Just think of a futures contract. It’s the fixed rate of a future, of a swap. So think of a futures contract.Krugman: Okay. But essentially, people were willing to accept a lower interest rate if they were just buying U.S. government debt, rather than doing something more complicated.Caballero: Yeah, actually it’s not necessarily more complicated. But it happens that the Treasury bonds have a lot of other advantages. You could use them for so many things: collateral and so on. And that was worth a lot. And that’s an interesting angle, actually. It was worth a lot also because the marginal holder was a very different holder from the current one—central banks and so on. For a central bank, like the Bank of Japan, it’s not very useful to have duration through swaps and the like. They like to hold the Treasury bonds.Now it’s a bit different. The marginal holder may not be the Bank of Japan. It may be some levered agent in the economy, and for that agent, balance sheet and so on is very important. So if you look across all the maturities, that spread was on the order of -18 basis points before COVID, if you will. And now it’s around, I don’t know, zero.And the other one is the duration component. And if you look across all the maturities, essentially the U.S. didn’t pay much for duration exposure and now it’s paying like 40 basis points for that. So that’s the way you get to 60 basis points.Krugman: So yeah, people are demanding a higher interest rate basically to tie their stock up in long-term stability.Caballero: Yeah, I mean, they’re demanding a higher premium because the safe interest rate goes up for the kind of things we were talking about before—wealth and the like. And the question is, what about on top of that?Krugman: Okay. And so, I should have these numbers in my head, but a few years back, the U.S. Treasury could issue 30-year bonds—so basically lock in financing for the next 30 years—for several hundred basis points, several interest percentage points lower. And it’s now 5-point-something, which is just way, way higher than before. It basically means the federal government was paying hardly more, if anything more, than the inflation rate, and in fact less, and then if you subtract growth in the economy, basically no burden of debt.Caballero: Yeah. I mean, in real terms, we went from zero or negative for the 30-year bond to plus 2% or 2.5%. So it’s quite significant. And what I’m saying is that perhaps maybe one-third of that is a result of the fact that there is a little bit of a glut of all these assets.Krugman: And just going back, what happened was that the United States and other countries that also issue stuff that is perceived as safe just sold a lot of bonds, and a lot of that was because of COVID, right?Caballero: Absolutely. That was a big thing. And nowadays corporates are issuing a lot of bonds as well because we’re in the middle of this investment boom. And so, I think corporates in the U.S. are going to issue on the order of $2 trillion this year. That’s an enormous amount of competition.Krugman: Yeah. And probably people think of Microsoft bonds as being very nearly as safe as U.S. government debt.Caballero: For a while, Apple bonds sold at a higher price than Treasury bonds. I think it was a very brief moment, but I think it did happen.Krugman: I do see where sometimes people say, “I’m going to get you something that’s safer than U.S. government debt.” And I always wonder, what do you think anything is going to be worth if the U.S. government goes bankrupt? Who’s going to enforce the contracts?Caballero: I assume they are talking about price risk more than the default risk. And by the way, I wrote this paper on a lot of debt, if you will, and what that does to aggregate demand. But I’m not predicting any sort of crisis; I don’t see that. I think there’s nothing that can substitute for U.S. Treasury bonds. I always say, you know, there isn’t enough French real estate you can move to if you want to get out of the U.S. So the paper I wrote says precisely, “No, no, no. Assume that this will remain safe.” I don’t think that this is the issue. The issue is that it becomes more costly to issue this safe debt and that begins to become a big drag on aggregate demand.Krugman: In some ways you answered the question already. But I’ve been wondering, how much of what we’re seeing is just that there’s a lot of debt out there and you basically have to reward people more to get them to absorb it, and how much of it is an actual loss of faith in the safety of the stuff?I’m seeing back and forth on this, by the way. I’m reading Robin Brooks, and he’s talking about the debasement trade and people worried about the security of U.S. debt. And I think you are not worried. But the question of whether you are worried and whether somebody out there might be worried are not the same question.Caballero: Of course.Krugman: Do you see any signs that people are, in fact, losing faith in the safety of U.S. debt as opposed to just that they don’t really want all that much of it?Caballero: I think inflation risk is something that is a bigger concern. That’s a debasement risk more than, I think, a default—I would assume. I mean, I don’t know what’s on some people’s minds. But I think there is a much bigger concern out there about inflation, and particularly with the current Fed and, you know, interaction there is not very good. But I suspect it’s that kind of thing.Having said this, you are seeing a little bit of a change. You remember we talked about corporate bond spreads having shrunk. But not in the hyperscalers. Now, you have seen a little bit of concern there that didn’t exist at all a few months back.Krugman: Yeah, I have to say, if you go back just a few years and you looked at the big established tech quasi-monopolies, they had this enormous cash flow and these huge business technological moats around their quasi-monopoly positions. And how could they ever be in financial problems? And the answer is, well, if they’re going to spend $3 trillion on a technology that, however great it is, may or may not actually be profitable for the people who spend on it... That could do it. So, yeah.It’s at least arguable—I mean, you don’t have to get particularly political to say that the U.S. government doesn’t sound the way it used to sound. Maybe you can help me here. I’ve been trying to wrap my mind around what a loss of confidence in U.S. debt would mean. How would that even play out? When people say, “Oh, people are going to dump their U.S. bonds,” I always ask, “And buy what?” And you’re in that same camp?Caballero: Mostly, yeah. I mean, again, local is different. With a small scare, you can see lost revenue. There was an episode when inflation was a little higher than now and people perceived, for the reasons you just described, equity in this hyperscale assets hypothesis. And I think part of the reason the equity risk premium was so low—and now it’s been increasing a little—it was exactly that. Treasuries were perceived relative to the main shocks that we were experiencing—inflation, if you like—Treasuries were perceived as riskier than some AI-related equities. So you could see for local shocks and so on, depending on the nature of the shock, something going into equities and the like. But otherwise I just think there is nothing that can be done in size, in very significant size.But we can get a spike. Remember in March of 2020, I think it was, there was a moment in which foreign central banks wanted to sell Treasuries and the Treasury swap spread got unwound because of margin calls, and we did see big spikes in treasuries. And I think the swap lines that were created by the U.S., by the Fed and the like, were mechanisms to try to stabilize episodic things. But I call them episodic. I just don’t see anything that can hang in there for a long time without creating a matching mess.Krugman: Yeah. One of the marks of really, really effective financial policy is that nobody even notices that you did it.Caballero: Exactly. Absolutely. That was very well managed.Krugman: March 2020, for a couple of days, was absolutely terrifying. But they responded effectively. Although, actually, even then, what were people buying?Caballero: Cash.Krugman: Ah yes, they were piling into cash. And of course, the thing about that is we can print cash.Caballero: True, eventually. But first you have to go through a spike and then it happens.Krugman: Yeah.Caballero: But effectively that’s what they did. When you create a swap line, it’s just like printing cash.Krugman: Yeah, that’s right. I’d say I probably get about 15 emails a morning saying, “Here’s how the dollar is going to collapse. It’s the great American financial crisis.” And it usually starts with how irresponsible U.S. policymakers are. All of which is true. But how does this happen? You know, give me the mechanics of the crisis. And I’ve never been able to get an answer on that.Caballero: Yeah, I don’t see it either, but I do see a drift. I do see a drift. People can be very creative. You give them time. If you tell me now I have to relocate $40 trillion of debt somewhere else, there’s nothing I can do. But, I mean, give them enough time. People start finding certain things that they use, to find sort of safe and appealing, or more appealing [places to put their money]. So I think drift can do a lot more damage than events.Krugman: Yeah. I mean, I’ve been on a kind of related subject: the international role of the dollar in the global payments system. And it’s really, really hard to see anything replacing the dollar, but workarounds that people manage to do—you know, we’re witnessing that in the Persian Gulf as we speak. People can find their way around it.Financially, what keeps you up at night? I mean, we’ve both lived through and were very attentive during two inconceivable financial crises. Although the one in 2020 got solved very quickly. But I remember 2008. I actually had a relative who was working at the New York Fed and that weekend, the 13th, 14th of September, he wasn’t answering his phone and we said something must be up. And it sure as hell was.Caballero: That was a long weekend there.Krugman: Yeah, it was. He had bags under his eyes big enough to pack your luggage in. But anyway, are there scenarios out there that you worry about now?Caballero: More than a crisis, I worry about the fragility of the current boom. Precisely for the reasons we have been discussing. I think that high valuations are a needed ingredient in the development of this wonderful technology nowadays. But at the same time, we’re quite fragile to that. I mean, the good thing is that we have a lot of space to cut interest rates very, very rapidly if something goes wrong. But I think things are fragile.I’m exaggerating here but, you know, Venezuela did great under Chavez for a long time because the price of oil was rising a lot. And I feel that a lot of what is happening that is good has to do with AI covering up a lot of stuff. So I’m a little afraid about something that depends on high valuations that could come down very abruptly, and then we don’t do that great.Krugman: Yeah, I mean, you’re younger than me, but old enough to remember the late ‘90s. And I remember how everything seemed wonderful. Although that was a bubble during which people were happy. We’re now managing to have something different: It may be a bubble, but somehow everybody hates it.Caballero: A lot of people are very happy with the current bubble.Krugman: That’s true.Caballero: But it is also true that there’s a negative side as well. Now, having said that—this may be very optimistic, but I think that the current story is—there’s more alignment between the high valuations and the people that are really involved in generating this revolution. I think the fragility comes from different things. The Chinese may come out with some technologies that wipe out a big part of the competitive advantage we have and things of that kind. Sort of creative destruction-type things can be quite bad for financial wealth temporarily.Krugman: So, last question: What do you think of Scott Bessent’s attempt to push those top rates down?Caballero: I suspect they got very nervous, and I think that they wanted to cut a tail. I think he’s smart enough to know that he cannot change fundamentals, but I think precisely because of the fragility—I mean, I think they’re very worried that financial conditions can tighten very abruptly with a spike of that long end and then crash precisely the equity market and the like. And I think to me, this was a sort of “put”-type policy for financial conditions, which is quite important, obviously, for all the developments, political and economic.Krugman: Interesting times. This discussion will be posted four days after we’re having it, and given the way things are, it may be totally out of date by then. But I’m actually feeling somewhat more relaxed after this discussion, because I was a little bit worried that you were going to tell us that there are no safe assets anymore and the world is doomed.Caballero: Currently I don’t believe that. We shall see whether that’s naivete or wisdom.Krugman: Well, thanks so much for talking with me.Caballero: It was a pleasure. 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For all my interviews and more, subscribe on YouTube.Note: After I recorded this it was reported that Trump officials are threatening to demolish the Kennedy Center if it can’t be renovated to Trump’s taste (and presumably with his name added). Matches my argument exactly.Der Untergang naht.Pardon my German pronunciation. I’m going to take a break today from wonky economic analysis and talk about, well, Donald Trump, but in a slightly different way from what I think most people are saying. Not positive, obviously. Just before recording this, I saw that Trump wants to rename Lake Ontario Lake America. Which is silly, would be funny, except that this guy is the President of the United States. And it’s really kind of troublesome that someone in that position is that out of it, that petty, disconnected from reality. And look, it’s not news to anybody that Trump is ego-driven, disconnected from reality, and at the same time, somehow commands a level of deference and obedience from the entire machinery of the federal government that no president has ever had before. So this is really quite serious. What I don’t think people are fully aware of is just how bad it can get, given that Trump is so obviously dissociating, decompensating, that he’s not all there. Obviously, he was already a very problematic personality, which was doing a great deal of damage to the United States. I don’t think even now people fully appreciate the amount of damage that has been done. Even before the Iran War, Trump’s provocations, insults, his trade wars, really destroyed the world’s trust in America.America became a country that could not be trusted to honor agreements. It was a country that constantly tried to bully other countries. Our word was worth nothing. Our sanity was not to be taken for granted. And then, of course, along comes Iran, where in addition to showing that we’re not to be trusted, that we’re not going to be relied upon., we also showed that we were far weaker than people imagined. If there’s one thing people thought it was, well, America has a powerful military. It turns out, well, not as powerful and not nearly as competent as people thought. How much of that is the result of Trump and Hegseth degrading it and how much of it was there to begin with is an interesting question. But anyway, at this point, we are not loved, we are not respected, and we aren’t even feared. And we’re not getting that back. Even if Trump is succeeded by someone decent —God help us if he isn’t— but even if we have a more or less rational, well-intentioned government that follows, the world now knows that we are capable of putting someone like Trump in a position of unprecedented, almost absolute power and that it can happen again. And the world also knows that we’re just not as fearsome as we seem to be. That we can be defied much more successfully even by smallish countries than anyone really imagined. And we’re not getting that back. I anxiously wait for the days when we’re no longer a Trump-ruled country, but this is my country, and what will be left of us, what will be left of our role in the world, even once he’s gone? Okay, the title I gave, the way that I opened this talk was Der Untergang, which is the German title of the movie Downfall, about the last days of Adolf Hitler. I hope that nobody is going to complain about my using the German, right? We’re long past the point where it’s considered unthinkable and incredibly rude to make Nazi parallels. There’s a lot of people in this administration or close to this administration who are effectively Nazis, in some cases explicitly Nazis. America is not yet Germany under Hitler. But the reason we don’t have a functioning Gestapo in this country is not for lack of desire to have one. It’s because these people, at least so far, don’t have the juice. So all of the stuff, all of the parallels seem appropriate.And the parallels are there. I mean, the parallels are there even in seemingly small things. Hitler was obsessed with building a gigantic gaudy ballroom. So there’s just a lot of parallels in there. Now the main message of the movie Der Untergang is that it’s about Hitler in his final days who knew that he was losing. He knew that defeat was looming. He knew that his power was collapsing. And his reaction was, among other things, to take it out on his own country. Hitler never accepted that he had failed Germany. He felt that Germany had failed him. And so he had a plan, often called the Nero Decree, which was to destroy as much as possible of Germany’s infrastructure. Supposedly to deny it to the victorious allies, but in large part to punish Germany. Well, Trump knows. He may deny it, he may have his moments when he actually believes that the polls are all fake and all of that, but in many ways he is behaving like somebody who knows that his days of supreme power are about to end. He, of course, is not going to accept that it’s his fault. It’s the fault, obviously, of the Democrats, who are all communists. It’s the fault of the Republicans, who didn’t live up to his leadership. The fault of everybody but him. What does he do in the position of losing? Probably not committing suicide in the Fuhrerbunker, but still in the position of losing all of his power. Well, what you do in that position, if you are somebody like Trump, who is an empty vessel: there’s nothing in there, the only pleasure he appears to take in life comes from dominating other people. Well, one thing you do is you try to stick your name everywhere, or leave your imprint everywhere. So Trump, according to reporting by Swan and Haberman, spends most of his time thinking about his construction projects and trying to leave his mark on everything in Washington. What I don’t think we’re fully appreciating even about those projects is that there isn’t a whole lot of actual construction. There’s a lot of starting of stuff, but so far it’s been mostly destruction, mostly tearing stuff down. We don’t have a triumphal arch, but we have a hole where the ballroom is supposed to be. We have just a lot of damage having been done to our nation’s capital and to the iconic structures that were supposed to define, symbolize who we are as a country. The scale of the destruction is really quite amazing. So I’m not going to try fancy video editing here. I’m just going to show you a picture of what the environs of the White House look like right now. There you go. That bare area is the South Lawn, ripped up because of Trump’s cage match. You can see in the corner there the hole in the ground, which is where the east wing of the White House used to be. Basically, Trump has left, so far, wreckage in his wake. Even the things which have not involved tearing stuff down, the gilding of statues, the horrific redecoration of the White House, is surpassingly ugly. That’s partly because Trump has terrible taste, but it’s also, I think, a clear sign of aggression. He’s saying, oh yeah, you’re going to give me a 33% approval rating? Well, I’m going to make the nation’s capital as ugly as I can in this little time as I possibly can. Now, this is all superficial. This is stuff that can and will be repaired. It’ll cost a lot of money, but OK. So we’ll rebuild the White House. We’ll reseed the South Lawn. We’ll strip the gilding off the statues. We’ll make the White House a dignified place again. But how much more will be coming? When we talk about Hitler’s last days, as I said, one of his last attempted acts was what’s called the Nero Decree, which was an attempt to destroy as much of Germany’s infrastructure as possible, supposedly to deny it to the victorious allies. But clearly, and even there’s some evidence that he actually he clearly thought this as a way of punishing the German people for failing him.Now, historiography is a little more complicated than that, as it usually is, but that’s clearly the gist of it. That Hitler’s final acts were to basically try to bring everyone else down with him. Do you really want to say that that’s not what’s going to happen with Trump? Assuming that he loses much, if not all, of his power to shape events this November, and of course we’re all worried about how he may try to disrupt or overturn the election, but assuming he doesn’t manage to do that, he will find himself much diminished. How much damage will he do basically taking revenge on America?Because always you want to bear in mind that Trump hates America. He hates the values on which America was built. He hates democracy. He hates rule of law. He hates all of the things that are what we’re supposed to be about as a nation.But increasingly it looks as if he just plain hates this country because it doesn’t love him. How much damage will he do? How much damage can he do? I don’t want to make a specific prediction, but I’m worried. And don’t say that he won’t do that or he can’t do that. Those have been famous last words again and again over the past decade. So this is going to be even worse, even uglier, I think than most people imagine. Have a great rest of your day. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.Better transcript!. . .TRANSCRIPT: Paul Krugman in Conversation with Jared Bernstein(recorded 8/20/26)Paul Krugman: Hi everyone. Paul Krugman talking with Jared Bernstein, former chief economist, head of the Council of Economic Advisers under Joe Biden. Now a policy fellow at the Stanford Institute for Economic Policy Research and at the Center for American Progress, which is in DC.Jared Bernstein: And I speak to you from Alexandria.Krugman: Yeah, and the reason I want to talk with you is, you know, there’s a lot of headlines now about debt. Interest rates, particularly at the long end, are way up. You and I have both been Substacking about it. I think we mostly are on the same wavelength, but I’d like to go back and forth, and I want to talk about some work that you’ve done, particularly with Bobby Kogan. But what’s your take right now? I mean, we had all these headlines about forty trillion dollars of debt. This is very different from the way we were talking about debt a few years ago, so what’s your take?Bernstein: Well, Paul, like you, for many years I was pushing back on those whose hair was on fire about the urgency of the federal debt. I thought that that overheating was overheated, and that as long as the growth rate surpassed the interest rate and we sort of kept our deficits within kind of a normal range, we could service our debt without breaking a sweat. But a few years ago, I began to become more hawkish and less dovish for a couple of reasons. One, the budget math became less favorable; the growth rate looked a lot closer to the interest rate, and that was before this recent bump up in bond yields. But also, you know, I’ve been in government a lot lately, and it looked to me like neither side really cared much at all. The reaction function, as we say these days, seemed to have been kind of dead in a way that I thought was problematic.Now, this is not a pox on both houses. And by the way, here’s an area where you and I may have slightly different views. The Republicans’ tax cuts—and Bobby and I have done a lot of work on this—are public enemy number one here. Exhibit A, in terms of why we’re in the mess we’re in. But you know, Democrats have largely endorsed those tax cuts and, in my view, have done some irresponsible stuff, too. So that’s kind of my first take.Krugman: Okay. You’re talking about r-g, but that’s kind of an important point, right? Why do we think about interest and growth and debt? Lots of people are out there saying, “Look, the interest on the debt is now so huge,” but that’s not quite the whole story, but it’s closer to the story. Anyway, your version of it...Bernstein: Yeah. For me, a lot of this comes from paying attention to Olivier Blanchard‘s work. He has kind of wedged into a lot of our heads this notion that when the growth rate surpasses the rate of interest, it is possible to keep rolling over that debt and not get into a kind of debt spiral because you’re generating enough growth and revenues and incomes to sustain the debt or to roll it over. Meaning, you know, replace some old debt with new debt without worrying about the debt getting on an unsustainable trajectory. As soon as r is bigger than g, that’s when you have the threat of a debt spiral.That’s not all the math. It depends on the size of your deficits as well. But broadly speaking, for many years we had pretty good growth and pretty low interest rates. We can talk about how that growth was distributed—a lot of it didn’t reach working-class people—but the fact that g, the growth rate, was higher than the interest rate was one reason why I was less wound up about all this.Krugman: Yeah, one of my favorite things is talking about the question of “How did we pay off the debt from World War II?” And the answer is we didn’t. The debt when John F. Kennedy was elected was about the same as it had been on V-J Day in dollar terms, but it was just vastly smaller as a share of the economy because we outgrew it. As long as debt doesn’t rise relative to GDP, it’s not a problem. That means if the economy is growing and interest rates are not too high, not only don’t you have to pay off the debt, you can actually keep it growing as long as it just doesn’t grow too fast, right?Bernstein: Exactly. So the problem we face is when our debt grows faster than our economy, when the debt ratio, or the debt-to-GDP, just keeps going up and up and up.Krugman: Basically for much of the period when everybody was going on and on about debt, the arithmetic there was actually pretty favorable, right?Bernstein: This is precisely why I kind of did a bit of a flip. I have an Op-ed in the Times—it’s from at least a year ago—where I managed to actually get them to put a graph in, which, you know, they don’t always do in there, which portrays this problem. It shows how the growth rate used to just reliably be well above the interest rate, where the economy grows faster than the debt, and so your debt-to-GDP ratio sort of glides along in a way that’s not particularly worrisome. But it looks like it’s starting to flip and starting to change.And then if you look at the CBO forecast, they actually have the interest rate on the debt falling below the growth rate numerous years out. And their estimates actually are kind of optimistic in debt terms because they assume a number of things: they assume tariffs continue to generate a bunch of revenue, which doesn’t look to be the case; they assume that some of the Trump tax cuts would fade, but now they’re permanent. So yeah, the budget math has gotten less comfortable.Krugman: Okay. I want to get to the interest rates in a minute, but the deficit that we’re running right now is just incredibly large. I mean, we used to run deficits to fight wars, and then we started to have big deficits when you had severe recessions. But now we have neither. I mean, there’s a war, but it’s not like World War II, right? It’s a fraction of a percent of GDP.Bernstein: Right, but it’s not free.Krugman: Yeah, but it’s not forty percent of GDP. It’s something like six percent of GDP now, right?Bernstein: Exactly. It’s a little north of six percent of GDP. And according to the kind of numbers that I run on this, with the macroeconomy doing pretty well—and again, I know it’s not reaching a lot of folks; affordability concerns loom large—but you know, GDP is growing around trend, which is about two percent real. The unemployment rate is close to four percent, which is in the neighborhood of full employment. And the stock market’s booming. We should have a deficit that’s closer to three percent than six percent.And what’s happened here, Paul—and you’ve written about this extensively—is that the constant ratcheting down of tax policy. All those tax cuts introduced by Republicans, too often kind of kept in place by Democrats, have really broken the linkage between solid economic growth and revenue flows to the Treasury. And what Bobby and I show is that if you take the Bush and the Trump tax cuts out of the mix, our fiscal scene would look fine. So, you know, that’s important.What you can do is simulate what the debt ratio would be—by debt ratio we mean debt-to-GDP—or what the deficit would be (either one), or what the interest payments on the deficit would be. You can simulate those if you take the Bush and the Trump tax cuts out of the system, which means taking them and not just the original cuts, but all the following-on legislation that made those cuts permanent.You know, when I say Democrats have played a role here: I was in the Obama administration when we essentially made permanent 80% of the Bush tax cuts. That’s not a hundred percent, so I’m glad that we let at least 20% at the top end revert back to what they were. But that’s the exercise we did.Krugman: The blue line in that chart is the projection for debt on the current trajectory, and up to the point where it gets dotted, it’s the actual debt-to-GDP. And it’s really three rounds, right? It’s Bush, which were very much tax cuts for the one percent; then Trump 1, more tax cuts for the one percent; and then Trump 2, even more tax cuts, not entirely for the one percent. Where we are now is not at all where we would be if we hadn’t had all of these tax cuts.Bernstein: Yeah, and let me say something about this. First of all, I know you do a lot of economic history, which is just really great work in my opinion, and I just don’t want our viewers to not note that that graph started back in, I think, the late 1700s. So that’s some pretty good economic history there.Remember, those figures, including the one that showed a much lower, much more sustainable debt path, include all the spending that is in the system. The only change we’re making is the tax cuts didn’t happen. And so this is important, because there are always going to be people who say, “You know, it’s all spending,” and “It’s all taxes,” and that’s a common fight. But that figure keeps the spending precisely where CBO says it is. So that’s not a judgment on whether we have the optimal amount of spending—we can argue about things that should be cut or expanded—but those are the numbers; those are the facts.Krugman: One of the things that strikes me about this is that often if we’re trying to understand what it would take to be able to pay for even what we have, that we would have to have something like European levels of taxation or something radically different. And actually, all we really need for that is Clinton-era levels of taxation.Bernstein: Precisely right. Yeah, in fact, under the Clinton regime was the last time we had an annual surplus, so the debt-to-GDP was starting to come down, which is what happens when you have a surplus. Now, a lot of that had to do with a big bump in capital gains, and that led to more revenue flows. But that’s precisely the channel that I think we’ve shut down with this endless ratcheting down of tax policy.Krugman: Yeah, it’s an amazing thing. And you and I both remember the nineties, and I didn’t feel that we were living in a regime of oppressive taxation that was stifling entrepreneurship. Those were the roaring nineties.Bernstein: No question. The extent to which the political class, particularly Republicans, has convinced so many people and so many media writers that taxes are always bad and must always be cut is one of the reasons we’re in this mess.Krugman: Okay. Now, clearly the deficit is so big because of, again, another round of tax cuts and the legacy of the past tax cuts. But also, the arithmetic of debt used to basically kind of melt away relative to GDP because of growth exceeding the interest rate, and that’s not the case anymore. Although the gap is not that large even now, right? It’s sort of like a four percent average interest rate on federal debt and maybe three percent nominal growth, three to three and a half. But still, it’s very different now. But the thing that is really striking is that interest rates are way higher than they were not very long ago, especially, of course, at the long end. So I’m actually not fully sure myself what I think is happening, but why do you think interest rates have gone up so much?Bernstein: You know that old movie—I think it’s called Murder on the Orient Express—where it turned out, spoiler alert, that they were looking for one perp, but there were like 17 perps?Krugman: Yeah.Bernstein: I think there’s a bunch of reasons. To me, it seems credible and plausible, so I don’t feel particularly confused about what I’m seeing, though I may be missing something, but I would put at the top of the list that there are two very large demanders of credit right now in both the US and other economies as well. Those are the AI build-out and all the picks and shovels therein. Those folks are now leveraged, meaning they’re borrowing somewhere between six, seven hundred billion and a trillion this year.Krugman: Right.Bernstein: I’ve seen plausible estimates that they’re going to borrow a trillion dollars. By the way, a lot of those AI companies used to invest using cash flow. They weren’t leveraging; now they’re borrowing. And they’re borrowing hand over fist. A lot of investors are confident about those returns. I personally think it’s kind of bubbly, but they’re confident about those returns, so they’re certainly buying that debt.The other big competitor is the US government, and I just mentioned maybe the AI bros will borrow a trillion this year. Well, we know that the US government’s gonna borrow twice that, a little bit north of two trillion. That’s thing one.Cause number two, is the Trump-induced inflation concerns. So look, if you think that inflation is going to be high and sticky and you’re about to lock up some of your money for a while in a bond, you might want an inflation premium. You might want a little bit more compensation on that interest rate to account for the fact that this is all a nominal deal, and so you want to be compensated for higher expected inflation.Then there’s the fact that Kevin Warsh has gotten off to a bit of a shaky start, and I think that’s spooking markets a bit, and that kind of uncertainty also calls for a higher risk or term premium.And then there’s the fact that the country’s being run by an orange maniac. I think that is kind of a long-term risk premium that any investor is concerned about. Some foreign investors, who have often bought a lot of our debt, are saying, “Huh, maybe not so fast given the way this country is governed right now.” So if you put those all together, to me they tell a pretty compelling story.Krugman: Okay. I think I mostly agree with that, except I have a couple of questions. One is that this is global, right? Interest rates are up all around the advanced world. They’re more or less moving on parallel tracks in Germany, with their famous, slightly insane fiscal discipline, and in Japan, where we used to say nothing ever seemed to matter. I mean, the AI boom is mostly here, and the orange maniac is only here. He would like to be elsewhere, but he’s only here right now. So—Bernstein: I think he spills over into some other places, but yes.Krugman: Yeah. So, is there kind of a common story?Bernstein: I mean, it’s a great question, and I should have said: I don’t think anybody can explain 100% of this variance, but my R2 gets up there pretty good, I guess. I think the problem is that the fiscal accounts of other countries are looking a little bit more like ours than they used to, and that they also seem to be facing a borrowing crunch.Japan, as you just mentioned, would make our debt-to-GDP ratio look very, very tame, because of course they’ve been north of 200%. And for years, nobody really thought that was too big a problem. But I guess because of some of the global risks—you know, we have geopolitical dynamics; when energy is stuck in the Strait of Hormuz, that is a much bigger deal for Europe, for Japan, for China than it is for us. And so I would argue that the combination of geopolitical tensions and unbalanced fiscal accounts is probably pushing up long rates in other countries as well. But there’s probably more to it.Krugman: We have a couple of financial indicators that are supposed to capture some of these risks. There’s breakevens, right?Bernstein: Yeah.Krugman: The US government sells bonds that are supposedly protected against inflation, and the spread between those and regular bonds should give you an indication of what Mr. Market thinks is going to happen to inflation. And that really isn’t showing anything, right?Bernstein: Right.Krugman: And then there are credit default swaps; insurance that will pay out if a company defaults. And there are credit default swaps on the United States government, although I always wonder a little bit what good any contract is if the US government goes into default. But anyway, those are just not flashing red at all.Bernstein: Yeah, I can speak to that. There’s a couple of points here, one of which I think is very important that you made in your post this morning, and I’ve been trying to stress as well. I really want to make sure we get into it, which I will here.The first point is that a second ago I said there’s an inflation premium in some of these bonds, meaning that credit investors want to have a slightly higher return because they’re worried about expected inflation. I think that’s a pretty small part of the puzzle; I think it’s more on short-term than on long-term loans. And this is clear if you look at where you really see the increase—for example, the 30-year bond is in the inflation-protected version, and that tells you that it’s not just inflation; it’s making the breakeven point a different way. And that tells you that there’s some nervousness about the long-term prospects of the US project.The important thing that I wanted to nail here is that I think of this as much more of a slow burn than something that’s going to explode this week or next week. I don’t think the US is going to have a Liz Truss moment. I’m referring to the case in the UK where creditors engaged in what’s called a sudden stop: they looked at her fiscal plan and said, “That’s it, we’re out. We’re not going to invest in that country anymore.” I don’t think that happens here, for a variety of reasons that you and I can tick through.But that doesn’t mean that everything’s fine and happy-dappy or we’re out of the woods. It’s more of a slow burn, this upward pressure on rates, which folds into affordability—mortgage, auto, credit card loans, and so on—that is a problem for American households and consumers. And that is less of a “what’s inflation going to be next week” story and more of a “higher for longer” problem, where rates look to me and to many others like they’re going to stay up for a while because these problems are structural.Krugman: Yeah. There’s a lot of crisis talk, as there was, by the way, back in 2010 when there was really no problem at all. And my problem with that has always been: explain to me how that happens. You say people will go on a buyers’ strike and try to sell all of their US government debt, and my question is always, “And buy what?” I mean, it’s not like there’s an obvious place. Even for Britain, the Liz Truss moment was much more limited than people claim. And for the US as a whole, it’s not like Greece, where people were demanding euros and the Greeks couldn’t print euros. As someone said, it’s that we should be thinking about termites, not a tornado.Bernstein: Yeah, and here’s why I think this is so important, and you and I have both been circling around this point: It’s very important for human welfare—not just American, but for human welfare—that the current thugs running the government be banished and held accountable. I’m sorry if that sounds partisan, but I don’t think it is.And for that to happen, I don’t think candidates can run on—I remember the John Kasich platform, which is, “Vote for me and I’ll lower the debt and the deficit. We’ll all eat our spinach.” And I think that’s a mistake. I think it’s a mistake politically, and I think it’s a mistake economically. As you wrote this morning, don’t panic. I agree with that. This is a structural problem that’s not going away anytime soon, but we can chip away at it by reversing some of the high-end tax cuts, which I think would be both progressive and send a signal to markets and investors that we’re actually back in the business of having a reaction function to our unsustainable path.But first and foremost, we have to meet the very basic, urgent needs of households that have been left behind for too long: health care, child care, housing, energy costs. That, to me, is the first demand on fiscal policy. And so I think the fact that neither you nor I see a pending sudden stop or credit crisis—we could be wrong about that, in which case we’ll have to reconfigure—but based on history, I think we still have time to get this right, and we should do both. We should walk and chew gum.Krugman: Okay. At the risk of delaying a moment until we get to what to do, there’s one thing that kinda bothers me intellectually: during the era of low interest rates, we had a really good story—secular stagnation—basically that largely because of low birth rates and a stagnant working-age population, there was just going to be lots of savings and not enough places to spend it on. And that’s kind of what we thought had happened to Japan. And now here we are.Just six years ago, I would have been a full-on secular stagnation guy, and now we have, whatever it is, 5.3% interest rates on the 30-year. Were we all wrong about that, or did something really radically change?Bernstein: I think that we were over-torquing or over-indexing a bit on a period where interest rates were uniquely low, and we built a big story about secular stagnation that I sort of believed at the time. But I look back now and I think that perhaps that wasn’t as believable as we thought.I think what might have been happening instead was we just had what Ben Bernanke called a global savings glut. We had excess savings, and there are a lot of reasons for that; it doesn’t have to be a lack of investment opportunities. A lot of it had to do with international imbalances, which you’ve written a lot about. And so these excess savings found their ways into U.S. Treasuries because it was the safest debt you could buy, and the U.S. looked like a going concern, so a lot of those resources flowed here. And that glut of savings, often coming out of Asian trade surpluses, led to rates that were really quite depressed for a long time. But as those dynamics changed, I think the savings glut is in the rearview mirror and the dynamics are more like those we’re talking about today.Krugman: Yeah. If I can say, one intellectual trap that I fall into far more often than I should is the lure of a beautiful model that seems to fit the facts for a while. The secular stagnation model was lovely, and it all fit together, and there were the low interest rates. And then all of a sudden, it wasn’t really that solidly grounded. But the fact that a model seems to work for a while doesn’t necessarily mean—Bernstein: Well, it may have been the right model for the time. And look, you’ve made a career and won a Nobel Prize for beautiful models, so I wouldn’t—I don’t want to wave you off of that.But I think there’s another dynamic to this—see if this resonates with you. One of the foundational principles behind secular stagnation is the idea that there’s more savings than there are credible investments, or places to put it; there’s just an absence of investment.Krugman: Right.Bernstein: And by the way, when Larry Summers raised this issue of secular stagnation, Ben Bernanke stood up at the IMF conference and said, “Wait a second, there’s lots of places to invest.” I’m not sure that was exactly right at the time, but it sure is not the case now, right? And that’s the AI boom.There’s this tremendous investment opportunity going on now. Again, I think those guys are over their skis because there’s so much more investment than there is profitability right now that I have bubble worries, and Ryan Cummings and I have written numerous pieces on this. But secular stagnation, or the absence of investment to absorb the excess savings, may have been a fact for a few years there, but as this new technology came along, as is often the case, you now have an investment absorption mechanism.Krugman: Right. And it’s probably worth saying, just going back, that it’s not just that the hyperscalers are borrowing money when they used to not have to, but also presumably before, all of these huge profits being generated off our social media addiction were effectively being parked in places where they could then be lent out. And now, instead of pouring water into that pool, they’re drawing water out of it, and that adds to this pressure.Okay, big question: hopefully January 20th, 2029, President—name your favorite—with majorities in both houses comes in. And aside from needing to go after all of the legacy of corruption and all of that, they’re going to come in during what looks like it’s going to be a less forgiving financial environment than we might have hoped. What do you do? What’s your agenda for how we address all this?Bernstein: Well, first of all, from your lips to God’s ears, as we used to say. If we find ourselves in that situation, I will be partying in the streets and not worrying about the interest rate, at least for a few days.I’m sure you’re right, and it’s an important question and an important framing of the question. I think there’s a path forward, though. First of all, we should definitely hold the Trumpies accountable and in a big way. I’ve written about that, and I think we have to Trump-proof our government because other authoritarians will come along. But if that’s all we do, we’re falling short. We really have to attack with the affordability agenda. And there, I think we should look at not just Mamdani and some of the others on the left who are making delivering the absolute key plank of their political project, but so is Abigail Spanberger and Mikie Sherrill from the center. So it’s not just a left-center thing; it’s just about rejecting the status quo and delivering to American households who’ve been not just abandoned, but abused for so long, especially under this administration.And in terms of the context of what we’re talking about now, how do you do that if you’re in a high-rate environment and you have this budget outlook? Well, we have to reverse the high-end tax cuts. We have to close investment loopholes. We have to close the tax gap. We have to fund the IRS enforcement mechanism, because for every dollar you invest in IRS enforcement, you collect something like nine or ten dollars in taxes that are currently being evaded almost exclusively from the top of the scale. Closing the tax gap is a project that could yield five, six, seven hundred billion per year.Krugman: Let me, by the way, explain again for listeners: “the tax gap” is a term of art. It’s not just hand-waving; it’s speaking specifically about money that people owe that we’re not collecting because the IRS doesn’t have the resources, and it’s overwhelmingly very high-income people. So you’re saying that’s like two percent of GDP.Bernstein: I recently heard Natasha Sarin talk about this and she used, I think, that exact figure. I’m colorblind, so I’m not sure what color it was, but the chart that Bobby Kogan and I used—I think it was green—that could get us closer back to that debt-to-GDP line that’s much more sustainable. And they rest largely on applying taxes to where income and wealth have exploded at the top of the scale, so they neither hurt middle-income people nor compromise the affordability agenda.I don’t want to be too Pollyannaish about this: a dollar spent on childcare is a dollar that’s not available for debt reduction. But what I really don’t think we should do is say we have to come in here and clean up the Republicans’ debt mess as our first priority. Anything we do that stops digging us into a deeper fiscal hole—even if we’re digging more slowly, or even better yet, stop digging, not necessarily filling—would be, I think, not only good fiscal policy, but probably welcomed by the markets as a sign that the congressional reaction function to the fiscal outlook isn’t dead.Krugman: I regret to inform you that the good debt scenario, if we hadn’t had all of these irresponsible tax cuts, the line is orange, which is kind of an unfortunate choice given where we are in America right now.Bernstein: Whoops.Krugman: But anyway, I think you may have partially answered my question. When I look at that “if we hadn’t had those tax cuts” line, that would be great. If that was where we were, then I certainly wouldn’t be worrying at all about debt. But although those tax cuts were very heavily tilted to the top, with something like thirty to forty percent going to the one percent, reversing all of them would hit a number of people who at least think of themselves as middle class. And so the question is: what is within the realm of the politically possible that we can actually do?Bernstein: Great question. And I definitely have argued and tried to stress that the right place to start and to linger is at the top of the scale. I don’t think we should raise taxes on middle-class or middle-class-adjacent people; they’re having a hard enough time already and don’t need an extra tax burden.But the extent to which income and wealth have accumulated at the top of the scale—I’m sure you’ve seen the factor share data showing that the labor share of national income is kind of uniquely low and the profit share is uniquely high. And so I think we have to be pretty aggressive in that regard, but we can do so without dinging the middle class.If you listen to some budget hawks, they say we have to get back to that orange line. To be clear, I’m not saying that. I don’t think we do have to get back to the orange line. By the way, Danny Yagan has some nice papers on this, saying that we can be really gradual about getting back to some version of fiscal responsibility, but we have to move in that direction. We sort of have to change the sign, even if the magnitude is tiny.Krugman: Yeah, I think the post-World War II story is actually kind of helpful here because people talked for a long time about, “How are we going to pay the national debt? How are we gonna pay off the war debts?” And we never did. In fact, by sometime in the sixties the debt was higher in dollar terms than it had been, but the trajectory of all of the ratios was down, and we probably don’t even have to do that steep a descent, right?Bernstein: Yeah. Some people want to say that AI is gonna save our bacon because it’s gonna generate so much growth. In the piece with Bobby, we have a section on it, and my view is kind of like: hope for the best, plan for the worst.Krugman: Yeah.Bernstein: I’m kind of stuck on the fact that the internet really did eventually have a strong productivity impact, and then it went away.Krugman: Yeah, things can go into reverse, but there was only about ten years of good growth.Bernstein: Yeah, exactly, and then we kind of got back to where we were. So a lot of the AI productivity discussion assumes that not only will AI boost the level of productivity, but it’ll just keep getting better and better and better so that it improves the growth rate. And you know, I hope that’s true, but I certainly wouldn’t bet on it.Krugman: So, what are you hoping for in the spring of 2029 as our hypothetical virtuous government comes along?Bernstein: I am hoping for the following: I spend a fair amount of time scratching my aging noggin with the question of how much of the damage done by the Trump regime is temporary and can be quickly repaired, or is long-term and will be with us for a while.If a good Democrat takes over and we have some legislative power, can we restore good relationships with Canada and Europe? Or are they gonna be like, “Screw you, we’ve seen what you guys do. You’re okay, but we don’t know who the next guy’s gonna be. We might be looking at President Vance around the corner.”So I guess what I’m hoping for and looking for is that the damage can be reversed in my lifetime, which isn’t the longest span of years. And that’s an open question.What about you? You answer that question.Krugman: Well, okay. When you ask me about the economics—can we restore, can we even significantly reverse the drift to oligarchy—I’m actually fairly optimistic that it’s within the realm of the doable. When it comes to our international relations, when it comes to our military credibility, I don’t know. I think we’re talking about a generations-long project, and that really upsets me quite a lot.At some level, you know, I talk about Iran or something like that and I say, “Okay, this is Trump’s failure and we should wrap it around his neck.” But in the end, it’s my country, too. And my God, we are not the country we were in the eyes of the world, and I don’t know when we ever will be again.Bernstein: I agree with you, Paul, and I share that worry. I’ll only say the following: it may be a generational project, but if it is, it’s a great generational project, and generations should be anxious to undertake it.Krugman: Well, on that happy note, thanks so much for talking to me. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

According to an old military maxim, amateurs talk about strategy, professionals talk about logistics. But these days we need a third category: Immature, insecure guys think that war is about acting tough and looking cool. Hi, Paul Krugman with a podcast update for today. I want to weigh in on the incredible rash of stories about how Trump and company are eviscerating the military. It is truly remarkable. If there’s one thing that we thought that the United States was still kind of number one at, it was that we had the world’s premier military. Now, of course, we managed to rather quickly effectively lose the war with Iran, although current management will never admit it. But also just a series of stories, some of them related to that war, some of them going beyond and to other areas that just are truly shocking, even for somebody like me, who had no expectation that this administration would be doing any good for the nation. Just to remember the story: So first we had the big warning that the U.S. military was basically running out of ammunition. That the precision missiles that are so essential to waging war were largely gone, expended unproductively against Iran. And clearly the cost benefit calculus was a disaster because the Iranians were sending cheap drones and we were using multi-million dollar weapons in an attempt to counter them. After that, we got the story about the horrific conditions on board the USS Lincoln, the aircraft carrier that’s been stationed for a very long time without, it appears, adequate resupply and with toilets flooding. Apparently just horrific conditions, which turn out to be not unique to that ship: Other ships are having problems. There’s the USS Boxer, an amphibious assault ship, which apparently has run out of feminine hygiene products, among other things. Okay, so we have those horrific stories. And then we have the stories about Trump intervening. Demanding, first, that the Navy construct a whole new class of ships, Trump-class battleships, which are useless and would be sitting ducks. Then demanding that the Navy replace modern catapults with steam catapults, which he thinks are cooler. And then demanding that they relocate the command tower on aircraft carriers because he wants them to look more like the way they looked during World War II. Is this America? I mean, think about the American way of war. We are not a warrior nation, which is fine. We are a lot of other things.We were a nation that was supreme in the arts of peace. We were a nation of know-how. America won its wars by doing the arts of peace right, by.building better and more stuff than other countries. By getting our act together in ways that didn’t necessarily involve fighting. Of course, you always need courageous warriors. You always need people able and willing to risk death in the service of their nation. But what America was supreme at was logistics. If you ask how did America and its allies pull off D-Day, well, a lot of it was being able to deliver supplies to the beaches of Normandy in a way that the Germans never thought was possible. America was always the place, the country that was really good at logistics. For us to be not feeding our sailors, not able to keep ships that are not, after all, under fire all the time, to keep the plumbing working, that is incredible. The idea that the president is imposing his personal aesthetic preferences to undo design decisions that were made by military professionals is also basically incredible.Okay, what is this all about? And what happened? Some of it is specifically military, but mostly it’s not. I think these military failings should be put in the same context as the frantic and disastrous destruction and redesign of Washington, D.C. The demolition of the East Wing. The disastrous attempt to refurbish the reflecting pool to reflect Trump’s aesthetics. Even the gold leaf and gold lettering that is polluting the White House. All of this is really part of the same picture.So what is going on here? Obviously we have a seriously mentally ill, mentally deficient guy with his finger on the button. The president of the United States is clearly dissociating, I’ve been calling it sundowning because I personally saw sundowning during my father’s awful last year. Trump is not in full possession of his faculties, and he is obsessing about things that are really just kind of remnant ego trips. I haven’t read the Haberman book yet, but reportedly he spends a large fraction of his time and probably a larger fraction of his mental energy on his redecoration projects, which aside from all being carried out disastrously are also in incredibly bad taste. But this is where he is. He’s actually more interested in his giant, tacky, gilded ballroom than he is in the fate of the nation. But how does somebody like this end up able to impose his will on these disastrous things? How does he end up able to eviscerate the military? Well, part of it is that this is a wannabe authoritarian regime. We’re in a peculiar state now where the United States is not yet a police state. It is not yet a place where the secret police will cart you away for expressing the wrong opinion, unless you are not a white U.S. citizen. Maybe the time is coming when that will happen. But in any case, we are not yet East Germany under the Stasi. We are not yet Putin’s Russia. But the Republican Party, senior politicians, who should be feeling that they have at least some dignity, ability to take a stand, behave as if they were living in an authoritarian state. They’re obviously terrified. They’re afraid to express any dissent. They go along with Bush’s — see, I’m dissociating, living in the past myself. They’re going along with Trump’s wishes.On top of that, I think it really helps to think of the ruling party in America right now as being a party that behaves as if we were a full-on authoritarian state. And one of the things we learn about in studying how authoritarian regimes behave is, first of all, that the leader actually can be possibly the worst informed person in the nation because nobody dares to tell him bad news. We’re hearing this a lot about Putin, that he doesn’t know how badly his war is going. Well, Trump in many ways probably still doesn’t understand how badly his war is going.The really striking thing about the munitions shortage and now the horrible conditions on US ships is that to the extent that any action has been taken on either of those issues is it has been only after extensive reporting in the press. So now the Pentagon is talking about a crash program to have defense manufacturers produce more of the missiles that we’ve been running out of. But it’s not clear it’s even started yet, and that call didn’t happen until many months into the war, whereas the munition shortage was obvious to independent observers just a few weeks in — that we were expending munitions that we couldn’t replace. Nothing happened until there was widespread press reporting. The USS Lincoln has finally been recalled for refit and shore leave. But that didn’t happen until after many press stories about it, all of which were denied, but it’s very obvious just looking at the behavior that the Pentagon and Hegseth and Trump finally reacted saying, oh, I guess something needs to be done. We can’t let this go on. But they didn’t do it until after the press reported.Now, is this because they’re totally callous? Well, they are. They don’t care at all. The people who yell support the troops most loudly are the people who actually have no interest whatsoever in supporting the troops. But I think it’s probably also the case that they may not have known. That nobody told Trump that we were running out of missiles. He may have read some press stories to that effect, but he said that’s all fake news and nobody within the administration was willing to tell him. They may not have been willing to tell Hegseth either, who by all accounts flies into a rage and punishes anybody who brings him bad news.So they just didn’t hear about this. They didn’t hear about the munitions. They didn’t hear about the conditions for US sailors until the drumbeat fromthe press became too loud for them to remain insulated, to remain in denial. So this is what happens. This is the problem with authoritarian regimes. It goes with the related problem with authoritarian regimes, which is that they have a single point of failure. You elevate one person to a position of untouchable authority, and if that person loses it, that person is sundowning, there is no recourse. One more thing to say about what’s going on is that authoritarian regimes systematically promote incompetence. This is Hannah Arendt on totalitarianism. That it’s not just that they value loyalty above competence. They actually actively dislike competence. Because someone who is competent, someone who knows what they’re doing, might stand on their dignity, might refuse to follow instructions from above. You need third-raters or worse.This has long been true in areas that I know something about. It’s been true of right-wing economics forever. It’s long been the case that although there are plenty of conservative, competent economists, what the right-wing wanted, even pre-Trump, was creatures like Steve Moore or Larry Kudlow, people who had no idea actually how to do economic analysis, but were unimpeachably, unquestionably loyal because after all, they had no constituency to fall back on.So we have this mix of leader principle, Führerprinzip. Yes, I think we’re allowed to use the original German here. Information blackout at the top because nobody wants to tell the leader bad news. And incompetence as a general principle throughout the government. And if you want to understand how the Reflecting Pool happened, if you want to understand how we ended up with this hole in the ground, that was previously the east wing of the White House, all of this is fundamentally the same stuff and it’s true of lots of other areas of policy as well.Still, I guess most of us thought — I thought, mea culpa — that the military would be among the last places to be hit by this. That, first of all, it should be obvious even to people likeTrump and Hegseth that you don’t muck too much with the military, that you don’t destroy the one instrument you really have, and also that the military itself had, so I thought, a strong enough culture, was highly enough respected among the populace that the military would be able to stand up and say no. But it turns out that I was wrong. And so instead of being insulated from the craziness and incompetence, the military is actually possibly the most acute victim of everything that’s happening. At this point they might manage to start feeding the sailors and fix the toilets, though I wouldn’t put 100% odds on that. But the broader problem of really destroying one of the last real sources of U.S. strength, that is not going to go away. Instead, it’s going to be the same thing. And the misery will continue until morale improves. Have a great day. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.. . .TRANSCRIPT: Paul Krugman in Conversation with Vanessa Williamson(recorded 8/12/26)Paul Krugman: This week, I’m talking to Vanessa Williamson, senior fellow at the Brookings Institution and author of a fantastic short history of taxation called The Price of Democracy, which is, I’m pretty sure, an allusion to Oliver Wendell Holmes’ “the price of civilization,” but a very different take. And because I’m so interested these days in tax policy, I thought I could talk to Vanessa to get a sense of a lot of these issues where I am very much an amateur and she’s done the homework. So, hi!Vanessa Williamson: Hi. Thank you so much for having me.Krugman: So, yeah, let’s talk about the title of the book first, because obviously the famous Oliver Wendell Holmes quote, which I’ve seen in slightly different versions, was basically saying, you know, if you want police and roads and public order, then you need to have taxes to pay for it. But you’re making a much broader point there. Why don’t you explain why you say it’s the price of democracy?Williamson: Yeah. So I love the Oliver Wendell Holmes quote, that it’s the price of civilization. But as I was writing this book, which was just going to be a history of taxation in America, it struck me that taxation is really more than the price of civilization—it’s the price of democracy. And that’s because democracy isn’t just being able to vote; it’s people having the power to actually make change to their government. And if the government doesn’t have enough money to act, then, even if you can vote, it’s inconsequential.Historically, this is a very deep story. Taxation and representation really do develop together. This goes back all the way to 1215 with the Magna Carta, when King John had been taxing at a higher level, and the barons demanded that if there were going to be extraordinary taxation, the king had to get the general consent of the realm.Krugman: Right.Williamson: And that was a very early iteration—an attempt to create what eventually became Parliament. So the very origins of representation in our historical tradition are really about taxation, because what you find is that when rulers want to tax, they become dependent on the taxpayers. And it builds a connection between the ruler and the ruled, and it gives the taxpayers power.I think commonly the story you hear in this anti-tax mythology that’s around is you’d imagine the taxpayers use that power to avoid taxation. The opposite is true: when representation develops, taxes go up because, of course, the taxpayers can now have a say in what the government is doing. So taxation and representation developed together historically, and they developed together cross-nationally. The freest countries today are high-tax countries.Krugman: That would be, above all, the sort of Nordic countries that are very high-tax?Williamson: Sure, but it’s true across the board. Even highly developed economies that are authoritarian have lower taxes than you would expect given their level of development. And that’s because authoritarians are simply not very good at raising taxes. They much prefer other forms of revenue, whether that’s a gold mine, the spoils of war, or fees and fines that they can apply to their political opponents. There are just other mechanisms that do not make them dependent on the rank-and-file people of their country.Krugman: Okay. And I want to come back to the high-tax countries in a minute. But one point that you make at several points in the course of the book is that the idea that taxes are okay is very much a challenge to wealthy people saying, “Well, my wealth is mine, and nobody has the right to take some of it.” And there’s a statement of principle that says, “Well, okay, but you too are subject to the laws of the republic and must pay.” Right? That seems to be a pretty big part of the story.Williamson: Yeah. There’s this long-standing tension, and it’s not all wealthy people or all the elites at any time in our history, but there are often some who are very, very wealthy. Fundamentally, they don’t like to see themselves as citizens, right? They like to see themselves as masters. The first group of people who felt this way, of course, were the slave owners who were desperately opposed to taxation. The anti-tax components of our Constitution were all put there as part of a compromise with slavery, right?Krugman: That’s a good point.Williamson: Yeah, the slaveholder class was afraid of mass democracy, even if only of propertied white men. So we get the Three-Fifths Clause. And they were specifically afraid that if every propertied white man could vote, what you would end up with is abolition by taxation—that we would tax slavery out of existence. And so that’s why you see these anti-tax measures in the Constitution.It happens again in the Gilded Age. You see Rockefeller claiming that high graduated taxation is the most fundamental threat posed by democracy. You see efforts to roll back suffrage rights during that period, even in Northern cities. So it’s a very long-standing fight between the mass public and the kind of things democratic governments usually want to do—roads, schools, and things of that sort—and a fraction of the elite who are willing to accept democracy as long as that democracy is too poor to threaten their power.Krugman: Wow. Okay. I’ll come back to the history shortly. One thing that I probably don’t talk about enough when writing about these things, but it’s something I certainly always taught when teaching a class on the economics of the welfare state, is that the high-tax, generous welfare state countries don’t have highly progressive tax systems. The state of the US debate always seems to be about, “Shall we raise taxes on the wealthy?”, which is an important concern. But places like Denmark or Sweden or, just in general, European welfare states, have high taxes sort of on everybody.Williamson: Yeah. That’s exactly right. I mean, that’s also how we pay for Social Security and Medicare. Big social safety net programs are typically funded by broad-based taxes.Krugman: Right.Williamson: I think it’s really important to remember all the things that taxes do. We really focus on the redistribution part. And it’s so important, absolutely, especially now with the incredible consolidation of wealth in this country. We focus on the straightforward redistribution part of the top rates, that kind of thing, or whether we should have a wealth tax. That’s important, you’re exactly right. But at the same time, we just need a lot of revenue. Traditionally, and in terms of long-term sustainability, that’s something that we fund by taxing everybody. But that’s part of citizenship.One of the things that is part of that anti-tax mythos that you hear all the time—people are under the impression that Americans hate paying taxes. It’s just not true. People are quite proud to pay taxes, and they’re very willing to pay taxes for things they think are valuable—things like Social Security and Medicare. So I think the fact that we’ve shied away from asking people to support their government by paying taxes at a federal level has really weakened the civic rhetoric of this country. I think it’s left us in a terrible position. If we can’t convince people that their government is worth paying for, how can we convince them that democracy is valuable?Krugman: Yeah, indeed. There are several episodes that I actually was ill-informed about. I kind of knew the numbers, but not at all the political history. There was this period, basically under the New Deal and through World War II, when the idea of broad-based taxes—that lots of people pay into social insurance programs, but also a broad-based income tax—really became established. That came as kind of a surprise, that people were willing to accept it, right?Williamson: Yeah. Before World War II, the income tax was what was called a class tax. It was paid only by the very wealthy. And the country relied far more heavily on tariffs. By the way, the tariffs chapter of my book is not what I expected as I was writing it to be—as relevant as it ended up being. But anyway, most people contributed to the federal government through the higher prices that resulted from tariffs, and the income tax was a tax on the very wealthy.Well, World War II comes along. We’ve got to pay for that. We need a ton of money, and they decide to go with an income tax. Now, we’re talking about a time when people didn’t have pocket calculators. A lot of people hadn’t been to high school. And suddenly they’re going to have to fill out a paper form and pay their taxes. And it’s not going to be withheld in the first years.So, there was a lot of fear in the Treasury Department: Could Americans do it? There were these incredible campaigns to let people know about the income tax and to help them pay. There was a song by Irving Berlin called “I Paid My Income Tax Today.” There were Donald Duck cartoons that played before movies. Donald Duck figures out how to fill out his taxes in the cartoon.So it was this huge effort, and in the end, it worked, right? Americans paid their taxes. We paid a much larger fraction of the bill for World War II than we otherwise could have. What’s especially amazing is how positively people felt about those taxes. They were voluntary contributions to the Treasury, made out to Uncle Sam. Polls suggested that 90% of Americans thought it was fair, because they saw it as a worthwhile thing to support the United States.Krugman: I guess the big increases in taxation have always come around wars, right? World War I is really where the income tax comes in, even for the wealthy, and then World War II comes in. But that’s a complete change in attitude. I don’t know if you remember after 9/11, when Tom DeLay, the House Majority Whip, said that “nothing is more important in a time of war than cutting taxes.”Williamson: Yeah. Extraordinary. It was the first time we fought a major war in this country without raising taxes. I think it speaks to the decline of accountability, that we stopped having that connection between the decisions of our policymakers and the costs.Krugman: We used to say that America was kind of special, at least compared with a number of other advanced countries, in the fact that we were so successful in getting people to pay income tax, that there was a lot less cheating. I don’t know if you touched on it in the book—I don’t remember—but is that something that you think is explained by the history or by contingency, or is that something about the American character, at least what we used to be like as a country?Williamson: That’s certainly an open question. But yes, American “tax morale” has always been high. That’s the jargon-y term for willingness to pay taxes. And that’s partly, I think, part of our civic culture. People see taxpaying as patriotic. If you ask Americans, “Is it every American’s civic duty to pay their fair share of taxes?”, you get over 90% of Americans agreeing, sometimes as high as 95%. I actually looked for poll data that showed equivalent levels of consensus. You have to ask things like, “Is Elvis alive?” or “Did we really land on the moon?”—just really out-there stuff. This is a shared belief.The first time President Trump, in his campaign against Hillary Clinton, talked about not paying taxes being “smart,” this was a huge change of rhetoric. If you recall Mitt Romney saying he’d always paid 13% or 14% in income taxes, this was a huge change in rhetoric, and it didn’t shift American attitudes. Americans did not suddenly come to see cheating on your taxes as acceptable. They see it as wrong.Krugman: One of the points you make along the way is that the public’s attitudes about taxes really haven’t changed that much over the years. I think the line used was that since the 1980s, the policy and the politics of taxes have changed, but Americans’ own attitudes have really not. Do you want to enlarge on that a bit—what you mean by that?Williamson: Yeah. Clearly, we live in a startlingly anti-tax time. One of the two major parties sort of sees taxation as fundamentally bad and sees taxes as something that should always go down, at least for the wealthy. That is a historical oddity. In the mid-20th century, neither political party saw taxation as a particularly major issue. It was important, but it was technical. It wasn’t a major part of either party’s platform. That changes in the period after the civil rights movement, where again you see the rise of the kind of anti-tax rhetoric that is fundamentally a kind of anti-democratic rhetoric, and that grew more and more extreme over the following decades. That’s sort of where we are today.The strange thing about that is, as our politics have become more extreme in so many ways, the politics of taxation have become more extreme, while the underlying views of Americans have been markedly stable. I think that speaks to the decline of the quality of our democracy, right? Because what happened was the politics became untethered from public views. Most Americans say that you have a responsibility to pay your fair share of taxes. Most Americans say that paying taxes is patriotic. If you ask people what their top concerns are about the tax system, their top two concerns for literally decades have been that corporations and the wealthy are not paying their share. The third is the complexity of the tax code. Somewhere below that falls the amount they personally pay.On this issue and on many others, frankly—you see it on things like gun control or the minimum wage, for example—the attitudes of most people are simply not a good predictor of our politics. I think that speaks to a real erosion of our democracy.Krugman: So when you say after the civil rights movement, there are two interpretations. I think there’s some of both in your book, The Price of Democracy. One is people feeling, “My money is going to support the bums on welfare,” because there was a huge expansion in AFDC (”Aid to Families with Dependent Children”), which is the classic rap on welfare, although it’s never really all that much money. But it’s a big expansion in the visible support for nonwhite people. Is it “my tax dollars are going to pay for that,” or how much of it is just the empowerment of conservative politics, to put it mildly, because of the backlash?Williamson: Yeah, I think both are happening at once. At the same time, you see welfare programs that had previously been available almost exclusively to white Americans suddenly become more available to Black Americans. You see, obviously, growing Black political power after the Voting Rights Act. So there’s a racial resentment and a backlash to that, and the origins of the “welfare queen” rhetoric. We’ve all heard the story. So that’s happening.At the same time, you start to see the divide between the very wealthy and the rest of us. The compression of incomes and the economic spectrum that had typified the mid-20th century starts to break down, and you see the decline of union power and the rise of business power. All of these things are pushing in the same direction towards an increasingly radical anti-tax politics on the right.Krugman: There’s a moment—an episode that really looms quite large in The Price of Democracy that I was really kind of unaware of—which is the 1978 change in taxes. This is pre-Reagan, although obviously some of the things that gave rise to Reaganism are very much in the air, but this is under Carter. Why don’t you tell us about what happened in ‘78? I thought that was a really remarkable story.Williamson: Yeah. You have to make a choice about where you are going to say the turning point was. You can claim it was the Reagan era, or you can say all these other things. I settled on 1978 because three things happened that year that I think were really significant, and again showed what the conservative alliance against taxation would look like. A bunch of different forces were brought together.First of all, you see a bill pass that is an enormous rollback on taxes for the wealthy, something that The New York Times at the time described as sort of incomprehensible in terms of our politics. Before that, it had been assumed that Americans liked raising taxes on the rich, and it would be very hard to do a tax cut that just helped the rich. But the new corporate interests found a way to do that, so you see this big rollback in taxes for corporations and the wealthy.At the same time, there’s an attack on the IRS that is the first of what would become a recurring problem for the agency. That is to say, some issue in tax enforcement gets blown up in the conservative media and makes the IRS into a whipping boy for anti-tax interests. In this case, what had happened was the IRS was obligated by law to figure out how to remove the tax-exempt status for segregation academies—the whites-only schools that opened in the South as white families fled integrated schooling. Those schools were segregated; they discriminated on the basis of race and therefore did not qualify for a tax exemption. The court so determined. So now the IRS has to figure out what is a segregation academy and how to go about removing their tax exemption.This was really hard to do because lots of schools opened in that period, and lots of schools were segregated. There was also a move to church schooling and evangelicalism in the same period, so the IRS was trying to sort through this. After several efforts to remove the tax exemption from the most obvious segregation academies, they issued a new set of rules. It became a trigger on the far right about how the IRS is coming for our tax exemptions, leading to congressional hearings and all sorts of fodder.This is widely agreed to have been a key precursor to the development of the Moral Majority, because conservatives had been trying to get evangelicals on board with the conservative movement for ages, but evangelicals didn’t want to participate in politics. This issue brought them into politics in a new way. There’s an amazing quote suggesting that even abortion couldn’t get evangelicals into politics, but coming for their school’s tax exemption did. So that happens at the same time.The third thing that happens in that same year is Proposition 13, the property tax cap in California. Property tax caps have a long and sordid history in America. They were invented in the Redeemer era that followed radical Reconstruction, as white supremacists came back to power. One of the ways they disenfranchised poor whites and Black Americans was by putting in place constitutional tax caps so that even if they managed to lose an election—if more poor Black or white people managed to vote—they still wouldn’t have the power to raise taxes on the rich. Now suddenly that same idea, which had been prevalent across the South a hundred years earlier, becomes a force in California. It’s very much part of the civil rights era backlash. They put in place a stringent property tax cap that applies largely to this day, which undermined public education funding in the state for decades to come.Krugman: Yeah. I lived in California in the mid-’90s and was always struck by Prop 13. We had newly purchased a house there, and we were probably paying five times the taxes of some people a little ways down the road. It was a remarkable thing for people who stayed in their houses—basically older white people who already owned their houses got a tremendous tax advantage from that. It was really something.So how did those 1978 tax cuts come about?Williamson: There’s a really fascinating movement on the right that leads into this moment, and it’s a series of corporate breaks. What leads into it, fascinatingly, is that in the Kennedy era, they were also trying to cut taxes. The economy was booming, and people’s taxes went up automatically—not rates, but brackets.Krugman: Right, bracket creep.Williamson: Bracket creep. So they had more money than they needed. When Kennedy wanted to assemble business interests to cut taxes for businesses, he couldn’t find any groups to act as the grassroots mobilizers of this. Over the coming decades—and exactly at the time that union power was in decline—they started to actually develop these business interests.There were moves to make what now sounds like completely standard rhetoric, but at the time was very strange: this new rhetoric about the possibility that these taxes were stifling innovation and entrepreneurship. That’s where they came in with these corporate tax breaks, to basically put in massively upward redistributive tax breaks. What they did was build grassroots organizations for business that today seem run-of-the-mill, but at the time were completely novel.For example, lobbyists in Washington would bring in local business leaders from all the districts for “fly-ins” so representatives would hear from their own constituents on these business issues. That was a real development in terms of lobbying prowess, and it paid off tremendously.Krugman: And so, in ‘78—and actually until Newt Gingrich comes along—you still had Democrats controlling the House of Representatives. This was not a Trump-era Congress, and it was a Democratic president. The public didn’t support tax breaks for the rich. I think public opinion would have been pretty populist in that sense. So what moved the votes? Why was Congress doing this? How did that influence work?Williamson: At the end of the day, the fact is that mass public opinion isn’t what causes politics to happen. Politics is not a public opinion poll; it’s the mobilization of organized interests through a party system. So you shouldn’t expect things that most people believe to automatically become law. That’s just not how it’s done; you have to have organized interests. It’s a collective action problem, fundamentally.That’s the underlying thing. But as the economy divides and as you have this concentration of wealth at the top, it’s self-reinforcing. As the rich get richer, they have more power, because money is power, and they start to invest very heavily in having greater political power. There was a lot of concern about the Nader era and all the regulatory things that were happening in the early ‘70s, which really helped to bring business power to bear—Krugman: The Nader era meaning when business really started to say it needs to stand up and throw its weight around?Williamson: Yeah, exactly. You saw what I would deem a great deal of progress on things like environmental protection and the regulation of consumer goods. These were some of the successes of that era, including clean air and clean water in the early 1970s. For a lot of more conservative-leaning business leaders, these were seen as encroachments on their capacity to be profitable, and so that helped convince them to devote themselves to politics. As they succeeded, of course, they became wealthier.This is exactly the same thing that happens with the tax code. As the top rates are rolled back, you see more and more loopholes for corporations to avoid paying taxes. As the IRS becomes underfunded so that they aren’t in a place to actually enforce the tax code for wealthy people, all of those things are reinforcing, because a substantial portion of the inequality that we’ve seen over recent decades can be attributed to the decline of top rates. So it’s a really negative, reinforcing cycle.Krugman: When I started, loosely speaking, doing the math, I was actually shocked—particularly if we’re talking about the very, very top—how much the change is actually driven by cuts in tax rates. As economists, we like to talk about technology, competition, and all of that, but actually taxes are a very large part of the story.Williamson: It’s really the ‘70s where this starts to happen. It is all, in a sense, mechanical. The money that you didn’t have to pay in taxes, now you have, and it will accumulate more over time. It also has pre-distribution effects. When, for example, a CEO had $0.90 out of every additional dollar they were going to get paid going to the government—which was true in the mid-20th century—the board of directors didn’t have a great incentive to raise their pay unless they really had done something to deserve it.There’s research on this, as you well know, but as tax rates go down, it becomes easier—cheaper, basically—to overpay executives. So it feeds in both ways: afterwards, you have these ballooning paychecks and they get to keep more of that money, but it also gives an incentive to balloon paychecks in the first place when those very high salaries are undertaxed.Krugman: Yeah. This is a long-standing thing. The committees that decide on the CEO’s pay have always been basically appointed by the CEO. But why did that translate into 30 times the average worker’s salary in the ‘60s and 300 times now? Part of the answer, you’re saying, is that it wasn’t worth pissing off people that much—sorry to use the technical term—when the CEO didn’t really get to keep the money anyway. Now that he can, they do it.Williamson: Exactly.Krugman: You get this first wave of big, top-end tax cuts under Reagan, but fairly quickly, we get people agitating about the budget deficit. This is also when the budget deficit becomes significant for the first time since World War II, and there’s a feeling we need to cut back—the beginnings of austerity. Why isn’t there more of a backlash against these tax cuts? Why didn’t that happen?Williamson: I think there are two things going on. First, there’s just the very effective lobbying techniques that business uses. They’re very powerful. There’s all kinds of political science research to suggest that legislators are more responsive to donors than to constituents, and more responsive to organized interests. They misperceive their own constituents again and again. It’s more true on the right, but it’s true on the Democratic side as well. Legislators misperceive their constituents as more conservative than they are. Some of that’s about who they talk to, and some of it’s about the media environment they live in.There’s this persistent problem in the background. Thinking back to that capital gains cut in 1978, there’s just this new playbook that becomes part of our politics. It’s hard for us to even imagine now that this was ever new, but I think that it really does speak to the moment we live in.Now, you’re asking about why it is that there hasn’t been a backlash. One important aspect of that is that for many, many years—and we are now testing the limits of this—these tax cuts were not “paid for.”Krugman: Right, right.Williamson: We paid for enormous wars with debt, and we paid for enormous tax cuts at the top with debt, so there was not a tradeoff that the American people would see right away. If you look at the George W. Bush era, this was a very conscious strategy. In principle, you could have taken the surpluses of that era and used them to shore up Social Security or do any of a number of other things. If you look at memos within the Bush administration, it was very clearly stated that in going to the voters to cut taxes in this very regressive way, they had to say there were no tradeoffs at all. Fiscally, barring the costs of debt and interest, there were no immediate consequences.So there’s a real decline in the signals that would have informed Americans more about the choices that were being made in their names. Right now, the most recent Trump tax cut is an exception to that rule. Where the big tax cuts going back to Reagan were off the books, this time they’ve done quite a lot of retrenchment of major social safety net programs. They delayed that, but it is coming now as we speak, and I think it’s a question of whether that will be more evident to people.One reason they were willing to take that step in the most recent Trump tax cuts—to also make it the most regressive budget legislation in history by simultaneously cutting taxes at the top and cutting benefits for poor people—is another indication that popularity is no longer a concern. Frankly, you want popularity to be a concern for politicians in a democracy. The budget legislation is a good indication that doing things that are popular in order to get re-elected by a majority of the voters is not the primary political strategy of the Republican Party anymore.Krugman: Just for listeners—the tradeoffs we’re talking about now are that the “One Big Beautiful Bill” includes big tax cuts very much for people at the top, offset only partially by really savage cuts to means-tested, poverty-oriented programs like food stamps and Medicaid. I guess the question is: Is this a kind of cynical calculation that most Americans won’t care about that, or just a calculation that it doesn’t matter what Americans think?Williamson: There are the immediate effects that will happen for the people who are affected, but this will have a huge impact on the economy. Medicaid supports health access for poor people and supports hospitals in rural areas. The ramifications are likely to be enormous and widely felt beyond the technical beneficiaries, for sure.Krugman: Same with food stamps, of course. The extent to which the places that voted most strongly for our current government are exactly the places where you are going to lose a critical mass of purchasing power and a critical mass of patients who can afford to pay their bills at hospitals. People are not going to lose hospitals anywhere close to where they live in New York City, but they very much could in West Virginia.Williamson: Yeah.Krugman: To just come back a bit: We’ve been in this tax-cutting mode since the late 1970s, but there was one range of substantial tax increases during the ‘80s, which was the increase in FICA, the increase in payroll payments. This kind of gets at your thesis. You have an extended section in the book about how we came to pay for Social Security and then later Medicare with payroll taxes. That’s a story I think people should know, because it comes up now a lot as we talk about what we can do between Social Security funding and general healthcare reform. How did that happen? Because this is a regressive tax. It’s $170,000 or thereabouts, just the maximum. It’s a flat tax up to that level and nothing above.Williamson: And it’s a tax on wages, not wealth, so it’s not taxing the income from wealth. The Social Security tax is a regressive tax that hits most people pretty hard. In fact, it’s the biggest federal tax for most households.Krugman: So why did FDR make this choice?Williamson: Well, he’s coming into office in the throes of the Great Depression, and they’re doing a whole bunch of emergency rescue measures to try and stabilize the economy. What he does not want is his pension plan to be seen as a temporary measure; he wants it to last forever. He wants this to be something that cannot be retrenched, and he wants to distinguish it from these other emergency measures.There was a lot of debate within the administration about this. Plenty of people within the FDR administration said, “No, this is not the way to fund this. We need to fund it differently.” FDR was not always a policy wonk, frankly. But on this point he was extremely adamant, both because he wanted to distinguish Social Security from emergency anti-poverty measures and because he was always thinking about the politics of how you tell a story about policy. He knew that he could tell people they were making a contribution, here was what they were going to get someday, and here was how it was going to work. He knew that he could tell the American people to contribute to a fund like this, and he was right.He famously said that the payroll tax contributions were not economics, but politics—to make sure that no politician can ever eliminate his Social Security program. To a substantial degree, that political logic was proven correct. The program not only survived, but grew after the Depression.It’s funny—business interests at the time tried to mobilize against it. They were really trying to mobilize against his “attack the rich” rhetoric. In the following elections, they tried to go after him on Social Security because it was a $1 tax coming out of people’s paychecks. Business interests put propaganda on people’s pay stub envelopes saying, “If you re-elect Roosevelt, you are condemned to this tax increase, and who knows whether you’ll ever get benefits?” A union organizer famously said, “Why didn’t they put propaganda in your pay stubs last time? There were no pay stubs!” It was FDR who was getting us out of the Depression.That was how FDR saw the fight. He was a political maneuverer, unparalleled perhaps in our history, and that was 100% the playbook they used for Medicare. They knew full well what to do to make a program that would survive.Krugman: Now, it’s interesting. I don’t know if people realize this, but it’s only Medicare Part A, the hospital insurance part, that is payroll, and the rest comes out of general revenue. But in some ways, the aura of this separately funded program extends to the whole thing, even though a lot of it is not paid for by that bit on your pay stub.Williamson: The downside, in terms of the price of democracy, is that people don’t necessarily think of these as government programs. People know about their Social Security taxes, and they don’t think it’s going into a bank account for themselves. Sometimes there’s worry about that, but people know that it’s going into a general fund and paying out today. They have that much of a sense about it, even if they don’t always have a full sense of the totals.The flip side of putting this aura around these particular programs is: Does it implicitly denigrate other programs? I think there’s a case to be made for that. Over here are Social Security and Medicare—the contributor-funded, worthy programs—and over there are other welfare programs that are somehow seen as not as deserving or worthwhile. That’s a real risk of the approach.Krugman: Yeah, okay. I’m always a little surprised looking at the record of the Obama years to see how much, particularly at high income levels, he did manage to raise taxes. CBO numbers say that the effective tax rate on the top 1% under Obama rose to pretty close to where it was pre-Reagan. But it was not going to be enough if we really want to have the kind of society that a reasonable, center-left person wants. So what are the prospects? Are we still living in this era of tax phobia? I think I’m dreading your answer here.Williamson: Well, I think one thing that’s happened is that the mask really came off on this. For many decades, being anti-tax was a kind of polite fiction, a rhetoric you could use to attack the idea that a democratically elected government could do good for people. Rather than directly attacking democracy, conservatives attacked taxation. This is a replication of precisely the rhetoric that followed the Reconstruction period. The Redeemers, the white supremacists, came back to power through violence and intimidation, and organized themselves as taxpayers using rhetoric that looks very familiar to anyone who knows about Reagan’s “welfare queen”—that Reconstruction governments were full of corrupt, untrustworthy chiselers, and the poor, burdened, implicitly white taxpayers were rising up against that. It’s very similar to the rhetoric you see in the aftermath of the second Reconstruction, the civil rights movement in our own time.To some degree, the dog-whistle aspect of anti-tax rhetoric has fallen by the wayside as the Republican Party has moved to an explicitly anti-democratic stance, like failing to accept election results. So the tax rhetoric is falling by the wayside, and the stakes are a lot clearer now.The problem, to my mind, is what we have not seen. You’ve seen some real movement on the center-to-left side on all kinds of things—rhetorical progress—but what remains missing is a willingness on the part of center-to-left politicians at a national level to tell people that their government is worth paying for. At a state level they have to do this, but nationally, the unanswered disparagement of government—which has been a consistent part of our politics for my entire lifetime—paved the way for things like DOGE and the massive destruction we’ve seen in the last two years.To some degree, I think that destruction has made the value of government more evident. It has brought things like the role of the CDC, or the fact that we had people watching our nuclear silos, to the forefront of our minds. But what I have not seen is politicians on the center-to-left talk seriously about the idea that the United States government is worth being paid for by all of us.And you see that with the plans by Senator Booker or Van Hollen. Once you’re proposing very large tax cuts for middle-class and upper-middle-class people to the tune of hundreds of billions of dollars, we will not have those measures in place to do the rebuilding that is so absolutely essential.Krugman: Even someone like Mayor Mamdani in New York City saying we’re going to tax the lavish pied-à-terres held by non-residents who have $100 million apartments—which is fine—shows he’s still kind of afraid to do a Willie Sutton and go where the money is.Williamson: Yeah. To me, it’s hard because people want you to say it has to be one or the other. They want you to say either you want progressive rates at the very top—and I think there’s no way around that as an approach to reducing wealth inequality in this country.I’ll tell you a story: Tom Paine, the guy who wrote Common Sense and famously said that the United States did not need a king, wrote The Rights of Man a few years later in defense of the French Revolution. In it, he includes a tax plan because he was worried about extreme wealth corrupting elections. It was a tax plan applied to income from wealth, and the top rate proposed by Thomas Paine in 1791 was 100%.He imagined that there should be a limit to wealth—explicitly saying “any level that you would possibly need to support a family, any amount that you could conceivably earn through your own effort.” But he thought a level of consolidation like the wealth of the lords and earls in rural England endangered a republic. So there’s a very long tradition in American politics of very progressive tax plans, and that’s an important part of thinking about the future. At the same time, we need to think about revenue that will be available in perpetuity, and come back to that old idea that this is our government and that’s why we pay for it.Krugman: Okay. So how long till we get a value-added tax in America?Williamson: I’m right there with you, yeah. I think it’s about seven economists behind the banner.Krugman: Okay. Well, this was great. The historical perspective is more and more important; you can’t understand where we are without looking back, and then looking forward with a little bit of trepidation, but maybe a bit of hope.Thanks for speaking with me today. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

Link to primer here.TranscriptIf you want to understand how we went so far down the road towards oligarchy, Malta is a good place to look. Hi, Paul Krugman, doing a video today.Yesterday, my weekly primer was another episode in the series about the rise of oligarchy and the policies that have led it to where it is. And this time, I focused on the role of a huge shift in taxation that has taken place over the past several decades, away from taxing capital and towards taxing labor. Half of that is a very large decline in the effective rate at which profits are taxed. Now that decline has taken place partly via a reduction in headline tax rates, but to a large extent, from expanding loopholes — of which one of the most important is the ability of corporations to use accounting tricks to shift their reported profits into low tax jurisdictions, which is where Malta comes in. On paper, according to the official numbers, Malta plays a remarkable role in the world economy. It’s a huge investment destination: There are only a bit over 500,000 people on the island. But it has attracted more than $500 billion in foreign direct investment. At the same time, Maltese companies have invested about the same amount overseas. That’s about a million dollars per man, woman, and child in each direction. Of course, it’s all fake. What we’re actually seeing is a proliferation of shell companies that are used by companies elsewhere as ways to launder, transfer their profits so that they pop up in Malta, which has a basically zero tax rate on corporate profits. This is a combination of tax avoidance and tax evasion. Avoidance is when it’slegal, although it probably shouldn’t be. Evasion is when it isn’t. There’s some of both going on in Malta. There’s quitea lot of actual money laundering and sheer criminal activity. Famously, an investigative journalist from the island who looked into it was blown up by a car bomb. But mostly it is probably, at least marginally, within the, or arguably within the outer limits of the law. So Crocs has a two-person office in Malta. And according to its books, basically all of its global profits come from that two-person operation in Malta. The New York Times had a very good report about all of this, which somehow I had not seen before writing the primer. What is going on here? Well, the mechanics are quite simple. The real question is why this is allowed to persist. Tax avoidance or evasion, but profit shifting to avoid taxation, is a big issue. Estimates for the United States are that we lose probably north of $100 billion a year to companies finding ways to make their profits appear someplace else. If you want a sense of perspective, that’s roughly the entire budget of the food stamp program. It’s roughly the entire amount that Medicaid spends on health care for children. These are programs that the administration falsely insists are full of fraud, but international profit shifting is fundamentally tax fraud, although it may be legal. Now, Malta is a sovereign nation, but there really wouldn’t be any problem if the major democratic nations said this must stop. Malta is in fact part of the European Union. The European Union could clearly stop it. It has not. Now, Europe is not totally hopeless. They actually have to some extent reined in the tax shelter status of Ireland, although it’s still there, but it’s weaker than it was. They have made moves toward a general international agreement that says that corporate tax rates must not be below 15% anywhere. It’s not really in effect, but they’ve moved in that direction. But Europe is characteristically weak in implementation. And let’s face it, there’s a fair bit of corruption there as well. The United States, well, the United States was part of the project to limit at least extreme tax havens. To impose that minimum 15% corporate tax rate. But Donald Trump has withdrawn from the agreement.It’s very clear that the United States government, as currently constituted, is not interested in cracking down on tax avoidance and tax evasion. In fact, the President of the United States and his lackeys are very much clearly on the side of tax cheats.Now, I don’t want to say that Malta is the whole story. It’s obviously just a piece, although it is pretty extraordinary. We’re taking about basically a million dollars of corporate profits being laundered for each inhabitant of this tiny island. But it’s an indication. It’s also an indication of what I’ve been calling the downward spiral of oligarchy. If we ask why is this outrage, this fundamental tax cheating permitted to continue, the answer is very clearly, it is the power of people with money who want to be able to avoid taxes. And their ability to avoid taxes leads them having even more money,which reinforces that power.So it’s going to take a really big effort to, you know, we really need to reverse this. And we need to do it, you know, not slowly because this is a cumulativeprocess. We are on a downward spiral here. Malta is slightly exotic, it’s a funny story, but it’s actually very much indicative of what’s going wrong for the United States. And a reminder that although we are definitely the bad guys here, theEuropeans aren’t such great guys either. But maybe they can be shamed. And maybe if we have a regime change here in the United States, we can finally be part of the effort.Have a great day.For all my interviews and more, subscribe on YouTube. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.. . .TRANSCRIPT: Paul Krugman in Conversation with G. Elliott Morris(recorded 8/6/26)Paul Krugman: I am returning for another of multiple conversations with G. Elliott Morris, whom I find the most informative polling and political data analyst out there. And for a couple of reasons: We just had the primary in Michigan, we have a lot of numbers, and the Strength in Numbers midterm model is up. So we have our first reads on best estimates of what’s going to happen. So there’s a lot I’d like to talk about.G. Elliott Morris: Hey, Paul. Yeah, let’s get real wonky on the forecasting. Good to be back.Krugman: Yeah, let’s start with the model. You have a first forecast, which is pretty encouraging for Democrats. But why don’t we talk about what the forecast says and then what might be issues to raise around it?Morris: Sure. The forecast, which people can find at fiftyplusone.news—which is sort of a sister publication to Strength in Numbers that I run with a couple of friends—is just a team effort, so we kind of have a different play sport than just a solo podcast. That forecast, as of recording (Thursday afternoon), says the Democrats have an 87 out of 100 chance to win control of the House. They need 218 seats; they have 215 right now, so it’s a pretty easy get. I can explain why. And that the Democrats have a 54 out of 100 chance to win control of the Senate. So pure toss-up territory there for the Senate. There, they need to win 51 seats; they currently have 47.Krugman: Now this is, of course, a map on the House that includes the extreme gerrymandering, all of the attempts to tilt it. And so you’re saying that despite that, the Democrats don’t have a lock, obviously. But I assume that without the gerrymandering, it would be even higher gains on the House.Morris: Yeah. I mean, without the gerrymandering, I would take close to 95 or 96% odds for them to take it. Our best guess is that the gerrymandering cost Democrats 5 or 6 seats in the House. So that combines a pretty good amount of gerrymandering in Texas—that cost them probably three seats there—and then 3 to 4 seats across the other Southern states. Tennessee is one; Louisiana, 1 or 2; Alabama, probably one there. Florida as well—a pretty big hit in Florida. And then, of course, it takes into account some gerrymandering back in the Democrats’ favor in California, and one lucky seat that they got a lucky break with in Utah with some court-mandated redistricting there. Democrats will take a seat from Utah for sure. So, yeah, I think that they’ll get 231 seats on average today, but that number should be close to 237 without the mid-decade cheating.Krugman: You’d said that they needed something like a four percentage point advantage in the popular vote.Morris: Yeah, we’ll be writing more about that. I think the number in the forecast now is close to three and a half. It’s a little more optimistic taking into account stuff like how candidate recruitment was really good for Democrats in some places. Their polling numbers and fundraising are looking really good in those competitive districts. So, you know, if the historical patterns are correct, Democrats gain some ground in the generic ballot, and the predictors are as reliable as they typically are in midterms, then it should be a pretty easy victory for them. We would predict a pretty easy, big House majority for them with 230 seats.Krugman: But just to talk about the Senate—so that’s a much heavier lift, right? I think I know why, but why don’t you give me your version of what it’s about?Morris: Yeah, well, in the Senate, Democrats currently control 47 seats. They need 51, so they have to find four seats to flip somewhere. The Democrats are very favored to win the seat in North Carolina. Former Governor Roy Cooper is running—a Democrat. He’s running against current Republican National Committee chair Michael Wheatley. And Roy Cooper is just kind of one of those politicians who has a good connection with his state and kind of can outperform those fundamental indicators in the state. So the typical voting pattern of the state is what I really mean there. So they will very likely win that seat—maybe an 85% chance we gave them.So they need three more. And Democrats are also defending a seat in Michigan, just for whatever that’s worth. So the other three seats the Democrats could get are Maine, Texas, Alaska, and Ohio. All four of those seats are toss-ups, leaning Democrat in Maine, although we lack a lot of data in Maine with the new nominee, the new Democrat nominee. So that’s really the territory. You could argue maybe Iowa looks potentially competitive based on early data, but it’s kind of thin. Georgia Democrats are looking to upset the incumbent Democrat, Jon Ossoff, but I don’t think they really stand a chance there.Krugman: Yeah. And the thing about the Senate, there’s two things about it structurally, right? First of all, only a third of the seats are up this year, so Democrats have to win a large percentage of the seats that are actually on the table—where they’re actually holding elections this year.Morris: Right.Krugman: And then the Senate gives Wyoming—whose population is basically the equivalent of a neighborhood in Brooklyn—and California the same number of senators. And that kind of works in Republicans’ favor, right?Morris: I mean, if you count them up, there are 6 or 7 competitive seats from the Republican side that Republicans currently hold. And as I mentioned, Democrats need to win four of those. So you’re looking at two-thirds or so of the competitive seats Democrats have to get to pick up the majority if they defend that seat in Michigan—which is not a certainty. I do think the polls are perhaps undercounting, underestimating the Democrats there, but I wouldn’t put money on that. That’s just kind of a hunch based on the polls and other seats.Krugman: Okay. But let’s talk about Michigan. So we had this extremely contentious primary. And, you know, Charlie Cook shows up in my feed saying Democratic chances of taking the Senate have just evaporated. And then I read you saying that it really doesn’t make a difference or not much of a difference that El-Sayed won. So let’s talk about this. There are interesting methodological differences.Morris: I guess the great Charlie Cook would have said that, yeah.Look, I think there’s a real lack of epistemic humility when it comes to Abdul El-Sayed’s chance of winning Michigan. There is a lot of conventional wisdom out there that, you know, let’s just say it: like a Muslim candidate cannot win the US Senate in Michigan, that Medicare for All and other progressive positions are going to drag him down. And frankly, a lot of this punditry comes from those center-left Democrats who should be in favor of those candidates winning. And so there is a sort of shooting-yourself-in-the-foot dynamic there as well. But if you actually look at the polling—and I wrote about this on Strength in Numbers—if you look at those polls pitting Abdul El-Sayed, the current nominee, against Mike Rogers, the Republican nominee, and then you compare them to how Haley Stevens would have done in those same horse-race matchup polls, the difference between the two Democratic candidates, or potential Democratic candidates, is statistically indistinguishable from zero. It is, on average, zero. Maybe it’s as big as three in either candidate’s direction. But if you’re Charlie Cook saying Democrats’ chances just evaporated, you are leaning heavily on some other priors or other punditry in saying that and not really the data.Krugman: So, there’s two aspects to this, one of which I take pretty strong statistical evidence from you and one of which is a kind of “don’t know,” but... One of them is saying El-Sayed is too far to the left, and you basically have said that that’s a dimension that exists in the minds of pundits, but not in the real world or not among voters.Morris: Yeah, there’s a strategist fallacy here as well. There’s an over-indexing on the perception of Abdul El-Sayed as some radical-left DSA candidate. For the record, he’s not even a member of the Democratic Socialists of America who have been winning so many seats. And there’s a default backlash to the idea that, you know, a more left-than-moderate Democrat could win in Michigan. There’s no similar skepticism, however, about the probability of a far-right Republican winning Michigan—Donald Trump in this case, who just won it. So clearly, this over-indexing on ideology from the pundit class, the strategist class, has, I think, pretty little bearing on the actual electoral outcomes.Krugman: Yeah. What I take a lot from you is that the idea of, “Well, Medicare for All, that’s kind of a left-wing policy, and people will be against it”—it’s not clear that the public even thinks about it as being a left-wing policy, or even that the public has a left-wing versus right-wing conception except sort of as a caricature vision. So...Morris: Yeah. A public option for healthcare, if you want to say it that way, polls very well. The 60–65% universal healthcare idea and expanding Medicaid polls at 75–80%. People want more of a government role in health insurance. I just saw a lot of the interviews with younger people in Michigan as well. And, you know, anecdotes are anecdotes, but still, most of the accounts from these young people about why they supported Abdul El-Sayed were healthcare-related—that they wanted some guarantee of health insurance.So I just think we all carry around a lot of biases in our heads about what’s possible politically. And that has changed a lot over the past decade with rising partisanship and a demand for change from Washington. Just one more statistic, and I’ll wrap up here: In our polling, 60% of people say that the political system needs major structural changes; to be torn down and rebuilt. That is similar to the DSA sentiment about how the economy’s not working, right? So you can imagine why the appeal would be there for the sort of anti-system candidates like Abdul El-Sayed.Krugman: I’ve always been shocked by polling by the likes of KFF that shows very, very strong public support for Medicaid, very comparable to Medicare. And I’ve always wondered how much of that is because people may not know the difference.Morris: I couldn’t tell you, but I think your instinct there is the right one. There is a lot of public support for government providing health insurance to people who need it. And then there’s a lot of definition about who needs it from the right, especially in campaigning against these benefits. I know you’ve written a lot about that.Krugman: Yeah, but it’s interesting. I’d like to say “the public loves Medicaid,” but I’m not entirely sure that people don’t think it’s the same thing as Medicare or, you know, don’t know that one of them is means-tested. But the only thing that gives me pause is I just worry about the idea, “I would have no qualms at all if someone had El-Sayed’s exact same positions, but was named John Smith.”Morris: Yeah.Krugman: And no one seems to want to talk about how...Morris: Yeah, they don’t want to talk about the Muhammad factor of it all. And that seems really relevant to our priors in American politics today. I mean, how many exact same articles were written about how Barack Obama was too far left to become president of the United States? And Barack Obama was not a far-left senator. It should be laughable in hindsight. If he wins and he wins by 5 or 6 points, I think maybe we’ll say a lot of this was all for naught. On the other hand, if he loses, people will point to his ethnicity and name as a reason, and as something Democrats should avoid in the future. I’m sure of that.Krugman: Yeah. You know, Obama was, in fact, very centrist, very restrained. I sometimes worried that because of his name, he felt that he had to be and that he was too cautious on some of the policy stuff.Morris: Well, I don’t know the guy.Krugman: Well, I did, though not a lot. But there were some meetings with economists wanting him to take a harder line on Wall Street, and bankers telling him he mustn’t. And the bankers won all the arguments.Morris: What else is new?Krugman: But yeah. And so you actually said, basically, that Stevens vs. El-Sayed makes no difference at all to your probability of the Senate.Morris: No. And that’s the other thing: If you are really splitting hairs about the probability of winning Michigan, then there is an on-average effect of Abdul El-Sayed winning. It’s on the order of 4 or 5 percentage points. So to spell that out, our current forecast, including Abdul El-Sayed, is for Democrats having a 64 or 65% chance of winning the seat in Michigan. Whereas if you replace the quantitative indicators for El-Sayed, such as the polls and some other factors, with those that you would have in a hypothetical election with Stevens, Stevens has a 69% chance of winning. So there is a five-point difference there.If, however, what you care about is the chance of controlling the Senate, this is negligible; it is less than one percentage point. Democrats in our forecast have a 55% chance of winning the chamber today. They had a 55% chance of winning the chamber on Monday [before the primary]. And, frankly, according to the quantitative data that we have right now, it just doesn’t matter who that nominee is. But maybe that’ll change, right? Democrats have gotten in some trouble recently nominating candidates who have not been vetted before, not run for office. We don’t know what will happen in the future. But as of right now, it doesn’t seem to matter who that nominee is in Michigan.Krugman: Okay. So the backdrop to all of this is the unpopularity of Trump and his policies. That’s what makes this a reality. I think that there’s been a noticeable further downleg in Trump’s approval. Is that right?Morris: Yeah.Krugman: Is that basically post-Iran, or is there more going on than that?Morris: Well, the war in Iran definitely eroded support for Trump at the beginning, which I guess was March 1st of this year, where in our average, we had him at a 37% approval rating. Then over the next month, his approval rating fell to the low 36’s. And on the other side, his disapproval rating increased from 55–56% up to 60%. So there was some consolidation, especially in opposition to Trump among those sort of, you know, maybe Trump-skeptical or unsure voters. There has been further degradation since then. I mean, Donald Trump’s approval rating was almost in the 35s a couple of days ago, and his disapproval rating was approaching 62%. It’s since bounced around a little; there’s some noise in the polling data, so the average bounces around a little. But his approval rating is at an all-time low—net of something like -25 or -24.But what we do is we compare Trump’s approval rating on the issues to whatever Donald Trump’s overall approval rating is on the day the issue surveys are released. And then as Trump’s overall approval rating changes, we predict what an issue approval rating would be given, you know, whatever his approval rating is on that day in the average. So what we’re actually doing is looking at the difference between his issue approval rating on something like prices and his overall rating, and then predicting that, until there’s new issue approval rating data. I mean, at this point, there is issue approval rating data like every couple of days; pollsters have started asking for it. Maybe it seems to get them a lot of attention to publish a really bad number on inflation, for example. So there’s plenty of data, at least on the big issues.Krugman: Okay, but there’s a kind of ranking of issues which are really bad for Trump and issues which are—at this point, I guess there are none that are really good, but there are degrees of badness. I think anybody can look at your site or at fiftyplusone.news, but tell me what’s kind of worst and best, and what do we know about those.Morris: Yeah, the “degrees of badness” is a fun way of putting it. You know, I was interviewed by WNYC a couple of hours ago so the numbers are fresh in my head. Trump’s approval rating is somewhere between what Richard Nixon’s was literally the week that he resigned the presidency in disgrace (around 32%) and George W. Bush’s in 2006, the middle of the Iraq War—I think just after the Abu Ghraib scandal—where he was around 38%. So Donald Trump’s ratings today, even with the amount of political polarization we have and the amount of partisan sorting that we’ve had over the past 20 years, has, you know, the approval rating of some of the darkest periods of American history in terms of the evaluations of the president. So it is very bad. I mean, despite what he wants to say on social media about having the best polls ever, he has an almost worst-ever approval rating for any point in a presidency.Krugman: By the way, the political polarization thing is something not everybody will understand. I mean, what you’re saying is basically that when Richard Nixon was president, people could actually be persuaded—Republicans could actually be persuaded that a Republican president might be bad. And, well, we were thinking that we weren’t in that kind of world anymore. But you’re saying that despite that, we’re kind of getting into there?Morris: Yeah. The approval rating and Gallup’s tracking for the out-party of the president—so the other party than the president’s party, in this case for Nixon, the Democrats—used to be able to get up as high as 50, 60%. The American voter was just more ideologically flexible and more willing to give credit to presidents of the other party, especially at the beginning of their term when there’s a so-called honeymoon effect for that president right when they start out. Comparatively today, you never see a poll with the out-party of the president approving more than 15%, even at the beginning. And now it’s closer to five. About 5% of Democrats say they approve of how Donald Trump is handling the presidency. I imagine a lot of that, by the way, is like measurement error in identifying who a Democrat is. So...But the point is, that makes it really hard for a president to have high approval. The president has a higher floor and a much lower ceiling. So it’s really hard to persuade members of the other party to approve of them. Equally, their party members tend to approve of them pretty much regardless of what they do. So the fact that Trump’s approval rating is as low as it was for some of these really dark times in American history—for the presidency, at least—really says something about numbers that low.Krugman: He started out pretty positive, despite all of this, with immigration, deportations, all of that. And that’s gone negative. Is that just part of the general decline, or is there something special going on with the deportations?Morris: You know, it is impossible for me to say with the data that we have now whether or not someone would say they disapprove of Trump on immigration now purely because of immigration policy. So I don’t want to overstate the case here, but the fact of the matter is that Donald Trump and the Republican Party had, I think, a 15 percentage point lead on trust to handle immigration and deportations in the 2024 election. And now they’re even or underwater. So, you know, you might want to adjust in your head for the fact that this number is affecting the Republican Party as well; it’s not just Trump overall. It’s probably not just a factor, I would say, of Trump’s approval rating going down overall, because there’s been this other observed trend downward in trust for Republicans. I mean, you’ve been writing a lot about...Krugman: Trump’s net negative, -25 or so on approval. And the generic ballot is a much narrower spread in favor of Democrats. And that’s from what?Morris: It’s mostly Republicans who say they disapprove of Trump’s handling of the presidency—you know, his approval rating overall. But these people are still Republicans, right? Most of them call themselves Republicans and conservatives. The vast majority of those people who say that they will vote for Republicans on the generic ballot, but disapprove of Trump, voted for Trump in 2024. In a couple of columns I’ve called them “closet Republicans.” The fact of the matter is they’re really just Republicans; they may not even be closeted. They say they’ll vote for Republicans again. So we can’t expect every person who disapproves of the president to change how they would vote in a congressional election.Krugman: It was true for Biden and Democrats, too, in 2022.Morris: That’s right.Krugman: Actually, the Democrats did kind of okay in the 2022 midterms.Morris: Right.Krugman: Or better than you might have expected, given how unpopular Biden was.Morris: Yes, yeah.Krugman: Someone—and I think it’s YouGov—actually breaks Republicans into MAGA and non-MAGA. It’s pretty striking. Basically, the non-MAGA Republicans, which might be something like the group you’re talking about, are in many ways a lot closer in views to independents and Democrats.Morris: Well, since you’ve mentioned this: In their most recent poll release, either this week or last week, actually, they’ve broken down Trump’s approval rating among Republicans who call themselves MAGA—if you ask them, “Do you identify with the MAGA movement?” I think that’s the wording of the question—and those who don’t. And Trump’s approval rating among non-MAGA Republicans has really degraded. I mean, that is probably responsible for much of, if not most of his degradation in his overall approval rating. But if you look at Trump’s approval rating among non-MAGA Republicans at the beginning of his term, it is almost identical to his approval rating among Republicans who call themselves MAGA. Now today it’s underwater by, I think, 5 or 10 percentage points. So he’s just really lost a lot of ground among that group who doesn’t identify with his movement.Krugman: You had a map that really caught my eye, and I’m planning to do a little statistics on it myself, where again, this kind of synthetic approach where you try to produce an estimate of what net approval is on deportations—I think it was specifically deportations by state. How is that done? How do you do that?Morris: In brief, these maps of opinion—so statewide approval rating for this case of deportations—is generated with a statistical model that is called multilevel regression and post-stratification. What we do is we take our national polling data—in this case, ours is Strength in Numbers and my polling partner’s site. And this national polling data is 20,000 people or so. And we look at their demographic characteristics and who they voted for in the last election. And then we predict how every person in a given state—so let’s just say, like Texas—would answer our survey if we had interviewed them instead. And we know the demographic characteristics of Texas from the Census, and we know the political characteristics of Texas by past voting behavior from the last election. So we know that these estimates are rooted in demography and politics. We just balance by congressional district as well, not just at the state level. We actually get a little fancier than that; like, we have local-level knowledge about where these people live and what the political characteristics are in their state. But [talking about] that would be getting pretty weedsy.Krugman: But if you look at the map, the places where there is still positive approval on deportations is what I think of as—I’m patenting this—”the ICE belt,” which is sort of from Louisiana through West Virginia. If you know anything about the geography of immigration in the United States, these all happen to be places where there are very few immigrants.But I guess the way you construct it, you aren’t actually directly asking people their views on deportation, so I’m not sure this actually provides an independent check on the hypothesis that people are really hostile to immigration if they’ve never seen an immigrant.Morris: I will provide you some studies. I was at Pew Research Center in 2017, and someone there was publishing an analysis of whether or not, controlling for all their demographic and political factors, you were more pro-immigrant if you had been around immigrants more. And in this case, they were actually looking at support for building the border wall. And they found that proximity to the border wall actually decreased your support of the border wall. The most pro-border-wall states were Montana, Idaho, North Dakota, South Dakota—the states furthest away from the US–Mexico border. So that might provide some suggestive evidence for you, Paul.Krugman: Yeah, because I realized I actually can’t use your data for this, but okay, that would be helpful. I mean, I have my two favorite kinds of email that I do get. One of them is from people, typically actually in the Southwest, not too far from the border, who are very anti-immigration. And I get letters saying, “How would you feel if New York City was full of immigrants?”Morris: Have they been to New York City?Krugman: I guess a surprising number of people have not. But the other one is—and this is a little more esoteric, but—”How would you feel if lots of professorship jobs were going to immigrants?” And if you ever looked at the listing of a well-known economics department...Morris: ...and definitely don’t look at the computer science department of your local public university.Krugman: Yeah. So it is kind of a funny thing. But I’d like to believe that the familiarity makes you see immigrants as people, but that may be a little too romantic.Morris: Yeah, might be a little too optimistic, Paul.Krugman: Okay. What everybody is wondering about is: If the midterms were held today, we can be reasonably sure that Democrats would take the House. Then the Senate is a much harder climb and also more quirky. How much can things change, or how much do the things that we know might change affect it? Historically, how locked in are midterms by this point? I actually don’t know the answer to that.Morris: I’ll have to do a blog post on that one, because I don’t know the answer to the question in terms of, like, how often does the party that’s ahead end up losing in terms of binary? But the reason that we do these forecasts, at least at Fifty Plus One, is to really contextualize the polls and, along with that, the other information we have about the election. So those fundamental indicators—by which I mean, like, the way a state typically votes and whether or not an incumbent is running—contextualize the expert race ratings from the race raters, people like Cook Political Report and Sabato’s Crystal Ball. And the forecast probability on our website takes into account the usual amount of change in the election, or rather, the upper bounds of historical change in the election. That is what our confidence interval, our uncertainty, is for. I mean, the whole reason we really do it is to measure uncertainty in the polls and the other indicators today to see what could happen if they change or are wrong by the amount that the polls have typically changed or been wrong by.Krugman: Right. So when you say 87%, that’s not 87% Democratic control of the House if the election were held today, right?Morris: Right. But it does also include that sort of normal further movement against the party holding the White House, but also the uncertainty of events. Our forecast, which is different from some other forecasts out there that you might see, projects the amount of change that there typically is in the generic ballot. So the advantage that the Democrats in this case would get over the course of the election—usually the party out of power gains about a point to two points in the polls between now and November. And that makes a big difference in your estimated probability that in this case the Democrats would win the House and the position that they would have in the Senate by the time November comes around. But that’s just the right way to do it.There is a chart on our methodology page that shows the trend of the generic ballot over the course of the election year for every midterm going back to 2006. And it is quite stark: at about the 60-day-out mark—so Labor Day—there has always been a 1 to 2 percentage point increase in the polls. Again, patterns break down over time, but that is a pretty safe bet that as people tune into the election, they come to the conclusion that the party that is in charge of the White House does not deserve to be in control of the House. And that’s just typically what has happened.Krugman: Okay. And my specific concern—you know, people have no idea which party I want to see win! But anyway, my specific concern here is, okay, it’s possible that essentially the US has surrendered and that the Strait of Hormuz will reopen on Iran’s terms and that gasoline prices will come down and all of that. And the question is whether that can really make a big difference in the time remaining before the midterms.Morris: Well, it would take some amount of time for oil to be shipped back to America if there were refining capacity left.Krugman: That’s my alley, so I’ve definitely done that one. But, you know, imagine that somehow gas prices were to tumble by $0.50 over the next two months, something like that—which is certainly in the realm of possibility, though might not be the most likely forecast. How much difference could that make to the election?Morris: Yeah, I wrote about this last Friday. If you game out a return to $3-a-gallon national gas, it looks like that’s worth about ten points in Trump’s net approval on prices, and about a point, maybe two points if you’re really stretching it, in his overall approval rating. And that forecast is based on the change in gas prices that we witnessed through much of June and the change in approval rating that Trump saw in June. He did get a bit of a bounce back in June as the price of gas receded. He did not go all the way back to where he was when gas was whatever price it was at the end of June—I’m just not remembering the exact price of gas at the end of June. Forgive me, forgive me.Krugman: No, that’s all right. Now I’ll ask you what a gallon of milk costs and we’ll rule the U.S. forever on $1.99, I think.Morris: Okay, there we go.Krugman: No, but we’ve had a back and forth—both face-to-face and in sort of interacting blog posts—about public views on the economy generally and what it takes. And I look a little bit at the Biden years, obviously. We had $5 gas for a little while there in 2022, and then the price of gas came way down. Inflation came way down by late 2023. You could have said, “Well, this looks like an okay situation on inflation and gas prices.” But Biden’s approval on the economy never really recovered. And that’s what suggests really long lags here, right?Morris: Yeah, I think that was the second chart of my blog post from last Friday as well. If you look at how Joe Biden’s approval rating went up by ten points from -20 to -10 from peak inflation, which was I think July 2022, through the next spring in 2023. And then it of course went back down and he had—yeah, he effectively resigned the presidency, right?Krugman: Yeah, I mean, I think that in some sense the narrative is probably baked in already. People think of Trump as somebody who drove up their cost of living.Morris: Yeah. You wouldn’t bet that a president would get credit for inflation easing, whether or not it would be CPI or gas prices. Even if I’m oversimplifying our interlocking blog post chains… But what people seem to be reacting to is the pain. And then they remember the pain, even if prices stopped going up by as much as they were going up or indeed go back down. That creates a negative impression in the public’s mind of the person in charge of preventing the bad stuff from happening in the first place.Krugman: I think you haven’t exactly said this will be a wave election, but you said it sure looks like a wave election. What do you mean by that?Morris: You can make the title of this podcast, “G. Elliott Morris Says It’s a Wave Election,” and I will back that up statistically.Krugman: Okay.You know, we rerun our forecast historically in a backtesting where our forecast predicts, in this case 2018, using only the data that was available to it through the previous election cycle—so 2016—to gauge how our model would have reacted historically on out-of-sample data, the way that it’s reacting or the way it should be reacting this year. When we do that, we predict at this point in the election that Democrats would have had around a 70-75% chance to take the House and no chance to take the Senate in 2018. The map was too far tilted against them back then. Democrats ended up losing, I believe, two seats in the Senate in 2018. Comparatively, we think Democrats have about an 85 to 87% chance of taking the House, and they could very well win back the Senate. So I think that qualifies as a big blue wave, really.Krugman: Okay, but there’s a world of difference between taking and not taking the Senate.Morris: Well, and you know, one thing we don’t take into account, to be fair, is Pennsylvania Senator Fetterman changing his party identity—something like that. A sort of real black swan moment without any historical precedents. We just kind of have to caveat that one away; we can’t assign a statistical probability to that. Although, hey, that’s a good blog post idea! Let me see what the forecast would be if you assign a 50% chance to Fetterman changing his party ID if Democrats win. We can run that math.Krugman: Yeah, again, although that’s something where the difference between 51 and 52 Democratic senators is, you know—sorry, but my own nerdishness says that’s an endogenous variable there.Morris: Yeah, right. And there’s some weird game theory whether or not he would change his party ID if it meant deciding control of the Senate, right? Perhaps he would be much less likely to do that. He does still mostly vote on Democratic bills, even though he doesn’t necessarily vote against Republican nominees. For example, sometimes he blocks very important cloture motions. But for the most part, he does vote against Donald Trump, I think 90, 95% of the time.Krugman: Okay, that’s something I didn’t know. That’s interesting, yeah.Morris: They don’t want to lose a Democratic senator, even if he goes on Fox News every day and creates bad headlines.Krugman: Okay. There’s a bunch more that I could ask. But actually, just one last thing—I thought that was the last question, but just coming back to Michigan: There was an awful lot of money... the campaign financing was very heavily weighted against El-Sayed, which seems to have made no real difference, right? Is that telling us something about this year? I mean, should we not be worried at all about Elon Musk and Ken Griffin?Morris: I hate to be the bearer of bad news to you on this front. Money does really seem to matter. At least in primary elections, it really seems to matter, because in primary elections, we as voters don’t have as many partisan or ideological heuristics to fall back on. All right, Haley Stevens and Abdul El-Sayed are both liberal Democrats. Maybe one is more moderate than the other, but you don’t have a conservative running in that race for you to use your ideological identity as a proxy. So money and exposure to advertisements—and especially negative advertisements against the other candidate—can really have an impact.And I would hazard the guess that the—whatever it was—$55 million spent on Haley Stevens’ campaign, especially in the last week or last two weeks of the campaign, may have even been a reason that the polls so dramatically underestimated her, because they were old by the time the election came around. It costs a couple hundred dollars to change a vote in a Senate election, essentially. So Elon Musk is spending $150 million out there—you can do the math on that. If he’s changing a couple hundred thousand votes in the right places that could really matter if there’s no countervailing spending. Now, in a general election, people have their partisan identities to fall back on, and money is less important. But unfortunately, billionaires spending hundreds of millions of dollars on campaigns does seem to matter, and that’s a problem that the Supreme Court has declined to deal with.Krugman: All right. So I guess our bottom line is Democrats heavily favored to take the House, Senate in play, and we should still be afraid of billionaires.Morris: Yeah. Democrats favored to take the House. Elon Musk might be kingmaker via his ad spending.Krugman: Oh dear. Well, could be worse, but all right. Good to know. And thanks for keeping us up to date. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.TranscriptContrary to what Trump administration officials say, we are not experiencing explosive economic growth. We are, however, experiencing an explosion in misery — and Donald Trump deserves full credit. Hi, Paul Krugman here, slightly different location. I want to talk about food stamps and health insurance, two areas where things have gotten dramatically worse just in the past year and are continuing to get worse. There's going to be a lot more hungry people in America, especially hungry children, by the end of this year, and a lot more people without health insurance or with inadequate health insurance. And it all can be tied directly to legislative action or inaction on the part the Trump administration and its allies. Here's what has happened. So we have what everybody still calls food stamps, though it's officially Supplemental Nutrition Assistance Program. But we have a situation now where the One Big Beautiful Bill didn't exactly cut the rate of benefits, but what it did was to impose work requirements. You might say, well,shouldn't people who can work work? Yeah, but that's not really what's happening. What's happening is that people who can work and do work —because among those who can work who are receiving food stamps, the vast majority do in fact work — must show proof of work. And that is, for many such people, a basically impossible burden. I mean, think of who is likely to be on food stamps. They may well be irregularly employed. They certainly may not have a job where they can call up the HR department and get the necessary forms. They are also presented with a complicated paperwork requirement. We're talking about people who are, to some extent, lacking in formal education. But above all — I've never been poor, thank God — but as everyone who's studied or been poor can tell you, the biggest issue of poverty in some sense is the cognitive burden, the constant struggle to just make ends meet, which is a huge burden on everything else. So you're imposing a bureaucratic hurdle, really a bureaucratic barricade in front of exactly the people least able to get across it. So of course, we're seeing a lot of people losing nutritional assistance with millions of those people children. Health insurance is a rather different story. The Affordable Care Act made a huge positive difference to many people's lives — in this case some people I do know quite well, small business people and so on. But the way it was set up, there are subsidies to help you purchase insurance through the exchanges. The subsidies are means tested. I could not get a subsidy for health insurance, nor should I. So they fade out with income. But as originally set up, they faded out too quickly with rising income, and there was a cliff at 400% of the poverty line, no more subsidies, which was clearly bad policy. And they knew that at the time. It was just that trying to scrape together enough votes to get that thing enacted was hard. So during the Biden years, the subsidy program was improved. It became somewhat more generous, but more important, it no longer had a cliff. It just gradually faded out. Unfortunately, that was not a permanent change. It wasn't enacted into legislation for forever. There was a cutoff date. Why? Well, two words, Joe Manchin. But in any case, obviously, Trump and Republicans in Congress refuse to even contemplate extending those enhanced benefits. And so a lot of people are now faced with vastly higher costs if they want to retain their health insurance. Interestingly, these are not the poorest. The poorest are going to be on Medicaid and even people a little bit above that are still going to have the full subsidy. But it's people in the middle class whose income is a little above 400% of the poverty line and suddenly have no subsidy available. That is a hardship for, again, millions of people. So far we know that enrollment on the exchanges that were set up to buy health insurance has dropped by about three million so far. Probably a lot more to come. And probably that understates the loss because people trying to save money because things are more expensive are in many cases stepping down to less comprehensive plans. So there's an increase in the number of underinsured too. Which means that a large number of Americans who had adequate health insurance no longer do. How should we think about all of this? The Trump administration has put out a report on the decline in Affordable Care Act enrollment, which is really a blood-boiling document because it portrays the big rise in enrollment that took place during the Biden years as a problem because it was an increase in fraud. Now, is there fraud? Yes, there's fraud in the Affordable Care Act. Is there fraud in the food stamp program? Yes — there's fraud in every program, public and private sector as well. There's fraud in the endless pasta deal at Olive Garden. There's fraud in frequent flyer schemes. There is no reason to believe that there is significant fraud in the sense that it's a significant, important part of any of these programs. And one thing that you always want to bear in mind when we're talking about these means-tested programs is how cheap they are. The average food stamp recipient receives $187 a month in nutritional assistance — $187 a month, a little over $2,000 a year. Maybe one way to put that in context is to say that Donald Trump's East Wing Ballroom Project, the one that is so far still just a hole in the ground and hopefully will never be finished, is costing $600 million. So that project alone, that scam, because we know that there's a lot of corruption involved, that is the equivalent of food stamps for 300,000 people for a year. So the things that we're talking about here are, it's not really about the money. It is one of those “the cruelty is the point” stories. And we could go on about that, but clearly the fact that a lot of people are going to suffer is not an unintended byproduct of these policies. It is kind of, in some ways, the goal. It's also enormously destructive, not just for people's lives now, but for the future. One of the best established facts about the benefits of government spending is that nutritional and health assistance to children pays off for society as a whole. That children who received food stamps or Medicaid in their early years grow up to be healthier, more productive adults who pay more in taxes and are less likely to need government assistance. The rates of return on both the food stamp program and Medicaid, the original aid for health care for the poor, are enormous. They're far bigger, far better substantiated than almost anything else you can do. If you ask, you know, what do we know about the payoff to infrastructure investment? Well, we think it's pretty big, but... that's not based on solid evidence. The evidence on these programs is enormous. So by cutting back on these programs, by creating this explosion of misery, they're not only making millions of Americans much, much poorer than they were, they're also making the country as a whole substantially poorer in the long run. It's an anti-growth policy. But of course, the cruelty is the point. And here we are. Many things happen to the economy, many things happen to society that are outside the control of the guy in the White House. Many bad things aren't really the fault of the party in power. This is absolutely, totally Donald Trump's fault. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.TranscriptSome say the world will end in fire. Some say in ice. Robert Frost wrote that in 1920. With more than a century gone by, we have a verdict. It’s fire for the win. Hi, I’m Paul Krugman. I thought I’d talk today about a story that should be getting even more play than it is. I mean, there’s so much going on, but, you know, Europe is on fire. There are massive wildfires in France and Spain that have forced the evacuation of hundreds of thousands of people, are menacing Bordeaux and not too far from Madrid. This, of course, follows on the enormous Canadian wildfires that for a while gave Toronto the worst air quality on the planet and turned the skies orange and the air foul across a large part of the eastern United States. And that, in turn, followed on that deadly heat dome in Europe that killed thousands of people. Okay. It’s pretty awful. It’s also something that was predictable and predicted. If you go back — I’ve been looking at a 2012 report from the UN, their climate project, that very clearly forecast growing incidents of extreme weather, extreme heatwaves, storms, flooding, and by implication, at least, wildfires. This was clearly in the cards. In fact, the story that somehow has not become standard is that climate scientists pulled off something that was extraordinary in intellectual terms. They got the basic outlines of what was coming and in many ways even the numbers on what was coming right decades in advance. In any kind of rational world we would be hailing them as heroes and very much listening to them about what we should be doing now. Of course where we are is that climate scientists are reviled. Climate change is almost crowded out of the political discussion and there’s a fair bit of actual personal persecution of people like Michael Mann and so on who are being punished for the sin of being right. Okay, of course, it’s more than just that. Now, there are sort of multiple levels to the climate story. At one level, it’s, you know, there are powerful vested interests that don’t want you to take global warming seriously. Fossil fuel interests are dying as an industry, but they’re dying slowly and they’re doing their best to take us all with them. And they have enormous influence in this administration. That feeds into something else, which is very true of the people now running the federal government, which is they hate science. So this is across the board. There’s almost always some financial interest, but it’s not just follow the money. It’s just a real hatred of the whole scientific enterprise. And so in an obvious sense, the climate denial is of a piece with the determination of RFK Jr’s health department to find a link between vaccines and autism. There have been many studies saying, no, it’s not there, but that’s not the answer they want. And they just kind of hate the idea of scientists, they hate the idea of objective research of any kind. And so that feeds right into the climate denial.And then, actually, it’s even broader and deeper than that. I don’t think you can really understand what’s going on in this administration without saying that there’s a kind of hatred of the intellect, not just science, but really any kind of hard thinking. I mean, at some, not very deep level, it’s an obvious correlation between Trump saying that the reason that we had fires in Canada is because the Canadians didn’t rake their forests, — all, by the way, two million square miles of boreal forest in Canada. You know, there’s just this absurdity, this kind of evil absurdity of the whole situation. And Pete Hegseth, having presided over the humiliation of the U.S. military because we were not ready for 21st century warfare and the Iranians were. So he’s busy suffering casualties and of course trying to hide them, suffering enormous damage and complete failure of war aims in the face of drones and missiles and basically this new world in which the Ukrainians are showing the way. This is warfare, which still requires some people, still requires enormous personal courage. But the decisive arms of battle are machines, fairly advanced machines, although cheap compared with the expensive hardware we have. And so here you have Pete Hegseth, faced with all of that, and he thinks that what the U.S. military needs is more testosterone. And that’s not a metaphor. Literally, he wants to give testosterone shots. The truth is that even the ancient Spartans didn’t win battles just by flexing their biceps. Intellect was an important part of war, even in the 5th century B.C. But now, above all, consider the craziness of thinking that it’s all about brawn and muscles and good grooming. Oh my god. But this is all hatred of basically anything that involves hard thinking. Again, the deep point is it’s not even exactly, I think, that people in this government are lying about climate, that they’re lying about military stuff. I mean, yes, of course there’s a lot of lying, but I’m not sure they even really have the concept that there is objective reality. And they certainly hate anybody who tries to argue that what they’re saying is objectively, empirically not true. How did we get here? I’ve been writing about oligarchy, and it’s certainly true that the big money — and the big money has never been bigger — that the big money has thrown its weight behind these deeply anti-intellect, anti-science people. This is in the long term, and not very long term, really against their own interests, but the short term lure of tax cuts and a corruptible government — because they’ve got the money to do the corruption — I guess outweighs that. And also, of course, quite a few of the mega-billionaires are themselves caught up in this. If we all get through this, Elon Musk and the general awfulness of the people who somehow end up with hundreds of billions of dollars is going to be a cautionary tale for generations to come. Anyway, that’s where we are. What can I say? I’d really like to not talk about depressing stuff, and I will now and then, but boy, we are in quite a state. And the sky is blue right now, so I guess I should go out and spend some time outdoors while we still can. Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.In my writing about wealth concentration and oligarchy, I steal a lot from lean heavily on the truly work of Gabriel Zucman, who is a hugely important researcher (winner of the 2023 Clark Medal) who is also starting to play a major role in policy. I’ve talked to him before, but this seemed like a good time to bring him back.. . .TRANSCRIPT: Paul Krugman in Conversation with Gabriel Zucman(recorded 7/23/26)Paul Krugman: So, hi everyone. Paul Krugman here, bringing back Gabriel Zucman, probably the best guy for thinking about inequality, especially wealth issues. And since I’ve been writing about that and stealing a lot of Gabriel’s research, I thought we should talk again. So, hi Gabriel.Gabriel Zucman: Hi Paul, thanks for having me on.Krugman: Yeah. So, you have been writing—and now I’ve been, you know, cannibalizing it—a lot about wealth concentration. Why don’t you tell us about your reasons for focusing on wealth.Zucman: Basically, because there’s a fundamental tension in democratic societies between extreme wealth and the very possibility of a well-functioning democracy. And it’s not a new idea—don’t get me wrong. All the thinkers of democracy have written about this, all the way back to Aristotle, more than two thousand years ago.Krugman: Right.Zucman: But there was a period of time after World War II when many people thought that this issue belonged to the past. And it corresponded to a very particular moment in history when extreme wealth had largely disappeared after World War II, after the shocks of the first half of the twentieth century.But now, of course, it’s making a dramatic comeback. And so we are back to this discussion of: how do we deal with this tension? How do we organize the economy and our society to prevent the forms of capture of the political process, in particular, that are associated with extreme wealth?Krugman: Now, there’s a question. I mean, I’ve been on the inequality beat for an alarmingly long time—since you were a small child, actually. But in the early nineties, let’s say, it was all income rather than wealth. And a lot of it was top quintile, and maybe top one percent. And now you’re telling us that we need to focus on the wealth rather than the income of the top 0.0002 percent. Why that shift? Why wealth rather than income?Zucman: Well, it’s for two reasons. Number one is a macroeconomic reason, which is that wealth as a whole has been growing much faster than income. So if you look at the ratio of total household wealth to GDP in the US in 1980, it was around 200–250%, and today we are past 500%. This means that the total wealth of the country is equivalent to more than five years of annual production, five years of annual GDP. The second reason is that wealth itself has become much more concentrated, and the rise of wealth inequality, especially at the top of the distribution—at the very top—has been massive and has been even faster and stronger than the rise of income inequality.So we all know about the rise of the top one percent; the top one percent’s share of total income has increased from about ten percent of income in the US in 1980 to about 20% today. But at the top of the wealth distribution, the increase has been even much more dramatic than that.Krugman: At the risk of derailing it slightly, one thing that I myself have gone back and forth on—and certainly I get from comments on things I write—is a question comparing the wealth of the top 0.001%, or whatever: should we be comparing it to total wealth or to total income? And I know you’ve used wealth to GDP, and I have some thoughts, but you’ve done it both ways. Which do you use, and why would you use it? I don’t know which is right, but what are your thoughts?Zucman: I think both statistics are interesting and capture different aspects of reality. So if you’re interested in wealth inequality, in the concentration of wealth, the most meaningful statistic is to divide the wealth of the super-rich by total wealth in the economy. So, for instance, if you look at billionaires—roughly the top 0.1 percent of the population—they own about seven percent of total US wealth today. In 1980, they used to own about one percent of total US wealth. So it gives you a sense of the rise in wealth concentration. If you look at the super-top, you know, the oligarchs, the twenty wealthiest families—a very, very small fraction of the population—their total wealth is 2.0 to 2.2% of total household wealth in the economy. So I think that if you care about wealth inequality, these are the relevant numbers.Now, it’s also interesting to compute another statistic, which is the wealth of those top groups, and in particular the oligarchs, relative to total income or total output in the economy, because it gives you a sense of their influence on the economy and also because it gives you a sense of how much revenue there is at stake from taxing their wealth. So let me illustrate. If you get back to the 20 wealthiest people in the country, they have about 2 to 2.2% of total US wealth, and that’s equivalent to about 12–13% of total US GDP.Okay, so now you’re dividing a stock—their wealth—by a flow. And what it means is that if they spend their wealth—of course, they’re not going to do that in a given year, but imagine that they spent all their wealth in a given year—then they could buy 13% of all the goods and services produced in a given year in the US. So it really gives you a sense of just how big they are relative to the economy as a whole. And also it gives you a sense of what’s at stake with taxing billionaires. Because, of course, the way we think about tax revenue and about government budgets, is often in relation to GDP.And so here, what you have with billionaire wealth is that there’s a potential tax base; we are not taxing billionaire wealth today, which has been skyrocketing. That’s the flip side of the rise of wealth concentration. The positive aspect in all of that is that now there’s a lot of tax revenue at stake from potentially taxing the wealth of billionaires.Krugman: Yeah. I mean, my version is, I mean, most people have very little wealth, right? Wealth is highly concentrated, and what most people have is income. But the very top has wealth, and in some sense, the wealth-to-income ratio is telling you how many minions they can buy, how much influence they can buy in the economy and in politics. Is that kind of what you’re saying, or is there something else?Zucman: No, exactly. When I say that expressing their wealth relative to total income gives a sense of the influence they have, precisely it gives you a sense of how much they can spend on buying media companies, on funding electoral campaigns. Billionaires accounted for nineteen percent of total political spending during the 2024 federal election cycle.Krugman: Right.Zucman: They can fund think tanks and foundations, and influence the prevailing ideology like that. So it’s in that sense that it’s really useful, I think, to express their wealth relative to the value of the total income of people in the country.Krugman: So again, what’s your take on why total wealth has grown faster than income?Zucman: There are different stories, and I think the one that makes most sense to me and that seems most consistent with the data is that there’s been a number of policy changes since the 1980s that have favored wealth and capital, broadly speaking. So, for instance, you used to have rent controls for housing in many countries; when you lift rent controls, the value of housing wealth tends to go up. Many countries used to have pretty high corporate income tax rates, of almost fifty percent on average at the world level in the 1980s. Well, when the government takes half of the profits of companies, it capitalizes into stock prices; it reduces the market value of companies. But then when governments slash the corporate tax—and it has declined from about 45–50% to about 20–25% today at the global level—well, that again capitalizes into stock prices, and now it boosts the market value of companies, of equities.And you’ve had deregulation in many sectors that has boosted the profitability of corporations. You’ve had a significant change in the division of value added between labor and capital—the rise of the capital share, the decline in the labor share. That means more profits, more income for shareholders; again, it boosts the value of corporate equity. So all of these changes, they don’t happen like that out of nowhere. They are, of course, heavily influenced by policy.So, for instance, changes in factor shares—labor and capital shares—have been partly affected by the decline in union power. When unions are stronger, you tend to get a bigger labor share. When unions are weaker, you get a bigger capital share. Also in the way that we organize international economic relations, globalization. When we organize things without any kind of international tax coordination, or to put it differently, if we organize global economic integration by allowing total tax competition—no minimum taxes, no minimum tax rates—then capital owners can threaten to outsource production or to shift profits to low-tax places, and again, it reinforces the power of capital, hence the value of wealth.Krugman: Okay, But going back maybe twenty-five, thirty years ago—and again, I’ve been in the decrying-inequality business for a long time—we were saying, “You know, there’s a huge rise in income inequality, but it hasn’t really shown up in wealth.” And that really started to change. It’s not just that wealth has increased, but as you say, a huge increase in concentration in a few hands. So, what’s your story? I think I know what your story is about what drives this increasing concentration of wealth, but what is the mechanism? What’s it all about?Zucman: I think there have been different factors at play, so it’s not just a one-issue story. The thing that seems important to emphasize from my perspective is the dramatic changes that have happened with taxation, particularly in the US. Many people have forgotten, but the US used to have a sharply progressive tax system where capital was heavily taxed, where high incomes were heavily taxed, where large inheritances were heavily taxed. In fact, it probably used to have the most progressive tax system in the world between the 1930s, the New Deal, and the late 1970s. And then during the 1980s, it went all the way in the opposite direction.And perhaps what’s most striking is what has happened with the income tax. So when Reagan enters the White House in 1981, the top marginal income tax rate in the US is 70%. At the time, it’s the highest top marginal tax rate of all industrialized countries in the world. And then in 1986, you have the big tax reform, the Reagan tax reform, that slashes this top rate to 28%, which at the time was the lowest tax rate among industrialized countries. So it’s a really big change in just five years. And you’ve had that for the income tax, but also for the estate tax. The corporate tax rate used to be 50% after World War II; after the 2018 Trump Tax Cuts and Jobs Act, it’s been reduced to 21%.And so all of these really big changes, all going in the same direction, have had a massive effect on two things. So, first of all, on the incentives for very wealthy people to try to earn super high incomes. When the top marginal income tax rate was close to 100%—more than 90% in the 1940s and 1950s—there was just no incentive to try to earn a ton of money, because you knew that past some point, almost any extra dollar would go to the IRS. So why bother? Why try to bargain a super high compensation as a CEO? It was just pointless. Now when the top marginal income tax rate is 28%, it becomes really profitable to try to earn super high incomes, right? Because you get to keep most of the money for yourself. So there is this incentive effect.And there’s of course the pure mechanical effect, which is that with lower tax rates, you have more disposable income when you’re very rich, that you can save and use to grow your wealth. And that’s why I think those changes to taxation, which have been particularly powerful in the US, have played a very important role in the particularly fast rise of US inequality.Krugman: Now when you talk about incentives, if I were a right-winger, I’d say, “Well, the old system discouraged people from innovating, being job creators, and all that.” And I think that’s not what you mean, right?Zucman: Well, then it becomes an empirical question, right? In principle, it could be true. You could say, “Well, when people face those super high top marginal income tax rates, it discouraged people from innovating, from launching businesses.” But then you look at the data and you realize that in those decades after World War II, GDP growth was higher, in fact, than it’s been since the 1980s. Investment rates were no lower; in fact, they were higher. US capitalism, broadly speaking, seemed to work okay in that period of time. So of course you don’t know the counterfactual. You don’t know what would have happened if the tax rates had been much lower at the top in those decades. But what you can know as a fact is that these quasi-confiscatory rates on high incomes—and we’re talking about rates that apply to only super high incomes of several millions of today’s dollars—just didn’t kill innovation and growth and capitalism. And you have to think about who you are discouraging, what type of behavior you’re discouraging when you tax very high incomes at very high rates.Krugman: Right.Zucman: You could say, okay, perhaps it’s going to discourage innovation, but you know, are scientists or innovators really motivated by the extra income they’re going to be able to make above five million dollars in income? You know, perhaps, perhaps not. You’re also discouraging people who want just to capture rents, who want to create private universities that sell fake diplomas, for instance, or want to exploit patents and squeeze as much money as possible from consumers or patients or sick people, and so on.So there’s always in the economy people who are motivated by innovating, creating knowledge, and broadly speaking undertaking activities that are positive-sum for the economy as a whole. But there’s also people who are motivated by rent extraction, by different activities that are inherently zero-sum or even negative-sum. And suddenly, when you have 90% top marginal income tax rates, you’re discouraging this type of zero-sum rent extraction, which is the plausible reason why this policy was so effective, at least relatively effective, in the postwar decades.Krugman: The classic example from my angle has been that corporate CEOs have always basically set their own salaries. But in 1959, extracting a salary that was 500 times that of your average worker just made everybody mad at you, and you didn’t get to keep much of it anyway. And nowadays you do. So…It looks as if—and certainly from your work and those of us who pick up on it—we have had this process since the late seventies of this concentration, this oligarchy rising in our society, and that taxes have a lot to do with it. So the question is: what are the remedies? I know that we’ll get to wealth taxes in a minute, but we had a workable recipe, which was high corporate taxes, high estate taxes, high top marginal rates. Is there a reason why we can’t just reconstitute that regime, or why we shouldn’t—either as a possibility or desirability?Zucman: I think we could do it and it would make sense, but also, probably, it wouldn’t be enough. First of all, one of the outcomes of the first Gilded Age at the beginning of the twentieth century was the creation of the progressive income tax in 1913 and the progressive estate tax in 1916. So we instituted taxes to prevent or to curb the rise of concentration that was observed at the time and that many people were worried about.Krugman: Right.Zucman: It made a big difference, but also there was, and there’s always been, a kind of fundamental limitation, I think, with this historical experiment, which is that when you’re extremely wealthy—and think about billionaires—it’s, in fact, very easy to own a lot of wealth without having to report any or any significant amount of income. And so it’s, in fact, relatively easy to avoid the income tax. And we kind of knew about that from various anecdotes and case studies.For instance, a few years ago you had revelations by ProPublica on the taxes paid by US billionaires, and you saw people like Jeff Bezos and Elon Musk in some years reporting very little income, paying very little income tax. There’s even one year when Bezos says, “Look, I’m so poor that I’m going to claim the child tax credit,” and he receives the child tax credit! So we kind of knew about these limitations of the income tax, but it’s only relatively recently that we’ve come to understand that this is a structural feature of income taxation in the US and globally—a structural feature that the super-rich have not yet entered into the system. The income tax is just not the right instrument to tax them.And so that’s why, in addition to the income tax, you need some kind of tax based on wealth. Because for the very rich, it’s easy to manipulate income to pretend they have no income. So, for instance, Bezos, as CEO of Amazon, didn’t pay himself a wage, he instructed Amazon not to distribute dividends, he didn’t sell shares, and so he didn’t realize capital gains, and so his taxable income was really low. There’s no tax evasion there; it’s all perfectly legal. But, of course, his ability to pay taxes as one of the world’s richest men is, of course, extremely high. And so that’s why, for people like him, the right tax is based not on income, but on wealth, which is much harder to manipulate than income. And that was partly one of the reasons for having an estate tax, which is a tax on wealth, but it’s not enough because the estate tax is just a one-time tax at the time of death. And so you can be in a situation where the wealthiest people in the country, year after year, pay no or almost no income tax. And it’s only when they die—when the estate tax was still functional—that we tried to make them pay a little bit of tax.That’s the limitation of the US experiment with progressive taxation, which is that it never really tried to make the ultra-wealthy pay personally on an annual basis. And I think that it is this limitation that we need to overcome in the 21st century. And basically, that has to involve some kind of annual taxation based on wealth.Krugman: Let’s talk about corporate taxes first. We used to collect a substantial amount of corporate taxes. There’s a lot of dispute about exactly who pays them, but your position, as I understand it, is that basically they fall on stockholders. Why did we retreat so much on corporate taxes, and could that be reconstituted or should it be?Zucman: So first of all, yes, you’re right that the corporate tax used to be a big source of tax revenue for the US. It peaked in the early 1950s at something like six to seven percent of US GDP in tax revenue, just from the corporate tax. That was with a nominal tax rate for the federal corporate tax that was slightly above 50 percent, but the effective rate was also 50 percent. It meant that out of any dollar of profit made, 50 cents went to the government.Krugman: Right.Zucman: And today we are down to about 1.5% or so of GDP in tax revenue—1.5 to 2%—from the corporate tax. So it’s a big decline. The standard story is that it’s going to reduce corporate investment, which is going to translate into a decline in the capital stock, and then workers are going to be less productive because capital is good, it complements labor, and so eventually it reduces wages, and so it’s bad for ordinary workers. That’s the standard story, which, frankly, doesn’t have a lot of empirical support for it. But why not? As an intellectual story, it makes some sense in principle.The other reason, which has been even more powerful in practice, is international tax competition. It’s the idea that we cannot tax corporations at higher rates because otherwise they move to other countries, and that there is this kind of law of nature: the race to the bottom with corporate taxation is something we just have to accept as a law of nature, like gravity. And that also is wrong, because, of course, it’s not a law of nature. It’s a choice that we make collectively to accept international tax competition, or to fight it and to curb it. So I think what this all means is that, of course, we could revert to higher corporate tax rates. That’s definitely something that the US, or in fact any country, can do.But what I want to say is that, also, it wouldn’t be enough, because the corporate tax is just a flat tax on corporate profits. So someone who owns just one share in Amazon, indirectly is going to pay the same tax rate through the corporate tax as Jeff Bezos, who owns ten percent of Amazon. It’s not progressive, and so that’s why it’s structurally limited.Krugman: Okay. In the abstract, if our concern is great wealth and we’re looking for some way to limit that and also raise some revenue—though I think in many ways the social and political implications are even more central than the revenue—the history shows remarkably little experience with wealth taxes, right? I mean, we don’t have a lot of evidence, and a lot of people say that they’re unworkable, citing what they claim to have been the history of France. So why don’t you talk to me about the history of wealth taxation?Zucman: Yeah, I mean, the US never had an annual progressive wealth tax, at least at the federal level. There’s, in fact, a pretty long history of wealth taxation at the state level in the 19th century, with so-called generalized property taxes that were taxes not just on real estate and land, but also on financial assets, typically at flat rates, so not rising with wealth. There’s a long tradition in the US that’s been largely forgotten.The more relevant history is the European experience with progressive wealth taxation. Many European countries used to have progressive wealth taxes. And I agree that the track record is not good. By and large, they were not big successes. But, of course, there are two ways to look at that experience. You can say, “Well, some countries tried wealth taxes, it didn’t work very well, hence it will never work.” End of story. Or you can try to study this experience and try to understand what were the problems and what lessons can be drawn, and whether the issues can be overcome.And this is what I’ve been doing with many others in my work, and the conclusion I’ve reached is that, yes, they had issues, these European wealth taxes, but the issues can be fixed.The biggest issue is that those wealth taxes didn’t even attempt to try to tax billionaires. Look at France, for instance. France is really a striking illustration. The French wealth tax was created in 1981 when a Socialist president comes into power and he has an absolute majority in parliament, and so he creates a wealth tax. But immediately he says, “Okay, we are going to exempt from the wealth tax people who own more than 25% of the shares of a company.” Okay? So if you’re a big shareholder in a company, no matter whether it’s listed on the stock market or not, if you own a ton of stock, that’s going to be removed from the base of the wealth tax. This will be tax-free. But, you know, the wealth of billionaires is precisely that: it’s owning a lot of shares in a company. So what France did in 1981 was like if the US today created a wealth tax and said, “We’re going to exempt Warren Buffett from the wealth tax, or we’re going to exempt Elon Musk from the wealth tax because they have so many shares in their businesses.”You know, it really makes little sense. And the consequence is that the effective wealth tax rate for French billionaires in 2016, on the eve of the abolition of the wealth tax, was just 0.005% of wealth. They didn’t pay it. And it’s not because they illegally hid assets. No, no, it’s because they were legally exempted from the wealth tax.Krugman: Why did Mitterrand do that? Do you know?Zucman: The way the story is often told is that some of the top billionaires complained and went to see him, and they said, “We’re going to move to Switzerland if you do that.” And so that’s how they got that exemption.But the deeper explanation, I think, is that there was no real commitment on the part of Mitterrand or the Socialist Party to having a tax on billionaire wealth, partly because they thought it would be impossible, that we had to accept international tax competition as a kind of given, that France would be powerless to do anything about that; partly because it was never a big priority for them. They bet on other policies to transform society that didn’t involve progressive taxation, but that involved things like the nationalization of some companies or labor market regulations. But progressive taxation was not part of their ideology, so to speak. They were not very committed to that.And also, I think in the 1980s, you could make the case that the government revenue at stake was just not very important. So it was not worth fighting for this. I think that was their view. And perhaps you could make that argument in the 1980s or 1990s, but today, it’s impossible. Look at what has happened to the curve—the wealth of billionaires has skyrocketed. So now it becomes really important to include them in the base. So that was the main problem: billionaires were legally exempt.The other big problem—and it’s related, of course, to the first one—is that those European countries never tried to do anything to fight the risk of out-migration by the super-rich. They just thought that, “Okay, we are powerless. If they want to leave, what can we do?” And that’s just not true. For instance, in the US, there is citizenship-based taxation, meaning if you are a US national, you have to pay taxes in the US no matter where you live. So you can move to Monaco or Switzerland if you want, but you still have to pay federal taxes.Krugman: Right.Zucman: France or Germany could have done that; they could have done a variation on that idea. But the big blind spot of the social democratic experiment in Western Europe has been, in my view, this inability to confront the forces of international competition, and international tax competition in particular.Krugman: So that’s it. Do you want to enlarge on that? Because I think that’s an interesting point.Zucman: Yeah, these social democratic governments never invested intellectually in trying to organize international economic relations and make those consistent with their ambitions for democratic transformation. Or, to put it differently, the social democratic project was always thought of as a purely domestic endeavor. And when they realized that there was competition from other countries—tax competition in particular—their reaction was not, “What can we do about that? How can we rewrite the rules of global commerce? How can we forge international agreements, or how can we design unilateral policies to protect ourselves from those forces?” Their reaction was not that. Their reaction was, “There’s international competition. We cannot do anything about that. We just have to adapt.” And so we have to embrace the race to the bottom with capital taxation.And that’s how, in fact, it’s socialist governments, or Labour governments in the UK, or the SPD in Germany, that have slashed the corporate tax rate. Scandinavia, too, moved from a comprehensive income tax where capital and labor are taxed the same, to so-called dual income tax systems where capital income is taxed at lower, flat rates than labor income. Always for the same reason: they never tried to think about how to make social democracy compatible with a globally integrated economy.Krugman: That makes sense. Although I think that the EU has a kind of minimum VAT rule, right? So the tax that falls on working people, you cannot make it too low, but the tax that falls on billionaires...Zucman: Yeah, that’s a very good point. The only form of tax harmonization that you have in the EU is on VAT. So when it comes to taxing consumers, the middle class, the poor, all of a sudden we can craft common rules. But when it comes to taxing companies or the rich, what can we do? You know, nothing.Krugman: So if Ireland goes and poaches corporations—although I think it’s mostly US corporations there, but anyway—Ireland can do that, but they can’t offer shoppers bargains. It’s pretty wild.Zucman: Yeah, exactly. That’s a very particular worldview, but that’s been central, in fact, in how European construction has proceeded so far. And I think if you want to rationalize this view, deep down there is the idea that it’s not just that international tax competition is a law of nature, but also that it’s a good thing, frankly. That it’s something we should embrace because those welfare states in Western Europe are too big and they need some kind of external outside pressure to force governments to be more efficient—to starve the beast a little bit. And I think many people, even left-of-center people at one point embraced this idea that we should welcome it—it’s going to make us more efficient. We should welcome international tax competition.And why not? You can make that case, but I think it has two problems. One is that it’s a pretty undemocratic way to decide things. It assumes that voters are going to structurally choose policies that overtax capital or the rich, and hence the need for constitutional constraints or external forces. And, of course, the other problem is that international tax competition, the way that it has unfolded, has fueled the rise of inequality, because the main winners from this are multinational companies and their owners, or people who derive most of their income from capital income, the wealthy, and so on.Krugman: Right. Sort of Reaganite ideas may have actually had a lot of impact even in Europe.Zucman: They did. Even though it was never formulated that explicitly, I think this ideology was very influential, in fact.Krugman: So you’ve been pushing for, in fact, some kind of global accord that basically makes it possible to do more wealth taxation. I’ve been re-reading your G20 paper on all of this. I don’t think this is anything likely to happen anytime soon, but what’s the state of the idea?Zucman: It will happen, but patience.Krugman: Yeah, patience. Well...Zucman: The beginning of all of this was in 2021: there was an agreement among 130 countries for having a minimum tax of 15% on the profits of big multinational companies. And, frankly, very few people had seen that coming, because the prevailing view was, “You know, it’s impossible to get an agreement like that. Small countries like Ireland benefit so much from international tax competition. It’s just utopian.” But it happened in 2021.And then, in 2024, Brazil had the presidency of the G20, and they wanted to put new ideas on the agenda, and they asked me what I thought. And what I told them is: “Look, I think we should do for billionaires what we’ve been able to do for multinational firms. So let’s try to have an agreement on a minimum annual amount of tax owed by billionaires.” They commissioned a report from me, and some progress was made at the G20, but then, of course, Trump was reelected, so nothing can happen at the moment at the G20 level.But what’s really interesting is what is happening at the national and, in fact, subnational level these days. Because right after the Brazilian G20 in 2024, the French National Assembly adopted the minimum tax on billionaire wealth that I had proposed. So it’s a tax of 2% on the wealth of people with more than 100 million dollars or euros in net wealth. And it’s a minimum tax, which means that if you already pay an income tax the equivalent of two percent of your wealth or more, you have nothing more to pay. But if you pay less than that, you have to pay the difference to reach the two percent minimum. So it’s the fairest and the most targeted tax that you can imagine, because it’s just on the ultra-wealthy, but not only that, on those among the ultra-wealthy that avoid taxation today.So France voted for that; it was then blocked by the very conservative Senate. But there is the beginning of an international movement in that direction. You’ve had a bill crafted under French legislation that’s been introduced in Belgium, perhaps soon in the Netherlands, and in Spain. At the moment in the UK, they’re talking a lot about that with the new Prime Minister, Andy Burnham.And then, of course, most important in my view, is what is happening in California with Prop 40, the California billionaire tax, which is going to be on the ballot in November. This would be a one-time tax of five percent on the wealth of California’s billionaires. Frankly, it’s very important for California, for funding healthcare, Medicaid in particular. But it’s even more important for the US and, in fact, for the world as a whole. Because if California passes the California billionaire tax in November, I think this will really be the beginning of the US and international movement to tax the wealth of the super-rich.Paul Krugman: Okay. And this is a one-time tax, and it’s retroactive, right? It’s based on your wealth last year.Zucman: Yeah, exactly. So it has several characteristics. It’s one-time and not annual. And it’s only for billionaires, not for you and me. It’s on billionaires, and it’s on those billionaires who were residents of California as of January 1st of 2026. So it’s too late to avoid the tax, meaning if you were living in California at the beginning of this year, you would still have to pay the tax. So in that sense, there’s a small retroactivity here. And these two characteristics combined—the fact that it’s one-time and based on being a resident as of January 1st of 2026—mean that it’s nearly impossible for any billionaire to avoid the tax by moving to another state. So it also means that if it passes, it’s bound to generate a lot of tax revenue.The arithmetic is quite simple. The billionaires of California have about two trillion dollars in wealth. So if you tax them at five percent, you get a hundred billion in tax revenue. Another kind of illustration of how big the billionaire wealth tax base has become, which I think is quite striking, is the following: if you look at all the income of Californian people as reported in their tax returns—you know, AGI, adjusted gross income for California as a whole—it is the same number as the wealth of California’s billionaires, 250 people. So, their wealth is 100% of California’s AGI. Meaning, if you have a five percent tax on the wealth of billionaires, it generates as much revenue as a five percent tax on the income of all people in California. So that’s just a very striking illustration of what we were discussing earlier, which is just how massive the wealth of the billionaires has become and hence its implications for public finance.Krugman: Yeah, one of the things in California is it does have high personal income and high personal wealth, but that’s a few hundred people. They really skew the numbers. And so, how’s it going? I mean, it’s a little bit disappointing to see all of the “don’t be evil” guys from Google and all of that scrambling to protect themselves from taxes. But how are you feeling about the proposition?Zucman: Well, I’m not surprised by that, right? They have good reasons to hate this, because this is the one tax that they would have to pay. You have to realize that they pay very little today. The billionaires in California pay in income tax the equivalent of just 0.2% of their wealth. So, you know, moving from 0.2% to 5%, even if it’s one-time, it’s a big difference for them, even though their wealth has increased like 200% over the last two years. So from that perspective, it’s a drop in the ocean.But I think the polling is good. It’s going to be a battle just because the billionaires are spending tens of millions, hundreds of millions already, to stoke fears and try to defeat the proposition on the ballot. But I think the logic, frankly, is so compelling, and also billionaires are not very popular at the moment in California, like everywhere else, so I think it has a good chance to pass.But what I want to say is that, first of all, it’s important for California because there’s a big shortfall of federal funding for healthcare as a result of the One Big Beautiful Bill Act. And so California needs to find broadly a hundred billion in revenues to just preserve Medicaid. So that was the main reason for having this on the ballot in the first place. And so if it doesn’t pass, you’re going to see the number of uninsured people rise a lot in California. Under business as usual, it’s going to increase from six percent to ten percent. So that’s why it’s important.But more fundamentally, in my view, it’s important because it’s the one concrete measure that can begin to make a difference to oligarchic wealth and power.And don’t get me wrong, five percent one-time is not enough, but this is what’s going to pave the way, I think, for eventually some kind of federal wealth tax and federal annual wealth tax. And the reason why there’s good reason to view it like that is because this is what happened for the income tax at the beginning of the 20th century, which was first implemented by a number of states, like Wisconsin in 1911, before becoming federal policy in 1913. So that’s why it’s really important. And I can tell you that the whole world is watching California. I think people in France are like, “This is amazing! Go California, tax the billionaires!” And this is going to be a blueprint for what we’ll do in France, in the rest of Europe, and frankly, globally.Krugman: States as laboratories of anti-oligarchy. Let’s hope for the best. Thanks a lot, and onward with the project. Take care.Zucman: Thank you so much, Paul. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.TranscriptGood news. The second richest man in America might be prevented from taking over CNN. That's the good news. The bad news is, aside from thefact that he probably will manage to pull it off anyway, the bad news is that that would be only a small piece of the ongoing takeover of U.S. media by oligarchs. And in turn, the media takeover is just part of the extraordinary exercise of power by the extraordinarily wealthy small number of men who have been wreaking so much havoc with America as we know it. Hi, I'm Paul Krugman. Doing a video today, because I didn't feel like doing a usual chart-heavy, analytics-heavy post, but very much on a topic I have been writing about and will continue to write about, which is the rise of oligarchy in America. Now, I know some people balk at that. But we're not talking about some kind of hidden conspiracy. We're not talking about the Protocols of the Elders of PayPal. We are talking instead about stuff that's largely out in the open, though not fully understood, which is the way that an incredibly wealthy small group of men, mostly men, is able to commandeer a lot of the political life of a country that is still nominally a democracy. And that's a fundamental story for our time, maybe the fundamental story. How does that takeover work? Well, there is what I think of as the middle level, which is the place where it's most easily quantified, tends to get most of the attention, which is campaign finance. American campaigns are very money intensive and have become more money intensive because we've opened the floodgates with Citizens United. And a lot of that money comes from a very small number of incredibly wealthy people. According to the New York Times analysis, about 20% of all campaign contributions in 2024 came from 300 billionaires and their families. That's a pretty big impact. A country of more than 300 million people, and 300 billionaires are a fifth of campaign finance, and surely more strategic, more targeted than the average donor. So that's really a very, very large role just in that direct sense of who pays for campaigns. But that's not the only level. There is a lower level, lower in the sense of morally lower, I guess, which is just plain buying politicians, buying policies, paying for the policies you want with cash or crypto on the barrel. There has always been some of that in our system, but it was normally discreet, indirect, deniable, the revolving door. It was the case even more than 20 years ago that when the Bush administration pushed through a Medicare bill that was very favorable to pharmaceutical interests, that the then chairman of the House Ways and Means Committee, who basically engineered and steered the bill through Congress, then promptly retired and became the chief lobbyist for the pharma lobby. So this kind of thing has been going on for a very long time. But now it's just blatant, out in the open, and the sums are massive. We just have literally billions of dollars thrown at the president and his family. No doubt large sums to other government officials, large sums to at least some members of Congress. So just plain buying the policies you want — and it’s not just that a large share of wealth is held by a small number of people, but that those are the people who are best positioned to really deploy their wealth to corrupt the system. There's also something, I guess you can call it a higher level, which is what military strategists call shaping the information space, which occurs at a couple of levels. One of them is the promotion of ideas and ideology that serve the interests of the very wealthy. You see that on many issues. You certainly see it very much on economic policy. If you ask, why do people still go out there saying that tax cuts pay for themselves and that tax cuts on the rich are an enormously powerful tool for stimulating economic growth? That's been tested to destruction, and it just ain't so. But it's a zombie idea. It keeps shambling along, eating people's brains, even though it should be dead. And the reason is, well, there's a lot of money in it. If you Google something I've written on, more often than not, when I do that, the top sponsored post at the top of the search page is an attack on me sponsored by some right-wing organization. And if you ask who supports those right-wing organizations, well, guess who. And it’s equally or worse the case in climate science. Scientific journals have been pretty good at not publishing climate disinformation. But when they do publish things that are somehow skeptical, or usually not outright denial, but attempting to sow discord about climate change, what percentage of those studies have received financial backing from fossil fuel interests? The answer is 100. It's all about the money. So this is, again, this is not new. Upton Sinclair: “It's difficult to get a man to understand something when his salary depends on his not understanding it.” So that has always been the case. But now we have something which is really, really important and is another level of this, which is the takeover of the media. So, okay. Ellison, or the Ellison family —because nominally this is Ellison's son in charge of Paramount — has already acquired CBS and has hired Bari Weiss to basically corrupt and destroy that network. If the deal for takeover of Warner proceeds, then CNN will get the same treatment. I'm finding CNN a very good news source, just braver at taking on what's really happening than my old employer, the New York Times, which is a great news organization and may be more necessary than ever, but tends to be cautious — and CNN is a little bit less cautious. But anyway, if he gets away with it, then CNN as we know it will almost disappear. It will almost turn into Fox News. Now, that won't be a profitable venture. There's already a Fox News, and so creating another one is not going to actually produce a lot of profits, if any, but that's not the objective. This is buying influence. Elon Musk, of course, took over the app formerly known as Twitter. Which was already becoming a more difficult place even before its takeover. I used to have, I guess, I think I had 4 million followers there. But it was impossible. I had to shut off comments because of the cesspool that Twitter had become. But now it is really by design. It is heavily tilted. That can be quantified. The algorithm really tilts it towards right-wing stuff, promotes really rabid racist views. And unfortunately, the network effects, the centrality that Twitter used to have, still keeps a lot of people on X, where they are influenced: people's views change. And also something that I don't know how to quantify, but it's very obvious if you follow and pay attention to people's positions, is that people who spend a lot of time on Twitter, elites who spend a lot of time on Twitter, start to think that the views they hear there are representative of where the country is — which they are not. But it does, in fact, tilt policy, tilt understanding to the right. The third richest man in America is Mark Zuckerberg, who made his billions from Facebook. Facebook is old-fashioned: I don't know anybody who uses Facebook. But I know that lots of people do. And it's still a very important information source and has, again, been tilted. On most of these media things, it's not as blatant as what Musk is doing at X. But it still has a big influence in changing the tone of the discussion and biasing the discussion towards positions that favor the interests of billionaires as well as favoring their prejudices if they happen to be, like Musk, authoritarian white supremacists. Okay. And the fourth richest man in America is Jeff Bezos, who purchased the WashingtonPost. I think he purchased the Post initially out of a belief that he was going to enhance his prestige. It certainly looked in his initial tenure as if this was actually more of a vanity purchase than a political purchase. But a billionaire is going to billionaire. And so he eventually shifted the Washington Post's editorial policy hard right, eviscerated the news division. There are still some brave, plucky reporters doing good reporting there, but it's a shadow of what it used to be. And of course, it's not at all the institution of Katherine Graham and Ben Bradlee, not anymore. So that's another challenge. What do you do about this? Obviously, one does what one can to try to limit this takeover of the information environment. And so we have the suit brought against the attempted purchase of Warner, hence CNN, by Paramount, hence Ellison. And that might succeed. You might think, well, if it's delayed, then what are the chances of actually ruling it out? Except that apparently there's a bit of a financial clock ticking for Ellison, who really has extended himself pretty far. So that's possibly going to block it, and that's good. It would have been great if someone had found a way to keep Musk from destroying Twitter. So you can look for solutions to immediate threats. But you're not going to hit all of these balls. And so the constant pressure towards a takeover of the news media, constant pressure towards a takeover of the general information environment by a handful of billionaires, is not going to go away. The constant threat or reality of corruption of the government by billionaires is not going to go away. Maybe once Trump is gone, it'll become less blatant, but it won't go away just because someone more discreet takes office. Even if we have an honest president, which in the current environment, I'm sorry, does mean a Democrat, but even if we have an honorable president, the corruption of the system will still be a continual threat because of all the money flowing around. So in the end, the only way out of this, the only reasonably durable solution is to not have so much wealth at the top. If you don't like what's happening to our institutions, if you don't like what's happening to the media, if you don't like the corruption of government, if you don't like the overwhelming of campaigns by big money with nefarious ends, the only lasting solution is to reduce the amount of wealth at the top. Woodrow Wilson: “If there are men big enough to own the government, they're going to own the government.” If we're going to have that much money in the hands of a few hundred people, and in the case of the real top of it, just 15 or 20 people, then you're not going to be able to maintain a truly democratic system of government. Oligarchy is not the only thing wrong with America. It's not the root of all evil. But it's the root of a lot of evil. And until we bring that concentration of wealth at the top down, we're going to be fighting a constant rearguard action trying to save some of what America is supposed to be about. Have a nice day. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

Lina Khan, who chaired the Federal Trade Commission under Joe Biden, is one of the smartest and most influential thinkers about antitrust in our high-tech era, and one who has blazed new paths in policymaking. I spoke with her at a Graduate Center event back in March, and caught up with her again earlier this week for another enlightening conversation.For all my interviews and more, subscribe on YouTube.. . .TRANSCRIPT: Paul Krugman in Conversation with Lina Khan(recorded 7/14/26)Paul Krugman: This week, I managed to get to talk to Lina Khan, who was the incredibly influential and smart head of the FTC in the previous administration—with the current administration doing everything it can to undo her work. She played an important role in the Mamdani transition team and has had a lot of smart thoughts about technology and policy right now. And I thought we could talk for a bit about this, well, it’s always a bizarre moment these days, but this is the bizarre moment we’re in. And so, hi.Lina Khan: Hi, great to be here.Krugman: I want to get into technology and AI, but I wanted to just start with something that just happened. One of your special causes, which is “Click to Cancel,” which you tried to get as a national policy, just went through in New York City. Can you talk a little bit about what was achieved here and why?Khan: I’d be happy to. So, last week, the Mamdani administration announced that they are moving forward with two consumer protection initiatives. One was the finalization of a “Click to Cancel” rule, which basically says that businesses have to make it as easy to cancel a subscription as it is to sign up for one.This rule is responding to the fact that we’ve seen a pretty significant pivot to service-based revenue, and more and more companies are relying on subscriptions as a regular business revenue line. And that has created an opportunity for firms to create a lot of friction when people are trying to unsubscribe. A lot of people can relate to situations where it’s very easy to sign up, or sometimes you’re enrolled without even your full knowledge or consent. But then once you try to cancel, companies can make you jump through all sorts of hoops. Maybe you signed up with one click online, but to cancel you have to phone somebody, except the hours are really restricted or there’s nobody there to pick up the phone. In some instances, you may actually have to go in person.When we were at the FTC, we got thousands upon thousands of complaints, and people shared how, even during the pandemic when they were looking to cancel their gym membership, some gyms required that they go in person even after they had left the state. So this has been a growing problem, and people lose real money from it. I mean, there are estimates that, in New York City alone, people could be collectively losing over $160 million a year. So this rule, which is going to go into effect in October, is an incredibly important step forward.The administration also announced that they’re going to be proposing a rule to tackle junk fees. These are the fees that oftentimes show up at the very end of a transaction, even though they were not reflected in the original advertised price. Sometimes they’re called convenience fees, service fees, or amenity fees. And these are non-discretionary; people have no choice but to see them included. Companies will, again, often not advertise them on the front end, which is both deceptive for consumers but also gives them an unfair competitive advantage, because honest businesses that are marketing the all-in price then lose business to those firms that instead do pricing where they market a lower price and then add all the additional fees at the end.So, I’m really thrilled that the Mamdani administration is moving forward on these two initiatives, especially because we have seen some very serious backsliding at the federal level, where consumer protection initiatives have either been abandoned entirely or powerful companies that have connections to the White House can basically pay their way out of legal accountability. And so it’s incredibly important to see cities and states fill in that gap.Krugman: I couldn’t actually quite figure this out, but there’s this other initiative from Mamdani: public interest technology. Are you involved with that?Khan: It is something we considered during the transition and wanted to set up the administration with the option. But, yeah, this is basically... they will be creating a team that is going to be laser-focused on improving service delivery—technological service delivery, digital service delivery—to New Yorkers. And so there are all sorts of online portals that people have to interact with that are not really optimized; really important city websites that are still optimized for desktop, and when people try to use them on their phones, they break down. And so there’s going to be a lean team of technologists designed to go in and make sure that across city services, people are having a good experience and that these things are easy to use and functional for people.I would say the effort has some analogs to what was done at the federal level with the U.S. Digital Service, which was a team in the White House of technologists back in the Obama era. When I was at the Federal Trade Commission, we similarly brought in a team of technologists, and we’ve seen that, especially as more and more commerce goes online, and more and more government services go online, it’s incredibly important to have technologists on board designed to make sure that these things are easy to use and well-functioning.Krugman: I’ve seen a couple of areas where essentially governmental functions are initially done by trying to buy off-the-shelf technologies or bring in Microsoft or whatever. And I know of at least a couple of examples where it was a huge improvement just getting their own people because they kind of knew what people actually needed. So, I don’t know if you’re thinking along those lines or where it goes.Khan: I think you’re right that it does get to this deeper issue of what does it mean for the government to have capabilities and to actually build those capabilities in-house. I think we’ve seen various eras where the government will largely rely on outsourcing, relying on various consulting firms. And there’s a first-order question as to whether the government is really getting a good return on investment there. I think we’ve all seen the news stories about New York City having paid millions of dollars to McKinsey to produce a report saying, effectively, “Put your garbage in garbage cans.”But beyond that, I think over-reliance on outside consulting firms can also deprive the state of building in-house state capacity, which can be incredibly important for the long term. And so, again, I think the administration, through bringing some of these functions in-house, is also going to be investing in those long-term capabilities within government.Krugman: Yeah. I’ll give you, just quickly, my own example. There are bigger ones, but everybody doing sort of macroeconomics now is utterly reliant on this thing called FRED, the Federal Reserve Economic Data, from the St. Louis Fed, of all places. And the thing is, they did not outsource. They just asked some of their own people, who actually knew what working economists needed, to produce a website that is really optimized for people like me, and that’s just incredibly helpful. I assume that there are many, many examples where that could be done.Khan: Yeah. I mean, the other risk that you create if you are entirely dependent on some external actor is that a single business decision can render some of those products useless or severely degrade the capability overnight, or it turns out that there’s a new subscription and so there are all these additional costs. And so, either diversifying those inputs or creating more in-house capability is important insurance around some of that private power.Krugman: Okay. And New York City would certainly be among the world’s 20 largest economies so this is not a small issue.But these days, everyone is talking about AI all the time, in terms of the economics and a lot of political stuff. You were doing a lot of work on AI at the FTC, and you have written quite a lot since. I wanted to pick your brain a bit, but why don’t you tell me where we were going before the change in administrations on AI policy, and we can move forward from there.Khan: At the Federal Trade Commission, we were really focused on both the competition implications of artificial intelligence technologies, as well as some of the protection implications. On the competition front, we were really focused on, first of all, understanding: what is the stack? What is each layer of the AI supply chain of sorts? And how do we make sure we understand what each of the economic properties are across the board?And so you have the chips, you have these hyperscalers, you have cloud infrastructure, you have these models, and then you have various apps and services built on top of those models. And what we’ve seen in other markets, including Web 2.0 and in digital markets, is that it can be very easy for one of these layers to become monopolized because of certain network effects, and because of economic properties that lend those markets to tip quickly. If you allow monopolization without additional rules—such as common carriage or requiring equal access on equal terms—it can really result in other layers and other markets similarly becoming monopolized or otherwise becoming distorted, rather than principles of open and free and fair competition being really what’s allowing more of this economy to thrive and develop.And so we were really looking at the AI stuff through that lens, trying to understand: are we already seeing certain layers where there are bottlenecks or gatekeepers emerging, and could that undermine fair and free competition in other layers in ways that could deprive the public of the full promise and innovation of some of these technologies? And so we had various investigations underway based on what we were hearing from market participants. But at the end of the day, we wanted to, again, make sure that inasmuch as this is a technological inflection point, there could be a lot of opportunity. How do we make sure that the best ideas have the opportunity to win, rather than existing gatekeepers using their power to basically pick and choose winners and losers in a way that results in more self-interested outcomes for them at the expense of the public and for the market as a whole?At that point, we were hearing various concerns about Nvidia and various ways that they had become a core gatekeeper. We’ve heard concerns about the hyperscalers and ways in which firms that run cloud computing could be getting privileged access across the AI supply chain. And so those were some of the types of concerns that we were hearing at that time.Beyond that, we were looking at potential consumer protection abuses of these technologies, ranging from abuse of people’s personal data. For example, with more and more AI firms looking to train their models, they’ve become even more hungry for data, including people’s personal data. And so we were starting to see things like Google [Workspace] or other types of service providers sometimes changing the terms of service, saying that they could now use the content of, say, people’s inboxes or their Google Docs to now start training their models without attendant protections for people’s data. And people had not been setting up their inbox or writing emails in a way where they were anticipating that suddenly a company like Google could be using all of that for training data. And so we made it very clear that these types of after-the-fact changes in terms of service could, in some instances, be illegal.We were also focused on ferreting out how some of these AI tools could be turbocharging fraud and scams. And so we were already seeing at that time: an uptick in complaints around things like voice cloning fraud, the way that some of these AI tools can be used to mimic somebody’s voice. You call somebody’s grandparent, pretend their grandkid is in distress and needs thousands of dollars wired over immediately. We were seeing this as a growing vector of fraud that people were starting to lose a lot of money to. And so we wanted to make sure, at the very least, that these companies knew that the existing laws on the books, both from an antitrust and competition perspective as well as from a data privacy and consumer protection perspective, still applied.Sometimes in Washington, there can be a pattern where firms try to use new technological moments to argue that existing laws are invalid or out of date and don’t apply. And we wanted to make sure there was no misunderstanding about that—that the existing legal tools in place absolutely applied.The other thing we heard on the competition side was this issue of “interlocking directorates.” We were seeing a lot of AI partnerships and a lot of investments, famously Microsoft and OpenAI, and a whole bunch of other ones between Google and Amazon. And there was a lot of murkiness around what were the actual terms of these partnerships and investments, and could some of these investments, in turn, give outsized control to some of the existing monopolists over competitively strategic decisions? And so that was another area where we were looking under the hood to try to understand what’s really going on here in terms of these financial relationships.Krugman: Going back into history, the trusts that originated “antitrust” as a term... that was kind of overlapping, interlocking control. It was basically when you had the same people overseeing many companies. I’m perhaps doing violence to the history here, but am I right?Khan: Yeah, that’s right. The trust referred to basically a form of corporate control where this trust vehicle would basically roll up various entities and have financial control over various enterprises.Krugman: Yeah. And the Standard Oil trust was the most famous, but by no means the only one. And did you have specifics about the kinds of laws that they wanted to put by the wayside? I mean, I’m sure, but just give it a little concreteness for us.Khan: Yeah. I mean, I think one of the legal issues that is still percolating is this question around copyright. A lot of these models have been trained on existing information that is online, but much of that information has copyright associated with it. And so we would also hear from a lot of authors, artists, graphic designers, and people who produce content for a living who said they woke up one day to find out that this model had been trained on their life’s work and was now suddenly spitting out content in some instances that was competing with them. And yet, it was trained on them. And then because some of these firms controlled how search results are listed, they were now losing business to the AI version of their work.And so there are some really serious, meaty legal issues embedded there around unfair competition and copyright. This is an instance where, in existing litigation, some of the AI companies are arguing for “fair use”—that they were basically able to scan and train on all of this information because it was effectively in the public commons. And so some of these issues are still being litigated.But it’s really important to think about what the long-term incentives will be for newsrooms, for example, to still invest in news production and investigations if they’re not able to actually recoup their investments because it’s then just being swallowed up by some AI model. And so there are some serious long-term questions here around whether we are structuring our markets and structuring compensation structures in ways that are still going to incentivize the production of news or information content that we, as a society, decide is valuable.Krugman: Yeah. One thing I’m hearing from people in the news business is that the rise of AI in search is sort of suppressing links. Instead of getting a link to the deep investigative report by The New York Times or Bloomberg or whatever, you get an AI summary of what was in it, and people never go to the links. That’s the kind of thing, I guess, we’re worried about in many domains.Khan: That’s exactly right. And this is something that we had been seeing with Google even before 2022 or 2023, where they were giving privileged search results to some of their own vertical products in reviews, maps, or other types of search and travel verticals. But this problem is now being turbocharged, precisely for the reason that you said, and some of the statistics that are coming from publishers around just what a dramatic drop-off there has been in terms of search traffic to some of these publishers’ websites is just staggering.And so we see: before, Google used to be a turnstile to the rest of the web, where Google was the starting point so you could get to other destinations. And now, especially with more of these AI tools summarizing what’s on other websites and keeping people just within Google’s ecosystem, it’s depriving all of these other publishers of the traffic and oxygen that they would need to continue being financially viable, even as those other publishers and producers are the ones that are creating the information and the content in the first place. And so I think these are going to be some serious challenges.Krugman: Yeah, this is something where people that I know fairly well are actually quite seriously scared that their financial models are being undermined at lightning speed. One thing you can say about AI is that whatever is happening, it happens really fast.Okay. The particular thing that got me wanting to do this interview was an Op-Ed that you published in The Times, I guess soon after leaving the FTC. That was February 2025. Although when I looked and saw that that was the date on it, I was shocked because, in my memory, it was so prescient that it had to have been written like late last year. But it was actually written at the beginning of last year. It was under the headline, “Stop Worshiping the American Tech Giants.” Can you summarize what you were saying there? Because it does seem incredibly relevant to where we are right now.Khan: So, this was a piece that I wrote looking at the history of innovation in Silicon Valley and noting that, historically, the most paradigm-breaking innovations have come from markets that have allowed for real competition and allowed for new ideas to come in, get funded, and then to be able to really break into the market and compete on the merits of whether businesses or consumers like their products and services, as opposed to markets where you have gatekeepers basically deciding who gets to enter and who doesn’t get to enter.And so I was noting in the piece that at this moment of growing investment in AI, we would do well to want to double down on that commitment to competition, rather than allowing the monopolies and incumbents of Web 2.0 to be the ones that get to decide who gets to come into this market and who gets to compete or not.One of the catalysts for my writing this piece was the emergence of DeepSeek. This was an AI firm that originated in China. And it really shocked Silicon Valley and Wall Street when its model was rolled out, because it mirrored or rivalled the sophistication of American models but was able to do that with much more efficiency. And it really, I think, was a wake-up call from where I sat as to what it would mean to allow the American giants to just control these markets and innovate on the trajectories that they were determining, rather than allow for real competition.And I think with the American AI giants, there’s this additional question around conflict of interest. Again, some of these very firms—the Microsofts, the Amazons, the Googles—have their own cloud computing businesses. And inasmuch as these AI models are heavily relying on cloud computing, I think there’s a question to be asked as to whether these firms are going to have the right incentives when it comes to wanting AI models to be efficient, if they are simultaneously making a lot of money from models that are not efficient. And so I think the DeepSeek revelation was something that brought that conflict of interest to bear.Krugman: I sometimes hate that everything gets formulated in terms of competition with China, but at least part of the issue now is the idea of “national champions”—and we get to that in a minute or two—but that they are arguably, at least, putting us behind in competition with China. And then again, a lot of that has come to a head recently. People started to say, “Oh my God, we’re spending too much on tokens,” and a fair bit of turning to Chinese models. And that’s a huge move. And that was why, when I look back and read your piece, the date just popped out at me. I can’t believe you wrote that 18 months ago.Khan: Yeah. I mean, I think you’re absolutely right. And there are some real historical parallels here when it comes to certain technological companies insisting that these markets are inevitably going to be monopolistic, and therefore the government should treat them as “national champions” and support their monopolization.The piece also mentions Boeing as a cautionary tale here. There was a merger in the late 1990s that the U.S. government approved, where we allowed Boeing to buy up their last U.S. rival, McDonnell Douglas. And that merger, and what followed, basically has led us down a path where you then had Boeing’s planes falling apart, and people have died. And I think it’s unfortunate to have to admit that the lack of competition there probably played a role in Boeing not having to invest as much. There were other factors in terms of the culture internally—moving away from one that focused as much on engineering to instead one focused more on a McKinsey-type culture based on consulting—but I think we’ve seen how a lack of competition in some cases has really major consequences.Krugman: Yeah. This is one of the things which I love about your analytical work: the interplay between the cutting edge and history. Because everything is new, but on the other hand, we’ve been here before. And I thought that the Boeing example, as how things would go wrong, was a little bit revelatory.I know that you have a bunch of other things on your plate, but to the extent you’re following AI—and you may be following it more closely than I would imagine—where are we in that process now? Has the U.S. AI sector managed to get sloppy with monopoly already? I mean, everything now seems to happen at ten times the historical pace.Khan: I think there are going to be some new openings for potentially having more competition. I think, even with some of the more open models, you’re seeing that they can themselves be an input into more competition. And historically, we’ve seen that with open source—there are a lot of committed people around it because they believe the philosophy, but open source as a business model can also be enormously lucrative because it can just really catalyze innovation. And so I think making sure that we still have a vector and markets that are going to be built around that openness is going to be incredibly important.I think this issue of conflicts of interest is one that we need to take seriously and think through. Does it make sense to have the vertical integration that we do? Vertical integration can have, no doubt, various types of benefits, and there are sectors where having markets vertically integrated in that way can make a lot of sense. In markets where you are going to have one layer or multiple layers—the bottleneck layers, new layers where you have a lot of consolidation—allowing market participants in those gatekeeper-monopolized layers to also have a presence in layers that actually should be competitive. There’s nothing about economic properties that require those layers to be monopolized. But that’s when I think you can see a real problem. Because then you allow the monopolies to export their control and their consolidated power up and down the supply chain, distorting competition and distorting the trajectory of innovation.And so I think that’s the kind of prism through which we really need to look at the AI stack, along with these questions of efficiency. And what are the underlying incentives here? Do we have the right incentives when it comes to wanting to promote more efficiency with these models?Krugman: Right. And getting back to your example, at least as I understand it, if you have big players, either directly or with substantial ownership stakes, who are also in the business of selling compute, essentially they have no incentive to help the models use less compute—even though that would mean less environmental damage—and also have an incentive to favor profits there that are inefficient. And possibly, given that we do have a global economy, losing ground to rivals. Am I garbling this, or is that kind of how it is?Khan: I think that’s right. I mean, the other thing is these AI technologies and advances are coming against the backdrop of markets that had already been monopolized, right? There are major litigations against Google, which has been found to be a monopolist three times over, and against Amazon and Apple. And these are companies, especially when it comes to Google and Apple, that already have very significant control over key portals and over key distribution points.So, the way that most people interact with some of these AI models is through technologies owned by some of the existing gatekeepers—be it Microsoft, Apple, or Google. And so with those firms in particular, and especially Google and Microsoft which have invested more in AI, that’s where we also see potential conflicts of interest. We’ve already seen Google’s share of some of these markets go up because they’ve made such an aggressive push to use their existing monopolies in areas like Chrome and Google Search to make sure that it’s their AI services that get a leg up.Krugman: Yeah. Just a quick sociological observation—this is striking. I remember in a way that hopefully you don’t, but the dot-com era: that was all the scrappy young guys in their garages, and this is all giant corporations—the already giant corporations, and guys who made their decabillions 10 or 15 years ago. In some ways, I almost sometimes feel like the AI investments are kind of a plutocrat midlife crisis playing out.Sorry, but last point on this: One concern I have about the view of national champions is that we end up with—and I think you expressed this as well—having national policy directed to protect these incumbents, these players, even when they don’t have the right stuff. And now with talk of the Trump administration taking a stake in things, how big is that in your view?Khan: Specifically the concern around state control?Krugman: Well, not so much state control as that maybe if the Chinese have a better model, we start saying, “Oh, no. National security. It can’t be used here.” Or if there’s a smaller player that has a better model, that somehow or other there will be federal contracts, federal rules written to favor the big players who help pay for ballrooms and stuff like that.Khan: It’s a huge concern. I mean, it’s no secret that the CEOs of some of these technology companies have made it a top business priority to curry favor with this White House. They were all sitting there on the stage at the inauguration. They all make regular pilgrimages to the White House, to various state dinners. And so I think there’s a very serious risk of capture—a very serious risk of regulatory decisions being made in ways that are not serving the public interest at large or serving competition at large, but instead are serving the narrow private interests of a very small number. And so I think those are very serious risks.We’ve seen some debates in the White House and some policies that are veering in this way or that way. It seems like initially the White House had a very hands-off approach when it came to AI, and then they’ve started to take more interest in some of these specific models and where and when they’re being released. But I think, from a competition perspective, there is a very real risk that we’re going to see the biggest, most powerful incumbents, through their access to the White House and politically powerful individuals, be able to get rules and regulations that are personally favoring them and personally advancing them at the expense of the broader market, in the sense of startups and newer firms that in some instances may have better ideas.I mean, this is an age-old debate: what are the underlying market conditions that best pay for innovation? Is it monopoly or is it competition? The famous Schumpeter-Arrow debate. And at the end of the day, it comes down to this question of what type of innovation you are trying to promote. The empirical evidence shows that monopolies can be good at innovating, but they are primarily good at innovating in ways that deliver incremental improvements on existing technologies. Historically, the breakthrough innovations and the paradigm-shifting innovations have come from outsiders and have come from a competitive market.And so I think that’s why it’s especially important, as we look down the inflection point of some of these AI technologies, that we’re not allowing extreme centralization of those systems, when it’s in fact openness and competition that have been such a key driver of American innovation and market growth.Krugman: Yeah, in your op-ed, you point out that, I guess, the fundamental, sort of conceptual breakthrough that made what we call AI possible all came from Google, which just did nothing with it. It wasn’t until people left that they brought it to other places, and it started to become what we now see all around us.Khan: That’s right. And sometimes if you talk to employees at some of these companies, they will note just the enormous amount of bureaucracy, an enormous amount of bloat and red tape that can start to hobble the ability of these bulking institutions to really deliver fast-moving innovations. And so that’s why you see that sometimes ideas that even came from within Google actually have to go outside to get the attention and space to really be able to deliver.Krugman: Yeah. One of the great myths of our time is that the private sector is being efficient and innovative and only government is bureaucratic and slow. But if you’ve ever worked for or know anybody who works at a large corporation, it just ain’t so.Okay, just an open-ended question: what competition issue are we not paying enough attention to right now? Just trying to think about all of that stuff going on. It’s so much AI-focused, but what else? What’s kind of nagging at you as you track what’s happening?Khan: Well, I think one question is the way that AI and continuing technological advances and sophistication will intersect with other markets that are already very consolidated. And so as we see more and more integration of some of these AI tools in areas like healthcare, for example, or in areas like retail, I think there is an opportunity for these technologies to move. On the one hand, they could make these markets more open; but on the other hand, they could actually result in even deeper consolidation.We’ve already seen a whole set of lawsuits noting how in areas like housing and agriculture, there is use of algorithms to facilitate price fixing and collusion. Because where you already have a lot of concentration, these tools can basically make it easier to collude, or make it easier to collude with more precision and sophistication. And so I think the intersection of AI and technology with the rest of the economy is going to be an area to keep watching.Krugman: All right. Brave new world and really kind of alarming. I wish you were still in the federal government. But you’re by no means out of public policy. So thanks for talking.Khan: Thanks for having me. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.TranscriptThe war with Iran has just reached a very scary phase, and I’m not talking about the bombs and the drones. Hi, Paul Krugman here, doing a brief podcast instead of a full post, because I actually spent the day with friends and doing other things, and this is a quicker alternative.If you’re following the news, you know that the sort-of ceasefire with Iran has been called off. Trump has reinstated the blockade. The Iranians are back to hitting things with their drones and missiles. The U.S. position has been wildly erratic. First, Trump said he was going to impose a 20% toll on all shipping, basically turning the Strait of Hormuz into a U.S. toll booth, which would have been wildly illegal and irresponsible, aside from being impossible. Now he says, no, he’s going to demand that countries invest in the United States, which is also actually wildly illegal. But in any case, it’s never going to happen.And yet, this is extremely scary. The reason to be afraid is not that I think the war is going to come to America. It’s not even that I think the United States is going to seriously try to occupy Iran. We don’t have the troops. We don’t have the missiles. Trump depleted a large share of our weaponry in the course of his failed war so far. So this is likely going to be punitive strikes, maybe some war crimes along the way, but that’s all.But what is really frightening here is that it does appear as if Trump has given up on trying to extract something that looks like victory. If we go back just a few days ago, it appeared that what was going to happen was that Trump was going to de facto pull out, give upon the project, take advantage of falling oil prices because the strait was sort of kind of open — and try to spin the story about this was truly, this was actually an American victory and the economy is great and look at the stock market. And, you know, just it was a little bit — more than a little bit —stupid and doomed. It was also kind of amazing because a serious attempt to end the conflict would have required facing up to reality, saying, OK, this war didn’t go well, but America remains great. Sorry about that.But that was apparently not something Trump emotionally could bring himself to do. He just cannot admit that this venture failed. He can never admit that anything failed. We’re going to be searching for the saboteurs of the reflecting pool for the remainder of his presidency.This is a change in strategy that is ominous because what is Trump’s plan for the midterm elections? Here the idea presumably was that there would be enough economic success and people would have sufficiently short memories that they would possibly give Trump credit for opening the Strait of Hormuz, but in any case have put the gas price shock and the whole disruption surrounding the war behind them. And be ready to start admitting that this is the golden age that Trump and company keep on claiming it is.Now that’s all off. Now it’s just we’re going to bomb Iran. No clear strategy there, but we’re not going to even pretend that things are okay. We’re going to blockade them, which actually has a little bit more leverage, but no hint that anything might be resolved in a way that would help Republican chances in the midterms. So what is going to happen?I don’t think it’s a coincidence that just as Trump essentially gives up, not gives up in the sense of abandoning his war, but gives up on trying to achieve anything he can even spin as a positive outcome, that we now have an announcement that this Thursday he’s going to have a primetime speech, which reports say is going to be about election fraud in 2020. Some reports hinting that he might try to declare the two Democratic senators from Georgia somehow illegitimate.Okay, that’s not going to actually work. And nobody’s going to be convinced by the claim that he actually won the 2020 election. But what is happening is that effectively he’s setting up the pretext, the groundwork for massive interference in the vote this November. That we’re basically seeing the stage set for some kind of attempt to block fair elections, maybe block elections entirely.I don’t know how this is going to play out. But we are really now at the point where it’s pretty clear that Trump and the people around him have given up on actually winning the election. They’ve decided instead that somecombination of propaganda, misinformation, disinformation, and possibly massive illegality is their way forward.And don’t say they wouldn’t do that. That has been famous last words every step of the way. The proposition that there were some things that even Trump and company would not do has been the best way to be wrong about everything, every step of the Trump administration.So in a peculiar way, the fact that Trump is back to bombing Iran is really bad news, not because of the bombs. Yes, it’s terrible and all that, But not because I have any real fear that America is going to be at risk from a foreign power, but because I think it signals an enormous risk to us from our own president, our own government.Be afraid, be very afraid.And take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.With everything else going on, the ongoing demolition of financial regulation and supervision, which is raising the risks of financial crisis, isn’t getting much attention. So I spoke with Dennis Kelliher, president of Better Markets, an independent think tank that is trying to sound the alarm.Full disclosure: my nephew works at Better Markets. But I would have wanted to talk to Kelleher regardless.. . .TRANSCRIPT: Paul Krugman in Conversation with Dennis Kelleher(recorded 7/10/26)Paul Krugman: Hi everyone. It seems hard to believe now, but the great financial crisis of 2008 and its aftermath are now in the distant past. I think, in fact, in November there will be some voters who weren’t born yet. But for some of us, it was a huge, defining event, and financial markets as a source of economic problems and instability hasn’t gone away. And I thought I would talk with Dennis Kelleher, who is the head of Better Markets, an independent think tank devoted to trying to make financial markets work better for the rest of us. And in the note, I’ll mention I do have a personal connection to Better Markets, but that’s not why I’m interviewing Mr. Kelleher. Dennis is a former Senate aide, and as you know, congressional staffers are one of the great sources of expertise in America. And we want to talk about financial markets, so hi.Dennis Kelleher: Hi. Thanks for having me, Paul. Good to see you.Krugman: Good to see you, too. I have a bunch of questions, but we can go wherever this goes. The first thing is, whenever I try to talk about financial market functioning, what comes up is that most financial assets are owned by a relatively small part of the population, even if you take 401(k)s into account. So why isn’t this just a fight among the investor class? Why should everyone care about this?Kelleher: Well, it’s a great question because there’s such a lack of information about financial markets, the financial system, and frankly, as you well know, the economy. You know, one of the great services that you and many of your colleagues have provided is basically translating what’s happening in the economy and financial markets to the average Main Street American, reader of the New York Times, and consumers of news. And the truth is that the financial markets and obviously the economy impact everybody, and you’re right.This November during the election, some of the people voting will not have actually had any awareness of the 2008 financial crash, which was the biggest crash in the United States since 1929, which caused the Great Depression. And even though they may not have been born at that time, the people who are voting in November are still living through the repercussions of the 2008 crash. We basically lost an entire generation of Americans, economically speaking, from that crash.It took ten years for the U-6, the broad unemployment rate, to return to pre-crash levels. It was 2017 before that happened. And indeed, the Fed did an interesting study, which people can quibble with the baseline, but they did a study in 2018 that showed at the end of 2016, 90% of Americans were poorer than they were in 2007 by 17 to 35 percent. So if you think about that, at the end of 2016, the best-off American in that ninety percent bucket was 17% poorer. Now you could say the baseline of 2007 was inflated, but by and large, 90% of Americans have been doing pretty poorly since the crash for a lot of reasons.And so in November, when those people go to vote, they might not know it but they are actually living through the continuing economic consequences, financial consequences, and actually political consequences. Because the rise of Trump and the dissatisfaction of voters, Americans, and actually voters in the UK and elsewhere—Martin Wolf from the Financial Times wrote a terrific book called The Crisis of Democratic Capitalism. It shows how if countries don’t deliver for the broad population, then democracy erodes and people look for easy answers, authoritarians, and strongmen. And we end up with Brexit, we end up with Trump.And so you’re right. People don’t remember the crash, but the crash is incredibly important to everybody in America. And the circumstances that we find ourselves in today are unfortunately echoing many of the drivers of that crash.Now, I didn’t answer your question about the investor class, but when you look at investors, something like 87% of the value of the stock market is owned by the top 10%. On the other hand, there are today $27 trillion worth of assets in 401(k)s and IRAs, retirement accounts. It’s overwhelmingly skewed to the top, but not only. And importantly, one of the great projects that America really needs to undertake is to democratize finance so that financial assets and the ability to grow wealth is more broadly spread out. One of the big crippling problems we have today is that the bottom 50% of Americans, about 165 million Americans, only have 2.5% of the wealth of the country. It’s astonishing, right?And so a big part of what Better Markets does in economic and financial policy making is to try and rebalance what we see as a rigged economy that’s driven by a rigged and broken financial system. So our economy is producing very well for the top ten percent, and our financial system is structured to deliver those results. Now, part of that is wealth extraction, but a lot of it is just structural drivers put in place by policy makers in Washington that cater to the top ten percent. And that, unfortunately, Paul, as you know, is on a bipartisan basis.Krugman: We’re gonna get into that in a bit, but let me just ask a question. I’m gonna actually kind of veer off course, although this is something I wanted to get to. Top ten percent. So basically, ownership of stock is, roughly speaking, a top ten percent activity. When you talk about skewed, I mean, I have a sense that it is actually increasingly skewed towards a fraction of a fraction. Do you have anything I should take away about how the system is rigged or skewed within the stock-owning population?Kelleher: Well, I think the problem is that the higher up you go on the wealth scale, the greater your ability to accumulate even more wealth in a tax-free fashion, right? And then to pass it along to both use it today as if it was cash and income, not be taxed on it, use it, and then hand it off through inheritance without being taxed to heirs for multi-generational wealth concentration at the top. It’s bad for the economy and bad for democracy.I mean, you’ve talked to Ro Khanna and there’s all sorts of people with different ideas about what to do. We’ve got a wealth tax on the ballot in California. But in terms of the structural drivers, one of the problems we see at Better Markets is that Democrats don’t pay enough attention to the financial structural drivers of the economy. So here’s just a simple example that people are often surprised by.Community banks in the United States—there’s about a little over four thousand of them. You see them on every corner across America, particularly in “real America,” as opposed to where you and I live, Paul, which is by no means real America. But those banks lend out seventy-five cents on average of every dollar of deposit. The big Wall Street banks, they lend out somewhere less than fifty cents of every dollar of deposit. And that’s because it’s so much more profitable for them catering to the rich, mostly engaging in financial activities, trading, and capital markets activities.And so ask yourself, why is that? Well, that’s because the rules enacted by the banking regulators and Congress and other regulators allow the profit margins on the financialized trading side to be so much greater than on the lending side. I mean, truthfully, the rules that are created in Washington actually discriminate against lending to the real economy.And so you have community banks which don’t have capital markets activities. They’re bread-and-butter banks for the most part. It depends on how you define community banks; some people define them all the way up to Wall Street, but those are people in the propaganda industry. But these are banks that are actually driving the real economy. So for example, the community banks have somewhere in the neighborhood of 10% of the total assets of the banking system, but they actually provide somewhere in the neighborhood of 40% of all loans to small businesses.Krugman: Right.Kelleher: Well, why are we not having rules that skew towards benefiting the real productive economy and away from the trading financialized activities which serve the very top one or two percent and not the rest? And actually, it not only doesn’t serve the rest of the country, it’s at the expense of the rest of the country. Better Markets put out a report showing that last year the growth in major Wall Street bank lending to what are called “non-banks” grew by 50%. Do you know what their lending to the real economy grew by? Zero. Zero. And so a lot of these activities are being pushed out into what are called non-banks because it’s more profitable. It’s more profitable because the rules make it more profitable. The rules are created in Washington by policymakers, regulators, and legislators who, unfortunately, too often are beholden to the wrong people. And so you end up with this cycle where the rules keep reinforcing the current structure that’s channeling activity and money to the top and away from Main Street.Krugman: So as I understood it, reading some of Better Markets’ reports, if you’re a big financial institution, lending to non-banks probably ends up being a roundabout route by which the money reaches lenders, but not through the original bank. They actually have kind of a regulatory advantage because it’s lower capital requirements. If I got that right?Kelleher: Well, it’s lower capital requirements, it’s lower requirements across the board. Capital is one of the core drivers, but it’s not the only one.Krugman: So if you put your money with Citigroup or another one of the big financial institutions, it’s not going to be lent out, or much of it will not be lent out to small business or households. It’ll be lent to others; it’ll kind of divert around and it’ll in effect be channeled into what you consider a worse way through which the money reaches the rest of the economy. Is that a fair summary?Kelleher: That’s a fair summary of part of it. Keep in mind a lot of this money is funding hedge funds doing big basis trades, basically swinging for the fences. I’m not saying there’s no value at any hedge fund to the real economy, but when you look at their activities, that’s not exactly what I would call beneficial lending to the real, productive economy. Private equity is basically a strip-and-rip business model. It gets their money from the banks. Almost everything goes back to the banks, and that’s because deposit money is the safest, soundest, and cheapest source of funding for economic activities.And so the banks have got the money, and what they decide is: where are they going to send it? Are they going to send it over here to lend to Main Street businesses where their profit margin is modest, or go over here to hedge funds, private equity, or other financialized activities—business development corporations, crypto, all sorts of things where the profit margin is large? They’re making rational economic decisions in their self-interest to profit maximize.The question is: why are the people in Washington structuring it that way so that their profit margins are like that? The current capital rules that we’re fighting about, Paul, are supposed to change that. And in fact, what they’re supposed to do is have, for example, the trading activities accurately reflect the risk associated with them. And if they accurately did that, the capital requirements for those activities would be much higher. Not only are the banking agencies with the Federal Reserve in the lead not doing that, but when they’re done with the proposed capital rules, capital at the biggest, most dangerous banks in the United States is going to be back to the levels roughly before what they were before the 2008 crash.I mean, think about that. It’s crazy, right? Here’s something that’s even crazier: a bunch of those big banks are going to have capital rules and capital levels that are roughly similar to community banks.Krugman: Which are low, because they’re in a very safe business, right?Kelleher: Yes. Well, right. The systemic risk to the economy of community banks, first of all as an absolute matter, is pretty low. But relative to the giants on Wall Street, they’re infinitesimal; they’re not even comparable. And we’ve got a Federal Reserve, particularly the Vice Chairman of Supervision and Regulation over there, that acts as if she’s the primary lobbyist for Goldman Sachs or JP Morgan Chase.She even hired three of Wall Street’s top lobbyist lawyers to be her senior advisors. I’m not making this up. One was a vice president at Goldman Sachs. One was one of Wall Street’s top lawyers at one of the top Wall Street law firms for 35 years. And the other one was a top executive at Wall Street’s biggest trade group in Washington. Those are her three top advisors.Krugman: Are you talking about Fed employees or outside consultants?Kelleher: No, they’re Fed employees. They’re on staff. We put out a press release about her hiring the three of them. I mean, this is not just the fox guarding the hen house; this is the fox in charge of all operations of the hen house. So the lawyer who was on Wall Street for 35 years, serving his clients for 35 years—all of the banks—is now the Director of Regulation and Supervision at the Federal Reserve of his former clients, and the right-hand top staffer for the Vice Chairman of Supervision and Regulation on the Board of Governors of the Federal Reserve. And so anybody who is surprised that the Fed is now enacting or proposing rules incredibly favorable to the biggest banks on Wall Street...And it’s not just capital, Paul. I mean, one of the tradeoffs here is that banks get to have a somewhat unique role in the United States, right? They get to accumulate all these activities and take people’s deposits. Main Street American deposits are how these banks fund themselves, largely. And then we insure that money through the FDIC so people have confidence that they’ll get their money back. But the exchange is: we regulate them so that they don’t actually threaten the economy and financial system of the United States because they’re so big. So that means they’re supervised.People don’t know this, but every day, people who work for the Federal Reserve and are paid by the American people, go to work at the biggest banks, supervising them. They literally have an office there. They go in, look at the books and records, and talk to people all day long at Goldman Sachs, JP Morgan Chase, and Citigroup. That’s called supervision. It’s basically invisible but incredibly important. But the Fed is not only cutting back on capital and regulation like stress tests and other important safety features; they’re also gutting supervision. And so they’re basically unleashing the biggest banks in the United States from modest, sensible regulation and supervision that’s supposed to protect Main Street jobs, homes, and savings from high-risk, reckless, and inappropriate conduct by these gigantic banks. We saw in 2008 what happens when you don’t regulate them or supervise them. And we actually just saw it again in 2023.Krugman: Right. This is 2023 with the Silicon Valley Bank and all of that, right?Kelleher: 2023 there were four big bank failures. Three of the four biggest bank failures in the history of the United States happened in 2023. People don’t realize it.Krugman: Even I didn’t realize that, and I’m supposed to be on top of these things. And this is happening incredibly fast, right? Normally we think you forget the lessons of the last financial crisis basically once people age out of the business and nobody is around who really remembers it. But we were dealing with the aftermath of 2008 just fifteen or sixteen years ago. And you’re saying that basically we’re fully back to that kind of Wild West, no-supervision world, or maybe worse.Kelleher: Well, we’re getting there, and the direction is there. We’re not quite there yet, but the thrust of what’s happening now is broader, deeper, and more reckless than it was in the years leading up to the 2008 crash. I mean, if you think about it, it’s quite amazing. The so-called shadow banking system—non-bank financial institutions—today is bigger than it was in ‘08 and less regulated.Krugman: That’s what I was going to say. Yeah.Kelleher: And it was identified as one of the primary drivers of the ‘08 crash.Krugman: That’s right. I mean, I remember very vividly in the fall of 2008, the conventional wisdom, even in textbooks—including my own—said, “Well, we can”t have a 1931-style banking crisis because the banks are insured and regulated,” and then the week of Lehman’s failure was, “Sixty percent of the banking system is shadow banks.” And you’re saying that we’re back to that and more now.Kelleher: Yeah, I don’t remember the exact percentage, but yes. And what’s worse is they’re less regulated today than they were then in many material respects. And now a lot of people think, “Well, it’s hard to worry about big catastrophic events when there’s a lot going on every day.” But this is happening fast, and because there’s so much happening in the Trump chaos machine—where there’s not a scandal a day, it’s like almost an hour.You know, J.D. Vance, who I almost never agree with on anything, said in a speech recently at the Nixon Library that if the Nixon crimes happened today, it wouldn’t even last a full news cycle. And he’s probably right. And so a lot of this is not only happening fast, it’s happening invisibly because just a very small slice of what’s happening is getting into the media. Meanwhile, the industry termites are working day and night in the policy-making process in Washington, eating away at the foundations of the financial stability of the United States.Krugman: You’ve been talking a lot about the Federal Reserve, which is critical because it traditionally has been the more competent, less politicized piece. And you’re basically saying that now that piece of the Fed has effectively been captured. Is that a fair description?Kelleher: The Fed has unfortunately been largely captured. It’s being run by people who have an agenda that is not consistent with the best interest of the American people, frankly. I’m not talking about the monetary policy side—that’s a whole different discussion—but on the supervision and regulation side, they are not acting consistently with the best interest of Main Street Americans. Wall Street is winning day in and day out in the policy fights.Krugman: Right.Kelleher: There’s going to be news coming out, I think, over the next several weeks, maybe months, that will illustrate that pretty starkly. It’s really quite astonishing what has happened at the Fed. And don’t get me wrong—there are a lot of good, hardworking, dedicated public servants at the Fed who nobody will ever see or acknowledge, who have been fighting the good fight for many years. But the leadership at the Federal Reserve at this point—the Trump leadership—is doing to the Federal Reserve what’s being done everywhere.Now, we know we had two big Supreme Court cases recently which supposedly cabined off the Federal Reserve from direct political control by the President, unlike the other agencies, and that’s true, but it’s all relative, right? I mean, he now has direct political control of the SEC, CFTC, and everything from the NLRB to the FTC to the FCC—all the critically important regulatory agencies that have been in place since the New Deal, basically creating and enabling an economy to be profit-maximizing but still have adequate protections for the public. I mean, that’s the balance that we need to get.And actually, a former colleague of yours, David Leonhardt, wrote a great book—and I always have it on my desk because I recommend it to people. It’s called Ours Was the Shining Future. It’s a great history of how the United States, post-Great Depression, built the largest middle class in the history of the world, really compressed gross income inequality, and created wealth in places people didn’t think it would happen. And he talks about how things changed when Reagan came in and kind of where we are now. But that was because we had a regulatory state.Now, people can argue about what’s reasonable—how much is too much, how much is too little—but we struck a balance that enabled the SEC, the CFTC, the Federal Reserve, and other regulatory agencies, from labor to health to product safety. That balance took some of the craziness off the blind profit maximization built within the engine of the economy.Now, the Supreme Court basically said last week that doesn’t exist anymore. What exists going forward is that the President gets to control all those agencies, and all those agencies are now subject to both the political agenda and the whim of whoever the President is.Krugman: So, for listeners who may not know: SEC is the Securities and Exchange Commission, which is supposed to regulate stocks and corporate accounting and all of that. CFTC is the Commodities...Kelleher: Futures Trading Commission, regulating derivatives and commodities. It’s the least known but a very important agency. For example, commodities: the bread in your lunch pail, the cereal in your breakfast bowl, the gas in your car, the heat in your home—all those markets are regulated by the Commodity Futures Trading Commission.Krugman: Yeah. And so Humphrey’s Executor, the case where the Supreme Court essentially said that Congress cannot establish a mandate and then expect an agency to fulfill it if the President doesn’t want to. That really affects all of these agencies, right?Kelleher: Right. Actually, the case last week was Slaughter v. FTC, and that case overruled Humphrey’s Executor, which was a Supreme Court case from ninety years ago. I don’t remember exactly; it could be eighty. Contrary to what my kids often think, I haven’t been around that long.Krugman: It’s ninety years ago because it was actually a ruling against FDR. FDR was trying to change something, and the Supreme Court said, “Well, that’s not what Congress said and you, Franklin Delano Roosevelt, cannot change it.” But now it’s been waived for Donald Trump.Kelleher: Yeah, well, look. We have a right-wing Supreme Court—a supermajority—that is essentially creating, for the first time in American history, an all-powerful executive branch. As you know, it’s been referred to by legal scholars as the “unitary executive theory,” where essentially the President, whoever they are, gets to control the entire executive branch. And of course, over the last ninety years or so since the New Deal, we’ve had an administrative state that has, in key respects, put some brakes on the worst excesses of unrestrained profit-seeking. They’re just basic public protections.I think of it as being like cars, right? Cars today are very safe; they have airbags, bumpers that are shock absorbers, glass that shatters and doesn’t kill you, and reinforced doors. What the Supreme Court is doing with Slaughter v. FTC and these other cases that are empowering the President is literally taking the airbags and bumpers off your car. Except the car, in this case, is the country. It’s our democracy, our economy, and our financial system. The safety aspects of that system that protect our democracy, economy, and financial system protect people’s jobs and savings.And frankly, their safety—even things like the Consumer Product Safety Commission or the FDA. These acronyms can get confusing, but what they really are are safety mechanisms and protections for Main Street Americans from things that happen in a gigantic economy like the United States that would otherwise have really bad impacts on Main Street Americans, whether it’s their job, their health, their safety, or their savings—frankly, their families and their dreams. And that’s what these agencies do; some do it better than others, and I’m not saying they always get it right. They don’t; they get it wrong. We criticize them all the time. We criticize them when Democrats are in charge and we criticize them when Republicans are in charge. We also praise them when they do well. But we need them; we need these shock absorbers on an otherwise unrestrained economy that’s just profit-driven, and that’s what we’re seeing now.Krugman: We’ve ended up talking a lot about the Fed, which has a critical supervisory role, but Better Markets has been writing a lot about the SEC lately, and there’s stuff happening there that’s barely being noticed. I’m barely seeing anything about it in the newspapers, and yet that’s just as important, right? There’s a lot going on at the Securities and Exchange Commission.Kelleher: So, the Securities and Exchange Commission was created in 1933. There were two laws: 1933 and 1934. And by the way, I should say if anybody’s really interested in this—I hate to sound like a book reviewer—but there’s some great stuff. Diana Henriques wrote a terrific book last year called Taming the Street, which is a history of the SEC, how it came about, why it’s so important, and what happened during the Great Depression. It’s also a history of the American economy, a bit like David Leonhardt’s book. And it’s an easy read.But the SEC regulates investor protection in our markets. And you asked this earlier, Paul: why should anybody really care given that so many of these assets are owned by the top ten percent? Well, as you know, we basically have an economy funding pipeline—a capital pipeline, if you will—in our economy. People all over the country come up with ideas, some of which fail and some of which succeed. Those that succeed need capital to grow so that they can take it from their garage to a local store, to a factory, and to global markets.Krugman: Right.Kelleher: When they start, they end up using angel capital or friends and family. Ultimately they get a good idea and a venture capitalist. And then the big success used to be your company would go public on the stock exchange. That’s how companies generated enormous amounts of capital—which is just a fancy word for money. They got enough money to grow their business, build things, and hire a lot more people. It’s how we built the middle class.And that’s what the SEC regulates: the public part of that capital pipeline—the big public markets like the New York Stock Exchange and the NASDAQ. They regulate both the disclosure obligations and they police those markets. They do that because what happened in the 1920s contributed mightily to the 1929 crash and the Great Depression. It was basically people who were lying, cheating, and stealing with almost no regulation at all. The big banks were often multi-headed financial conglomerates doing self-dealing and conflicts of interest. Not only didn’t they disclose things, but when they did, they often lied and defrauded people. A lot of that ended up being basically what we would think of today as Ponzi schemes—nothing really there except the people running the firms enriching themselves.The SEC was created to make sure we had well-regulated and well-policed markets so investors wouldn’t get fleeced, providing capital for businesses to grow. And until very recently, the SEC was the global gold standard for investor protection. Well, that’s gone. The SEC under Trump has now moved from investor protection to management protection. It is as captured as, unfortunately, the Fed in many respects. It is cutting back on disclosures and investor rights.For example, they’re even interfering with proxy advisors. It’s very difficult if you’re an investor to keep track of the proxies at all the public companies. The big investors have to vote on director appointments or major policy questions, so they hire proxy advisors, just like you would hire an advisor for anything else. Well, the SEC is now interfering with people hiring advisors to give them advice on proxies. How can you say I can’t contract with somebody to give me independent advice? They’re interfering with that because it makes investors more dependent upon management.Krugman: Just explain to me how that works. How is the SEC blocking that? I’m just curious because that sounds important.Kelleher: It is important, and the details are on our website. But at a very high level, there are two big proxy advisor firms that have a large amount of the market. And what you would do is hire them to provide tailored advice. For example, if you were interested in companies that were socially active and cared about the climate, you could tell your proxy advisor you want advice related to that. If you were on the other side and you loved fossil fuels, you could tell them that and the proxy advisor will tailor it to you. You then pay them, right? What the SEC said in one of its proposed rules—I’m not kidding—is that the proxy advisor had to submit any comment about a company to the company’s management, and management had the right to comment on it. Well, it’s the exact opposite of independent advice. How that’s even constitutional is beyond me.The proxy advisory firms have been engaged in litigation I believe in Trump I and in Trump two, about the restrictions that they’re trying to put on independent proxy advice. It’s just one example. I actually put out a report called The SEC is Demolishing Investor Protection, Threatening Capital Formation and the US Economy, which detailed many of the actions they’re taking.But the problem we have is that this isn’t just an issue for rich investors; it impacts the entire economy. One of the reasons people all over the world send their money to the United States capital markets is because they are well-regulated and well-policed. They’re not going to do that if those protections are gone. There’s already been reporting about people thinking about putting their money elsewhere. Now, because the US stock market is doing so well, you could argue it’s still a safe bet. By and large, there’s no other place that can compete robustly with the United States at the moment. Leave aside whether it’s a bubble or not. As an investment vehicle, it’s one of the top global places to put your money.Well, that’s because—and this is what they don’t get, Paul—they are well-regulated and well-policed. You take that away, and you’re going to end up with crooked, rigged markets where you don’t know what happens to your money. And if that happens, that doesn’t just hurt the rich people who own most of the financial assets. That’s going to have impacts all the way down the capital formation pipeline to the real economy and people’s jobs.Krugman: Okay. I was completely unaware that the SEC was doing all of that. But I just want to move on a bit. Better Markets has been writing quite a lot about crypto. Crypto has suddenly faded from public attention because there’s so much else going on, like AI. But crypto is still a two trillion dollar asset class. Talk to me about crypto and where it fits into all of this.Kelleher: Well, to start with, we have been the tip of the spear fighting crypto since 2020. We were the leading opponents of FTX and Sam Bankman-Fried back in ‘21 and ‘22 when he was trying to buy all of Washington and get his predatory model approved by the CFTC. In fact, we were so much of a thorn in their side that Sam called and came into the office for ninety minutes to try to convince me to support him. Unfortunately, there are so few people active at the CFTC, which is where he was trying to get his predatory model adopted.Krugman: This is Sam Bankman-Fried who came in to talk to you. Okay.Kelleher: Yeah, him and his bipartisan phalanx of advisors, because he bought everybody. For ninety minutes he tried to convince us. We didn’t know about his crimes obviously—but he clearly had an entire business model that was financially predatory. It was basically: “If we get rid of all these customer and investor protections, I can make a lot of money.” And I was like, “Well, anybody can make a lot of money.” You could make a lot of money building buildings if you don’t put in fire escapes or fire doors. It doesn’t mean it’s a good idea. That was essentially what Sam Bankman-Fried was trying to do in the derivatives markets, and we opposed him.He also thought he could bribe us; he offered us a million dollars or more. Frankly, I could have asked for twenty-five million bucks and I’m sure he would have delivered it in a paper bag. We said no. To my knowledge—and I don’t say this arrogantly, but in sadness—I think we were the only ones in Washington who didn’t take his money. He ended up in the right place.But Better Markets has been out front on this because there is no legitimate use case for crypto. They’ve had 18 years to come up with one. They keep throwing things up like “an inflation hedge” or “source of stability.” Every one of them has turned out to be baseless. The only real use for crypto is tax evasion, money laundering, and crime. It’s the preferred mechanism of choice for global terrorists, sex traffickers, and rogue nations like North Korea and Iran.You have to ask yourself why crypto has basically hijacked the political agenda of Washington. It’s because they followed the Sam Bankman-Fried model of buying bipartisan support by spending hundreds of millions of dollars in campaigns. And this is the astonishing thing, Paul, that people don’t know.Krugman: Okay.Kelleher: It’s the biggest bait-and-switch in history. In the hundreds of millions of dollars they spend on campaigns, they don’t mention crypto. That’s because they know crypto is toxic. Poll after poll shows crypto is toxic with the American people. Politico and the Wall Street Journal independently looked at the massive amounts of ads bought by the crypto industry supporting candidates in the United States, and not one mentioned crypto. Then they get their friends elected who come to Washington and say, “Crypto voters sent us here,” except not one voter voted based on crypto. They were mostly negative attack ads on extraneous issues.So crypto has now basically hijacked the agenda. The amount of attention politicians give it is crazy. The Senator from Maryland was recently quoted as saying, “I’m spending virtually all my time on crypto.” If his constituents knew that, they wouldn’t be happy. So here we have a financial product of no social use and massive negative uses that is being integrated with our core banking and financial system. Now, I’m sure it’s a coincidence, Paul, that the President is getting filthy rich on crypto.The problem is that the downside of crypto is not going to fall only on the people getting rich on it. Once they connect it up to the banking and financial system, which they’re doing across the board, we are going to see problems. In many ways, I think what’s happening now is worse than what happened before the ‘08 crash. Before the ‘08 crash, we had subprime. Well, we not only have financial craziness going on, we have this entirely new multi-trillion dollar financial product that has no value, is incredibly volatile, and is rife with conflicts of interest. It is going to be a core part of our banking system within the next twelve to thirty-six months.Krugman: Okay. This is a broader question of what happened to the political system. Massive campaign spending, but also a lot of effective bribery. You’ve been going after that. And it is kind of shockingly bipartisan. I mean, obviously, nobody has ever been “bribed.” The bribery of Donald Trump is, as he would say, “like nothing anybody’s ever seen before.” But it does extend across the political spectrum. You’ve been writing about that, right?Kelleher: Well, unfortunately, it has. Any ordinary person looking at what’s happening would think it was bribery. Unfortunately, it’s not technically bribery because the Supreme Court has made that almost impossible to prove in a political context. So we have politicians taking massive amounts of money from the crypto industry and then prioritizing their special interests over the American people. Poll after poll—and we have this on our website—shows that very few people in America use or own crypto. These are not our polls; these are from Pew and other non-industry sources. Even the FDIC and the Federal Reserve’s own surveys show this.If you look at the polls looking at what voters think, including one right before the 2024 election that looked at swing voters in six states, 68% of them had a negative view of crypto. That’s why crypto doesn’t mention crypto in its ads. But you have all this money coming into the political system, and now Democrats want that money too. Their view is: “Elections cost a lot of money. We need to neutralize this money cannon from crypto.”Therefore, they deliver for them so the industry doesn’t fire that money cannon against them—or better yet, gives them some of it. They do that directly through campaigns, independent expenditures, and Super PACs. They also do it through the revolving door where the industry hires former public officials, including Congressmen and Senators. They purchase them like you go to a vending machine. They give them a ton of money, and next thing you know, they’re mouthpieces for the crypto industry. They also hire lobbyists who are family members of very important people.There was a story that Senator Gillibrand’s twenty-two-year-old son has founded a company.That company is being funded by billionaires and other financial types because apparently he has a brilliant idea and they randomly found him in a phone book, Paul. Everybody is pretending it has nothing to do with the fact that his mother is a powerful Senator from New York who isthe leading cheerleader for crypto special interests. She also happens to be the chair of the DSCC—the Democratic Senatorial Campaign Committee—which raises the money to elect Senate Democrats.You can just read the media reports. You have to ask yourself: how are all these billionaires putting money into this startup? The spokesperson said these people are “longtime friends” of the son. When you’re twenty-two years old, how do “longtime friends” really work? Where do you run into billionaires? I know if you’re a Princeton professor they’re all over the place, but where I come from, running into a billionaire just isn’t common. Getting them to give you money for a startup at twenty-two might be the American Dream, but it ain’t working the way it’s supposed to.Krugman: I’m not a Princeton professor anymore, and there are very few billionaires at the City University of New York. But okay, there’s so much here. Any quick thoughts about AI? It’s monopolizing attention, but where is the financial side of that?Kelleher: I think in some ways it is monopolizing attention too much, and in other ways it’s not getting enough attention in the right places. We think that we’ve got a huge problem here. AI is inevitable; the real issue is what the safety features will be. Cars were a great innovation, but they killed a lot of people until we got airbags and protective glass. There is a fight now between people who think AI should proceed unregulated and those who think it should have regulation. We think you need a balance.The American people are on to this. They know it’s going to impact them. For one, these gigantic data centers are sucking up electricity and driving up bills, straining the electrical grid to the point where the entire country could be subject to blackouts. But also, AI is going to have a very big impact on whether you get a loan or at what rate. It’s not just your energy bill; it’s your local bank. When everything becomes automated, how does a community bank keep up?Community banks provide loans to the auto dealer or the local grocery store. They are going to come under enormous pressure because they can’t keep up with the infrastructure spending they’ll need. We have some ideas on how to strengthen them because they are so vital to our economy—providing 40% of small business lending. You lose community banks, you lose small business.And then there’s the gigantic banks’ use of AI with infrastructure and spending. Community Banks are gonna need to make major investments if they’re gonna keep up. I mean, as I said earlier, forty percent of the lending to small business in the United States comes from community banks. You lose community banks, you lose small business, you lose community. So that’s just one way, but it’s all the way up the chain.Another issue is that the people writing the algorithms are importing their own bias. Who’s guarding against that? There’s the “fat finger” problem where traders make mistakes, but who is testing AI machines pre-deployment? Representative Ro Khanna from California has made this point before, as have others. Truthfully, whether you like him or not, or you agree or don’t agree, you should listen to him because he’s got lots of thought provoking ideas on topical issues people really need to think about, and this is one of them.It’s like thinking: “Let’s open a nuclear plant in our neighborhood.” Everybody would say you wouldn’t do that without checking a million things first. AI is the same, if not worse, because it’s less visible. Better Markets is putting out a “people-centered agenda” on how we should find the right balance so we can get the best of AI while avoiding the bad parts—many of which are unknown. We shouldn’t be putting AI on autopilot. And you know, just like we’re not letting cars on the road running on autopilot without thoroughly testing them and making sure they’re not going to kill everybody. We sure as heck shouldn’t be putting out AI on autopilot.Krugman: Okay. This altogether makes me justifiably much more nervous.Kelleher: Then, let me end on an up note. I thought your piece this morning on jury duty service was interesting. I’m optimistic because the vast majority of the American people are reasonable and community-minded. The problem we have is that there’s so much money flooding into the system, and that money represents the extremes. The extremes are buying the political system. We need to figure out how to get more Americans involved so the reasonable people can have civil conversations. I do think most Americans agree on striking a balance within a reasonable range. Our problem is a Supreme Court empowering billionaires, and we have a president that doesn’t care about laws, norms, customs, or rules.What we’re trying to do at Better Markets—we just did this with our SEC campaign—is engage people. We engaged retail investors, and to our shock, two hundred thousand of them commented on an SEC rule. That is a historic high. So there are people out there, and we need to identify them and get them engaged. If we do, then I believe the core of the American Dream can be reflected in our political system.Krugman:I think that’s an upbeat note on which to end. Thanks so much. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.TranscriptToday i want to give you some encouraging news about the state of the heartland. Well, actually New Jersey, but you got a problem with that? But I did something kind of different yesterday — which has prevented me from producing a usual analytical Substack post — and it was actually a very uplifting experience.So hi, I’m Paul Krugman. What i did yesterday was participate in jury selection in Mercer County, New Jersey, where i am still a legal resident.That is something I’ve done before: back in 2020 I spent 16 weeks on a grand jury. It was done remotely, because it was the depths of Covid. It was a New Jersey grand jury, which is not high profile cases. It’s actually very ordinary cases in which the police want to bring someone to trial but 23 citizens must agree that they have provided sufficient evidence to bring the case to trial. You don’t have to judge guilt or innocence but you have to judge that there is sufficient evidence to warrant bringing charges. It was enlightening. I got to see a lot of the negative side of life, obviously, but it was just it was a pretty good experience on the whole.So I was summoned again this year. I wouldn’t have been able to do it, but I had to participate in the selection in order to explain to the judge, if necessary, why I could not be available during the period of this grand jury — a bunch of already agreed to conferences and talks in Europe.So it wasn’t going to be something I could do, but I did the right thing and went through the whole procedure of listening to the explanation, being pronounced present, and waiting to see the judge and explain the issue. Now, as it turned out, I didn’t even have to do that. By the time they had reached the people who had said they could not do it, including me and 77 other people, they already had filled the jury. So it ended up that it was time-consuming, okay, not a terrible thing, but it was a procedure that had to be done. And I did my citizenly duty and was released well into the afternoon.But what was interesting about it was that those of us who had said we couldn’t do it — 78 people in a Zoom room — had a long wait while the judge did whatever she needed to do with the rest. And after a little while some people unmuted themselves and we started having a conversation. This was by definition kind of a random sample of people — of course people who have felony convictions are not part of this, people are not us citizens are not part of it, and to be fair it’s Mercer County which includes Princeton although it also includes Trenton. Still, it’s on average an affluent, highly educated county so this was not exactly typical America but it wasn’t exactly the elite either: This wasn’t a virtual room full of Princeton professors.So conversation started. Obviously people are not fools so it wasn’t about politics, it wasn’t about current events, it started with people saying “anybody want to recommend some books that I should read?” and then turned to TV shows and movies and then somehow or other we got involved in a discussion of AI and applications and learning. Because there were several school teachers.Not everyone spoke up — most people didn’t — but everyone was listening, it seemed fairly attentively. And it was a great conversation! People were reasonable, they were either well informed or were happy to say “I don’t know about this.” There was actually some discussion about “how should I where should I go for news now that everything is so polarized” — nobody talked politics but they did talk about the fact that news is kind of hard to parse these days.The book recommendations, the TV and movie recommendations to the extent that I know them were pretty good. And the whole tone was, wow, it was civilized. I felt a little bit as if I was in the middle of a Norman Rockwell painting.By the way, yes, people did recognize me and a couple said you know I read your Substack and I talked a little bit but I made a deliberate effort to step back and not play the celebrity there.And that was good, because I got to listen to other people who were really level-headed, interesting, pretty well informed about a bunch of stuff. Oh, and just to say that this was New Jersey, so it was a very diverse group of people — a random selection of people from New Jersey, which meant that it was multi-racial and multi-ethnic. The clerk had some trouble with pronouncing everybody’s name, which was okay — I mean everybody was very forgiving of that.So it was very much America as I see it — a country of lots of people who look very different, who sound different (except a fair number of people did have New Jersey accents.)And it was just a far more hopeful scene — at least I found it much more hopeful —about the state of the country. It turns out that ordinary Americans — this is, again ordinary Americans from Mercer County, New Jersey, but still — ordinary Americans are a lot nicer, more thoughtful, more willing to hold interesting discussions than you might think.And it does seem to me, given all the political news, there’s a lot of people out there, I would say primarily on the right, but not only on the right, who fundamentally hold ordinary Americans in contempt, who believe that you have to go with cheap slogans and that you can appeal to the baser instincts of everybody’s nature and that’s the way that you win.And obviously they do sometimes win. But it’s worth going out there a little bit.I mean I’m never going to be the kind of person who travels around and has conversations with the person in the street and reports back on what I’ve learned about the real America. But I actually did have, by accident, a pretty good selection of real Americans — because we’re all real Americans — and came out of it feeling just much lighter in mood. You know, this country is actually okay if we can just get past some of the people who are trying to take us down a dark path. We’re not bad people — we’re mostly good people. And there’s a lot there’s a lot of uplift out here if you’re willing to see it. For once if I say I’m ending on a happy note, I really am.Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.TranscriptYesterday, Donald Trump ordered Scott Bessent, the Secretary of theTreasury, to cut off all trade with Spain. Bessent said “Yes, sir.” Trump also said that this is because the Spaniards had stolen his strawberries. Okay, I made up that second part, but he did in fact order Bessent to cut off all trade. This is not going to happen.Presidents have a lot of discretionary authority on tariffs and trade, more than they should, but you do not have the right as president to impose tariffs on a country just because you don’t like their defense spending or you think that they haven’t been nice enough to you.So this would not fly even in the Trump administration. Even with a supine congress and a permissive Supreme Court this is not going to happen. Also Spain is part of the European Union. So this is like Europe declaring “we’re cutting off all trade with Florida”: they can’t do that. And also, there’s a lot of U.S. business with Spain. In fact, Spain is one of those countries with which we run a trade surplus. So U.S. business would be howling.So this is all a non-event, this is is not something that is real. Except that the President of the United States did say this. It was completely crazy, and that’s the story that we should be taking from this. It’s not really at this point about economics. It doesn’t even make sense to talk about Trump Administration policies, let alone ideology. What we have is President Sundowner. I mean, this this is completely insane stuff. In any kind of normally functioning political system, in any kind of normally functioning party environment we would have a massive bipartisan call across the aisle, across almost everybody except for a handful of members of congress who are themselves crazy, to say okay this guy is non compos mentis. We cannot leave the fate of the United States or the world in the hands of somebody who is completely irrational, who is making demands and believing himself to have powers that he does not. And of course, instead, not only does everybody pretend that he’s still a rational human being, but the Republican Party, the Trump administration, is full-on engaged in trying to build a personality cult.What this says to me is that the problem is a lot bigger than Trump. Something is fundamentally wrong with America, and at this point you don’t have to go through complicated justifications. You can just say something is wrong with a country and a system that lets this guy remain in a position of power.Have a good day. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.TranscriptDonald Trump has distinguished himself in many ways. One of them is that he is our first pump and dump president. Hi, Paul Krugman here. A podcast today rather than a full-on piece: I’m a little exhausted from number-crunching over the weekend. So I thought I’d talk briefly about the really extraordinary financial picture that we’re seeing under the current administration.Obviously no president has enriched himself from office the way that Trump has. That’s common knowledge. One of the things that is really amazing about it, however, is the way in which he enriched himself — a lot of which has to do with crypto.So the New York Times had a report just the other day on Trumpcoin, the memecoin issued on Trump’s behalf which got a lot of buyers, a lot of money came flowing into it. It should have been obvious from the beginning that the coin was inherently worthless, and at this point it essentially is worthless. It has lost 97 percent of its value. But a lot of people did buy in at the high prices.What was special about the New York Times story was two things. First, they put a number on how much money naive investors have lost on the coin, which is 3.8 billion dollars. And even more surprising is the number of people who were in effect suckers here — almost a million.That’s really amazing. I mean, I was completely cynical but I didn’t think there were that many suckers out there. But it turns out there were really a lot. A few people made money off the coin — basically insiders who got to buy it early and then were able to cash in before the broader retail market realized that this was a worthless token. There’s another token, the World Liberty Financial coin — which has also crashed, although the Times had difficulty in tracking down how many people have lost how much money. There’s the Melania coin. Okay, all of this is amazing. As Trump would say, it’s like nothing anybody’s ever seen before. I think we should say, however, that this is a bigger story than just the Trump coin, and it’s a bigger story than just Trump himself.What we’re witnessing is or has been a really enormous pump and dump scheme, I would argue, involving more or less all of crypto. So if you don’t know the background, Trump used to be highly critical of cryptocurrency, saying it was worthless and a scam, which was true. But then when it became clear that there was money in it for him, he reversed course. And during the 2024 election, crypto interests contributed a lot of money to Trump. They then after the election poured a lot of money into his own enrichment, into his own projects. And the administration came in with a very pro crypto stance: deregulation encouraging uses of crypto, at least talk about a national bitcoin reserve, all of that. And the price of bitcoin doubled after the election; the valuation, the market cap of cryptocurrency in general went from a little over two trillion to more than four trillion.And then starting last fall it all came crashing down. Not all the way to zero — the price of Bitcoin right now as I record this is about what it was on the eve of the 2024 election; it’s about half what it was at its peak. That’s also true, roughly speaking for the market cap. So we’ve seen about two trillion dollars of market valuation wiped out.Why is this a pump and dump story? Well what is cryptocurrency good for? As you know, I’ve been on this for a long time. Bitcoin was introduced in 2009 — this is a seventeen year old idea which has yet to find any legitimate use cases. Illegitimate use cases, yes. There was also a report in the Wall Street Journal about the extent to which Iran and North Korea have been making use of cryptocurrency to evade U.S. sanctions, so there is that. But it’s still not enough to justify a multi-trillion dollar asset.Anyway, it was trendy, it was exciting, it was fashionable and particularly after November 2024 it was pushed with the encouragement of the Trump Administration. It was just a heavy marketing campaign that had the advantage of also having the authority or whatever, the credibility — such as it was but among some people real —of Donald Trump behind it. They all evaporated.I think we can say that to some extent what happened was that Trump kind of moved on to other things. There also is some distracted boyfriend meme: the guy looking over his shoulder. A lot of the excitable, fear of missing out, latest thing money has probably moved from crypto to AI. So that might have happened even without Trump. But the basic story is that Trump guided, pushed people into a whole asset class, crypto, of which a large part is Bitcoin, but other stuff as well. We don’t know how much, or I don’t know, how much crypto was bought during this period, but it has to be substantial. And then it crashed. And at this point, essentially anybody who bought crypto during this era, since the 2024 election, has lost money.It’s a lot of money; we know that on paper — it’s not really paper, but anyway — in principle two trillion dollars has been lost in crypto. Now a lot of that is probably money just given back, imaginary gains that took place during the run-up. But a substantial amount of additional money was from people who did buy in during this whole episode. So this has to be many times the size of the losses on the Trump coin. And it is, I would say, at a functional level another pump and dump scheme.In this case the beneficiaries were people who were already in crypto. Clearly some of the crypto interests that bought themselves a president probably stayed fully invested. But others must have cashed out, and a lot of innocents — well a lot of a lot of suckers, let’s not mince words here — a lot of suckers clearly lost a lot of money.It’s an extraordinary thing. There have been pump and dump schemes forever, probably going back to the Phoenicians or something. But this is on a scale we’ve never seen, and with the president of the United States in the center of it. Which I guess given everything else comes as no surprise.Happy 250th birthday, America. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.Lisa Graves is the author of Without Precedent, a history and analysis of the Roberts Court and the expert on how the Federalist Society has been working to undermine democracy. Yesterday this happened:So I managed to arrange a conversation with Lisa about what is happening:. . .TRANSCRIPT: Paul Krugman in Conversation with Lisa Graves(recorded 6/29/26)Paul Krugman: Hi everyone. This is a bit of an emergency recording and podcast because today, which is Monday as we’re recording this, the Supreme Court has just handed down several decisions, of which one was really alarming. And I had talked earlier with Lisa Graves, head of True North Research, and Court Accountability who had been warning about all this stuff when I talked with her previously and on other occasions. And I wanted to get somebody who’s actually following this to weigh in. So, hi Lisa.Lisa Graves: Paul, thank you so much for inviting me back on. I really appreciate it.Krugman: Yeah. So, there were obviously several decisions that came down, but Humphrey’s Executor… This is absolutely mind-boggling. So why don’t you talk about Humphrey’s Executor and then we’ll talk about the background and what this says about the Roberts Court?Graves: Yes. Today’s Slaughter case involving the FTC, is a case where the Roberts Court has overruled nearly a century of legal precedent which prohibited presidents from firing commissioners, specifically on the Federal Trade Commission, the case that you mentioned, Paul. Humphrey’s Executor was specifically about the FTC. It was about this provision that barred FDR, Franklin Delano Roosevelt, from firing someone whom Hoover appointed to that commission. When Congress created the FTC, it set a standard that required that you would have to have cause to fire someone outside of their term.The way the FTC is set up is that it has five commissioners by statute. Three of those commissioners are appointed by the president, two from the president’s party, and two are not from the president’s party. What’s happened over the past year is since Donald Trump became president again, he fired the Democratic commissioners on that commission. And so for the last 15 months, that commission has had only two commissioners, two Republican appointees, which has meant there hasn’t been a Democrat even in the room to consider these cases that are brought to the FTC, which relate to the power of huge corporations to merge with one another or not. And so, in essence, the FTC investigates proposed mergers and other things that might be considered a restraint on trade or affect the ability of consumers to get a fair price on things, for example. And what Trump has done is that he’s basically dominated that board in defiance of the plain language of the statute.So any legal action by Donald Trump that has been countenanced by this Supreme Court, which allowed that firing to stand, in essence, did not allow the lower courts to reinstall Rebecca Slaughter to that post while the case was pending, and then just today ruled that, in fact, under their new approach to the Constitution, Donald Trump has the power to fire anyone at any independent agency—other than the Fed, it seems—no matter what Congress has said. And this is the result of an invention of a theory from the Reagan revolutionaries back in the day to try to aggrandize presidential power through what they describe as “the unitary executive theory.”So the bottom line is that this ruling by the Roberts Court will allow more of the corruption that we’ve seen going on by this administration in terms of people who may be donors to Trump seemingly getting out of investigations or having their mergers go through, and we will not have a commission at the FTC that has any independence—just loyalists for Donald Trump for the foreseeable future.Krugman: And it applies obviously not just to the FTC but to any agency except not the Federal Reserve. But the FDA—if there’s an FDA official who is viewed as being too hostile to RFK Jr’s vaccine doctrine or something, then Trump can fire him. And the Supreme Court has said, “Well, yes, the president has that power. Congress cannot set any ground rules that can’t be overruled by presidential edict.” Is that a correct interpretation?Graves: Well, that’s the broad strokes of it, but just to add a little bit of gloss to that, which is that Roberts has been pursuing this agenda for years now. And he accomplished part of it through a case called the Seila Law LLC case, where he allowed Trump to remove the head of the Consumer Financial Protection Bureau. And the CFPB also had restrictions on whether that person could be fired without cause, and Roberts already moved the ball forward on that. And that has had a cascading effect along with the terrible, unprecedented immunity decision, where the Roberts Court gave Donald Trump immunity from criminal prosecution for any of his so-called official acts, which included directing agencies like the Justice Department to do his bidding.And so, up until now, what was left was this notion that if Congress created a board that specifically had limits on how a person could be removed from that board because of its regulatory function to implement congressional will to act in a legislative way, boards like the Federal Trade Commission or the National Labor Relations Board could not be swept of their members. But before this decision, through the machinations of John Roberts, in essence, Donald J. Trump was already exerting a power to fire anyone within the executive branch, whether they were on an independent board or not.Krugman: The Consumer Financial Protection Bureau felt like it was a little bit different. It was basically Elizabeth Warren’s creation. It was a relatively new agency. But this now generalizes it to everything, and it goes back to the FTC, which is a very, very old institution and is where this whole Humphrey’s Executor comes from. So now that’s everything.Graves: Yes, except for the Fed. That is correct. And I think, as you were describing it at the outset, Paul, this has enormous implications for the American people and American consumers, because, in essence, consolidating power in this way in a president is not required by the Constitution. Although Roberts is somehow claiming it is, it’s not. This is part of this invention of this so-called “structural Constitution” under this very rigid notion of separation of powers, which basically guts some of the core powers of Congress and vests those powers, in the views of this court, in the hands of the president and the president alone.And this ignores the reality of what’s happening, which is that you have a president who’s not actually executing the laws passed by Congress; who’s thwarting those laws. When you look at Article One and Article Two of the Constitution, what you see is that the president’s primary job is “to faithfully execute the laws of the United States.” And what’s happening here is that the president is circumventing those laws, thwarting those laws, and doing so in ways that raise serious questions of corruption or potential corruption or undue influence.And the area of trade and mergers is one of the most, you know, potentially profitable areas for people trying to curry favor with Donald Trump. And what we’ve seen over the past fifteen months is that the FTC under the control of two Trump loyalists has dismissed more than thirty-three investigations into mergers that were begun before Donald Trump took over.Krugman: This is basically a Federalist Society thing, and when they began pushing this, they probably had in mind that we would be pursuing an ideological agenda, that this would be something that would allow a right wing president to essentially just overrule Congress when it was doing things that weren’t sufficiently right-wing, or weren’t sufficiently “Reaganesque,” since this goes way back to the 1980s. But now it’s very much personalist. We’re talking about this as what one guy gets to do, which might not even be ideological. As you say, it might just be corruption.Graves: Yeah. I think it’s both, right? So there is this throughline from the Federalist Society that helped get these judges on the court. These six members were all either active members or noted to be members of the Federalist Society. They were part of the pipeline to power that the Federalist Society was created to accomplish. Roberts and Alito and the three Trump appointees, they were all appointed in the aftermath of the “No More Souter” campaign by Federalist Society activists who said they didn’t want judges who were going to follow the precedent. They wanted people who were going to basically be ringers and change the law to reverse the progress of the 20th century.And this attack on what they call the administrative state is really an attack on expertise. It’s an attack on the ability of agencies to do the job Congress has entrusted them to do, which is to faithfully implement those laws in defense and in pursuit of the public interests of the American people. So you now have this convergence between a president who is so determined to take cash, in many ways, out of other people’s pockets, including the pockets of the taxpayers, in order to advance himself, to aggrandize himself. And this has come to a head at a time when the court has the majority. So this captured court has the majority it needs to accomplish its long-term ideological agenda.And what a lot of people don’t realize is that when you look at the Supreme Court, this nine-member court, and the six members in the Republican-appointed majority, five of those six members were executive branch attorneys. They were people who cut their teeth for years in advancing presidential power, in trying to expand presidential power. And they’ve acted, I think, with a real arrogance toward congressional power, hostility toward congressional power, and with a bias toward their own long-standing agenda as lawyers, as Republican lawyers in this cause. And they’re moving forward even at a time when we have a president at the helm who is abusing his power almost on a daily basis in terms of asserting extraordinary king-like powers to do almost anything he wants.Krugman: I would actually disagree with that. I don’t think it’s almost on a daily basis. I think it’s at least several times a day.Graves: It’s an hourly basis, right? Yes. I’ll take that correction.Krugman: But yeah. You say that these cases were not brought to try and stop corporations from doing stuff, but the ability to exercise the function of the FTC as a guardian of the public interest. But it’s also a negative power. You can imagine that a merger that the FTC would normally have blocked is allowed, but also one that it would normally have approved could be blocked if, you know, the corporation in question has not cut Jared Kushner in on the deal, basically.Graves: Well, right. You know, I looked into those instances where you can see the list of the various mergers that the FTC has stepped away from investigating. And one of the things I saw was that before Trump’s appointees took office, there was a Joe Biden appointee—her name is Lina Khan. She’d been a vocal critic of Google and Amazon’s market powers. And what happened in one of these cases was that the FTC terminated the examination of one of Google’s acquisitions.You had Google’s CEO at the inauguration last year, you had Google Alphabet giving like a million dollars to the inauguration committee. You have a tie-in on underwriting the Trump ballroom, and then you have an FTC that is not pursuing a further examination of that acquisition. Maybe it would have been approved with the full commission, maybe it wouldn’t have—we don’t know. But what we do know is that there are other ongoing investigations, perhaps around Facebook, for example. Maybe in their view or in someone’s view, Facebook hasn’t ponied up enough cash to get that dismissed. It creates this real environment of coercion and shakedowns, the perception that if you’re not playing ball with Trump, you’re going to be treated unfavorably. And in fact, he’s routinely threatened companies that he thinks aren’t sufficiently loyal to him.Krugman: Yeah, I mean, it’s so raw and out in the open now. And by the way, Lina Khan is impressive as hell. I had a dialogue with her at the Graduate Center a few months ago, and she’s now advising Mamdani in New York. It’s just worth saying that a lot of the players in this have been around for a while and keep on showing up in different venues.But the power to do favors is also the power to withhold favors. So this is, as you say, an enormous source of potential corruption. You also have to wonder, if you’re a business, do you even know what the ground rules are? That’s what I’m wondering about a lot now.Graves: Well, you know, I think that that is a really good question. And it reminds me of this historical episode from that robber baron era when Teddy Roosevelt was president and the big companies—Standard Oil, for example, the mega-millionaires who would be billionaires today—were exerting such power over Congress that the smaller companies, the median-sized and smaller companies, were being shut out of the ability to really influence legislation. And that resulted in the Tillman Act, which is still on the books, that bars direct corporate contributions to a candidate. They get around that through PAC donations that are allowed, or through giving now to these C4 nonprofit groups.But you know, since about 110 or 115 years ago, it has been banned for there to be direct corporate contributions because, at that time, other businesses who weren’t the super-bigs were feeling like they were getting the raw end of the deal. And so I think that’s probably repeating now, where there are smaller companies that can’t afford to make million-dollar donations to the inaugural committee or make tens of millions of dollars of secret donations to this ballroom boondoggle, who are going to be disadvantaged because they can’t potentially buy their way in to favorable treatment.Krugman: Yeah. I mean, even big corporations who happen, for whatever reason, to be not sort of buddies. You know, it definitely looks like this administration has it in for Anthropic. I’m sure that they’re not angels, but this is still pretty amazing that this is one of the best AI out there, but they are not friends with the president and so they’re…Graves: Right. And look what happened at TikTok. For quite a while there we were hearing all of these attacks on TikTok, concerns about security or security access through that app. And with the visit of one billionaire, Jeff Yass of Pennsylvania, who’s one of the fifteen richest billionaires in the world—who made part of his fortune on super-rapid trading, but another part of his fortune on an early investment in ByteDance, the owner of TikTok—with one visit to Mar-a-Lago by Jeff Yass, suddenly Donald Trump was singing a different tune about TikTok, and then ultimately intervened in a way that ended up giving some of his allies ownership in TikTok.And so you have this real... I would say the most generous thing I could say would be it’s unseemly. I mean, it’s outrageous, actually, to have a president engaging in sort of corporate manipulation in this way to reward his friends and punish his enemies, as we’ve seen with Trump going after law firms, Trump going after universities, Trump assailing different corporations whom he dislikes or whom he considers not to have donated to him or advanced him. This is extraordinary in American history. I think it’s unprecedented, actually. Even with the corruption that was unfolding during that robber baron era, I think we’ve never seen anything like this kind of grift and graft.And this corruption is inherently destabilizing to American society, to American business, to investments in the United States. If the U.S. becomes, as it is becoming, a society in which basically you have to engage in these sorts of legalized bribes—although I’m not sure how legal some of them may ultimately be—that changes the U.S. as a stable economic superpower.Regardless of what a particular policy preference may or may not be at a given time, this is an extraordinary devolution of Americans’ role in both the U.S. economy and our role in the world—to have a situation where companies and countries have to pay up to a president or cut a deal with the president’s son-in-law or Howard Lutnick on minerals or what have you, or where someone can make a call to the Pentagon to get a special contract approved for Donald Trump’s sons. As you said, this is not just corruption on a daily basis. Whether it’s legally actionable—some of them may be, some of them may not be—but on a moral level, it’s corrupt on an hourly basis.Krugman: Yeah, on average every hour now. So, you mentioned devaluing expertise. The role of experts in a lot of this stuff—I think part of the issue is whether there are sort of procedures for consulting experts on things that will now be by the chopping block. Is that right?Graves: Yeah, I mean, that is part of a broader trend. It transcends the Slaughter case. But what we’ve seen is a real war on expertise. Certainly part of that was through the DOGE efforts of Musk, but those efforts, those firings of so many people, so many experts across the board in all these agencies, that has really decimated, not just the baseline of our skilled workforce in the federal government, but also demoralized the people who remain. And that’s across the board. That’s in areas of vaccines, it’s in public health, it’s in climate science, it’s in earth science, it’s in trade. It’s in all areas where we’ve probably cumulatively lost I don’t know how many thousands of years of expertise that the people actually invested in through paying these civil servants who were hired on a non-political basis, who were hired for their expertise to serve the American public. Whether it’s through the National Institutes of Health, or the FDA, or the U.S. Department of Agriculture, we’ve lost an enormous amount of expertise.And we’ve also seen the ways in which this Roberts Court has not intervened to protect against those firings. You’ve had people who should never have been fired, and months and months later, some of them are reinstated. Meanwhile, they may have moved on to other jobs, they may not want to come back into the government. This loss of expertise is a disadvantage for we, the people of the United States, in terms of having people who are looking out for our interests based on years of work, as well as scientists who’ve been reliant at the universities on these grants and more.This also is a real disadvantage for our national security, because it’s not just in U.S. civil society that we’ve seen these firings. We’ve seen people fired from the Pentagon who were, leading lights, people who had records of impeccable service to our country. We’ve seen that happening in the national security arena, in the intelligence community, where people who have deep expertise have been fired. We’ve seen that at the Justice Department where people who had expertise in anti-corruption, in enforcing DOJ’s rules to make sure that prosecutions weren’t politicized. We’ve seen the FBI firing people for just the act of doing their job to protect and investigate those who committed violent acts against our Capital Police officers. So this war on expertise, this war on civil servants, is deep and wide, and it is going to take a lot to repair.Krugman: Yeah, my experience in dealing with higher-level civil servants has always been that we had far better people in those positions, in a sense, than we deserved. You had all of these people at Treasury or at agencies that I would deal with, who could have made two or three times as much money in the private sector, but they did what they did because they thought they were doing something meaningful. They felt that it was a better use of their lives. And now, even if you haven’t fired them, if you’re disrespecting them, we’re going to lose that.Graves: Yeah, I mean, I have a bias on this because I was a career hire for the Justice Department and ultimately became Deputy Assistant Attorney General in the Office of Policy Development, the Office of Legal Policy. And I was there with other attorneys who could have been making three, four, five, six times as much in the private sector, but we were honored to be able to serve the American people.And I felt, every time I walked into the Justice Department back then—this was in the Clinton administration with Ms. Reno as the attorney general—there was this engraving that said, “The place of justice is a hallowed place.” And I thought about it as a place where people set aside their partisan political views or their personal religion to do the work of the American people. And almost in every instance where I had the chance to work with someone across that agency and other agencies, I was so impressed with the devotion and intellect and wisdom of the people who had chosen public service as their career.Krugman: Yeah. I mean, this was the Clinton administration, but you know, I had my year in government in the Reagan administration at sub-political level. But you know, the kind of deputy assistant secretary and office director level were astonishingly good people. Once in a while, you would get to see one of them lay down the law to the political appointee above them and say, “No, that’s not how it works.”So, this is a long-term project, as you said—the unitary executive, the stripping away. Presumably, when John Roberts and his friends began this, they didn’t imagine that “the unitary executive” to whom they would give all this power would be—to use the technical term—a f**k-up like Donald Trump. I mean, I’m a little surprised that didn’t at least give them some pause here.Graves: Yeah, it’s interesting. You’d think that they could slow things down for a moment given how reckless and destructive Donald Trump is, but they haven’t, right? This is not necessarily something they’re compelled to do. So, for example, Humphrey’s Executor has been on the books since the 1930s. They could easily have just said, “We affirm the lower court in Slaughter’s case and we affirm Humphrey’s Executor as still good law,” and just been done with the case. She would have been back on the commission months and months ago, maybe last summer. For Lisa Cook, you know, they sort of held that for a moment, held out this notion that they were going to allow her to remain, that they weren’t going to intervene on the Fed, but everything else was fair game.This court is taking cases where it could easily just either affirm the ruling below or reverse it based on a citation of long-standing legal precedents, but it’s not. And what most people don’t know is that this Roberts Court is only hearing 60 to 70 cases a year. A couple of years back, the Supreme Court was hearing up to a hundred or more cases. In the 1980s, there were changes to the court’s jurisdiction to basically leave most of its jurisdiction discretionary. The court only has to take cases basically where there’s like a fight between Arizona and Colorado over the Colorado River—when there’s a fight between two states. Otherwise, every case they take is discretionary. They are choosing this docket.They’re choosing, in Donald Trump’s term, to take up cases on the shadow docket where they ruled for him almost all the time—more than 90% of the time—and on the main docket, the docket that we’re seeing the decisions coming from now. Those are all cases where the Roberts Court has decided to have an oral argument and issue a decision, even where the long-standing precedent is against Trump’s actions.And so I wish that they had some heartburn over it. They don’t seem to, though, because they could easily, in the Slaughter case, have said, “No, she has to go back on that commission under the long-standing precedent of Humphrey’s Executor.” And they chose not to do so. And they chose not to do so even as the Musk operation, the DOGE operation and more were decimating our agencies; as they were decimating—not the FTC in that particular sense because it was hitting all the agencies,—but they did so knowing who Trump is and knowing what he’s doing.Krugman: And now they have to know him even more, right? In some sense, we are all in the reflecting pool, and yet they are giving him unbridled power. Just amazing.Suppose that we actually do manage to have a genuine election in 2028 and the next president is a Democrat. What do you think this court does then?Graves: Well, if the court were principled, and I don’t think it is, then it would, in essence, allow a Democratic Senate to confirm only Democratic appointees to those agencies and let them revise the rules and restore the statutory actions, the regulations that were stripped away by Trump. The reason I’m reluctant to believe that they will allow this to happen is how this court behaved toward Joe Biden and toward Barack Obama.During the Biden administration, there was a very modest student debt relief proposal. It was, I think, about $10,000 for people who made just about the average income in the United States, and that was based on a law that allowed emergency debt relief. It was expressly allowed for emergency debt relief; we were in an emergency under COVID. People were losing their jobs or weren’t working as the economy was cascading, and that was the basis, the statutory basis, for Biden doing so.But this Roberts Court asserted that Biden couldn’t do that, that this was a so-called “major questions doctrine,” and things like that had to go through Congress—that a president couldn’t just implement this through a regulation. And yet Donald Trump has done something far broader and deeper than that small, modest debt relief on a daily, if not weekly basis, and the court has barely breathed the words “major questions doctrine.”And that so-called doctrine, which is really a theory, was invented to gut our power to mitigate climate change through the EPA. That was in a case that Charles Koch and his billionaire-funded groups brought—or basically aided—in the West Virginia v. EPA case, where the Roberts Court invented the notion that the EPA could not regulate carbon without specific congressional approval under the so-called major questions doctrine. And so, in that instance, what you had was again what I consider to be a modest effort to mitigate climate change by way of requiring utilities to invest more in solar and wind energy to help address the climate changes underway—not a radical cutting off of fossil fuels or anything, but just a transition.Krugman: Right.Graves: And that was blocked by the Roberts Court. So when it comes to a Democratic president, they seem very eager to block actions that are ameliorating or compromises. But when it comes to a Republican president, they seem very eager to do the opposite—to allow even some of the most radical actions to take hold and proceed while litigation goes forward, or even to authorize and give a blessing to those actions.But there’s hope. Should I say there’s hope? There is hope. Can I tell you why I think that?Krugman: Well, sure. What is the hope, actually? What does “Supreme Court Project 2029” look like? What do we do?Graves: Look, this is a situation where we have not just executive branch aggrandizement, but we have judicial supremacy happening. We have a Roberts Court that is deciding that it is the decider—basically being the kingmaker for Donald Trump—but also the decider on almost any issue that they want to take up and issue a decree on. And that is disempowering to the American people, to representative government, to our democracy.And so what we need to have is a really robust Congress. In my personal view, we need to elect people to Congress who are going to clean house, who are going to deal with this corruption in the near term, who are going to investigate this corruption and engage in oversight in ways that make it crystal clear to as many people as possible how this is not a tenable way to run a democracy, and then build on that to hopefully sweep into power real reformers in 2029. Like what happened with Franklin Delano Roosevelt, where you have a real surge in demand by the American people to clean things up and create policies that actually help the American people.If we can move forward despite the threats this president is making with the aid of this court in terms of intervening in this midterm election with the map drawing, if the will of the people can prevail as you see it in the polls, then we have a real chance not just at a rebuke of this corruption, but actually of creating new ways to protect our interests and having an even more vigorous federal government that can help serve our needs. But that’s going to also require court reform to be part of it, because this court will strike down the same thing if it’s passed again unless we reform this court.Krugman: Okay, but what does reform look like? Is it court packing? Is it something like that?Graves: I think it’s all of the above. I think we have to have a real conversation about how we contain this out-of-control court. It could be expanding the court; there’s no number set in the Constitution. Nine isn’t the magic number. The Republicans were willing to have eight as long as it served them, you know, when they were blocking Barack Obama’s nominee.I think we have to look at jurisdictional reform. Article III of the Constitution specifically allows Congress to set the jurisdiction of the Supreme Court—it’s in plain language there.We certainly need ethics reform because the court has also been enveloped in a cloud of scandal over trips and kissing up to billionaires by Clarence Thomas and other members of that court.And we also need to have a real sense of our power in the 21st century, the American people’s power, to have a people’s Congress that actually represents our interests and not just the interests of the richest few. Because of this Roberts Court in the Citizens United ruling, because of the concentration of wealth as Ronald Reagan sought to take down the progressive taxation of billionaires, we now have these billionaires who have so much money they can invest millions, hundreds of millions, in elections without missing a beat.I did a calculation once, by the way, on Jeff Yass in terms of his spending in the Pennsylvania Supreme Court race. His spending, which was in the millions, was the equivalent of an ordinary Pennsylvanian buying a coffee and a bagel once a week. And that’s not just because they’re lucky and they’ve got money to invest in risk; it’s because the tax rate is so out of whack and has to be fixed as well.Krugman: Okay, well, let’s hope for the best. But my god, that’s among the reasons not to celebrate the 250th anniversary as wholeheartedly as one might have liked. Thanks for talking to me, and especially on such short notice.Graves: Gosh. Well, I will just say, you know, there still is a lot to celebrate, and we can set the course of the next 250 years if we don’t give up and we don’t give in.Krugman: Okay. On that note, let’s press on with the fight we are in, as Lincoln would have said. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.Note: It’s Lisa Cook, not Lisa Graves. Talking to Lisa Graves shortly.Earlier today, the Supreme Court declared war on U.S. democracy. It also declared war, basically, on modern society, on everything it takes to function in the 21st century. And I’m not sure that people understand that yet. Hi, Paul Krugman with a quick video update. I’ll have more on this tomorrow. Really shocking decisions handed down by the Supreme Court. There were a couple that were not awful. Lisa Cook gets to stay at the Federal Reserve, although that in itself is a huge contradiction to the important stuff that the court did. I mean, Lisa is important and the Fed is important, but much more important is Humphrey’s Executor, which is the generations-long precedent that says that when Congress creates an independent agency, it is independent. It’s able to make decisions. Of course, the president has some role. Typically, the president can choose the agency’s head subject to congressional approval, but the president can’t just go and fire officials that he doesn’t like for whatever reason or for no reason, because the agencies that operate the U.S. government and basically run our society are supposed to be professional. They’re supposed to be following their legal mandate. They’re not supposed to be personal tools of a dictator in the White House. Well, the court just scrapped that. Now, lawyers, people who are legal experts, can do a better job of explaining just what went down. But what I think is important to understand is not only does this give essentially dictatorial powers to the occupant of the White House, but it also makes it extremely difficult for the economy to function. It makes it extremely difficult for society to function. We live in a complicated world, a world of technology, where there are all kinds of spillovers, all kinds of ways in which it’s important that there be well-established ground rules. If you’re a business, take the example of medicines and foodstuffs, where we have an FDA, Federal Drug Administration, that is charged with ensuring that products that people consume are safe. We do that for very good reason. We know that not just that that there have been examples, historically, of products that were foods, medicines that were not at all safe, but also that people want some assurance.The fact that something has been FDA approved is a bit of a warranty, that it might turn out to be very harmful, but probably not. Businesses that want to invest in developing stuff need to know that there are some ground rules that determine what they can and cannot sell.Now imagine that all these decisions are made by political appointees who are loyalists to the president, who basically do whatever the president wants, whatever the people around the president want. Do you want to invest in something where you have absolutely no idea what the ground rules will be, whether it will be approved or not? Do you want to invest in a whole business line when, for all you know, the White House will abruptly decide that your product isn’t safe and that a competitor’s product is, based on spurious grounds? And what would cause those decisions to happen? Well, how about the fact that some businesses are better at the business of bribing the president and his family than others. And if you think that this is outlandish — you know, a few years ago you might have said this was outlandish, things like that wouldn’t really happen — well, as we speak, these things are happening all the time.So you are setting up a situation in which, you know, it’s a little bit like traffic laws. Traffic laws, yeah, they can be annoying, but aren’t we all kind of glad that there are in fact rules about when you can turn and when you can go through an intersection? In order to function, in order to drive your car around you need to have a set of stable traffic rules, not a situation in which a police officer can decide you broke the law and the other guy did not because I say what the law is. And especially not where the police officer does that based upon who’s been paying him off or who he expects to be paid off. The real world is far more complex than traffic rules but we need those rules and we need some stability and those rules cannot be specified with every letter, every punctuation mark set by Congress. The world is too complicated and changes too much. You need to have standing ethos, standing doctrine at the agencies that make modern life possible. Now all of that is gone. Now, it just adds to it that all of this is being done to empower a president who is the worst possible person for this job. This is not somebody you want supervising anything, everything that Trump touches turns to crud because he doesn’t care and he doesn’t actually understand or recognize that there’s such a thing as expertise as knowing what you’re doing. So this would be terrible even if we had a temporarily competent administration. But now you’re doing all of this, the Supreme Court is doing all of this to empower the guy who brought you the Reflecting Pool, who brought you the Iran war. Utter nightmare. Now, what will happen, hopefully, we emerge at the other end having fended off dictatorship. Then, I mean, as everybody knows, this Supreme Court is not actually empowering the presidency. It is empowering this president. And as soon as there’s a Democrat in the White House, suddenly there will be all kinds of restrictions on what that person can do. Well, this cannot go on. This is a clear argument that says we have to one way or another disempower the Supreme Court. I don’t know enough to tell you what is the best route to do that but court packing or something else is going to have to happen. Because this has been the clearest signal yet that we have six people (there are three who are not part of it, but we have six people) who are fundamentally hostile to democracy, fundamentally hostile to the modern world and determined to put the catastrophically bad leader that we currently have sitting in the White House in charge of everything, which is a nightmare scenario on every level. Take care, I guess. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For all my interviews and more, subscribe on YouTube.TranscriptIt’s kind of hard to believe, but the original Borat movie was 20 years ago. It’s time for a second sequel. And I already have the title. It would be Corruption for Make Benefit Glorious Family of Trump. I hope that some of my listeners are young enough to not remember the original Borat movie. But it was a mockumentary, a satire, in which Sacha Baron Cohen pretended to be a journalist from Kazakhstan investigating and interviewing Americans about American mores. It was not about Kazakhstan, although he did insult the country along the way. The reason I think about it is that today’s New York Times has a piece that reports, investigative reporting, on an immense mining deal in Kazakhstan, which, what do you know, turns out to be a big profit center for the Trump sons and also the sons of Howard Lutnick, the Commerce Secretary. Check out the investigative reporting for the details, but basically here’s another one, another big one.It’s part of an immense series of corrupt deals, often with petrostates — which Kazakhstan is — that financially benefit Donald Trump and his family and some of his cronies and cabinet members as well and their families. It’s all on a truly epic scale. This is a message I have been trying to get across. I don’t think many people even now understand just how much of a departure what’s happening now is from past US history. I still see people saying we might be, could be heading for another Gilded Age. But we have a level of concentration of wealth in the hands of a few people that is something like three times what it was at the peak of the Gilded Age. We’re in a super duper Gilded Age. And I sometimes hear people say, well, could we be returning to old kinds of corruption? Might we have another Teapot Dome scandal? Well, my God. Teapot Dome was a scandal actually involving mineral rights and bribes during the Harding administration, although not bribes to the president’s family, which is, again, something entirely new. The scale of the bribes was about $500,000: adjusting for inflation, that’s something like $9 million today.So how much has Trump enriched himself since returning to the White House about 500 days ago? The answer is certainly more than four billion dollars, almost certainly more than four and a half, maybe five billion dollars. Divide that by 500 and we basically have a Teapot Dome sized corruption scandal on an average day under Trump.So it’s basically day after day of scandals as big or bigger than Teapot Dome. Our corrupt grandfathers, great-grandfathers were pikers compared with this, just as the Gilded Age robber barons were pikers compared with the modern-day tech bros. This is obviously not good. It’s actually quite horrifying. How did we so quickly descend into becoming a truly massively corrupt country on a level that we used to think of as being associated only with tinpot dictators in the third world? And yet here we are. This ought to be a political issue and it ought to be a legal issue as soon as the government is back in the hands of people who actually take the rule of law seriously. Again, without going into the details of the deal, it’s surely illegal. I mean, it’s illegal under the Emoluments Clause. Probably since there are definitely Kazakhs on the take as well, it’s illegal under the Foreign Corrupt Practices Act. This is just, it’s illegal up the wazoo.Of course, it will not be prosecuted as long as Trump is in the White House. But forget any Democrat who isn’t promising to go after this massive corruption when they regain power. If they don’t, then none of this matters, but that should be a core part of anybody’s platform. I’m not a political expert — sometimes I think nobody is — but my God, again, this corruption is so blatant. And it does resonate with people. It’s really clear that corruption at the top and the sense that ordinary people are paying the price while people with power enrich themselves is an effective popular issue. That is actually the issue that brought Viktor Orban down in Hungary, which is one of the hopeful signs for what may happen to America going down the pike. So here we are, just to remind you that this scandal, it’s a huge thing. It’s page one in the New York Times, but in a way it’s actually kind of ordinary, since even this size of scandal is happening every few weeks these days.Do not make the mistake of treating what’s going on as in any sense normal. This is hugely abnormal, and I believe that the American people will understand that it’s abnormal even if pundits get bored of talking about the corruption. So drive it home, maybe for make benefit American people instead of the Trump family. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

For all my interviews and more, subscribe on YouTube.Ro Khanna represents a large part of Silicon Valley, and not surprisingly is a very smart guy. Perhaps more surprisingly, he’s also a very interesting progressive, who has drawn considerable ire from the tech lords, with Elon Musk most recently calling for his imprisonment. I caught up with him Friday:TRANSCRIPT: Paul Krugman in Conversation with Congressman Ro Khanna(recorded 6/26/26)Paul Krugman: I’m talking again to Rep. Ro Khanna, the Representative for Cupertino, as it were, representing the heart of Silicon Valley in ways that don’t always please the tech oligarchs. I had planned to ask about AI, but there’s so much going on and Ro is right in the middle. So, welcome to this interview.Ro Khanna: Well, I’m honored to be back on. I usually just read you to learn, but I’m glad we’re going to get to have another conversation.Krugman: As it happens, tech-related politics is really central now. And you seem to be in the middle of at least three big issues: Elon Musk, AI generally, and the California Wealth Tax Initiative. I want to talk about all of those, but maybe let’s start with Elon Musk, who has called you evil, which is a great honor. Do you want to talk about that controversy and where you came in here? Because I think it’s very interesting.Khanna: Well, he’s called me evil, he’s threatened to sue me, and he’s threatened to jail me. I have this quaint idea, Paul, that in a democracy, Elon Musk should have one vote. He doesn’t seem to think that, and the reason he has been so triggered is that I not only cited a Lancet study—which said that his USAID cuts could potentially lead to the deaths of 4.5 million children and over 10 million adults—but I also cited an Atul Gawande/ Boston study showing that some of these deaths have already taken place. This triggered him, not just because I cited these studies, but because I said he’s going to have to come before the House Oversight Committee when we take back the majority; we’re going to have the power to subpoena him. And, of course, defying a congressional subpoena could lead to contempt of Congress and penalties. And so he’s been spending the last few days obsessively tweeting about me. You would think if you had $1 trillion, you’d have better things to do, but this is what’s occupying him.Krugman: Yeah, let’s back up a bit. One of the things that I found really kind of astonishing in the whole discussion—and obviously, SpaceX went public and there was amazingly little discussion of Musk’s role at DOGE where he was a quasi-government official. I guess it was kind of weird what the legal basis for all of that was—but this had immense impacts. And as you say, one of them was that he just, more or less by personal fiat, eliminated USAID, which is our premier aid agency. Do you have any thoughts just generally about what Musk did at DOGE? I think it’s a hell of a story, so let’s start with that.Khanna: The keywords you used were “by personal fiat.” I mean, he literally went there, didn’t consult Congress, didn’t report to Congress, and just started cutting programs that Congress had explicitly authorized. And no one stopped him. We voted to subpoena him, but he defied coming in and explaining anything to Congress. By some accounts, he cut 83% of the programs that were at USAID. And some of these programs are to feed some of the poorest people in the world; some are to provide medicines to some of the poorest people in the world. So, you literally had the world’s richest person hurting the world’s poorest people. And he was doing it with no accountability, in defiance of Congress.Congress then fortunately restored some of these programs, so he was not able to end all of them. But the USAID programs are a shadow of their former self. They now are scattered in administration, and many were so disrupted that these academic studies have shown that it potentially could—or in some cases already has—led to the deaths of some of the poorest people and children in the world.Krugman: Yeah, the important thing is what he did. But the attitude also at the time... I think he said something like, “Oh, I just fed USAID to the wood chipper, and I could have gone to some great parties instead,” as if it was, you know, annoying that he had to go out there and cut off medical aid for millions of children.Khanna: Yeah, it was total arrogance. He said it was all fraud, but of course, he then didn’t have the guts to come before Congress or the American people and explain where he found fraud. He didn’t consult any of these programs. It’s not like he was on a plane to Africa or a plane to other parts of the world where these programs were being administered. And for someone who was going to go after cuts to the federal budget, instead of starting at the Department of Defense, which is 65% or so of the discretionary federal budget, he decides to start with an administration with less than 1% of the federal budget. It was a purely ideological agenda that, turns out, has real-world consequences—especially with this Ebola outbreak. I mean, one of the things he cut was the oversight and testing in places like the Republic of the Congo, and now we’re seeing the consequences.Krugman: And his reaction has been really quite over the top, considering, you know, if you’re any kind of public figure, you expect to be facing criticism.Khanna: It’s just denial, right? I think he said that not a single person has died because of his cuts, which is totally implausible. He said, “there’s not a single documented case.” And he said that everything he cut was simply a fraud, and that these academic studies are totally fraudulent. Granted, the Lancet study is a model of what could happen, but the Atul Gawande study is actually a documentation of actual deaths that have taken place. And there are a lot of anecdotal statements which Nicholas Kristof and a lot of people have reported on.Krugman: And now he’s threatening to sue you. Presumably, I don’t think we’re that far gone that there’s any chance that such a suit would prevail, but how much of that is an actual burden on you?Khanna: Well, I put it into Grok to see how strong a case Elon has, and Grok doesn’t think he has a very strong case. So there’s that.Krugman: In case anybody doesn’t know, Grok is Elon Musk’s or xAI’s LLM. It’s a competitor to ChatGPT and Claude, except it’s not really a competitor because it’s awful, right? But yeah.Khanna: I would have a better case of defamation given what he has said about me. But, of course, I believe in free speech, Paul. I thought he did, too, and I would never think of suing someone for calling me a robber or calling me names. That’s the First Amendment. But I’ll tell you what it does: it creates a doubt in other people who are on the Oversight Committee—you know, “Is this really worth the bother? Should we really criticize Musk?” So that’s one thing.Obviously, Musk has more than one vote. He’s got millions of dollars that he can spend on candidates, but now it turns out it’s not enough for him to just have the ability to support Super PACs; he also wants to be able to intimidate any public official who dares to go against him. It’s not just that he would spend money against them, but that he could actually sue them. And so if you’re a member of Congress, you’re thinking, “Well, do I really want this fight? Or maybe we could just focus on the hundred other issues.” So, it’s less about the headache for me and more about the signal he’s sending to other elected officials.Krugman: So you aren’t trying to do a GoFundMe for a legal defense or anything like that? Because I know people who have faced other spurious lawsuits and it’s actually cost them money, even though there’s no chance of it prevailing. They feel that they do need to hire people, but you’re not in a position where you are personally feeling liable? Or are you just well-positioned to sort of weather this?Khanna: Well, he hasn’t sued yet. If he does sue, it will be a drain on resources and we would have to raise funds. We would. But I don’t want to have people do something before there is an actual lawsuit. We’ll see what he does. But that’s exactly what his strategy is, whether it’s against someone like me or just a message to others that he has unlimited resources and he can make your life very, very difficult.Krugman: Okay. And he’s also called for you... I guess there was nothing specific about why, but for you to be put in jail, which is even more amazing.Khanna: Yes. And ordinarily you would kind of laugh it off because he’s a private person with no power. But of course, in this administration, him calling for that and the way the Justice Department works—there are political motives to how they’ve been operating. I mean, they have the governor of California and his wife that they’re threatening along with Adam Schiff... the list is long how they have operated.Krugman: Yeah. I’m a friend of Lisa Cook at the Federal Reserve and for her, this has been much more. She was, in fact, targeted and all of that by essentially the same gang. So yeah, it’s quite something. Just the last bit: Musk has also then gone out with this claim that USAID somehow is responsible for COVID, and also went full-in on the conspiracy theories about COVID. Do you have any comment on that, just since it came up in this context?Khanna: It’s so nonsensical. I don’t even understand what he’s talking about. I think what he is trying to argue is that the lab that some people believe was the testing ground for the virus somehow is connected to USAID, but he just puts these things out there with no evidence and for ideological reasons. The reality is the large part of USAID was to help poor people with food and medicine, and it had support from everyone from George W. Bush on.Krugman: Yeah. I’m pretty sure that USAID doesn’t actually spend money creating labs in China.Khanna: I’m 99% sure that’s true. I mean, Paul, you and I usually check things before we say something definitively. Elon doesn’t have any of those filters, so he’s just throwing these things out there.Krugman: Yeah. It’s pretty terrifying. The world’s richest man with a very strong political in with the U.S. government and... just, wow. Well, that was in the news so I thought I’d ask.Khanna: He does have a huge platform, right? I mean, he has 240 million followers. So him saying, “Okay, I’m going to sue Khanna. Khanna is a horrible, evil human being,” you know, has more reach by far than when I go on Meet the Press or ABC News. And he’s putting out basic falsehoods, so it’s a real danger.Krugman: Yeah. Okay, let’s move on. So the technology of the moment is AI. Last time we talked, which is a while back now—I mean, a while back in tech time, anyway—we were talking about crypto, and there’s a little bit of the distracted boyfriend thing where people are looking now at AI instead of crypto. But AI does look really much more substantive. You can actually almost start to see its impact on productivity, maybe on layoffs. So it looks like a serious technology. And you’ve been staking out a position which is calling for a lot more intervention and regulation. Do you want to talk about what you think is happening and what needs to be done?Khanna: Well, so far, AI has been enriching tech lords and tech billionaires, but it’s caused deep anxiety with ordinary Americans. And I would argue that there are four things we need to do. We need to first care about jobs. Now, here’s the good news, Professor Krugman: it used to be that the people who cared about a jobs program were folks in de-industrialized communities—blue-collar, or people who had lost factory jobs. Now you have kids at Brown, kids at Yale who are worried about whether they’re going to have a job. So I think there’s an opportunity for a broad coalition to have the most ambitious jobs agenda in a generation.And what does that look like? I would say first, it means taxing agentic AI more than we tax human workers. This is not my idea; it’s Daron Acemoglu’s idea, which is basically that the tax code is biased towards capital. If you have to hire someone, you’ve got to pay their health insurance and you’ve got to pay a payroll tax. If you want to have an agentic AI worker or a robot, you don’t have to pay that. So, neutralizing that tax code.Second, we should—and I’ve argued this—have a “Work for America” program, a federal jobs program for young people out of school, out of trade school, or out of college to rebuild communities, maybe to come to the federal government. Maybe they go to a community that they didn’t grow up in. This can be akin to military service and can help rebuild not just the physical infrastructure of America, but the social infrastructure.Third, bargaining power for employees. So, not just go retrain them, but give them an actual say in the company if there are going to be layoffs. What role will they have? If there’s going to be displacement, what jobs would they have? Are they going to get a share of the profits from the increase in AI productivity? Are they going to get time off with the increased productivity?And finally, a sense of ensuring that jobs are there, that there’s intervention in having humans in the loop in various jobs—whether that’s the four million truck drivers and thinking about their role, or whether it’s jobs making decisions about people’s healthcare or making decisions about their finances.Krugman: So, yeah, I mean, a few things to unpack here. One is, obviously, nobody really knows what this is going to be, but we are starting to see, or we think we’re seeing, real job impacts and income impacts from AI. Probably. If you had to say, where would we be seeing these things first? It would be kind of in your district, right? So, what do we actually see? What are you hearing from your own constituents?Khanna: First, it’s much harder to get hired into these tech jobs. There’s a lot of anxiety from 21-, 22-, and 23-year-olds and their parents. The job market used to be, even at a place like Stanford, “Okay, I’m going to get 10 or 15 offers before I’m done with my senior year.” Now, they’re lucky to get a job, or it’s much harder to get a good job.Second, there have been a fair amount of tech layoffs. Now, some people are arguing that was because they overhired in the pandemic and they’re correcting for that, but it’s hard to imagine that AI is not at least part of the factor in that, and that it’s not just a correction for overhiring.And then third, just the sense of what the new jobs in these tech companies are going to look like in terms of being able to implement AI or use AI, and what computer science is going to look like in different schools.Krugman: Yeah, it is interesting what you just said, which is that we have a better chance of getting action because the jobs at stake here are sort of high-education rather than blue-collar work. In a way, that’s an indictment of our politics—that in some sense, we think Stanford graduates feeling aggrieved carry more weight than ten blue-collar workers in Ohio. But on the other hand, it is really striking, right? Obviously, you’re hearing from people who are just seeing that entry-level jobs are not there. To what extent is this actually manageable? Can we channel this, or is this technology just going to sweep away efforts at, particularly, job retention?Khanna: I do think it’s manageable in that there are a lot of human tasks, in my view, that can’t simply be automated: goal setting, team building, and the origination of customized new ideas for settings. And there’s a lot of work, public work, that can be done—whether it’s opening new parks, whether it’s helping represent people who are underserved, whether it’s making government services better, whether it’s providing counseling, whether it’s providing teaching, or whether it’s providing childcare. So, in my view, there is a role for a robust federal jobs program, and it could help in de-industrialized areas and for factory jobs.And we should keep in mind, we wanted to do this years ago when we saw the devastating effects of globalization, but our politics, for whatever reason, didn’t allow it. And now you have a much broader set of people with anxiety. Of course, it’s not the Great Depression when FDR had 20 to 30% unemployment and a total collapse in demand, but it is one where you meet an average person who’s concerned about it. And I think there is polling showing 30 to 40% of Americans are anxious about jobs. That seems to me to provide a moment where a politician coming with a jobs agenda or intervention in the free market would have a reception which, in a lot of the last 30 or 40 years, has been very hard to get. People just say you’re interfering in the markets.Krugman: Just to say—I mean, you kind of implicitly said this—but in effect, you’re calling for something like a WPA (Works Progress Administration) or CCC, ‘30s-style, but at least in part for tech workers, not just for people with shovels, but people doing skilled—I hate that word—but high-education-content work. Have you put any kind of numbers to this, or is it just a general outline at this point?Khanna: I wrote an op-ed called “Work for America” in The Wall Street Journal, and it was about $50 billion a year, which I said you could fund through an AI token tax. And it would be hiring anyone out of high school or out of college for jobs to open a park, to help with their local community, to teach, or to come to the federal government to do something. What I was particularly excited about is that kids growing up in Fremont, in my district, could go to Middletown, Ohio, to do something there so that you’re building things. And it would help for folks who may be displaced.And I explicitly said it was inspired by FDR’s Works Progress Administration, which hired 8 million people. Of course, that’s where the “boondoggle” idea came from, because some people back then said some of those jobs weren’t real—they were criticizing it. But my understanding, and you’re a better student of history, is that it did work in creating meaningful employment and many meaningful projects, and certainly helped the social infrastructure of the country.Krugman: I want to come back to jobs in a second, but you’re basically at least accepting as a strong possibility that this technology is biased towards capital and away from labor. Are you seeing that? Is that really what’s happening?Khanna: We’re certainly seeing it in terms of the explosion of wealth in my district and with billionaires. And we’ll get to the idea of a billionaire tax, but I mean, they have reaped massive amounts of benefit from the AI revolution, and we haven’t been seeing that for the average worker or even the average tech worker. They’re not reaping the rewards in the way that a few people have.And you’re seeing this also in terms of, certainly, the difficulty in entry-level jobs. I mean, when I was at Suffolk University and giving one of the commencement speeches, the line that got the most applause was when I said we need to tax agentic AI more than human workers. Young people are concerned about AI, and I don’t think their fears are totally irrational; I think they’re finding the job market to be harder. And I have a lot of cases in my district of people at these tech companies who are being laid off or told that they need to be let go. Now, you talk to the tech leaders and they’ll say there are other factors too—they’ll cite overhiring in the pandemic, they’ll say they’re just adjusting. So, I don’t know if there are academic studies that show it’s correlated completely to AI, but I certainly think it is one of the variables. And I think there was one study at Stanford showing that for young people in automatable jobs, AI had contributed.Krugman: Okay, you gave a commencement talk and got a positive response, unlike Eric Schmidt and, there have been multiple instances, but I guess Eric Schmidt is the famous one, the former CEO of Google, giving a commencement address in which he started to talk about AI and immediately got massive boos from the students.Khanna: I took the opposite tack. I said AI is not doing your generation a good service, and it’s something that we need to be tackling—not preaching all the benefits of AI. And it was a surprise to me because that was not the place where I expected to get applause. It was not the central part of my address, but the two places that got the most applause were calling for a billionaire tax and calling for a jobs program and taxing AI, which I was almost going to keep out of it because I thought, “Is that too political?” But the students, actually, that’s what resonated with them.Krugman: And so, at least conceptually, there are two separate issues. There’s a wealth tax, which I want to get to in a bit, but you’re talking about essentially—you call it a token tax—a tax basically on the use of AI. Are we able to implement that? Do you think it can be done reasonably well?Khanna: I do. It seems to me that’s the easiest thing because right now there’s a cost, of course, to the use of AI. And there’s a large debate, by the way, about what that cost is because it’s fairly expensive. It turns out it’s fairly expensive in terms of the energy consumption of AI; it’s expensive in terms of the capital expenditure for data centers, which is a whole separate conversation. And so, the question of labor displacement, I think, also depends upon how much AI costs actually come down or don’t come down. But right now, companies are paying a lot for the use of these tokens, which is basically the output of AI when you type something into ChatGPT. And so, if you just put a tax on that, that would both disincentivize automation and would raise revenue.Krugman: I’m not aware of an earlier parallel where there was something—sort of an output of machinery at some level—that could be compared in a way with labor. And of course, aside from income taxes, the FICA on every paycheck shows that we tax labor. And you’re just saying that we should do something for the stuff that’s coming from AI capital, right?Khanna: Yeah. That’s exactly right. And simply put, the idea right now is that it’s not just that people have a higher degree of variability because you could get sick, you need to be with your kids, or you have to pay health insurance. We’re not taxing what these tech people are saying is labor-replacing, and so we should tax that.Krugman: Okay. Now, people’s immediate reaction is, “Oh, but we’re in a competitive race with China.” What’s your answer to people who say, “Oh, you know, if we start to tax this stuff, we will forfeit the lead to other countries. It’s a great international race.”Khanna: Well, first of all, even China is changing its policies. I read recently that some of the court decisions in China are saying you can’t lay off people based on AI, and they have almost 18% youth unemployment. When I went there, a lot of the young folks didn’t want to work in the factories, and they’re concerned about losing jobs. So, I think China itself is realizing that having just unregulated AI is not healthy for society.The second thing is we want to compete with excellence. That’s always been the American aspiration—that we want to have products that have the highest standards. We want to have high safety standards, the highest set of standards in terms of privacy. So, if we’re producing AI that is safe, where agentic AI isn’t going to go do crazy things and isn’t going to engage in surveillance, then that should be something that we can export and be a model for the world. I don’t think we have to have a race to the bottom in the type of AI we produce.Krugman: Okay. And AI that’s safe, which, of course, is one of the big concerns. Any thoughts on the runaway models? Grok, which you mentioned, apparently was used for targeting in Iran with not-very-good results. Are you hearing anything, or is there any movement on intervention—basically congressional action to try and avoid some of these dangers from AI?Khanna: There hasn’t been, because this administration has basically said, “Let the tech billionaires do whatever they want.” The only time they’ve shown any interest in regulation is with Mythos, Anthropic’s latest model, which could detect cyber vulnerabilities. And it’s unclear whether their concern is simply motivated by the unsafety of Anthropic’s model or is retribution because Dario Amodei got into a fight with Pete Hegseth. But other than that issue, the administration has basically said, “Do whatever you want.”And it’s really scary because usually, even by these tech leaders’ own worries, they say, “This is transformational. This is going to change the world. This is the most important technology since fire.” Well, if that’s really the case, we have a federal agency for electricity, we have a federal agency for nuclear weapons and nuclear power—why wouldn’t we have a federal agency for AI, on your own terms? And yet there’s been no effort to do that.Krugman: Okay, for listeners, by the way, Amodei is the CEO of Anthropic. The two big models out there are OpenAI’s ChatGPT and Claude, which is Anthropic. Most of the buzz that I’m hearing about usability involves Claude, but Anthropic is politically not that aligned with the administration and has particularly said that it will not allow its AI to be used for autonomous weapons, and that has made them on the outs. And it’s really very hard, right? When the administration lays down rules or policies on AI, you can never tell whether they’re really concerned or whether they’re just trying to punish a company that isn’t on their side. That’s what you’re saying about Mythos, right?Khanna: Exactly. And I mean, given the administration’s history in general on retribution across so many places, but also in this explicit retribution against Anthropic... there, Amodei basically said that he didn’t think technology should be used in a way that would violate privacy. He didn’t think AI should be used to make decisions about what to strike without human judgment. Hegseth didn’t like that; they had a whole fight. And so now that they have Mythos, it may be that there really should be regulations and export controls because this technology is explosive and could cause cyber vulnerabilities. The problem is we don’t know, because the administration also has a motive for retribution, and they’ve lost the credibility of any independence.Krugman: Yeah, that makes it especially hard now. All right. It’s actually amazing how much impact Anthropic’s products are having. I’ve been talking with senior financial types on stuff, and it’s amazing how often I hear, “Well, I was thinking about that, so I asked Claude.” It really is shocking how—you know, we’re not talking about saying, “I had my staff go and look it up,” it’s, “I went and asked Claude myself.” So, like it or not, this is the world we’re in now.Okay, it seems to me that your whole vision is a step beyond. I mean, if you go back to actually quite early on when they were still making apocalyptic warnings and Sam Altman was saying, “Oh, well, given AI, we’re going to have to have something like—” I don’t think he exactly used these words, but something like, “We’re going to have to have taxes on capital to pay for universal basic income.” And that’s kind of the Silicon Valley vision. But your idea is more that we should have taxes on the wealth that’s been created to help provide for job programs. So, it’s not just that we’re going to give people money so they can sit at home and let the machines do stuff, but we’re going to subsidize ways that give people work.Khanna: Absolutely. And that work could be childcare, it could be home care, it could be new types of industry, it could be helping provide better government services, or it could be doing something meaningful in the community. I believe we have the need for productive work, and that the federal government should play that role.And by the way, the hypocrisy of some of these tech folk saying, “Just tax me so we can have universal income”—well, they’re not willing to pay the tax. I mean, when you look at Sam Altman’s proposal on universal basic income, which is, “Take a 2% tax on my company every year in terms of equity shares,” if you just did the math on that, after five years, maybe every year, each American would get about a $1,000. That’s not exactly universal income. So, I’m not for just taxing and giving everyone a check and saying work doesn’t matter. I don’t think that’s a healthy society, but they’re not even willing to do the first part of that, which is pay the tax. It’s just empty rhetoric.Krugman: Yeah. I always had a problem that these proposals for UBI—even if they raised enough money—the amounts are not enough to live on, and also just collecting what we used to call welfare is not a substitute for actually having meaningful work.So, let’s talk first about the California proposal for a one-time wealth tax, which you are supporting, but is amazingly controversial even within the Democratic Party. Tell me about the proposal and some of the criticisms.Khanna: There are three million people in California who risk losing their healthcare because of the big, ugly bill that Trump passed, which everyone acknowledges cuts Medicaid and cuts the subsidies in the Affordable Care Act. So, that’s a fact that everyone acknowledges—that these folks are going to lose their healthcare. The second fact that people acknowledge is that there are about 200,000 healthcare workers—nurses, aides, hospital workers—who are going to lose their jobs.And what this program, this ballot initiative, says is: let’s have a one-time 5% tax on billionaires. There are about 250 of these billionaires. Their worth, as Gabriel Zucman’s work shows, is about $2 trillion. That is the equivalent—and I’m not saying it’s the same thing—but it’s the equivalent of about half of California’s GDP. There are 250 people who are worth that. And if you tax them one time at 5%, you could literally raise about $100 billion and make sure that we cover all of these Californians, and that we don’t lose 200,000 jobs.The ballot designers went and said, “Okay, let’s just do 2%,” and that proposal was rejected. That would have raised $40 billion and staved off the crisis for two years. And so now we’re going to the ballot on this. These 250 billionaires, by the way, have made about 150% over the last three years. Their wealth has increased 150% largely because of AI, and yet they’re not willing to pay a 5% one-time tax to make sure that Californians don’t lose healthcare.Krugman: It always astonishes me how small the number of people that we’re talking about is, right? It still annoys me when people talk about the 1%, because we’re talking about a tiny, tiny fraction of 1%—just 250 people in California. But it’s a quite significant amount of money that could be raised by such a tax, right? So, the first question people ask is: won’t they all just decamp, leave? What would be the possibilities for avoidance—not evasion, since evasion is illegal, but avoidance is not—so that everyone won’t just pull up stakes?Khanna: So, first of all, we have actual data on this. We know that in Q1 of 2026, 85% of venture capital in America went to California—the highest ever. And this is months after the state ballot initiative was announced, and when you’re seeing reports of Sergey Brin and others leaving. So, in terms of capital investment into California, it has only increased since the announcement of the ballot initiative. And that’s obvious; no one thinks that the AI revolution is happening in Miami or happening in Austin. It’s happening in Silicon Valley. It’s happening in my district and the surrounding areas. So, you may be losing some individuals, but you’re not losing the capital into Silicon Valley, and that’s just what the data shows.The second thing is, okay, maybe you lose some of these individuals, but as Zucman’s work has shown, these billionaires are only paying about 2.5% of the total general fund in California. And the reason they’re paying so little is because they basically weren’t being taxed—I mean, they don’t have income. And so, if you lose a few people, it’s not some devastating blow to the tax revenue of the state, and you’re not losing the capital investment.And the final point is, if you haven’t moved already, you’re subject to the tax the way it was designed: it’s one-time, and it’s based on whether you were in the state by the end of last year or not.Krugman: Okay, that’s really important. It’s a retroactive tax, in a way. It is a levy, but that’s kind of okay, so there would be no possibility of people avoiding it. But I guess one criticism has been that while they can’t avoid this tax, they won’t pay income tax in the future. But you’re saying that they basically weren’t paying income tax before.Khanna: And the irony of it is, what’s the point of making money? Part of it is you get to do things that you want to do. One of the most basic things that people want to do is live where they want to live. And the idea that you would be a billionaire and then not want to live where your family is, or where you like, or where you grew up, or where you find it most fulfilling simply because of tax considerations seems to be quite ironic. And the truth is that there are a lot of billionaires who will grumble and say all of that, but aren’t going to be leaving California.Krugman: One of my favorite lines was about the attempts to turn Miami into the new Wall Street. There was some Wall Street guy who told Bloomberg, “The trouble with moving to Florida is that you have to live in Florida.” There’s a California version of that.So, this would be a one-time California thing. Do you have a vision for what an attempt to kind of make AI and just general technology less of something for a few hundred people would look like? What would America 2035 look like if we could have a Ro Khanna vision of policy?Khanna: We would have a new social contract. We would be taxing these billionaires and trillionaires, and that would raise about $4 trillion if you did it at 5% a year. You would have other basic taxes—have an actual effective corporate tax rate that is at least 28%; right now, they’re not even paying 21%. You would have capital taxed the same as ordinary income. You would have a step-up in basis. You’d raise that revenue rate—Krugman: We should mention “a step-up in basis.” Why don’t you explain what it means?Khanna: Well, that’s when these people die and their kids get their estate. But if they had huge stock appreciation in their lives, their kids don’t have to pay taxes on that stock appreciation.Krugman: Yeah. We’ve got a system in which a large part of capital income is basically never taxed. So you’re talking about eliminating that.Khanna: Why would we have a system that’s already capital-biased, where basically, if you have this capital, you’re making money in your sleep and you’re paying less taxes than someone who’s a doctor or nurse or a factory worker who pays ordinary income tax?That should be leveled.And when people say, “Do billionaires deserve what they make?” I don’t deny that they have built something often of value, and that they’re hard-working, and that they’re entrepreneurial. I’m just saying that the system—because of the way we tax capital less, because of the way that corporate taxes aren’t really collected, because of the fact that we don’t have a wealth tax, because of the way we have allowed the estate tax to operate—has allowed for the accumulation of extraordinary wealth beyond what a system with a rational tax code would allow.And so if we had a rational tax code, we’d have all of this revenue, and then you could do things like having universal childcare at $10 a day, having a thousand new trade schools, having free public college (which we had in California in 1960, and in many places as well), having a jobs program, making sure that we had a livable wage and union bargaining power, and expanding healthcare. I mean, I’m ultimately for a single-payer, Medicare-for-All system, but at least expanding it, doing things like dental, vision, hearing, and making sure that we had drug negotiation.All of this is to say something very simple: when I go around the country and I say Elon Musk has become a trillionaire, I’m met with huge boos. And when I talk about these tech billionaires, huge boos. That was not always the case in America where people would just boo successful business leaders. It should be a wake-up call that most people don’t think that their lives are improving, even though we’re generating more wealth than ever before. And my view is: why can’t we have a society, if we’re generating all this wealth, where most Americans feel like they have more economic security? And how do we do this?And the last point I would say is, I’m the nice guy. I’m 49 years old, about to turn 50. You know, the folks in their 30s, the folks who are winning in New York, they’re not as nice as me saying, “Okay, let’s just have a new social contract.” They want to rip the total system down. They’ve had it. They want a total revolution. And so, either we’re going to have this transformation, or we’re going to have a far more radical new generation that is totally upset at society.Krugman: So, you’re basically saying you can do these reforms, you can do something that will spread the benefits, create societal sharing, or the pitchforks and torches will be coming for you. Is that a good way to summarize it?Khanna: [Laughs] That’s my message. I’ll say pay it as an anti-revolution tax. But you know what? Even in my district, Paul, when I have town halls and I say, “What do you think of a billionaire tax?”—and I remember in one of the most affluent districts in the world—90% of folks will raise their hand: “Yes, it’s a good idea.” To your point, this is not talking about the 1%. I can’t do the math, but the 0.0001%. Everyone wants them to pay taxes. The doctors do, the investment bankers do. And then there will be people who say, “No, Ro, I disagree.” I say, “Why is that?” And they’ll say, “Well, why is it just 5%? I want 20%.” I mean, they’re not thinking of the wealth tax necessarily and what consequences that would have.But this is the sentiment, not just in Pennsylvania, Michigan, or Ohio; this is the sentiment in my district. And I think a lot of people are oblivious to the anger and the anxiety young people have. They can’t buy a house, they have huge debt, they don’t think their lives are going to resemble their parents’, and don’t understand why that’s the case in a nation that’s producing so much wealth.I mean, you’ve done a lot of work on this, and I’d ask you, in development economics and often in the developing world, there’s a trade-off between economic development and economic fairness, right? But it seems to me what’s so ironic in our case is that trade-offs don’t need to exist. We’re producing all this wealth; it’s simply a matter of values that we’re not allowing most Americans to have economic security.Krugman: That might be a good coda here. I mean, it is an extraordinary thing that we don’t seem to be facing a trade-off. It really is the case that in almost every respect except the wealth of a few hundred people, this kind of fairness agenda looks positive. So, how are you feeling about the politics of it? Do you think you’re getting traction?Khanna: I do. You know, they poured in $1 million-plus against me with my primary opponent [a Democrat who opposed the wealth tax]. And California’s a weird system: Democrats, Republicans, we all run together. I got 62%, my challenger got 6%, and the Republicans got the rest. So, I think that was a bit of a wake-up call for some of these folks that, you know, democracy still works. And I’m very, very optimistic heading into the midterms that this central idea of fairness is one that’s resonating with many people. And I am confident we’re going to take back the House.Krugman: Okay. The congressman from Silicon Valley says democracy may still work. I think that’s a really optimistic punchline.Thanks so much for talking with me. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

I often think of labor economics as a role model for the field: a subfield in which theory is disciplined by evidence and (most) researchers are willing to listen to that evidence even when it challenges their preconceptions. And hardly anyone does modern labor economics as well as UMass Amherst’s Arindrajit Dube, who has an excellent new book out. I talked with him about that book and the state of labor more generally.. . .TRANSCRIPT: Paul Krugman in Conversation with Arindrajit Dube(recorded 6/18/26)Paul Krugman: One of the most satisfying parts of economics, which doesn’t get as much attention as it should, is labor economics. It’s obviously important. Most of us work for a living, or at least pretend to work for a living. But also it is a field, a subfield you might say; more scientific than almost anything else in economics, really evidence-based. You’ve had multiple revelations where the data have actually changed the way people, myself included, have thought about stuff. And among the most effective, prominent practitioners of modern labor economics is Arin Dube, who has a new book called The Wage Standard. And I thought we’d take a break from all the other stuff going on and talk about Arin’s work. So hi, Arin.Arindrajit Dube: Hi Paul, nice to see you.Krugman: Yeah, welcome to my virtual studio. Why don’t you talk just a little bit about The Wage Standard and what you’re trying to do, and then we can get into the broader labor economics issues?Dube: Yeah. So, I wrote a book. Here it is.Krugman: By the way, we mostly don’t do that in economics; we write 5,000-word articles.Dube: Exactly. Paul, of course, you’ve written many amazing books. But economists don’t usually write books. We publish articles.Krugman: That’s right.Dube: And so it was actually a big deal for me to sort of think about, did I want to write a book? And I kind of went for a number of years and I said, like, “Oh, well, I’m not writing this book for other economists as a main audience,” though of course, I’m very happy for other economists to read it, but I wanted to try to have a broader conversation, and I needed to be clear that I wanted to know what I was going to say in that conversation.And so here’s basically the main point of the book. The main argument is that Americans deserve a raise, that most American workers actually could get paid more and should get paid more. And there are really good reasons to think that. You know, the market has not delivered what could be a sustainable but higher wage for those in the bottom and lower part of the income distribution. So that’s basically the core idea. And I try to bring in what we know about the research that I think has really blossomed in the last decade or two decades on a bunch of topics when it comes to understanding the labor market.I was writing this book at the beginning of the pandemic and especially 2021. And it was really interesting because this was one of the more remarkable episodes in the labor market that really highlighted a lot of things that I was actually talking about in the book. Of course, it did it in a very messy way, because there were lots of things happening during that time. But it made for a very interesting process where I felt like I was writing the book and the world was writing itself outside, which was both exciting and challenging.Krugman: Okay. I said that labor economics has been revelatory. When I was not young, but younger, I think most economists circa 1990 would have thought of the labor market as just being a market of supply and demand. And where they crossed determines wages, and there’s nothing much you can do about it. And if you try to change it, you do so at your peril; bad things will happen. And as you say in the book, and in many of your writings that I’ve been following on all this stuff, that’s something that really, really changed. You want to talk about what happened?Dube: Yeah. So, one really interesting thing is to think about how wages are set. And we could start with the basic supply and demand story, which basically is that there’s demand for workers of different skills and then there’s supply. And depending on the supply and demand conditions, you’re going to have different wages, a different skill price. And let me be clear, I think there’s a lot of important aspects of that that actually matter, but it’s also incomplete. Because here’s the thing: if the market really worked like the textbook supply and demand story, basically workers of a particular type would just get paid the same—that’s the skill price. But in reality, it turns out companies have a substantial degree of discretion in setting pay. And you can start to see this by just looking across companies hiring similar workers, but choosing to pay someone different.One simple example to start with is FedEx and UPS. Workers may be driving very similar routes delivering similar packages, but it turns out FedEx pays lower than UPS. UPS has maybe 37% of the workers; a few years back, they were paying less than $20 an hour. For FedEx, it was more like 60%. And so, of course, that’s just one example, but you have others. Like, look at Walmart versus Target. It turns out that Walmart tends to be paying somewhat lower than many of its other similar, large retail competitors. And the list goes on. But this is not a new observation. Labor economists who were studying this in the mid-20th century had gone and collected surveys and understood that, you know, factories in the same labor market could be paying different wages.But here’s what was not fully convincing: how do we know that it’s not maybe somewhat of a different skill mix? Maybe these companies are similar, but they’re hiring somewhat different types of workers the pay difference reflects that. So that argument held sway for decades until we had better data. And this is where what you say about labor economics, I think, really is right. And part of that has been our ability to really get much more granular and high-quality data, including administrative data linking pay for virtually most people in the labor market. And you can track them as they go from company to company. So you could say, “Hey, actually, what happens if the same person moves from Walmart to Target? Do you see they’re getting a higher pay?” Because you’re holding their skill set constant there. And so this kind of data and this sort of research design helped establish that actually, no, it turns out there is a substantial amount of variation in pay that comes from companies choosing different types of pay policies. And that’s a big part of the argument in my book, more broadly, that there are choices we have made.You know, if we wanted to go back and look to see what’s happened to productivity and what’s happened to wages since 1980, productivity has grown much more strongly than wages—maybe not as strong as it did in the postwar era, but nonetheless, it grew a lot more than the pay for the typical worker, certainly pay for those at the bottom. And one of the arguments that I make is that this reflects choices made in a variety of places, and that starts from choices at a corporate level, different companies choosing different pay policies, all the way to policies that are being made by state and federal government. But the core part of it is like, why does that make any sense? It doesn’t make much sense to talk about companies choosing pay policies if the market is just your supply and demand. There’s no role for saying, “Are you doing the high-wage strategy or a low-wage strategy?” That’s a nonsensical question in a perfectly competitive market. But it’s an absolutely sensible question to ask when companies have some degree of wage-setting power.You know, economists have a funny word for this, right? Monopsony. It’s a funny word. But the basic idea is really straightforward. You know, companies are making a choice there. You could go for a higher wage strategy or you could go for a lower wage strategy. Now, if you’re paying lower wages, you are going to have some more people quit and you’re going to have a somewhat harder time recruiting new workers. But the key thing is, it doesn’t mean that if you pay below a hypothetical market wage, everyone bolts, right? So you actually face a meaningful tradeoff of exactly how much more to pay or how much less to pay, and different companies end up choosing different amounts.And this is also where—and this is even more recent, really in the last, you know, 5 to 7 years—we have seen a really big increase in research on the topic of monopsony, so we can really better understand exactly how much wage-setting power companies have. And it just sort of turns out that if a company’s choosing to pay, let’s say, a 10% lower wage, they’re going to have higher quits. Maybe about 14% higher quits. I just finished doing a review for the Journal of Economic Literature, and that’s basically where it sort of lands, and the quit rate is just not super sensitive to wage. So this gives employers a degree of discretion. And they’re going to do a couple of things that are important. First, different companies may choose different strategies. That is what creates these differences across companies. And the way companies have made those choices has really been different in the arc of history.Krugman: Okay. So that’s where actually I came in on this topic, which was a classic paper by Claudia Goldin and Bob Margo. You know, I grew up in a world very different from the world where you grew up, with much more equal wages than we have now. But it turns out that wasn’t something that gradually evolved. It happened in a few years, basically during the New Deal and World War II: the Great Compression.Dube: Absolutely. Yeah. And so that’s a story that has been told. But I also tell it with sort of a labor market focus. And a key part of that was actually creating a set of collective bargaining institutions, starting with the National Labor Relations Act; we had an upsurge in union organizing. And I highlight some more recent work that has been really careful to try to actually understand the causal effect of that unionization, for example, on the wage structure—work by Henry Farber and coauthors that really documents this very carefully. And it’s not just in the National Labor Relations Act. It’s also during the war. The Roosevelt administration actually helped encourage an increase in unionization. And that had a lasting impact on pay setting.So this is basically where, after the end of the war, we had what is called the Treaty of Detroit, which was the landmark agreement, as coined by Fortune magazine, between United Auto Workers and the big three automakers, which spills over into the nonunion sector and other parts of the economy through this pattern bargaining process. But all of that created something very different than we had in the early 20th century. It basically created a set of mechanisms that helped ensure wages stayed relatively well tethered to overall productivity. And wages, both at the bottom and the middle, stayed tethered to the top. There were lots of issues. I don’t want to romanticize the 1950s or early 60s. But when it came to how wages were determined, it just meant you had broader based prosperity.Krugman: So in the wage structure there are social institutions that set norms and so that’s part of it; the thing is much more sort of a surface on which you can move back and forth based on institutions. That was one of the lessons I took from the Great Compression. And now you’re saying that there’s much more of that. And also that you can get away with it. I would say that if somebody now proposed something like what happened during the New Deal and the war, The Wall Street Journal would be running nonstop, fire-breathing editorials about how this will destroy the economy and lead to mass unemployment. And your point is that it doesn’t, because of the range of discretion that companies have in setting wages.Dube: Exactly. And those range of discussions in some cases evolved and were forged in the fire of union organizing and militancy in the ‘30s and ‘40s, and other times. There are ones that come up in an era where it’s largely nonunion workplaces that are expanding—for example, Walmart in the 1980s—and in an era when there’s very different ideologies about how businesses should behave.So the entire shareholder primacy revolution that sort of happens in the ‘70s and ‘80s, turns out had a real impact on how wages were set. I talk about this in the book. Research by Daron Acemoglu from M.I.T. and coauthors find a really interesting fact. So it turns out that actually, most businesses are not run by people with a business school degree. I actually didn’t know that. Even today, that’s actually the case. But the share that actually have a CEO with a business school degree has been rising quite, quite steadily. So what happened, for example, in the ‘80s or the ‘90s, when a company moved for the first time to a CEO with a MBA? Sometimes it’s because maybe someone retired or even died, you know? It sounds kind of grim, but actually it makes for a good natural experiment where, almost like by random, you introduce a CEO with a MBA for the first time. And what’s really interesting is that it leads to a very clear reduction in pay: about a 6% reduction in pay for workers overall, and about a 9% reduction for blue-collar workers. So the labor share falls by about five percentage points. That’s the amount of money going to workers versus owners. And of course, CEO pay rises. Now you may say, well, maybe that happens, and that’s just like the cost of running the business better, right? MBAs probably raise productivity. Wrong. It has no effect on productivity compared to comparable businesses. So it’s purely a rent transfer, as we say. Meaning, you’re taking money from one group and giving it to the other. In this case, the money is going towards owners of capital and high-income managers, and away from the workers, especially blue-collar workers.Krugman: Wow. I always thought that the Harvard Business School was evil, but I didn’t realize it was quite that evil. So that’s pretty impressive. That’s really a significant impact on sort of the nature of our society that comes from almost an academic doctrine.Dube: Absolutely. This is sort of like ideology. It’s ideology, not skills that is explaining this important change here. And, in fact, this turns out to have played a non-trivial role in the fall in the labor share in the United States, for example.Krugman: That’s a really funny thing for me. Economists are supposed to be hard-headed, but in fact, if you really look at the data, and really do economic science, it says that ideology matters a lot.Dube: That’s right. And that’s one of the most important things. The late economist Alan Krueger once actually told me—well, he told us on Twitter in a conversation with me—that the idea that core theory is falsifiable and testable is a really big idea. And that is exactly right. Because if you start with saying, “Well, I’m pretty sure the labor market works this way,” and then I come and tell you, “Oh, actually, you know, it turns out this MBA CEO comes in and pay falls,” so you’d say, “Well, there’s got to be a really good explanation for that that is consistent with my model.” But it’s certainly not because the model is false, because it can’t be. And that basically highlights, in some ways, the conversations we had about the role of the minimum wage, which is something we could talk about as well.Krugman: I want to come back to wage structure for a second. When I say that labor economics is especially good or virtuous, or in some way special, it’s because there’s really this use of natural experiments where something happens and just looking at it—at least on a couple of major occasions—it has contradicted what most economists believed. And I do want to come back to wage structure, but minimum wage is the classic. It’s an extraordinary story. You could probably tell it better than I can. To some extent it’s where you came in, but it’s definitely where Alan Krueger and David Card came in. So let’s talk about that.Dube: Yeah. So maybe one thing just as a background for listeners: the United States, of course, introduced a minimum wage as part of the Fair Labor Standards Act in the 1930s, and during the ‘40s, ‘50s, ‘60s, and even ‘70s, the minimum wage was updated fairly regularly. You could have a Republican president or a Democratic president, or Congress, but it was generally updated and kept up with sort of like the typical or the median wage and even overall productivity and so on. That all changed in 1980, when Ronald Reagan came into power and he didn’t increase the minimum wage; he refused to, because he thought this was a bad idea. And this was also a time in the early ‘80s when, of course, we had real, still high inflation. So the combination of the fact that the nominal minimum wage just stayed put and there was inflation meant the actual real value of the minimum wage fell a lot. And so that had a really important impact on wage inequality at the bottom. It reduced pay for roughly the bottom 30 to 40% of the workforce. And so we went for basically a decade almost at this time without raising the minimum wage.And we have now had several of these long stretches. The most recent one is particularly long: it’s 17 years since we have actually raised the minimum wage. And so that’s a very dysfunctional way to set policy. But here’s the silver lining. The silver lining of dysfunctional policies is that you have natural experiments. So what happened starting in the ‘80s is that states started to come in and raise their own minimum wage. And so you started to create all of these little natural experiments. And this is really what began this literature—it’s called the new minimum wage literature—which started to look to see, ‘hey, New Jersey raised its minimum wage in 1992, but look, neighboring Pennsylvania did not. Eastern Pennsylvania and New Jersey are not super different; they’re right next to each other. There’s a lot of similarities, maybe sharing similar types of economic shocks and so forth. Why don’t we compare to see what happened?’ And this is exactly what Alan Krueger and David Card did. They went and surveyed fast-food restaurants on both sides of the state border, and then went back a year later and said, “Well, let’s take a look. What happened? Didn’t we actually see a lower number of jobs in New Jersey?” And what they found really shocked the profession. It turns out, not so much. In fact, not really anything we can see. And, you know, this was really kind of an earth-shattering discovery, because it challenged the core model of the labor market: the labor market is supply and demand, that’s it, there’s not much more to it, just like any other market. And this was really hard to square with it. And I think this led to kind of an emergence of a whole literature.And there are also things written that are very critical and, you know, not very polite about Card and Krueger. But, you know, it led to a lot of debate and also follow-up work, which is the way science progresses, if it’s doing the results that they’re replicated—Krugman: Yeah, the results have been replicated now many times, and you’ve done a fair bit of that. Because there are so many states and so much asynchronous minimum wage increases that you get results. And people might say, “Oh, it’s just fast-food workers in New Jersey.” But it turns out that we have now lots and lots of evidence that says, hey, these minimum wage hikes do not actually seem to cost jobs, or at least not significantly. Right?Dube: Yeah. So I think that my sort of contribution to the literature in our 2010 paper could be probably summarized by the word “many.” We see many of these and for many years, not just one short impact. And what we found was very much along the lines of what Card and Krueger had found. And even more recently, we updated that with more data, and we’re continuing to find very similar effects. In fact, just a couple weeks ago, I put out a Substack post that really sort of leverages, in some ways, an important fact related to what I said—that we’ve not raised the federal minimum wage for 17 years, and that means 20 states have today a $7.25 an hour minimum wage, which economically is sort of equivalent to not having any minimum wage. It’s so low that it barely affects anyone. So we’re running this basically just more than a generation-long experiment where you have about half the country—a little less than half the country—with essentially no minimum wage, while the other half raised it sometimes quite substantially, or comparable to some of our European peer countries. And that creates this very sharp divide.But it also creates a divide that makes it very easy to see what is going on, because you don’t have to do a lot of fancy, you know, econometric statistics to really tell. Just plot, for example, as I do: what’s the restaurant wage in these two groups of states? Well, it turns out there’s a big gap that’s opened up, like maybe an 8 or 9% average earnings gap for restaurant workers. What happened to restaurant employment? It looks pretty much like a flat line. They’ve been growing very similarly. Per capita, restaurant employment has been very similar. And that just makes it very hard to look at that very simple fact and say, “No, I’m pretty sure it’s killing a lot of jobs,” because where is (the data that proves) it?I do a bunch of other things, but this sort of highlights how, for a very long, long stretch of time, we’ve split the country in some ways in half. And by the way, some of these states that have raised the minimum wage have also been more Republican-leaning. A lot of times when the minimum wage is on the ballot, it’s in red and purple states. In fact, this week in Oklahoma for a variety of reasons it didn’t pass, but it has passed in Nebraska, Florida, Arizona, and so on and so forth. So I think this sort of highlights, in some ways, one of the partial successes because we have been able to raise the minimum wage in about half the country. And as we have learned more, I think it has led to policymakers actually experimenting with potentially higher minimum wages. And that has, I think, helped create and raise wages at the bottom, partly offsetting the growth in inequality that had occurred over decades after 1980.Krugman: So I read the Substack post and I noticed that you had some, I would say discreetly acerbic comments for some of the people who refused to believe it. Or maybe it was a later comment of yours. But there have always been some economists who keep on insisting that this cannot be right, either because they believe in Econ 101 and that demand curves slope down, or at least implicitly, a little bit of a political critique because obviously a pro-minimum wage argument or something that seems to say that raising the minimum wage is okay has a kind of political side. But what’s actually striking is how little of that there is—that labor economics makes economics look good in the sense that if you have kind of overwhelming empirical evidence that contradicts people’s preconceptions and maybe even their political slant, people actually mostly go with the evidence. Am I being too idealistic?Dube: I think that’s generally right. I think in general, people have certainly updated their views. It’s not that there’s only a single answer to what does the minimum wage do, regardless of how high it is or something like that; it’s going to differ. And so, there are disagreements like, “Well, where is the turning point?” But that’s part of good science. But to be clear, there will be studies that claim that no, actually the minimum wage always causes job losses. And even just this week, there was one that sort of argued that if you don’t control for population differences, if you just look at the number of jobs, well, the number of jobs in California has grown less than Texas. Most economists, of course, look at what share of people are actually working—that’s the employment rate. But if you simply look at the number of jobs, that actually might suggest that it’s falling.Now, here’s the thing: it has been falling in these minimum-wage-raised states compared to the 20 states that haven’t raised it for four and a half decades. That’s largely driven by college-educated workers, because, of course, we have more college-educated workers moving to the Sunbelt. So, I think this is sort of a silly argument, but it is an argument that has been made. But it goes to show that there will always be studies. But if you look at the body of evidence overall, it suggests that the typical study finds very small employment effects, and especially in studies published in the last ten years, it’s basically around zero. And I think that has had an impact.And I think economists have sort of updated—I would say probably especially younger scholars. Sometimes, you know, as we get older, maybe it becomes harder for some of us to revise our priors, but younger scholars are therefore really important.Krugman: Yeah. I occasionally find people digging up some old quote of mine where I said minimum wages reduce employment, and it’s a 30 or 35-year-old quote, and I get to use the line, “When I see new evidence, I change my mind. What do you do, exactly?” There was a flurry of stuff showing up in my inbox claiming that California raised the minimum wage and it’s a disaster, and the evidence is in. But I guess the evidence actually goes the other way now, right? So what happened in California?Dube: Yeah. So here’s the interesting thing. California established a sector-wide minimum wage for the fast-food workers, higher than the overall minimum wage. So this is a case where this is applying for larger chains with 60 or more locations across the country to have a $20 minimum wage. And at that time, I think the minimum wage was $16 overall in California. So what’s interesting is this is much higher. And it’s also partial coverage, meaning, you know, only part of the low-wage workforce is covered. So you could actually imagine there’d be more theoretical reasons to expect a more negative employment effect, because you can switch—maybe you can relabel workers who are delivery workers as, like, outsourced and so forth, and not covered. So anyway, well, you’ve now had about five studies that have looked at it, including one that I did. And, you know, there are some differences across the studies, but really, it turns out a big part of that is what kind of data is used, in a really surprising way.So there are two kinds of administrative data sources that are really government data accounting based on actual payroll records: the QCEW and the QWI. And I know this is going into the weeds a bit, but it just turns out that one better captures the number of jobs at a point in time, and then the other looks at how many people are in a particular pay period. Now, this increase in wages also raises turnover because these are much better jobs now, so you have less people cycling through the same number of positions. And so there’s one data set that looks at a whole pay period; it seems to find a small reduction in employment. The other looks at a point in time and finds no change. And it turns out this is driven by the fact that these jobs begin so much better: people are not quitting so there’s just a lot lower turnover. But generally speaking, the overall range suggests that the employment effects were quite small—small positive in some cases, small negative depending on exactly how you do it—very large wage effects, and a very sharp reduction in turnover. So even in this very specific and very sharp and high minimum wage increase that serves as an experiment, if you will, it doesn’t show any clear predictions and projections about job losses so far.Krugman: Okay. I want to cycle back just for a couple of minutes to the wage structure issue, where, again, there’s this kind of historical story which says that the United States became relatively egalitarian because of New Deal era and 1940s policies, and then became a lot less equal. It’s funny. I always blame what happened after 1980 on Ronald Reagan, but you’re saying it’s partly the Harvard Business School, but there’s also cross-national comparisons. Talk to me about Sweden and then maybe I’ll weigh in.Dube: Well, I think we’ve both been writing about Europe and both visiting there. And so I was in Sweden for a while and partly talking about this book and also doing some of my research. What’s really interesting is that Sweden, of course, has been historically held up as sort of an egalitarian country, but it’s also gone through quite a bit of reforms in the ‘90s and 2000s, including scaling back partly some of the welfare state. And so I was really curious, like, where are they in terms of inequality? And it turns out that, yeah, if you look at their tax and transfer, they actually redistribute less than they used to. But the starting point, which is how much inequality do you have to begin with from the pay structure, that is still much lower than most other high-income countries. And the United States, of course, is the other extreme.So, just one example: the gap between someone at the 90th percentile and the 10th percentile—that kind of is a good measure of wage inequality—between like the early ‘90s and today, it went maybe from 1.8 in Sweden to 2.2, a little bit of an increase. In the US, starting off much higher to begin with, it went from like 3.7 to 4.8. And it actually increases even more if you look at a broader time horizon. So it’s just a really important thing to understand: like, why is that? And we can go back to, well, is it because the Swedes are just a lot more similarly skilled between each other? Because that would have to be the reason. Or is there something else? It turns out it’s mostly something else, and that has to do with collective bargaining. And this is also a really important aspect of where people don’t fully also appreciate one really interesting and important fact, which is that in the United States, when we ask, “Is your job covered by union contract?” that question is almost the same as asking, “Are you a union member?” And of course, union membership in the US, maybe in the private sector, having something like, you know, 35% back in the ‘50s, is today like 6%. And so barely anyone overall is covered in the private sector by a union contract.But here’s the interesting thing: if you went to France and asked what share of the workforce are union members overall, it’s like 10%. But 98% of jobs are covered by a union contract, right? Because what you have is sectoral bargaining. And this is a key thing which I talk about in the book. Sectoral bargaining was something that the US never really had. We basically had organizing and negotiating between the union and the employer at a company-by-company, sometimes store-by-store or factory-by-factory level, versus in a lot of our peer economies, what happens is workers and their representatives bargain with the employer and their representative at a sectoral level and at a national setting.Krugman: Basically, sectoral level means that instead of getting a wage agreement with XYZ contractors, you got a wage agreement with the whole construction industry. And so even workers who are not members of unions, even workers who work at companies that have hardly any union members get the benefit of the negotiation. And so, Sweden’s an interesting case where they actually have high union membership.Dube: Yeah. And Nordic countries generally, partly because of the way unions help provide some additional benefits, including unemployment benefits—that makes it more rewarding to actually join a union. But their coverage rate is even higher. And in countries like France or Austria, the coverage rates are substantially higher. So as a result, we have seen wage inequality not rise as much in a lot of other countries. And in Sweden, it’s actually been particularly low, and they’ve actually been able to retain it. And so that is a really important contrast.So one of the things that I talk about in the book is that we can’t get to sectoral bargaining at the national level without a substantial change in labor law. And look, the reality is that past attempts at changing and reforming labor law have not fared well. But the good news is that we can actually get to pay standards at the industry or sector level state-by-state. And what’s even more interesting is we actually have started to see some of this already, and this really leans on a model that actually now comes from a different continent: Australia. Australia has basically a national-level setting of wage floors by industries and, within industries, by different types of jobs. And that’s done not through collective bargaining—they have collective bargaining on top of that—but this is basically a sector-wide floor that’s set. And again, Australia has lower wage inequality, substantially lower than the United States.So, I talk about what the U.S. might look like if we had states do something similar. And like I said, I started to write this book in 2021. I actually had put out a survey proposal back in 2019. But in the last five years, we have a number of states that have started to implement some of this. For example, Minnesota has a sector-wide board that has representatives from workers and employers and the government to set pay in the nursing home sector. We have California that has a healthcare-wide minimum wage. Even more recently in the state of Washington we have a childcare sector board that just in the coming months will be issuing a set of wage floors in that sector. So we’re starting to see experimentation like this. And that’s important because if we’re trying to rebuild wages, not just at the very bottom that the minimum wage can really hit, but also those towards the middle, especially in the childcare or healthcare sectors, these kinds of jobs, you can actually raise pay there through these sectoral initiatives.And I’m very excited to see more being done along these lines, especially because, you know, I don’t know what can be done in Washington, DC right now. But we don’t have to necessarily wait around for a better day to come in DC. We can actually start doing some of this now, more or less.Krugman: So, it’s like the minimum wage is where half the states can do a lot on this broader issue of a more equal and better wage structure, even if things are totally stymied in Washington.Dube: That’s right. And that’s one of the nice things about federalism in the U.S., that we do actually experiment at the state level. And in the best cases, some of the better experiments actually get adopted. It could also be that some not-so-great experiments are done and get adopted. But that’s the nature of democracy.Krugman: Yeah. One of the areas where you really did a lot of the research and it was revelatory, but also, in a weird way, something where I found a lot of my sort of lefty friends not willing to believe it, was about wages post-COVID. So, let’s talk about that for a second. What happened?Dube: So, around 2021 and 2022, of course I looked at wages like any labor economist. I started to look around and find something that was puzzling because, as we’ve known for a long time, wages have been rising faster at the top than the middle and the bottom. And this is the growing wage inequality story. But it was looking like wages right after COVID, when we were reopening, a lot of people didn’t have jobs, especially in the hospitality sector—we’d sort of shut down part of the economy.So if in January 2020 someone said, “We are going to shut down some parts of the economy for a while, especially with low-wage workers, and then we’re going to reopen,” it’s like—here’s your quiz. If I could have given my class this question, like, “What do you think? What’s your prediction about what will happen to wages for low-wage workers?” I would have said wages would probably fall due to lower demand. And instead, it looked like wages were rising more at the bottom. And so this is what David Autor—my coauthor on this along with Annie McGrew—and I called The Unexpected Compression, meaning the compression of wages, reducing inequality—which is exactly what happened in the aftermath of the reopening after COVID, and led to a surprising amount of wage growth at the bottom. And it reduced maybe a quarter to a third of the increase in wage inequality that had occurred between 1980 and 2019.And so this was really very, very striking. And we asked, well, why? And the reason is because we had a very tight labor market. There were a lot of job openings chasing workers and, as a result, it increased workers’ leverage. And it’s not just that there was more demand for workers—that’s true—but we also saw people leaving jobs. So we had quits from particularly low-paid jobs. This goes back to the issue of different companies with different pay policies: well, companies that were actually going for a low-wage strategy found it harder to hold on to those workers, and wages actually then rose more there. And this is the increasing of intensification of competition in the labor market that actually really helped boost wages.In many ways, this was like: if we want the market to actually work well for workers, you need the market to be relatively tight. And in writing the book, what I’ve found was that, it just turns out between 1980 and 2019—up to just before the pandemic—there were about seven years of a tight labor market. We used to spend a lot more time with tight labor markets in the postwar era before 1980 than we did since. And this turns out to be another important part of that equation of: what did it take to have broad-based wage growth? Those seven years—if I just, like, snap my fingers and just erase those like some evil genius villain, what would happen? Well, if I went to the top of the pay distribution, it would make very little impact; the average wage growth would fall from 1.1 to 1%. Not much change. At the bottom, it would go from already a small 0.3% average real wage growth to zero. So the entirety of the wage growth at the bottom between 1980 and 2019 happened in a handful of years that was basically close to full employment: the late 1990s and the late 2010s. Under Trump I, those years also saw significant compression.And this is why the post-pandemic period was a really important one. But it’s also very messy because, as we know, this was also a time of a large increase in inflation, a chunk of which was, by the way, global in nature. But nonetheless, people were very reasonably unhappy about it. So it makes for a difficult thing to extract the signal from noise. And this is why in the book, I really highlight also why even these other periods in US history were so important in actually raising wages, highlighting really the critical pillar that full employment plays if we are trying to rebuild the wage standard.Krugman: Okay. What do you see happening now? My comment sections are full of, “Oh, it’s a K-shaped economy —the top is rising, the bottom is falling.” And people really refuse to admit that the compression ever happened. But also there are all these fears about AI. Everybody wants to know what AI is going to do, and nobody can honestly say that they know. But do you have any views on where we’re going right now?Dube: Yeah. So the easiest part of that to answer is just to start with wages. The good news is that much of the compression that we saw has remained. The bad news is that the last year and a half has seen some take-back. Basically we have seen lower wage growth at the very bottom. The particularly bad news is, of course, from this year, when higher inflation has erased, as of now, pretty much the entirety of the real wage growth since Donald Trump took office. And so, that’s really bad. That’s not just at the bottom, but just generally. And so I think wages are not doing great right now and that part is largely just an unforced error of where we are today with having raised inflation, literally having caused a supply shock—inflation purely out of discretion, right?But yeah, the other part—and this is the longer part and harder to say—is what we see not within pay, not wage inequality. Wage inequality has been an important part of inequality overall in the last 50 years. But wealth and the division between capital and labor. And looking into the future, that’s where my worries lie: where are we going? And I guess, the worrisome part of me thinks that, broadly, there are two possible ways that the current AI structure can go. My modal view is probably that I think it’s going to lead to moderate productivity gains. And how well that translates into wage growth partly depends on what we do in our other policy and institutional choices. But I think it can potentially be a source of possible wage growth.The other—and these are two very polar cases—well, this is going to be the singularity. I tend to be skeptical of that view of an artificial general intelligence that really just dramatically transforms the world as we know it. It’s possible—anything is possible—but the other possibility is that actually there’s a bubble and then it bursts, and that leads to a downturn. And that downturn could be harmful. So, there are all of these possibilities and I, of course, don’t know which it might be. But there are risks on both ends where what I do know—and this is what I sort of talk a little bit about in the book—is that, again, it goes back to the word “choices.” I don’t think we need to think about what AI does as something that just happens to us. We can choose to have institutions and a governance structure that can regulate that.You know what’s interesting, going back to Sweden, I was talking to folks in the labor movement there, and they, of course, have contractual language that requires negotiations over technology, and that includes AI. Where that goes is unclear at this time—it’s still early days—but that’s the kind of thing that we need to think about. So imagine having sectoral boards in the health care sector that, among other things, also sort of has regulatory language around how AI is used and how it can affect the workforce. So we need to think creatively, of course at the national level, but even more locally if necessary, about what that governance looks like, and understanding that this is part of the choice that we can make and not simply, you know, take the technology as just a force of nature that we just have to live with.Krugman: Okay. So, choices. We can actually shape our future. Probably won’t, but can. Anyway, thanks so much for talking to me. And I’m sure we’ll want to come back in a couple of years and see how all of this played out.Dube: Sounds great. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

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

A quick video, thankfully not from Midtown ManhattanHi there. Paul Krugman with a very quick update. I haven’t done a regular post today because I’m jet-lagged out of my mind, but I just wanted to weigh in on something that will be happening a few minutes after I record this. Which is that a significant piece of Midtown Manhattan — the area surrounding Madison Square Garden — is about to be closed to all pedestrians.This is because of the Knicks game which is in Madison Square Garden. And Donald Trump is attending the Knicks game. Which means that the game entry itself is going to require enormously strict security. People are forbidden from bringing any kind of bag in there. It means that what should be an exciting joyous occasion is going to become quite hellish with long lines and who knows what else.But what really may not be obvious to many people — you might not know if you’re not a New Yorker — is that Madison Square Garden sits on top of Penn Station.That’s a story in itself, but there it is. And Penn Station is the busiest transit hub in America. It is where 600,000 or so people pass through on their way to and from New York by way of the Long Island Railroad and New Jersey Transit. I’ve spent a lot of my life waiting for trains at Penn Station. And it’s completely insane to ruin people’s day like that. You could say, well, what else are you going to do if you’re going to have to provide security for the President of the United States? And the answer is, Why does he have to go to this thing? The simple way to make several hundred thousand people’s lives noticeably better, at least for today, would be to just not go to the damn game. He can watch it on TV. He can go have a cage match in the ripped up White House lawn, if he likes.It’s not such a small thing. It shows a kind of contempt for ordinary people and a kind of self-aggrandizement — I want this so I’m going to make other people’s lives miserable just to indulge my whim — that is part and parcel of everything else that’s going on. It’s a small thing but my god I would actually have had a problem if I went into my office today because my office is not that far from Penn Station. It’s not in the banned zone but it’s going to be nightmares all around.All right, just another message that the people in charge do not care about people like you. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

TranscriptThe President of the United States is mentally ill, but everybody knows that. So while we should continue to focus on this degeneration taking place in front of our eyes, we should also, beyond that, ask what we can do about the powers, the interests, the system that put this horrifying person in a position of power.Hi I’m Paul Krugman. First video update in a while.It’s May 31st. If you have been following some of the news you may know that Trump’s mental deterioration, which has been obvious for quite a while, got even more extreme in the past few days. Tellingly, the things that are really driving him into more obvious dysfunction are things that are blows to his ego. I was especially struck — I was rattled actually — by his reaction to the wave of artists canceling out on the self-glorifying concert series he’s holding on the mall.So, if you haven’t seen it, here’s what he said on Truth Social: That artists are “getting the yips” and I am thinking about bringing the number one attraction anywhere in the world the man who gets much larger audiences than Elvis in his prime, and he does so without a guitar, the man who loves our country more than anyone else, and the man who some say is the greatest president in history, Donald J. Trump. Oh my god. I would not want to trust this guy alone in a room, let alone running the world’s formerly greatest power, although he’s doing a lot to run that into the ground.Okay, but we knew that, right? It’s not really a surprise to find out that he has lost his mind, what was left of it. And yet, he is in power. People who did a lot to put him in power did so, knowing this — the billionaires who contributed vast sums of money to his campaign, the Supreme Court which gave him immunity back in 2024 — they all knew who they were doing this for. They understood what they were doing. Now, maybe, even they are getting a bit of cold feet as as he goes over the edge and as we’re starting to see in Iran and elsewhere what happens when you have a lunatic running the United States, a lunatic who has far more power than a previous president because all of the normal institutional safeguards have been short-circuited or dismantled. Still, they are continuing to support him, and they are continuing to do so not just in concrete ways, but verbally, which matters. They continue to cover for him. Just the other day, Jeff Bezos — who is not an idiot; he has to know what he’s looking at — but he said, oh, Trump is much more mature than he was in his first term, which is obviously a complete lie. That is not what Jeff Bezos thinks. And it’s telling you that he is still providing cover. The Supreme Court, although it’s been knocking back a few things, is for the most part continuing to give Trump treatment that it would never have accorded, not just to any Democratic president, but to any previous Republican president. Okay, this is not coming out of thin air. These people — I’m not talking about Trump but people who are empowering him — are not stupid. Some of them are weak but they are also acting because they think there’s something in it for them.All of this at some level is about money and power for people beyond Trump. And it’s made possible by the fact that there is so much money in the hands of a few people, many of whom turn out, not too surprisingly, to be terrible, insensitive, anti-democratic people themselves. Obviously, we need to defang Trump as much as possible and make sure that neither he nor anybody who follows in his footsteps has power after the next two elections. But beyond that, we really need to do a thorough purging of the United States. We need a deMAGAfication. And I’m not going over the top by using a word that’s very similar to the denazification that we pursued successfully after World War II in Germany. And it’s not just the MAGA ideology, but the whole structure of hugely unequal power, hugely unequal wealth that made this horrific moment possible. It’s not going to be easy, and maybe it’s not going to be doable, but we have to try because this is a nightmare. This is a nightmare beyond, I think, even the worst fantasies of progressives, beyond the worst fantasies of conservatives who still have a conscience. (There still are plenty of those, but they’re no longer MAGA.)This has to be turned around and we should not, above all, whitewash or forget this moment. This is where a lot of forces in America have been leading and if we don’t do something beyond just getting rid of Trump, it’s going to happen again. Have a good rest of your weekend. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

I’m posting our Wednesday conversation as this week’s video. Transcript below.. . .TRANSCRIPT: Paul Krugman in Conversation with Heather Cox Richardson(recorded 5/20/26)Heather Cox Richardson: How are you doing, Professor Krugman? I know you’re on vacation.Paul Krugman: Yeah. As I wrote the other day, I’m in Europe, which means I don’t have to think about Trump 100% of the time, only about 90%. So that’s a little bit of release psychologically.HCR: It’s really astonishing, isn’t it? But hopefully we don’t talk entirely about him today. I’m actually interested and would love to hear what you have to say about artificial intelligence, not itself as an entity, but as a factor in the economy. Because boy, it sure looks to me like we are way overinvested in AI. I think the growth on the stock market is basically AI companies. We know now that there’s more construction in AI data centers than there is in commercial real estate. And I’m wondering, can we just talk about that and you walk us through what this looks like? Because everybody keeps saying, “Oh, it’s a bubble like the housing bubble or like the dot-com bubble.” And I’m looking at it and saying…PK: Obviously, history is mostly what we have to go on. There have been many bubbles like this. There’s some broad similarities to dot-com, which was also a telecommunication thing. It also looks like the canal bubble in England, which was earlier. Most of the bubbles were pretty clearly bubbles at the time and that was certainly true for dot-com which I sort of still remember in real time. But with AI, I’m finding that the contrasts with the late 90s bubble are really illuminating. Obviously it’s again technology with lots of investment. There’s an enormous enthusiasm of a kind, but in other ways, it’s quite different.HCR: Well, let’s start with this. What exactly is a bubble?PK: Yeah, it’s always a question, but a bubble more or less means that people are investing in something that has no realistic chance of paying off—not socially but just commercially, to an extent that justifies the amount of money being thrown at it. Crucially, a bubble is something that people do because everyone else is doing it. So, Robert Shiller, the great bubble theorist of modern economics, said that a bubble is a natural Ponzi scheme. It’s something where you get in and you make money because other people get in, and people keep on coming in because everybody before them made money. But in the end, it’s a game where the money isn’t really there. It all depends on fresh crops of suckers coming in. And at some point you run out of suckers. So that is a Ponzi scheme, especially when someone like a Bernie Madoff does it deliberately in a bubble. It also happens naturally. Nobody is orchestrating it but nonetheless the logic of it is the same as a Ponzi scheme. So basically, it’s a lot like pornography where you know it when you see it.But it’s not just the fact that people are wrong but that people are wrong in a way that should have been predictable and where it’s really something that is sustained by the momentum, by the fact that other people keep on coming in until they don’t.HCR: Okay, so when historians talk about this, they example they often use is tulips. It’s something that you can explain to people as a reference because it’s kind of a cool story. When you take it out of the economic system that we understand now, it’s easier to see.PK: Yeah, I mean, I’m not really fond of the tulips analogy but sort of the first thing that people think of as being something like a modern bubble was the tulip mania in the Netherlands. 17th century Netherlands was not quite the first modern economy because they weren’t quite modern, but they were on the way. They were commercialized. They were banking. And people were speculating in tulip bulbs, which were in fact valuable investments, but it got crazy. The prices went up because people were buying and buying and then prices went up further.And so, you can see the financial logic there, but I’m not really fond of this example because there wasn’t a whole lot of real investment. People weren’t building tulip infrastructure. But I guess in terms of the psychology, the market logic, it was not that different from railroad shares or dot com shares. So, yeah.And it is telling you, the fact that this is the Holland of Rembrandt and not only wasn’t there an internet, there weren’t even telephones, and yet the psychological logic was the same. And that’s kind of telling you that in some ways there’s a kind of universality about bubbles.HCR: So when we look at AI now, am I correct that there are two super companies in which the majority of AI money is invested?PK: Yeah. There’s OpenAI and there’s Anthropic and who are the big players but it’s an industry. It’s not just that these are the two biggest AI models. So you’re either talking to ChatGPT or to Claude which are the two leaders but then Google has its own model which is Gemini and then Elon Musk has a really bad one, Grok. And then there’s a bunch of Chinese versions, where they’ve taken a very different strategy. So it’s a little bit more complicated than that. And then there’s this network.So in a lot of ways, you want to think of this whole AI boom bubble as being a little bit like the California gold rush, another historical parallel. The people who are selling Anthropic and OpenAI are like miners, prospectors looking for gold. And what we know in California in the 1840s was that the people looking for gold mostly ended up bust but the people who made money were basically the Levi Strausses who didn’t make money by finding gold. They made money by selling equipment, by selling jeans and picks and shovels and also brothels and liquor to the prospectors.The equivalents of that now are companies like Nvidia which is selling the specialized chips that go into AI and there’s a bunch of other companies making a lot of money basically renting out computational capacity. So now we’re starting to see at least a little bit of money being made by Anthropic. All of my friends are playing with Claude and I just can’t get myself to do it. The big thing seems to be vibe coding, which lets you do programming without knowing how to program. And so Anthropic is actually making some money because people are subscribing to that service. But at this point, most of the money being made is from people basically selling equipment, selling the suppliers to this thing.And so the question from a kind financial economic point of view is whether there will ever be enough revenue, whether people actually end up paying enough for AI, this thing that we call AI, to justify all of the money being thrown at the industry. And history would suggest there’s a very good chance that the most likely outcome is no. The most likely outcome is that it will end up being a waste. But again, history doesn’t always repeat so maybe this pays off but I don’t think that explains the enthusiasm.HCR: Well, it’s interesting because one of the things that you’re seeing lately is the changing model for paying AI. That is, most of the use of AI currently is subsidized really quite heavily for every dollar of computing power that people use. It’s subsidized between $3 and $25 at the minimum. And the idea that people are actually going to pay the extraordinary costs that certainly right now it would warrant…it doesn’t seem like it’s going to happen.PK: Well there’s a question. Let me play devil’s advocate here for a second. When the dot-com bubble happened and people were offering all these services on the Internet where people weren’t willing to pay remotely enough to justify the money that was being thrown at it. But what eventually happened was that a few companies managed to create walled gardens. They managed to create enclaves. Essentially, Facebook is a walled garden where people pay for ads or watch ads or whatever. Google basically ended up being a kind of walled garden. The search was free, but Google was making money out of pushing targeted ads. We used to joke about Amazon. I’m old enough to remember when Amazon was famously unprofitable and was never going to be profitable. But it turns out that, well, in the end, Jeff Bezos built a moat with all of the infrastructure, the distribution centers. And so now Amazon is a huge moneymaker and evil. But that’s another story. And what’s happening with AI is, to a certain extent, they’re building walled gardens from the beginning.So I know people who’ve been using Claude or have been playing with Claude, I think would be a better description, and the results have been terrible. And it turns out that the results are terrible unless you pay and buy a higher tier of service. Now even there it’s not remotely enough to justify the expense [of investments] but clearly Anthropic is trying to create a situation in which people get hooked on vibe coding and then end up addicted and they’re going to end up shelling out large amounts of money to have the the version of Claude that works. And with something like that you can already see the outlines, at least, of how the industry intends to make money.Now, history suggests that usually there are only a few winners. Although one thing that’s also different from the dot-com bubble, is that in the dot-com bubble, there were hundreds of players trying to succeed, and in the end, just a few highly profitable corporations survived. This is not like that. This industry, at least on the U.S. side, is just a handful of players. So the chance that one or two or maybe three big AI models will end up becoming highly profitable monopolies, it’s not that remote.So, as I say, things tend to be somewhat different. I mean, we don’t want to start talking about what AI is exactly, but I think there are inherent weaknesses of it. I mean, it’s a technology where you cannot predict exactly what the tools will do, and you cannot know when they’re going to betray you; when they’re going to deliver hallucinations instead of actual-actual true results. That’s weird. I don’t know if there’s anything like that and you have to wonder, just how much will our society be willing to rely on technology that every once in a while just decides to go crazy or basically turn into Frankenstein’s monster on you. So that would be my guess, but it’s not as if there’s no possible way these guys could make money.HCR: Well, but there is something interesting in it as well, and I think you’ve identified that many of the things that we’re identifying as bubbles actually start with a product that people want. They don’t have to create their own markets. And the other piece of that is I certainly have heard people say exactly what you’re saying, that there will be a fallout where we’ll get a few good ideas out of where we are. And then you can have your walled gardens around those things. But it’s rare.I mean, I can think of an occasion for it when we got the Union Pacific Railroad in the 1860s, because Congress recognizes that people actually would like to get to California. But if you actually wait for there to be enough of a market in the plains to get those railroads going all the way to California, you’re going to be waiting a very long time. So they put the money up to create a market for those railroads. But then very quickly you get all these branch roads that lead to nowhere and end up feeding that railroad boom in the 1870s that collapses.So it does feel to me like this is something different. You’re not getting those walled gardens right now where people say, “Yeah, I really want to get into that and I’m willing to pay for it,” the way we were with iPhones, for example, or the way we were with the internet. I remember the first time I turned on the internet I was teaching at MIT and they made us take seminars so that we understood this new technology and I can still remember going home and saying, “Oh my god. My world just changed because I can do all this research.” This is the very early days but you look at the AI stuff and, I started using it pretty heavily just to see what it would do and I have become completely against it because so far I haven’t seen anything that isn’t crap. And I was agnostic. I’m usually pro-technology.Now, I am willing to admit that there are places where it is probably a good thing, like checking engineering plans in construction plans, for example. We know that there are ways in which mixing cement can be much more efficient if you use AI [for calculations]. But right now, I don’t see it taking off.PK: Well, you and I are not typical, of course. I think there’s an important distinction here but what I actually am using a little bit of AI for is actually producing transcripts of videos. You run a video through AI to produce a transcript which is often hilarious in detail but you can fix that. You wouldn’t believe what AI was making of the words, “vibecession.” But anyway, it can do certain things. I also find that with economic history, often there are a lot of papers that have tables and charts and I can feed them into a sort of low grade AI model as a PDF and get the numbers out instead of having to type the numbers from the old papers. So there are uses even for someone like me.I mean, in a lot of ways AI is kind of awesome in how much it manages to produce intelligible if sometimes dishonest responses to plain language questions. That is awesome given where we used to be, even if it’s not totally reliable. But the main thing is that a lot of AI—and certainly what is likely to be the paying uses of AI—is not coming from individuals. It’s not coming from me or you or some middle manager deciding, “Hey, maybe I can use AI to do this better, or maybe I’m just going to have some fun with it.” (Slightly scary but I do know people who are developing relationships with Chat GPT.) But it’s mostly coming from people working at businesses and large organizations who are being told, “You must use AI.” And this is something I’ve never seen before. This is kind of coercive technology adoption where the big money is telling workers that you must use this technology.And one thing you’ll remember from the early days of the internet, it was joyful. People loved the internet. People hate AI. We’re now having a regular pattern at college commencements of speakers who start talking about AI and all of the students start booing because everybody hates this. And the question is, how far can you go with a technology that everybody hates? So that’s one of the things that is unprecedented.You think of the people whose jobs were displaced by power looms, the Luddites. Okay, they hated the technology because they didn’t like what it was doing to their jobs but people hate using AI and they hate the fact that other people are using it. But they are to a large extent being dragooned into doing it and I’m not sure that I can think of a historical example like that. It doesn’t seem like it’s a very sustainable path forward.HCR: So, Henry Ford would have something to say about trying to force people to take on new technologies. I actually saw an Edsel a few years ago. I’d never seen one. I’d always just heard about how much they were rejected. And I saw it and I’m like, “That’s it? They just didn’t like the front grill?” And yeah, people just didn’t like the front grill and they wouldn’t go with it. But that brings up another question for me. You’re hearing a lot and there were stories out just today about companies cutting thousands of jobs because people were being replaced by AI. And I have a question for you about that. I actually then want to end with, what does this look like for the entire society? But it certainly looks to me that as the economy slows down, that it’s certainly possible that companies are letting workers go saying it’s AI. And what they’re really doing is they’re reducing their forces. Is it right that AI is possibly simply being a cover for people who wanted to downsize anyway?PK: Well, there’s some of both. I mean, if you’re a company that wants to, in effect, increase the workload on a smaller number of workers, then AI is a great cover story. You can say, “Oh, we’re doing this because of the wonders of modern technology.”And by the way, we expect you to, in effect, put in 10 hour days.We keep getting stories of companies that lay off a lot of workers saying that AI can do it better and then it turns out it can’t. And I don’t think these are just stories. If we’re saying that AI is just doing routine stuff. Some of my friends who actually work on this, like Henry Farrell, say that AI is a social technology. It’s basically agglomerating what lots of people have said. And it’s delivering back to you what a lot of people who know something about a subject would say if asked the question you asked. And it’s not understanding. There’s no mind there. But it is delivering a kind of aggregated, standard response. And a lot of jobs are like that. If you’re talking to the help desk at a call center somewhere thousands of miles away, the person that you’re talking to, if it is an actual person, may very well be there with a three-ring binder looking for what they’re supposed to say. And AI can replace that job. AI is basically doing much the same. A lot of people are doing fairly routinized, standardized work. It’s just the common opinion of common opinion responses to things as a way of doing their jobs. So that’s real.So it’s not just that AI is an excuse, but again, it’s an excuse. I mean, we always see this, right? To the extent that businesses care either what their workers feel or what their customers feel, stuff happening provides external excuses.This is the story of greedflation, that companies may raise prices when there’s an energy crisis, not because their actual costs have gone up, but because with everybody raising prices, who will notice if I get greedy? So there’s something like that on AI and jobs as well. But I don’t know. I mean, again there are enough stories now of companies that have laid off all of their experienced professionals for AI, and it turns out, well, the experienced professionals could actually deal with questions that were not routine, and they didn’t hallucinate, and so they’re finding that they made a mistake.But it’s amazing how little we know about how this works. I don’t remember there being so much uncertainty about what you could actually do with the internet. And of course, I don’t have any memory of what people thought you could do with railroads. But I think this is kind of unprecedented as this massive technology that we’re investing trillions of dollars in and still nobody quite knows how it works or what it will do.HCR: Well, I want to end with my real question. That is, if I’m correct, and these people I’m reading are correct about it looking like a real bubble, what does it look like if that bubble bursts? This is the reason I use the comparison of the 19th century railroads, or you could do the 1920s with cars, and the investment in AI in data centers, in hiring practices, certainly in investments, certainly in NVIDIA and all these different places that are tied into that specific technology.Now, I’ve heard from a lot of people, you included, that we’re going to get some good technologies out of it no matter what happens. And I agree with that. We always do. But with all the pressures that are on the American economy right now, I’m worried. And should I be?PK: Yeah. Let me give you sort of good news and definitely bad news. The good news, and I say sort of for a reason, is that on the face of it, if you just look at the scale of the AI investment, it looks like that’s driving all of our economic growth. But it turns out that an awful lot of the AI spending is actually imported tech gear. It’s actually imported chips and computer equipment and so on. So if the AI bubble bursts, a large part of the burst would be falling imports. It would be a big shock to the domestic economy but not nearly as much as you might think. There’s been a back and forth about how much economic growth has been AI and how much the high import intensity of the stuff. So in some ways this is a shock to the world economy and not so much to the U.S. economy, specifically. So I guess that’s kind of good news, though not so good for other countries. But, you know, Taiwan has experienced an enormous economic growth because of all the chips they’re selling to U.S. AI companies. So a lot of the bad news will end up showing up in Taiwan rather than in the U.S.The bad news: this would have been true of railroads, as well, but the dot-com bubble in terms of the actual really big money laid out was telecoms rather than dot-coms. It was the telecommunications companies investing especially in fiber optics, laying down tremendous amounts of fiber optic cable which stayed unused for a long time. There was lots of dark fiber after the dot-com bubble burst but it was still there. Fiber optic cable doesn’t depreciate rapidly. It was still there in the ground and eventually got used. So it was a lot of useful investments.As I understand it, these data centers that are being built, the investment in chips, the investment in software, this stuff will depreciate physically pretty fast. It will become outmoded pretty fast. So I think there’s likely to be a much higher proportion of just wasted investment that never finds a use out of this boom than there was out of the last tech boom. So, not so great.And by the way, the Chinese are taking a very different approach. They’re building much more limited models that just don’t use as much information but get a high fraction of the performance and use a lot less energy. If the world ends up going to that model of AI instead of the all-encompassing ones then we will have just wasted the money. We will have spent a lot of money on building super impressive stuff that nobody actually wants to use.Obviously the railroads still had railroads. You could use the tracks later on. You could use dark fiber. I think the original boom that looks something like this was, in fact, the British Canal boom around 1800. All of those left usable legacies. And this one might not.HCR: Wow. Fascinating. Absolutely fascinating. Thank you. It’s always a pleasure to talk to you.PK: Good to be on. Let’s do this again. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

For more videos, visit my YouTube channel. TranscriptHi, Paul Krugman here. Different city, different country, still not home. Unfortunately, couldn’t manage to do this one in a cafe, but we have been sitting in cafes a fair bit.I just want to weigh in on a really kind of alarming report on consumer confidence that came out today. This is the long-running University of Michigan survey of consumer sentiment. It is kind of time hallowed. I don’t know that it’s necessarily the gold standard — there are other surveys — but this is the one that people really do focus on most.The numbers are terrible, people. We’re hitting a record low on consumer sentiment which fits in with the general picture. We know that people are very upset about prices; they’re very upset about economic management; they just don’t feel that there’s anyone making any sense who’s in charge of things; which is all true. I mean we can argue that objectively things are not as bad as all that. We have consumer sentiment that’s worse than at the depths of the financial crisis. We have consumer sentiment that is worse than during the stagflation circa 1980. And it’s hard to say that that’s really justified. But OK, the customer is always right. If people are feeling this down then we need to take that seriously.But that is actually not the big issue. The really big issue is inflation expectations.Now why do we focus on that? Inflation for a short period of time is not good but it’s tolerable. If we have a year of elevated inflation — even if you do something stupid, if you impose tariffs and raise consumer prices, or you start a war and mishandle it and you drive up oil prices that is not good. But it only turns into a really, really serious problem if it gets “entrenched” in the economy.That is usually the term that people at the Federal Reserve use. And what they mean is this. If you think about how wages and prices are set, think about the process of inflation. Not all prices are set at the same time. There’s a kind of a leapfrogging in which each individual company, each individual employer is setting prices based both on inflation in the past and on inflation that they expect in the future. They’re looking over their shoulders at what they think competitors are going to be charging. They’re looking over their shoulders at what they think is going to happen to their costs. And they need to do that because for many prices, it’s impractical and costly and disruptive to change them too frequently. So you set prices for a year in advance, something like that. You set prices for a while, which means that a lot of what’s happening to prices now is determined by what people think is going to be happening to prices in the future.We don’t have great measures of what’s in the minds of people who are setting prices, but we have pretty good, or at least consistent over time, measures of what consumers expect. And, you know, we’re all living in the same society. So that’s telling you something about where we are in terms of expected inflation. If you have a spike in inflation, if inflation comes and goes, but it doesn’t get built into expectations of higher inflation for a long time, then okay, you ride through it. Maybe people vote the bums out, but you ride through it. If it gets built into expectations, then it’s a much a much more difficult situation. Then you have to somehow wring those expectations of high inflation out of the economy because if you don’t, inflation will just feed on itself. Prices will rise because everybody expects prices to rise and those expectations will be confirmed and it just goes on.So if you want to return to an acceptably low rate of inflation and if people are expecting a high rate of inflation, then while there may be other ways, normally what we do is we put the economy through a wringer. which is what happened at the beginning of the 1980s.After the inflation of the 1970s, inflation was eventually brought under control, but that would happen through years of extremely high punishing unemployment. Some people looking at inflation four years ago, looking at the inflation of 2021-2022 predicted that we’d have to do the same thing, that having seen a burst of inflation after decades of low inflation, that we were going to have to go through something like the end of the 70s stagflation, that we’d have to go through a severe recession with high unemployment for years to get inflation back down. Something I called right — we all get things wrong, but something I called right — was that I said no, that that’s not going to happen, that it’s a false analogy. And the reason I said it was a false analogy was because medium-term expected inflation had not gone up very much.Now, we go for medium term because we know that for short-term inflation, well, people’s expectations about that bounce around a lot, often driven by fluctuations in gasoline prices. But medium-term expectations are normally more stable, so if they rise that’s an indicator that you are starting to get entrenched inflation and things will be really bad.In 2022 — sorry, let’s go back to 1980 — medium-term inflation expectations as measured by the Michigan survey were about nine percent — expected inflation over the next five to ten years was 9%. That was really bad. That said that people had basically internalized the inflation of the 70s and expected it to continue indefinitely.This meant that actually getting inflation back down to tolerable levels was very costly and very painful. In 2022, well, expected inflation over the next five years had crept up by a fraction of a percentage point, but it was still quite low. People were not at all building in anything like the expected inflation that prevailed before the great painful disinflation of the 1980s.And so I was quite confident that the dire predictions about what it would take to bring that inflation back down were wrong. Well, guess what? Especially in the last two months, expected inflation over the next five years has gone up a lot. It’s 3.9 percent in the latest Michigan release. That is, it’s not 1980 but it’s really bad. It’s the worst we’ve seen on that number since the early 1980s. It is saying that the person on the street is starting to believe after the tariff shock and now the Iran shock that we’re in a higher inflation environment. And we have to suspect that people making decisions about prices are thinking the same way. They’re going to start building those expectations into pricing. So we’re starting to get the thing that everyone in the economics biz fears, which is entrenched inflation. And if that’s happening, then the costs of the policy failures, the policy foolishness of the past year and a half are going to be a lot bigger than anyone is now reckoning. This is going to be an extremely painful situation that we have. It looks, at least according to these preliminary indications, as if Donald Trump has managed to create the kind of environment that we had at the end of the 1970s stagflation, which means that this is going to be really, really ugly and that we are going to be paying the price for these misadventures for years to come. Happy thought. Have a nice day. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

TranscriptMy president went to China, and all I got was even higher gas prices. Hi, Paul Krugman here. Recording a video today rather than one of my usual posts,.I just feel like I’ve been too immersed in charts and wanted to do something shorter, simpler, whatever. It’s Friday. The summit between Trump and Xi Jinping has wrapped up. Hard to say what exactly was accomplished, but at least Trump is saying that China is going to buy more US oil. That’s the headline on at least some of the financial sources that I look at. And in fact, crude oil prices in the United States have risen at least a little bit in response to that announcement.The odd thing is that Trump seems to think that China buying more US oil is a good thing, which it is probably not from the point of view of the United States and definitely not for him. So let’s walk through what all of this means. Background: The United States, which used to import a large part of its oil, is now a net exporter of oil. That’s what shale oil did. Since about 2020, we’ve been selling more oil to the rest of the world than we buy. Now that’s a net number. It’s actually a fairly complicated picture because there are different kinds of oil and the geography of oil creates some complications. So we have the upper Midwest importing oil from Canada, Texas exporting oil to Europe and it’s a bit of a mix of of where the oil is produced and where it goes so that there are actually quite large gross flows underneath that net transaction. But, okay, that’s not all that relevant here. What is relevant, you might think, is that the United States overall produces more oil than it consumes. And you might think, in fact, some people still seem to imagine, that this insulates the United States, that when the Strait of Hormuz is closed and global oil prices skyrocket, well, America, which is actually selling more oil than it buys, should be a net winner, which arguably is true for the economy as a whole, although as I’ll say in a minute, even that’s not entirely clear.But it’s definitely not true for most of the U.S. public. Most of us have little or no stake in the oil industry, but we buy gasoline and diesel and we buy products whose price ultimately includes the cost of gasoline and diesel. So higher oil prices hurt most Americans.And it’s the global situation that has led to higher prices in the United States. If you look at net exports of oil and petroleum products before the Iran war started the United States was exporting about 2.9 million barrels a day on net of oil. Now we’re exporting about 5.8 million barrels a day.That’s a response to the very high prices that buyers in Europe and Asia are willing to pay for oil now that the Strait of Hormuz is closed. That’s how markets work. That’s a significant contributor by the way to easing the impact of Hormuz on the world economy outside the United States. There were something like 20 million barrels a day of oil being shipped through the strait. Some of that is being routed around through pipelines across Arabia to the Red Sea. But a significant part of it, something like 15% of that shortfall is being made up by increased exports from the United States.We still have a looming crunch because a significant amount of oil demand is being met by drawing down inventories and we’re kind of getting to crunch point there but that’s a whole other issue. Now the downside for the United States is that more oil shipped abroad, unless we have a large increase in US production— which is not happening and won’t happen any time quickly — that means more oil being shipped abroad means less oil for the US market so prices have risen. And so here we have the United States which is self-sufficient and more than self-sufficient in oil, we’re nonetheless seeing gasoline prices $1.50 or $1.60 a gallon higher than they were before the war started and diesel prices up even more than that. So this is not a great thing for, this is a bad thing for most Americans and having the Chinese buy some more oil — hard to know what if anything is going to come of this — but having the Chinese buy even more US oil is going to enhance the negative effect. It’s going to drive gas prices even higher. Now there are beneficiaries. Basically, oil producing companies are getting a windfall. They’re getting a much higher price for their product. West Texas Intermediate, the benchmark price of the United States, was around $65 a barrel before the war started. It’s around $102 as I record this. So that’s a pretty big benefit in terms of profits for a select group of oil companies. Who benefits from that? Because in the end, corporations are not people, they are ultimately owned by people. Well, okay, people who own stock in oil companies are the ultimate beneficiaries of these higher profits. So who are those people? We don’t know exactly. If you look at it, it turns out that oil industry stuff is largely owned by institutional investors who in turn have other investors and it’s a more than a little bit not transparent exactly who the beneficiaries are here. But in general what we know about US stocks is two things: A significant fraction are owned by foreigners. There’s a little bit of dispute on this, but I’ve seen estimates that run as high as 40% of U.S. equities being foreign owned. If that’s the case then of these excess profits something like 40 cents on the dollar might be going to foreigners. Not totally sure about that number but what we do know is that among U.S. investors, among the U.S. public, stocks are basically held by a small fraction of the population, about half by the richest 1%, another 37%, according to the latest numbers I’ve seen, by the next 9%. So 10% of the US population, and this by the way includes mutual funds, it includes pension, it includes your TIAA — sorry TIAA, that’s only what academics have — it includes your 401ks. So US stocks are overwhelmingly held by a small fraction of the population. The great bulk of the U.S. population has very little stake in the stock market. For all the talk about it, it really is not something that’s terribly relevant to most people. On the other hand, almost everybody has to fill up their tanks and even if you don’t, even if you are carless in New York City, which is not very many people but anyway, even so, the price of almost everything you buy is affected by the price of fuel. And it’s affected by the price of fertilizer, which also is very much petroleum related. So, on balance, certainly 80, 85% or more of the US public is a net loser from higher oil prices and hence a net loser from increased US sales of oil abroad. Okay, you can think of a couple of ways that you might be able to change that conclusion. It would be more beneficial to the US public at large if oil companies paid a lot of taxes on their profits. Well, I can stop right there. Obviously the oil industry has historically been famous for not paying very much in taxes.It could be a good thing for the American public if wealthy investors who have capital gains as a result of this surge in oil prices pay a lot more in taxes. But again we can stop right there. The U.S. system in general gives people who derive their standard of living, their wealth, their income from capital gains a much, much lower burden than ordinary people. I mean, the income tax system is progressive. The income tax rate on — my favorite line from the movie Wall Street, $400,000 a year working Wall Street stiffs — they pay quite high personal tax rates, especially of course if they live in New York City. But the people who are getting their money from stocks and from gains in stock prices pay much lower tax rates. So this is not going to be a significant source of revenue and therefore it’s not going to ease the burden of paying for government on the rest of us.So very hard to see how you can treat increased Chinese purchases of oil as a win for America. It’s a win for people who benefit from higher oil prices, but that’s a small group of people, and it’s a loss for people who are hurt by higher oil prices, which is almost everybody.Why we should think of this as a positive outcome, well, obviously, I’m tired of pointing out things that Trump doesn’t understand, but what you would think is a little peculiar is that this is bad politically. I mean the price of gasoline has become a real flashpoint in the US political debate. You could argue that it’s looming larger than the actual share of gasoline in people’s budgets can justify. But in this case: historically, presidents have had very little impact on the price of gasoline. It’s always been a kind of a standing complaint among political observers that this price that presidents really don’t control should play such a large role in politics. Except this time around the price of gasoline is higher because Donald Trump decided to start a war. End of story. So in this case to the extent that it’s a negative — and the approval of Trump on prices in general and gas prices in particular is incredibly negative — you would think that he would know that getting China to buy more US oil is not something that you want to do now. It’s certainly not an achievement that you want to trumpet, but here we are.In the end I I actually don’t think this is going to happen. I think that the Chinese will in practice do what they’ve done on previous trade agreements, which is just say that they’re going to do stuff and not do it and it’ll all get kind of lost in the shuffle.But to the extent it happens, this is not a gain. If this was the major consequence of the summit, the United States scored another own goal. On that note, have a great day. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

Remember tariffs? They have not gone away. Hi, Paul Krugman with another video update from another cafe. You may remember that back in April 2025, which was seven years ago — well, actually just about one year ago, but it feels like longer — Donald Trump shocked us all with massive tariffs on basically everybody. It was an extraordinary policy move.It was also clearly illegal. It was also clearly really very stupid from the point of view of any kind of rational economic strategy. All of that seemed like the biggest thing in the world at the time. But of course it’s been overshadowed in the last 70 plus days by something new which was also illegal and massively stupid and even more so because it’s war. So the tariff issue has kind of receded in our perception. But it has not gone away. Since the initial imposition of tariffs, we’ve had a lot of action. Again, it would be the biggest thing in the world if it wasn’t for everything else that is going on. The whole legal basis of the tariffs was tossed out by the Supreme Court after having been ruled illegal by lower courts in several different hearings. The basis of the original tariffs was an obscure law called the International Economic Emergency Power Act, which clearly did not apply to the situation as of April 2025. When those tariffs were tossed, Trump responded or his people responded by invoking “Section 122.” I know there’s a lot of section numbers in all of this stuff and one question is what law are they sections of. and the answer is mostly they’re all different laws but anyway, 122 is for a balance of payments emergency. It allows a 10% tariff — lower than the IEEPA tariffs — but that was also clearly illegal, and a court has just ruled that it was illegal too. So now that will be appealed and there will be a couple more stages and we’ll see what the Supreme Court does.In many ways I think people kind of tuned this out because there’s a time limit on 122 tariffs —150 days — so by the time the courts reached a decision that story would probably be over anyway and the Trump administration would have turned to other tariffs. But it turns out to actually not be good to ignore these tariffs because one thing we have learned — actually we should have known if we thought about it — was that when the administration imposes illegal tariffs and they are eventually ruled illegal, that is a machine for ripping off the American public. When the tariffs are imposed they get passed on to consumers in the form of higher prices. When they are ruled illegal many of the companies that were importing goods get refunds — which is slowly getting underway for the original tariffs and will eventually happen, probably, for the new tariffs — but they don’t pass that on to consumers. And as I’ll explain in a minute, that’s not a result of conspiracy. It’s basically a policy failure, given the way this works. There’s no reason to think that consumers would benefit from the refunds on the past tariffs. But in any case, what we’re seeing now is really, really destructive policies, although it takes a lot of bad economic policy to do as much damage as a war, especially a stupid failed war, but that’s where we are. Let’s talk for a second about the tariffs. The crucial point for the immediate effects is this. When a tariff is imposed, the tariff is paid by importers, which is either companies that specialize in import-export or fairly often U.S. companies or retailers that are buying stuff from abroad and arranging for it to be shipped, either to be used in production or to be sold on to US consumers.From their point of view, the tariff is a cost per unit sold. It’s a marginal cost, to use economic jargon. And so, of course, they have every incentive to pass the tariff on to consumers, unless foreigners bear the tariff, which actually doesn’t happen, although Trump insists that it does.When the tariff is eventually ruled illegal, you can’t say oh well sorry about that but water under the bridge. If you’ve collected taxes from somebody and you didn’t have the right to do that then rule of law at the most minimal level says you have to pay it back. Which is in fact going to happen to a lot of a lot of the Trump tariffs. But that is not a marginal cost. The amount that an importer gets as a refund from illegal tariffs that were imposed in the past doesn’t depend on how much they sell now.So it’s not a marginal cost, again, to use the economics jargon. Some people have been saying that the fact that there’s no sign that the tariff refunds will be passed on to consumers is somehow monopoly power or collusion or something. Well, I’m not saying there isn’t monopoly power and collusion, but you don’t need that. That’s exactly what you would expect even if there was lots of competition among the importers. The refund doesn’t affect the price that a company needs to charge to make back its expenses. It doesn’t affect the price they need to charge to stay in line with their competitors.So we have created a machine which rips off consumers when the tariffs are imposed, then hands a bunch of money to corporations when the tariffs are ruled illegal. So this is really not great stuff, and it’s pretty big. The Trump tariffs have been something like 1% of GDP, and most of them illegal and therefore a ripoff of consumers. That’s a big deal. That’s hundreds of billions of dollars that were taken for no good reason. It almost seems beside the point to point out that the tariffs have also failed. All of the things that they were supposed to do rebuild manufacturing — manufacturing employment is down — reduce the trade deficit — the trade deficit isn’t down — haven’t happened. So this was all a really large burden on the US public completely without any payoff. What happens from here? Well, you might think that maybe at least Trump and maybe at least the people around him have learned a lesson and they’ll stop doing such stupid things. Not going to happen. Nothing is learned here. The latest is that Kevin Hassett, the administration’s chief economist, more or less, says that we’re going to have 6% growth this year. Which is, doesn’t happen except when you’re coming out of a deep, deep recession. The last time it happened, except for recovery from COVID, was in 1984, Morning in America. There is no reason at all to think that we’re going to have Morning Under Trump. So another policy disaster, although it’s overshadowed by the war. But this is really, really bad. Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

TranscriptAccording to press reports, Jeff Bezos is planning to sell his 417-foot yacht, the one with a carved figurehead of Lauren Sanchez, his second wife, at the front. According to these reports, he’s unhappy at the attention that the yacht is getting. Funny how that works. Hi, Paul Krugman with a bit of an experiment.I am recording this in a cafe, a cafe that is not in New York, as you could probably guess. Let’s see how the noise level works with the headphones. OK obviously playing the world’s tiniest violin . We’re not going to weep for Jeff Bezos’s discomfort and yes there’s a certain amount of just plain satisfaction at seeing him taken down a peg. But I think there’s a little bit more to it. This is not just invidious comparison and hostility towards people who have acquired great wealth, although there’s nothing wrong with that. This is about the role of moods, vibes, and the motivations of the malefactors of great wealth that play such a large role in the US political system now. As everybody should know, we have seen an extraordinary concentration of wealth at the top, probably bigger than the concentration that took place in the Gilded Age. And it’s gone along with something which is, I think, different from what we had in the late 19th century. In the late 19th century there were certain proprieties that people of great wealth felt that they had to observe. They had to maintain a certain pretense. The Victorian virtues were honored at least on the face of it. Extremely wealthy men had conventional marriages. Presumably very many of them had mistresses as well; the strictures of conventional morality were not actually obeyed nearly as much as people wanted you to think — but they wanted you to think. They wanted to pretend to be good family men, all of that. A kind of hypocrisy was part of the package, and hypocrisy is the tribute that vice pays to virtue. Now we have a very permissive culture, which is not on the whole a bad thing. There’s a lot of openness, there’s a lot of misery that is avoided by not having to maintain the pretense that all marriages are happy, that people don’t have whatever motivations they have in reality. But one of the things that’s happened is that we have now a plutocracy, a concentration of incredible wealth and power at the top, without even the hypocrisy of morality, the hypocrisy of pretending to be virtuous.Now there was, politically, some back pressure against that until Trump was elected the second time. And I think we have to bear in mind, we have to take seriously the idea that an important reason that we are in the state we’re in, an important reason that we have a would-be fascist regime in power — I don’t think they’re quite managing to pull it off, but they definitely would if they could — is that a handful of incredibly wealthy men wanted all restraints off. They wanted to be able to live the privilege of their great wealth. They wanted to be able to just flaunt their wealth, performatively display their dominance, not have to worry about people chiding them for being politically incorrect just because they were abusive towards other people because of their gender or their whatever, their race, anything. There was a Financial Times article just after the 2024 election with Wall Street people celebrating the fact that they were now free to say pussy and retard again. This is a pretty big deal. And I think if you look at the first year or so of the second Trump administration, the people at the top, Elon Musk, Jeff Bezos, Mark Zuckerberg, they all were acting as if OK, no need to apologize, no need to pretend to be good. By the way, charitable giving has dropped way off. The super wealthy are just not doing the kind of reputation enhancing philanthropic giving that their predecessors in the Gilded Age engaged in. So this is a completely amoral elite, I got it, you don’t, I’m in power, I’m friends with the people who hold ultimate power, I don’t have to worry, I don’t care what you think. But it’s not lasting. It turns out, and this is why I think this is somewhat important, it turns out that the backlash is powerful enough, scary enough at least to worry them.I don’t think that people like Bezos are actually scared that the torches and pitchforks are coming for them, but they are starting to realize that maybe they haven’t purchased themselves total immunity the way they thought they had. And this is, I think, a good sign. We need more hypocritical billionaires.OK, we need fewer billionaires and we need to work on that. But in the meantime having them feel at least somewhat disciplined by the public opprobrium that outrageous behavior brings is a good thing. More ostracism, more boycotts, sneering at and yelling at giant yachts and people who own them is a good thing. Now, of course, Jeff Bezos choosing to spend his infinite billions on something other than a yacht, doesn’t actually free that wealth up, although maybe even maybe he might be persuaded to spend a little bit on good causes. But in any case I think there’s something culturally going on. I think we are seeing a turn and we’re seeing that the collapse of all standards in favor of the belief that wealth is the only thing that matters is not complete and may even be reversible.So, this is a silly story but I think not an entirely trivial one.Anyway, let’s find out if this recording is actually audible given the cafe noises behind me. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

Some quick thoughts about yesterday’s hearing.TranscriptKevin Warsh, the next chairman of the Federal Reserve, is Donald Trump’s sock puppet. But we knew that. The question during yesterday’s confirmation hearing was whether he was sufficiently brave, sufficiently good at acting to pretend that he was more than that. And the answer is no. Hi, Paul Krugman here with a Wednesday update. I didn’t watch or write about the Warsh hearing because it seemed there wasn’t really that much at stake. He’s going to be confirmed pretty much regardless and there’s a whole lot else going on in the world. But I thought I should weigh in a bit on what we actually learned from the hearing. Now about Warsh, he is smart. He is very good at saying things that sound thoughtful and impressive, but he is also, and it’s really very clear, a partisan hack. He’s for tight money when a Democrat is in the White House and for easy money when there’s a Republican. He has managed to claim that he was part of the great economic rescue that took place after the global financial crisis. But at the time, although he was on the Federal Reserve Board, he basically trashed his colleagues for trying to do their job.And he has made a lot of criticisms over the years, but they’re always very selective.Often when he makes a statement, you wonder, what exactly did he say? Because there tends to be lots of complex verbiage that sounds sophisticated, but when you try and distill it down to what it was all about, it’s very hard to figure out, except that, again, it’s always tight money if there’s a Democrat in the White House, easy money if there’s a Republican. Recently, Employ America, which is a group that I follow, wrote about Warsh. They aren’t very partisan. They do mostly inflation analyses and inflation nowcasting, trying to predict what the next number will be. But they had a scathing survey of his positions over the years, which says that he is a partisan who has chosen to align conveniently with the current president, that he is someone who abandons his principles “for whatever might suit his personal and partisan interests.” That’s not very nice, but it seems to be quite accurate. So there was a hearing, and everybody knows pretty much who he is.There are people, sort of centrist Democrats, who claim to find some virtues in him. But I think that’s all positioning. I think everybody understands what we’re getting with Warsh. The question in the hearing was, could he put on an act? Because he is usually a pretty slick customer. He’s not someone who simply rants and raves and spouts MAGA propaganda. And he was asked a a question which isn’t about monetary policy, but is very much exactly a kind of litmus test for, not really for who he is, but what he’s willing to say, at least in the interest of appearing to be not a complete sock puppet. He was asked who won the 2020 election. which is not a question that is remotely in doubt. This is not something about which reasonable people can disagree. There is nothing to the claims of a rigged election except the fact that Donald Trump can’t admit that he lost that election. And Warsh evaded. He said, well, this body certified that election, which is not the question. The question is basically, are you willing to challenge Trump on a completely obvious grotesque lie? And it would have been in Warsh’s interest, you would think, to say, well, no, I believe that Joe Biden won that election. But to do that would be to show some independence, even not in action, but some independence, at least rhetorically, from Donald Trump. And he wouldn’t do that. He was also asked about the spurious prosecution of Lisa Cook, asked about the spurious charges being brought about Jay Powell and refused to take a stand in support of people who will be his colleagues once he gets to the Fed. So what we got was not a test of how he will behave, not a test really of his policy views. I mean, there were no interesting policy arguments going on here. There are some discussions we could have about shrinking the Fed’s balance sheet and all of these things, where I do think that Warsh’s expressed views are quite wrong. But that’s kind of not what was on trial here.What was on trial was, can he at least pretend to be not a total hack? And the answer is no. He’s afraid to even show a little bit of verbal independence without substance when it comes to Donald Trump, which is bad. It should be utterly disqualifying for the position because being the Fed chair is important. It requires a lot of independent judgment and requires a lot of credibility because the Fed is mostly needed in moments of crisis. And in those moments of crisis, people need to believe, markets need to believe, but the general public needs to believe that we’re talking about people who are serious experts and seriously have the interests of the nation at stake rather than their partisan political views. He failed that test with flying colors. And he will be confirmed anyway. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

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

More than a year ago I interviewed my old friend and colleague Kim Lane Scheppele, a constitutional scholar who speaks Hungarian and knows Hungary, about the march of autocracy. Now, suddenly, a much happier occasion. I found her account of how this happened startling — a lot I didn’t know, even though I’ve been following the news obsessively. And some of it is wild. Here’s a transcript:. . .TRANSCRIPT: Paul Krugman in Conversation with Kim Lane Scheppele(recorded 4/16/26)Paul Krugman: Going back after a number of months to Kim Lane Scheppele, my former office neighbor at Princeton and I think we can safely say America’s leading constitutional scholar who also knows Hungary and speaks Magyar, although you’re probably the only one.Kim Lane Scheppele: Sorry to interrupt you, but the language is Magyar nyelv, and Magyar, the name of the person we’re going to be talking about, who’s also the new prime minister, means Hungarian. That’s your Hungarian lesson for the day. Ha!Krugman: Oh, wow. Thanks. I would have gotten that all wrong. All right. Well, anyway, as you say, it’s been quite a week. You were on this case on my blog starting in 2010, but I think we want to just talk about first reactions to this extraordinary election on Sunday.Scheppele: Well, yeah. It’s been hard to even comprehend the magnitude of this. I mean, not only did Péter Magyar win this election, but he won the election overwhelmingly in a rigged system. And so that’s the miracle magic of it. It turns out that Viktor Orbán had rigged the election rules so that only he could win. And the shortcut of what he did was that essentially a vote in the countryside counted three times as much as a vote in the cities. And what he counted on was that usually, if you get a challenger to a right-wing autocrat, they’re all going to be liberals, right? They’re all going to get their votes from the cities, from the educated populations. And Orban had a lock on the countryside. And then he put all the weight of the system on counting his people more than others. So Peter Magyar spent the last two years going out to villages, just meeting all of these people in person and getting around the fact that Orban also controlled all the media. So the media was rigged, the election system was rigged. And when the vote came in on Sunday, he was at 15 to 20 points ahead in the polls.Krugman: Right.Scheppele: But that did not guarantee he was going to win. And it did not guarantee that he was going to win by the majority. And so when the numbers started piling up, like I was watching the early returns and the early returns were coming in from villages that should have been the Orban vote. And it was a Tisza vote, it was a Peter Magyar vote. And so you knew just from the first 2 or 3% of the vote that it was going to be overwhelming. And sure enough, the whole evening the results came in and Peter Magyar won. It might shift a little bit, 1 or 2 numbers now, but about 138 seats out of the 199 seats in the parliament, and Orban had to concede. There was just no way that he could even claim fraud or try to do anything to change it, because he just didn’t have votes come in from anywhere.Krugman: Okay, it’s funny but that’s the first clear explanation I’ve gotten of how the rigging worked. Because the reporting has been pretty vague. And, you know, there’s still a fair number of people saying, “oh, it can’t really have been rigged, because after all, he lost.”Scheppele: Yeah. No, it was so rigged. I mean, literally, Orban rewrote all the rules in 2015. And, Paul, I need to give you a shout out here because, you know, Americans didn’t know anything about this. And I live in my head in Hungary. And I would come in every day to campus and see you in my office next door and go on whining and complaining about how Orban had been building a dictatorship starting in 2010. And you said, “Well, how come The New York Times isn’t covering it?” And I said, “Well, no one’s covering it because no one can see it.” It was all legal. It was all technical. It was really hard to see how Orban was nailing things down.And then you called me up on a Sunday and said, “Okay, I’m going to do tomorrow’s column on Hungary.” And so, remember, we scrambled around, I was translating documents. The fact checkers were calling me up, and you wrote that blog post on a Monday, and then you said to me, “Look, you know, it’s more complicated than I could say. You can put something up on my blog.” And then we did that for like 3 or 4 years. You were putting all my commentaries up on your blog, and I was the only one covering it in English at that time. So, you know, if it wasn’t for your venue, it would have been impossible to get this on the radar screen of Americans. So, Paul, it’s your victory, too.Krugman: I hope it is. I mean, I feel like I was facilitating your victory, it’s obviously the Hungarian people’s victory. But actually one of the things that strikes me here is that, we talk a lot about how Orban muzzled and controlled the media in Hungary, but, effectively, there was an international muzzling coming out of a couple of things.Scheppele: Yeah.Krugman: I remember you saying that basically even big international news organizations sort of had one stringer in Budapest who often turned out to be somebody affiliated with Fidesz. So.Scheppele: Right. Well, there were a whole bunch of ways that he muzzled the international press. So one was just that, if you were a domestic journalist reporting for the international press, you were under surveillance, you were under threat. The international news organizations, including, by the way, the New York Times, had to start providing physical security for the reporters because they were really being threatened with death threats and the whole nine yards. And, you know, I got death threats, too, sometimes through the comments section on your blog. Right? So, everybody commenting on it was really under threat in some sense.But the other thing that happened was once the international press pulled out because they couldn’t pay for the security anymore, they’d hire Hungarian stringers and then the Hungarian stringers would have other things happen to them, like they’d get doxxed and there’d be mobs outside their apartment and they’d have to move out of their houses. And really, it was a huge campaign. And then the final thing, and maybe not the final thing, but at every single Hungarian embassy in the world, the ambassador was told, “Your job is to keep negative news about Hungary from appearing in the press.” So every time there was a story criticizing Orban, the embassy would call the editors and say, “You’ve got to give us equal time,” or “you can’t trust those journalists,” or “you should never use those sources again.” Going back, this was during your days at the Times, there was a Hungarian-American reporter who was writing for the Times, and the Hungarian government called the Times and said, “we don’t trust this guy.” And they stopped putting his byline on stories until they did a full check on him.Krugman: Okay.Scheppele: So that was happening to the international press. So it’s not just the domestic press that was muzzled, but the international press as well. And so it took a very long time. I mean, Orban had the whole system locked down in just three years, and it took until five, 6 or 7 years later before the rest of the world caught up to the fact that a dictatorship had been constructed in plain sight.Krugman: What’s also extraordinary is that even now — I mean, this is the first time I’ve heard anyone, and I’ve been reading the news reporting obsessively, but the first time I’ve had as clear an explanation of how the rigging worked and how Magyar broke it. And, you know, the eyes of the world have been on Hungary a lot, if only because Hungary has been the star of CPAC for years now. And you would think that by now reporting would have gotten it right.Scheppele: Yeah. Well, I’ll tell you, part of the problem is that Orban and his circle are lawyers, and they pioneered this sort of 21st-century version of dictatorship where you don’t shut down the media. You just regulate them or you threaten them or whatever. Everything was done technically by law. And I think most Hungarians didn’t understand how the law was rigged. I wrote a quite detailed article about this in the Journal of Democracy after the last election, going in detail step by step through all the stages of exactly how Orban rigged things. So, it was gerrymandering. It was things like, the districts expected to vote for Orban had 30,000 voters, and the district expected to vote for the opposition had 90,000 voters.Krugman: Right, right.Scheppele: And then there were all kinds of other election tricks that Orban borrowed. For the 2014 election, I wrote about this on your blog in five parts. Remember? You put up five parts. “Election in Question, part one,” “Election in Question, part two.” There was just every single which way [they could change the rules]. So just another example. Orban said, “we have all these minority groups in Hungary. They should be represented in the parliament.” Everybody’s cheering, like minority representation—what a good thing. So there was this possibility of the Roma having a separate representative in parliament and the Germans and other ethnic groups. And it turns out if you registered to vote on that party list, you only needed 20,000 votes to get a seat. So all those seats got colonized by Orban’s people. The Roma guy was a Fidesz person. That’s Orban’s party. The German guy was a Fidesz person. So all these little things gave Orban one seat here, four seats there and so on. And if you look at Orban’s popularity in Hungarian opinion polls going back to 2010, he never got above 35% in his personal popularity. And in elections, he would struggle to get 45%. But then he would get 67% of the seats in the parliament, and that two-thirds threshold mattered because the Hungarian Constitution can be amended with a single two-thirds vote of the unicameral parliament. And if he could get two thirds, he put himself above the law. So it’s 199 seats in the Hungarian Parliament, 133 is two thirds larger. Magyar just got 138. That’s what’s so stunning.Krugman: One immediate thought is thinking about the extreme unequal representations, rural versus urban. The closest equivalent I can think of is the US Senate.Scheppele: Yeah. The Electoral College, too, right?Krugman: The Electoral College somewhat. But the Senate, where California has two senators and Wyoming has two senators, exactly like that. It over-represents the rural areas. And when you get this urban-rural, educated-uneducated split, it guarantees that the right always has an advantage. And you said Magyar’s been campaigning about two years, right? He was in Fidesz. He had actually been part of Orban’s government.Scheppele: Yeah. So here’s the good news and the bad news about Peter Magyar. So he came of age and was attracted to Orban’s party because he’s basically a center-right kind of guy and Orban’s is the center-right party. So he went into the party machine sort of right after school, and he stayed in the Orban machine for 20 years. He was posted to Brussels. He was in what’s called the Hungarian Perm Rep, which is the big embassy that every member state of the EU has in Brussels, which handles the state affairs with the EU. He was there. Then he came back and he held a variety of positions in the state-owned companies that Fidesz ran. So he was in the system. He benefited from the system. And then there was this really funny event that brought him to public attention. He had this acrimonious divorce.Krugman: Okay.Scheppele: And, like, you can’t make this stuff up. Wait till we get to zebras.Krugman: Okay.Scheppele: But his wife, who was always a trailing spouse with all of his appointments, and also a very clever lawyer, really smart. Orban had named her the justice minister of Hungary. Her name is Judit Varga. And she presided over, really defending Orban’s interests at the EU. And she’s kind of a pit bull like Orban. She and Peter had this acrimonious divorce. But it happened around the same time that —probably Orban, we don’t know for sure—but she approved a pardon of a guy who ran an orphanage in which the orphanage had had state employees who engaged in sexual abuse of children, in other words, a pedophilia scandal.Krugman: Right.Scheppele: And the principal had known about it and cooperated. She issued the pardon for this guy, and there was this huge firestorm of objection. A pedophilia scandal. I mean, you can think of the American parallels, right? And so Orban insisted that she be fired. So she left the cabinet. And that was the moment when Peter Magyar, having just divorced her, popped out of the woodwork and said, “How dare Orban hide behind women’s skirts?” And then he said, “And because I was married to her, I know where all the corruption happened, where all the bodies are buried.” And he had, it turns out, made audiotapes of his conversations with his ex-wife during the acrimonious divorce. I mean, that’s why you can’t make it up. I have to tell you this because this is something that’s not really making the headlines in the U.S. but he actually had the tapes through which she had talked about some of the corruption scandals inside the Orban government. And so he pops out, accuses Orban of hiding behind women’s skirts, then goes on this YouTube channel.Krugman: Okay.Scheppele: So by this time the opposition has no TV, no radio, hardly any major newspapers. The opposition started a YouTube channel. So Peter Magyar goes on the YouTube channel with the audiotapes from his ex-wife, and gives this big interview about how much corruption there is inside the Orban camp. This makes him an instant superstar, right? Because everybody kind of knew it, but nobody knew precisely how. And so he then starts going around the countryside and giving speeches about all the corruption. He attracts a crowd, then he attracts a bigger crowd. This is all a few months before the last European election. I think he begins to get the idea, like “maybe I could form a party and run for the European election.”The European election rules require strict proportional representation, not rigged. So he had a much better chance of getting elected to the European Parliament than he would have getting elected to the Hungarian Parliament but it’s too late to register a party. Okay, so he looks around and he finds that there’s this little party called Tisza, which is the name of a river in eastern Hungary. And he goes to the people who took out the party name and said, essentially, “Can I kidnap your party?” And so that’s how he gets a party, cobbles together who knows who to run on the party list. And he gets actually a pretty big vote to put himself into the European Parliament. Okay, now that matters, because first of all, it’s a clap-a-meter that shows you the guy actually has a real chance of standing up to Orban. But second of all, he becomes a member of the European Parliament and that gives him parliamentary immunity.Krugman: I was about to ask that.Scheppele: And at first he said, I’m not going to take my seat. I’m going to give it to somebody else. I’m going to stay here and work for Hungarian liberation here. And then I think somebody said to him, yeah, but you get parliamentary immunity. So I’m not sure he ever showed up in Brussels, but he did get parliamentary immunity. And so when Orban came after him with sort of—pardon the expression—trumped-up charges to try to sideline him, the government technically had to go to the European Parliament and ask that his parliamentary immunity be lifted. And the European Parliament said, no.Krugman: Right. Like you have to know he got a lot of help. But it’s just too complicated and too detailed. Right.Scheppele: But it tells you how many things had to fall into place for him to overcome how rigged the system was. Okay, so then he figures out that if you don’t win the countryside, you can’t win at all. And he comes out of the countryside, actually, and he’s a center-right guy, which is to say that on left-right issues, he’s unlikely to be very different from Orban. You know, it’s fine. It’s a center-right country. On democracy-dictatorship issues, he’s entirely different from Orban. And that’s what we need, right? And that’s what he’s promised to do, is really restore democratic institutions.Okay, so Peter Magyar has this acrimonious divorce. He was known for wearing these highly, shall we say, form-fitting clothes. He got the nickname “Slim Fit Jesus,” because, you know, he’s pretending to save the masses. But all of his clothes were so tight-fitting that, shall we say, it was almost embarrassing to look at him. And so he gets this kind of name, but of course, he’s also auditioning for girlfriends, right? Because he’s a 45-year-old guy who no longer is married. So the Orban intelligence services send him a girlfriend who then tapes all their recordings. Just what he did to his ex-wife, right? And she comes out with these recordings in which he calls members of his own party idiots because he doesn’t know them. I mean, he just sort of cobbled together the party. That doesn’t affect his popularity.And then actually, during the election campaign, the government did this thing where—I mean, they didn’t say it came from the government, but where else? It goes to the government media. They release a still photograph of a bedroom with a rumpled bed and some white powder on the side table. And it’s got a camera, sort of from the ceiling angled down on the bed. And the media is told: “coming soon.” So you think it’s going to be a Peter Magyar sex tape. He comes out and he says, “I’m a healthy 45-year-old man who has consensual sex with women.” Like, so there.Krugman: As in, regarding the tape.Scheppele: And this is like the brilliant thing that starts happening. He’s got these crowds. He’s got people who are so thrilled to discover that they’re not alone in hating the Orban regime because they’d been threatening people. They’d been separating people. There was no public space in which to figure out that you weren’t the only one who hated Orban. And Magyar’s rallies had become the place where you could do that. So he’s got all these young people who have joined the campaign. And when this still photograph of the bedroom comes out, suddenly all these Hungarian computer whizzes start doing AI-generated videotapes of Orban in bed with Trump and Putin in bed with Orban. And like all of these things. So if they were going to drop a sex tape, it would be indistinguishable from, you know, two dozen or so of these AI fake videos of everything else that might have happened in the bedroom. And so the government never released the sex tape.Krugman: By the way, one of the things that I didn’t really realize, actually, until the craziness of South Korea, is that we were all focused on X, formerly Twitter, and BlueSky was down this morning and I was quite upset—but YouTube is a tremendously important medium for political communication around the world.Scheppele: Exactly. And that’s how the opposition has been communicating. So, for example, on election night, I couldn’t go there, but I was just watching the Partizán channel and they just had all these commentaries. They had good graphics and actually the funny thing was that they had in their studio a spinning head where one side of it had the face of Orban and the other side had the face of Magyar. And the whole evening it was spinning. And then when it became clear, it stopped and you saw only Magyar. So it was fun to watch Partizán this time. But the campaign had turned out to be fun. This was the thing we’ve all missed. Like the rallies were just occasions to find out that everybody didn’t want Orban. And they got bigger and bigger. There were rock bands, there were speeches, there was humor, and then there were the zebras. I promised you, zebras.Krugman: So, the zebras. I know a little bit, but tell us about the zebras.Scheppele: Yeah. So it turns out that Peter Magyar became this sort of rock star because of his exposure of corruption. There were some great investigative journalists and some anti-corruption campaigners. And one of the anti-corruption campaigners discovered this palace that was being built outside of Budapest, allegedly by Orban’s father. So we know his father and it was Orban’s money, right? And next door is the palatial estate of Orban’s best friend, the blue-collar worker who is now the richest man in Hungary. Everybody knows that’s Orban’s money, right? And somehow they got a picture over the fence of a little—I keep saying I’ve got to look up the collective noun for zebras.Krugman: Okay.Scheppele: But they found a gaggle, a flock, a herd of zebras, and took pictures of zebras. And suddenly this became the symbol of Orban’s corruption. So people are turning up at the rallies with zebra heads and zebra costumes and little zebra pins wearing black-and-white striped t-shirts and all this kind of stuff. So the zebra became the meme. But the reason why I mentioned the looking over the fence is that this anti-corruption campaigner, Ákos Hadházy is his name, sponsors tours where he takes a ladder and a bunch of people, and he puts up the ladder on the fence and everybody climbs up and looks over and sees for themselves. And that’s also been part of the anti-corruption campaign.Krugman: Right. So I think the original picture may have come from drones, but then other people are climbing over the wall to look at the zebras. And just a quick thought, I mean, actually it reminds me a bit of the fall of communism when people were going on about the luxury in which the East German leadership lived. And I was thinking, yeah, that’s not luxury by US standards. Even then, with US inequality being what it was. I saw the photos of the Orban estate and it’s very nice, maybe particularly since we know it’s all stolen money. But my God, it’s not something that Mark Zuckerberg would find remotely impressive.Scheppele: Exactly. It’s got one of those one-lane lap pools instead of a giant kind of private lake like Yanukovich had in Ukraine, which had his own yacht in his private lake. It’s not that kind of estate, right? But in Hungary, it’s shocking, because Hungary had one of the most egalitarian distributions of wealth after communism. Not so many visible oligarchs. So the oligarchs have only become that rich more recently and under Orban. That’s also what’s happened. And this is, like, “it’s the economy, stupid.” I mean, I’m sure you were watching this. The pandemic hit Hungary very hard because it exposed that the hospital system had been chronically underfunded for years. So another meme that Peter Magyar used very effectively was toilet paper. The hospitals don’t have toilet paper.Krugman: My God.Scheppele: And of course, when I lived there in the ‘90s, the hospitals also didn’t have toilet paper, but never mind. But he would go into hospitals with a camera crew and look for the toilet paper. Just look at the peeling paint on the walls and stuff like that. So the pandemic exposed the underfunding of the health care system, and the death rate from Covid in Hungary was actually quite high. And they put the military in charge of the hospitals so that the information wouldn’t leak out about how bad things were. That was, you know, 2020-2021. So then what happened, of course, was the post-pandemic inflation that hit the world. And you’ll know what that was in Hungary, right? It got to 20% a year.Krugman: Yeah. I’m not quite sure I fully understand that. I mean, that’s supposed to be my department. But why inflation was so bad in Hungary was always a bit of a puzzle.Scheppele: Yeah, I was hoping you’d explain that to me. But there were, I think, a couple of things going on. One was that Orban was both spending well beyond his means and spending corruptly. So it wasn’t actually benefiting the economy. Like, more and more money was going to private pockets. So the whole economy was sort of teetering on the brink. I think that’s part of it. And you’ll know better how that feeds into inflation. But I was trying to get the EU to cut their money ever since 2012.Krugman: Right.Scheppele: And so I got together with a group of wonderful friends, academic scholars. We first wrote the law review articles that explain why they could do it under EU law, then lobbied for the laws so they had a structure for doing it, then had to lobby the European Commission to actually do it in the courts to uphold it. And anyway, it was a ten-year process. And in December 2022, the EU cut almost all the funds to Hungary overnight. So this is cohesion and a lot of other funds. Remember, there was a big recovery fund where the EU had gone to the markets to make up for the budget hole caused by Covid and the UK departure. The total EU budget was sort of half the usual budget, and that was half the recovery fund. But they had built so-called conditionality into both those streams of funding. So Hungary lost about €36 billion in a sharp cut overnight. And that was on top of inflation creeping up. But I think the markets were also anticipating this was going to happen.Krugman: Okay. And you know, Hungary has the same population as New Jersey, it turns out. And much poorer than New Jersey. So €36 billion is a lot of money for Hungary.Scheppele: Right. Exactly. And Orban had been siphoning off about a quarter of that money just straight off the top into private pockets. And the EU knew that. So when the EU cut the funds, it was a huge hit. And it was the disposable income that Orban used to hold his party together. And, you know, frankly, I’d been saying, at least to you, I mean, we used to have these conversations. “If we can just cut Orban’s money, his crony system will fall apart because they’re all on the take. That’s what holds him together.” And if you cut off their source of funding, think of it as like a resource curse problem, right? Where the resource curse is EU money. It was the only money really coming in. So, yeah.So sure enough, that happens in 2022. Peter Magyar jumps out of the woodwork in February 2023 or a little bit later that year. But it doesn’t take long for the inside of the Orban machine to start to crack. And I think that’s one of the things that gets Peter Magyar to jump out, because he can see that the ship is going to sink if it doesn’t have the EU funds. And the EU was pretty serious about all of that. So, I do think that was a contributing factor, but there were all these other things too. I mean, just the exposure of corruption. And it was the high inflation. It was “the economy, stupid.” You know, just everything. The growth rate had flatlined. So the economy was just in serious trouble.And Peter Magyar’s through line was “Orban is corrupt. And that’s why public services are underfunded and that’s why the economy is mismanaged. And this is why your lives are miserable in the countryside.” And so that was his pitch. And I think that’s not a left or right pitch exactly. You know, that’s something everybody can get on board with. So as it became clear he was going to really be able to run in the Hungarian parliamentary election, all the small center and center-left parties just collapsed and stood behind him, even though they knew he was not one of them at one level. But the campaign was about the elimination of corruption and the restoration of democracy. It was not about the usual left-right issues.Krugman: Yeah. I noticed a number of people were saying, “Well, Magyar will be Orbán-ism without Orbán,” but that is referring to more left-right issues.Scheppele: That’s right. So for example, I think he’s going to carry on with most of Orban’s policies about things like immigration or about, you know, support for families as opposed to single people without kids. All these kind of center-right things. But he has already said he’s going to lift his veto on UN sanctions against Russia and on money for Ukraine.Oh, by the way, I should mention one other thing that came out during the campaign, which was, again, not surprising, but it’s different when you hear the tapes. Probably European security services—that’s my guess about the source—were taping Putin and Lavrov, the Russian foreign minister. Now, there are tapes that came out a couple weeks before the election of Viktor Orban, talking to Vladimir Putin and saying things like, “Well, you are the lion and we are the mouse.” Like, “How can we be helpful?”Krugman: Wow, I hadn’t seen that.Scheppele: Yeah. And so again it came out through the Hungarian investigative journalists, but they said they had been talking to European security services. And what also came out were these other tapes in which Peter Szijjarto, who was the foreign minister of Hungary, had been calling Sergei Lavrov, the Russian foreign minister, after every European Council meeting and disclosing what happened behind closed doors as the EU was trying to decide how to counter Russian aggression in Ukraine. And those tapes came out too. And so the slogans then started to be, “Ruszkik, haza!” which means “Russians go home.” And then actually, the final little bit of Russian intrigue here was that Orban’s campaign was floundering and failing. I mean, he was trying to run this as a foreign policy campaign but he just wasn’t getting any traction. He was sinking in the polls. So about a month and a half before the election, he invited in the Russian disinformation team that had rigged the Moldovan election by running Russian bots, by taking over Facebook feeds and just swamping the thing with disinformation. They had to move to Hungary because they can’t do it in Hungarian the way they can do it in Russian from Moldova. And so they were literally there. The investigative journalists figured it out and Orban didn’t deny it. And everybody could see their Facebook feed slowly getting taken over by Russian bots. So again, Hungarians take to this and they start labeling and flagging and making fun of and meme-ing the Russian bots.It was just incredible how many people were online fighting this thing. I mean, maybe Peter Magyar organized some of it, but some of it was probably a spontaneous reaction. Like, “We’re fed up with Orban thinking we’re still part of the Soviet Union.” Right?So, “Ruszkik, haza!“ was one of the main chants at the rallies and at Magyar’s election victory, because Orban had so tilted toward Russia and so far away from the EU. Peter Magyar’s slogan was, “We will rejoin Europe and I will get the money back.”Krugman: This is something I was thinking a lot about. The role of the EU. If somebody tried to lean a ladder up against the fence at one of Putin’s estates to take a look, you know, I don’t think they’d come back to tell the tale. And then in general, just sort of the willingness to just plain use violence as opposed to legal stratagems.Scheppele: Yeah. That surely has a lot to do with the fact that Hungary was still in the EU and under restraints.Krugman: Yeah.Scheppele: I think that the EU puts a floor underneath how far the government can sink to using coercive measures. And so they never really resorted to violence against Hungarians. Now of course immigrants—that was a different story, right? And that was sort of with a wink and nod from the EU, as well. But in terms of actually assaulting journalists, you’ll probably recall because this happened when I was guest blogging on your blog, but I had a source that was feeding me a lot of information from inside Hungarian institutions. And that person was beaten up and left for dead on one of the main streets of Budapest.Krugman: Yeah.Scheppele: And he went and reported this to the police. I think we talked about this at the time, and the police said to him, “Oh, it just so happens the CCTV cameras were turned off at that time.” And he and I both interpreted this as they knew he was the one feeding me a lot of sensitive information. And he was getting beaten up and I got death threats. And as you know, the last time I went to Hungary, which was before the pandemic, I was literally met at the plane door inside the jet bridge by six uniformed police. So it’s not that they were above using coercion, but they wouldn’t have shot someone on a ladder looking over the fence, right? They’d harass you. They’d arrest you. You’d suddenly discover that you needed a tax audit or, you know, it was that kind of stuff instead of overt violence.Krugman: Given all that, it’s still kind of astonishingly brave that people were willing to stand up in this campaign.Scheppele: Absolutely. And Peter Magyar developed into this role, right? Because he came out of Fidesz circles. I don’t think he imagined himself as the opposition. He spent 20 years in the shadows. This is not what most leaders do. So he kind of grew into the role as people projected onto him a role he should play. And so one of the things he started saying at his rallies is “We shall not live in fear ever again.” And so it was the fear thing. And he would travel. I mean, Peter Magyar never had security. I’m sure he had death threats. I’m sure that they had a target on his back. He was clearly bugged and wiretapped. They would occasionally release conversations between him and close associates. Like I said, they sent him a girlfriend from the security services. I mean, they had him on their radar but he never traveled with security. He’d dive into crowds to shake hands and so forth, and he would say, “This is our country. We cannot live in fear.” And then crowds were chanting like, “We shouldn’t live with fear!”And today, actually, I was just in tears this morning reading this. One of my close friends wrote to me and was trying to make sense of everything. He’s also a sociologist, I might add. And he said, “What just happened can be expressed in the most beautiful way by the word “awakening.” I felt the country is waking up to self-consciousness as we wake up every morning. Hungarian society woke up from an unbearable world into a normal and livable world. It took time, but I feel like in the last two years, people’s attitude toward each other and toward politics has changed step by step. I just had to follow the events of the Tisza Party. [Magyar’s Party] Because whoever saw these events could testify that not only more and more people came out to the streets to listen to Peter Magyar, but people were smiling more and more and became more intimate, more joyful, more confident. And they were increasingly connected to the community with a sense of belonging. On the day after the election, Peter Magyar put it simply: ‘What happened was this is the end, and what lies ahead is change and creation.’”I mean, that’s what those rallies were. More than what he actually said, you showed up and saw how many other people felt the same thing you did. And then the fear went away as the crowd expanded.Krugman: That’s it. I mean, at one point I talked to Erica Chenoweth, who’s at Harvard, on the importance of the revelation that you are not alone being a very big deal. I mean, obviously it’s something that’s happening here.Scheppele: Absolutely. All the “No Kings” demonstrations are meant to achieve that kind of sense, right? That it’s your neighbors, it’s people you know. You see who turns up at the demonstration, and then you realize who are your allies in this political fight.Krugman: Yeah, but still extraordinary to see that happening when—it’s not quite a mailed fist inside the glove because they were restrained. I mean, none of this would have worked in Putin’s Russia, but it’s still kind of amazing.Scheppele: Yeah, but now I think this week is euphoria week. And then we have to start looking ahead because even though Peter Magyar has this overwhelming supermajority, Orban’s system is still in place.Krugman: Right.Scheppele: I feel like you see the yellow brick road heading to the Emerald City, but between here and there is a swamp full of alligators, right? So, first of all, he met with the President of the Republic yesterday, who is sort of a figurehead but the President of the Republic has to sign all the laws. The President of the Republic is a Fidesz holdover. You can expect him to veto reform laws. And then the Constitutional Court is packed. And so you get a case to the Constitutional Court but it’s all packed with Orban people. They can veto whatever Peter Magyar does, right? And then it’s the audit office. It’s all these different things. And so he has to get rid of these people, and has to recover the offices. And he can change the offices by law, but not through this set of veto points, unless he finds a way to fire the people. And that won’t be a legal step, you know.And so then how does he do that? So far, one of the disappointing things is that there’s a European advisory body called the Venice Commission which reviews laws for their compliance with European standards. And they were very important in a lot of these transitions. But in the last couple of years they’ve gotten hugely formalistic about things. So this problem recently came up in Poland, where the Tusk government came in, swept away the aspirational autocrats. They had a president who was a veto player associated with the past regime who vetoed all the laws, the Constitutional Court had been captured and declared everything else unconstitutional. The government can’t do anything. It may get voted out of power because it’s been ineffective, right? Because of the veto.At Princeton we just had Adam Bodnar who was the justice minister in the Tusk government, who came out with a plan about how to sort of get rid of all the veto players. He sent it to the Venice Commission, which is usually the gold standard on legal advising. Basically, is it compliant with European norms? And the Venice Commission said, “No, all these people were lawfully appointed. You can’t fire them.” And I finally lost it. I’ve worked with the Venice Commission for 35 years. I’ve really appreciated their work. I broke with them and wrote an article called “Blinded by Legality.” And I said, look, the laws under which these people were appointed, that you’re now saying is a lawful appointment, were laws you told the Polish government they shouldn’t pass because they violated European standards. Right? So they passed the law that you told them not to pass, and now you’re telling them they have to follow the law you told them not to pass. What kind of advice is that?Well, it was slightly embarrassing because I’d been invited to be the keynote speaker at their 35th anniversary, and that was after I’d come out with the broadside. So I had a very frosty reception for my keynote address. But they’re still doing that. So, you know, Peter Magyar is going to have to figure out a way through this. And it’s a little unclear how he’ll conquer the alligators before he gets to the clear path ahead.Krugman: Well, I have to say, when I’m feeling down about the European idea, it’s that kind of thing. The Euro pettiness. Beyond the alligators, although that may be the big story, what do you think he’s going to try to do? I mean, again, this is no liberal.Scheppele: Yeah. No, it’s true. But again, as I keep saying now, there’s a left-right political spectrum which is perfectly consistent with democracy, European values and everything else. And, you know, you and I would be on one part of the spectrum. Peter Magyar would be in another part of the spectrum, and I wouldn’t vote for him in an ordinary election, okay? But then there’s another political spectrum which runs from democracy to dictatorship.Krugman: Yeah.Scheppele: And on that, we’re all on the same side, right? And Peter Magyar has signaled, and I hope he follows through, that he is really in favor of restoring democratic institutions, fighting corruption. And he’s come up with two concrete proposals. The first two are pretty good. And this is where, again, the EU can be petty and it can be very helpful. So the European Union set up something called the European Public Prosecutor’s Office. And the European Public Prosecutor’s Office is just—for the EU law people in your audience—it’s an “enhanced cooperation mechanism.” That means that a number of states got together and said we want to integrate even more than the EU allows us to integrate. And so we want to do this thing. The EU says “Fine, as long as everyone can join it.” So a number of states got together, created the public prosecutor’s office. And the only two countries that hadn’t joined were Poland and Hungary. You know, they were the dictatorships, right?So Peter Magyar promised—and he could do it by himself, actually—on day one, Hungary will join the European Public Prosecutor’s Office. Members of the Hungarian Prosecution Service is like the current DOJ, right? It’s totally in the pocket of Orban. So now he has a spare set of prosecutors from the EU who can come in and investigate the mis-spending of EU funds. And since most of Orban’s corruption came out of EU funds, that will go a very long way, and that’s he’s already said “we’re doing this day one.” And then the second thing is, he said, “The first constitutional amendment we want to pass is to limit the Prime Minister to eight years in office, and no more, starting with me. Including me.” And if that passes, it also disqualifies Orban from coming back.Krugman: That’s an interesting backdoor way of doing it.Scheppele: Exactly. So that’s the first constitutional amendment, he says. So that’s not bad, right? For a start. I mean, I think he’s just getting his mind around it all. He knows because he’s been inside the system and he’s a good lawyer so he’ll know how many obstacles there are, and a lot is going to depend on timing. So, like yesterday, he had a meeting with the President of the Republic, Tamas Sulyok, who used to be President of the Constitutional Court. He’s a Fidesz guy. And they came out. They posed for pictures, both looking severe. Not the best pictures of either of them. They’re full of gloom because Peter Magyar called on the president to step down. And again, just since you love the legal detail, Paul, and you’ve listened to me for so long, let me tell you one more little legal detail. I could tell Orban knew he was going to lose the election back in December because he pushed through the Parliament an amendment to the Act on the Presidency, and they changed the system for impeaching the president to make it impossible for the Parliament to impeach the president.Krugman: Okay.Scheppele: So my thought was, okay, that’s the office they’re going to rely on if Peter Magyar wins the election and Orban loses. So here again, you’ve got this guy in power. And actually he said yesterday he might step down. But everything depends on when he steps down. If he steps down, even with Orban’s parliament, as a lame duck, his two-thirds Parliament is still there for another few weeks.Krugman: I was wondering about that.Scheppele: Yeah, if Sulyok steps down, Orban’s Parliament can elect somebody. And the reason why they might do it is because Sulyok’s term expires before Magyar’s term is over. And if they reset the clock, the presidency lasts five years, the government lasts four years, they would have somebody who would be there through the whole Magyar term. And I thought that was going to happen regardless. So that may still happen. But they came out and they said, “Well, look, maybe what we should do is change to an elected presidency, because right now the parliament elects the president.” And Peter Magyar said, “Well, maybe that’s a good idea.” And everyone listening is going to say, “Yeah, what a good idea.” And here’s the caution: we had the same debate in 1989. The outgoing communist parliament knew it was going to lose the election. And so they said in the new constitution, “what we want is an independently elected president,” because what they knew was that the only people that had public personas were all the communist guys. And the communist reformers, they were probably going to put up somebody like that, whereas the opposition had all these people who had been denied access to public media. Nobody knew who they were. And it was a ploy by the communists to keep control, even though they were going to lose the election. Here we go again, right? It’s the same thing. Who would run for president? It could be Orban, right?Krugman: Wow.Scheppele: He might be disqualified from being prime minister, but he’s not disqualified from being president. Who else do people know? It’s like this echo of 1989. It’s the same debate. So the way they solved it in early 1990 was that the Constitution left that space open, and the two sides agreed that it would be decided by a public referendum. And the public voted, having heard this was the debate, for the Parliament to elect the president to keep the communists out.So it’s here we go again. And just one last thing while we’re on 1989 and the echoes of communism. I like the way Peter Magyar talked about the Hungarian government—not to say the “Orban kormany“ which would be the government or, like, administration, like we say, “Trump administration.” He would say it was the “Orban rendszer,” which means the Orban regime. And so his motto toward the end of the campaign and the big slogan behind him at the big rally where he declared victory on Sunday night was, “Most, Rendszervaltas,” which means NOW, SYSTEM CHANGE. And that was the slogan from 1989.Krugman: Wow. I mean, I think it’s really important to understand this is not over. On the other hand, I have to say, it does sound, with the role of the Europeans and probably European security services—probably meaning the French and the British— in some ways the whole argument made by JD Vance that “the European globalists are plotting against us,” it was sort of true.Scheppele: Well, they cut the money and the security service provided the information. They have this European public prosecutor’s office ready to go. And I think it was always aimed at Hungary. So that’s also ready to go. They’ve sort of recognized Peter Magyar. They may—and I have mixed feelings about this—but they may just give him all the money back now. I mean, there’s all these frozen funds. They haven’t made the changes yet that would deserve getting the money back, but theoretically, they could give at least some of this money back now, because Orban has overspent. Orban has spent 85% of the 2026 budget already.Krugman: Yeah. So this could be a significant boost. They could have a “morning in Budapest” or whatever if these frozen EU funds are coming back.Scheppele: Yeah, but since I know you follow the money, here’s one more money thing to follow. So in the last round of EU budgets, they had this recovery fund to overcome Covid. And this time they’ve got this huge amount of money that they’re raising on the markets to fund what’s called the SAFE fund, which is to fund the European defense build-up that’s coming.Krugman: Okay.Scheppele: So again, I think Orban’s known for a long time he would lose. I don’t think he thought he would lose this big, but he would lose. So what they’ve done is they’ve rapidly privatized the whole Hungarian defense sector. So if and when that money comes to Hungary, it’s going to go straight through the government into the pockets of Orban’s cronies, because all of the defense sector in Hungary is now privatized with his friends.Krugman: Interesting.Scheppele: Yeah. So, you know, it’s not over yet. You can’t get rid of 16 years of this with one election.Krugman: But they got rid of at least some of it.Scheppele: Oh yeah. It’s a necessary but not a sufficient condition, as the philosophers would say.Krugman: Congratulations above all to the Hungarians. But to you. You’ve been on this case since the beginning, and at least some good has prevailed.Scheppele: I couldn’t have done it without you, Paul, because you were the only one willing to post all the kind of legal detail about how this stuff was happening. And really, it was a team effort at the beginning, and I really appreciate all you did.Krugman: Well, it’s trivial compared with this. Anyway, so great to talk to you. And we may come back on in a few months when hopefully we know a little bit more about how this is playing out. But wow, what a revolution.Scheppele: I know. I mean, people were dancing in the streets. Just the euphoria and the number of young people. We didn’t lose that generation and they didn’t forget what democracy could be, even though they’d never experienced it. Right? I mean, it’s just amazing. And, you know, we could do that here, right? We can do that.Krugman: Here’s hoping.Scheppele: Okay, Paul. So we’ve got our next task cut out for us. 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No time for a regular post today, so here’s a video.TranscriptWhen Donald Trump took us to war with Iran, he dismissed warnings from the experts, from the military, from the intelligence community, saying that this was a highly risky proposition. Now he wants to bring that same level of clarity and judgment to monetary policy, and we should all be very afraid. Hi, Paul Krugman here. Today, I’m going to do a video rather than a proper post because I just have too much stuff going on. I’ve been too busy to actually do the charts and quantitative analysis that would be involved in actually writing a post about this stuff. I’m recording this on Wednesday afternoon.The news to which I’m reacting is that in the midst of everything else that’s going on, Trump is doubling down on his attempt to turn the Federal Reserve into a personalized institution that will do what he wants, and never mind the fact that it’s set up to have substantial independence, never mind the fact that there’s a long tradition of respecting the Fed’s independence. Trump thinks that he should be, as George Bush would say, the decider on monetary policy. This would be a bad thing even if Trump was somebody who generally had good judgment. Monetary policy, what the Fed does — control of short-term interest rates, control of the money supply— monetary policy is technical. Doing it right does require that you know quite a lot about what’s going on. It’s something that you really do want, technocrats at least having a strong role in the decision-making process. And in fact we generally leave it up to technocrats.Part of the reason for doing that is it’s too easy. It doesn’t require legislation to change interest rates. It just requires a phone call to the open market desk in New York City. So it’s really easy for a president who wants to rev up the economy, wants to juice things up before an election or just plain has crackpot economic ideas, it’s just too easy for a president to do a lot of damage. So we put layers of insulation. Members of the Federal Reserve Board are appointed for long terms. The whole setup is one that is designed to at least take some time. It doesn’t allow a madman in the Oval Office to muck with monetary policy. It’s especially bad if the guy in the Oval Office is somebody like Trump, who is impulsive, very much short-term reward-centered, and, of course, doesn’t read, doesn’t study, doesn’t listen to experts. And we know that Trump has a bee in his bonnet, that interest rates should be drastically lower than they are now, which is simply not supported by any of the facts about what’s happening to the economy. Inflation is running hotter than it should be. The Fed has a target of 2 percent inflation on the PCE price index. It’s actually running at around 3.That’s not good conditions for a rate cut. The economy doesn’t need a rate cut, at least it doesn’t appear to right now. We’re not in a recession. So technocrats at the Federal Reserve will not actually deliver the rate cuts Trump wants unless he’s able to exert personal control.Now, the way he’s been trying to do that is itself outrageous. His minions at the Justice Department have tried to force Lisa Cook off the Federal Reserve Board based on totally spurious charges about her mortgage applications long before she was at the Fed. And they’re trying to force Powell out over allegations of cost overruns in Federal Reserve construction projects. This is crazy stuff, and nobody takes it seriously. Nobody thinks those are genuine charges. This is all about trying to use the mechanisms of the Justice Department to intimidate monetary policy makers and turn them into instruments of the presidential will.The presidential will here, aside from being utterly self-centered, is also deeply uninformed. If you read what Trump has had to say about monetary policy, it’s clear that he doesn’t think of interest rates as a tool to manage the economy, as a tool to control inflation, and so on. He thinks of low interest rates as a gold star that you get if we have a great economy. So he keeps on saying that it’s a wonderful golden age, the economy is terrific, none of which is actually true. It’s not a golden age. Inflation is running high.None of that is true, but in any case, that’s not how it works. Monetary policy is not a reward for good behavior. It’s not a reward for achievement. It’s something that is a tool for keeping the economy on an even keel. If he does get his way, this will be bad. The Federal Reserve has credibility, the fact that people making decisions, particularly decisions about pricing, believe that the Fed will keep the economy on an even keel, that it will not allow inflation to remain stubbornly too high. It did allow some inflation for 21-22, which was arguably the right thing to do to allow some, but it quickly took the steps needed to bring it back down again. And that credibility, the fact that people believed that the Fed would do the right thing actually helped it to do the right thing, allowed us to have “immaculate disinflation,” a big fall in the inflation rate without a big rise in the unemployment rate.If Trump gets his way, that will all be gone. The credibility of the Federal Reserve will be shot. Now, I don’t think he’ll get his way there. I don’t think he will get his way on monetary policy. But he might. And more than that, what the fight over the Fed is telling us is that Trump has learned nothing. You would think that the debacle in Iran would lead to some loss of self-confidence, some dent in the arrogant ignorance, the belief that just because the intelligence agencies and the generals and the admirals say that this is very risky and what about the Strait of Hormuz, never mind, I know this will be a quick, easy war. And apparently the fact that it hasn’t turned out that way hasn’t led to any questioning of his own impeccable, perfect judgment. So the attack on the Fed is a bad thing in itself, and it’s also a symptom of “this is not a guy who should be in the White House.”And the fact that he still commands so much deference from his own party and so much timidity on the part of people who should be standing up to him really makes me worried about the future of America and the world. 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Thank you Quentin Hardy, Beth Arnold, Jane Trombley, Resistance Media, Victoria Priya, and many others for tuning into my live video with Heather Cox Richardson! Join me for my next live video in the app.TranscriptHCR: Hey, everybody here from Bonita Springs, Florida and Elgin, Illinois and Portland, Oregon and Seattle, Washington, Fairbanks, Alaska. Boy, it must be getting beautiful up there right now. Newfoundland, Canada, Oak Park, Illinois. Still, we do not have a duplicate Plano, Texas. Then we got I think we got Oak Park, Illinois. That’s two Illinois.We got Cuyahoga Falls, Ohio, Vienna, Austria. Where is our Facebook? from Albuquerque, New Mexico, Dublin, Ohio. And Kristen is here from Facebook. So welcome, everybody. And here, Dr. Krugman and I go again with Lunch Money. Hey, Paul, how are you? PK: Hi, I’m good. How are you? HCR: I’m good. We have spring here, finally, which is unbelievable.PK: We’re hitting 86 this afternoon in New York.HCR: Oh, I can be there in about three hours. We’re not going to be 60.PK: So yeah, here from beautiful New York City, actually more or less across the street from the Empire State Building. This is my academic office.HCR: Oh, that’s nice. That’s nice. I’m just across from trees. Listen, so the world is changing so quickly that it’s kind of hard to get your mind around it. And one of the things that jumped out to me this week was the degree to which we’re focusing on the loss of soft power. We’re looking at the loss of you know, the idea of American military dominance. That’s another question. But I’m really interested in what it means for the U.S. economy to have taken such a dramatic turn away from dominance around the world. And what got me thinking was I did an interview the other day with Vanessa Williamson of the Brookings Institution about taxes, right? And she really offhandedly said, well, you know, we have this thing in economics called the resource curse, where if you have a country that has a reliance on an easily accessible resource like gold or oil or whatever, it means that they don’t really the leaders don’t really have to pay any attention to the people, because they can just dig it out of the ground. And she said, I’ve always kind of thought that maybe America’s resource curse was the fact that we were the world’s reserve currency. So we could borrow as much money as we wanted at really low prices. But that’s changing. And she just kind of threw it out there. And I thought, oh, my heavens, I have never thought about this at all that way. And I thought to come to you and say, I don’t know if she was right. I don’t know if this makes any sense at all, but what are we looking at in terms of the economy with the extraordinary instability of the United States on the world stage right now?PK: Okay, so let me first of all just say that, one resource curse that we have in the U.S. is an actual resource curse. We would not be rejecting renewable energy, we would not be rejecting electrotech, probably, if we didn’t have all of this oil and gas. That in some sense, our politics are kind of polluted by the power of our own fossil fuel industry. And that’s actually probably ending up being an economic disadvantage. So just to say that we’re not that different from countries that actually have mineral resources that end up to be negatives, not positive for them.On the dollar: I do need to say that that’s one of those things where the people who have studied it most tend to think that the special role of the dollar is least important. And it’s people who haven’t who tend to think that it must be tremendously important.So, okay, the dollar is the overwhelmingly dominant currency of international business. If somebody in Brazil wants to do business with somebody in Malaysia, the stuff’s going to be invoiced in dollars. The debts are going to be in dollars. And those private uses of the dollar are more important than the official reserves, although that’s part of it as well.HCR: Can I stop you for a second there? And for them to do that exchange, it has to go through the SWIFT bank, right? Probably, yes. Can you explain all this stuff?Yeah. So there’s an interbank market. So if you’re going to exchange reais in Brazil for Malaysian ringgit banks that are going to do the deal. And the interbank markets are all against dollars. There is no market where you can exchange Brazilian currency for Malaysian currency directly. The banks will sell one for dollars and then use dollars to buy the other. The interbank market is conducted primarily through this thing called SWIFT, which I forgot what the acronym stands for, but anyway, it’s the electronic settlement system based in Belgium, rather oddly, but effectively answering to the United States. There are ways around it, but it’s by far the most convenient way to, to do these transactions. And the role of the dollar gives the U S government a lot of power. Everything that goes through SWIFT is revealed to the National Security Agency. The United States can effectively veto transactions. Because everybody needs to have an account at a U.S. bank in order to do basically any business anywhere in the world, the U.S. government can blockade transactions. And so this is an extremely powerful lever of power. Actually, I’ll recommend a book by friends of mine, Henry Farrell and Abe Newman, called Underground Empire, which is all about these invisible channels of power, and the currency stuff is a big part of it. There are ways around it. The United States has tried to embargo Iranian transactions for many years, and the Iranians have costly, kludgy workarounds, but they do have workarounds. The Chinese yuan has done nothing as international currency, but people do make deals that involve using China’s banking system to get around the U.S. blockade. But it’s still a big influence of the United States.So, okay, this is really important. Now, some think that the dollar is about to collapse, that people are going to stop using dollars. Yeah, if we are crazy enough, we can do that, but it’s really hard. I think I’m getting a little nonlinear here, but anyway, the best essay I’ve ever seen on this — the best paper I’ve ever read, but it’s just in the form of an essay, no math, no diagrams, was on the dollar. It was an old article by, my late teacher, Charlie Kindleberger, called The Politics of International Money and International Language, in which he said that the role of the dollar in the world economy is like the role of English. Everybody in the world who needs to communicate does it in English, because everybody else does it. Everybody uses dollars because everybody else does it. And that’s actually extremely hard to dislodge.Even if United States policy is crazy, it’ll take a lot to change that. Think about what it would take for us to start doing international business in Mandarin. That’s not going to happen overnight. Sorry, I’m going on too long. I haven’t let you get a word.HCR: No, no, no. This is great.Does all of this translate into the United States can borrow without limit? PK: Well, first of all, we are not the only country that can borrow a lot. It turns out that if you are looking at the ability to run large trade deficits year after year, the United States has done that, but so has Australia. So has Britain.So it’s not actually the case that the United States has a unique ability to borrow. We are impressive in the ability to borrow in dollar denominated debt. Not that we get free borrowing, but that U.S. borrowers — the government, but also corporations —issue debt that’s payable in dollars, which does give the United States some autonomy. If the dollar plunges on world markets, so do our debts. So we’re insulated from that particular concern. But it’s not unique. We aren’t uniquely able to run big deficits. Whether we get cheaper borrowing or more borrowing, whatever the effect is, it’s not strong enough to be clear. for the signal to overwhelm the noise. You try and look for, is America able to borrow more cheaply than Britain or Japan? Maybe, but you can’t really see it in the data. It’s not overwhelming. So at a basic level, I don’t think that the resource curse story vis-a-vis the dollar is especially compelling. I would say that the role of financial services qualifies, although that’s much bigger for Britain than for the United States. I mean, Britain really suffers, everything in Britain except for London suffers from the city of London’s role in international finance, but the United States a little bit. But I think it’s more a psychological thing, a sense of impunity that the United States tends to have because of the role of the dollar. We don’t think about, nobody ever thinks about a U.S. financial crisis and the IMF having to come in. And maybe we should.HCR: So that was just sort of a starting point because what that did, whether or not that was something that I should be staying up at night about, was it really made me think about, you know, I look at the politics of where we are and I look at soft power and I look at the cultural norms and so on And certainly I look at individual pieces of the fact, for example, that oil is getting very expensive and therefore we’re going to see inflation, more inflation than we’re already seeing and so on. But on a cosmic level, you know, on a really big level, what does it mean for the what is the instability that we are seeing coming out of the Trump administration? And you can define that however you wish. What does that mean for the American people? I mean, like literally, I don’t even know where to start with that. Does it mean nothing? I can’t imagine that.Does it just mean inflation? You suggested it doesn’t mean that we have to worry about not any longer being able to borrow. What does it mean? PK: Okay. So, the U.S. is, less of a trading nation than almost anybody else. We’re less dependent on export related jobs than anybody else. But that doesn’t mean zero. It’s actually quite large. And I’ve been thinking about this a lot. I mean, the United States has really made it sort of dead obvious that we are we’re not reliable. We’re not serious people. You cannot trust the United States to behave. You cannot trust the United States to honor its promises. You cannot trust the United States to behave rationally. Sorry to say that, but that’s where we are right now.This has to have some negative effects. There’s some sort of almost crude mechanical stuff that people don’t think about. I never looked at this, before, but how much does the US export economy depend on selling arms? Just plain selling military equipment.It turns out that more than 10% of our exports is military equipment. I had no idea myself, and I should know these things. And Mark Carney, Prime Minister of Canada, just said, we will no longer spend 70 cents of every defense dollar on the United States, right? And around the world, governments must be thinking about that. Should their next fighter plane, should their next anti-aircraft system be U.S.? Partly because the U.S. is not reliable, partly because it turns out that maybe U.S. military technology is not quite as supreme as we thought, given what’s happened the past six weeks.So that right there, that’s probably millions of jobs in the United States that are directly or indirectly linked to the world, having relied on our weapons, which it probably won’t do to the same extent anymore. PK: So I’m sitting in my academic office here. One of America’s biggest, biggest exports is higher education.HCR: Yeah.PK: Right. We get a a lot of foreign students. We’ve just, we just had Mayor Mamdani here this morning, uh, believe it or not, um, for an event. And we were all talking about how the student, foreign students who are very big here at CUNY, but throughout the U.S. educational system, they’re not coming anymore. We’re having a big hit. And if you think it’s just those academics, but even if you’re not in academia, there’s a lot of jobs, employment opportunities, and also our scientific base that is ultimately dependent on foreign students. Also, there are some reports this morning that hotels are slashing prices. They were expecting to be able to rent out a lot of rooms for the World Cup, but the world is not going to come to this World Cup because it’s in Trump’s America. So putting all that together: the U.S. economy is so huge that even all of this it’s very unlikely to subtract even 1% from U.S. GDP.But 1% of U.S. GDP is $300 billion a year. So this is all, in the end, fairly big stuff.HCR: So I want to be clear that people understand. When foreign students come to the United States of America, they pay full freight. U.S. students often get discounts through scholarships, through simply rake-offs, through, you know, they pay quite a bit less for their tuition dollars than foreign students do. So increasingly higher education has focused, and sometimes prep schools as well, have focused on attracting foreign students to basically to make their ends meet. So you’re seeing in a lot of universities right now, not only cuts coming from the administration, but also the loss of these foreign students on which a lot of the tuition depended.So there’s a real crisis going on in higher education. Lots of people don’t understand that this is not just a question of getting widespread good intellectual talent. It’s also dollars.PK: That’s right. I mean, education is a business, among other things. I mean, it’s a lot of money. There’s kind of synergistic effects as well. I mean, the foreign students... It’s not just that they pay in full and the domestic students don’t. It’s also just having more students.So we’re able to maintain the size of the U.S. educational system in part because of the foreign students. Advanced degree students are also a large part of the workforce for U.S. research. So it’s all pretty critical. Now, there’s also foreign tourists. Again, Carney, I think in that same speech where he talked about the defense dollars, he started with a joke: “Has anybody drunk any bourbon lately?” And, of course in Canada, basically no, and they’re also not coming as tourists. So turning yourself into a global pariah, which is what we’ve been doing is, bad for business. There are there are worse things than being bad for business, but it is also bad for business.HCR: Well, so what about the long term? Because you’re talking about slower growth. You’re talking about a more stagnant economy. But, you know, I’m watching the the Trump administration trying basically to move us back to the 19th century dependence on old technologies, including petrochemical, you know, including fossil fuels.And watching China and the rest of the world moving forward toward new technologies … I have a sister who’s a marine biologist in another country, and she has been saying to us for years that if the U.S. didn’t get its act together, the next generation of appliances and of technologies and of energy are going all to be keyed to Asia and not to the United States of America. And Biden and his team seemed to be aware of this and to work really desperately with the Inflation Reduction Act, among other things, to try to bring America up to speed and the Chips and Science Act to compete with China and to regain control of that future. And I’m watching us just piss that away and thinking, What does this look like in terms of jobs, in terms of technology, in terms of producing energy and so on in the future? And how long down the road are we looking at that problem? And is it recoverable?PK: Okay. Some friends of mine who are in the kind of energy future space say that, look, at this point, effectively, the United States and China are offering to the whole world two different visions of what your energy future will look like. China, even though the Chinese themselves still burn a lot of coal, which we wish they would phase out quickly, but China is basically saying the future lies in wind and solar and batteries and electric cars and buy our technology and you can enter that wonderful world. The United States is saying No, none of that stuff. That’s bad. Windmills kill birds or something.Anyway, we’re saying reject that vision of the future. What we need is hydrocarbons, back to oil and gas. And hey, we have lots of oil and gas, which because we do all this fracking, and we can supply you. You can buy your oil from the United States. you can get liquefied natural gas from the United States, and that’s the route you should go. Now, that was probably a losing proposition to begin with, because the fact of the matter is that at this point, the sort of clean energy technologies are getting just plain cheaper, even aside from all of the environmental issues and so on.They’re just getting cheaper. But In any case, would you now trust this America to be your supplier of LNG? Who knows whether Trump or the next Trump-like U.S. president will decide that you’re not our friend and cut off your supplies of resources. We used to be the country that whatever else you could say, America honored its promises. And we are not that country anymore. We’re not reliable. It’s unfortunate but unfortunately, I think it’s true that people consider China a more reliable, rational player than the United States, and this has a direct impact on that choice. And you can see it’s happening overwhelmingly. The world is not rushing to install new gas-fired power plants. It is rushing to install solar panels, of which 80% are made in China. So, that is bad, although a world in which China produces the equipment that allows us all to have abundant energy is not such a terrible world, but still does mean that the U.S. is losing out on that. But I also worry that the United States will refuse to use this technology. So we will be, in some sense, the last country that still has internal combustion cars and still has fossil fuel power plants when the whole rest of the world has moved on to a better cleaner and cheaper technology HCR: Well the cost of gas is certainly making a lot of people who loved their big trucks rethink that up here although as you yourself have pointed out it takes about 10 years for the fleet to turn over.PK: Right, that’s one of those shocking little things i didn’t know. I’ve been around for a while and i remember when you know we used to say, well, cars stay on the road for nine years. It’s now 14 years. And that’s partly because Detroit, the big auto companies kind of made a decision not to sell affordable cars, that they would focus on SUVs and luxury vehicles. And then people who didn’t make a lot of money would rely on secondhand vehicles. So we turn over our auto fleet very, very rarely. And that means that if we don’t start moving to the future, we will be stuck. And of course, the autos are the visible part of it. But it’s just a lot of our infrastructure that, you know, we’re not doing a whole lot of building in this country. And so that means, among other things, that we are stuck with legacy energy systems, legacy industrial systems. And we’re building that legacy right now. And it’s not the right one.HCR: OK, so I’m going to ask you this and it’s just an observation. And if you feel like you don’t want to answer it, I totally get that. But it’s a little hard to miss the fact that the countries where Trump has exerted his power are ones that control a lot of oil and and, you know, Iran and Venezuela. And do you and of course, he works very closely with Vladimir Putin, whose money depends on oil and the sale of oil and that internationally. Do you think that that is playing a role in the places that Trump is trying to gain control over?Or is that just me with a tinfoil hat over here in my study in Maine?PK: You don’t want to dismiss that sort of thinking, but I think in some ways you may be imputing too much calculation and rationality. HCR:That’s fair. PK: If Trump was trying to seize the oil in Iran, then that’s insanity. He sometimes talks as if we can just go in and take the oil, and it’s like, you know, 20 million barrels a day is the amount that flows through the Strait of Hormuz. You don’t just take that, right? And are you really thinking that we can occupy Iran? Now, it’s actually funny. I have to give some, I guess, credit. Venezuela has turned out to be less of a disaster than I expected because it is a completely corrupt regime, and Trump has basically been able to kill off the old capo and install a new capo who is just as bad as the old one, but gives him a cut.HCR: That’s what Iran was about.PK: That’s what they thought was going to happen in Iran, and the current management of the United States is continually surprised to learn that other countries are real, have real ideology and nationalism of their own. So that’s not going to happen. I actually think that the channels here are generally subtler.It’s not that Trump and Hegseth and executives of the major oil companies sat down and plotted this thing together to seize the oil. But it’s been clear all along that current U.S. government is much more comfortable with petro-state oligarchs, whether it be Vladimir Putin or Mohammed bin Salman, that those are more their kind of people than, you know, basically American workers, and that more, I think, out of instinct than calculation, they do tend to follow policies that are favorable to them. So one of the many conspiracy theories is that this whole war was about raising the price of oil to help Putin. Well, I don’t think it was, I think that’s been a consequence, but I don’t think it was carefully calculated to do that.HCR: Yeah. Yeah. I’m afraid I’d agree with you on that one. So here’s another question for you. This has been an issue in the United States. The attempt to wean ourselves off of fossil fuels and to work in renewables, which as you say are now cheaper than fossil fuels. And I’d love to have you explain that a little bit more closely. But then what what can we do? What can ordinary American consumers do to say to the administration or to say to the country, we don’t want to be left back in? All I can think of is the Spindle Top oil gusher, which was, you know, incredible when it happened. But it was also more than 100 years ago versus where we could be going. So, why is it cheap? What do you mean when you say it’s cheap? Renewables are cheaper than fossil fuels at this point.PK: Well, literally, I mean, there’s something called levelized cost, which is an estimate basically of how much it’s going to take to generate electricity over the lifetime of a power plant or power facility. And the levelized cost for solar and wind are clearly well below coal fired power plants and they’re sort of about even with or dropping below natural gas fired power plants. So if you are a utility company making a decision now should I build another gas turbine electric generation facility or should I build a solar farm or a wind farm um it’s right now just on the sheer dollars and cents you would probably go for the renewables you go for solar or wind.There was a critical problem that we used to have, which was that the sun doesn’t always shine and the wind doesn’t always blow. But there’s also been spectacular progress in batteries. So battery technology has become more effective and immensely cheaper. And all of the renewable related stuff, green energy, has had incredible learning curves. As we accumulate experience, the costs just keep falling. So they are now all cost competitive or more so and that will keep on happening. So on a typical day now in both California and Texas — anyway, most of the electricity on a typical day will be generated by solar and wind. Some of it will be fed into batteries during the day and then the lights will stay on at night because you have the batteries. That is where technology wants us to go. So that’s the big transformation. And of course, electric cars have gone from being cumbersome to actually being, you know, on my Substack I had the other day, I just had a photo of a BYD car and it’s pretty spiffy and the range problems have rapidly diminished. So, you know, this whole the technology of, um, uh, non-fossil fuel future is pretty much already here.And it works. It works on dollars and cents and it works in terms of reliability. Um, now I’m not, I lost the second half where you were.HCR: So, so what, you know, I, I suspect most of the people listening here are not going to disagree. And I certainly don’t. And I’m not even talking about the cost of, you know, data centers, which are sending, uh, electric bills through the roof, the cost of diesel, especially right now, which is prohibitive for farmers and fishermen.I’m just talking about a lot of us would like to see this future and thought we were achieving it. And now we’re looking at an administration and therefore perhaps downstream different kinds of industries that are moving us backward and not forward. And how does one, a normal everyday American put pressure on a country to change their economic behavior, not just their political behavior, that’s my back, but their economic behavior. What do we do? I mean, there’s people who are talking about general strikes. There are people who are talking about at least a May Day strike.You know, how do we make this future happen for us and not just for the rest of the world?PK: I’m not sure that I have an answer there. I mean, politically, I think it’s going to take a while before we get back to the Biden era subsidies for the energy future, which is terrible.But at the minimum, we can really demand that we that the US government not actively block the energy future. What’s been going on under Trump is that they’ve been refusing federal permits for wind farms, for solar farms. There’s really conspicuous cases of offshore wind farms that they’ve been trying to force to cancel midway through construction. They’ve been losing court cases on most of those. But there are just hundreds of smaller developments where more quietly permits are being denied. So we have a government that is actively hostile, not just refuses to spend money on green energy, but is actively trying to suppress it.And I think that political activism to to say stop getting in the way is relatively likely to succeed. You as an individual, I don’t know. I mean, that’s kind of not how it works. Right. I say I’m not a good role model here. I still drive an internal combustion car, which happens to be 20 years old.So I guess I’m OK. Am I right? Yeah, it’s 20 years old. So I think I’m forgiven for not ditching it for a new car yet. But as for the power of individual purchases and even boycotts, not sure. I don’t think we’re going to get general strikes over energy policy, but election outcomes will have a huge impact here.HCR So now we’re back on my turf.PK Yes, we are. I’m sorry. That’s the thing about living in something that still has at least some of the institutions of democracy is that votes matter.HCR: Well, amen to that. And we certainly saw that last weekend in Hungary. Listen, I could talk to you forever. Thank you for doing this. And we, and thank you everybody for being here and we’ll do it again. Is it, is it next month?PK I think so. HCR I haven’t actually looked at the calendar, so I have no idea, but it’s always a pleasure, Paul. I hope you get a chance to get outside in this gorgeous weather.PK I think, I think I’m going to take myself out for dinner. Robin’s away, but even though it’s a luxury, I don’t have outdoor seating at my New York apartment. So I think I’m going to go find someplace that does have outdoor seating.HCR Well, and do you know, I love New York anyway, but one of the things I just, this is so obvious, but just blows me away about New York is you can get any food from anywhere around the world in New York city. It’s just, I mean, I’m in Maine and we’re very lucky for so many reasons here, but like, I can’t get food from Bhutan for, for at least, you know, a long drive.PK Oh gosh. Whenever you’re here, let’s go to Jackson Heights. If you’ve ever been there, there must be 30 national cuisines on every block.HCR That’s just so cool.Anyway, thank you, everybody, for being here. And we will see you again the next time Lunch Money Regroups. Thanks for being here.PK Take care, all. HCR Thanks, Paul. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

TranscriptWhat is Hungary to us or we to Hungary? Hi, Paul Krugman here. A Saturday morning update ahead of the big election in Hungary taking place tomorrow. The eyes of the world are upon Budapest. It’s a little odd that Hungary is so much the focus of a lot of people, myself included. It has about the same population as New Jersey, about a quarter of New Jersey’s GDP. It’s not a big place, but it’s symbolic. It is a role model for right-wing authoritarians everywhere. It still formally has the institutions of democracy, but has for the past 16 years been a one party state — ruled by a right-wing authoritarian ethno-nationalist regime that enforces its will partly by rigging elections, partly through an extensive system of crony capitalism that rewards its friends and punishes its enemies. In other words, it’s a MAGA kind of place. It’s what they would like to do to the United States, although with less sophistication and more brutality.Donald Trump has been frantically trying to keep Viktor Orban in power, largely in ways that demonstrate that he really doesn’t understand how the world views him. Sending JD Vance to campaign for Orban is not helpful to Orban. It’s a boost to the opposition. Spewing frantically on Truth Social about how important it is that Orban win is, again, a gift to the Hungarian opposition. The system is still very rigged in Hungary, but there’s pretty good reason to hope that the popular wave against Orban and Fidesz is so large that it will sweep away all of the rigging that they’ve imposed to try and keep themselves in power.We’ll all be watching the polls eagerly tomorrow. What struck me, however, as something new is that lately, at the very end, Trump is now saying, oh, elect Orban and I will help you out economically. And just yesterday, he put up a post saying that if Orban is re-elected, that the Economic Might of the United States will come in to aid Hungary and its well-deserved prosperity and all of that. Which is interesting because it’s an illustration of the megalomania, the delusions of grandeur that really afflict the current U.S. administration, a complete inability to have a sense of the limits of American power. What Hungary is to us or what Hungary is to MAGA is clear, but what are we to Hungary? Look at Hungarian trade. It is a relatively open economy, which depends a lot on its role as a relatively low-cost manufacturing platform, which it has been able to maintain despite the crony capitalism and all of that. Where does Hungary export to? Well, about 80% of its exports go to either the European Union, or Britain has a little bit on top. So essentially the democracies of Western Europe are where 80% of Hungarian exports go. How much does it export to the United States? 3.5%. Basically, Hungary, for practical purposes, does no business with the United States.This is mostly about gravity: The “gravity equation” in international trade says among other things that trade depends very much inversely on the distance between countries. Hungary is in the middle of Europe. It’s going to inevitably do a lot of trade with Europe. And that’s even larger because the special role that Hungary has taken is that of being a a manufacturing platform for relatively low-wage pieces of the European manufacturing sector. In a way, kind of like Mexico is for North American manufacturing.By the way, the fact that German companies in particular have invested a lot in Hungarian production is a large part of the reason that the European Union has been so derelict in trying to rein in Orbán and his destruction of democracy. But in any case, the point is that there’s just no way that the United States is going to be an important economic partner for a small country in the middle of Europe. It’s a complete misunderstanding of how big, how important, how powerful the United States is. It is in a way kind of the economic counterpart of imagining that the United States can easily effect regime change and bludgeon Iran into submission. This is not who we are. It’s not our role. We are not big enough. We are not the sole global superpower. And in any case, being a superpower isn’t what it used to be. So all of this will be ignored by the Hungarians.The one thing that may happen is that the clear message that Trump favors Orban may be the straw that breaks the camel’s back, maybe the final, tipping point that removes Orban from power. I’m not counting any paprika chickens before they’re hatched. There is a kind of a nightmare here about what happens if there’s a clear attempt to simply overrule, defraud the Hungarian electorate, not just the rigging that has worked so far, but something even more extreme. And then will the Europeans ever live up to their own values, their own ideals?I hope we don’t come to that point. But anyway, whatever is happening, one thing that’s clear is that U.S. economic partnership or lack thereof with Hungary doesn’t make a damn bit of difference. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

Lisa Graves is a legal activist and the author of a remarkable and terrifying book, Without Precedent, that documents the assault on democracy via the story of John Roberts. I spoke with her about how America has come to its current state, and what the future may hold:. . .TRANSCRIPT: Paul Krugman in Conversation with Lisa Graves(recorded 4/9/26)Paul Krugman: I’m speaking today with Lisa Graves, author of an incredibly revelatory and deeply disturbing book called Without Precedent, about the Roberts Court and what it has done to America. And...hi, Lisa. Welcome on.Lisa Graves: Paul, thank you so much for having me on. It’s an honor to be here with you. And thank you for your kind words about my book.Krugman: I guess I was first sort of seriously alerted to what was happening at the Supreme Court in 2000, with the stolen election and all that. But I have to say, I don’t think I fully appreciated what Citizens United would do. And so why don’t you give us a little background on what has happened, the court and its role and what’s been happening to America?Graves: Well, I really appreciate your starting with Bush v. Gore, because that in some ways is the beginning of this period. It’s a precursor in a way to what we’ve been experiencing. And that was when the US Supreme Court, in a sharply partisan decision — although not all the Republicans voted to stop the recount — five Republicans voted to stop the recount in 2000, in Florida. And the effect of that was to give George W. Bush the presidency and with it, not just the power to, in essence, make war with the consent of Congress, but also the power to remake the courts, the Supreme Court in particular.And by the way, as part of my research for the book, I looked into what was happening at that time, and it turned out that Clarence Thomas’s wife Ginni Thomas was working for the Heritage Foundation on the predecessor to Project 2025 — basically Project 2000. And she was screening people for positions in the potential George W. Bush administration. And Clarence Thomas didn’t recuse himself from that case. By the way, that five-four decision — it would have been four-four. The count would have been allowed to proceed. And the count that actually occurred with news organizations after the fact, after Bush was sworn in, showed that Gore would have won Florida and would have become the president of the United States.By the way, after Thomas voted to effectively make George W. Bush the president, Ginni Thomas was given a promotion as the liaison from the Heritage Foundation to the White House, and she became the highest paid non-board member of the Heritage Foundation. And so she was rewarded very well for her work and, basically, for the consequence of her husband’s decision to vote to stop that recount.So that was really a moment where I think a lot of people didn’t understand what was happening. And because that decision happened so quickly, there were no motions for Thomas to recuse himself. It just was a very rapid, very political, partisan decision by the court. And it is really a precursor to what’s happened next, which is that George W. Bush was reelected as an incumbent, or elected anew in 2004. And there were two vacancies that came up immediately. It was for O’Connor’s seat and Rehnquist’s seat. And John Roberts got the role of chief justice, and Sam Alito got the role of associate justice.And then to fast forward to your question about Citizens United, again, this is a 5-to-4 decision issued by the Roberts Court, where Clarence Thomas sat on that case — the fifth vote, in essence, on that case — even though a billionaire named Harlan Crowe had staked his wife Ginni Thomas with $500,000 to launch a group to take advantage of the decision to come in Citizens United, to allow these so-called C4 groups under the IRS code to spend unlimited money to influence elections. And Clarence Thomas did not recuse himself from that case, and even had the audacity to write a concurring opinion saying that disclosure of money being spent by these groups — who the sources are — would chill speech, meaning money, like the money to his wife, which he did not disclose.And so that decision unleashed a tsunami of cash into our elections, where candidates are routinely outspent by the outside groups. And this has given a disproportionate, and extraordinarily disproportionate, power to billionaires in our society, in America, to secretly influence elections in order to get people into positions of power to advance their interests, like the huge tax breaks that Donald Trump signed into law at the behest of Charles Koch and his groups in the first term of President Trump. And again, similarly, in this second term of Donald Trump, the extension of those deeply unfair and destructive tax cuts for the richest few.Krugman: You kind of described what Citizens United is, but let’s talk more about that. Citizens United is the birth of super PACs, right?Graves: Yes.Krugman: And it’s basically saying that outside players — but it ends up being largely billionaires — can put lots of money with some basically tissue-thin restrictions on what they can do, but can basically put in unlimited amounts of money to influence political campaigns.Graves: That’s right. And so Citizens United was a decision that basically asserted that under the First Amendment, money is speech, and that outside groups that were not coordinating with the candidate — so-called independent expenditures — they could spend unlimited money, and they were not subject to the rules that the Bipartisan Campaign Reform Act, BiCRA, otherwise known as McCain-Feingold, sought to put in place to deal with this sort of what they were calling soft money — money that was outside the campaigns that was not required to be disclosed.So Citizens United and its progeny — a case called Speech Now vs. FEC — that’s what spawned these super PACs, where you have enormous money going into PACs, political action committees. That money can be million-dollar, even $10 million checks. For the super PACs that are operating in a particular way, they have to disclose their donors. But for the C-4 groups, which are these other nonprofits, they don’t have to disclose their donors.And so what it’s created is a situation in which, on the one hand, a billionaire can now give millions to a super PAC in a way that they could not give directly to the candidate. They couldn’t just write a check to the presidential candidate or congressional candidate. They can do it now in an unlimited amount through the super PACs. And then separately, they can give tens of millions of dollars — unlimited money — secretly to a C-4 group that runs so-called issue ads. Those are the ads that say vote for or against this person, or call them because you oppose their policy. But it’s really obviously about influencing the election, and that’s the dark money that’s being spent in our elections.Krugman: The Times found that 300 billionaires represented 19% of all campaign financing in the 2024 cycle. But I’m not sure how they know. Are the C-4s even in there? It may be more than that, right?Graves: It’s certainly more than that. And only under certain circumstances can you actually see some of the funding of a C-4, based on how it’s related — who’s funding it, if who’s funding it is known. So for example, if a foundation gives to a C-4, if it has the capacity through a trust or a foundation to give to a C-4, that sort of giving is required to be disclosed. But if an individual, a billionaire like Charles Koch, writes a check to the C-4, that is not disclosed. It’s only if it comes through a nonprofit entity that you can see just a glimpse of the sources of that funding.So whenever I talk to reporters who are doing those calculations about how much money is being spent by billionaires, I always tell them that their counts are going to be extraordinarily under the actual reality, because we know that these outside groups, these C-4 groups, are spending hundreds of millions of dollars cumulatively in the election cycle, and the only people who know who’s giving to them are the groups themselves. And probably some of the candidates know who’s giving to those C-4s.Krugman: Wow. So if we look at someone like Peter Thiel, who basically bought a Senate seat for JD Vance. I don’t actually know the number, but the numbers we see may actually be only the tip of the iceberg.Graves: That’s correct. There are a couple of rules in states and also at the federal level for certain types of independent expenditures, or if you have what’s known as a 527 group under the IRS code, that is allowed to spend directly in elections. But even then, what you see is a shell game. So for example, the Republican State Leadership Committee, RSLC, has created a subgroup to target state Supreme Court races. And it’s the sole funder of the subgroup. So when the subgroup discloses who funds it, it’s disclosing its parent organization. So it doesn’t disclose how much of that money is from Leonard Leo, or how much of that money is from Charles Koch or Koch Industries or the oil companies that goes into the bigger pool of funds.And so there are all these ways in which I believe that most of the money that’s being spent in our elections in America is not disclosed. It’s not disclosed under the campaign finance reports of the candidates, of the party, or the super PACs, because it’s the C-4 money that is most potent, because it’s the vehicle that allows them to hide the true funders — the biggest funders of these operations.Krugman: If we look at issues like energy and climate policy, there’s obviously huge amounts of fossil fuel money flowing into elections, but there’s also huge amounts of money going into supporting pseudo research at think tanks, which is a kind of whole universe. And if they’re already supplying a very large part of campaign finance, then add in all of this stuff, and we really live in a political environment that’s very much determined by big money.Graves: That’s really true, and while the C-4 spending sometimes is not described as political, it’s obviously political. It’s obviously spent around the elections to influence the outcome of the elections. And it’s often spent on ads, which is why there was a bill that was introduced by members of Congress that was called S1 in the previous Congress, which was designed to basically say, if you’re going to spend money around the elections, it really needs to be disclosed.But as you point out, in some ways that enormous money that’s coming in around our elections is, in a way, the tip of the iceberg, because there’s this whole other structure where fossil fuel companies and fossil fuel CEOs like Charles Koch and others, are spending enormous sums year after year on these so-called think tanks — or as some people call them, “stink tanks.”Krugman: Heh.Graves: But really, these are entities that have been stood up over the past few decades to generate research findings that are informed basically by the funders who are funding that research, in order to assail efforts to mitigate climate change, for example.And when you look at the nonprofit infrastructure in the United States, the United States has a thing that is known internally, in essence, by the experts as “the independent sector.” We have the private sector, the public sector meaning government, and the independent sector—and that’s the nonprofit sector. And it is an enormous part of the US economy. That’s like churches and hospitals and colleges. But a significant portion of that nonprofit spending is going into policy operations, operations that describe themselves as informing the public, as public education — not public schools, but educating the public.And the fossil fuel industry has played a big role in funding a number of these groups that are at the forefront of basically “studies” — and I’ll use that term loosely — but studies that then are cited by some members of Congress as a basis for objecting to the reality of climate change, or objecting to government efforts to intervene and try to mitigate climate change. And so it’s a massive distortion machine. We sort of swim in a political environment, a political and social environment, which has been greatly influenced, swayed by the amount of so-called research that these groups are putting out in order to advance the industry’s interests.And this is part of what’s known as a third-party strategy that the tobacco industry really helped pioneer in America, where they were trying to fend off efforts to regulate tobacco and its cancer-causing effects. And so they didn’t want to run ads, for example, saying “tobacco companies say tobacco is just fine” — although they did say smoking was good for you — but they put forward doctors and, you know, so-called studies saying it was safe, even though the actual independent science was showing that there were carcinogenic effects in some instances of smoking.And so that third-party tactic is what the fossil fuel industry and its CEOs are using. They don’t think that people would believe them if they ran an ad saying, “Hey, I’m Charles Koch. Trust me, all this fossil fuel money that’s making me the 23rd richest person in the world — it’s great for everyone. The planet isn’t on fire, and we can solve everything.” You know, instead, what happens is they fund these groups that do bus tours and they lobby Congress, or they do all these influence campaigns. And the objective is to protect the industry basically at all costs.And there was a book that was written a couple of years ago about how in Koch world, both the for-profit part of Koch Industries—which is now known as Koch—and in their nonprofit empire, carbon was job one.Krugman: Right. And there’ve been some studies— I think by Oreskes and others—that demonstrated how among the alleged scientific papers that disputed the consensus about climate change, the percentage funded by the fossil fuel industry was basically 100. That this is an entirely manufactured thing by special interests. So you place a big emphasis on fossil fuels. Tobacco is kind of where the strategy begins. But fossil fuels are, in your view, at the root of this perversion of the U.S. system.Graves: Well, I think it’s a key component of it. Other than, I suppose, the war industry.Krugman: Right.Graves: Which is related. The fossil fuel industry is the most lucrative field of business in the world. And they’ve made so much money, you know, selling fossil fuels. And there’s a real intolerance for any limit. And in fact, when you look at a lot of the groups that have been funded in the US that are part of attacks on the EPA, attacks on the power of the Environmental Protection Agency to regulate carbon, when you trace those back, you can see money from the coal industry and coal barons. You see money from the natural gas—otherwise known as the methane gas—producers, the frackers and the compressing companies for those fracking for the gas and oil industries.And you can see within that what’s happened: a number of these big CEOs — for example, the largest seller of compressed gas compressors in the United States for these big fracking operations — they’re paid an enormous amount for running these companies. And then they create a nonprofit that then fuels groups like the Heritage Foundation, American Enterprise Institute, and these other entities that are at the forefront of trying to stop congressional efforts to regulate carbon or to mitigate climate change.Krugman: So, I mean, we’ve seen a lot of certainly favorable tax treatment for fossil fuels forever. But still, you know, I’ve been around for a while. I remember the 70s when, in response to the oil crises, we did get price controls and windfall profits taxes. They may not have been great policy, but it’s kind of unthinkable that we would do that now. What changed, do you think? Why did the U.S. system become so much more porous to this kind of influence?Graves: Well, I so appreciate your raising that, Paul, because the timing of that coincides with a memo that was written by a person who became a justice on the Supreme Court. It’s called the Powell memo. It was written by Lewis Powell to the Chamber of Commerce. And that was just months before Powell was nominated by Nixon to the Supreme Court. And in that memo, the Powell memo, he wrote that American businesses needed to play a greater role in American society. And I think this is a laughable assertion. He asserted in 1971 that no one had less influence on public policy in America than the American businessman. That wasn’t true then. It’s certainly not true now.And that memo helped spawn a new generation of investment in trying to capture these levers of power. And so demi-billionaires like Richard Mellon Scaife and others rose to that call to create this apparatus to oppose government regulation. For example, Scaife helped fund some of these early think tanks in the 1970s. But another key figure in that time was Charles Koch, when he had just inherited his father’s company in the late 1960s. He was very involved in these early right-wing movements. He personally, actively objected to those price controls. He started seeding groups in the Libertarian Party, an adjacent movement, before he ultimately tried to co-opt the Republican Party and move this into the mainstream of that Republican Party agenda, you know, with the help of Reagan, who had deeply antagonistic views toward regulation.When you look at that period, that’s when Charles Koch, as a young man, claimed that America under Nixon was basically socialist because we dared to have any price controls. And then, in response to the efforts of Congress and the White House to address the oil crisis and the challenges that America was facing in terms of the energy crisis and the like, Charles Koch actually opposed the creation of a Department of Energy for the United States of America. He objected to that. And so those are very early parts of this movement that most people don’t know happened. You know, it’s obviously before Google. It was a bit below the radar. But that helped seed decades now — the 80s, 90s, the 2000s into the present moment — where those initial investments really took hold.And I guess the key in some ways to their success is that I always describe Charles Koch as being the deepest, longest, most enduring funder of this effort to attack the regulation of carbon and the like. And he’s been at it now for, you know, going on 50, coming up on 60 years, really.Krugman: Right, so this is going back to the Powell memo in, like, 1970–71. So this is 55 years now. I guess what you’re saying is that the billionaires got smarter and learned to play the long game.Graves: Yes.Krugman: It’s the power of long-term thinking, except not on behalf of the human race.Graves: Yeah. It’s astonishing, because you can see there’s all these different assessments of progressive funding versus so-called conservative funding, and there has not been the type of investment in this infrastructure to push these fringe ideas into the mainstream on the left. It is just not how the funding works on the left. The right has billionaires and families of billionaires and children of children — proto-billionaires, you know, multi-multimillionaires back in the day — whose families have been at this for decades now. You can see it through the foundation work they’ve done, and how the different foundations have spawned other foundations.And so on the right you see a very deep investment in moving these fringe ideas into reality, into legally binding rules for us, including to the Supreme Court. And on the left — for example, on the Supreme Court, or in the middle to the left there — there was this effort to not capture the Supreme Court, to try to put people on the court who had a reputation for fairness, and not because they were going to be someone who was driving the law to the left. But the right has been really disciplined in this court-capture plan, along with its plan to capture these other levers of power.Krugman: Yeah. I think to some extent unions used to be the kind of long-term strategic players such as they were on the at least moderate left. But we all know what happened to unions. Although that’s another story.Graves: But can I add in there? Because part of what we saw was how Reagan came in with this hostility to unions, even though he’d led the Screen Actors Guild. He came in with this real effort to try to break the unions. And then that was met, ultimately, in the longer run, with big funding from these big foundations, including the Bradley Foundation, which had one of the biggest reserves in the country, and it was targeting unions to break unions, but also to break their political power, their political influence.But when I traced this back, this so-called “right to work” movement — which is not about the right to work, but the right to break unions in these states — what you can see in the historical record is one of the early funders of that effort was Fred Koch. Charles Koch’s father, in the 1950s, was one of the big backers of this long-term campaign to limit the power of unions, the power of people to organize in unions, and also to basically try to break their political power.Krugman: Wow. So that means these are sort of dynastic efforts. I haven’t really thought about that. But, you know, we talk about the institutions, but it’s actually also these sort of personalized dynasties, which is just amazing.Graves: Yes, so Dick Scaife and the Mellon fortune. It’s the Mellon Banking Corporation. Andrew Mellon was Treasury Secretary under Coolidge and Hoover, and ended up basically losing his cabinet seat due to a financial scandal. So that Mellon banking fortune became basically Richard Scaife’s fortune. That’s the origin of it.Krugman: Because back in the day, you know, pre-Citizens United, when you looked at right-wing think tanks and all of that, it turns out there was sort of Bradley or Mellon-Scaife money behind almost all of them. But now I think it’s a bigger pool.Graves: It is a bigger pool. We have more billionaires now, or more people in that class — that 0.000001.Krugman: Yeah, I think it’s four zeroes and a one. But I always forget.Graves: Yeah. And it’s interesting, because I used to occasionally talk to reporters about David Koch when he was alive, and they’d say, “Oh, but he’s given so much money to the theater or to cancer research,” but they’ve given less money, in some ways at the time, to political operations, although that’s now increased. And I would say it costs a lot more money to build a building than it does to actually buy policy, unfortunately, in America.And so what’s happened is we have this political class of super-elite, super-rich people who have extraordinary sums at their disposal. So, for example, one of the richest men in America and in the world is a guy named Jeffrey Yass. He got rich on TikTok and also on these super-fast trades on Wall Street. He’s the richest guy in Pennsylvania. When he drops $1 million, $10 million in a race — let’s just put that ballpark out — it’s a huge sum, but from the standpoint of a dollar per dollar, the ratio is the equivalent of an ordinary American buying a coffee and a bagel once a week. It’s just nothing to them.Krugman: I think it’s less true now, but still quite true, that given how much political decisions can influence the wealth of the wealthy, the amount that is spent to influence elections is actually still a pretty small number.Graves: Yes, it really is. I mean, when Elon Musk was dropping 100 million or 10 million a year in these different races, he has so much money. I think at one point I calculated how much he was making per minute, or how much, in theory, his net worth was per minute. And what he was dropping in the races was nothing. It was pocket change to him. Basically, it would be pocket change to an ordinary American. Their wealth is so vast. And so, interestingly, even though they’ve invested a lot of money — people like Musk and Koch — in our elections, they still, in essence, don’t over-invest. They could spend a lot more and still not have it make a dent into their holdings.Krugman: One thing I think most people really don’t have a sense of — even if you’ve heard a number, you don’t have a sense of how rich the rich are. You know, this was a time years ago when inequality was a lot lower. But I remember when I was still at MIT — so it’s a long time ago — but I don’t remember who we had. You know, faculty was rolled out for lunch with some rich guy, and the president of MIT whispered, “If only we could get his daily fluctuation.”Graves: Yeah, that’s how much money. And now it’s incredibly more so.Krugman: Yeah. Fossil fuels was really, really big. Still is, I suppose. But lately we’ve been seeing a lot from crypto and tech. What’s your sense of what they’ve achieved? I mean, they’ve spent an enormous amount of money and obviously bought a lot into this last election. But where are we on that?Graves: Well, I will say just briefly, one last note on the fossil fuel industry, there’s a great news story out in ProPublica this weekend about the money behind the effort to give immunity to the fossil fuel industry, to forbid liability, and have Congress do so and have the states try to help with that. And so that piece really details that spending, that includes some significant amount of spending by Leonard Leo, who is the guy who helped pack the US Supreme Court. And so that issue—the fossil fuel influence on policy, the effort to get them off the hook for the liability for the climate changes that are underway—that is an ongoing, active campaign by the industry, or by the industry’s proxies, by the groups that are advancing that agenda.But you’re right, now with the fossil fuel industry in terms of influence, it is being rivaled by, I guess the new rich in a way, in terms of the tech industry and the tech billionaires. And their influence was enormous in a way. Before this election, they had tremendous capacity, due to their wealth, like the Peter Thiels and others, to spend in our elections or to back certain candidates and get their person in a position of power.But now that you have this administration that is basically making deals with our public policy — which I personally would describe as bribery, but they have not been charged — where you have industry insiders who are getting benefits: the tech industry, the media industry, getting benefits from kissing up to Trump, from doing favorable coverage in essence for Trump, you have a corruption component, in my view, that is combining the effect of the wealth already. And you have the policy distortion. You have this additional component because Trump is so willing to basically bend policy to favor his friends or people who favor him.And then the crypto money, that’s the darkest of the dark money. I used to think that the dark money coming in around the election—the money spent by C-4s or their related C-3s—was dark money, but crypto is the darkest money. I mean, it is inherently concealed in terms of who the money’s going to and who holds the money. And we now have a president and his family that is involved in crypto and adjacent to crypto operations in a way where who knows how much money is coming in and from what sources, foreign or domestic? And crypto has also sought to basically influence politicians on a bipartisan basis, giving money to Senate candidates on both sides of the aisle in order to try to limit the regulation of that industry.Krugman: Yeah, I’ve always thought that we kind of underrated the influence, the importance of sheer actual personal corruption. It’s not just campaign finance, but it’s actually what you yourself get: a bonus for accommodating special interests. But it used to be that led to cushy jobs at think tanks. We used to talk about how if you lost an election, that’s okay. There’d be a Center for Fear and Loathing that would offer you a job. But now it’s actually millions of dollars in the new dark money that somehow flow to you personally. Or in the case of Trump, billions of dollars.One thing I learned from Rick Perlstein, one of my favorite historians of this whole thing, is that there’s another industry which has always played a large role in funding, which is basically the quack medicine industry. I mean, in some sense, that’s what’s going on with RFK Jr. We think of it as just this crazy guy. But actually, there’s a lot of money there.Graves: There’s an enormous amount of money there. This so-called MAHA movement —to “Make America Healthy Again”—has really taken advantage of the internet’s access to create these individual communities, where people are getting really selective science. And I use that term loosely. Dressed up as science. Again, it may be funded by industries that are benefiting from it. But you also just see the rise of this influencer culture in the US, where some of them are also paid by these companies to promote their products or promote their lifestyle. And it has become such an influential, distorting thing.I mean, the notion that we would have a rejection of vaccines and vaccinations for children in the aftermath of eradicating in the US diseases like measles, in the aftermath of a whole period, you know, 50, 60, 70 years, of having a really successful public health policy for vaccination to prevent these childhood diseases that can maim kids or blind them or, you know, basically disable them for life. And yet you can have this surprisingly large number—though it’s still a small percentage of the American population—embrace attacks on that science. And do so despite all of the weight of evidence of how successful these vaccines have been in promoting the health of the American people. It’s extraordinary that this is taking hold.But as you point out, it’s not just the marketplace of ideas. It’s a marketplace. And that marketplace is profiting from pushing quack remedies and profiting enormously from pushing remedies that don’t work. And we saw that in full scream during the pandemic, when quack treatments, which were not effective at all, were so widely embraced and promoted by some of the people profiting from them, and also by Donald Trump himself or his closest advisers.And one of the things I looked at at that time — ultimately there was a New York Times story about this — but I took a close look at how RFK Jr.’s wealth himself had increased over time, moving from his role in the Riverkeepers to his role of prominence in this anti-vaccine movement. And you could just see, as he took more and more aggressive positions against vaccines, how much more he himself was paid. I think in 2021 or 2022, he was making half a million dollars a year from the nonprofit group that he was leading, attacking vaccinations. So he was benefiting himself personally from those attacks.Krugman: You’ve sort of structured your book around John Roberts’ own biography and how that kind of parallels the history of the movement. So tell us about that a bit.Graves: Yeah. Thank you so much, Paul. It was a labor of love to write this book, because I really think that it’s hard to understand what’s happened to America without understanding what’s happened to the Supreme Court. The Supreme Court under John Roberts has exerted extraordinary power. And has asserted power in ways that the court has not previously done, including when John Roberts orchestrated the destruction of Section 4 and Section 5 of the Voting Rights Act. And he’s now on the precipice of doing the same to Section 2 of the Voting Rights Act in the Louisiana vs. Callais case that the court has heard and will be decided this summer.But what people don’t realize is that John Roberts cut his teeth on trying to block the extension of the Voting Rights Act, trying to block the repair of the Voting Rights Act after his mentor, Bill Rehnquist, helped destroy a significant component of that act, which was designed to prevent the dilution of Black votes.Krugman: Right.Graves: And so you have a person who was chosen for the Supreme Court not because they thought he would be fair, but because they thought he would be a ringer. And he spent his early days in the Reagan administration as a Reagan revolutionary at the top of the Justice Department, trying to block the renewal of the Voting Rights Act with the amendments to overturn a Supreme Court decision. He spent time at the White House counsel’s office for Reagan, trying to block civil rights enforcement. He has devoted his life to advancing this very far-right agenda.And he was someone who, when he was nominated, was not met with any of the howls of “No More Souters,” which was the sort of campaign mantra from the Federalist Society of not wasting a Supreme Court seat on a fair judge. And so after Roberts was confirmed, Bush nominated his counsel, a Republican lawyer named Harriet Miers, to the bench. Robert Bork and these other right-wing leaders screamed that this was a betrayal of their movement, to appoint a Republican lawyer and not a loyalist. And so her nomination was pulled down and Alito was swapped in, and again, “No More Souters” was not chanted at him.And so the Republicans were able to secure a court that is now operating like a lever of power, aiding Donald Trump, aiding the Republican Party at almost every turn. And that includes the counter-constitutional ruling John Roberts orchestrated in 2024, giving Donald Trump unprecedented immunity from criminal prosecution. And then he and his fellow Republican appointees married that decision with 24 rulings last year on the emergency docket, the shadow docket, basically telling Donald Trump he could go forward with extreme actions, extreme assertions of presidential power, that were contrary to the Constitution, statutes, regulations, but that he could proceed over the temporary restraining orders that lower court judges had issued. And so this court, in my view, is out of control. It’s in desperate need of reform. And John Roberts is helming this court that is on a path of destruction against our rights.Krugman: So, shadow docket. I didn’t know what that was until I heard you talk about it. So explain to people what that means.Graves: Yes. So what most people don’t know is that the Supreme Court has about 8,000 to 9,000 petitions every year, and it only takes about 60 cases. It chooses 60 cases. These are all matters of discretion. They’re not required to take any of these cases unless it’s a state versus state case. And so the court is taking fewer cases, and it’s basically creating a docket where one year it’s about destroying the separation of church and state, another year is destroying reproductive rights, another year it’s destroying regulation of industry and carbon.And then it has this emergency docket, which typically has been used for death penalty appeals. Someone claims at the last minute, “Please stop my execution,” and the court will issue a ruling, without full briefing, without oral argument, on an emergency basis. That emergency docket has been deployed by John Roberts and his fellow appointees as a shadow docket to basically change the law in America in significant ways over this past year in terms of policies on immigration policy, or allowing these mass firings to go on, allowing the gutting of funding for sciences and more. The court has allowed those things without having full briefings, without having a full opinion on it. They’ve just reversed the decisions of lower court judges.And it’s significant in many ways because—as Judge Michael Luttig has talked about—this is a huge lack of transparency, a way in which the court is operating outside the bounds. But also, it’s the case that in almost every one of those shadow docket cases — where, again, no oral argument, no real public discussion, no opinion written — the court has intervened and overturned lower court rulings that temporarily blocked Trump, after those lower courts made factual findings that people would suffer irreparable harm and that under the law they were likely to succeed. What the Roberts Court is saying is: “you’re not likely to succeed. We are basically pre-reversing those cases.”Krugman: So the contrast is that something like the birthright citizenship — where probably they won’t do the most horrible thing, but there are formal arguments — that’s all in the glare of publicity. But a lot of the things they’re empowering — the sort of pogroms against immigrants — are being done just sort of, “Oh, by the way, the Supreme Court has, without any visible deliberation, suddenly said that what Stephen Miller wants is okay, right?”Graves: Yes.Krugman: That that’s really quite horrifying. Gosh.So now let’s talk about the immunity issue. There’s been a lot of stuff in this since 2004 that is really horrifying. But the immunity for Trump is kind of the most glaring of them. And just tell us about that for a second.Graves: Yes. This case that was issued by John Roberts — it was a 6-to-3 decision right before the election in 2024, and it invented immunity from criminal prosecution for a president. That’s never been the law in America. Ever. Not since the beginning. And that’s why there was a reaction to that decision, in part to have the introduction of the No Kings Act, because that immunity decision basically made Donald Trump king-like in his powers, by saying that he and any future president could not be held accountable for any crimes they committed.When John Roberts wrote that opinion, he basically effectively pardoned Trump for the crimes he had committed. But he larded that opinion with additional assertions, trying to set the pardon power beyond any judicial or congressional review, asserting that there’s no limit on how a president can direct the Justice Department in its prosecutions, even though there have been longstanding limits in order to protect from the weaponization, the politicization, of the Justice Department to go after political enemies.And so you have a situation now where you have a president who can commit crimes—and has committed crimes, in my view, and in the view of Jack Smith—who can commit crimes under John Roberts’ opinion. Hopefully this will be ultimately repudiated. He can pardon his co-conspirators, which is what he did when he pardoned the January 6th people who were convicted. But in essence, he could pardon any of his cabinet members or others—people on the ground in Minneapolis, for example—if he wanted to. He could pardon people who were engaging in illegal activity at his behest in foreign policy, war crimes, or domestically. And that would be okay under John Roberts. That is the essence of the destruction of the rule of law. If a president can break the laws, and he can order people to break the laws, and he can then give them immunity or pardon them for doing so, basically no law can hold.And on top of all that, you know, it’s John Roberts who swears in Donald Trump on January 20th, 2025, where Donald Trump takes an oath to uphold the Constitution, to defend the Constitution. And yet John Roberts has just allowed Donald Trump to violate the Constitution in that immunity decision. A lot of people haven’t read the Constitution all the way through. I’m certain Donald Trump has never read more than maybe a sentence of it. But there are two duties in particular of the president in Article Two of the Constitution, and one is to uphold the Constitution. And nothing could be further from upholding the Constitution than breaking the law, than violating our criminal laws. And so John Roberts orchestrated this. It is a truly destructive decision that puts us all at risk.And I hope that the people will come together to reform this decision, to reject it along with embracing court reform, like I’ve been working on with my work partner Alex Aronson at Court Accountability, and with our allies, to put together a really bold package of reform for the next possible opportunity to reform this court. But also to restore our rights and repeal—in essence reject—this immunity decision, which is counter-constitutional. It’s an anathema.Krugman: So what would that mean? Hope for the best? Hope that we actually have a fair enough election in 2028 and a mass public revulsion against everything that’s been happening? How do we get out of this? Because the problem is a lot of these justices are still fairly young. So how do we get out of it?Graves: Well, there are a lot of reforms that we’ve supported. For example, term limits, but also some jurisdictional changes for the court. I personally have been looking into court expansion and intermediate appellate court changes to try to deal with this court’s excesses and the fact that this court needs to be unpacked. The term limits would, if they were applied immediately, have an effect on removing three of the justices.But I also think we need robust ethics reform, because the idea of taking secret gifts from billionaires, I mean, it’s outrageous. Or having a billionaire or a billionaire-funded group on the right funding a spouse, fueling a spouse’s income that feathers the nest of the justice. That’s outrageous and wrong. But there are so many other pieces that this court has dismantled, including the power to regulate carbon. That effort that the court has engaged in to try to kneecap the EPA [and rollback] voting rights, reproductive rights—there aree so many things where I think most of the American people really want changes. They want to get our rights back and expand them.And so I’m hopeful that we can put together and be part of a movement that makes those reforms not just possible, but that people perceive how essential they are. Or this court—the Roberts Court—will continue to just dismantle our rights.Krugman: Okay. Other than that, we’re doing great, right?Graves: But you know, here’s the thing, Paul. There are more people than ever that are supporting these reforms. There is a growing reform movement. It’s hard to see, given the way Donald Trump captures the headlines and the legitimate controversies over the war and over the Epstein files and more. But beneath that, when you look at the polling, what you see is that people understand that this court is not trustworthy, cannot be trusted, and that we need to reform the court. And they also, on issue after issue, reject this administration’s policies, almost across the board. And so I think that there is a real desire for us to take a different path. A better path.Krugman: That’s, I think, a hopeful note to end on.Thanks so much for talking with me today. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

TranscriptAll around the world, big, strong men with tears in their eyes are coming up to Donald Trump and saying, “Sir, you’re a loser.” Hi, I’m Paul Krugman. A brief update on something that has palpably changed in the world in the last few days.As regular watchers of Donald Trump and regular readers of mine know, Trump has a thing about insisting that people treat him with immense respect — the big strong men with tears in their eyes thing, “Sir” stories. And in particular about believing that the world despised America under Joe Biden and respects it now under his leadership, which was never true either in the first part or the second.But it is true that until quite recently, many people in the world at least felt obliged to pretend to respect Trump, felt obliged to flatter him, to stifle the negative feelings that they were having about the course of the United States under current management. And maybe Trump actually took these kind of coerced professions of respect as reality. But in the last few days, suddenly the masks are off. Volodymyr Zelensky just yesterday tweeted out a part of an interview that he gave in which he said, among other things, “In my view, Russia played the Americans again.”So it was just saying, basically, that Trump is working with the Russians, which obviously he’s known and has surely thought for a long, long time. But to say it that openly is something new.Zelensky — not a big strong man — but Zelensky is a tough guy. Keir Starmer, Prime Minister of Britain is, alas, not. But also Starmer just in a statement said that we’re tired of a world in which, I’ll quote, “bills go up or down on energy because of the actions of Putin or Trump.” Equivalence, Trump and Putin in the same sentence, in the same breath, that’s pretty stiff stuff. And Starmer has been notable in trying to preserve the special relationship, avoid offending Trump, trying to make him get a few points off the tariff rate, whatever. But now Starmer is pretty much openly saying, you know, you are the problem and we don’t trust you. What’s this about? Well, obviously, the United States went to war with a fourth rate power, Iran, and lost. Exactly how that plays out, we don’t know. But it was truly impressive how poorly the United States military and US strategic thinking has played out here. The United States has also proved both temperamental and weak, lashing out at our erstwhile allies and veering between threats of war crimes and then what looks a whole lot like abject surrender. So the world no longer either fears or trusts us. It turns out that our military might is not what it was cracked up to be, and our reliability is essentially zero at this point. We can’t count on the United States to do anything that it has promised. It’s a world in which the hegemon has basically gone AWOL. So that’s a big thing.There’s another story which I think is important, which has kind of has been overshadowed by the debacle in Iran: The bigger ongoing war, which is Ukraine-Russia, is not going well for Russia. It is, if anything, tilting increasingly in Ukraine’s favor. Now, what’s interesting about that, why is that relevant?Trump is basically on the side of Putin. He’s been unwilling and probably unable to just openly support Russia but has effectively pulled all aid from Ukraine, There’s essentially no money no military aid, no economic aid flowing from the US to Ukraine anymore — it’s all on the Europeans. The Europeans have still been buying some U.S. weapons and transferring them on to Ukraine, but that’s been largely choked off. And I think the assumption was that Ukraine would be in grave danger, would perhaps collapse without American support. Not happening. What’s actually happening is that Ukraine appears to be gaining the upper hand in the drone war, which is what this war is mostly about. And Ukraine’s success in adapting to modern warfare has been so great that now it looks like there are a significant number of Ukrainian drones and to some extent maybe personnel already deployed in the Middle East, and that Middle Eastern nations other than Iran are quickly moving to strike deals with Ukraine, to buy Ukrainian equipment. It’s kind of like, well, if you need help and Iran is still a menace, which it is, don’t count on the Americans, but maybe Ukraine knows how to do these things. Obviously, that helps empower Zelensky to be open in saying what he really thinks about the United States. Does this matter? Well, we’re not about to see the whole world turn on us. The United States may have threatened to seize Greenland, but I don’t think that Denmark is going to threaten to seize Alaska or anything like that. But it’s a big comedown, and it will hurt.It’s a slow erosion, but having countries that trust you, that support you, is a very big asset in geopolitics. Losing all of that is therefore a big liability. And this is my country. I’m not celebrating all of this, because I’d like to see America, particularly I’d like to see the next president, assuming that we actually have a legitimately elected president, inherit a brand that is not completely damaged and corrupted. But that’s not where we’re going. It’s really looking pretty bad. And what can you say? We had the worst and the dumbest in charge. We still do. And that’s taking a toll on all of us. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

TranscriptThis is America’s darkest hour. Hi, Paul Krugman with an update Tuesday morning. Earlier today, Donald Trump posted on Truth Social, A whole civilization will die tonight, never to be brought back again. Not going to be a problem if we ever do get the war crimes trial that all of this deserves. A statement of motive, intent is completely clear. I don’t need to say how vile it is. It is shocking, although at some level, if you didn’t see this as a real possibility, then you weren’t paying attention. Not much to say here except to talk about how those of us who are not Donald Trump should behave.First of all, any military commander given orders to start destroying civilian infrastructure in Iran should disobey that order, should say it, should not even quietly resign. This is a time to stand up and make it clear that this is totally unacceptable. This is a violation of everything that the military stands for. It’s a violation of everything that America stands for. Second, any member of the Trump administration: to continue in your position doing your job as Trump takes America on the course of becoming a criminal nation, a criminal terrorist nation, you cannot continue in good conscience.Particularly, if you play any role in making this happen, then you are a war criminal too. Then you ought to be brought up someday before an international tribunal. But even if you’re in a peripheral role, even just putting your head down and saying, well, I’m an assistant secretary at the agriculture department or something like that, that’s not good enough. This is not a regime that you can serve in good conscience. Republican politicians, any Republican, I mean, there are people already saying, “oh, you know, I don’t approve of destroying civilizations, but” — that “but” makes you an accessory to the crime, if you are failing to stand up against it.And I really don’t like this notion that only Democrats have agency. This is a very common thing. All of this is made possible by the lockstep slavish obedience of Republicans. Nonetheless, Democrats have a role here, too. And this is not a time to attack Trump’s war because it costs too much money or to attack it because it’s bad for energy markets or raises the price of groceries. I mean, it does do all of that. All of that is true. But we’re way past that point now. We’re at the point where you need to unambiguously condemn the immorality and criminality of what’s going on. No mincing of words. Damned if I know what’s going to happen. I mean, at some level, I think that the civilization that may be destroyed tonight is our own. I mean, are we civilized if we do this kind of thing? If America as a nation doesn’t stand up against this, what are we?So, God help us. Normal life will continue. It’s going to be a really weird thing to be out there, you know, grocery shopping and taking the subway and all of those things. But this is, in a way, the defining moment. The fate of the whole American idea is on the line.I have no idea how this ends. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe