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?
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.
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.
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Jared Bernstein on Debt (Reposted with 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.
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.
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.
If 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.
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.
Contrary 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.
Some 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.
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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.
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.
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.
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.
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.
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.
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.
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.
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