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TRANSCRIPT: Paul Krugman in Conversation with Azeem Azhar

(recorded 10/29/26)

Paul Krugman: Hi everyone. I am talking today with Azeem Azhar, writer, researcher, investor with Exponential View, who is one of the people I turn to when I don’t understand what’s happening with AI, which is basically all the time. There was a really striking piece that Azeem wrote the other day about the PHP hack with the title, “The Wuhan Moment.”

Why don’t you explain to me what you mean by that, and let’s try to understand what’s going on here.

Azhar: Yeah. Well, that PHP hack was just one particular instance of a range of things that are now happening because AI models have become good enough. And the reason I called it the Wuhan moment is that there are infectious diseases all the time, but then came along one with slightly different characteristics, and it had a much bigger impact than all the other ones that were circulating.

So, when I say AI models have gotten more capable—we’ve had this experience as we use ChatGPT, it gets smarter and smarter—and AI models became good enough to be used in code, to be directed to find vulnerabilities and weaknesses and bugs in software. And because AI systems are tireless and indefatigable, and you can just spin more of them up and they don’t get exhausted, they’re not like human security researchers or human hackers. They can find all of these vulnerabilities, many vulnerabilities, quickly. They can research them in novel, non-human ways and chain them all together. And that’s a new regime that we find ourselves in. And it feels different to where we were a year or two ago when these weaknesses and vulnerabilities were discovered methodically by the occasional hacker, but generally by security teams. So that’s the moment.

Krugman: So my understanding is that basically the way the world works now is that there’s software everywhere. Everything is being run on software which is complicated and maybe not that carefully put together. Tell me if I’m wrong on this, but I think it’s sort of on stilts where you have newer software laid on top of older software, and God knows where the vulnerabilities are.

Azhar: Well, software and technology is this really big industry that somehow managed for 50 or 60 years to escape any part of safety testing.

Krugman: Right.

Azhar: And so, you know, that’s why you have beta releases and bug fixes, because the culture of software development for the longest period of time has been started from a tinkering mindset. And there’s no real security model required around software. It’s not an AI problem, it’s not a social media or an internet problem.

It was a problem in the ‘70s and the ‘80s. It’s just that we started to move from centralized mainframes to having personal computers and many, many more opportunities for that software to be developed in a decentralized way. And so here we are decades later, and it’s a miracle the internet works, given how many bugs and issues there are. But that has also been its benefit, because what it has by not being a fixed cathedral is agility. One software developer likened it to a crowded, buzzing bazaar. It has the ability to respond, adapt, and stay pretty resilient, which the internet has by and large done, except for a few major cyber attacks over the last 25 years. So what was a feature, and a flaw recognized by software engineers, that there’s no agreed security model for making software—has also been the reason why we’ve had a flourishing of software, and we are able to continue on our way even when bugs are found and there are problems that get discovered.

Krugman: Right. And a lot of it is based on PHP. You should probably tell people what it is. I mean, I actually had never heard of it until last week, but of course...

Azhar: Well, you’ve certainly used it. In reality, 70% of websites are running on PHP. It’s a programming language that happens to be very easy for people to use, and so it was cheap. If in the late ‘90s you wanted to write a piece of software, you used PHP. It’s simplistic; it doesn’t have the learning curve of C++ or something else. And it got extended and extended. Facebook used it a lot, and so it became part of the internet’s architecture. And like many other systems we use, like Python, which is another language, or BIND, which is a piece of software that turns friendly internet addresses like Substack.com to the numbers that the routers need. These are pieces of software that are actually open source as well, you know, they’re written by collaborations of volunteers who have their own governance systems, who share that code in repositories. And again, if you don’t think about it, you’ll be surprised. And it feels like it’s a miracle that it works, but we have evidence and proof that it does.

Krugman: Okay, and how relevant is it that it’s old? That PHP is a ‘90s thing. It’s all jerry-built, which was good enough until now we have these AI models that are tireless, right? And basically an army of gimlet-eyed experts in deception can go and find the holes, right?

Azhar: Right, yeah. I mean, the whole setup was maybe not quite on stilts because it all worked. It also has to be recognized that it’s really hard to write extremely precise, foolproof software in an enterprise—be it a corporate, consumer, customer environment—because standards change. If you want to understand why, think about the experience when you’re flying on an old plane, as you will across the Atlantic, and you pull up the in-flight entertainment, and the software is so slow compared to your modern smartphone because it had to be designed and locked down 18 years ago, or 10 years before the airline bought it, and it’s still in place. So all of these things were really part of the trade-off that we as customers and consumers made to have something that would adapt and be responsive to our lives. None of us really want to use the type of software that runs a nuclear power station, right? Because it’s stuck in the ‘70s or ‘80s. And that means that there are just lots of different ways of getting these pieces of code to crash, and once they crash, maybe to get access to the machine and figure out where to go next. And that’s what great hackers do.

AI models crossed a threshold at the start of this year when Anthropic had a model called Claude Mythos. It’s the best cybersecurity model in the world. It was not made widely available. In fact, only a small number of organizations get access to it. And they’ve been running around trying to patch or fix these bugs and close loopholes. The first part is finding them. But one of the things that happens with AI, is that the capabilities cascade down to cheaper models very, very quickly.

And so at some point this summer, the open-weight models, also known as open-source models, started to get towards the capabilities that Mythos had. And so they, too, crossed that uncanny valley into a point where they can be chained together and directed by either hackers or bad actors to find vulnerabilities before the good guys find them and then try to exploit them. And we’ve seen an uptick, a rapid increase in the number of those vulnerabilities that are being discovered. And this PHP one was one example of it.

And I guess what I was writing in my essay was to say, Look, what we know about these technologies is that they get cheaper, and as they get cheaper, they get used far, far more, right? We all take many more digital photos than we do film photos now from 40 years ago. The same thing would likely happen here. And that means if there are vulnerabilities or exploits, however obscure, it’s quite possible that they would be found and exploited. And I’ll just mention one data point that I’ve seen. There was one particular piece of software that had been tested for vulnerabilities trillions of times by humans running test suites. And yet a recent AI model was able, despite that, to find severe vulnerabilities that c…

Billionaires should not be making decisions critical to national security. That’s straightforward. And the case of Elon Musk and his attempt to undermine Ukraine makes that clearer than ever. Recent events, that is in the past 24 hours, really don’t change that point. If anything, they reinforce it.

Hi, Paul Krugman.

Yesterday, I wrote that Starlink’s control must be taken away from Elon Musk. The occasion was that Musk abruptly and without warning downgraded the effectiveness of Starshield, which is a sort of high velocity, high frequency version of Starlink that has been playing an essential role in Ukraine’s defense.

Suddenly, the speeds of communication were capped, which is devastating for Ukraine. Exactly how that happened? The Wall Street Journal reported that Musk made the decision or gave the order. Musk said that, oh, that’s under the White House’s control. The White House said, no, it was just him.

In fact, none of the parties to all of this are credible. None of them are reliable narrators. And it doesn’t really matter. The point is that this is a gray zone situation. That should not exist, that it should be very clear that if national security is at stake, which it is — this is a war in which US technology is playing a critical role — that unambiguously, this should be under the control of publicly elected officials, the president and Congress, not some guy who happens to have a lot of money. But it is not.

We have private property, but we are a democracy. And critical decisions for the national interest should be made by democratically elected leaders.

OK. So the development since then is that,according to both the Journal and the Times, Trump called Musk and asked him to lift the restriction on transmission speeds.

It’s completely unclear right now whether that has actually happened or to what extent it’s happened. Some reports say that speeds are up. Others say that nothing has changed. Obviously, this matters critically for how many Ukrainians will die this winter. But think about this at a fundamental level. The president asked a private business to stop killing Ukrainians.

This is not the kind of thing where you ask. Especially Donald Trump, who is very fond of giving orders in places where he has no authority. In this case, the idea that he’s saying, pretty please, Elon, don’t let quite so many Ukrainians die — this is not how things should be working.

This guy, meaning Elon Musk, should not be in this position. Beyond that, what we’ve actually seen is the fact that Trump asked, has certainly made a point of having people leak the fact that he had asked, although he himself has been a little bit blurry on exactly what happened,

This is actually telling you that having national security interests explicitly under control of elected politicians is a good thing even if the politicians have bad intentions. There’s no real question that whatever the details of how it happened that Starlink denied high-speed access to Ukraine, obviously it’s what Musk wanted, but also that at the very least Donald Trump was okay with it and it may have been what he wanted as well.

But Trump and Trump’s officials were hiding behind Elon Musk, were saying, well, this was Musk’s decision and, well, it’s a business and we don’t know what happened.

Again, nobody involved in this should be believed, should be trusted. And for the exact truth, I’ll wait for years of investigative digging to find out what happened, plus subpoenas. Because if Democrats do take Congress, especially if they take the Senate, they will be investigating with support from at least some Republican senators. Patriotism is not completely dead on the GOP side.

The important point here is that the public outcry, the outrage, the many articles written similar in some respect to mine, — though I think I was more explicit than most in saying essentially that we need to nationalize or at least take control of Starlink — but the public outrage mattered.

Even though Donald Trump clearly wants Vladimir Putin to win, he doesn’t feel that he can act too openly He can’t take a pro-Russian stance. He can’t be seen to be openly and explicitly undercutting Ukraine’s ability to defend itself, which is, and was trying to avoid that.

Whether he gave the order or Musk gave the order doesn’t really matter. The fact was that the private ownership, private control of Starlink allowed Trump to hide behind, or he thought it would allow him to hide behind, the fact that this was a private enterprise. For the U.S. government to have ordered a U.S. government agency —say if Starlink was run by the Defense Department —for the U.S. government to order the Defense Department to cut Ukraine off at the knees was too much even for Trump.

And once it became clear that the attempt to pretend that this was not in accord with Trump administration intentions, whoever actually pulled the switch, was too much. And so now Trump is very visibly asking, pretty please, asking Elon Musk to let Ukraine defend itself.

That’s telling you that even with a bad president, explicit public control of national security does help. It means that public outrage gets reflected in policies that are somewhat less treasonous than would otherwise be taking place.

But this, of course, is just the beginning. Hopefully, in a little over two years, we will have a president who actually does support US interests and doesn’t work for Vladimir Putin. Before that, we will have a lot more, almost surely, a lot more congressional oversight. So this is a situation in which public policy will be infinitely better if it’s explicitly public policy than hiding behind the skirts of a multi-billionaire who owns these critical national assets.

Again, we don’t know what’s really happening. We don’t know whether the intention is to kind of muddy the waters and then to allow Musk to continue to undermine Ukraine. There’s just so much we don’t know. But we do know that the situation is unacceptable. It’s unconscionable.

National security is a matter for national policy. We know that whether Musk really acted independently — or whether the pretense that he was acting independently allowed Trump to do what he’s doing — policy is really bad when you leave critical national security interests in the hands of individual plutocrats.

So we did learn that public outcry appears to matter. It’s not that these guys are going to do whatever they’re going to do regardless. So by all means,keep up the pressure now, but the solution in the end has to be this cannot be an independent private enterprise. Maybe it can be run by somebody under contract, but the decisions about how Starlink is used — or many other technologies — the decision about how these are used to represent U.S. interests has to be a public decision. No more foreign policy, national security policy by billionaires.

. . .

TRANSCRIPT: Paul Krugman in Conversation with David Nir and G. Elliott Morris

(recorded 10/1/26)

Paul Krugman: Like almost everybody I know, I spend about 17 hours a day thinking about the midterms, and I’ve got G. Elliott Morris and David Nir from Strength in Numbers and The Downballot here to talk to me about: What do we know? What’s going to happen? What are the indicators? And then maybe some broader issues about what the heck we think is going on in U.S. politics. So, hi, guys. Welcome.

Elliott Morris: Hey, thanks, Paul.

David Nir: Paul, it’s a pleasure.

Krugman: So, yeah, as we record this, I guess it’s one month and two days before the midterms, and if I believe you guys, the polling and other indicators, which David will talk about, seem to be almost kind of shocking right now. Elliott, I just looked at your Fifty Plus One post, and I believe you now have 99% odds of Democrats controlling the House.

Morris: Yeah, well, it’s October, Paul. So we’re in what I consider spooky probability territory. 99% is when you start to go, “I hope these models are parameterized correctly.” Look, the way to unpack this: Our model at 50 Plus One shows a 99% chance that the Democrats will win 218 seats or more. 99% seems very large. As the forecaster, I don’t want to be wrong on the 99, but it makes sense when you look at the numbers on paper.

So, let’s take 2018 as a comparison case. That’s when Democrats won 235 seats in the House. That year, the generic ballot—which is a question that asks people how they will vote in their local congressional district, for which party they will vote—that has Democrats up somewhere between 8 and 9 points. Democrats won in 2018, leading the polls by about 8 or 9 points. They actually won the House popular vote by seven and a half points or so, if you account for some weirdness with, like, uncontested seats. So we are in a more favorable environment, if the polls are right, than 2018. And we also have a lot of other district-level indicators pointing the same way.

Krugman: But, I mean, the gerrymandering was fairly extreme before this, and if we go back to the beginning of this year, it was looking a little iffy, if I recall.

Morris: Yeah. So gerrymandering seems to have shifted maybe a handful of seats at most to the Republicans, accounting for some pretty rosy polling, for example, in South Texas and in Florida for the Democrats, where there’s been a larger shift than the national shift, which is about 10 or 11 percentage points. So if we are around eight points, our model says Democrats need to win the House popular vote by about three and a half points. So there’s room for the polls to be wrong by about five.

The average expected error for the polls at this point, 30 days before the election, is about three and a half percentage points. So we’re looking at a larger-than-average error in the polls. And then if you account for other indicators, district-level surveys, the race raters like we do, that’s how we get up to that 99. But yeah, I acknowledge this is a very, very large probability.

Nir: And Paul, just to address your point about the gerrymandering, which did heavily favor the GOP, it’s important to remember that Republicans were not doing that from a position of strength. They were doing it from a position of weakness, precisely because they knew that they were facing a very difficult midterm election. And they definitely—I can say this with certainty—definitely will not pick up, they will not flip, all of the seats that they targeted in Texas and Florida and elsewhere. And that has a lot to do with the quality of candidate recruitment on both sides.

And also, in particular in Texas and Florida as well, has a lot to do with Latino voters moving back against Trump after moving heavily for him in 2024. So, 2024 in a lot of ways was a high watermark. And so when you’re looking at how Trump performed in these districts two years ago, in a lot of cases, expect really a lot of fallback for the GOP.

Krugman: Tell me if I’m being underinformed here, but my understanding is that the gerrymandering was based, at least partially, on the assumption that the Hispanic shift towards Trump that took place in ‘24 was an enduring feature of the landscape, and that it all kind of goes wrong if, as now appears to be the case, it’s not enduring. Right?

Nir: That’s definitely what it appears to be. Because if you look at these redrawn districts, and instead of looking at how they went in 2024, if you go back a few years earlier and look at how they performed in 2020, when Joe Biden did much better with Latino voters than Kamala Harris did in many parts of the country, they show a much more competitive picture. And so you have Republicans talking about, you know, “Oh, these districts are Trump plus five, Trump plus ten, Trump plus 15.” But that’s 2024. You dial back to 2020, and suddenly we’re talking about districts that Joe Biden won, that Democrats have a real chance of holding on to in 2026.

Krugman: Okay. And I want to talk about other indicators, and polling in general. But just a question about the Senate: So now, we’re up into the 70s again for the Senate, right? And that’s a lot less. I mean, the Senate is sort of inherently gerrymandered. States that have about the population of some neighborhoods in the Bronx have as many seats as California. So, yeah. But that’s also looking pretty strong, right?

Morris: Well, speaking of state gerrymandering, don’t get me started about the drawing of the state border of Nevada. I mean, that was a gerrymander, right? So, look, the Democrats have 47 seats right now. They need 51 to have a majority and to overcome JD Vance’s tiebreaker as president of the Senate. So they need four pickups. They look likely, according to our model, to get a pickup in North Carolina, where the former governor, Roy Cooper, is running against the current chair of the Republican National Committee. So that’s what’s on my mind.

They look then likely as well to somewhere between a sort of toss-up and a lean Democratic seat in Texas and Ohio, where Democrats have got some good recruits in James Talarico and Sherrod Brown, a former incumbent senator of Ohio. And I should say Democrats are also very likely to hold on to their seat in Georgia, just for what it’s worth. And then we get into the seats that are, like, a lot, a lot tighter. That’s Iowa, currently Republican-held, but where the Democrat, Josh Turek, is leading the polls; Maine, where the polls were somewhat, you know, incredibly wrong in 2020, showing Susan Collins losing to—

Nir: Sarah Gideon.

Morris: See, this is why we do it together, Paul, right?

Krugman: Yeah, I know, it’s okay.

Morris: And then there’s Michigan, which seems like it should be a Democratic win in an environment where Democrats are ahead by eight points on the generic ballot. But the race is surprisingly close between Abdul El-Sayed and Mike Rogers. And there’s like a bunch of other reach seats that might be competitive. We can talk about Kansas, where Democrats currently have a polling deficit of under half a point in Kansas. Like, what’s the matter with Kansas?

Krugman: Yeah. I mean, objectively, Trump policies, especially a war that’s driven up diesel prices and fertilizer prices and all of that, has been really pretty bad for farm country. But I don’t know to what extent we’re seeing that, to what extent we’re just seeing really just bad Republican recruitment or just general Trump fatigue.

Morris: I’ll say one thing about the numbers and then hand it over to David. But the other Plains states—Nebraska, Iowa, and Kansas are the ones I’m thinking of—are all much more competitive than you would expect, given the fact that Donald Trump won these places by, you know, between 10 and 28 percentage points. I think in the case of Nebraska, if I’m remembering correctly. These are all within a point or so in the polls today, and back in 2025, w…

Transcript

On September 28th Jamie Dimon, CEO of JPMorgan Chase, one of the most prominent, most successful financial figures in the United States, published an article in the Wall Street Journal titled, “The Hell with Trump, Let’s Go Back to Globalism.”

Okay, that’s a lie. That wasn’t what the article was titled, but it was, in effect, what it said.

And it was a very interesting message to be coming at this moment in time. I think Dimon’s op-ed can be viewed as a harbinger of a big shift in the business community’s political positions and its attitudes that may be coming in the very near future — in effect a bet that Trump and MAGA in general are going to be in the rearview mirror, not too far from now.

Now, a word about Dimon. He’s an extraordinarily successful financial leader. He navigated the 2008 financial crisis and aftermath better than almost anyone else in Wall Street. He had the good sense to limit JP Morgan’s exposure to the practices that helped to create that financial crisis.

He is also a very, very smart political operator. He has had a talent for not making enemies, for staying at least on decent relationships with administrations from both parties, which is no mean feat in 21st century America. He certainly did not join the cavalcade of business leaders rushing to prostrate themselves at Trump’s feet after the 2024 election, and yet he was subtle enough about his restraint to not get put on Trump’s enemies list. So,you know, his political judgment should be trusted.

His economic judgment, all right, being a great businessman is not at all the same thing as being a great economist. And there’s no particular reason to think that he is always right about economic affairs. But that is, in a way, mostly beside the point.

So what did Dimon call for? Well, he basically said, we need to repair theWestern alliance. We need to bring the Western world, the advanced democracies, above all the United States and Europe, back together in part as a way to stand up against the threat of a rising China. And his proposal for how to do that was to negotiate a free trade agreement between the United States and the European Union.

That’s quite something. That’s a very un-MAGA position to take. You want to bear in mind that, first of all, we’re currently under a government of people who do not at all believe in the virtues of free trade. In fact, are extremely hostile to globalism. Certainly don’t believe in binding international agreements. Maybe they want agreements that bind other countries, but not them.

And they are also not of the mind that we have a lot of shared values with the democratic governments of Europe. The MAGA position, if anything, is that they like the anti-democratic forces in Europe. J.D. Vance essentially campaigned for Viktor Orban in Hungary. Trump officials have been quite clear that they have sympathy for the AfD in Germany. So if we have common values with some Europeans, the Europeans with whom they have common values are neo-Nazis. And Trump’s de facto support for Putin in his invasion of Ukraine has been alarmingly clear over the past two years.

What we’re seeing here is Jamie Dimon basically saying that I don’t care about any of that. I don’t believe that you people are going to be in charge. And I think that we can go back to trying to rebuild bridges to Western Europe.

Now, it’s kind of interesting the way he phrases it. He puts a lot of it in terms that I suspect are intended to appeal to economic conservatives in the United States who are not MAGA types. He sells his proposal in part as an incentive for Europe to conduct pro-business, pro-economic reforms. He cites the Draghi report on European Competitiveness, which has been very influential in Europe. And points to him for even knowing about it! There are probably not a lot of people in the United States who have read the Draghi Report, absorbed its lessons.

I myself have read it. I have had some criticisms of some of the analysis in the Draghi Report, but the reforms that Draghi proposes, which have a lot to do with completing the European internal market, making the capital markets in Europe more flexible and responsive and so on, are very much in the right direction. So this is a good thing. And I’m glad to see someone in the United States, someone prominent, actually taking European affairs seriously and wanting the Europeans to do things that will improve their own position.

Dimon is almost surely overstating how important a free trade agreement with the United States could be. The reality is that the obstacles to European reform are internal — as are the obstacles to all the reforms we should be making here. Politics is real on both sides of the Atlantic.

And we are not as important to Europe — or they to us — as a lot of people imagine. The fact of the matter is that Europe only exports around 3% of what it produces to the US. And we were pretty close to free trade with Europe until Trump II came along. We had our average tariffs of only something on the order of 2% on European products. So it’s not as if he’s actually offering a tremendous benefit to Europe, something that would radically dislocate their internal politics and move them in a positive direction.

But, all right, it’s a good proposal. And I think that, as I understand it, Dimon believes that the process of negotiating towards a free trade agreement would in itself help to improve politics. That it would be a signal that the ultra-nationalist, anti-democratic, often anti-European policies of theTrump era are behind us.

So he’s looking forward to the day when we can start to try to repair some of the immense damage that has been done to our international relations during the Trump years.

Dimon is a smart political operator. I’m reasonably sure he would not have written this op-ed if the polls weren’t pointing towards a Democratic blowout. And of course, he could be wrong in believing that that’s going to happen, as we all could. But I’m sure that he is looking at the situation and envisaging a Democratic Congress — almost surely the House and quite likely the Senate — after the November election.

And a reasonable president, not necessarily a Democrat, but most likely, but in any case a reasonable president after Trump has gone from the scene.And a president and Congress that would be interested in trying to rebuild the Western alliance. Because ultimately, although Dimon’s proposal is economic in the narrow sense, it’s really political. It’s about rebuilding an alliance.

That won’t be easy. The fact of the matter is that the United States did just casually rip up solemnly signed trade agreements. Almost everything that Trump has done on tariffs is a violation of agreements made over several generations. Also, it’s not just Trump. The American people elected Trump twice, and the rest of the world is not going to forget that.

But free trade agreements can be a way of not just of enhancing trade, which is important, but maybe not as important as economists would like to think. But they can also be a way of binding countries closer together. They can be a gesture of alliance. And Diamond obviously thinks that this is possible, or at least thinks that it might be possible — close enough to being something that would really be on the table, that it’s worth making a case for it, and that it’s worth positioning himself and his institution for a post-MAGA era. And as Isaid, Diamond is a smart guy with a very, very good political judgment.

So that op-ed was one of the most encouraging things I’ve seen in months.

On that happy note, take care.

Transcript

Will crypto crash the blue wave? Probably not a question you’ve been asking, but you should.

Paul Krugman here with a video update for September 22nd. I want to talk about something that was a very big deal in the way we talked about the 2024 election, which was the role of the cryptocurrency industry.

We’re talking about it a lot less this time, I think largely because AI has stolen the limelight. But crypto is still out there. And while it has not succeeded in creating a viable business in the normal sense, it has been extraordinarily successful at buying political influence. And they’re set to do it again.

Now, the background here is, as I record this, the midterm elections look, based upon polling, based upon just impressions, looks like a big blue wave. Elliot Morris gives the Democrats a 97% chance of taking the House and two-to-one odds of taking the Senate.

But there’s still a few weeks to go and it looks like there’s a big wave of right-wing money that’s going to come crashing in. We don’t know how effective that will be. The role of money in politics, particularly of last-minute advertising blitzes, is somewhat unclear.

But it is coming and crypto is going to be a pretty big part of it. Based on Open Secrets, which tracks campaign financing, it appears that the crypto industry, which spent big in 2024, is going to spend even bigger in 2026, which is unusual because midterms are usually lower stakes than presidential years: They don’t usually involve as much spending.

But this industry is going to go all in. The crypto political strategy has been to knock out candidates that it considers hostile. And that is a strategy that was very effective in the last election cycle. They spent money in primaries knocking out Democrats, because Democrats were by no means united in their skepticism about crypto, but in some cases in favor. They knocked out Democrats in favor of other Democrats in primaries. And then in the general election, they spent quite a lot, not entirely on Republicans, but there were some big cases. And then Ohio spending was a particular success story.

And in general, crypto became seen in Washington as a force to be afraid of.

Not a force that has actually managed to get anywhere in the economy. It’s nothing like AI, which is everywhere. Crypto is still barely used for legitimate transactions. According to the Federal Reserve, only 2% of Americans have actually used crypto to buy something other than assets. So basically non-speculative crypto use remains trivial. And that’s after many years of trying to market this stuff.

But the political effectiveness has been huge, and it has intimidated a lot of politicians. Back in February, Chuck Schumer warned his colleagues not to do too much to offend Fairshake, the big crypto lobbying group.

Crypto has also, in addition to campaign contributions, done a lot of what in the old days, we would call bribery. There’s a lot of money that flows from the crypto industry to politicians and their relatives, and not just Trump. I don’t really want to ask too much about why there’s a lot of money going into a firm founded by Senator Gillibrand’s son. So there’s a big financial issue.

Now, the Clarity Act posed as “we’re going to establish a sound regulatory framework, especially for stablecoins” — cryptocurrencies that supposedly have a guaranteed value in dollars. Why exactly did Democrats turn on it? I mean, on the merits, they were right to be against this because whatever one may say, the purpose of the Clarity Act was to kind of legitimize cryptocurrency in the economy and particularly to legitimize stablecoins, which are, once you cut through the jargon and all of that, essentially poorly regulated banks.

It would essentially be posing new threats to the stability of the financial system and undermining banking regulation, which is something, of course, that the Trump administration and its allies are trying to do anyway, but this would have been another step in that direction. Presumably many of the Democrats who voted against this, and there were some Republicans as well, but presumably many of the senators who voted against this thing were genuinely concerned.

But I also think that there’s some spillover. For analytical purposes, cryptocurrency and AI are quite different things, and they are actually playing a very different role in the economy. Companies are really investing in AI, rightly or wrongly, but they are really trying to put it to use. And cryptocurrency is being used only for, pretty much only for, criminal activities, including, by the way, Iranian efforts to bypass U.S. sanctions. But in the public mind, it’s all tech. It’s all fancy jargon. It’s all doing stuff we don’t quite understand. Sounds fancy.

AI turned out to have an interesting political trajectory. It really is impressive. I mean, it really is impressive what it can do. Who would have thought that matrix algebra with a little bit of non-linearity could produce what feels like a conversation with a chatbot? Who would have believed that you could do vibecoding the way you do. Now whether all of that is economically productive is another question. And whether it kills us all is yet another question.

Still, crypto has not done any of that. But it feels, I think, to a lot of people similar. And the bad reputation that AI has quickly developed, I think, is spilling over to anything techie and therefore has meant that the support for crypto is weaker than it was.

It’s also true, by the way, that there was a big boom in Bitcoin prices after Trump was elected because everybody thought he was going to be the crypto president, was going to do great things for the industry, which then kind of evaporated. There’s been some recovery in crypto in the last few weeks, which I actually suspect, I mean, no one quite knows, but I actually suspect has something to do with the fact that, well, the Iranians have found a use for crypto. That basically illegitimate uses of cryptocurrency are turning out to be significant. So there is that.

But in any case, the industry is still out there. There are still trillions of dollars in assets. And it’s an industry that had developed a really effective political strategy. They couldn’t actually produce stuff. But if we count the 1.4 billion or so that Trump personally has made from crypto as part of its campaign contributions, then crypto may be the biggest single political financial force out there.

Will it work this time? The answer is, of course, I don’t know. It’s going to be a lot of money. It does look as if basically, as best I can make out from the Open Secrets data, crypto may end up spending, well, something like an Elon Musk-sized amount on these elections.

It’ll be much more partisan. The primaries are over, and in the general election, there are not going to be a lot of Republicans out there that they’re going to try to defeat. And also, they have a clear sense of where the balance lies.

I mean, Susan Collins did vote against the Clarity Act. Nobody, seriously, is going to give her credit. She’s pulled this too many times. Nobody’s going to think that the crypto industry should try to defeat Susan Collins. But they will try to defeat Sherrod Brown, even though Brown himself has softened his anti-crypto rhetoric. He has talked about it very little.

But if he wins, he might well be the deciding vote or one of the two deciding votes in a Democratic majority in the Senate. And we now know that the Democratic Party is not clean as the driven snow. It is not immune to financial influence.It’s not even immune to de facto bribery from crypto.

But it’s a completely different universe from the Trumpian Republican Party. And so the crypto industry knows that if Democrats really do sweep, if this is a blue wave which brings them not just the House but the Senate, it will be a less favorable environment. So their scam will be greatly endangered. And so here comes crypto.

Now, it’s only part of t…

. . .

TRANSCRIPT: Paul Krugman in Conversation with Henry Farrell and Abraham Newman

(recorded 9/10/26)

Paul Krugman: So, it’s a world full of choke points. Weaponized interdependence is a term I think coined by Henry Farrell and Abe Newman. Certainly I learned it from them. And there’s a big conference—not including them for some reason—taking place at the European Central Bank a few days after we record this. And so I thought I would talk again with my two favorite international relations people (although now I’m thinking of some friends who will be upset by my saying that.) But anyway, hi guys.

Both: It’s great to be here.

Paul Krugman: There was a seminal 2019 paper by the two of you, and then a book called Underground Empire. Anybody want to tell me what you meant by that? And let’s talk about the history, and then this weirdly more weaponized moment than anyone expected that we’re living in.

Henry Farrell: Maybe I’ll take a first stab at it.

So really, where this came from was that we had finished a long book looking at fights between the United States and European Union over privacy. And as part of that, one of the things we had looked at was the SWIFT system, which is a system which you use when you’re making bank transfers. It’s a messaging system that makes sure that the money gets to the right place, and that everything gets reconciled properly at the end of the day.

And so Abe pointed out after we had finished this, he said, “Well, nobody’s written anything about SWIFT, and there’s something interesting and important with geopolitics going on.” And I was working with a statistical physicist who does a lot of work on networks and network dynamics, and so he thought that we could come up with something on this.

And so we began to write. And we began to figure out that there was something really going on, which I think had been going on in plain sight for a number of years, but which nobody had really been able to put their finger on in such a way that they could actually sort of crystallize what the phenomenon was. And this was what we called “weaponized interdependence.” And the idea behind it was very straightforward. You know, we’ve been living for decades in a highly interdependent global economy, and the ways in which both political economy people in international relations and, I think, most economists had thought about it was in terms of the enormous efficiency advantages that flow from this. Because, if you think about interdependence in terms of trade theory, even in terms of the simple benefits of specialization that Adam Smith talked about a couple of centuries ago, the more interdependence you’re able to use, the better you’re able to achieve various outcomes collectively.

But we began to think about the ways in which this relied upon all of these really boring-seeming networks, such as SWIFT, and the ways in which these networks had increasingly and quietly become a target of international coercion, especially at that stage coming from the United States.

So we argued that if you had two conditions—one, a network which had some degree of centralization, so that there were some kinds of choke points in the network; and secondly, you had some great power which had a means of putting pressure on the actors that were in charge of those choke points—that you would begin to get the conditions where a weaponized interdependence could begin to happen. That is, that that great power could begin to weaponize that choke point against others.

And then our argument was that this could also set a longer dynamic in train, because our fundamental sense was that this was not an equilibrium. This was not something that was sticky and was static unless the weaponizing power was extremely careful, and that the more that a power like the United States sought to weaponize choke points against its adversaries—and here the U.S. used a dollar clearing system as a means of cutting Iran and other countries out of the global banking system; it began increasingly to use other forms of technology and also semiconductor supply chains after our work began—the more that we saw a power doing that, the more that other powers were likely either to look to defend themselves or to retaliate against us. And this, we think, is a world that has come into being.

Krugman: So if you were looking at SWIFT, that’s an interesting case, among other things, because the bureaucracy is formally based in Belgium. But that doesn’t really matter, right?

Abraham Newman: No. I mean, with many of these things, there are Americans that sit on the corporate board, and often that’s the way that the U.S. or anybody that’s weaponizing—they look for, like, a legal channel in order to influence the operations of a company. And so first, it was just like the personnel. But at the time that they were doing this, SWIFT also—they had a data center in the United States where they mirrored all of their data, in Virginia. And so that was also just easy pickings for the Bush administration at the time, as they were trying to kind of deal with the response to 9/11.

Krugman: What you were focused on very much was the U.S. trying to weaponize its control of financial and, I guess, information networks, largely against Iran, but also to some extent against China. And so this starts out as a U.S. initiative, right? So in some sense, you know, who started the fire? We did.

Newman: I think it’s important, as Henry was talking about, that the source of this power is often about that: the key platforms, infrastructures of the global economy are centralized. They’re not flat. You know, we were told this vision was like “the world is flat,” but actually, you know, look at even my iPhone: it’s not flat. Those products and platforms were often American companies. And so in many domains, what the U.S. kind of realized—and in our book, Underground Empire, we kind of chart how after 9/11, different U.S. bureaucracies start to see these places in the international system where they can either exclude actors, like with SWIFT—say you can’t have access—or they use it to monitor, to surveil. We call it the Panopticon. And that’s what you see in the Snowden revelations. And so it’s both the development of markets, that markets are centralizing around U.S. companies and products, and then also that the U.S. government has this legal jurisdiction over them.

Farrell: And the final thing to add to that is just that there’s also an institutional change that happens as well. And this is really connected with September 11th, 2001, because before that, you know, SWIFT manages to push back relatively successfully against U.S. efforts to try and get into its data. Mueller and other people—of course, Mueller is famous for his efforts to try and figure out what Donald Trump did, but at the time, he was in the FBI. And so he tries to get SWIFT to provide information, sort of via subpoena, and SWIFT’s response, crudely speaking, was, “We don’t do subpoenas.” And they are able to call on their friends in the U.S. Treasury, and Treasury sees part of its job at the time as being protecting the global financial system against the depredations of the United States national security state.

And then suddenly, after September 11th, that is completely reversed. Treasury radically revises its understanding of its self-interest as being—instead of trying to protect the global financial system—it begins to start looking at the global financial system, thinking, “What are the ways in which we can enhance U.S. power to defend against these actors, these terrorists?” And over time, as happens in every bureaucracy, this begins to creep. It begins to expand until the U.S. is willing to go after lots and lots of different actors, including, most recently under Trump, officials in the International Criminal Court.

Krugman: Okay, I want to come back to all of that. But when I read Underground Empire, the focus was, first of all, lar…

Transcript

“Mary had a little lamb, but when she saw it sicken, she sent it off to Packingtown, and now it’s labeled chicken.”

Hi, Paul Krugman here. That’s a little ditty that was circulating, I can’t find any original source, around 1905, when Upton Sinclair published “The Jungle” — about the meatpacking industry, one of the sort of founding documents of the progressive movement.

The topic today is Donald Trump and beef, because here we are back in Upton Sinclair territory.

So you may have seen that last month Trump announced, given that we have high beef prices, that he was going to allow the tariff-free import of 300,000 tons of ground beef.

Rather oddly, he didn’t say from where and wouldn’t say from where for a while. And then eventually said, well, from Argentina, Brazil, and other places.

There has been a substantial uproar over these imports of ground beef because of concerns about safety. You know, if he won’t even say where it’s coming from or whether the countries involved are going to be practicing food safety, that is kind of an issue. And it turns out it’s not just, you know, not just woke liberal types but ranchers, lawmakers and food safety experts who were very concerned about the plan and were not reassured when Trump said the meat is “very clean and very good.”

Okay, little by little details are coming out about how all of this happened. It turns out that the initial plan to allow the beef imports was announced the day after a closed door meeting between Trump and a Brazilian meat packing billionaire who is a major donor to Trump.

And they went right ahead and announced the plan, although again without details. There doesn’t seem to have been much discussion of how this would work, of the concerns. After some initial blowback — even ranchers are concerned that people might become worried about the safety of U.S. beef — Trump announced that he was going to also allow farmers and ranchers to process their own beef rather than having to go through the regular meatpacking companies. But it turned out that the ranchers hate that too, because what they want is for people to believe that beef is safe. They want to be assured that there are quality standards being upheld.

And now that we have at least some information about the origins of the beef, we are even less reassured. In fact, just the other day, the European Union banned beef imports from Brazil because Brazil was not adhering to EU standards on the use of antibiotics. So there are, in fact, real concerns here about safety.

Okay, this is quite a story, and beef is not that trivial a product, but there’s a lot of secondary implications here. The first is that this is a very Trumpian story. It’s got this sort of characteristic combination of raw corruption and raw incompetence. Raw might not have been the best word to use here, but anyway.

The corruption: Obviously, this was a decision made because somebody who has given Trump’s campaign and possibly Trump himself money had a meeting with him and got an immediate policy change. So this certainly looks like undue influence. We don’t know exactly how it happened because it was a closed-door meeting.

Also, shouldn’t somebody have been in the room to or at least passed on this before it was announced to say, you know, is this a good idea? Shouldn’t there have been somebody from the Agriculture Department, somebody from the U.S. Trade Representative’s Office, but certainly someone from food safety to pass judgment or give some warning?

In a normal administration, any kind of decision like this involves a process in which multiple agencies get a chance to weigh in and in which somebody who knows something gets to say, look, there are real problems with this idea. But obviously that didn’t happen here. And basically it doesn’t happen in this administration.

This is an administration that does not like experts. Does not listen to expertise. That’s not just a result of particular personnel decisions that Trump made. That is just a defining characteristic. At a fundamental level, they’re just hostile to the idea of expertise in any domain, in pretty much every agency where there’s something to know, where there’s technical stuff that you need to know to make good decisions.

The people who actually know things, or the people who are willing to speak up about what they know, have been silenced, purged. That’s across the board. Basically, it’s Hegseths all the way down in this administration.

And so in this case, nobody was there apparently to say, this is really not a very good idea.

And I think it’s really striking that even Trump thought, well, okay, I can fix this. At least I can mend fences with the ranchers by giving them more leeway to be unregulated themselves. But it turns out that the ranchers want regulation. They want customers to know that the beef that they buy is safe. So just raw incompetence on top of the raw corruption.

There’s an even larger issue here. Normally, when we think about, or as we used to think about, left versus right, there is a question about the role of government. How big a role should government play? And ultimately, it’s a values question, normally. It is a question, should it be the government’s business to ensure that citizens are not in dire poverty? Should it be the government’s business to ensure that everyone has access to essential healthcare?

And the question of how far in that direction you want to go is the traditional left-right distinction. Obviously, I’m on one side of that, and I think that morally I’m right. I think even in practical terms I’m right, but that is a debatable point.

But there are certain roles that government must play. The government needs to provide public goods. The government needs to provide things that the private sector cannot do for itself, which is obviously things like national defense, things like public safety, and it turns out also things like ensuring the safety of the food supply, just like ensuring the safety of the water supply.

It turns out that regulation of what goes on in meatpacking plants, regulation of what goes into your food is something that you really want the government to do. Even people in the industries want that unless they are particularly unethical types. The people who are trying to do the business right want those public goods provided because if you don’t have those provided, then people will not trust their products.

And this is not something that you can leave up to the private sector. It’s not something where you can do your own research. It’s a very complicated world out there. And the informational burden of trying to figure out whether the people responsible for your package of hamburger are actually following safe procedures, that’s beyond everybody. It’s actually quite similar in a way to public health measures, including, by the way, of course, vaccination.

Like I said, it’s all the same story here: This retreat from even the most essential roles of government.

So this is not an administration that’s trying to turn the clock back to 1930. It’s not trying to undo the New Deal. It’s an administration that’s trying to turn us back to the 19th century or before. It’s really just trying to undo even the most essential functions of government.

They’re not doing this, I think, out of a philosophical concern. I don’t think they have a theory that says that we really don’t need these things. They just don’t think about it at all. They don’t do expertise. They don’t do thinking, really. And a lot of policy is just based upon who last spoke to Donald Trump and who has given him money.

It turns out that this is a case in which Brazil — and it appears it’s probably Brazil, there may be some Argentine stuff here, but it’s probably Brazil — Brazil is notorious for not practicing internationally accepted standards on the safety of its meat.

And so the last thing you want to do is allow Brazilian ground beef to be admixed. And by the way, none of this would be u…

Transcript

At this point, it’s almost a commonplace to say that under DonaldTrump, America has become a kakistocracy, ruled by the worst. But I don’tthink it’s fully appreciated the extent to which we’ve also become a cheatistocracy, ruled by the most corrupt.

Today’s commentary is a follow-upon yesterday’s primer, which was about the role of tax evasion both in leading to or contributing to our downward spiral into oligarchy and also as a surprisingly large factor in the budget deficit and therefore in America’s debt problem.

Before I get to tax evasion, let me say something about where I’ve been going in my kind of intellectual journey into understanding oligarchy. As an economist, normally my instinct is to think about the invisible hand, to think about market forces, about technology as driving what happens to society. And even now there’s at least some extent to which the rise of kind of garden variety inequality, the rise of the top quintile at the expense of the middle, may be partially explained by the bias of technology towards higher formal skills, although that may be ending now with AI and all of that.

But as I began to focus on oligarchy, on the very small number of people who have enormous wealth, enormous income, but the wealth is an even bigger factor — there are a really handful of people who have come to play such a large role.In our society, in our economy, and above all, of course, in our politics— I was forced more or less by the numbers to say this is not about the invisible hand. This is not about market forces. It isn’t even mostly about technology.

Yeah, some technologies create winner-take-all markets that make people int he right place extremely wealthy. But the really big factor that’s driven us from the relatively equal society that we were 50 years ago — not obviously anywhere close to truly equal, but nothing like the dominance of a tiny elite that we have now — the really important factor is policy and above all tax policy.

We basically stopped imposing progressive taxes that limited the growth of enormous fortunes. And sure enough, as the tax barriers to accumulation of excessive wealth went away, excessive wealth began to concentrate.

This is, in many ways, the fundamental story. We got rid of, we ended the Gilded Age with its dominance by, as FDR said, the power of organized money, largely by taxing a lot of that organized money away. And we got back to something which in many ways is worse than the Gilded Age by taking away those taxes and allowing vast fortunes to snowball and buy themselves enormous political power, which allows them to snowball even further.

One factor in all of that is the rise of simply not paying taxes that you’re supposed to pay. A lot of it is reductionist statutory tax rates. We tax corporate profits at a far lower rate than we did In the 1950s, we tax top incomes at a much, much lower rate than we did in the 1950s. But what’s also true is that we simply allow people to get away with not paying taxes to an enormous extent, to almost surely a much greater extent than used to be the case.

The numbers are big, and in the primer I go through the tax gap. The money owed but not in fact collected is certainly north of $600 billion a year. It is something like 40% or more of the U.S. federal budget deficit. It is a major contributing factor to the accumulation of vast fortunes.

What is striking is that far from really making an effort to rein in that tax gap, for the most part politically our system has moved to let it rip, has basically tried to make America safe for tax cheats.

This is something that overwhelmingly benefits people with high incomes and large wealth because people with really big incomes, people who are extremely wealthy, for one thing, they just have much more complicated income. It’s much, much harder to track down and audit someone who has multiple businesses, some of which are dummy businesses, some of which may be real, but nonetheless are conduits through which money can move. And only the very wealthy can maintain offshore accounts that enable them to hide income and so on.

So tax evasion is something that overwhelmingly benefits people with very high wealth and income. Not all! Not every billionaire is a tax cheat. There are levels and levels. There are some people who just feel that’s not something I want to do.People who feel that it would be wrong. Morality does exist. There are people who feel that their personal losses, should they be caught out cheating heavily on their taxes, would be large. So they care about their reputation.

And then there are those who don’t.

What’s astonishing is that we have, especially since 2010, especially since the hard right Republicans took control of the House of Representatives, we have moved to largely eviscerate any attempt to control that type of tax evasion.

The numbers are really startling, and the IRS has actually put out very useful information. If you are someone with a very high income, the IRS stops counting pretty much at a million or more a year, but presumably it’s even more true further up the scale.

In 2011, before the right-wing Congress was able to do its work, more than 7% of tax returns in that range were audited, which is not unreasonable because there’s obviously a lot of possibility for malfeasance there. It’s not saying that 7% of people with incomes of morethan a million were sent to jail. Obviously nothing like that, but we had widespread auditing, which among other things, encouraged people not to cheat on their taxes.

By 2019, just eight years later, that number had gone from 7.2% to 0.7%. So almost nobody with high incomes was being audited for possible tax fraud.

Now, why was that happening? There had been savage cuts in the funding to the IRS. Very large, at least 25 to 30% adjusting for inflation, something like a 40% reduction in the staff available for enforcement. And as it turns out, auditing the taxes of a very high income person is a lot more expensive than auditing a regular person. An ordinary blue collar worker, middle income, white collar worker who might be failing to declare some income, in many cases, it’s really very hard for them to evade taxes at all. And if they do, it tends to be relatively straightforward to pick apart what’s going on. And so audits of ordinary people are cheap.

Audits of millionaires and billionaires, sounding like Bernie Sanders, are very expensive. And so the IRS, with limited resources and wanting to show that it was in fact auditing people, largely gave up on auditing the extremely wealthy.

And this is a big number. The amount that we lose to tax evasion is something like the entire budget of Medicaid. It’s something like six times what we spend on food stamps. It’s something like 15 times the amount of money that Elon Musk saved by destroying USAID and killing millions of people in Africa. And yet it has been allowed to flourish.

Notice, by the way, that this is all pre-Trump.

Now, under Biden, there was a push to rectify the situation, a push to restore enforcement, increase the resources of the IRS, and increase enforcement actions in an attempt to tilt the agency’s priorities back towards where it should be, which is going after the big money. And that was just getting started. It takes a while to ramp those things up.

And you know what happened. Of course, Trump’s one big beautiful bill did savage cuts in IRS resources for enforcement.Savage cuts in personnel. We’re now back to a situation where things are worse than they were before Biden started to try to fix it. So this is going to continue.

What I find remarkable and interesting — I mean, I wouldn’t say that I’m baffled, but I think it is something that takes some analysis is why exactly.

I mean, it’s one thing to favor the interests of the uber wealthy. Okay, we know that’s what the modern Republican Party is, whatever it may claim to be.

But it’s another thing to systematically favor the least honest. What this…

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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 t…

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Note: After I recorded this it was reported that Trump officials are threatening to demolish the Kennedy Center if it can’t be renovated to Trump’s taste (and presumably with his name added). Matches my argument exactly.

Der Untergang naht.

Pardon my German pronunciation. I’m going to take a break today from wonky economic analysis and talk about, well, Donald Trump, but in a slightly different way from what I think most people are saying. Not positive, obviously.

Just before recording this, I saw that Trump wants to rename Lake Ontario Lake America. Which is silly, would be funny, except that this guy is the President of the United States. And it’s really kind of troublesome that someone in that position is that out of it, that petty, disconnected from reality.

And look, it’s not news to anybody that Trump is ego-driven, disconnected from reality, and at the same time, somehow commands a level of deference and obedience from the entire machinery of the federal government that no president has ever had before. So this is really quite serious.

What I don’t think people are fully aware of is just how bad it can get, given that Trump is so obviously dissociating, decompensating, that he’s not all there.

Obviously, he was already a very problematic personality, which was doing a great deal of damage to the United States. I don’t think even now people fully appreciate the amount of damage that has been done. Even before the Iran War, Trump’s provocations, insults, his trade wars, really destroyed the world’s trust in America.

America became a country that could not be trusted to honor agreements. It was a country that constantly tried to bully other countries. Our word was worth nothing. Our sanity was not to be taken for granted. And then, of course, along comes Iran, where in addition to showing that we’re not to be trusted, that we’re not going to be relied upon., we also showed that we were far weaker than people imagined.

If there’s one thing people thought it was, well, America has a powerful military. It turns out, well, not as powerful and not nearly as competent as people thought. How much of that is the result of Trump and Hegseth degrading it and how much of it was there to begin with is an interesting question. But anyway, at this point, we are not loved, we are not respected, and we aren’t even feared.

And we’re not getting that back. Even if Trump is succeeded by someone decent —God help us if he isn’t— but even if we have a more or less rational, well-intentioned government that follows, the world now knows that we are capable of putting someone like Trump in a position of unprecedented, almost absolute power and that it can happen again.

And the world also knows that we’re just not as fearsome as we seem to be. That we can be defied much more successfully even by smallish countries than anyone really imagined.

And we’re not getting that back. I anxiously wait for the days when we’re no longer a Trump-ruled country, but this is my country, and what will be left of us, what will be left of our role in the world, even once he’s gone?

Okay, the title I gave, the way that I opened this talk was Der Untergang, which is the German title of the movie Downfall, about the last days of Adolf Hitler. I hope that nobody is going to complain about my using the German, right? We’re long past the point where it’s considered unthinkable and incredibly rude to make Nazi parallels. There’s a lot of people in this administration or close to this administration who are effectively Nazis, in some cases explicitly Nazis. America is not yet Germany under Hitler. But the reason we don’t have a functioning Gestapo in this country is not for lack of desire to have one. It’s because these people, at least so far, don’t have the juice. So all of the stuff, all of the parallels seem appropriate.

And the parallels are there. I mean, the parallels are there even in seemingly small things. Hitler was obsessed with building a gigantic gaudy ballroom. So there’s just a lot of parallels in there.

Now the main message of the movie Der Untergang is that it’s about Hitler in his final days who knew that he was losing. He knew that defeat was looming. He knew that his power was collapsing. And his reaction was, among other things, to take it out on his own country.

Hitler never accepted that he had failed Germany. He felt that Germany had failed him. And so he had a plan, often called the Nero Decree, which was to destroy as much as possible of Germany’s infrastructure. Supposedly to deny it to the victorious allies, but in large part to punish Germany.

Well, Trump knows. He may deny it, he may have his moments when he actually believes that the polls are all fake and all of that, but in many ways he is behaving like somebody who knows that his days of supreme power are about to end. He, of course, is not going to accept that it’s his fault. It’s the fault, obviously, of the Democrats, who are all communists. It’s the fault of the Republicans, who didn’t live up to his leadership. The fault of everybody but him.

What does he do in the position of losing? Probably not committing suicide in the Fuhrerbunker, but still in the position of losing all of his power. Well, what you do in that position, if you are somebody like Trump, who is an empty vessel: there’s nothing in there, the only pleasure he appears to take in life comes from dominating other people.

Well, one thing you do is you try to stick your name everywhere, or leave your imprint everywhere. So Trump, according to reporting by Swan and Haberman, spends most of his time thinking about his construction projects and trying to leave his mark on everything in Washington.

What I don’t think we’re fully appreciating even about those projects is that there isn’t a whole lot of actual construction. There’s a lot of starting of stuff, but so far it’s been mostly destruction, mostly tearing stuff down. We don’t have a triumphal arch, but we have a hole where the ballroom is supposed to be. We have just a lot of damage having been done to our nation’s capital and to the iconic structures that were supposed to define, symbolize who we are as a country. The scale of the destruction is really quite amazing.

So I’m not going to try fancy video editing here. I’m just going to show you a picture of what the environs of the White House look like right now. There you go. That bare area is the South Lawn, ripped up because of Trump’s cage match. You can see in the corner there the hole in the ground, which is where the east wing of the White House used to be. Basically, Trump has left, so far, wreckage in his wake.

Even the things which have not involved tearing stuff down, the gilding of statues, the horrific redecoration of the White House, is surpassingly ugly. That’s partly because Trump has terrible taste, but it’s also, I think, a clear sign of aggression. He’s saying, oh yeah, you’re going to give me a 33% approval rating? Well, I’m going to make the nation’s capital as ugly as I can in this little time as I possibly can.

Now, this is all superficial. This is stuff that can and will be repaired. It’ll cost a lot of money, but OK. So we’ll rebuild the White House. We’ll reseed the South Lawn. We’ll strip the gilding off the statues. We’ll make the White House a dignified place again.

But how much more will be coming? When we talk about Hitler’s last days, as I said, one of his last attempted acts was what’s called the Nero Decree, which was an attempt to destroy as much of Germany’s infrastructure as possible, supposedly to deny it to the victorious allies. But clearly, and even there’s some evidence that he actually he clearly thought this as a way of punishing the German people for failing him.

Now, historiography is a little more complicated than that, as it usually is, but that’s clearly the gist of it. That Hitler’s final acts were to basically try to bring everyone else down wi…

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Better transcript!

. . .

TRANSCRIPT: Paul Krugman in Conversation with Jared Bernstein

(recorded 8/20/26)

Paul Krugman: Hi everyone. Paul Krugman talking with Jared Bernstein, former chief economist, head of the Council of Economic Advisers under Joe Biden. Now a policy fellow at the Stanford Institute for Economic Policy Research and at the Center for American Progress, which is in DC.

Jared Bernstein: And I speak to you from Alexandria.

Krugman: Yeah, and the reason I want to talk with you is, you know, there’s a lot of headlines now about debt. Interest rates, particularly at the long end, are way up. You and I have both been Substacking about it. I think we mostly are on the same wavelength, but I’d like to go back and forth, and I want to talk about some work that you’ve done, particularly with Bobby Kogan. But what’s your take right now? I mean, we had all these headlines about forty trillion dollars of debt. This is very different from the way we were talking about debt a few years ago, so what’s your take?

Bernstein: Well, Paul, like you, for many years I was pushing back on those whose hair was on fire about the urgency of the federal debt. I thought that that overheating was overheated, and that as long as the growth rate surpassed the interest rate and we sort of kept our deficits within kind of a normal range, we could service our debt without breaking a sweat. But a few years ago, I began to become more hawkish and less dovish for a couple of reasons. One, the budget math became less favorable; the growth rate looked a lot closer to the interest rate, and that was before this recent bump up in bond yields. But also, you know, I’ve been in government a lot lately, and it looked to me like neither side really cared much at all. The reaction function, as we say these days, seemed to have been kind of dead in a way that I thought was problematic.

Now, this is not a pox on both houses. And by the way, here’s an area where you and I may have slightly different views. The Republicans’ tax cuts—and Bobby and I have done a lot of work on this—are public enemy number one here. Exhibit A, in terms of why we’re in the mess we’re in. But you know, Democrats have largely endorsed those tax cuts and, in my view, have done some irresponsible stuff, too. So that’s kind of my first take.

Krugman: Okay. You’re talking about r-g, but that’s kind of an important point, right? Why do we think about interest and growth and debt? Lots of people are out there saying, “Look, the interest on the debt is now so huge,” but that’s not quite the whole story, but it’s closer to the story. Anyway, your version of it...

Bernstein: Yeah. For me, a lot of this comes from paying attention to Olivier Blanchard‘s work. He has kind of wedged into a lot of our heads this notion that when the growth rate surpasses the rate of interest, it is possible to keep rolling over that debt and not get into a kind of debt spiral because you’re generating enough growth and revenues and incomes to sustain the debt or to roll it over. Meaning, you know, replace some old debt with new debt without worrying about the debt getting on an unsustainable trajectory. As soon as r is bigger than g, that’s when you have the threat of a debt spiral.

That’s not all the math. It depends on the size of your deficits as well. But broadly speaking, for many years we had pretty good growth and pretty low interest rates. We can talk about how that growth was distributed—a lot of it didn’t reach working-class people—but the fact that g, the growth rate, was higher than the interest rate was one reason why I was less wound up about all this.

Krugman: Yeah, one of my favorite things is talking about the question of “How did we pay off the debt from World War II?” And the answer is we didn’t. The debt when John F. Kennedy was elected was about the same as it had been on V-J Day in dollar terms, but it was just vastly smaller as a share of the economy because we outgrew it. As long as debt doesn’t rise relative to GDP, it’s not a problem. That means if the economy is growing and interest rates are not too high, not only don’t you have to pay off the debt, you can actually keep it growing as long as it just doesn’t grow too fast, right?

Bernstein: Exactly. So the problem we face is when our debt grows faster than our economy, when the debt ratio, or the debt-to-GDP, just keeps going up and up and up.

Krugman: Basically for much of the period when everybody was going on and on about debt, the arithmetic there was actually pretty favorable, right?

Bernstein: This is precisely why I kind of did a bit of a flip. I have an Op-ed in the Times—it’s from at least a year ago—where I managed to actually get them to put a graph in, which, you know, they don’t always do in there, which portrays this problem. It shows how the growth rate used to just reliably be well above the interest rate, where the economy grows faster than the debt, and so your debt-to-GDP ratio sort of glides along in a way that’s not particularly worrisome. But it looks like it’s starting to flip and starting to change.

And then if you look at the CBO forecast, they actually have the interest rate on the debt falling below the growth rate numerous years out. And their estimates actually are kind of optimistic in debt terms because they assume a number of things: they assume tariffs continue to generate a bunch of revenue, which doesn’t look to be the case; they assume that some of the Trump tax cuts would fade, but now they’re permanent. So yeah, the budget math has gotten less comfortable.

Krugman: Okay. I want to get to the interest rates in a minute, but the deficit that we’re running right now is just incredibly large. I mean, we used to run deficits to fight wars, and then we started to have big deficits when you had severe recessions. But now we have neither. I mean, there’s a war, but it’s not like World War II, right? It’s a fraction of a percent of GDP.

Bernstein: Right, but it’s not free.

Krugman: Yeah, but it’s not forty percent of GDP. It’s something like six percent of GDP now, right?

Bernstein: Exactly. It’s a little north of six percent of GDP. And according to the kind of numbers that I run on this, with the macroeconomy doing pretty well—and again, I know it’s not reaching a lot of folks; affordability concerns loom large—but you know, GDP is growing around trend, which is about two percent real. The unemployment rate is close to four percent, which is in the neighborhood of full employment. And the stock market’s booming. We should have a deficit that’s closer to three percent than six percent.

And what’s happened here, Paul—and you’ve written about this extensively—is that the constant ratcheting down of tax policy. All those tax cuts introduced by Republicans, too often kind of kept in place by Democrats, have really broken the linkage between solid economic growth and revenue flows to the Treasury. And what Bobby and I show is that if you take the Bush and the Trump tax cuts out of the mix, our fiscal scene would look fine. So, you know, that’s important.

What you can do is simulate what the debt ratio would be—by debt ratio we mean debt-to-GDP—or what the deficit would be (either one), or what the interest payments on the deficit would be. You can simulate those if you take the Bush and the Trump tax cuts out of the system, which means taking them and not just the original cuts, but all the following-on legislation that made those cuts permanent.

You know, when I say Democrats have played a role here: I was in the Obama administration when we essentially made permanent 80% of the Bush tax cuts. That’s not a hundred percent, so I’m glad that we let at least 20% at the top end revert back to what they were. But that’s the exercise we did.

Krugman: The blue line in that chart is the projection for debt on the current trajectory, and up to the point…

According to an old military maxim, amateurs talk about strategy, professionals talk about logistics. But these days we need a third category: Immature, insecure guys think that war is about acting tough and looking cool.

Hi, Paul Krugman with a podcast update for today. I want to weigh in on the incredible rash of stories about how Trump and company are eviscerating the military. It is truly remarkable. If there’s one thing that we thought that the United States was still kind of number one at, it was that we had the world’s premier military. Now, of course, we managed to rather quickly effectively lose the war with Iran, although current management will never admit it.

But also just a series of stories, some of them related to that war, some of them going beyond and to other areas that just are truly shocking, even for somebody like me, who had no expectation that this administration would be doing any good for the nation.

Just to remember the story: So first we had the big warning that the U.S. military was basically running out of ammunition. That the precision missiles that are so essential to waging war were largely gone, expended unproductively against Iran. And clearly the cost benefit calculus was a disaster because the Iranians were sending cheap drones and we were using multi-million dollar weapons in an attempt to counter them.

After that, we got the story about the horrific conditions on board the USS Lincoln, the aircraft carrier that’s been stationed for a very long time without, it appears, adequate resupply and with toilets flooding. Apparently just horrific conditions, which turn out to be not unique to that ship: Other ships are having problems. There’s the USS Boxer, an amphibious assault ship, which apparently has run out of feminine hygiene products, among other things.

Okay, so we have those horrific stories. And then we have the stories about Trump intervening. Demanding, first, that the Navy construct a whole new class of ships, Trump-class battleships, which are useless and would be sitting ducks. Then demanding that the Navy replace modern catapults with steam catapults, which he thinks are cooler. And then demanding that they relocate the command tower on aircraft carriers because he wants them to look more like the way they looked during World War II.

Is this America? I mean, think about the American way of war. We are not a warrior nation, which is fine. We are a lot of other things.

We were a nation that was supreme in the arts of peace. We were a nation of know-how. America won its wars by doing the arts of peace right, by.building better and more stuff than other countries. By getting our act together in ways that didn’t necessarily involve fighting.

Of course, you always need courageous warriors. You always need people able and willing to risk death in the service of their nation. But what America was supreme at was logistics. If you ask how did America and its allies pull off D-Day, well, a lot of it was being able to deliver supplies to the beaches of Normandy in a way that the Germans never thought was possible.

America was always the place, the country that was really good at logistics. For us to be not feeding our sailors, not able to keep ships that are not, after all, under fire all the time, to keep the plumbing working, that is incredible.

The idea that the president is imposing his personal aesthetic preferences to undo design decisions that were made by military professionals is also basically incredible.

Okay, what is this all about? And what happened? Some of it is specifically military, but mostly it’s not. I think these military failings should be put in the same context as the frantic and disastrous destruction and redesign of Washington, D.C. The demolition of the East Wing. The disastrous attempt to refurbish the reflecting pool to reflect Trump’s aesthetics. Even the gold leaf and gold lettering that is polluting the White House. All of this is really part of the same picture.So what is going on here?

Obviously we have a seriously mentally ill, mentally deficient guy with his finger on the button. The president of the United States is clearly dissociating, I’ve been calling it sundowning because I personally saw sundowning during my father’s awful last year.

Trump is not in full possession of his faculties, and he is obsessing about things that are really just kind of remnant ego trips. I haven’t read the Haberman book yet, but reportedly he spends a large fraction of his time and probably a larger fraction of his mental energy on his redecoration projects, which aside from all being carried out disastrously are also in incredibly bad taste. But this is where he is. He’s actually more interested in his giant, tacky, gilded ballroom than he is in the fate of the nation.

But how does somebody like this end up able to impose his will on these disastrous things? How does he end up able to eviscerate the military?

Well, part of it is that this is a wannabe authoritarian regime. We’re in a peculiar state now where the United States is not yet a police state. It is not yet a place where the secret police will cart you away for expressing the wrong opinion, unless you are not a white U.S. citizen. Maybe the time is coming when that will happen. But in any case, we are not yet East Germany under the Stasi. We are not yet Putin’s Russia.

But the Republican Party, senior politicians, who should be feeling that they have at least some dignity, ability to take a stand, behave as if they were living in an authoritarian state. They’re obviously terrified. They’re afraid to express any dissent. They go along with Bush’s — see, I’m dissociating, living in the past myself. They’re going along with Trump’s wishes.

On top of that, I think it really helps to think of the ruling party in America right now as being a party that behaves as if we were a full-on authoritarian state. And one of the things we learn about in studying how authoritarian regimes behave is, first of all, that the leader actually can be possibly the worst informed person in the nation because nobody dares to tell him bad news. We’re hearing this a lot about Putin, that he doesn’t know how badly his war is going. Well, Trump in many ways probably still doesn’t understand how badly his war is going.

The really striking thing about the munitions shortage and now the horrible conditions on US ships is that to the extent that any action has been taken on either of those issues is it has been only after extensive reporting in the press. So now the Pentagon is talking about a crash program to have defense manufacturers produce more of the missiles that we’ve been running out of. But it’s not clear it’s even started yet, and that call didn’t happen until many months into the war, whereas the munition shortage was obvious to independent observers just a few weeks in — that we were expending munitions that we couldn’t replace. Nothing happened until there was widespread press reporting.

The USS Lincoln has finally been recalled for refit and shore leave. But that didn’t happen until after many press stories about it, all of which were denied, but it’s very obvious just looking at the behavior that the Pentagon and Hegseth and Trump finally reacted saying, oh, I guess something needs to be done. We can’t let this go on. But they didn’t do it until after the press reported.

Now, is this because they’re totally callous? Well, they are. They don’t care at all. The people who yell support the troops most loudly are the people who actually have no interest whatsoever in supporting the troops. But I think it’s probably also the case that they may not have known. That nobody told Trump that we were running out of missiles. He may have read some press stories to that effect, but he said that’s all fake news and nobody within the administration was willing to tell him.

They may not have been willing to tell Hegseth either, who by all accounts flies into a rage and puni…

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TRANSCRIPT: Paul Krugman in Conversation with Vanessa Williamson

(recorded 8/12/26)

Paul Krugman: This week, I’m talking to Vanessa Williamson, senior fellow at the Brookings Institution and author of a fantastic short history of taxation called The Price of Democracy, which is, I’m pretty sure, an allusion to Oliver Wendell Holmes’ “the price of civilization,” but a very different take. And because I’m so interested these days in tax policy, I thought I could talk to Vanessa to get a sense of a lot of these issues where I am very much an amateur and she’s done the homework. So, hi!

Vanessa Williamson: Hi. Thank you so much for having me.

Krugman: So, yeah, let’s talk about the title of the book first, because obviously the famous Oliver Wendell Holmes quote, which I’ve seen in slightly different versions, was basically saying, you know, if you want police and roads and public order, then you need to have taxes to pay for it. But you’re making a much broader point there. Why don’t you explain why you say it’s the price of democracy?

Williamson: Yeah. So I love the Oliver Wendell Holmes quote, that it’s the price of civilization. But as I was writing this book, which was just going to be a history of taxation in America, it struck me that taxation is really more than the price of civilization—it’s the price of democracy. And that’s because democracy isn’t just being able to vote; it’s people having the power to actually make change to their government. And if the government doesn’t have enough money to act, then, even if you can vote, it’s inconsequential.

Historically, this is a very deep story. Taxation and representation really do develop together. This goes back all the way to 1215 with the Magna Carta, when King John had been taxing at a higher level, and the barons demanded that if there were going to be extraordinary taxation, the king had to get the general consent of the realm.

Krugman: Right.

Williamson: And that was a very early iteration—an attempt to create what eventually became Parliament. So the very origins of representation in our historical tradition are really about taxation, because what you find is that when rulers want to tax, they become dependent on the taxpayers. And it builds a connection between the ruler and the ruled, and it gives the taxpayers power.

I think commonly the story you hear in this anti-tax mythology that’s around is you’d imagine the taxpayers use that power to avoid taxation. The opposite is true: when representation develops, taxes go up because, of course, the taxpayers can now have a say in what the government is doing. So taxation and representation developed together historically, and they developed together cross-nationally. The freest countries today are high-tax countries.

Krugman: That would be, above all, the sort of Nordic countries that are very high-tax?

Williamson: Sure, but it’s true across the board. Even highly developed economies that are authoritarian have lower taxes than you would expect given their level of development. And that’s because authoritarians are simply not very good at raising taxes. They much prefer other forms of revenue, whether that’s a gold mine, the spoils of war, or fees and fines that they can apply to their political opponents. There are just other mechanisms that do not make them dependent on the rank-and-file people of their country.

Krugman: Okay. And I want to come back to the high-tax countries in a minute. But one point that you make at several points in the course of the book is that the idea that taxes are okay is very much a challenge to wealthy people saying, “Well, my wealth is mine, and nobody has the right to take some of it.” And there’s a statement of principle that says, “Well, okay, but you too are subject to the laws of the republic and must pay.” Right? That seems to be a pretty big part of the story.

Williamson: Yeah. There’s this long-standing tension, and it’s not all wealthy people or all the elites at any time in our history, but there are often some who are very, very wealthy. Fundamentally, they don’t like to see themselves as citizens, right? They like to see themselves as masters. The first group of people who felt this way, of course, were the slave owners who were desperately opposed to taxation. The anti-tax components of our Constitution were all put there as part of a compromise with slavery, right?

Krugman: That’s a good point.

Williamson: Yeah, the slaveholder class was afraid of mass democracy, even if only of propertied white men. So we get the Three-Fifths Clause. And they were specifically afraid that if every propertied white man could vote, what you would end up with is abolition by taxation—that we would tax slavery out of existence. And so that’s why you see these anti-tax measures in the Constitution.

It happens again in the Gilded Age. You see Rockefeller claiming that high graduated taxation is the most fundamental threat posed by democracy. You see efforts to roll back suffrage rights during that period, even in Northern cities. So it’s a very long-standing fight between the mass public and the kind of things democratic governments usually want to do—roads, schools, and things of that sort—and a fraction of the elite who are willing to accept democracy as long as that democracy is too poor to threaten their power.

Krugman: Wow. Okay. I’ll come back to the history shortly. One thing that I probably don’t talk about enough when writing about these things, but it’s something I certainly always taught when teaching a class on the economics of the welfare state, is that the high-tax, generous welfare state countries don’t have highly progressive tax systems. The state of the US debate always seems to be about, “Shall we raise taxes on the wealthy?”, which is an important concern. But places like Denmark or Sweden or, just in general, European welfare states, have high taxes sort of on everybody.

Williamson: Yeah. That’s exactly right. I mean, that’s also how we pay for Social Security and Medicare. Big social safety net programs are typically funded by broad-based taxes.

Krugman: Right.

Williamson: I think it’s really important to remember all the things that taxes do. We really focus on the redistribution part. And it’s so important, absolutely, especially now with the incredible consolidation of wealth in this country. We focus on the straightforward redistribution part of the top rates, that kind of thing, or whether we should have a wealth tax. That’s important, you’re exactly right. But at the same time, we just need a lot of revenue. Traditionally, and in terms of long-term sustainability, that’s something that we fund by taxing everybody. But that’s part of citizenship.

One of the things that is part of that anti-tax mythos that you hear all the time—people are under the impression that Americans hate paying taxes. It’s just not true. People are quite proud to pay taxes, and they’re very willing to pay taxes for things they think are valuable—things like Social Security and Medicare. So I think the fact that we’ve shied away from asking people to support their government by paying taxes at a federal level has really weakened the civic rhetoric of this country. I think it’s left us in a terrible position. If we can’t convince people that their government is worth paying for, how can we convince them that democracy is valuable?

Krugman: Yeah, indeed. There are several episodes that I actually was ill-informed about. I kind of knew the numbers, but not at all the political history. There was this period, basically under the New Deal and through World War II, when the idea of broad-based taxes—that lots of people pay into social insurance programs, but also a broad-based income tax—really became established. That came as kind of a surprise, that people were willing to accept it, right?

Williamson: Yeah. Before World …

Link to primer here.

Transcript

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.

So Crocs has a two-person office in Malta. And according to its books, basically all of its global profits come from that two-person operation in Malta. The New York Times had a very good report about all of this, which somehow I had not seen before writing the primer.

What is going on here? Well, the mechanics are quite simple. The real question is why this is allowed to persist. Tax avoidance or evasion, but profit shifting to avoid taxation, is a big issue. Estimates for the United States are that we lose probably north of $100 billion a year to companies finding ways to make their profits appear someplace else. If you want a sense of perspective, that’s roughly the entire budget of the food stamp program. It’s roughly the entire amount that Medicaid spends on health care for children.

These are programs that the administration falsely insists are full of fraud, but international profit shifting is fundamentally tax fraud, although it may be legal.

Now, Malta is a sovereign nation, but there really wouldn’t be any problem if the major democratic nations said this must stop. Malta is in fact part of the European Union. The European Union could clearly stop it. It has not.

Now, Europe is not totally hopeless. They actually have to some extent reined in the tax shelter status of Ireland, although it’s still there, but it’s weaker than it was. They have made moves toward a general international agreement that says that corporate tax rates must not be below 15% anywhere. It’s not really in effect, but they’ve moved in that direction. But Europe is characteristically weak in implementation. And let’s face it, there’s a fair bit of corruption there as well.

The United States, well, the United States was part of the project to limit at least extreme tax havens. To impose that minimum 15% corporate tax rate. But Donald Trump has withdrawn from the agreement.

It’s very clear that the United States government, as currently constituted, is not interested in cracking down on tax avoidance and tax evasion. In fact, the President of the United States and his lackeys are very much clearly on the side of tax cheats.

Now, I don’t want to say that Malta is the whole story. It’s obviously just a piece, although it is pretty extraordinary. We’re taking about basically a million dollars of corporate profits being laundered for each inhabitant of this tiny island. But it’s an indication.

It’s also an indication of what I’ve been calling the downward spiral of oligarchy. If we ask why is this outrage, this fundamental tax cheating permitted to continue, the answer is very clearly, it is the power of people with money who want to be able to avoid taxes. And their ability to avoid taxes leads them having even more money,which reinforces that power.

So it’s going to take a really big effort to, you know, we really need to reverse this. And we need to do it, you know, not slowly because this is a cumulativeprocess. We are on a downward spiral here. Malta is slightly exotic, it’s a funny story, but it’s actually very much indicative of what’s going wrong for the United States. And a reminder that although we are definitely the bad guys here, theEuropeans aren’t such great guys either.

But maybe they can be shamed. And maybe if we have a regime change here in the United States, we can finally be part of the effort.

Have a great day.

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. . .

TRANSCRIPT: Paul Krugman in Conversation with G. Elliott Morris

(recorded 8/6/26)

Paul Krugman: I am returning for another of multiple conversations with G. Elliott Morris, whom I find the most informative polling and political data analyst out there. And for a couple of reasons: We just had the primary in Michigan, we have a lot of numbers, and the Strength in Numbers midterm model is up. So we have our first reads on best estimates of what’s going to happen. So there’s a lot I’d like to talk about.

G. Elliott Morris: Hey, Paul. Yeah, let’s get real wonky on the forecasting. Good to be back.

Krugman: Yeah, let’s start with the model. You have a first forecast, which is pretty encouraging for Democrats. But why don’t we talk about what the forecast says and then what might be issues to raise around it?

Morris: Sure. The forecast, which people can find at fiftyplusone.news—which is sort of a sister publication to Strength in Numbers that I run with a couple of friends—is just a team effort, so we kind of have a different play sport than just a solo podcast. That forecast, as of recording (Thursday afternoon), says the Democrats have an 87 out of 100 chance to win control of the House. They need 218 seats; they have 215 right now, so it’s a pretty easy get. I can explain why. And that the Democrats have a 54 out of 100 chance to win control of the Senate. So pure toss-up territory there for the Senate. There, they need to win 51 seats; they currently have 47.

Krugman: Now this is, of course, a map on the House that includes the extreme gerrymandering, all of the attempts to tilt it. And so you’re saying that despite that, the Democrats don’t have a lock, obviously. But I assume that without the gerrymandering, it would be even higher gains on the House.

Morris: Yeah. I mean, without the gerrymandering, I would take close to 95 or 96% odds for them to take it. Our best guess is that the gerrymandering cost Democrats 5 or 6 seats in the House. So that combines a pretty good amount of gerrymandering in Texas—that cost them probably three seats there—and then 3 to 4 seats across the other Southern states. Tennessee is one; Louisiana, 1 or 2; Alabama, probably one there. Florida as well—a pretty big hit in Florida. And then, of course, it takes into account some gerrymandering back in the Democrats’ favor in California, and one lucky seat that they got a lucky break with in Utah with some court-mandated redistricting there. Democrats will take a seat from Utah for sure. So, yeah, I think that they’ll get 231 seats on average today, but that number should be close to 237 without the mid-decade cheating.

Krugman: You’d said that they needed something like a four percentage point advantage in the popular vote.

Morris: Yeah, we’ll be writing more about that. I think the number in the forecast now is close to three and a half. It’s a little more optimistic taking into account stuff like how candidate recruitment was really good for Democrats in some places. Their polling numbers and fundraising are looking really good in those competitive districts. So, you know, if the historical patterns are correct, Democrats gain some ground in the generic ballot, and the predictors are as reliable as they typically are in midterms, then it should be a pretty easy victory for them. We would predict a pretty easy, big House majority for them with 230 seats.

Krugman: But just to talk about the Senate—so that’s a much heavier lift, right? I think I know why, but why don’t you give me your version of what it’s about?

Morris: Yeah, well, in the Senate, Democrats currently control 47 seats. They need 51, so they have to find four seats to flip somewhere. The Democrats are very favored to win the seat in North Carolina. Former Governor Roy Cooper is running—a Democrat. He’s running against current Republican National Committee chair Michael Wheatley. And Roy Cooper is just kind of one of those politicians who has a good connection with his state and kind of can outperform those fundamental indicators in the state. So the typical voting pattern of the state is what I really mean there. So they will very likely win that seat—maybe an 85% chance we gave them.

So they need three more. And Democrats are also defending a seat in Michigan, just for whatever that’s worth. So the other three seats the Democrats could get are Maine, Texas, Alaska, and Ohio. All four of those seats are toss-ups, leaning Democrat in Maine, although we lack a lot of data in Maine with the new nominee, the new Democrat nominee. So that’s really the territory. You could argue maybe Iowa looks potentially competitive based on early data, but it’s kind of thin. Georgia Democrats are looking to upset the incumbent Democrat, Jon Ossoff, but I don’t think they really stand a chance there.

Krugman: Yeah. And the thing about the Senate, there’s two things about it structurally, right? First of all, only a third of the seats are up this year, so Democrats have to win a large percentage of the seats that are actually on the table—where they’re actually holding elections this year.

Morris: Right.

Krugman: And then the Senate gives Wyoming—whose population is basically the equivalent of a neighborhood in Brooklyn—and California the same number of senators. And that kind of works in Republicans’ favor, right?

Morris: I mean, if you count them up, there are 6 or 7 competitive seats from the Republican side that Republicans currently hold. And as I mentioned, Democrats need to win four of those. So you’re looking at two-thirds or so of the competitive seats Democrats have to get to pick up the majority if they defend that seat in Michigan—which is not a certainty. I do think the polls are perhaps undercounting, underestimating the Democrats there, but I wouldn’t put money on that. That’s just kind of a hunch based on the polls and other seats.

Krugman: Okay. But let’s talk about Michigan. So we had this extremely contentious primary. And, you know, Charlie Cook shows up in my feed saying Democratic chances of taking the Senate have just evaporated. And then I read you saying that it really doesn’t make a difference or not much of a difference that El-Sayed won. So let’s talk about this. There are interesting methodological differences.

Morris: I guess the great Charlie Cook would have said that, yeah.

Look, I think there’s a real lack of epistemic humility when it comes to Abdul El-Sayed’s chance of winning Michigan. There is a lot of conventional wisdom out there that, you know, let’s just say it: like a Muslim candidate cannot win the US Senate in Michigan, that Medicare for All and other progressive positions are going to drag him down. And frankly, a lot of this punditry comes from those center-left Democrats who should be in favor of those candidates winning. And so there is a sort of shooting-yourself-in-the-foot dynamic there as well. But if you actually look at the polling—and I wrote about this on Strength in Numbers—if you look at those polls pitting Abdul El-Sayed, the current nominee, against Mike Rogers, the Republican nominee, and then you compare them to how Haley Stevens would have done in those same horse-race matchup polls, the difference between the two Democratic candidates, or potential Democratic candidates, is statistically indistinguishable from zero. It is, on average, zero. Maybe it’s as big as three in either candidate’s direction. But if you’re Charlie Cook saying Democrats’ chances just evaporated, you are leaning heavily on some other priors or other punditry in saying that and not really the data.

Krugman: So, there’s two aspects to this, one of which I take pretty strong statistical evidence from you and one of which is a kind of “don’t know,” but... One of them is saying El-Sayed is too far to the left, and you basically have said that that’s a dimension that exists in the minds of pundits, but not in the rea…

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Transcript

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.

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.

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Transcript

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.

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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In my writing about wealth concentration and oligarchy, I steal a lot from lean heavily on the truly work of Gabriel Zucman, who is a hugely important researcher (winner of the 2023 Clark Medal) who is also starting to play a major role in policy. I’ve talked to him before, but this seemed like a good time to bring him back.

. . .

TRANSCRIPT: Paul Krugman in Conversation with Gabriel Zucman

(recorded 7/23/26)

Paul Krugman: So, hi everyone. Paul Krugman here, bringing back Gabriel Zucman, probably the best guy for thinking about inequality, especially wealth issues. And since I’ve been writing about that and stealing a lot of Gabriel’s research, I thought we should talk again. So, hi Gabriel.

Gabriel Zucman: Hi Paul, thanks for having me on.

Krugman: Yeah. So, you have been writing—and now I’ve been, you know, cannibalizing it—a lot about wealth concentration. Why don’t you tell us about your reasons for focusing on wealth.

Zucman: Basically, because there’s a fundamental tension in democratic societies between extreme wealth and the very possibility of a well-functioning democracy. And it’s not a new idea—don’t get me wrong. All the thinkers of democracy have written about this, all the way back to Aristotle, more than two thousand years ago.

Krugman: Right.

Zucman: But there was a period of time after World War II when many people thought that this issue belonged to the past. And it corresponded to a very particular moment in history when extreme wealth had largely disappeared after World War II, after the shocks of the first half of the twentieth century.

But now, of course, it’s making a dramatic comeback. And so we are back to this discussion of: how do we deal with this tension? How do we organize the economy and our society to prevent the forms of capture of the political process, in particular, that are associated with extreme wealth?

Krugman: Now, there’s a question. I mean, I’ve been on the inequality beat for an alarmingly long time—since you were a small child, actually. But in the early nineties, let’s say, it was all income rather than wealth. And a lot of it was top quintile, and maybe top one percent. And now you’re telling us that we need to focus on the wealth rather than the income of the top 0.0002 percent. Why that shift? Why wealth rather than income?

Zucman: Well, it’s for two reasons. Number one is a macroeconomic reason, which is that wealth as a whole has been growing much faster than income. So if you look at the ratio of total household wealth to GDP in the US in 1980, it was around 200–250%, and today we are past 500%. This means that the total wealth of the country is equivalent to more than five years of annual production, five years of annual GDP. The second reason is that wealth itself has become much more concentrated, and the rise of wealth inequality, especially at the top of the distribution—at the very top—has been massive and has been even faster and stronger than the rise of income inequality.

So we all know about the rise of the top one percent; the top one percent’s share of total income has increased from about ten percent of income in the US in 1980 to about 20% today. But at the top of the wealth distribution, the increase has been even much more dramatic than that.

Krugman: At the risk of derailing it slightly, one thing that I myself have gone back and forth on—and certainly I get from comments on things I write—is a question comparing the wealth of the top 0.001%, or whatever: should we be comparing it to total wealth or to total income? And I know you’ve used wealth to GDP, and I have some thoughts, but you’ve done it both ways. Which do you use, and why would you use it? I don’t know which is right, but what are your thoughts?

Zucman: I think both statistics are interesting and capture different aspects of reality. So if you’re interested in wealth inequality, in the concentration of wealth, the most meaningful statistic is to divide the wealth of the super-rich by total wealth in the economy. So, for instance, if you look at billionaires—roughly the top 0.1 percent of the population—they own about seven percent of total US wealth today. In 1980, they used to own about one percent of total US wealth. So it gives you a sense of the rise in wealth concentration. If you look at the super-top, you know, the oligarchs, the twenty wealthiest families—a very, very small fraction of the population—their total wealth is 2.0 to 2.2% of total household wealth in the economy. So I think that if you care about wealth inequality, these are the relevant numbers.

Now, it’s also interesting to compute another statistic, which is the wealth of those top groups, and in particular the oligarchs, relative to total income or total output in the economy, because it gives you a sense of their influence on the economy and also because it gives you a sense of how much revenue there is at stake from taxing their wealth. So let me illustrate. If you get back to the 20 wealthiest people in the country, they have about 2 to 2.2% of total US wealth, and that’s equivalent to about 12–13% of total US GDP.

Okay, so now you’re dividing a stock—their wealth—by a flow. And what it means is that if they spend their wealth—of course, they’re not going to do that in a given year, but imagine that they spent all their wealth in a given year—then they could buy 13% of all the goods and services produced in a given year in the US. So it really gives you a sense of just how big they are relative to the economy as a whole. And also it gives you a sense of what’s at stake with taxing billionaires. Because, of course, the way we think about tax revenue and about government budgets, is often in relation to GDP.

And so here, what you have with billionaire wealth is that there’s a potential tax base; we are not taxing billionaire wealth today, which has been skyrocketing. That’s the flip side of the rise of wealth concentration. The positive aspect in all of that is that now there’s a lot of tax revenue at stake from potentially taxing the wealth of billionaires.

Krugman: Yeah. I mean, my version is, I mean, most people have very little wealth, right? Wealth is highly concentrated, and what most people have is income. But the very top has wealth, and in some sense, the wealth-to-income ratio is telling you how many minions they can buy, how much influence they can buy in the economy and in politics. Is that kind of what you’re saying, or is there something else?

Zucman: No, exactly. When I say that expressing their wealth relative to total income gives a sense of the influence they have, precisely it gives you a sense of how much they can spend on buying media companies, on funding electoral campaigns. Billionaires accounted for nineteen percent of total political spending during the 2024 federal election cycle.

Krugman: Right.

Zucman: They can fund think tanks and foundations, and influence the prevailing ideology like that. So it’s in that sense that it’s really useful, I think, to express their wealth relative to the value of the total income of people in the country.

Krugman: So again, what’s your take on why total wealth has grown faster than income?

Zucman: There are different stories, and I think the one that makes most sense to me and that seems most consistent with the data is that there’s been a number of policy changes since the 1980s that have favored wealth and capital, broadly speaking. So, for instance, you used to have rent controls for housing in many countries; when you lift rent controls, the value of housing wealth tends to go up. Many countries used to have pretty high corporate income tax rates, of almost fifty percent on average at the world level in the 1980s. Well, when the government takes half of the profits of companies, it capitalizes into stock prices; it reduces the market value of companies. But then when governments slash the cor…

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Transcript

Good news. The second richest man in America might be prevented from taking over CNN. That's the good news. The bad news is, aside from thefact that he probably will manage to pull it off anyway, the bad news is that that would be only a small piece of the ongoing takeover of U.S. media by oligarchs. And in turn, the media takeover is just part of the extraordinary exercise of power by the extraordinarily wealthy small number of men who have been wreaking so much havoc with America as we know it.

Hi, I'm Paul Krugman. Doing a video today, because I didn't feel like doing a usual chart-heavy, analytics-heavy post, but very much on a topic I have been writing about and will continue to write about, which is the rise of oligarchy in America.

Now, I know some people balk at that. But we're not talking about some kind of hidden conspiracy. We're not talking about the Protocols of the Elders of PayPal. We are talking instead about stuff that's largely out in the open, though not fully understood, which is the way that an incredibly wealthy small group of men, mostly men, is able to commandeer a lot of the political life of a country that is still nominally a democracy. And that's a fundamental story for our time, maybe the fundamental story.

How does that takeover work? Well, there is what I think of as the middle level, which is the place where it's most easily quantified, tends to get most of the attention, which is campaign finance. American campaigns are very money intensive and have become more money intensive because we've opened the floodgates with Citizens United. And a lot of that money comes from a very small number of incredibly wealthy people. According to the New York Times analysis, about 20% of all campaign contributions in 2024 came from 300 billionaires and their families.

That's a pretty big impact. A country of more than 300 million people, and 300 billionaires are a fifth of campaign finance, and surely more strategic, more targeted than the average donor. So that's really a very, very large role just in that direct sense of who pays for campaigns.

But that's not the only level. There is a lower level, lower in the sense of morally lower, I guess, which is just plain buying politicians, buying policies, paying for the policies you want with cash or crypto on the barrel.

There has always been some of that in our system, but it was normally discreet, indirect, deniable, the revolving door. It was the case even more than 20 years ago that when the Bush administration pushed through a Medicare bill that was very favorable to pharmaceutical interests, that the then chairman of the House Ways and Means Committee, who basically engineered and steered the bill through Congress, then promptly retired and became the chief lobbyist for the pharma lobby. So this kind of thing has been going on for a very long time.

But now it's just blatant, out in the open, and the sums are massive. We just have literally billions of dollars thrown at the president and his family. No doubt large sums to other government officials, large sums to at least some members of Congress. So just plain buying the policies you want — and it’s not just that a large share of wealth is held by a small number of people, but that those are the people who are best positioned to really deploy their wealth to corrupt the system.

There's also something, I guess you can call it a higher level, which is what military strategists call shaping the information space, which occurs at a couple of levels. One of them is the promotion of ideas and ideology that serve the interests of the very wealthy.

You see that on many issues. You certainly see it very much on economic policy. If you ask, why do people still go out there saying that tax cuts pay for themselves and that tax cuts on the rich are an enormously powerful tool for stimulating economic growth? That's been tested to destruction, and it just ain't so. But it's a zombie idea. It keeps shambling along, eating people's brains, even though it should be dead. And the reason is, well, there's a lot of money in it.

If you Google something I've written on, more often than not, when I do that, the top sponsored post at the top of the search page is an attack on me sponsored by some right-wing organization. And if you ask who supports those right-wing organizations, well, guess who.

And it’s equally or worse the case in climate science. Scientific journals have been pretty good at not publishing climate disinformation. But when they do publish things that are somehow skeptical, or usually not outright denial, but attempting to sow discord about climate change, what percentage of those studies have received financial backing from fossil fuel interests? The answer is 100. It's all about the money. So this is, again, this is not new. Upton Sinclair: “It's difficult to get a man to understand something when his salary depends on his not understanding it.” So that has always been the case.

But now we have something which is really, really important and is another level of this, which is the takeover of the media. So, okay. Ellison, or the Ellison family —because nominally this is Ellison's son in charge of Paramount — has already acquired CBS and has hired Bari Weiss to basically corrupt and destroy that network. If the deal for takeover of Warner proceeds, then CNN will get the same treatment. I'm finding CNN a very good news source, just braver at taking on what's really happening than my old employer, the New York Times, which is a great news organization and may be more necessary than ever, but tends to be cautious — and CNN is a little bit less cautious.

But anyway, if he gets away with it, then CNN as we know it will almost disappear. It will almost turn into Fox News. Now, that won't be a profitable venture. There's already a Fox News, and so creating another one is not going to actually produce a lot of profits, if any, but that's not the objective. This is buying influence.

Elon Musk, of course, took over the app formerly known as Twitter. Which was already becoming a more difficult place even before its takeover. I used to have, I guess, I think I had 4 million followers there. But it was impossible. I had to shut off comments because of the cesspool that Twitter had become. But now it is really by design. It is heavily tilted. That can be quantified. The algorithm really tilts it towards right-wing stuff, promotes really rabid racist views.

And unfortunately, the network effects, the centrality that Twitter used to have, still keeps a lot of people on X, where they are influenced: people's views change.

And also something that I don't know how to quantify, but it's very obvious if you follow and pay attention to people's positions, is that people who spend a lot of time on Twitter, elites who spend a lot of time on Twitter, start to think that the views they hear there are representative of where the country is — which they are not. But it does, in fact, tilt policy, tilt understanding to the right.

The third richest man in America is Mark Zuckerberg, who made his billions from Facebook. Facebook is old-fashioned: I don't know anybody who uses Facebook. But I know that lots of people do. And it's still a very important information source and has, again, been tilted.

On most of these media things, it's not as blatant as what Musk is doing at X. But it still has a big influence in changing the tone of the discussion and biasing the discussion towards positions that favor the interests of billionaires as well as favoring their prejudices if they happen to be, like Musk, authoritarian white supremacists.

Okay. And the fourth richest man in America is Jeff Bezos, who purchased the WashingtonPost. I think he purchased the Post initially out of a belief that he was going to enhance his prestige. It certainly looked in his initial tenure as if this was actually more of a vanity…

Lina Khan, who chaired the Federal Trade Commission under Joe Biden, is one of the smartest and most influential thinkers about antitrust in our high-tech era, and one who has blazed new paths in policymaking. I spoke with her at a Graduate Center event back in March, and caught up with her again earlier this week for another enlightening conversation.

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. . .

TRANSCRIPT: Paul Krugman in Conversation with Lina Khan

(recorded 7/14/26)

Paul Krugman: This week, I managed to get to talk to Lina Khan, who was the incredibly influential and smart head of the FTC in the previous administration—with the current administration doing everything it can to undo her work. She played an important role in the Mamdani transition team and has had a lot of smart thoughts about technology and policy right now. And I thought we could talk for a bit about this, well, it’s always a bizarre moment these days, but this is the bizarre moment we’re in. And so, hi.

Lina Khan: Hi, great to be here.

Krugman: I want to get into technology and AI, but I wanted to just start with something that just happened. One of your special causes, which is “Click to Cancel,” which you tried to get as a national policy, just went through in New York City. Can you talk a little bit about what was achieved here and why?

Khan: I’d be happy to. So, last week, the Mamdani administration announced that they are moving forward with two consumer protection initiatives. One was the finalization of a “Click to Cancel” rule, which basically says that businesses have to make it as easy to cancel a subscription as it is to sign up for one.

This rule is responding to the fact that we’ve seen a pretty significant pivot to service-based revenue, and more and more companies are relying on subscriptions as a regular business revenue line. And that has created an opportunity for firms to create a lot of friction when people are trying to unsubscribe. A lot of people can relate to situations where it’s very easy to sign up, or sometimes you’re enrolled without even your full knowledge or consent. But then once you try to cancel, companies can make you jump through all sorts of hoops. Maybe you signed up with one click online, but to cancel you have to phone somebody, except the hours are really restricted or there’s nobody there to pick up the phone. In some instances, you may actually have to go in person.

When we were at the FTC, we got thousands upon thousands of complaints, and people shared how, even during the pandemic when they were looking to cancel their gym membership, some gyms required that they go in person even after they had left the state. So this has been a growing problem, and people lose real money from it. I mean, there are estimates that, in New York City alone, people could be collectively losing over $160 million a year. So this rule, which is going to go into effect in October, is an incredibly important step forward.

The administration also announced that they’re going to be proposing a rule to tackle junk fees. These are the fees that oftentimes show up at the very end of a transaction, even though they were not reflected in the original advertised price. Sometimes they’re called convenience fees, service fees, or amenity fees. And these are non-discretionary; people have no choice but to see them included. Companies will, again, often not advertise them on the front end, which is both deceptive for consumers but also gives them an unfair competitive advantage, because honest businesses that are marketing the all-in price then lose business to those firms that instead do pricing where they market a lower price and then add all the additional fees at the end.

So, I’m really thrilled that the Mamdani administration is moving forward on these two initiatives, especially because we have seen some very serious backsliding at the federal level, where consumer protection initiatives have either been abandoned entirely or powerful companies that have connections to the White House can basically pay their way out of legal accountability. And so it’s incredibly important to see cities and states fill in that gap.

Krugman: I couldn’t actually quite figure this out, but there’s this other initiative from Mamdani: public interest technology. Are you involved with that?

Khan: It is something we considered during the transition and wanted to set up the administration with the option. But, yeah, this is basically... they will be creating a team that is going to be laser-focused on improving service delivery—technological service delivery, digital service delivery—to New Yorkers. And so there are all sorts of online portals that people have to interact with that are not really optimized; really important city websites that are still optimized for desktop, and when people try to use them on their phones, they break down. And so there’s going to be a lean team of technologists designed to go in and make sure that across city services, people are having a good experience and that these things are easy to use and functional for people.

I would say the effort has some analogs to what was done at the federal level with the U.S. Digital Service, which was a team in the White House of technologists back in the Obama era. When I was at the Federal Trade Commission, we similarly brought in a team of technologists, and we’ve seen that, especially as more and more commerce goes online, and more and more government services go online, it’s incredibly important to have technologists on board designed to make sure that these things are easy to use and well-functioning.

Krugman: I’ve seen a couple of areas where essentially governmental functions are initially done by trying to buy off-the-shelf technologies or bring in Microsoft or whatever. And I know of at least a couple of examples where it was a huge improvement just getting their own people because they kind of knew what people actually needed. So, I don’t know if you’re thinking along those lines or where it goes.

Khan: I think you’re right that it does get to this deeper issue of what does it mean for the government to have capabilities and to actually build those capabilities in-house. I think we’ve seen various eras where the government will largely rely on outsourcing, relying on various consulting firms. And there’s a first-order question as to whether the government is really getting a good return on investment there. I think we’ve all seen the news stories about New York City having paid millions of dollars to McKinsey to produce a report saying, effectively, “Put your garbage in garbage cans.”

But beyond that, I think over-reliance on outside consulting firms can also deprive the state of building in-house state capacity, which can be incredibly important for the long term. And so, again, I think the administration, through bringing some of these functions in-house, is also going to be investing in those long-term capabilities within government.

Krugman: Yeah. I’ll give you, just quickly, my own example. There are bigger ones, but everybody doing sort of macroeconomics now is utterly reliant on this thing called FRED, the Federal Reserve Economic Data, from the St. Louis Fed, of all places. And the thing is, they did not outsource. They just asked some of their own people, who actually knew what working economists needed, to produce a website that is really optimized for people like me, and that’s just incredibly helpful. I assume that there are many, many examples where that could be done.

Khan: Yeah. I mean, the other risk that you create if you are entirely dependent on some external actor is that a single business decision can render some of those products useless or severely degrade the capability overnight, or it turns out that there’s a new subscription and so there are all these additional costs. And so, either diversifying those inputs or creating more in-house capability is…

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Transcript

The war with Iran has just reached a very scary phase, and I’m not talking about the bombs and the drones. Hi, Paul Krugman here, doing a brief podcast instead of a full post, because I actually spent the day with friends and doing other things, and this is a quicker alternative.

If you’re following the news, you know that the sort-of ceasefire with Iran has been called off. Trump has reinstated the blockade. The Iranians are back to hitting things with their drones and missiles.

The U.S. position has been wildly erratic. First, Trump said he was going to impose a 20% toll on all shipping, basically turning the Strait of Hormuz into a U.S. toll booth, which would have been wildly illegal and irresponsible, aside from being impossible. Now he says, no, he’s going to demand that countries invest in the United States, which is also actually wildly illegal. But in any case, it’s never going to happen.

And yet, this is extremely scary. The reason to be afraid is not that I think the war is going to come to America. It’s not even that I think the United States is going to seriously try to occupy Iran. We don’t have the troops. We don’t have the missiles. Trump depleted a large share of our weaponry in the course of his failed war so far. So this is likely going to be punitive strikes, maybe some war crimes along the way, but that’s all.

But what is really frightening here is that it does appear as if Trump has given up on trying to extract something that looks like victory. If we go back just a few days ago, it appeared that what was going to happen was that Trump was going to de facto pull out, give upon the project, take advantage of falling oil prices because the strait was sort of kind of open — and try to spin the story about this was truly, this was actually an American victory and the economy is great and look at the stock market.

And, you know, just it was a little bit — more than a little bit —stupid and doomed. It was also kind of amazing because a serious attempt to end the conflict would have required facing up to reality, saying, OK, this war didn’t go well, but America remains great. Sorry about that.

But that was apparently not something Trump emotionally could bring himself to do. He just cannot admit that this venture failed. He can never admit that anything failed. We’re going to be searching for the saboteurs of the reflecting pool for the remainder of his presidency.

This is a change in strategy that is ominous because what is Trump’s plan for the midterm elections? Here the idea presumably was that there would be enough economic success and people would have sufficiently short memories that they would possibly give Trump credit for opening the Strait of Hormuz, but in any case have put the gas price shock and the whole disruption surrounding the war behind them. And be ready to start admitting that this is the golden age that Trump and company keep on claiming it is.

Now that’s all off. Now it’s just we’re going to bomb Iran. No clear strategy there, but we’re not going to even pretend that things are okay. We’re going to blockade them, which actually has a little bit more leverage, but no hint that anything might be resolved in a way that would help Republican chances in the midterms. So what is going to happen?

I don’t think it’s a coincidence that just as Trump essentially gives up, not gives up in the sense of abandoning his war, but gives up on trying to achieve anything he can even spin as a positive outcome, that we now have an announcement that this Thursday he’s going to have a primetime speech, which reports say is going to be about election fraud in 2020. Some reports hinting that he might try to declare the two Democratic senators from Georgia somehow illegitimate.

Okay, that’s not going to actually work. And nobody’s going to be convinced by the claim that he actually won the 2020 election. But what is happening is that effectively he’s setting up the pretext, the groundwork for massive interference in the vote this November. That we’re basically seeing the stage set for some kind of attempt to block fair elections, maybe block elections entirely.

I don’t know how this is going to play out. But we are really now at the point where it’s pretty clear that Trump and the people around him have given up on actually winning the election. They’ve decided instead that somecombination of propaganda, misinformation, disinformation, and possibly massive illegality is their way forward.

And don’t say they wouldn’t do that. That has been famous last words every step of the way. The proposition that there were some things that even Trump and company would not do has been the best way to be wrong about everything, every step of the Trump administration.

So in a peculiar way, the fact that Trump is back to bombing Iran is really bad news, not because of the bombs. Yes, it’s terrible and all that, But not because I have any real fear that America is going to be at risk from a foreign power, but because I think it signals an enormous risk to us from our own president, our own government.

Be afraid, be very afraid.

And take care.

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With everything else going on, the ongoing demolition of financial regulation and supervision, which is raising the risks of financial crisis, isn’t getting much attention. So I spoke with Dennis Kelliher, president of Better Markets, an independent think tank that is trying to sound the alarm.

Full disclosure: my nephew works at Better Markets. But I would have wanted to talk to Kelleher regardless.

. . .

TRANSCRIPT: Paul Krugman in Conversation with Dennis Kelleher

(recorded 7/10/26)

Paul Krugman: Hi everyone. It seems hard to believe now, but the great financial crisis of 2008 and its aftermath are now in the distant past. I think, in fact, in November there will be some voters who weren’t born yet. But for some of us, it was a huge, defining event, and financial markets as a source of economic problems and instability hasn’t gone away. And I thought I would talk with Dennis Kelleher, who is the head of Better Markets, an independent think tank devoted to trying to make financial markets work better for the rest of us. And in the note, I’ll mention I do have a personal connection to Better Markets, but that’s not why I’m interviewing Mr. Kelleher. Dennis is a former Senate aide, and as you know, congressional staffers are one of the great sources of expertise in America. And we want to talk about financial markets, so hi.

Dennis Kelleher: Hi. Thanks for having me, Paul. Good to see you.

Krugman: Good to see you, too. I have a bunch of questions, but we can go wherever this goes. The first thing is, whenever I try to talk about financial market functioning, what comes up is that most financial assets are owned by a relatively small part of the population, even if you take 401(k)s into account. So why isn’t this just a fight among the investor class? Why should everyone care about this?

Kelleher: Well, it’s a great question because there’s such a lack of information about financial markets, the financial system, and frankly, as you well know, the economy. You know, one of the great services that you and many of your colleagues have provided is basically translating what’s happening in the economy and financial markets to the average Main Street American, reader of the New York Times, and consumers of news. And the truth is that the financial markets and obviously the economy impact everybody, and you’re right.

This November during the election, some of the people voting will not have actually had any awareness of the 2008 financial crash, which was the biggest crash in the United States since 1929, which caused the Great Depression. And even though they may not have been born at that time, the people who are voting in November are still living through the repercussions of the 2008 crash. We basically lost an entire generation of Americans, economically speaking, from that crash.

It took ten years for the U-6, the broad unemployment rate, to return to pre-crash levels. It was 2017 before that happened. And indeed, the Fed did an interesting study, which people can quibble with the baseline, but they did a study in 2018 that showed at the end of 2016, 90% of Americans were poorer than they were in 2007 by 17 to 35 percent. So if you think about that, at the end of 2016, the best-off American in that ninety percent bucket was 17% poorer. Now you could say the baseline of 2007 was inflated, but by and large, 90% of Americans have been doing pretty poorly since the crash for a lot of reasons.

And so in November, when those people go to vote, they might not know it but they are actually living through the continuing economic consequences, financial consequences, and actually political consequences. Because the rise of Trump and the dissatisfaction of voters, Americans, and actually voters in the UK and elsewhere—Martin Wolf from the Financial Times wrote a terrific book called The Crisis of Democratic Capitalism. It shows how if countries don’t deliver for the broad population, then democracy erodes and people look for easy answers, authoritarians, and strongmen. And we end up with Brexit, we end up with Trump.

And so you’re right. People don’t remember the crash, but the crash is incredibly important to everybody in America. And the circumstances that we find ourselves in today are unfortunately echoing many of the drivers of that crash.

Now, I didn’t answer your question about the investor class, but when you look at investors, something like 87% of the value of the stock market is owned by the top 10%. On the other hand, there are today $27 trillion worth of assets in 401(k)s and IRAs, retirement accounts. It’s overwhelmingly skewed to the top, but not only. And importantly, one of the great projects that America really needs to undertake is to democratize finance so that financial assets and the ability to grow wealth is more broadly spread out. One of the big crippling problems we have today is that the bottom 50% of Americans, about 165 million Americans, only have 2.5% of the wealth of the country. It’s astonishing, right?

And so a big part of what Better Markets does in economic and financial policy making is to try and rebalance what we see as a rigged economy that’s driven by a rigged and broken financial system. So our economy is producing very well for the top ten percent, and our financial system is structured to deliver those results. Now, part of that is wealth extraction, but a lot of it is just structural drivers put in place by policy makers in Washington that cater to the top ten percent. And that, unfortunately, Paul, as you know, is on a bipartisan basis.

Krugman: We’re gonna get into that in a bit, but let me just ask a question. I’m gonna actually kind of veer off course, although this is something I wanted to get to. Top ten percent. So basically, ownership of stock is, roughly speaking, a top ten percent activity. When you talk about skewed, I mean, I have a sense that it is actually increasingly skewed towards a fraction of a fraction. Do you have anything I should take away about how the system is rigged or skewed within the stock-owning population?

Kelleher: Well, I think the problem is that the higher up you go on the wealth scale, the greater your ability to accumulate even more wealth in a tax-free fashion, right? And then to pass it along to both use it today as if it was cash and income, not be taxed on it, use it, and then hand it off through inheritance without being taxed to heirs for multi-generational wealth concentration at the top. It’s bad for the economy and bad for democracy.

I mean, you’ve talked to Ro Khanna and there’s all sorts of people with different ideas about what to do. We’ve got a wealth tax on the ballot in California. But in terms of the structural drivers, one of the problems we see at Better Markets is that Democrats don’t pay enough attention to the financial structural drivers of the economy. So here’s just a simple example that people are often surprised by.

Community banks in the United States—there’s about a little over four thousand of them. You see them on every corner across America, particularly in “real America,” as opposed to where you and I live, Paul, which is by no means real America. But those banks lend out seventy-five cents on average of every dollar of deposit. The big Wall Street banks, they lend out somewhere less than fifty cents of every dollar of deposit. And that’s because it’s so much more profitable for them catering to the rich, mostly engaging in financial activities, trading, and capital markets activities.

And so ask yourself, why is that? Well, that’s because the rules enacted by the banking regulators and Congress and other regulators allow the profit margins on the financialized trading side to be so much greater than on the lending side. I mean, truthfully, the rules that are created in Washington actually discriminate against lending to the real economy.

And so you have community banks which don’t have cap…

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Transcript

Today i want to give you some encouraging news about the state of the heartland. Well, actually New Jersey, but you got a problem with that?

But I did something kind of different yesterday — which has prevented me from producing a usual analytical Substack post — and it was actually a very uplifting experience.

So hi, I’m Paul Krugman. What i did yesterday was participate in jury selection in Mercer County, New Jersey, where i am still a legal resident.

That is something I’ve done before: back in 2020 I spent 16 weeks on a grand jury. It was done remotely, because it was the depths of Covid.

It was a New Jersey grand jury, which is not high profile cases. It’s actually very ordinary cases in which the police want to bring someone to trial but 23 citizens must agree that they have provided sufficient evidence to bring the case to trial. You don’t have to judge guilt or innocence but you have to judge that there is sufficient evidence to warrant bringing charges.

It was enlightening. I got to see a lot of the negative side of life, obviously, but it was just it was a pretty good experience on the whole.

So I was summoned again this year. I wouldn’t have been able to do it, but I had to participate in the selection in order to explain to the judge, if necessary, why I could not be available during the period of this grand jury — a bunch of already agreed to conferences and talks in Europe.

So it wasn’t going to be something I could do, but I did the right thing and went through the whole procedure of listening to the explanation, being pronounced present, and waiting to see the judge and explain the issue.

Now, as it turned out, I didn’t even have to do that. By the time they had reached the people who had said they could not do it, including me and 77 other people, they already had filled the jury. So it ended up that it was time-consuming, okay, not a terrible thing, but it was a procedure that had to be done. And I did my citizenly duty and was released well into the afternoon.

But what was interesting about it was that those of us who had said we couldn’t do it — 78 people in a Zoom room — had a long wait while the judge did whatever she needed to do with the rest. And after a little while some people unmuted themselves and we started having a conversation. This was by definition kind of a random sample of people — of course people who have felony convictions are not part of this, people are not us citizens are not part of it, and to be fair it’s Mercer County which includes Princeton although it also includes Trenton. Still, it’s on average an affluent, highly educated county so this was not exactly typical America but it wasn’t exactly the elite either: This wasn’t a virtual room full of Princeton professors.

So conversation started. Obviously people are not fools so it wasn’t about politics, it wasn’t about current events, it started with people saying “anybody want to recommend some books that I should read?” and then turned to TV shows and movies and then somehow or other we got involved in a discussion of AI and applications and learning. Because there were several school teachers.

Not everyone spoke up — most people didn’t — but everyone was listening, it seemed fairly attentively. And it was a great conversation! People were reasonable, they were either well informed or were happy to say “I don’t know about this.” There was actually some discussion about “how should I where should I go for news now that everything is so polarized” — nobody talked politics but they did talk about the fact that news is kind of hard to parse these days.

The book recommendations, the TV and movie recommendations to the extent that I know them were pretty good. And the whole tone was, wow, it was civilized. I felt a little bit as if I was in the middle of a Norman Rockwell painting.

By the way, yes, people did recognize me and a couple said you know I read your Substack and I talked a little bit but I made a deliberate effort to step back and not play the celebrity there.

And that was good, because I got to listen to other people who were really level-headed, interesting, pretty well informed about a bunch of stuff. Oh, and just to say that this was New Jersey, so it was a very diverse group of people — a random selection of people from New Jersey, which meant that it was multi-racial and multi-ethnic. The clerk had some trouble with pronouncing everybody’s name, which was okay — I mean everybody was very forgiving of that.

So it was very much America as I see it — a country of lots of people who look very different, who sound different (except a fair number of people did have New Jersey accents.)

And it was just a far more hopeful scene — at least I found it much more hopeful —about the state of the country. It turns out that ordinary Americans — this is, again ordinary Americans from Mercer County, New Jersey, but still — ordinary Americans are a lot nicer, more thoughtful, more willing to hold interesting discussions than you might think.

And it does seem to me, given all the political news, there’s a lot of people out there, I would say primarily on the right, but not only on the right, who fundamentally hold ordinary Americans in contempt, who believe that you have to go with cheap slogans and that you can appeal to the baser instincts of everybody’s nature and that’s the way that you win.

And obviously they do sometimes win. But it’s worth going out there a little bit.

I mean I’m never going to be the kind of person who travels around and has conversations with the person in the street and reports back on what I’ve learned about the real America. But I actually did have, by accident, a pretty good selection of real Americans — because we’re all real Americans — and came out of it feeling just much lighter in mood.

You know, this country is actually okay if we can just get past some of the people who are trying to take us down a dark path. We’re not bad people — we’re mostly good people. And there’s a lot there’s a lot of uplift out here if you’re willing to see it.

For once if I say I’m ending on a happy note, I really am.

Take care.

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Transcript

Yesterday, Donald Trump ordered Scott Bessent, the Secretary of theTreasury, to cut off all trade with Spain. Bessent said “Yes, sir.” Trump also said that this is because the Spaniards had stolen his strawberries.

Okay, I made up that second part, but he did in fact order Bessent to cut off all trade.

This is not going to happen.

Presidents have a lot of discretionary authority on tariffs and trade, more than they should, but you do not have the right as president to impose tariffs on a country just because you don’t like their defense spending or you think that they haven’t been nice enough to you.

So this would not fly even in the Trump administration. Even with a supine congress and a permissive Supreme Court this is not going to happen. Also Spain is part of the European Union. So this is like Europe declaring “we’re cutting off all trade with Florida”: they can’t do that. And also, there’s a lot of U.S. business with Spain. In fact, Spain is one of those countries with which we run a trade surplus. So U.S. business would be howling.

So this is all a non-event, this is is not something that is real. Except that the President of the United States did say this.

It was completely crazy, and that’s the story that we should be taking from this. It’s not really at this point about economics. It doesn’t even make sense to talk about Trump Administration policies, let alone ideology.

What we have is President Sundowner. I mean, this this is completely insane stuff. In any kind of normally functioning political system, in any kind of normally functioning party environment we would have a massive bipartisan call across the aisle, across almost everybody except for a handful of members of congress who are themselves crazy, to say okay this guy is non compos mentis. We cannot leave the fate of the United States or the world in the hands of somebody who is completely irrational, who is making demands and believing himself to have powers that he does not.

And of course, instead, not only does everybody pretend that he’s still a rational human being, but the Republican Party, the Trump administration, is full-on engaged in trying to build a personality cult.

What this says to me is that the problem is a lot bigger than Trump. Something is fundamentally wrong with America, and at this point you don’t have to go through complicated justifications. You can just say something is wrong with a country and a system that lets this guy remain in a position of power.

Have a good day.

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Transcript

Donald Trump has distinguished himself in many ways. One of them is that he is our first pump and dump president.

Hi, Paul Krugman here. A podcast today rather than a full-on piece: I’m a little exhausted from number-crunching over the weekend. So I thought I’d talk briefly about the really extraordinary financial picture that we’re seeing under the current administration.

Obviously no president has enriched himself from office the way that Trump has. That’s common knowledge. One of the things that is really amazing about it, however, is the way in which he enriched himself — a lot of which has to do with crypto.

So the New York Times had a report just the other day on Trumpcoin, the memecoin issued on Trump’s behalf which got a lot of buyers, a lot of money came flowing into it.

It should have been obvious from the beginning that the coin was inherently worthless, and at this point it essentially is worthless. It has lost 97 percent of its value. But a lot of people did buy in at the high prices.

What was special about the New York Times story was two things. First, they put a number on how much money naive investors have lost on the coin, which is 3.8 billion dollars. And even more surprising is the number of people who were in effect suckers here — almost a million.

That’s really amazing. I mean, I was completely cynical but I didn’t think there were that many suckers out there. But it turns out there were really a lot. A few people made money off the coin — basically insiders who got to buy it early and then were able to cash in before the broader retail market realized that this was a worthless token. There’s another token, the World Liberty Financial coin — which has also crashed, although the Times had difficulty in tracking down how many people have lost how much money. There’s the Melania coin.

Okay, all of this is amazing. As Trump would say, it’s like nothing anybody’s ever seen before. I think we should say, however, that this is a bigger story than just the Trump coin, and it’s a bigger story than just Trump himself.

What we’re witnessing is or has been a really enormous pump and dump scheme, I would argue, involving more or less all of crypto.

So if you don’t know the background, Trump used to be highly critical of cryptocurrency, saying it was worthless and a scam, which was true. But then when it became clear that there was money in it for him, he reversed course. And during the 2024 election, crypto interests contributed a lot of money to Trump. They then after the election poured a lot of money into his own enrichment, into his own projects. And the administration came in with a very pro crypto stance: deregulation encouraging uses of crypto, at least talk about a national bitcoin reserve, all of that. And the price of bitcoin doubled after the election; the valuation, the market cap of cryptocurrency in general went from a little over two trillion to more than four trillion.

And then starting last fall it all came crashing down. Not all the way to zero — the price of Bitcoin right now as I record this is about what it was on the eve of the 2024 election; it’s about half what it was at its peak. That’s also true, roughly speaking for the market cap. So we’ve seen about two trillion dollars of market valuation wiped out.

Why is this a pump and dump story? Well what is cryptocurrency good for? As you know, I’ve been on this for a long time. Bitcoin was introduced in 2009 — this is a seventeen year old idea which has yet to find any legitimate use cases. Illegitimate use cases, yes. There was also a report in the Wall Street Journal about the extent to which Iran and North Korea have been making use of cryptocurrency to evade U.S. sanctions, so there is that. But it’s still not enough to justify a multi-trillion dollar asset.

Anyway, it was trendy, it was exciting, it was fashionable and particularly after November 2024 it was pushed with the encouragement of the Trump Administration. It was just a heavy marketing campaign that had the advantage of also having the authority or whatever, the credibility — such as it was but among some people real —of Donald Trump behind it. They all evaporated.

I think we can say that to some extent what happened was that Trump kind of moved on to other things. There also is some distracted boyfriend meme: the guy looking over his shoulder. A lot of the excitable, fear of missing out, latest thing money has probably moved from crypto to AI. So that might have happened even without Trump. But the basic story is that Trump guided, pushed people into a whole asset class, crypto, of which a large part is Bitcoin, but other stuff as well.

We don’t know how much, or I don’t know, how much crypto was bought during this period, but it has to be substantial. And then it crashed. And at this point, essentially anybody who bought crypto during this era, since the 2024 election, has lost money.

It’s a lot of money; we know that on paper — it’s not really paper, but anyway — in principle two trillion dollars has been lost in crypto. Now a lot of that is probably money just given back, imaginary gains that took place during the run-up. But a substantial amount of additional money was from people who did buy in during this whole episode. So this has to be many times the size of the losses on the Trump coin. And it is, I would say, at a functional level another pump and dump scheme.

In this case the beneficiaries were people who were already in crypto. Clearly some of the crypto interests that bought themselves a president probably stayed fully invested. But others must have cashed out, and a lot of innocents — well a lot of a lot of suckers, let’s not mince words here — a lot of suckers clearly lost a lot of money.

It’s an extraordinary thing. There have been pump and dump schemes forever, probably going back to the Phoenicians or something. But this is on a scale we’ve never seen, and with the president of the United States in the center of it. Which I guess given everything else comes as no surprise.

Happy 250th birthday, America.

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Lisa Graves is the author of Without Precedent, a history and analysis of the Roberts Court and the expert on how the Federalist Society has been working to undermine democracy. Yesterday this happened:

So I managed to arrange a conversation with Lisa about what is happening:

. . .

TRANSCRIPT: Paul Krugman in Conversation with Lisa Graves

(recorded 6/29/26)

Paul Krugman: Hi everyone. This is a bit of an emergency recording and podcast because today, which is Monday as we’re recording this, the Supreme Court has just handed down several decisions, of which one was really alarming. And I had talked earlier with Lisa Graves, head of True North Research, and Court Accountability who had been warning about all this stuff when I talked with her previously and on other occasions. And I wanted to get somebody who’s actually following this to weigh in. So, hi Lisa.

Lisa Graves: Paul, thank you so much for inviting me back on. I really appreciate it.

Krugman: Yeah. So, there were obviously several decisions that came down, but Humphrey’s Executor… This is absolutely mind-boggling. So why don’t you talk about Humphrey’s Executor and then we’ll talk about the background and what this says about the Roberts Court?

Graves: Yes. Today’s Slaughter case involving the FTC, is a case where the Roberts Court has overruled nearly a century of legal precedent which prohibited presidents from firing commissioners, specifically on the Federal Trade Commission, the case that you mentioned, Paul. Humphrey’s Executor was specifically about the FTC. It was about this provision that barred FDR, Franklin Delano Roosevelt, from firing someone whom Hoover appointed to that commission. When Congress created the FTC, it set a standard that required that you would have to have cause to fire someone outside of their term.

The way the FTC is set up is that it has five commissioners by statute. Three of those commissioners are appointed by the president, two from the president’s party, and two are not from the president’s party. What’s happened over the past year is since Donald Trump became president again, he fired the Democratic commissioners on that commission. And so for the last 15 months, that commission has had only two commissioners, two Republican appointees, which has meant there hasn’t been a Democrat even in the room to consider these cases that are brought to the FTC, which relate to the power of huge corporations to merge with one another or not. And so, in essence, the FTC investigates proposed mergers and other things that might be considered a restraint on trade or affect the ability of consumers to get a fair price on things, for example. And what Trump has done is that he’s basically dominated that board in defiance of the plain language of the statute.

So any legal action by Donald Trump that has been countenanced by this Supreme Court, which allowed that firing to stand, in essence, did not allow the lower courts to reinstall Rebecca Slaughter to that post while the case was pending, and then just today ruled that, in fact, under their new approach to the Constitution, Donald Trump has the power to fire anyone at any independent agency—other than the Fed, it seems—no matter what Congress has said. And this is the result of an invention of a theory from the Reagan revolutionaries back in the day to try to aggrandize presidential power through what they describe as “the unitary executive theory.”

So the bottom line is that this ruling by the Roberts Court will allow more of the corruption that we’ve seen going on by this administration in terms of people who may be donors to Trump seemingly getting out of investigations or having their mergers go through, and we will not have a commission at the FTC that has any independence—just loyalists for Donald Trump for the foreseeable future.

Krugman: And it applies obviously not just to the FTC but to any agency except not the Federal Reserve. But the FDA—if there’s an FDA official who is viewed as being too hostile to RFK Jr’s vaccine doctrine or something, then Trump can fire him. And the Supreme Court has said, “Well, yes, the president has that power. Congress cannot set any ground rules that can’t be overruled by presidential edict.” Is that a correct interpretation?

Graves: Well, that’s the broad strokes of it, but just to add a little bit of gloss to that, which is that Roberts has been pursuing this agenda for years now. And he accomplished part of it through a case called the Seila Law LLC case, where he allowed Trump to remove the head of the Consumer Financial Protection Bureau. And the CFPB also had restrictions on whether that person could be fired without cause, and Roberts already moved the ball forward on that. And that has had a cascading effect along with the terrible, unprecedented immunity decision, where the Roberts Court gave Donald Trump immunity from criminal prosecution for any of his so-called official acts, which included directing agencies like the Justice Department to do his bidding.

And so, up until now, what was left was this notion that if Congress created a board that specifically had limits on how a person could be removed from that board because of its regulatory function to implement congressional will to act in a legislative way, boards like the Federal Trade Commission or the National Labor Relations Board could not be swept of their members. But before this decision, through the machinations of John Roberts, in essence, Donald J. Trump was already exerting a power to fire anyone within the executive branch, whether they were on an independent board or not.

Krugman: The Consumer Financial Protection Bureau felt like it was a little bit different. It was basically Elizabeth Warren’s creation. It was a relatively new agency. But this now generalizes it to everything, and it goes back to the FTC, which is a very, very old institution and is where this whole Humphrey’s Executor comes from. So now that’s everything.

Graves: Yes, except for the Fed. That is correct. And I think, as you were describing it at the outset, Paul, this has enormous implications for the American people and American consumers, because, in essence, consolidating power in this way in a president is not required by the Constitution. Although Roberts is somehow claiming it is, it’s not. This is part of this invention of this so-called “structural Constitution” under this very rigid notion of separation of powers, which basically guts some of the core powers of Congress and vests those powers, in the views of this court, in the hands of the president and the president alone.

And this ignores the reality of what’s happening, which is that you have a president who’s not actually executing the laws passed by Congress; who’s thwarting those laws. When you look at Article One and Article Two of the Constitution, what you see is that the president’s primary job is “to faithfully execute the laws of the United States.” And what’s happening here is that the president is circumventing those laws, thwarting those laws, and doing so in ways that raise serious questions of corruption or potential corruption or undue influence.

And the area of trade and mergers is one of the most, you know, potentially profitable areas for people trying to curry favor with Donald Trump. And what we’ve seen over the past fifteen months is that the FTC under the control of two Trump loyalists has dismissed more than thirty-three investigations into mergers that were begun before Donald Trump took over.

Krugman: This is basically a Federalist Society thing, and when they began pushing this, they probably had in mind that we would be pursuing an ideological agenda, that this would be something that would allow a right wing president to essentially just overrule Congress when it was doing things that weren’t sufficiently right-wing, or weren’t sufficiently “Reaganesque,” since this goes …

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Note: It’s Lisa Cook, not Lisa Graves. Talking to Lisa Graves shortly.

Earlier today, the Supreme Court declared war on U.S. democracy. It also declared war, basically, on modern society, on everything it takes to function in the 21st century. And I’m not sure that people understand that yet.

Hi, Paul Krugman with a quick video update. I’ll have more on this tomorrow.

Really shocking decisions handed down by the Supreme Court. There were a couple that were not awful. Lisa Cook gets to stay at the Federal Reserve, although that in itself is a huge contradiction to the important stuff that the court did. I mean, Lisa is important and the Fed is important, but much more important is Humphrey’s Executor, which is the generations-long precedent that says that when Congress creates an independent agency, it is independent. It’s able to make decisions.

Of course, the president has some role. Typically, the president can choose the agency’s head subject to congressional approval, but the president can’t just go and fire officials that he doesn’t like for whatever reason or for no reason, because the agencies that operate the U.S. government and basically run our society are supposed to be professional. They’re supposed to be following their legal mandate. They’re not supposed to be personal tools of a dictator in the White House.

Well, the court just scrapped that. Now, lawyers, people who are legal experts, can do a better job of explaining just what went down. But what I think is important to understand is not only does this give essentially dictatorial powers to the occupant of the White House, but it also makes it extremely difficult for the economy to function. It makes it extremely difficult for society to function.

We live in a complicated world, a world of technology, where there are all kinds of spillovers, all kinds of ways in which it’s important that there be well-established ground rules. If you’re a business, take the example of medicines and foodstuffs, where we have an FDA, Federal Drug Administration, that is charged with ensuring that products that people consume are safe. We do that for very good reason. We know that not just that that there have been examples, historically, of products that were foods, medicines that were not at all safe, but also that people want some assurance.

The fact that something has been FDA approved is a bit of a warranty, that it might turn out to be very harmful, but probably not. Businesses that want to invest in developing stuff need to know that there are some ground rules that determine what they can and cannot sell.

Now imagine that all these decisions are made by political appointees who are loyalists to the president, who basically do whatever the president wants, whatever the people around the president want.

Do you want to invest in something where you have absolutely no idea what the ground rules will be, whether it will be approved or not? Do you want to invest in a whole business line when, for all you know, the White House will abruptly decide that your product isn’t safe and that a competitor’s product is, based on spurious grounds?

And what would cause those decisions to happen? Well, how about the fact that some businesses are better at the business of bribing the president and his family than others. And if you think that this is outlandish — you know, a few years ago you might have said this was outlandish, things like that wouldn’t really happen — well, as we speak, these things are happening all the time.

So you are setting up a situation in which, you know, it’s a little bit like traffic laws. Traffic laws, yeah, they can be annoying, but aren’t we all kind of glad that there are in fact rules about when you can turn and when you can go through an intersection? In order to function, in order to drive your car around you need to have a set of stable traffic rules, not a situation in which a police officer can decide you broke the law and the other guy did not because I say what the law is. And especially not where the police officer does that based upon who’s been paying him off or who he expects to be paid off.

The real world is far more complex than traffic rules but we need those rules and we need some stability and those rules cannot be specified with every letter, every punctuation mark set by Congress. The world is too complicated and changes too much. You need to have standing ethos, standing doctrine at the agencies that make modern life possible.

Now all of that is gone.

Now, it just adds to it that all of this is being done to empower a president who is the worst possible person for this job. This is not somebody you want supervising anything, everything that Trump touches turns to crud because he doesn’t care and he doesn’t actually understand or recognize that there’s such a thing as expertise as knowing what you’re doing.

So this would be terrible even if we had a temporarily competent administration. But now you’re doing all of this, the Supreme Court is doing all of this to empower the guy who brought you the Reflecting Pool, who brought you the Iran war. Utter nightmare.

Now, what will happen, hopefully, we emerge at the other end having fended off dictatorship. Then, I mean, as everybody knows, this Supreme Court is not actually empowering the presidency. It is empowering this president. And as soon as there’s a Democrat in the White House, suddenly there will be all kinds of restrictions on what that person can do.

Well, this cannot go on. This is a clear argument that says we have to one way or another disempower the Supreme Court. I don’t know enough to tell you what is the best route to do that but court packing or something else is going to have to happen. Because this has been the clearest signal yet that we have six people (there are three who are not part of it, but we have six people) who are fundamentally hostile to democracy, fundamentally hostile to the modern world and determined to put the catastrophically bad leader that we currently have sitting in the White House in charge of everything, which is a nightmare scenario on every level.

Take care, I guess.

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Transcript

It’s kind of hard to believe, but the original Borat movie was 20 years ago. It’s time for a second sequel. And I already have the title. It would be Corruption for Make Benefit Glorious Family of Trump.

I hope that some of my listeners are young enough to not remember the original Borat movie. But it was a mockumentary, a satire, in which Sacha Baron Cohen pretended to be a journalist from Kazakhstan investigating and interviewing Americans about American mores. It was not about Kazakhstan, although he did insult the country along the way.

The reason I think about it is that today’s New York Times has a piece that reports, investigative reporting, on an immense mining deal in Kazakhstan, which, what do you know, turns out to be a big profit center for the Trump sons and also the sons of Howard Lutnick, the Commerce Secretary.

Check out the investigative reporting for the details, but basically here’s another one, another big one.

It’s part of an immense series of corrupt deals, often with petrostates — which Kazakhstan is — that financially benefit Donald Trump and his family and some of his cronies and cabinet members as well and their families. It’s all on a truly epic scale.

This is a message I have been trying to get across. I don’t think many people even now understand just how much of a departure what’s happening now is from past US history. I still see people saying we might be, could be heading for another Gilded Age. But we have a level of concentration of wealth in the hands of a few people that is something like three times what it was at the peak of the Gilded Age. We’re in a super duper Gilded Age.

And I sometimes hear people say, well, could we be returning to old kinds of corruption? Might we have another Teapot Dome scandal? Well, my God. Teapot Dome was a scandal actually involving mineral rights and bribes during the Harding administration, although not bribes to the president’s family, which is, again, something entirely new. The scale of the bribes was about $500,000: adjusting for inflation, that’s something like $9 million today.

So how much has Trump enriched himself since returning to the White House about 500 days ago? The answer is certainly more than four billion dollars, almost certainly more than four and a half, maybe five billion dollars. Divide that by 500 and we basically have a Teapot Dome sized corruption scandal on an average day under Trump.

So it’s basically day after day of scandals as big or bigger than Teapot Dome. Our corrupt grandfathers, great-grandfathers were pikers compared with this, just as the Gilded Age robber barons were pikers compared with the modern-day tech bros.

This is obviously not good. It’s actually quite horrifying. How did we so quickly descend into becoming a truly massively corrupt country on a level that we used to think of as being associated only with tinpot dictators in the third world? And yet here we are.

This ought to be a political issue and it ought to be a legal issue as soon as the government is back in the hands of people who actually take the rule of law seriously. Again, without going into the details of the deal, it’s surely illegal. I mean, it’s illegal under the Emoluments Clause. Probably since there are definitely Kazakhs on the take as well, it’s illegal under the Foreign Corrupt Practices Act. This is just, it’s illegal up the wazoo.

Of course, it will not be prosecuted as long as Trump is in the White House. But forget any Democrat who isn’t promising to go after this massive corruption when they regain power. If they don’t, then none of this matters, but that should be a core part of anybody’s platform.

I’m not a political expert — sometimes I think nobody is — but my God, again, this corruption is so blatant. And it does resonate with people. It’s really clear that corruption at the top and the sense that ordinary people are paying the price while people with power enrich themselves is an effective popular issue. That is actually the issue that brought Viktor Orban down in Hungary, which is one of the hopeful signs for what may happen to America going down the pike.

So here we are, just to remind you that this scandal, it’s a huge thing. It’s page one in the New York Times, but in a way it’s actually kind of ordinary, since even this size of scandal is happening every few weeks these days.

Do not make the mistake of treating what’s going on as in any sense normal. This is hugely abnormal, and I believe that the American people will understand that it’s abnormal even if pundits get bored of talking about the corruption. So drive it home, maybe for make benefit American people instead of the Trump family.

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Transcript

For most of last year, Elon Musk was the second most powerful man in America. He was running a large part of the government’s budget. And during that time, he established a track record of evil incompetence. I mean, really evil and really incompetent on enormous scales. And why aren’t people talking about it more?

Hi, I’m Paul Krugman, doing a brief follow-on to my discussion that was posted earlier today with Ro Khanna, the Congressman from Silicon Valley, who’s a very interesting guy in many ways.

One of the things that has made him especially interesting in the last few days is that he said something entirely reasonable, which is that if Democrats retake Congress, they should hold investigations into the role of Elon Musk as head of DOGE, the sort of not exactly but effectively government agency, in destroying USAID, the agency that was the principal channel for aid to the most desperate, poorest people in the world.

That’s entirely reasonable, and Khanna went on to say that there are credible estimates that the cancellation, the destruction of Doge has led to millions of unnecessary deaths, including millions of children — which is exactly true. There are studies that say that there is both in the field evidence of widespread death as a result of the cancellation and, of course reasonable health models. Because what do you think happens when you cut away tens of billions of dollars of aid to people who are living right on the edge? So of course it’s a reasonable thing to say.

Musk, of course, responded not by saying, no, it’s not true or something like that. He did say that not a single person has died because of those cuts, which is utterly implausible. But he also went on to say that he was going to sue Khanna, though he hasn’t actually so far, and that Khanna should be in prison for saying — not even saying that Musk killed people, but that there are studies that say that he killed people.

It’s quite evil and so much for free speech. Musk is very much like Trump, somebody who can dish it out but can’t take it, can’t even handle the kind of criticism that any public figure should expect to receive. Honestly, you shouldn’t be at all in the public domain unless you’re prepared to deal with a lot of insults and accusations. When you have the kind of role that Musk did that would come with the package even if he had done a decent or non-catastrophic job.

But of course he didn’t. And so let’s talk first about the evil.

It’s not just that Musk more or less personally set out to destroy this aid agency set out to cut off healthcare, nutritional assistance, just basic necessities of life for millions and millions of extremely desperate people. But he did so callously, carelessly, he even actually tweeted out, oh, “I just fed USAID to the wood chipper and I could have gone to some great parties instead.”

What can you say? This is an extraordinarily evil act. It came in the context of somebody who made enormous promises about what he was going to do. People have kind of forgotten that Musk came into DOGE promising to find trillions of dollars in waste, which he would eliminate, none of which happened. Overall, it’s pretty clear that DOGE actually worsened the budget deficit at least a little bit.

He also made specific claims along the way, most notably his claim that there were something like 20 million dead people receiving Social Security benefits. That was because the 19-year-olds that he put in positions of great influence, the Muskrats, whatever you want to call them, didn’t understand government databases. You know, you get parachuted into an agency with access to the computer system but absolutely no knowledge of what the agency does or how it does it and then couple that with a kind of arrogance — believing that these people must all be stupid and I can just sit down for a day or two with their data and find vast waste and fraud.

Well, nobody in a position of responsibility should believe that kind of thing.

It’s possible that Big Balls and his other hench people actually believed that they knew what they were doing. But my god, if you’re put in charge of a hugely important government function, you don’t assume that everybody there is an idiot and that your neophyte attaches have somehow stumbled on things that nobody else noticed.

And of course, Social Security is so pervasive, such a large part of everybody’s life, that the idea that there could be tens of millions of dead beneficiaries and nobody has noticed it, that’s completely crazy. You even wonder, did Musk really believe that? Does he even have a notion that some things are true and some things are not?

But in any case, there you are. And so it was a total disaster. He left the government not, clearly not because Trump thought that he was too extreme, too bad a guy, but because it was so clear that he did not know what he was doing.

And the reports of alleged savings from DOGE: it was starting to get embarrassing because it was so easy for news organizations to find out that the claims were utterly false, that none of what they claimed was happening was actually happening.

So he left. and then he goes back to his companies and becomes at least temporarily a trillionaire with an enormous public offering. Why didn’t people think that his record with enormous public responsibility was somehow relevant to his financial future?

I mean, if a guy who can convince himself that there are 20 million dead Social Security recipients, who can convince himself that you can massively slash foreign aid and it’s all waste and fraud and nobody will be hurt — why would you trust that person to run a company? And furthermore, the character flaws that are revealed here — flaws is what too weak a word, but anyway — when you have somebody who refuses to acknowledge uncomfortable reality, refuses to acknowledge error, who responds to any perfectly truthful statement that reflects badly on him by saying, I want that guy put in jail. — those are not the character traits that make for an effective manager. If you can’t accept that you are ever wrong, how are you ever going to get things right?

Because things will go wrong, and you will make mistakes. We all do. So all of this seems terribly relevant, and yet it says something, I guess, about America that people piled in to SpaceX stock, although some of that has come off now. It really was clearly an early frenzy, a fear of missing out frenzy.

There are now reports that SpaceX also sold bonds, which itself is a little troubling. Why should they be needing to go into debt right away? What is that about? And those bonds have already lost some of their value, which is much more serious than the stock coming down. When bonds lose value, that’s because people think that there is now a risk that this company might default, might not be able to honor its promises. So seeing those bonds start to trade at a discount almost immediately is a pretty bad sign for the company. But again, why did anybody believe any of this?

Musk is a horrible, terrible person and has the blood of millions of children on his hands. Let’s be clear. Yes, it’s not something that has been proven, but it’s close to. It’s so overwhelmingly likely that it clearly has to be true. And he’s also a weak personality — very much like Trump again — he can’t take criticism, he can’t admit error. So what does it say ultimately about our society that so many people are willing to throw money at this guy and that they’re so willing to forgive the incredible failures that he carried out, the incredible disaster of his time in a position of public responsibility. And I don’t really know the answer to that.

There’s a real question about how it is we got at our current age of irresponsible oligarchs and with so little public backlash. And it’s starting to develop. But still, the fact that Elon Musk is still in business, let alone the world’s richest man, is in…

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Ro Khanna represents a large part of Silicon Valley, and not surprisingly is a very smart guy. Perhaps more surprisingly, he’s also a very interesting progressive, who has drawn considerable ire from the tech lords, with Elon Musk most recently calling for his imprisonment. I caught up with him Friday:

TRANSCRIPT: Paul Krugman in Conversation with Congressman Ro Khanna

(recorded 6/26/26)

Paul Krugman: I’m talking again to Rep. Ro Khanna, the Representative for Cupertino, as it were, representing the heart of Silicon Valley in ways that don’t always please the tech oligarchs. I had planned to ask about AI, but there’s so much going on and Ro is right in the middle. So, welcome to this interview.

Ro Khanna: Well, I’m honored to be back on. I usually just read you to learn, but I’m glad we’re going to get to have another conversation.

Krugman: As it happens, tech-related politics is really central now. And you seem to be in the middle of at least three big issues: Elon Musk, AI generally, and the California Wealth Tax Initiative. I want to talk about all of those, but maybe let’s start with Elon Musk, who has called you evil, which is a great honor. Do you want to talk about that controversy and where you came in here? Because I think it’s very interesting.

Khanna: Well, he’s called me evil, he’s threatened to sue me, and he’s threatened to jail me. I have this quaint idea, Paul, that in a democracy, Elon Musk should have one vote. He doesn’t seem to think that, and the reason he has been so triggered is that I not only cited a Lancet study—which said that his USAID cuts could potentially lead to the deaths of 4.5 million children and over 10 million adults—but I also cited an Atul Gawande/ Boston study showing that some of these deaths have already taken place. This triggered him, not just because I cited these studies, but because I said he’s going to have to come before the House Oversight Committee when we take back the majority; we’re going to have the power to subpoena him. And, of course, defying a congressional subpoena could lead to contempt of Congress and penalties. And so he’s been spending the last few days obsessively tweeting about me. You would think if you had $1 trillion, you’d have better things to do, but this is what’s occupying him.

Krugman: Yeah, let’s back up a bit. One of the things that I found really kind of astonishing in the whole discussion—and obviously, SpaceX went public and there was amazingly little discussion of Musk’s role at DOGE where he was a quasi-government official. I guess it was kind of weird what the legal basis for all of that was—but this had immense impacts. And as you say, one of them was that he just, more or less by personal fiat, eliminated USAID, which is our premier aid agency. Do you have any thoughts just generally about what Musk did at DOGE? I think it’s a hell of a story, so let’s start with that.

Khanna: The keywords you used were “by personal fiat.” I mean, he literally went there, didn’t consult Congress, didn’t report to Congress, and just started cutting programs that Congress had explicitly authorized. And no one stopped him. We voted to subpoena him, but he defied coming in and explaining anything to Congress. By some accounts, he cut 83% of the programs that were at USAID. And some of these programs are to feed some of the poorest people in the world; some are to provide medicines to some of the poorest people in the world. So, you literally had the world’s richest person hurting the world’s poorest people. And he was doing it with no accountability, in defiance of Congress.

Congress then fortunately restored some of these programs, so he was not able to end all of them. But the USAID programs are a shadow of their former self. They now are scattered in administration, and many were so disrupted that these academic studies have shown that it potentially could—or in some cases already has—led to the deaths of some of the poorest people and children in the world.

Krugman: Yeah, the important thing is what he did. But the attitude also at the time... I think he said something like, “Oh, I just fed USAID to the wood chipper, and I could have gone to some great parties instead,” as if it was, you know, annoying that he had to go out there and cut off medical aid for millions of children.

Khanna: Yeah, it was total arrogance. He said it was all fraud, but of course, he then didn’t have the guts to come before Congress or the American people and explain where he found fraud. He didn’t consult any of these programs. It’s not like he was on a plane to Africa or a plane to other parts of the world where these programs were being administered. And for someone who was going to go after cuts to the federal budget, instead of starting at the Department of Defense, which is 65% or so of the discretionary federal budget, he decides to start with an administration with less than 1% of the federal budget. It was a purely ideological agenda that, turns out, has real-world consequences—especially with this Ebola outbreak. I mean, one of the things he cut was the oversight and testing in places like the Republic of the Congo, and now we’re seeing the consequences.

Krugman: And his reaction has been really quite over the top, considering, you know, if you’re any kind of public figure, you expect to be facing criticism.

Khanna: It’s just denial, right? I think he said that not a single person has died because of his cuts, which is totally implausible. He said, “there’s not a single documented case.” And he said that everything he cut was simply a fraud, and that these academic studies are totally fraudulent. Granted, the Lancet study is a model of what could happen, but the Atul Gawande study is actually a documentation of actual deaths that have taken place. And there are a lot of anecdotal statements which Nicholas Kristof and a lot of people have reported on.

Krugman: And now he’s threatening to sue you. Presumably, I don’t think we’re that far gone that there’s any chance that such a suit would prevail, but how much of that is an actual burden on you?

Khanna: Well, I put it into Grok to see how strong a case Elon has, and Grok doesn’t think he has a very strong case. So there’s that.

Krugman: In case anybody doesn’t know, Grok is Elon Musk’s or xAI’s LLM. It’s a competitor to ChatGPT and Claude, except it’s not really a competitor because it’s awful, right? But yeah.

Khanna: I would have a better case of defamation given what he has said about me. But, of course, I believe in free speech, Paul. I thought he did, too, and I would never think of suing someone for calling me a robber or calling me names. That’s the First Amendment. But I’ll tell you what it does: it creates a doubt in other people who are on the Oversight Committee—you know, “Is this really worth the bother? Should we really criticize Musk?” So that’s one thing.

Obviously, Musk has more than one vote. He’s got millions of dollars that he can spend on candidates, but now it turns out it’s not enough for him to just have the ability to support Super PACs; he also wants to be able to intimidate any public official who dares to go against him. It’s not just that he would spend money against them, but that he could actually sue them. And so if you’re a member of Congress, you’re thinking, “Well, do I really want this fight? Or maybe we could just focus on the hundred other issues.” So, it’s less about the headache for me and more about the signal he’s sending to other elected officials.

Krugman: So you aren’t trying to do a GoFundMe for a legal defense or anything like that? Because I know people who have faced other spurious lawsuits and it’s actually cost them money, even though there’s no chance of it prevailing. They feel that they do need to hire people, but you’re not in a position where you are personally feeling liable? Or are you just well-positioned to …

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A short talk in lieu of a post. Back on full duty tomorrow.

Transcript:

Hi, Paul Krugman here.

I’m recording this on Tuesday afternoon. I just won’t have time to write a normal post for tomorrow when you’ll see this. And I would take the day off, except it seemed to me as if people might want some reaction to the carnage that’s been going on, at least in part of the tech sector and stock markets around the world, which has been pretty remarkable.

It’s really tempting to say that it’s deeply meaningful. But in general, you want to be very cautious about putting too much stake in stock market events. I’ll come back to that in a minute. But it is striking enough that it does seem to be worth commenting on.

So what’s happened? There’s been a fall in tech stocks very much concentrated in semiconductors. The Philadelphia Semiconductor Index was down almost 8%. on Tuesday. The KOSPI Korean Index, which is largely a semiconductor index, was down just about 10% sort of the previous day or the same day, you know, time zones. And there was a 2.2% fall in the NASDAQ. We’ve seen a lot of decline in tech stocks, things related above all to chips. What’s going on there?

Part of the answer is that trying to understand why the market does what it does is, generally speaking, a mug’s game. In this case, however, it does seem that part of what’s happening, probably a large part of what’s happening, is that the tone, the rhetoric surrounding use of AI, and hence the demand for compute, has really shifted quite a lot just very recently.

All of a sudden, we have a spate of studies that seem to show that, yeah, AI models allow people to churn out a lot more stuff, but the actual payoff to that stuff is much, much smaller than the volume of stuff that they’re churning out, most obviously lines of code, but just in general. AI lets you do much more, but how productive that is in terms of the ultimate goals of a business, let alone economic growth and quality of life is much more doubtful.

On top of that you have a rather abrupt, jarring turn in business strategy. Up until just the other day a lot of businesses were more or less whipping their workers into using AI — you know, we’re going to judge you on how much you’re using AI whether or not you really want to whether or not you yourself think it’s valuable. We’re actually going to score you, we’re going to require that you do tokenmaxxing.

And then, with compute getting scarce and with the price of chips having gone through the roof, suddenly the AI companies began charging and the marginal cost of using a lot of tokens became really, really very high. And suddenly companies were saying, oh wait, stop. We want you to economize on your use of tokens and hence to ultimately reduce the demand for compute. And that’s a sudden U-turn.

This is part of a broader phenomenon, which I’m going to write about very soon, which is that there is a kind of lack of organicness to the AI boom.

There are people who are using it because it looks great. They’re using it because it’s fun. I have colleagues who are just mucking around with Claude and finding some uses for it. But there’s also a large amount of Corporate America that thinks that this is the way it has to go. Fear of missing out, not by the individual investor, but by the corporate bureaucracy. And then pressure from the financial markets, saying, you know, your company better be on the cutting edge of AI or else. All of which is very fragile. It’s a kind of a bubble, but not in the normal sort of asset price form. It’s more of a kind of fad, almost a social delusion. And that, it seems likely, certainly got ahead of itself.

Now, I’m reading way too much into these stock prices. And so let me give you a little bit of a caution on all of that. So yeah, the Philadelphia Semiconductor Index was down 8% in a day, which is one hell of a drop. But it was up 157% over the past year.

So you want to have some perspective here. This is a stunning setback, but the fact of the matter is that over the course of a year, these stocks have been incredibly high-performing. The KOSPI, the Korean index, was down 10%, strictly speaking, 9.99%. But anyway, it was down 10%.

But after that 10% fall, it was up 172% over the year. So we’re not talking about a catastrophe. We’re not yet talking about, we aren’t even talking about a Bitcoin level of disappointment for investors. But okay, it’s a break in the trend.

The other thing we should say: the famous old line by my teacher and colleague, Paul Samuelson, was that the stock market had predicted nine of the last five recessions. There’s many more than that now. In fact, just over the course of the past year and a half, we’ve had two major stock market declines that turned out to be false alarms.

There was a big decline in April of 2025 after Liberation Day, the Trump tariffs, because there was a lot of people just sort of, it’s chaos, terrible things may happen. While the tariffs have been a bad thing, they did not cause an economic catastrophe and stocks recovered the losses that they experienced then.

And then there was another round of major stock declines associated with the Iran war. Of course, the Iran war has been a complete debacle and a disaster, and we’ll be paying a price for that for a very long time. But the consequences for short-run macroeconomics were more modest than many people, myself included, expected. And it appears that the Strait of Hormuz is going to gradually open because the United States basically said, okay, you win. It won’t literally say that, but in practice, that’s what we’re doing. So that is going to be over.

So it’s not that uncommon for the markets to react as if something terrible is about to happen and be wrong.

And so you really don’t want to assume — there’s a real temptation to assume — that because there’s so much money involved, a big decline in markets must be signaling that something is really very much amiss in the fundamentals, that where there’s smoke, there’s fire. And sometimes, no, there’s just smoke, no fire.

So this might not be that big a deal. But it comes at a moment when the rhetoric really has shifted. You can see that there’s just a kind of a walking back.

There was a really striking interview just the other day with Satya Nadella of Microsoft. Microsoft is actually a consumer of AI, rather than a producer. They have tools you can use within Microsoft products, but I think they run basically off OpenAI.

And Nadella was pretty scathing about saying, you know, we can’t give all of this power and all this money to the big AI companies, and we should be using cheaper models. And hinted that Microsoft may start making use of DeepSeek, the Chinese model, which is less comprehensive. In general, the Chinese models are less comprehensive, but immensely cheaper, and among other things, just do a lot less computation. That’s kind of the core of why they’re cheaper.

And in that case, the picture changes a lot.

What bearing does all of this have on AI and the future of the economy and AI and the future of humanity? Well, part of what we’re seeing may not be so much disappointment in what AI can do as realizing that this extremely compute-intensive AI is not essential.

And maybe you can still get whatever the big productivity benefits are and still possibly the big labor-displacing effects without quite so much compute. But it’s not entirely separate either. I think we need to be saying that this is what a quasi-bubble quasi-bursting might look like.

Take care.

I often think of labor economics as a role model for the field: a subfield in which theory is disciplined by evidence and (most) researchers are willing to listen to that evidence even when it challenges their preconceptions. And hardly anyone does modern labor economics as well as UMass Amherst’s Arindrajit Dube, who has an excellent new book out. I talked with him about that book and the state of labor more generally.

. . .

TRANSCRIPT: Paul Krugman in Conversation with Arindrajit Dube

(recorded 6/18/26)

Paul Krugman: One of the most satisfying parts of economics, which doesn’t get as much attention as it should, is labor economics. It’s obviously important. Most of us work for a living, or at least pretend to work for a living. But also it is a field, a subfield you might say; more scientific than almost anything else in economics, really evidence-based. You’ve had multiple revelations where the data have actually changed the way people, myself included, have thought about stuff. And among the most effective, prominent practitioners of modern labor economics is Arin Dube, who has a new book called The Wage Standard. And I thought we’d take a break from all the other stuff going on and talk about Arin’s work. So hi, Arin.

Arindrajit Dube: Hi Paul, nice to see you.

Krugman: Yeah, welcome to my virtual studio. Why don’t you talk just a little bit about The Wage Standard and what you’re trying to do, and then we can get into the broader labor economics issues?

Dube: Yeah. So, I wrote a book. Here it is.

Krugman: By the way, we mostly don’t do that in economics; we write 5,000-word articles.

Dube: Exactly. Paul, of course, you’ve written many amazing books. But economists don’t usually write books. We publish articles.

Krugman: That’s right.

Dube: And so it was actually a big deal for me to sort of think about, did I want to write a book? And I kind of went for a number of years and I said, like, “Oh, well, I’m not writing this book for other economists as a main audience,” though of course, I’m very happy for other economists to read it, but I wanted to try to have a broader conversation, and I needed to be clear that I wanted to know what I was going to say in that conversation.

And so here’s basically the main point of the book. The main argument is that Americans deserve a raise, that most American workers actually could get paid more and should get paid more. And there are really good reasons to think that. You know, the market has not delivered what could be a sustainable but higher wage for those in the bottom and lower part of the income distribution. So that’s basically the core idea. And I try to bring in what we know about the research that I think has really blossomed in the last decade or two decades on a bunch of topics when it comes to understanding the labor market.

I was writing this book at the beginning of the pandemic and especially 2021. And it was really interesting because this was one of the more remarkable episodes in the labor market that really highlighted a lot of things that I was actually talking about in the book. Of course, it did it in a very messy way, because there were lots of things happening during that time. But it made for a very interesting process where I felt like I was writing the book and the world was writing itself outside, which was both exciting and challenging.

Krugman: Okay. I said that labor economics has been revelatory. When I was not young, but younger, I think most economists circa 1990 would have thought of the labor market as just being a market of supply and demand. And where they crossed determines wages, and there’s nothing much you can do about it. And if you try to change it, you do so at your peril; bad things will happen. And as you say in the book, and in many of your writings that I’ve been following on all this stuff, that’s something that really, really changed. You want to talk about what happened?

Dube: Yeah. So, one really interesting thing is to think about how wages are set. And we could start with the basic supply and demand story, which basically is that there’s demand for workers of different skills and then there’s supply. And depending on the supply and demand conditions, you’re going to have different wages, a different skill price. And let me be clear, I think there’s a lot of important aspects of that that actually matter, but it’s also incomplete. Because here’s the thing: if the market really worked like the textbook supply and demand story, basically workers of a particular type would just get paid the same—that’s the skill price. But in reality, it turns out companies have a substantial degree of discretion in setting pay. And you can start to see this by just looking across companies hiring similar workers, but choosing to pay someone different.

One simple example to start with is FedEx and UPS. Workers may be driving very similar routes delivering similar packages, but it turns out FedEx pays lower than UPS. UPS has maybe 37% of the workers; a few years back, they were paying less than $20 an hour. For FedEx, it was more like 60%. And so, of course, that’s just one example, but you have others. Like, look at Walmart versus Target. It turns out that Walmart tends to be paying somewhat lower than many of its other similar, large retail competitors. And the list goes on. But this is not a new observation. Labor economists who were studying this in the mid-20th century had gone and collected surveys and understood that, you know, factories in the same labor market could be paying different wages.

But here’s what was not fully convincing: how do we know that it’s not maybe somewhat of a different skill mix? Maybe these companies are similar, but they’re hiring somewhat different types of workers the pay difference reflects that. So that argument held sway for decades until we had better data. And this is where what you say about labor economics, I think, really is right. And part of that has been our ability to really get much more granular and high-quality data, including administrative data linking pay for virtually most people in the labor market. And you can track them as they go from company to company. So you could say, “Hey, actually, what happens if the same person moves from Walmart to Target? Do you see they’re getting a higher pay?” Because you’re holding their skill set constant there. And so this kind of data and this sort of research design helped establish that actually, no, it turns out there is a substantial amount of variation in pay that comes from companies choosing different types of pay policies. And that’s a big part of the argument in my book, more broadly, that there are choices we have made.

You know, if we wanted to go back and look to see what’s happened to productivity and what’s happened to wages since 1980, productivity has grown much more strongly than wages—maybe not as strong as it did in the postwar era, but nonetheless, it grew a lot more than the pay for the typical worker, certainly pay for those at the bottom. And one of the arguments that I make is that this reflects choices made in a variety of places, and that starts from choices at a corporate level, different companies choosing different pay policies, all the way to policies that are being made by state and federal government. But the core part of it is like, why does that make any sense? It doesn’t make much sense to talk about companies choosing pay policies if the market is just your supply and demand. There’s no role for saying, “Are you doing the high-wage strategy or a low-wage strategy?” That’s a nonsensical question in a perfectly competitive market. But it’s an absolutely sensible question to ask when companies have some degree of wage-setting power.

You know, economists have a funny word for this, right? Monopsony. It’s a funny word. But the basic idea is really straightforward. You know, companies are making a choice there. You could go for a higher …

Transcript

Hi everyone. Instead of a regular post today, I’m going to put up a video. There are a number of reasons why I feel like doing that instead of the usual. One of them is that this is a dry run for a talk that I will be giving virtually later today.

There’s a conference on the economics of digital transformation taking place in Croatia, although I’ll be doing it remotely. And they have asked me to talk about global power, geoeconomics, and Europe. Those are all themes that I’ve been thinking about quite a lot. And today’s miniature talk is an opportunity to try talking through those themes.

And the way I want to structure it is as what has changed, at least in the way that we all now understand the world, since, well, basically since Donald Trump returned to power. That’s an American-centric point of view, if you like, but it’s kind of a natural bracket.

And of course, everything really has changed, mostly not for the better, under Trump. And it has, as it turns out, big implications for Europe as well. So let me just try to get into that.

Start by talking about the world as it seemed to be at the beginning of 2025.

There were, and still are, three great economic superpowers in the world: China, the United States, and the European Union, in that order. If we measure GDP in 2024 at purchasing power parity, which is basically just adjusting for differences in national price levels, you had China with a GDP of something like $37 trillion, the United States with something like 29 trillion and the EU with something like 28 trillion. That last bit may be a bit of a surprise — maybe all of it is a surprise to some people — but yes, in terms of the actual amount of stuff it produces the Chinese economy is now substantially bigger than the US economy. And the European economy is almost the same size as the US economy. If you think that Europe is backward and poor and helplessly dependent, it’s not. It is an economic superpower.

And in fact, by this measure, Europe has basically maintained this position of being about comparable to the United States for a long time. This is a whole other topic that I’ve been writing about and will continue to write about in the future.

In that world, basically, two things were really kind of striking. One is that the United States seemed to perceive itself as being a dominant power, even though China was bigger and even though Europe was about the same size, and Europe acted as if it seemed to perceive itself as not being in the same league, as being not a superpower at all. All of that may be changing, and events are part of the reason, so let’s talk about the events.

Now, the most obvious: the United States just lost a war. Just lost it bigly, as Trump used to say. It’s an astonishing story. We went up against Iran, which was definitely not a major military power or a major economic power, a sort of middle-ranked power, if that, and utterly failed to achieve our war goals.

In the process, we inflicted a lot of damage on the world economy and depleted our stocks of high-tech weapons that will take years to replace. Altogether, immense damage was inflicted on Iran, but Iran has clearly emerged stronger. The United States has emerged humiliated.

The attempts by Trump and minions to pretend that it was a victory don’t help. They only make the United States look not just humiliated but delusional.

So that’s a big deal. It has large implications for US power and influence going forward as well. To explain those implications, it’s helpful to talk about one of the other things that really dramatically changed with Trump coming back into office, which was trade policy.

The United States began really seriously trying to throw its weight around. Liberation Day, the tariffs on everybody, basically trying to pressure all of the world into giving us various kinds of concessions. Give us what we want or we won’t let you sell in our market and everybody needs to sell in our market.

Okay, what we learned from now well over a year of trade war is that U.S. power in that dimension is substantially less than certainly than Trump appeared to believe it was. And just in general, trade, leverage and trade negotiations, leverage in trade disputes has less to do with market access than a lot of people assumed and more to do with supply chains, with getting stuff that you use in your economy, means of production, not in the sense of capital, but intermediate inputs or just inputs in general. The nation that has more ability to strangle its rivals by cutting off supply chains is the one that has the upper hand.

So it turns out, and we had already learned this from the trade stuff, that China with its dominant position in rare earths and some other crucial industrial materials actually had a stronger hand than the United States. Yes, we have a big market, but loss of a market can be offset to some extent by domestic stimulus, domestic support programs. Not having crucial industrial materials is not so easy to make up for. So we learned that the power in international trade disputes in a fundamental sense reflects power over supply, not power over demand, which is something economists have always tried to say.

The point of trade is not to sell. The point of trade is to get stuff. You sell as a way to pay for things that you get from other countries. But now we have it demonstrated very obviously in real life. So that in itself meant that we’ve had a blow to the perception of US power. It turns out the US market is not almighty; access to the US market is not anything like as powerful a tool as we thought and Chinese strangleholds over key inputs are much more important.

And then of course we’ve seen that even more graphically demonstrated by war with Iran and it turns out that Iran’s ability to disrupt traffic through the Strait of Hormuz was a really huge empowering point, and it was the kind of thing that the United States really didn’t think about, and certainly the Trump administration didn’t think about.

And it shows the true rules of global economic power, because largely Iran was able to win this war through economic power rather than strictly military action, the rules of economic power are not what a lot of people thought they were.

Who benefits from that? Well, obviously China. What we’ve seen now is that in terms of a global power competition, China has demonstrated that they have substantial power over supply chains. They’ve also demonstrated that they can weather a cutoff of oil pretty well.

And global power is a zero-sum game. So the United States, by weakening itself, by showing that we don’t have the ability to impose our will militarily, we don’t even have the ability to keep international shipping routes open, has emerged as just a much less formidable player, which means that China by comparison looks better. Add to that the fact that the United States has been erratic and unreliable. Our current leadership just doesn’t understand that a reputation for doing what you promised, honoring your agreements, is itself a source of power, and we have done an enormous amount to undermine that. Not news to anybody.

Trump looks much weaker. America looks much weaker. To a certain extent, China is the beneficiary of all that, at least in terms of power.

Now, of course, life is not all about power. And in the end, you don’t run a country to maximize global power. Maybe the Chinese do. I’m not sure about that. But in any case, it’s not a zero-sum game in terms of living. But in terms of power, it is a zero-sum game. And the United States share of that power, however you measure it, is clearly down as a result of the war.

Europe is a little bit interesting here. Europe played essentially no role in any of this. Europe wasn’t involved, obviously, in the war. Europe didn’t do very much at all except to suffer. Still, one thing that is kind of important is that Europe — at least to some degree, not really through emergency responses but just through …

Thank you Michael Scarmack, Scotland Explained, Oakbridges.ca, Kim G, Cathy Stein, and many others for tuning into my live video with Heather Cox Richardson! Join me for my next live video in the app.

I last spoke with Azeem, the proprietor of Exponential View, 18 months ago — ancient history on this subject. So we revisited the state of AI.

.

TRANSCRIPT: Paul Krugman in Conversation with Azeem Azhar

(recorded 6/12/26)

Paul Krugman: Hi everyone. Paul Krugman back on my usual schedule of recording interviews. And today I’m talking with Azeem Azhar, who I spoke to in January 2025, basically centuries ago in AI time. And with AI on everybody’s mind, I thought it would be good to revisit. I should say Azeem is an independent researcher and founder of Exponential View, which is one of the top tech Substacks out there.

So hi, welcome to another conversation.

Azeem Azhar: Yeah, thank you, Paul. And it has been eighteen months, also known as one and a half centuries in AI time since we spoke.

Krugman: Yeah. Let me ask sort of the dumbest question: what is this thing called AI? How does it do what it does? I mean, even skeptics have to admit that it’s really impressive how it’s sort of leapt over all of the previous barriers. How is this happening?

Azhar: You know, I think we’re still figuring it out. I think of AI ultimately as a machine that does certain things, and it’s been built by passing first millions, then billions, then tens of billions, hundreds of billions of trillions of words of human output through a neural network to give it some sense of how humans have thought about the world. And because it operates at dimensions well beyond the form of space and time, it seems to be able to find relationships between quite complex concepts. And I think we’ve all had that experience, whether we’ve been using Chat GPT or Claude over the last two or three years, that it seems to be able to recognize things that are quite deeply related that don’t immediately spring to mind.

And in the last year and a half or so, the labs have started to train the AI models not just on words in books, but actually on tasks, like, “what is the set of things that you do to write a piece of code that does something?” “What is a set of things you do to use a piece of software in an enterprise?” And they’ve tried to train those models on those particular tasks. Essentially it’s aping what we do, and they use various mathematical tools like reinforcement learning where the model notionally gets a reward. Of course it’s not a reward the way you and I think of it because it’s a machine.

Paul Krugman: Right.

Azhar: And so that’s what it is. It’s sort of reflecting back, but also I think discovering some really deep relationships in the world that we might not spot, you know, prima facie as humans.

Paul Krugman: Brad Delong calls it “a vast stew of linear algebra,” which makes some sense to me because I think that Pagerank with Google was the last thing I actually understood. And that’s the eigenvector with the largest eigenvalue. Not that anybody needs to know that, but this is like a million times bigger, right?

Azhar: That’s basically it. Yeah.

Krugman: But it’s sort of not what artificial intelligence was supposed to be, right?

Azhar: No, not at all. I mean, I sometimes go back and look at the TV series of the seventies that I grew up with as a child, and they’ll always have an AI in the spaceship. Space 1999 had an AI you could talk to. And it was very precise, it was very clipped, and it did things and got things right. And there was a sense that you could trust it. But you’d never think to say, as I sometimes do now, you know, “Find me five analogies to help make this point.” I use it as a brainstorming partner, or I give it tracts of my book, the book that I’m writing, and say, you know, “How would Paul Krugman criticize this argument?” And I get suggestions that I then work through by hand? I don’t think we really imagined it would look like that.

Krugman: Yeah. In sci-fi it would talk in a monotone and would be relentlessly logical. And in fact these models are unpredictable, they’re sometimes temperamental, they’re not reliable. That’s probably one of the big problems. It’s not at all what we imagined.

Azhar: It’s not at all and this point about reliability is so complex. A couple of months back, one of the versions of Anthropic’s Claude came out and I found it so sycophantic that it became unhelpful because I like these things to help me on hard problems and to challenge me. So I switched back to Chat GPT, which has always been a little bit less friendly. And what’s going on there, Paul, is that because we don’t really have a good theory about how to build these. They are developed almost like in a petri dish and nudged in particular directions so they take the shape that we expect them to take. And to use an economist term, they improve non-monotonically with every release. So you’ll see the latest release of an Anthropic model, and there are maybe twenty or thirty public benchmarks that they’re measured against, like how well they summarize text and how well they write software code. And the next version of the model won’t necessarily be better at everything than the previous version, because you lose something in order to get it. And that’s the complexity that the labs are wrestling with.

Krugman: Wow. Okay. Second naive question. I don’t think I’m a Luddite. I’ve always been happy to adopt technologies, but maybe I’m incurious on some of these things. I tend to pick up things like mathematical techniques, as needed, because I see something that could be useful. Now, I’m using NotebookLM to extract tables from PDFs, that sort of thing. But what should I be doing? I have friends who are using Claude a lot, but I can’t quite figure out what particularly agentic AI should be doing for me.

Azhar: You know, I’m really sympathetic to that because I have the same issue. These tools have been developed by software developers in a really particular part of the world, which is Silicon Valley, where the culture really revolves around the art of the programmer. And so if you have a programmer’s day and you think in coding terms and you have programming workflows, it becomes really obvious what you do with a really advanced AI tool. I do a lot of research, some of it qualitative, some of it quantitative, and in such a world, those workflows don’t match the way that I think through problems. And so the way that I get around this is that I do look at things on Twitter or X as it’s called because people are sharing tips. And I often just ask the models, you know, “What could I do with you given that I’m trying to do this thing? I’m trying to solve this problem.” And it will come back and give me a suggestion.

And I have had some success with agents. So I have an agent called R. Mini Arnold. So R is a play Isaac Asimov’s robots. They’re all called R. Arnold is after the good Terminator in Terminator 2, played by Arnold Schwarzenegger, who protects humanity. And R. Mini Arnold is available on my WhatsApp and it’s available on email.

Krugman: Okay.

Azhar: And it has access to a whole set of resources. It can browse the web, it can access LinkedIn, it can access Twitter, it can look at my library of PDFs of research that I’ve downloaded. And I can throw tasks to it a little bit like I would say a pretty decent but slightly temperamental graduate student. So sometimes it just disappears for six or seven hours at a time. And one of the differences between using an agent like that and using Claude is that R. Mini Arnold has a lot of my life’s context. It knows the music I like, it knows the book I’m working on, it knows the investments I’m making, it knows the essays I’m doing, it’s got the calendar of speeches that I’m about to give. And so when it goes off and does a task, it tries to figure out what in my world is this going to be relevant to and where can I draw threads from? And when it works, it is really sublime and it does feel a little bit like science fiction.

But I would say it’s incredibly brittle. I mean there’s breaks every four or five…

A quick video, thankfully not from Midtown Manhattan

Hi there. Paul Krugman with a very quick update.

I haven’t done a regular post today because I’m jet-lagged out of my mind, but I just wanted to weigh in on something that will be happening a few minutes after I record this. Which is that a significant piece of Midtown Manhattan — the area surrounding Madison Square Garden — is about to be closed to all pedestrians.

This is because of the Knicks game which is in Madison Square Garden. And Donald Trump is attending the Knicks game. Which means that the game entry itself is going to require enormously strict security. People are forbidden from bringing any kind of bag in there. It means that what should be an exciting joyous occasion is going to become quite hellish with long lines and who knows what else.

But what really may not be obvious to many people — you might not know if you’re not a New Yorker — is that Madison Square Garden sits on top of Penn Station.

That’s a story in itself, but there it is. And Penn Station is the busiest transit hub in America. It is where 600,000 or so people pass through on their way to and from New York by way of the Long Island Railroad and New Jersey Transit. I’ve spent a lot of my life waiting for trains at Penn Station.

And it’s completely insane to ruin people’s day like that. You could say, well, what else are you going to do if you’re going to have to provide security for the President of the United States? And the answer is, Why does he have to go to this thing? The simple way to make several hundred thousand people’s lives noticeably better, at least for today, would be to just not go to the damn game. He can watch it on TV. He can go have a cage match in the ripped up White House lawn, if he likes.

It’s not such a small thing. It shows a kind of contempt for ordinary people and a kind of self-aggrandizement — I want this so I’m going to make other people’s lives miserable just to indulge my whim — that is part and parcel of everything else that’s going on. It’s a small thing but my god I would actually have had a problem if I went into my office today because my office is not that far from Penn Station. It’s not in the banned zone but it’s going to be nightmares all around.

All right, just another message that the people in charge do not care about people like you.

Hi everybody. I’ve been having an extremely busy week, so no two talking heads conversation this week. Just my head talking alone for a relatively short time.

Hi, I’m Paul Krugman. I’m winding down some travel, and I’ve been meeting all sorts of people face to face, so virtual interactions are down. So just to give you some kind of Saturday video, I thought I would talk a little bit about latest economic news, markets — things that I don’t normally weigh in very much because that kind of market commentary is usually something that is best done by business economists who are focusing on the day-to-day stuff talking to market participants. But I think that the latest stuff is interesting enough to warrant some discussion and maybe a way to think about where we are economically right now.

So okay, if you’re paying attention to this stuff you probably know that yesterday was a job report day. The report was unusually strong, certainly stronger than almost any of the professional forecasters expected, 172,000 jobs.

Predictably, Trump first boasted about this with a lot of talk about how you know we didn’t have this kind of prosperity under Joe Biden. It is kind of odd given how well things are supposedly going how much Trump and his people talk about Biden. If it was really that much better would you need to be constantly comparing yourself and making claims about how much better you’re doing?

For what it’s worth you know how often during his 48 months in the White House did Biden preside over job reports that were as good as yesterday’s in terms of job creation? The answer is 37 times.

Now, there are reasons why the rapid job growth of the early Biden years, which was coming out of the COVID slump, can’t be replicated. And the fact that immigration is way down means that a normal jobs report is going to be a lower number.

But still this was unexpectedly high job growth but not really something that should alter your fundamental view about how the economy works, although the near-term outlook looks stronger than you might have thought.

One thing I should say, since there are some people wondering, can we trust these numbers? And particularly pointing out that the unemployment rate did not fall, even though we had a unexpectedly big job creation number and wondering how does that add up, are these books being cooked? The answer is no. You’re not helping by saying that.

I’m not saying that the books might not be cooked at some time in the future, but we will know. It will be obvious that this is happening. And it would basically be impossible to do it without there being lots of warning bells, without there being lots of whistleblowers.

So far, the Bureau of Labor Statistics is still apolitical, professional — under-resourced, which is becoming a problem — but these are the best numbers they could do.

If you’re puzzled by how we can have strong job growth and no change in the unemployment rate, the answer is that these are two different surveys. The unemployment rate is based on a survey of households. The job creation number is based on a survey of employers. Those numbers don’t have to match up. I mean, in an ideal world, they would always tell the same story, but there’s statistical noise, there’s sampling error, there’s just conceptual differences.

So this kind of discrepancy is not that unusual. And what it really tells you is, well, is the economy, is the labor market really sort of flat, which is what the unemployment numbers suggest, or are we seeing at least a mini boom in employment, which is what the

nonfarm payroll numbers suggest? And the answer is who knows? Time will tell. Over the course of a year there’s not usually a significant discrepancy in the stories these numbers tell; month by month, well, it’s noisy and you shouldn’t overreact.

Okay trying to make sense of what is going on — why is the labor market as strong as it appears to be? One important point about the economy right now is that there are three big forces that are hitting us. It would be really great from the point of view of professional economists if just one thing would happen at a time. But unfortunately, that’s not how it works. So there are three things happening. First, we are still feeling the effects of Trump’s erratic tariff policy, which has had a depressing effect on employment — not so much the tariffs themselves as the uncertainty. It’s very hard for businesses to make plans, very risky for them to sink money into new ventures when they have no idea what the tariff regime will be a few months down the road. But that uncertainty probably did a one-time hit to employment which is mostly probably behind us because yeah we have crazy erratic trade policy, but that’s now just a piece of the landscape which affects the level of employment, maybe, but not the rate of growth. The second thing is AI. So we have this enormous boom in spending on data centers, a large surge in investment, big rise in stock prices because of hopes about what AI might return. There are not that many people who benefit from high stock prices, but these are people with a lot of money and a lot of spending power. And if they go out and spend more, that boosts the economy. So that’s a sort of force that operates in opposition to the effects of the tariffs.

And possibly the AI-driven spending is coming on now while the tariff effect is sort of closing out.

About oil: For what it’s worth, prediction markets are by and large evil things, but they do give you a quick way of summarizing conventional wisdom. And just about a week ago,

Kalshi said that the probability that the Strait of Hormuz would be open by August 1st was 60%. It’s now 26%. So people have justifiably gotten very skeptical of White House pronouncements that this is just about over. They should have been more skeptical before.

But anyway, it just does not look like it’s going to open. And there’s a still huge remaining uncertainty about what does this imply? Through all of this there’s been a dichotomy between people in financial markets — including people in the futures market for oil who are presumably more professional, less vibes driven than a lot of investors — and what people who actually study the physical market for oil have to say.

And right now futures prices are way up from where they were before the war, but they’re still under $100. Yet the oil industry people are basically hair on fire, saying, we’ve been meeting the loss of supply from the closure of the strait by drawing down inventories and the inventories are very close to critical critically low levels — there’s a certain amount you need to just sort of function — and there were a lot of warnings that really bad things would happen if the strait wasn’t reopened by June 1st. Well guess what here we are, it’s June 6th, D-Day, and the strait is not open. So is there a really severe oil crunch just a few weeks down the pike, or is it kind of manageable?

So are we going to be hovering around current oil prices? I still find the physical oil argument quite persuasive, but I do wonder, again, it’s not like there are a lot of meme stock investors speculating in oil futures. That’s not a market that you would expect to be

highly emotional. We know that there are insider traders who seem to know what Donald Trump is going to do a few minutes before he does it, who are in the market, but they’re probably not enough to be seriously, on a sustained basis, distorting the price. So I don’t know what’s happening on the oil scene except that it is a source of worry.

Other objective economic facts: that jobs report also showed wage growth slowing, which it has been doing for a while, at the same time as inflation has been accelerating. Inflation was first pushed up by the tariffs, and now has been pushed up further by oil prices and prices of other goods, fertilizer, helium, that were transiting the Strait of Hormuz. That hit to prices is not all the way through the system. There’s a lot of effects, pa…

Transcript

The President of the United States is mentally ill, but everybody knows that. So while we should continue to focus on this degeneration taking place in front of our eyes, we should also, beyond that, ask what we can do about the powers, the interests, the system that put this horrifying person in a position of power.

Hi I’m Paul Krugman. First video update in a while.

It’s May 31st. If you have been following some of the news you may know that Trump’s mental deterioration, which has been obvious for quite a while, got even more extreme in the past few days. Tellingly, the things that are really driving him into more obvious dysfunction are things that are blows to his ego. I was especially struck — I was rattled actually — by his reaction to the wave of artists canceling out on the self-glorifying concert series he’s holding on the mall.

So, if you haven’t seen it, here’s what he said on Truth Social: That artists are “getting the yips” and

I am thinking about bringing the number one attraction anywhere in the world the man who gets much larger audiences than Elvis in his prime, and he does so without a guitar, the man who loves our country more than anyone else, and the man who some say is the greatest president in history, Donald J. Trump.

Oh my god. I would not want to trust this guy alone in a room, let alone running the world’s formerly greatest power, although he’s doing a lot to run that into the ground.

Okay, but we knew that, right? It’s not really a surprise to find out that he has lost his mind, what was left of it. And yet, he is in power. People who did a lot to put him in power did so, knowing this — the billionaires who contributed vast sums of money to his campaign, the Supreme Court which gave him immunity back in 2024 — they all knew who they were doing this for. They understood what they were doing. Now, maybe, even they are getting a bit of cold feet as as he goes over the edge and as we’re starting to see in Iran and elsewhere what happens when you have a lunatic running the United States, a lunatic who has far more power than a previous president because all of the normal institutional safeguards have been short-circuited or dismantled.

Still, they are continuing to support him, and they are continuing to do so not just in concrete ways, but verbally, which matters. They continue to cover for him.

Just the other day, Jeff Bezos — who is not an idiot; he has to know what he’s looking at — but he said, oh, Trump is much more mature than he was in his first term, which is obviously a complete lie. That is not what Jeff Bezos thinks. And it’s telling you that he is still providing cover.

The Supreme Court, although it’s been knocking back a few things, is for the most part continuing to give Trump treatment that it would never have accorded, not just to any Democratic president, but to any previous Republican president.

Okay, this is not coming out of thin air. These people — I’m not talking about Trump but people who are empowering him — are not stupid. Some of them are weak but they are also acting because they think there’s something in it for them.

All of this at some level is about money and power for people beyond Trump. And it’s made possible by the fact that there is so much money in the hands of a few people, many of whom turn out, not too surprisingly, to be terrible, insensitive, anti-democratic people themselves.

Obviously, we need to defang Trump as much as possible and make sure that neither he nor anybody who follows in his footsteps has power after the next two elections. But beyond that, we really need to do a thorough purging of the United States. We need a deMAGAfication. And I’m not going over the top by using a word that’s very similar to the denazification that we pursued successfully after World War II in Germany.

And it’s not just the MAGA ideology, but the whole structure of hugely unequal power, hugely unequal wealth that made this horrific moment possible.

It’s not going to be easy, and maybe it’s not going to be doable, but we have to try because this is a nightmare. This is a nightmare beyond, I think, even the worst fantasies of progressives, beyond the worst fantasies of conservatives who still have a conscience. (There still are plenty of those, but they’re no longer MAGA.)

This has to be turned around and we should not, above all, whitewash or forget this moment. This is where a lot of forces in America have been leading and if we don’t do something beyond just getting rid of Trump, it’s going to happen again.

Have a good rest of your weekend.

Chad Bown and Soumaya Keynes have a terrific new book with that title — a breezy survey of our chaotic new world of international economics, couched as advice for nations trying to get the upper hand. The book is here.

I spoke with them last week about their book and the world in general. Fun stuff in a slightly grim way, and I hope we kept the acronym level tolerable. Transcript provided by the Financial Times, lightly edited to remove the ums and ahs. u

TRANSCRIPT

​

Paul K: Hi everybody. I’m Paul Krugman, professor at the City University of New York, and an independent newsletter writer on Substack. You might have noticed that I’m not Soumaya Keynes, host of The Economics Show podcast. I’m here with Soumaya, as well as her longtime collaborator, Chad Bown, who is a senior fellow at the Peterson Institute for International Economics, formerly chief economist at the US State Department. Together, these two have just written a book called ‘How to Win a Trade War’, and today we’re going to be asking just that. How do you win a trade war? Soumaya, Chad, hi.

Chad Bown: Hi, Paul!

Soumaya: Hi!

Paul K: So maybe I can start by asking a slightly funny question, which is, who are you? I know you’re Chad and Soumaya, but when we talk about how to win a trade war, who is this? You know, who’s the audience? Presumably not actually Donald Trump. It’s probably not Xi Jinping. I mean, everybody should read it, but who do you think might, in some sense, read it or at least be briefed on people who’ve read it?

Soumaya: Well look, if Donald Trump wants to read the book, then we are very willing to sign a copy. We’ll hand deliver it however he wants. The conceit of the book is that you, the reader, are really interested in fighting a trade war, right? And we are the two nerdy kind of reluctant guides saying, “Uh, if you really want to do it, then, you know, we’ll give you the evidence that you need. We’ll tell you everything there is to know,” You know, it’s not easy to fight and win a trade war. Um, and so, you know, at least arm yourself with the evidence of what’s happened in the past, what works, what doesn’t work. We kind of acknowledge that most readers may come to this not actually wanting to fight a trade war, right?

Um, so the point is it’s for... You know, it’s to help people understand, how to navigate this world of economic conflict as I feel like, you know, many people have become unwilling participants in these massive, massive geopolitical conflicts. It can be a bit bewildering. So the book is really supposed to be for everyone, right? To understand how we got here and where we go next.

Paul K: Okay. Because yeah, I found myself thinking that it was easier somehow to follow the line of argument is to think of myself yeah, still a little bit of delusions of grandeur, but imagine myself to be Mark Carney, Prime Minister of Canada, or to imagine myself as Ursula von der Leyen, uh, uh, making policy for the EU.

But basically, you’ve got these two powers. We’ve got the United States, which is basically Donald Trump, and we’ve got China, which is a little bit more of an institutional thing. But they are certainly waging something that they consider trade wars.

Let’s talk a little bit about, how did we get here? How did we get to this point? I think, if we were holding this conversation around ten years ago, it mostly would have been, “Well, we’re economists. We understand free trade is great.” Uh, maybe fifteen years ago, even more so.

And, so you know, the answer is just, “Don’t do this, free trade.” So I think all three of us probably have had some visions on the road to Damascus about why that isn’t an adequate approach. Anybody want to start off on that?

Chad Bown: Maybe I’ll take a stab first. Um, so I guess to answer the question, we have to talk about what trade war we could or should be fighting because there are, I think, arguably multiple trade wars happening right now. You’ve got President Trump doing a lot of things. Um, but beneath, behind that, there’s another really big trade war that’s happening, and that’s the one having to do with China.

So let me start there. Um, I would say, and it’s not as if I noticed this at the time, but say in 2015, when China rolled out its Made in China 2025 strategy, industrial policy that said, you know, we’re gonna have these market share targets to dominate certain important sectors of the future, that was kind of a sign that China was thinking about things differently than I think other, other, traditional, the United States and others had been.

And then you fast-forward a couple of years with, Xi Jinping and his “dual circulation” strategy more clearly articulating the idea that China did not want to be interdependent with the rest of the world. It wanted the rest of the world to be dependent on China for their supply chain, so the United States to be dependent on China for sourcing stuff, but China to not have dependencies on the rest of the world.

When you start to think about a functioning trading system, as we’ve lived in for the post-war period since the, the late 1940s, it requires rules, all those things, but it also fundamentally requires a willingness to be interdependent, right? And to trust that I’m gonna export to you, you’re gonna import to me, and, and yeah, there’ll be sometimes some frictions, but by and large, that will be okay.

And China was saying, “No, we wanna have an asymmetric relationship, we wanna do what we wanna do, but we’re not all that interested in what you wanna do.” So for me, it was kind of seeing those things that really made me think that, ah, the world has changed. We’re in some sort of trade war, and really China is the part that’s driving this.

Soumaya: So my journey, I think, um, you know, there was an important moment for me in the first Trump administration, right? And so, you know, Trump, ran onto the scene, during his first term and started throwing tariffs at China predominantly. And you know, Chad and I had this podcast about trade, and we were the loudest voices saying, you know, “What are you doing? You gotta play by the rules, why not try to use the rule book to solve these underlying structural problems that we have with China?” Um, and you know, I was covering trade full-time at that time, and, you know, something that was happening behind the scenes, um, was that there were efforts to try and get some kind of coordinated plan to save the rules-based system, to try and solve some of the structural problems between China and the US by writing new rules.

So you had these trilateral discussions between the US, Japan, and the EU, and the idea was, okay, well why don’t we just write out the way in which we want China to behave, limits on subsidies, um, you know, new, new ways of protecting ourself against China’s subsidies. And the idea was, you know, they would agree on that common plan, then they might go to China and say, “Hey, look, we’ve got some new rules. You sign up to these, and look, President Trump will drop his tariffs.” That was the hope of some involved in that process. It certainly wasn’t Donald Trump’s plan. And I think, you know, a very fundamental way in which I have moved on from that is I just don’t believe that the solution to these problems lies in a new set of common rules that everyone is going to sign up to, right?

In fact, the Trump administration did go to the Chinese government with a list of requirements or requests in terms of, you know, China’s subsidy behavior, and the Chinese, you know, shredded it, right? They weren’t gonna change their system. and that’s really the backdrop to where we are today, which is, you know, the Trump administration, I think, pretty much most everyone else, has given up on the idea that the rules are gonna save us.

And that is kind of scary. It’s a bit, you know... It means that we can’t rely on the rule book to predict what’s going to happen next. It’s a much more chaotic power-based world, and we’re kind of feeling our …

I’m posting our Wednesday conversation as this week’s video. Transcript below.

. . .

TRANSCRIPT: Paul Krugman in Conversation with Heather Cox Richardson

(recorded 5/20/26)

Heather Cox Richardson: How are you doing, Professor Krugman? I know you’re on vacation.

Paul Krugman: Yeah. As I wrote the other day, I’m in Europe, which means I don’t have to think about Trump 100% of the time, only about 90%. So that’s a little bit of release psychologically.

HCR: It’s really astonishing, isn’t it? But hopefully we don’t talk entirely about him today. I’m actually interested and would love to hear what you have to say about artificial intelligence, not itself as an entity, but as a factor in the economy. Because boy, it sure looks to me like we are way overinvested in AI. I think the growth on the stock market is basically AI companies. We know now that there’s more construction in AI data centers than there is in commercial real estate. And I’m wondering, can we just talk about that and you walk us through what this looks like? Because everybody keeps saying, “Oh, it’s a bubble like the housing bubble or like the dot-com bubble.” And I’m looking at it and saying…

PK: Obviously, history is mostly what we have to go on. There have been many bubbles like this. There’s some broad similarities to dot-com, which was also a telecommunication thing. It also looks like the canal bubble in England, which was earlier. Most of the bubbles were pretty clearly bubbles at the time and that was certainly true for dot-com which I sort of still remember in real time. But with AI, I’m finding that the contrasts with the late 90s bubble are really illuminating. Obviously it’s again technology with lots of investment. There’s an enormous enthusiasm of a kind, but in other ways, it’s quite different.

HCR: Well, let’s start with this. What exactly is a bubble?

PK: Yeah, it’s always a question, but a bubble more or less means that people are investing in something that has no realistic chance of paying off—not socially but just commercially, to an extent that justifies the amount of money being thrown at it. Crucially, a bubble is something that people do because everyone else is doing it. So, Robert Shiller, the great bubble theorist of modern economics, said that a bubble is a natural Ponzi scheme. It’s something where you get in and you make money because other people get in, and people keep on coming in because everybody before them made money. But in the end, it’s a game where the money isn’t really there. It all depends on fresh crops of suckers coming in. And at some point you run out of suckers. So that is a Ponzi scheme, especially when someone like a Bernie Madoff does it deliberately in a bubble. It also happens naturally. Nobody is orchestrating it but nonetheless the logic of it is the same as a Ponzi scheme. So basically, it’s a lot like pornography where you know it when you see it.

But it’s not just the fact that people are wrong but that people are wrong in a way that should have been predictable and where it’s really something that is sustained by the momentum, by the fact that other people keep on coming in until they don’t.

HCR: Okay, so when historians talk about this, they example they often use is tulips. It’s something that you can explain to people as a reference because it’s kind of a cool story. When you take it out of the economic system that we understand now, it’s easier to see.

PK: Yeah, I mean, I’m not really fond of the tulips analogy but sort of the first thing that people think of as being something like a modern bubble was the tulip mania in the Netherlands. 17th century Netherlands was not quite the first modern economy because they weren’t quite modern, but they were on the way. They were commercialized. They were banking. And people were speculating in tulip bulbs, which were in fact valuable investments, but it got crazy. The prices went up because people were buying and buying and then prices went up further.

And so, you can see the financial logic there, but I’m not really fond of this example because there wasn’t a whole lot of real investment. People weren’t building tulip infrastructure. But I guess in terms of the psychology, the market logic, it was not that different from railroad shares or dot com shares. So, yeah.

And it is telling you, the fact that this is the Holland of Rembrandt and not only wasn’t there an internet, there weren’t even telephones, and yet the psychological logic was the same. And that’s kind of telling you that in some ways there’s a kind of universality about bubbles.

HCR: So when we look at AI now, am I correct that there are two super companies in which the majority of AI money is invested?

PK: Yeah. There’s OpenAI and there’s Anthropic and who are the big players but it’s an industry. It’s not just that these are the two biggest AI models. So you’re either talking to ChatGPT or to Claude which are the two leaders but then Google has its own model which is Gemini and then Elon Musk has a really bad one, Grok. And then there’s a bunch of Chinese versions, where they’ve taken a very different strategy. So it’s a little bit more complicated than that. And then there’s this network.

So in a lot of ways, you want to think of this whole AI boom bubble as being a little bit like the California gold rush, another historical parallel. The people who are selling Anthropic and OpenAI are like miners, prospectors looking for gold. And what we know in California in the 1840s was that the people looking for gold mostly ended up bust but the people who made money were basically the Levi Strausses who didn’t make money by finding gold. They made money by selling equipment, by selling jeans and picks and shovels and also brothels and liquor to the prospectors.

The equivalents of that now are companies like Nvidia which is selling the specialized chips that go into AI and there’s a bunch of other companies making a lot of money basically renting out computational capacity. So now we’re starting to see at least a little bit of money being made by Anthropic. All of my friends are playing with Claude and I just can’t get myself to do it. The big thing seems to be vibe coding, which lets you do programming without knowing how to program. And so Anthropic is actually making some money because people are subscribing to that service. But at this point, most of the money being made is from people basically selling equipment, selling the suppliers to this thing.

And so the question from a kind financial economic point of view is whether there will ever be enough revenue, whether people actually end up paying enough for AI, this thing that we call AI, to justify all of the money being thrown at the industry. And history would suggest there’s a very good chance that the most likely outcome is no. The most likely outcome is that it will end up being a waste. But again, history doesn’t always repeat so maybe this pays off but I don’t think that explains the enthusiasm.

HCR: Well, it’s interesting because one of the things that you’re seeing lately is the changing model for paying AI. That is, most of the use of AI currently is subsidized really quite heavily for every dollar of computing power that people use. It’s subsidized between $3 and $25 at the minimum. And the idea that people are actually going to pay the extraordinary costs that certainly right now it would warrant…it doesn’t seem like it’s going to happen.

PK: Well there’s a question. Let me play devil’s advocate here for a second. When the dot-com bubble happened and people were offering all these services on the Internet where people weren’t willing to pay remotely enough to justify the money that was being thrown at it. But what eventually happened was that a few companies managed to create walled gardens. They managed to create enclaves. Essentially, Facebook is a walled garden where people pay for ads or watch ads or whatever. Google basically ended up being a kind of walled garden. The searc…

For more videos, visit my YouTube channel.

Transcript

Hi, Paul Krugman here. Different city, different country, still not home. Unfortunately, couldn’t manage to do this one in a cafe, but we have been sitting in cafes a fair bit.

I just want to weigh in on a really kind of alarming report on consumer confidence that came out today. This is the long-running University of Michigan survey of consumer sentiment. It is kind of time hallowed. I don’t know that it’s necessarily the gold standard — there are other surveys — but this is the one that people really do focus on most.

The numbers are terrible, people. We’re hitting a record low on consumer sentiment which fits in with the general picture. We know that people are very upset about prices; they’re very upset about economic management; they just don’t feel that there’s anyone making any sense who’s in charge of things; which is all true.

I mean we can argue that objectively things are not as bad as all that. We have consumer sentiment that’s worse than at the depths of the financial crisis. We have consumer sentiment that is worse than during the stagflation circa 1980. And it’s hard to say that that’s really justified. But OK, the customer is always right. If people are feeling this down then we need to take that seriously.

But that is actually not the big issue. The really big issue is inflation expectations.

Now why do we focus on that? Inflation for a short period of time is not good but it’s tolerable. If we have a year of elevated inflation — even if you do something stupid, if you impose tariffs and raise consumer prices, or you start a war and mishandle it and you drive up oil prices that is not good. But it only turns into a really, really serious problem if it gets “entrenched” in the economy.

That is usually the term that people at the Federal Reserve use. And what they mean is this. If you think about how wages and prices are set, think about the process of inflation. Not all prices are set at the same time. There’s a kind of a leapfrogging in which each individual company, each individual employer is setting prices based both on inflation in the past and on inflation that they expect in the future. They’re looking over their shoulders at what they think competitors are going to be charging. They’re looking over their shoulders at what they think is going to happen to their costs.

And they need to do that because for many prices, it’s impractical and costly and disruptive to change them too frequently. So you set prices for a year in advance, something like that. You set prices for a while, which means that a lot of what’s happening to prices now is determined by what people think is going to be happening to prices in the future.

We don’t have great measures of what’s in the minds of people who are setting prices, but we have pretty good, or at least consistent over time, measures of what consumers expect. And, you know, we’re all living in the same society. So that’s telling you something about where we are in terms of expected inflation.

If you have a spike in inflation, if inflation comes and goes, but it doesn’t get built into expectations of higher inflation for a long time, then okay, you ride through it. Maybe people vote the bums out, but you ride through it.

If it gets built into expectations, then it’s a much a much more difficult situation. Then you have to somehow wring those expectations of high inflation out of the economy because if you don’t, inflation will just feed on itself. Prices will rise because everybody expects prices to rise and those expectations will be confirmed and it just goes on.

So if you want to return to an acceptably low rate of inflation and if people are expecting a high rate of inflation, then while there may be other ways, normally what we do is we put the economy through a wringer. which is what happened at the beginning of the 1980s.

After the inflation of the 1970s, inflation was eventually brought under control, but that would happen through years of extremely high punishing unemployment. Some people looking at inflation four years ago, looking at the inflation of 2021-2022 predicted that we’d have to do the same thing, that having seen a burst of inflation after decades of low inflation, that we were going to have to go through something like the end of the 70s stagflation, that we’d have to go through a severe recession with high unemployment for years to get inflation back down.

Something I called right — we all get things wrong, but something I called right — was that I said no, that that’s not going to happen, that it’s a false analogy. And the reason I said it was a false analogy was because medium-term expected inflation had not gone up very much.

Now, we go for medium term because we know that for short-term inflation, well, people’s expectations about that bounce around a lot, often driven by fluctuations in gasoline prices. But medium-term expectations are normally more stable, so if they rise that’s an indicator that you are starting to get entrenched inflation and things will be really bad.

In 2022 — sorry, let’s go back to 1980 — medium-term inflation expectations as measured by the Michigan survey were about nine percent — expected inflation over the next five to ten years was 9%. That was really bad. That said that people had basically internalized the inflation of the 70s and expected it to continue indefinitely.

This meant that actually getting inflation back down to tolerable levels was very costly and very painful.

In 2022, well, expected inflation over the next five years had crept up by a fraction of a percentage point, but it was still quite low. People were not at all building in anything like the expected inflation that prevailed before the great painful disinflation of the 1980s.

And so I was quite confident that the dire predictions about what it would take to bring that inflation back down were wrong.

Well, guess what? Especially in the last two months, expected inflation over the next five years has gone up a lot. It’s 3.9 percent in the latest Michigan release. That is, it’s not 1980 but it’s really bad. It’s the worst we’ve seen on that number since the early 1980s. It is saying that the person on the street is starting to believe after the tariff shock and now the Iran shock that we’re in a higher inflation environment. And we have to suspect that people making decisions about prices are thinking the same way.

They’re going to start building those expectations into pricing. So we’re starting to get the thing that everyone in the economics biz fears, which is entrenched inflation.

And if that’s happening, then the costs of the policy failures, the policy foolishness of the past year and a half are going to be a lot bigger than anyone is now reckoning. This is going to be an extremely painful situation that we have.

It looks, at least according to these preliminary indications, as if Donald Trump has managed to create the kind of environment that we had at the end of the 1970s stagflation, which means that this is going to be really, really ugly and that we are going to be paying the price for these misadventures for years to come.

Happy thought. Have a nice day.

For more videos, visit my YouTube channel.

I’m away but alas staying in touch with political news at home, and thought I would check in with one of the best public opinion quants about where we stand right now …

TRANSCRIPT: Paul Krugman in Conversation with G. Elliott Morris

(recorded 5/13/26)

Paul Krugman: Hi everyone. Returning today to G. Elliott Morris, my favorite polling and public opinion analyst. We’ve had an eventful time with redistricting and there’s a lot of stuff going on, so we’ll see where this goes. The big news is, of course, the Court leaving Democrats stunned by overruling the referendum with Virginia redistricting, which now gives Republicans a substantial lead. You’ve been doing some analysis. How should we think about how this changes November?

G. Elliott Morris: Yeah. Big picture is: as long as Democrats are still winning the popular vote by four points, they’re still taking back the House of Representatives. A lot has changed over the last three weeks. First, the Supreme Court has invalidated section two of the Voting Rights Act. This was the portion of the law that prevented state legislatures or other state bodies from diluting the power of black voters.

Krugman: Right.

Morris: This, of course, matters for our partisan calculations, because black representatives in the South tend to be Democrats. Now the Supreme Court has said states can divvy up their votes. Republican-led states in the South, including Tennessee, Alabama, and Louisiana, have since passed, or are about to pass, maps that will take away three Democrats at least, and potentially five. So that is quite a few seats. On top of that, there has been other redistricting news. Virginia voters had passed a constitutional amendment to adopt a Democratic gerrymander that has been struck down. So Democrats in Virginia are going back to their old map, and they will lose two seats because of that—two seats that they would have otherwise gained. So, if you’re catching up on the math here, that’s three seats lost from the Democrats. It would have only been one; now it’s three.

But then we have redistricting in Texas, Florida, North Carolina, Ohio, and Missouri. If you add up all of those Republican states, they have taken away about 13 seats from the Democrats, and Democrats have gained only five or so out of California, the only state they have really redistricted. If you add up all this, then Democrats are down about six seats from the gerrymandering wars that Donald Trump started last year. And that could be potentially decisive in a close race.

Krugman: My very informal impression was that prior to all of this stuff, the kind of Republican bias of the voting was largely gone, and that the House majorities tended to more or less reflect the popular vote. But now we’re in a situation where we’re back with probably the biggest ever Republican lean there.

Morris: Yeah. So the 2024 congressional map was technically still biased toward the Republicans. If in a perfectly average year with perfectly average candidates—and that is the big “if”—if 2024 had been rerun, we would have expected Democrats to lose the majority of seats, even if they had won the popular vote by about a point. The big benefit in 2024 was that recruitment by Democrats in close seats was really, really good. So they beat expectations. But if you rerun it, it still would have been slightly biased towards Republicans. Now we’re at around a Republican bias of four points, which is close to the bias right after the 2010 redistricting. What happened in 2012? So this is pretty bad. We’re getting to the point where the structural bias in basically every electoral institution at the federal level is significantly overweighting Republican votes, just by the fact of where they live or who’s in charge of drawing the maps.

Krugman: A few weeks ago, I talked with Kim Lane Scheppele, my old friend from Princeton, about Hungary. And, you know, a lot of what Orbán did was, in fact, basically whatever the Hungarian word for gerrymandering is, but on a heroic scale. She said that they basically weighted rural voters by about 3 to 1 over urban voters. But of course, that was overtopped by a huge wave election. And you would still think that the most likely scenario, given the current polling, is probably still that the Democrats are going to probably crest.

Morris: I think the 2026 election will be significantly pro-Democratic, and that the gerrymandering won’t matter. It won’t matter in terms of who wins the majority of the seats. Democrats will still be down six seats, at least, from where they should be. But if they’re gaining twelve, then, you know, they’re still managing to recapture the House because it was so close last time. Republicans only had three extra seats at the last election. So it’s a pretty easy wave election for the Democrats. But they’ll still be down seats, like they’re still deprived of representation in the South. And more importantly, in 2028, when we’re not expecting Democrats to have such a large wave—unless the country comes to its senses. I know you talk a lot about tariffs here. That’s a big example. Then we’re expecting a much closer election. And in that 2028 scenario, this gerrymandering could give Republicans the majority, even if Democrats win the popular vote.

Krugman: Just a quick, amateur question on this stuff: to what extent is there the possibility of a “dummy-mander”? I was just thinking about the Hispanic vote—that the Republicans may have drawn these districts on the belief that the 2024 Hispanic vote was going to remain. And they seem to have really lost that, at least if the polling is at all right. Does this mean there’s a possibility that the Republicans have essentially diluted their own support in order to wipe out Democratic districts, and that they’ve opened the possibility of losing a lot of normally red seats?

Morris: So, it’s a great question. I’ve done some math on this. My own simulations of election outcomes, where I assume rationality. But Republicans basically went after five districts in Texas. Maybe two or three of those are highly susceptible to a dummy-mander. In which case, if you do the math and Latinos move 20 points toward the Democrats, and everyone else only moves ten points to the Democrats—assuming Latinos are moving twice as much as everyone else, which is pretty close to what happened in the 2025 elections—then Republicans only gain two seats out of Texas, but they’re still gaining seats. So there is a possibility that they have drawn themselves too thin in the case of a big Latino backlash. But they’re just subtracting some seats that they could have otherwise gained. So it’s not the fact that they’re going to lose overall in terms of the overall gerrymandering. In other words, they’re still coming out ahead.

Krugman: Okay, that’s slightly depressing, but I’ll take it. I find myself wondering: if we really have a very clear, massive, public backlash against Republicans, but these maneuvers keep them in control of the House, how much damage does this do to legitimacy and feelings about the government?

Morris: I don’t know how much worse feelings of legitimacy or approval of the government could get. I mean, approval of Congress is 20%, SCOTUS is 20%, and Trump’s approval rating is 35%—only by virtue of that question being really partisan-polarized. If you actually ask Americans how they approve of Donald Trump’s handling of stuff like prices and tariffs, then it’s closer to 25%. So, it would be very striking to have lower confidence in the US government to solve the problems of everyday people. Basically, this might make an impact on how Americans view the functioning of their democracy or what have you. And actually, from my point of view, that type of education could be useful for stuff like electoral reform or proportional representation. But we don’t have to get into that for now. But it’s pretty bad out there. It’s pretty bleak out there, Paul.

Krugman: The unp…

Transcript

My president went to China, and all I got was even higher gas prices.

Hi, Paul Krugman here. Recording a video today rather than one of my usual posts,.I just feel like I’ve been too immersed in charts and wanted to do something shorter, simpler, whatever.

It’s Friday. The summit between Trump and Xi Jinping has wrapped up. Hard to say what exactly was accomplished, but at least Trump is saying that China is going to buy more US oil. That’s the headline on at least some of the financial sources that I look at. And in fact, crude oil prices in the United States have risen at least a little bit in response to that announcement.

The odd thing is that Trump seems to think that China buying more US oil is a good thing, which it is probably not from the point of view of the United States and definitely not for him. So let’s walk through what all of this means.

Background: The United States, which used to import a large part of its oil, is now a net exporter of oil. That’s what shale oil did. Since about 2020, we’ve been selling more oil to the rest of the world than we buy.

Now that’s a net number. It’s actually a fairly complicated picture because there are different kinds of oil and the geography of oil creates some complications. So we have the upper Midwest importing oil from Canada, Texas exporting oil to Europe and it’s a bit of a mix of of where the oil is produced and where it goes so that there are actually quite large gross flows underneath that net transaction.

But, okay, that’s not all that relevant here. What is relevant, you might think, is that the United States overall produces more oil than it consumes. And you might think, in fact, some people still seem to imagine, that this insulates the United States, that when the Strait of Hormuz is closed and global oil prices skyrocket, well, America, which is actually selling more oil than it buys, should be a net winner, which arguably is true for the economy as a whole, although as I’ll say in a minute, even that’s not entirely clear.

But it’s definitely not true for most of the U.S. public. Most of us have little or no stake in the oil industry, but we buy gasoline and diesel and we buy products whose price ultimately includes the cost of gasoline and diesel. So higher oil prices hurt most Americans.

And it’s the global situation that has led to higher prices in the United States. If you look at net exports of oil and petroleum products before the Iran war started the United States was exporting about 2.9 million barrels a day on net of oil. Now we’re exporting about 5.8 million barrels a day.

That’s a response to the very high prices that buyers in Europe and Asia are willing to pay for oil now that the Strait of Hormuz is closed. That’s how markets work.

That’s a significant contributor by the way to easing the impact of Hormuz on the world economy outside the United States. There were something like 20 million barrels a day of oil being shipped through the strait. Some of that is being routed around through pipelines across Arabia to the Red Sea. But a significant part of it, something like 15% of that shortfall is being made up by increased exports from the United States.

We still have a looming crunch because a significant amount of oil demand is being met by drawing down inventories and we’re kind of getting to crunch point there but that’s a whole other issue.

Now the downside for the United States is that more oil shipped abroad, unless we have a large increase in US production— which is not happening and won’t happen any time quickly — that means more oil being shipped abroad means less oil for the US market so prices have risen.

And so here we have the United States which is self-sufficient and more than self-sufficient in oil, we’re nonetheless seeing gasoline prices $1.50 or $1.60 a gallon higher than they were before the war started and diesel prices up even more than that.

So this is not a great thing for, this is a bad thing for most Americans and having the Chinese buy some more oil — hard to know what if anything is going to come of this — but having the Chinese buy even more US oil is going to enhance the negative effect. It’s going to drive gas prices even higher.

Now there are beneficiaries. Basically, oil producing companies are getting a windfall. They’re getting a much higher price for their product. West Texas Intermediate, the benchmark price of the United States, was around $65 a barrel before the war started. It’s around $102 as I record this. So that’s a pretty big benefit in terms of profits for a select group of oil companies.

Who benefits from that? Because in the end, corporations are not people, they are ultimately owned by people. Well, okay, people who own stock in oil companies are the ultimate beneficiaries of these higher profits. So who are those people? We don’t know exactly. If you look at it, it turns out that oil industry stuff is largely owned by institutional investors who in turn have other investors and it’s a more than a little bit not transparent exactly who the beneficiaries are here.

But in general what we know about US stocks is two things: A significant fraction are owned by foreigners. There’s a little bit of dispute on this, but I’ve seen estimates that run as high as 40% of U.S. equities being foreign owned. If that’s the case then of these excess profits something like 40 cents on the dollar might be going to foreigners.

Not totally sure about that number but what we do know is that among U.S. investors, among the U.S. public, stocks are basically held by a small fraction of the population, about half by the richest 1%, another 37%, according to the latest numbers I’ve seen, by the next 9%. So 10% of the US population, and this by the way includes mutual funds, it includes pension, it includes your TIAA — sorry TIAA, that’s only what academics have — it includes your 401ks. So US stocks are overwhelmingly held by a small fraction of the population. The great bulk of the U.S. population has very little stake in the stock market. For all the talk about it, it really is not something that’s terribly relevant to most people.

On the other hand, almost everybody has to fill up their tanks and even if you don’t, even if you are carless in New York City, which is not very many people but anyway, even so, the price of almost everything you buy is affected by the price of fuel. And it’s affected by the price of fertilizer, which also is very much petroleum related.

So, on balance, certainly 80, 85% or more of the US public is a net loser from higher oil prices and hence a net loser from increased US sales of oil abroad.

Okay, you can think of a couple of ways that you might be able to change that conclusion. It would be more beneficial to the US public at large if oil companies paid a lot of taxes on their profits. Well, I can stop right there. Obviously the oil industry has historically been famous for not paying very much in taxes.

It could be a good thing for the American public if wealthy investors who have capital gains as a result of this surge in oil prices pay a lot more in taxes. But again we can stop right there. The U.S. system in general gives people who derive their standard of living, their wealth, their income from capital gains a much, much lower burden than ordinary people. I mean, the income tax system is progressive. The income tax rate on — my favorite line from the movie Wall Street, $400,000 a year working Wall Street stiffs — they pay quite high personal tax rates, especially of course if they live in New York City. But the people who are getting their money from stocks and from gains in stock prices pay much lower tax rates. So this is not going to be a significant source of revenue and therefore it’s not going to ease the burden of paying for government on the rest of us.

So very hard to see how you can treat increased Chinese purchases of oil as a win for America. It’s a win for people who benefit from higher oil pri…

Transcript

What’s good for Elon Musk is not necessarily good for America. In fact, it may go the other way around. So why did Donald Trump take Musk and a bunch of other top executives to China with him?

Hi, Paul Krugman, again from a cafe, a little noisy behind me, but I hope it’ll be tolerable.

So Donald Trump has gone to Beijing. I wrote something about it earlier today, about the economics and about the generally pathetic state of the United States in geopolitics right now. But I want to focus for this video on the remarkable decision of Trump to bring a bunch of wealthy executives, in the case of some of them, like Musk, extremely wealthy executives, with him on a trip that is supposed to be something about serving the interests of the United States.

America’s corporations are not America. They really have very distinctive differences in interest from those of the general public. You may have heard the old line that what’s good for General Motors is good for America. That’s not exactly what the CEO of General Motors said. What he said is that what’s good for America is good for General Motors and vice versa.

But in any case he said that a very very long time ago, when corporations’ role in American life was not what it is now. General Motors at the time was a “stakeholder” corporation. That is, it did not see itself as solely serving the interests of stockholders. It viewed itself as having multiple groups that had a stake in the company.

There was the workers who were represented by a powerful union. There were customers who were considered to be part of the story. They played a role in the wider community.

Today corporations ruthlessly maximize value for stockholders, unless they do it for the founder who is considered to be the owner. (It’s not entirely clear that Tesla is run in the interest of Tesla stockholders. To a large extent, it’s run just in Elon Musk’s interest, but it’s certainly not run in the interest of U.S. workers or U.S. national security or anything like that.)

Why then should we care? It’s probably worth knowing that to the extent that corporations are run in the interest of their stockholders, the stockholders of an “American” corporation are by no means necessarily American. We think that something like 40% of US equities are owned by foreigners. So anything that enhances the profits of corporations, you should think of 40 cents on the dollar of that gain actually going to other countries.

And among Americans, stock ownership in the United States is extremely concentrated in the hands of the top 10% of the population, a large fraction just in the hands of the 1% or less. and most Americans have very little stake in stock prices. They may have some stake in the success of business in the United States, but that doesn’t have to be what we consider American corporations.

It’s not really right to think of Tesla or NVIDIA, whose Jensen Huang also went to China, as being somehow America going to China. These are corporations that serve stockholders around the world, serve some tech bros who have a special control over them. What they want is profits . What they want is access to the Chinese market, including being able to sell China stuff that from the US national point of view maybe we shouldn’t be allowing them to sell — you know, highly sophisticated equipment that on national security grounds we should actually try to restrict the access of fundamentally unfriendly powers.

Anyway, we know that’s what’s good for Nvidia is definitely not good for America. What’s good for Elon Musk is more problematic but there’s very little reason to think that any business advantages that Tesla might gain out of this, or xAI, or whatever whatever enterprise is he’s hoping will realize some gain, that this is going to redound significantly to the benefit of US workers.

T,o the extent that it benefit redounds the benefit of these guys the people who are on the plane, why should we care? An extra billion dollars in the hands of Elon Musk or Jensen Huang doesn’t do anything for the great majority of Americans.

And yeah, it does something for them, but not very much, right? When you have that much money, a billion here, a billion there, and what’s the difference? So this is a really peculiar group to be taking. unless you try to think about what does Donald Trump want?

Well, from Trump’s point of view, his son Eric, who runs the family business, was on the plane. They claim it’s just it’s just a family thing — yeah, right. He might as well have been walking around Beijing with a sign that says — in block capitals, of course, this is Trump — BRIBE ME. That’s very clearly what that’s about and as for the rest, well, you know, these corporations are in a way Trump’s base or at least they gave him a lot of money both in campaign funds and directly in one way or another.

I’m still wondering, by the way, why do we need a billion dollars for that ballroom? I thought the corporations were were paying for the ballroom by bribing Trump. But maybe I don’t know where that money is going.

Anywa,y whatever the story, these are not U.S. national interests being represented here. The whole visit — aside from the fact that it’s humiliating, that it’s really a pathetic display of U.S. weakness and Chinese strength — the whole visit is also yet another spectacular example of the corruption that now pervades everything about U.S. governance.

And we should be angry. We should be outraged. We certainly shouldn’t allow Trump and company to spin whatever comes out of this as a victory. We mostly defeated ourselves here, but we certainly aren’t getting anything for us. Maybe something for Elon Musk comes out of this, but there’s nothing for the rest of us coming out of this essentially tributary visit to China.

Take care

Remember tariffs? They have not gone away.

Hi, Paul Krugman with another video update from another cafe. You may remember that back in April 2025, which was seven years ago — well, actually just about one year ago, but it feels like longer — Donald Trump shocked us all with massive tariffs on basically everybody. It was an extraordinary policy move.

It was also clearly illegal. It was also clearly really very stupid from the point of view of any kind of rational economic strategy. All of that seemed like the biggest thing in the world at the time.

But of course it’s been overshadowed in the last 70 plus days by something new which was also illegal and massively stupid and even more so because it’s war. So the tariff issue has kind of receded in our perception. But it has not gone away.

Since the initial imposition of tariffs, we’ve had a lot of action. Again, it would be the biggest thing in the world if it wasn’t for everything else that is going on.

The whole legal basis of the tariffs was tossed out by the Supreme Court after having been ruled illegal by lower courts in several different hearings. The basis of the original tariffs was an obscure law called the International Economic Emergency Power Act, which clearly did not apply to the situation as of April 2025. When those tariffs were tossed, Trump responded or his people responded by invoking “Section 122.”

I know there’s a lot of section numbers in all of this stuff and one question is what law are they sections of. and the answer is mostly they’re all different laws but anyway, 122 is for a balance of payments emergency. It allows a 10% tariff — lower than the IEEPA tariffs — but that was also clearly illegal, and a court has just ruled that it was illegal too. So now that will be appealed and there will be a couple more stages and we’ll see what the Supreme Court does.

In many ways I think people kind of tuned this out because there’s a time limit on 122 tariffs —150 days — so by the time the courts reached a decision that story would probably be over anyway and the Trump administration would have turned to other tariffs.

But it turns out to actually not be good to ignore these tariffs because one thing we have learned — actually we should have known if we thought about it — was that when the administration imposes illegal tariffs and they are eventually ruled illegal, that is a machine for ripping off the American public. When the tariffs are imposed they get passed on to consumers in the form of higher prices. When they are ruled illegal many of the companies that were importing goods get refunds — which is slowly getting underway for the original tariffs and will eventually happen, probably, for the new tariffs — but they don’t pass that on to consumers. And as I’ll explain in a minute, that’s not a result of conspiracy. It’s basically a policy failure, given the way this works. There’s no reason to think that consumers would benefit from the refunds on the past tariffs.

But in any case, what we’re seeing now is really, really destructive policies, although it takes a lot of bad economic policy to do as much damage as a war, especially a stupid failed war, but that’s where we are.

Let’s talk for a second about the tariffs. The crucial point for the immediate effects is this. When a tariff is imposed, the tariff is paid by importers, which is either companies that specialize in import-export or fairly often U.S. companies or retailers that are buying stuff from abroad and arranging for it to be shipped, either to be used in production or to be sold on to US consumers.

From their point of view, the tariff is a cost per unit sold. It’s a marginal cost, to use economic jargon. And so, of course, they have every incentive to pass the tariff on to consumers, unless foreigners bear the tariff, which actually doesn’t happen, although Trump insists that it does.

When the tariff is eventually ruled illegal, you can’t say oh well sorry about that but water under the bridge. If you’ve collected taxes from somebody and you didn’t have the right to do that then rule of law at the most minimal level says you have to pay it back. Which is in fact going to happen to a lot of a lot of the Trump tariffs. But that is not a marginal cost. The amount that an importer gets as a refund from illegal tariffs that were imposed in the past doesn’t depend on how much they sell now.

So it’s not a marginal cost, again, to use the economics jargon. Some people have been saying that the fact that there’s no sign that the tariff refunds will be passed on to consumers is somehow monopoly power or collusion or something. Well, I’m not saying there isn’t monopoly power and collusion, but you don’t need that. That’s exactly what you would expect even if there was lots of competition among the importers. The refund doesn’t affect the price that a company needs to charge to make back its expenses. It doesn’t affect the price they need to charge to stay in line with their competitors.

So we have created a machine which rips off consumers when the tariffs are imposed, then hands a bunch of money to corporations when the tariffs are ruled illegal.

So this is really not great stuff, and it’s pretty big. The Trump tariffs have been something like 1% of GDP, and most of them illegal and therefore a ripoff of consumers. That’s a big deal. That’s hundreds of billions of dollars that were taken for no good reason.

It almost seems beside the point to point out that the tariffs have also failed. All of the things that they were supposed to do rebuild manufacturing — manufacturing employment is down — reduce the trade deficit — the trade deficit isn’t down — haven’t happened. So this was all a really large burden on the US public completely without any payoff.

What happens from here? Well, you might think that maybe at least Trump and maybe at least the people around him have learned a lesson and they’ll stop doing such stupid things.

Not going to happen. Nothing is learned here. The latest is that Kevin Hassett, the administration’s chief economist, more or less, says that we’re going to have 6% growth this year. Which is, doesn’t happen except when you’re coming out of a deep, deep recession. The last time it happened, except for recovery from COVID, was in 1984, Morning in America. There is no reason at all to think that we’re going to have Morning Under Trump.

So another policy disaster, although it’s overshadowed by the war.

But this is really, really bad. Take care.

Transcript

The super rich are different from you and me. They are pettier and more self-centered than most of us can easily imagine.

Hi, Paul Krugman here. This video is partly me trying to show that yes indeed I am on vacation, sort of, although on my laptop too much of the time.

But anyway, I’m at least working on the laptop sitting in cafes. But I also wanted to do a follow-up on a post earlier this week in which I talked about Jeff Bezos feeling now that he needs to sell his ostentatious, bad taste yacht because people are paying attention to the ostentatiousness and the bad taste — which is, kind of, what did he expect. But it is news that rich people are feeling some of the heat, that some of the backlash is starting to get to them.

Today I want to talk about a story that’s a couple of days old but is more along the same lines and has some other resonance I think is worth talking about.

So, Ken Griffin is a hedge fund billionaire. was a big Trump supporter, although not a reliable one, and he happens to be the owner of the most expensive apartment ever purchased in America, at least as far as we know, a $200-something million place on Central Park South.

Zoran Mandani, New York’s very interesting mayor, has called for a pied-à-terre tax, a tax on luxury residences exceeding $5 million that are owned by people who are not residents of New York, who are therefore not paying New York City income taxes. It’s a wealth tax, but a limited one. It would definitely raise some money, but of course has got people irked. And he put out a video which featured a shot of the building in which Ken Griffin has his apartment.

Griffin went wild. He said this is a personal attack on me, it’s putting me at risk. He even compared himself to Donald Trump facing assassination attempts and just in general went wild, as if this was the most evil horrible thing ever.

First of all the sheer again self-centeredness and pettiness is kind of amazing. Griffin has also threatened — I’ve actually written about him before when he made a big splash of moving his firm from Chicago to Miami and then fairly soon started renting a lot of space in Manhattan because it turned out that New York was a better place to do the hedge fund business. Now he’s saying he’s going to pull out of or threatening to pull out of New York because of this.

You know, Griffin has investors. They should care about him locating his operations where it makes sense as a business proposition, not about where he feels like pulling them out of personal spite. His feeling that Mamdani dissed him is not a reason to to move his business to a place where it can’t be done as well. so that’s kind of a bad thing in and of itself, but also again the self-centeredness is quite amazing.

But this apparently is what great wealth does to people. F. Scott Fitzgerald said that they’re careless people, but there’s more than. They’re people who put their minor discomforts on a level with matters of life and death for normal human beings.

Let me also say something that is not terribly rigorous but still substantive. I do not understand why someone with that much money would want to have a residence in Manhattan. Certainly why they would want to live in Manhattan, which Griffin sort of presumably does only part-time.

New York City is not at this point a city for the working class or or the middle class. It’s expensive. Things cost a lot. Real estate costs an awful lot. I saw a an article in a local West Side publication saying that the Upper West Side is a haven for independent minds. My immediate thought was, yeah, independent minds who can afford to pay $1,700 a square foot.

But it is a paradise basically for the 5%. The city has never been safer. It has never offered a greater diversity of cuisine, of culture. It’s a great place. Not quite the same as places with cafes where you can sit for hours and no one will bother you; they’re kind of scarce in New York. But anyway but it’s great for the affluent.

But if you’re super rich, if you spend your time being driven around in a car with tinted windows, if you don’t go anywhere without an entourage and probably at the upper limits of wealth with bodyguards, then you lose the whole the life of the streets.

New York is a place to to wander around. It’s a place to try out an ethnic restaurant that you haven’t been in before. (Everything in New York is an ethnic restaurant.) Basically, the random happenstances of life are a big part of what makes the city worth living in.

I knew somebody who had an upper floor apartment on Central Park South. It wasn’t his. He had a position at an institution where the apartment came with the job. And his family actually hated it despite the vast panoramic view of Central Park because there was no neighborhood. Many of the apartments were vacant most of the time because they were owned by oligarchs, princelings, and sheikhs. People didn’t support local stores, didn’t support any of the things that make urban life worth living.

So I’m not even sure what the point is if all you’re going to do is be chauffeured around, if you’re going to eat only at see-and-be-seen high-profile restaurants. I used to say you might as well be living in Dubai. Well, New York has the advantage of not being hit by cruise missiles currently. But still, what is the point?

But anyway, there it is.

And the extent to which America’s oligarchs put their personal foibles, their pettiness, their small senses of discomfort or lack thereof on a par with major issues is a huge source of evil right now. Elon Musk, who doesn’t feel that people give him enough credit, got to take his personal obsessions to the Trump administration and played them out in DOGE cuts. Among other things, the current estimate is that his destruction of USAID has killed 600,000 people, mostly children, so far. This is awesome.

I have to say, if displaying Ken Griffin’s apartment building helps win support for a progressive agenda, fine. Griffin and people like him should look at themselves in the mirror and ask, who are we? What are we doing with our lives?

Take care.

Transcript

According to press reports, Jeff Bezos is planning to sell his 417-foot yacht, the one with a carved figurehead of Lauren Sanchez, his second wife, at the front. According to these reports, he’s unhappy at the attention that the yacht is getting. Funny how that works.

Hi, Paul Krugman with a bit of an experiment.

I am recording this in a cafe, a cafe that is not in New York, as you could probably guess. Let’s see how the noise level works with the headphones.

OK obviously playing the world’s tiniest violin . We’re not going to weep for Jeff Bezos’s discomfort and yes there’s a certain amount of just plain satisfaction at seeing him taken down a peg.

But I think there’s a little bit more to it. This is not just invidious comparison and hostility towards people who have acquired great wealth, although there’s nothing wrong with that. This is about the role of moods, vibes, and the motivations of the malefactors of great wealth that play such a large role in the US political system now.

As everybody should know, we have seen an extraordinary concentration of wealth at the top, probably bigger than the concentration that took place in the Gilded Age. And it’s gone along with something which is, I think, different from what we had in the late 19th century. In the late 19th century there were certain proprieties that people of great wealth felt that they had to observe. They had to maintain a certain pretense. The Victorian virtues were honored at least on the face of it.

Extremely wealthy men had conventional marriages. Presumably very many of them had mistresses as well; the strictures of conventional morality were not actually obeyed nearly as much as people wanted you to think — but they wanted you to think. They wanted to pretend to be good family men, all of that. A kind of hypocrisy was part of the package, and hypocrisy is the tribute that vice pays to virtue.

Now we have a very permissive culture, which is not on the whole a bad thing. There’s a lot of openness, there’s a lot of misery that is avoided by not having to maintain the pretense that all marriages are happy, that people don’t have whatever motivations they have in reality. But one of the things that’s happened is that we have now a plutocracy, a concentration of incredible wealth and power at the top, without even the hypocrisy of morality, the hypocrisy of pretending to be virtuous.

Now there was, politically, some back pressure against that until Trump was elected the second time. And I think we have to bear in mind, we have to take seriously the idea that an important reason that we are in the state we’re in, an important reason that we have a would-be fascist regime in power — I don’t think they’re quite managing to pull it off, but they definitely would if they could — is that a handful of incredibly wealthy men wanted all restraints off.

They wanted to be able to live the privilege of their great wealth. They wanted to be able to just flaunt their wealth, performatively display their dominance, not have to worry about people chiding them for being politically incorrect just because they were abusive towards other people because of their gender or their whatever, their race, anything.

There was a Financial Times article just after the 2024 election with Wall Street people celebrating the fact that they were now free to say pussy and retard again. This is a pretty big deal. And I think if you look at the first year or so of the second Trump administration, the people at the top, Elon Musk, Jeff Bezos, Mark Zuckerberg, they all were acting as if OK, no need to apologize, no need to pretend to be good.

By the way, charitable giving has dropped way off. The super wealthy are just not doing the kind of reputation enhancing philanthropic giving that their predecessors in the Gilded Age engaged in. So this is a completely amoral elite, I got it, you don’t, I’m in power, I’m friends with the people who hold ultimate power, I don’t have to worry, I don’t care what you think.

But it’s not lasting. It turns out, and this is why I think this is somewhat important, it turns out that the backlash is powerful enough, scary enough at least to worry them.

I don’t think that people like Bezos are actually scared that the torches and pitchforks are coming for them, but they are starting to realize that maybe they haven’t purchased themselves total immunity the way they thought they had. And this is, I think, a good sign. We need more hypocritical billionaires.

OK, we need fewer billionaires and we need to work on that. But in the meantime having them feel at least somewhat disciplined by the public opprobrium that outrageous behavior brings is a good thing. More ostracism, more boycotts, sneering at and yelling at giant yachts and people who own them is a good thing.

Now, of course, Jeff Bezos choosing to spend his infinite billions on something other than a yacht, doesn’t actually free that wealth up, although maybe even maybe he might be persuaded to spend a little bit on good causes.

But in any case I think there’s something culturally going on. I think we are seeing a turn and we’re seeing that the collapse of all standards in favor of the belief that wealth is the only thing that matters is not complete and may even be reversible.

So, this is a silly story but I think not an entirely trivial one.

Anyway, let’s find out if this recording is actually audible given the cafe noises behind me.

Jared Bernstein, former top Biden economist and all-round economic expert, and I bat around the puzzle of persistent negative economic sentiment. Recorded Wednesday.

. . .

TRANSCRIPT: Paul Krugman in Conversation with Jared Bernstein

(recorded 4/22/26)

Paul Krugman: Hi everyone. This week I’ve got Jared Bernstein with me for a talk about economic vibes. We had planned and hoped to have G. Elliott Morris in on the conversation, but he came down sick. So it’s just going to be two economists talking about why people are still so negative about the economy. Clearly this is very important for lots of purposes, but also just kind of interesting. So, hi Jared. Maybe you should lead off by explaining why it’s so compelling and then I’ll chime in. We’ve both done work on this, but you’ve done more.

Jared Bernstein: Yeah, well, to me, it’s personal because I was in the White House—in the Biden administration’s Council of Economic Advisers, as you know—during this period when what began to be called the vibecession arose. I associate that term with Kyla Scanlon. This was a situation where we were posting some good strong macroeconomic numbers. GDP was strong. It was above trend. We got back to full employment very quickly after the pandemic-induced recession. But there was a big spike in inflation. As that spike came down, we were rolling down the other side of inflation mountain in the second half of 2022, we thought that was a pretty good development, given how upset people were. But consumer sentiment, consumer confidence, people’s feeling about the economy—these vibes—just kept getting worse. And it seemed to me at the time that that shock, not just to inflation, but to the level of prices—how much prices went up—was more important than most economists were realizing. As you well know, people in our field think a lot about inflation and inflationary shocks. We think less about the level of prices and sort of take that as a given. So that struck me as quite important at the time. And I began to look into it in ways I’m sure we’ll get into.

Krugman: I mean, what was striking about it was that historically, there’s a pretty good relationship between consumer sentiment and macroeconomics. And way back they called it the misery index, which is the inflation rate plus the unemployment rate. It was designed by Arthur Okun, and it did a pretty good job. And then you added a little more sophisticated version of that, and it has historically done a pretty good job of tracking sentiment. But after 2022, even by these measures that had worked before, it looked like an economy that should have had people feeling a lot happier, but they weren’t. But let’s talk a little bit about price level because what always struck me, even from the beginning, was a question about: what period of inflation are we talking about? You know, why should it be the one-year rate of inflation that enters into the misery index as opposed to a two-year, or three-year, or four-year? That’s how we kind of started. In your recent work, you started by saying, “well, maybe with inflation over a longer period,” but this kind of morphed into this price level issue. So why don’t you tell me about that?

Bernstein: So, a couple of things to amplify points you were just making. My coauthor on a recent paper, Daniel Posthumus, and I made a model of consumer sentiment. And this works both on the Michigan version and on the Conference Board version.

Krugman: By the way, people should know that U. Michigan is the longest-standing regular survey of how people feel. But the Conference Board—I don’t know how far back they go.

Bernstein: It actually goes back to ‘62, and U. Michigan goes back to ‘52. But that’s kind of relevant for what I was about to say. So we built a model to predict the sentiment or confidence indices. We used the stock market returns, real consumer spending, inflation, and unemployment. Very simple. And we ran it from 1990 to 2019. It then predicts very well what the index does all the way back to the 1950s. So even though we ran it from ‘90 to 2019, it tracks the index very well. And then as you said, it breaks down in 2019. And as you well know, the ‘20, ’21, ‘22 inflation shock wasn’t the first inflation shock in our history. But it was the first one in this series where you see this big gap between how people should feel based on those variables, those predictors, and how they do feel.

And I do want to get this down early on: that’s a pretty complicated thing to explain—how people feel about the economy. You know, you ask ten economists what “vibes” mean, or pollsters, whatever; they’ll tell you ten different things. But I think what happened to prices is very important. But I want to be clear— and you’ve underscored this in some of your recent work— it’s not the only thing. So, there’s that.

I guess one other thing I’ll say: I have a particular set of experiences. I used to go out on WHNL, which stands for White House, North Lawn, and that’s where we used to go and talk to the cameras about how things were going. And no matter where we started, no matter what we were talking about, like a good unemployment report: “We just had 250,000 payroll jobs.” You know, “productivity is up, GDP inflation’s way down.” “Groceries had a 12% inflation rate. Now they have a 1.5% rate.” These are the things we were talking about out on WHNL, and it always got back to [the press saying], “Why do people feel so bad about the economy? They’re telling us things are too expensive. What are you going to do about that?” So that really got into my head.

Krugman: So your story is one that I have largely gone with. You did the hard work on the econometrics, which I have not, but again— you or I would say, “Look, inflation is way down.” They said, “What do you mean? Things cost so much more than they did in 2019.” And so you kind of introduced this “excess price level” as a story, which is very widespread. But why not that as opposed to just inflation over a longer period, or is there really a better story there?

Bernstein: Yeah. So, they’re quite similar. Inflation over a longer period is basically asking the question: how much did the level of prices go up over this period? So you raise a fair point. Most of what we talk about on inflation day is the change in the monthly inflation rate or, maybe, the yearly rate. But I think in some senses we’re circling around the same thing, which is people’s memory about prices. And that’s key to this research. It’s something I hadn’t thought enough about but I’ve more recently been kind of obsessed with, which is people’s memory of what things used to cost. And this gets you down an interesting set of questions.

So if that were the only thing in play here, everybody—including me and you—would be walking around totally depressed all the time because when I started driving, gas cost $0.60 a gallon. And, you know, right now it’s a $4 national average, but this increase from $0.60 to where it is now or any other price you want to focus on—that’s salient to the consumer market basket. It tends to go up very gradually. When you have a shock, like we did in ‘21, ’22, people have this set of prices still emblazoned in their head. I used to call it the “personal price vector,” which is this idea that we walk around knowing what the things we buy kind of cost. And when that gets shocked, you know, it’s really quite upsetting to folks, and it takes a while for them to acclimate. The question is, what do we mean by “a while”? And I’m still wrestling with that question.

Krugman: Yeah, I think there has to be a statute of limitations there somewhere. I mean, people aren’t pining for the days of 15-cent McDonald’s hamburgers. I started driving a lot earlier than you did. So, I don’t remember what gas cost, but I do remember a quarter to go to the movies. But obviously, at some point, people stop remembering. I’m probably going to get all nonlinear here, but I mean, we’re n…

Some quick thoughts about yesterday’s hearing.

Transcript

Kevin Warsh, the next chairman of the Federal Reserve, is Donald Trump’s sock puppet. But we knew that. The question during yesterday’s confirmation hearing was whether he was sufficiently brave, sufficiently good at acting to pretend that he was more than that. And the answer is no.

Hi, Paul Krugman here with a Wednesday update. I didn’t watch or write about the Warsh hearing because it seemed there wasn’t really that much at stake. He’s going to be confirmed pretty much regardless and there’s a whole lot else going on in the world. But I thought I should weigh in a bit on what we actually learned from the hearing.

Now about Warsh, he is smart. He is very good at saying things that sound thoughtful and impressive, but he is also, and it’s really very clear, a partisan hack. He’s for tight money when a Democrat is in the White House and for easy money when there’s a Republican. He has managed to claim that he was part of the great economic rescue that took place after the global financial crisis. But at the time, although he was on the Federal Reserve Board, he basically trashed his colleagues for trying to do their job.

And he has made a lot of criticisms over the years, but they’re always very selective.

Often when he makes a statement, you wonder, what exactly did he say? Because there tends to be lots of complex verbiage that sounds sophisticated, but when you try and distill it down to what it was all about, it’s very hard to figure out, except that, again, it’s always tight money if there’s a Democrat in the White House, easy money if there’s a Republican.

Recently, Employ America, which is a group that I follow, wrote about Warsh. They aren’t very partisan. They do mostly inflation analyses and inflation nowcasting, trying to predict what the next number will be. But they had a scathing survey of his positions over the years, which says that he is a partisan who has chosen to align conveniently with the current president, that he is someone who abandons his principles “for whatever might suit his personal and partisan interests.” That’s not very nice, but it seems to be quite accurate.

So there was a hearing, and everybody knows pretty much who he is.There are people, sort of centrist Democrats, who claim to find some virtues in him. But I think that’s all positioning. I think everybody understands what we’re getting with Warsh. The question in the hearing was, could he put on an act? Because he is usually a pretty slick customer. He’s not someone who simply rants and raves and spouts MAGA propaganda.

And he was asked a a question which isn’t about monetary policy, but is very much exactly a kind of litmus test for, not really for who he is, but what he’s willing to say, at least in the interest of appearing to be not a complete sock puppet. He was asked who won the 2020 election. which is not a question that is remotely in doubt. This is not something about which reasonable people can disagree. There is nothing to the claims of a rigged election except the fact that Donald Trump can’t admit that he lost that election.

And Warsh evaded. He said, well, this body certified that election, which is not the question. The question is basically, are you willing to challenge Trump on a completely obvious grotesque lie? And it would have been in Warsh’s interest, you would think, to say, well, no, I believe that Joe Biden won that election. But to do that would be to show some independence, even not in action, but some independence, at least rhetorically, from Donald Trump. And he wouldn’t do that.

He was also asked about the spurious prosecution of Lisa Cook, asked about the spurious charges being brought about Jay Powell and refused to take a stand in support of people who will be his colleagues once he gets to the Fed.

So what we got was not a test of how he will behave, not a test really of his policy views. I mean, there were no interesting policy arguments going on here. There are some discussions we could have about shrinking the Fed’s balance sheet and all of these things, where I do think that Warsh’s expressed views are quite wrong. But that’s kind of not what was on trial here.

What was on trial was, can he at least pretend to be not a total hack? And the answer is no. He’s afraid to even show a little bit of verbal independence without substance when it comes to Donald Trump, which is bad.

It should be utterly disqualifying for the position because being the Fed chair is important. It requires a lot of independent judgment and requires a lot of credibility because the Fed is mostly needed in moments of crisis. And in those moments of crisis, people need to believe, markets need to believe, but the general public needs to believe that we’re talking about people who are serious experts and seriously have the interests of the nation at stake rather than their partisan political views.

He failed that test with flying colors. And he will be confirmed anyway.