America as we knew it may end Tuesday.

Hi, I’m Paul Krugman. Sunday morning update. Yesterday, I talked about how awful Trump’s message about glory to God and all of that was, but it’s looking much, much worse today. I’ll quote Trump in a second.

But let me do a Heather Cox Richardson here and talk about history for a second. Think about what Abraham Lincoln, a president who was actually winning his war, said in his second inaugural. You’ve all probably heard the magnificent conclusion, which begins,

with malice toward none, with charity for all, with firmness in the right as God gives us to see the right, let us strive on to finish the work we are in.

Determination, humility, decency, Now, let me read you Donald Trump’s Truth Social post from this morning:

Tuesday will be power plant day and bridge day, all wrapped up in one in Iran. There will be nothing like it. Open the f****n strait, you crazy b******s, or you’ll be living in hell. Just watch. Praise be to Allah.

What happened to us? This is not the country we were supposed to be.

If Trump is actually going to give the order for massive war crimes, for destruction of civilian infrastructure, power plants, bridges, which will, among other things, lead to a lot of deaths in Iran, will the military obey it? A year ago, I would have said no.

But what we do know now is that, first of all, there turns out to be at least a significant MAGA component inside the officer corps. And we know that Pete Hexeth has been systematically corrupting, dismantling the military over the past 14 months. Generals who raise ethical concerns have been fired. Officers who even just want to be intelligent about warfare. and not believe that it’s all about warrior ethos and lethality have been fired, so it’s quite possible that there’s a quorum of officers who will follow instructions to commit war crimes.

You can get even more pessimistic. Tim Snyder has been arguing that we’re basically in preparation for a coup, that somehow or other the war will be a pretense and arguing that this insane expansion of military spending in the latest Trump budget is a bribe to the military.

I hope he’s wrong. But in any case, my God, if Trump gets his way, and if he doesn’t chicken out —and I think TACO is greatly overrated, I think all too often Trump actually does follow through on his insane stuff.

It’s entirely possible that basically by this time Tuesday, America will have established itself as one of the world’s great villains. I don’t want to be here, but, you know, be warned. This is happening. This is real.

It’s the most astonishing, awful thing that I’ve ever seen, and we’ve all seen a lot of awful things. Take care, I guess.

Donald Trump isn’t sounding like himself, and that’s terrifying. Hi, Paul Krugman here with a brief update on Saturday afternoon.

Not my usual thing. No economics, no analytics, just I felt I needed to say something. On Wednesday, Trump gave a speech, which was... pretty depressing. He was low energy, listless, and seemed to be disconnected from reality, insisting that everything is going great in this war and everything is going great across the board. And in terms of the closure of the Strait of Hormuz, well, it’s somebody else’s problem. And the Strait may naturally open by itself, which didn’t sound like leadership.

In some ways it sounded like Trump, always living in a fantasy world in which things are going his way. But if you thought about the outcome for the world, it seemed to be pointing towards the U.S. never admitting it openly, but implicitly basically giving up and leaving a stronger Iran, but with the Strait of Hormuz opening up — maybe with tolls collected by the regime in Iran, and just a diminished, weakened U.S., but better than some of the alternatives.

Today Trump put up a Truth Social post, which said that if Iran doesn’t open up the Strait of Hormuz within 48 hours, “all hell will reign down on them.” That was how he put it. All hell will rain down. Misspelled rain, but OK. And then finished it up with glory be to God. GOD in caps.

Wow. So first of all, this is a completely different picture suddenly. Aside from the Strait of Hormuz not being our problem to we will commit massive war crimes, presumably. That’s the only thing that makes sense here, unless they open it up, which is pretty bad.

And also... I don’t think Trump has ever said “glory be to God.” That doesn’t sound like him. That sounds almost as if Pete Hegseth wrote this post, which maybe in some sense he did. The misspellings and all do look like Trump in his own hand, but it feels like this is the influence of our religious fanatic Secretary of War, or as people in the Pentagon apparently call him the Secretary of War Crimes.

This is really bad. It’s hard to see what happens in 48 hours. It’s clear that Trump, for all his pretense of, “I’m always winning,” is aware of how completely he screwed things up, that he’s aware that he has basically led America into an epic strategic defeat. I don’t think he cares about that from the point of view of America, but he is realizing what this has done to him — that he will probably quite rapidly lose his grip on U.S., politics, and certainly to the extent that he cares about his legacy, it’s not going to be his wonderful ballroom. It’s going to be that he’s the man who single-handedly led America to one of its greatest defeats ever. But now what?

It would be one thing if he just kind of slunk away into the night, which is what we would have hoped would happen, but instead it sounds like he’s unable to accept it and that he is going to try and do something truly awful in an attempt to somehow redeem himself and the situation.

If we had a functioning democracy, this would be 25th Amendment time. This guy should not have any authority at all. Finger on the button, although I don’t think we’re talking about nukes, but he shouldn’t have any authority on matters of state violence when this is the kind of mood he’s in. Just in general, although religiosity is often expected of American leaders, saying glory be to God before you unleash violence, that is not what used to be the American way.

Anyway, I’m scared. I wonder very much what the next few days will bring because this is looking like basically a president who is losing it and unfortunately losing it in a way that can really make the world a much worse place very fast.

I guess enjoy the rest of your weekend.

Imagine if the U.S. government had wasted as much money as Mark Zuckerberg. PS: I know, the company still named Meta was formerly Facebook; bit of a senior moment in there.

Also, it’s easy to miss, but there’s a button above that says “Transcript.” It’s AI-generated and not edited like my Saturday interviews, but it’s there for the text-oriented.

I don’t believe that it’s corruption, but it’s not a good look.

People in power can keep insisting that things are going great, never mind reality — until they can’t.

Another month, another war — this one looking like a complete c*******k. I spoke again with my go-to military historian, who among other things has thoughts about shoes. Here’s a transcript:

. . .

TRANSCRIPT: Paul Krugman in Conversation with Phillips O’Brien

(recorded 3/12/26)

Paul Krugman: Paul Krugman here with another conversation with my favorite military historian/expert, Phillips O’Brien. We do this every time there’s a new war, which means I guess we’re gonna be having a lot of them at the rate we’ve been going.

Phillips O’Brien: Yeah, I’ll see you when he attacks Cuba, right? That’s the next one. So we have Iran now, and then Cuba in a few weeks, I think.

Krugman: I’m not sure we have the resources for Cuba, but yeah. So okay. We’re recording this a bit less than two weeks into this new war with Iran. There are a couple of specific areas I wanna talk about, but first, do you have anything to say that might be a useful starting point?

O’Brien: I don’t think they know what they’re doing. And I don’t think that they had a plan. He basically did what megalomaniac leaders do. They underestimate their enemy and they think they will do this quickly. It’s what Putin did to Ukraine in 2022. “We will just march in, we’ll do what we want. We have this great military.” He was boasting about American military power, and I think he just thought this would be relatively straightforward. He liked to refer to the Venezuela model and I think he thought, ‘okay, what I’m gonna do is blow up the leadership, kill the leadership, and then I’ll get a new leadership that will be much more compliant and do what I want. I don’t wanna actually bring any kind of freedom or democracy to the Iranian people.’ Because, by the way, he’s talking about a leader for the next five to 10 years. So he is actually talking about putting another authoritarian in place. And he thought it would happen, a little bit harder than Venezuela it seems, but not much harder. And he completely underestimated what he was taking on. And what he’s done is caught himself without a strategic plan. They never thought through the second and third order effects, they were nowhere down wondering what would happen if the Strait of Hormuz was cut and they couldn’t get anything out of the Gulf. And I think they’re just making it up now as they go along.

Krugman: Yeah. That’s what we’re all seeing. I wanna come back to that a bit, but, your specialty has been air power, sea power, and strategically how wars are fought that way. And in a way the United States came in with “the O’Brien Supremacy.” We have vastly more, in normal terms or in historic terms, complete air superiority. We have the Navy but actually, let’s talk first about air power. In some ways it seems more effective. It can do big things.

O’Brien: Well, the United States and Israel can blow up anything they want in Iran. Or practically anything they want in Iran. They can’t get to the deep nuclear stuff, or at least they don’t. They’re not sure if they can get to it, but otherwise they could blow up any target on the ground they want to blow up and there’s nothing the Iranians can do about it. Their air defenses, from what we can tell, have mostly been neutralized.

The issue with air power is, it’s great for blowing things up if you have air supremacy, but it’s not great for putting anything else in its place. And this is what they hadn’t worked out. They thought, ‘Okay, we’ll blow things up and something we want will come along and start ruling Iran in a way that we’d like.’ They also didn’t understand that Iran has air power. Not to defend itself, but to strike back. So they totally missed the Iranian capacity to strike back. And Iran has struck back with very cheap drones and very cheap sea drones from what we can tell. And so the Americans haven’t been able to take out Iran’s strike power coming back at them. And it’s why we’re left in this situation.

The US and Israel can destroy anything they want in Iran. And that’s what they’re doing every night. But that doesn’t leave them in the ability to keep Iran from striking back. It doesn’t allow them to put anything else in the government’s place.

Krugman: They can destroy anything they can find. I guess part of the issue is that there’s stuff you can’t find.

O’Brien: This is what I was just saying in the article for The Atlantic. I know it’s only been over a year into Trump’s second term, but already I think we see signs of rot in American institutions. They spent months preparing for this, and on the first day they attacked a girl’s school on one of obviously the high priority targets. You would’ve thought they would’ve had the best intelligence possible. They had a long time to prepare this, but what they did is they committed a massive war crime. Because they didn’t have good intelligence, that alone should set alarm bells off. If you’re planning this intricate military campaign, you would think, at least on the opening strikes, you would have some idea of what you were attacking, but clearly they didn’t have an idea of what they were attacking and if that was the quality of intelligence that they had when it started, now that the Iranians are probably hiding more, spreading things out, trying to protect themselves, we don’t know the quality of the intelligence that they’re gonna have.

They don’t seem to have gotten the second supreme leader. So they got the first one because they knew where he was. But since then, they’ve seemed to have had more trouble tracking down the Iranian leadership. So I think it’s a sign of rot that the Trump administration has brought to US institutions.

Krugman: Yeah, I was really struck by the decapitation strike. That was an intelligence triumph—not the weapons that were there, but actually being able to find, basically, the entire leadership and wipe them out on the first day. That seemed to say that they had very good intelligence. And yet on the same day, they struck this girl’s school. And I don’t know how to reconcile that.

O’Brien: Well, they had very good intelligence on one strike package, but they didn’t have the depth of intelligence throughout the system. A lot of good people have left the US government, a lot of good analysts, so they might have had enough ability to do the strike on the leadership with, by the way, the help of the Israelis. We assume Israelis played a big role in providing a lot of that intelligence, but they haven’t had the depth and they didn’t have the depth to protect those troops in Kuwait. They clearly left American soldiers in Kuwait, unprotected. And unable to fight to protect themselves from what they should have anticipated coming at them. So there’s just all these really worrying signs. The US military is still gonna win every battle it fights with the Iranians. That’s not the issue. They can win any battle. But what we don’t know is if they can maintain the high level of excellence to actually triumph in this war.

Krugman: Just as a very casual observation, the Israeli IDF seems to be less degraded as a force. I don’t like at all what Israel has done. Gaza is a massive war crime. But the IDF seems to be functioning in a way that I’m not sure the US military is.

O’Brien: No, I think the Israelis have maintained a higher level of military efficiency. What Israel has done, a very small country, arguably has the second most powerful air force in the world, or third most powerful air force in the world. We don’t know how the Chinese one would actually operate, but we could say that the best air power in the world is the US, China, and Israel probably among first rank. No one else would be in that category. And the Israelis also have great intelligence of what is happening in Iran. So that is absolutely key. On the other hand, the Israelis seem to also have a much harsher group of political objectives than the United States. Not that the United States’ objectives aren’t harsh, but the Israelis seem to be wanting to go for full regime change. So they’re helping the United States, but in some ways they’re also leading the United States down a road that the United States might not want to go down.

Krugman: And it is striking that they don’t seem to be able to take out the drone sites, the missile sites. How is it that the Iranians are managing to keep these things hidden?

O’Brien: Because they’re small, they’re really easy to launch. The US has been thinking in terms of taking out the air power of another country by taking out its major air bases where it keeps its expensive aircraft in actually relatively small numbers. A few hundred would be a very large air force for most people. And you can’t spread all these aircraft around everywhere because they need maintenance. So actually the ability of anyone to exercise traditional air power with fixed wing aircraft would have a relatively limited number of targets. With drones and missile launchers, they’re cheap, they’re unpiloted, you don’t need to build a lot of military support and you can spread ‘em around. So if you have them spread out, it’s very hard to find all of them.

Remember the Iranians have been preparing for this since last summer, since they were first attacked in that campaign by the Israelis and the United States. So clearly they have been thinking about some kind of strategy of response since then, and it seems what they have done is dispersed a lot of these drones around the country in very small numbers, which is making it difficult for the US and Israel to track them all down.

Krugman: That now is astonishing to me. I thought that they must have been doing that and I’m a pure amateur. But just watching the conflict in Ukraine, it was obvious that drones, cheap missiles were going to be major tools of this war. And that if you didn’t have a strategy for neutralizing those, you didn’t have a strategy. How is it that the US didn’t know that?

O’Brien: I really think Trump believed he would’ve had a few days of air raids, decapitate the government, and that would be it. I just don’t think it entered their mind, and because no one stands up to him. Supposedly, there were some military warnings, people saying, ‘the Iranians might fight back and you have to have preparations in case they do. But he seemed to not take those on. And these are people who wear shoes that are too big for them to make him happy.

That story about Marco Rubio, that picture reveals a great deal about where we are. I don’t know how he kept them on, but he did and he was humiliated, because Trump gave him those shoes. If that is the culture you create around you, you’re gonna make really bad decisions. You know what I thought? I actually thought, and I’m not saying Trump is Stalin but it’s very much the culture Stalin had around him where he humiliated everyone around him by making them look and be faintly ridiculous. That was actually something he did deliberately. And what happened, of course, is that all they would do is reinforce all his prejudices. And that’s why you end up with Stalin saying, “Oh, Hitler’s not gonna attack me in June, 1941. Never! Not gonna happen!” And everyone around him going, “Of course Joseph, of course they won’t do that.” And that’s where we are. We basically have a Stalin-like court around Trump and we see the decisions that such a court makes.

Krugman: Now I’m trying to understand. I think we knew what conventional air power could do. What are the capabilities of the kind of stuff that the Iranians have left? In Ukraine there’s a kill zone, but there’s also a lot beyond that. So can you tell me about that?

O’Brien: They have a very great geographical advantage. They control the coast of the Gulf to the north. That’s basically all Iran. So the Iranians are the north coast of the Gulf, and what they really have to attack to keep that closed is shipping. And ships are slow. They’re slow and big and not that difficult to hit with a drone and they can’t maneuver. They’re not gonna be able to maneuver out of the way. And these are civilian ships that don’t have any protective devices on them. No one seems to want to go in and protect those vessels. So actually the Iranians have a very easy job in that way, that the targets they’re going for are targets that really are not protected and as long as they can keep attacking those with a small number of drones, they don’t need a lot. As long as they can keep shutting down shipping, they are going to put massive pressure on the Trump administration.

Oil prices are already up. They dipped a little bit when Trump acted like the war was almost over. They’re back up. We’ve seen real problems with nitrogen supplies and real trouble with helium supplies. And the irony is, the only country shipping out of the Gulf is Iran. Iranian shipments of oil are up, so Iran is sending everything it wants out of the Gulf and they’re sending oil directly to the Chinese. I think the Chinese are laughing at this, that they’re seeing the US unable to have its allies get their oil out.

Krugman: Yeah. There were Chinese chartered ships going through the Strait of Hormuz broadcasting in English. “We are a Chinese ship carrying Iranian oil,” and they were transiting the strait. But just to enlarge this a bit, there’s a lot of talk about how the Strait of Hormuz is 33 kilometers wide at its narrowest point, but in some ways I think that, as I understand, it’s irrelevant. Essentially, the entire Persian Gulf or Arabian Gulf is easy drone range for the Iranians, right?

O’Brien: Yeah. It’s a very narrow body of water considering the vital shipping that goes through it. Far more vital than I understood. I had no idea of the value of the nitrogen exports or the helium exports that went through. I had no idea. If someone had told me that 20% of the world’s fertilizer supplies came out of the Gulf or something like that, I would’ve had no idea. But considering what a narrow body of water it is and how long the Iranian coast is, Iran runs along the Gulf for hundreds and hundreds of miles. It just means the Iranians can really pick and choose their targets and the United States and Israel are gonna be left scrambling trying to find every little drone. It’s a real needle and haystack kind of situation.

Krugman: Yeah. Again, Ukraine. There’s obviously tremendous intellectual crossover between these two wars and in Ukraine we talked about this sort of 40 kilometer wide kill zone, but that’s a kill zone for, like, tanks.

O’Brien: Yep.

Krugman: And the kill zone for oil tankers has gotta be basically....

O’Brien: There is not a safe place in the whole Gulf for an oil tanker. I can’t believe there’d be any safe place. And by the way, the Americans are acknowledging that because the tankers have asked for American escorts and the United States won’t even send warships into the Gulf. The fact that the United States is rebuffing requests for escorts means that they don’t believe that they can keep US war ships safe in the Gulf right now. And that’s a pretty damning indictment. If you go to war and have not anticipated that you might need to protect your own warships in this vital body of water… It reveals a lot about the shoddy nature of the strategic planning we’re seeing.

Krugman: I’m not even sure what an escort would do.

O’Brien: An escort might essentially try to shoot down the drones with Gatling guns or different kinds of technologies that they would have. They could use Aegis or other very expensive systems. But you might try to just shoot down all the drones you can with the escorting ships.

Krugman: As I understand it, the Ukrainians have developed some of these technologies since we keep on not giving them Patriot missiles. They’ve developed systems that shoot down drones that are substantially cheaper. The Ukrainians had actually offered to sell them to the United States and are now going to sell them to, like, Saudi Arabia. What exactly is the Ukrainians’ role in this?

O’Brien: Well, the Ukrainians understand the cost and expense of the way this war goes. The issue that the United States has been faced with is these drones probably cost the Iranians $30,000 to make, some say 50, some say once you get to mass production, they’re even cheaper. But let’s say $30-40,000 for one of these Shahid type drones. The United States, if they shoot them down with a Patriot or a THAAD, is spending millions of dollars to take down a $30,000 drone. That’s an unsustainable kind of exchange. And plus, the United States stockpiles weren’t that great to begin with. The United States has fired more Patriots in the few days fighting the Iranians than they’ve given to Ukraine the entire war. That’s to give you a sense of the kind depth of fire.

What the Ukrainians understood is they’re not gonna be able to rely on their expensive systems. They’ve been trying to keep their Patriots to defend themselves against the very expensive Russian missiles, the hypersonic missiles, the ballistic missiles—that’s what they keep their Patriots for. So they said we have to come up with a system that will protect ourselves against the cheaper drones. And so they’ve come up with anti-drone drones. That’s what these are, they’re basically smaller anti-drone drones, and they cost between $1000 and $5,000. So that actually is a very good cost balance ratio. The United States just didn’t have that. And American partners didn’t have them ‘cause they were relying often on American technology.

So Trump will never say thank you, but as soon as they ended up in this situation and their air defense stock came under pressure, they turned to the Ukrainians. To the point, and this is actually something that I think should make people stop and think: Ukraine has provided the United States with more aid in 2026 than the United States has provided to Ukraine. United States provided no aid to Ukraine in 2026. Ukraine has provided military aid to the United States and to American allies in the Gulf. And people might think about that.

Krugman: Yeah, there was almost none already in 2025. There’s this chart from the Kiel Ukraine Support Tracker that shows that US aid just disappeared already last year. And it’s all European aid at this point. And Ukraine’s helping us more than we’re helping the Ukrainians.

So, as I know from your writings, air power has been tremendously effective in wars, but there’s a context to that. Let’s talk a little bit about what the US is trying to do now.

O’Brien: Air power is changing. We used to think about air power from an American point of view, and I think the US Air Force probably still did going into this war. And air power was, first of all, shutting down the ability of the other side to attack you. So you would suppress enemy air defense and destroy the other side’s ability to strike back. And then once you did that, you would go and take out all the targets you wanted. So it was a phase process, but the first phase was to neutralize the other side’s air force. It might be now that you cannot do that. Then you cannot fully neutralize the other side’s air force and air power because the other side can produce quite cheap drones in large numbers. So until you actually have a good defensive system, you can’t do what would’ve been doing in the first step in (classic) American air power, which is to neutralize the other side’s air power, which is why in some ways both sides can still attack, and that is a change in air power.

We’ve normally seen air power as a struggle for dominance. One side wins, and when one side wins, it can overwhelm the other side. But we are now in a situation where both sides can continue fighting and actually striking. I mean, my own view on this is that it’s gonna lead us down a very dark road. I wrote a little piece on it saying The future of war seems to be ranged fires and war crimes, because no one’s gonna be able to stop people from having some kind of ranged air capacity. And it will be very tempting to rely on war crimes to try and get your way; threats and that kind of coercive behavior. But it does seem to me that we will have a lot of long range fires and aggressive firing for this period of warfare.

Krugman: Yeah, I found myself reading a little bit about Normandy in World War II and where the Germans had a terrible time just getting forces to the front. To go back to Ukraine, both sides are in that position now because of these ranged fires. Neither side has air superiority and both have air superiority in the sense that there’s this wide zone of death.

O’Brien: In the second World War, you would think, “oh, the United States made so many aircraft.” The United States made, I think, 88,000 aircraft in 1944 at the absolute high point of production. For one year it was 80 or 90,000 aircraft. Ukraine’s gonna make 7 million drones this year.

Krugman: I didn’t know it was that big.

O’Brien: The number of systems that are being thrown in the air are so much larger. They’re not always that effective, but they don’t have to be. It’s gonna be impossible to shoot them all down now unless you have a revolution in the ability to do air defense. And so we are dealing with a world where air power is going to be everywhere and it’s going to be very hard to deal with.

Krugman: And so how does all this compare with Venezuela, which was a limited operation?

O’Brien: My view on Venezuela was, this is not regime change and it’s not bringing freedom to the Venezuelan people. It’s basically replacing one dictator with a compliant dictator. So it’s been great for Trump. It’s been absolutely brilliant for Trump and God knows where the money’s going and who’s getting kickbacks in these business deals. But he has a leader in Venezuela who is, I think, playing for time right now. And as she plays for time, she’s going to make sure that she doesn’t get him upset. I didn’t understand even the total venality of what he was doing. Everyone was saying, “Oh this is all Rubio trying to bring some freedom and openness to Venezuela.” That’s just nonsense.

And I think in Iran the problem is, even that is much harder to do. It’s much farther away. The Iranians have a far more capable military. They’ve been preparing for this. And also, by the way, the Russians and the Chinese are going to help the Iranians. No one was gonna step in for Venezuela. But I don’t think the Russians or the Chinese are quite keen to see a pro-western, pro-US Iran. And they’re not going to go down without a fight. So far, the Russians have been helping the Iranians kill Americans. Quite clearly they’re helping them do that. And it will be interesting to find ou—if we ever find out later—what the Chinese have been doing, but I’m assuming they’ve been helping as well.

Krugman: There was a comment by Adam Serwer, I think just a day or two ago, that Trump doesn’t understand people who act on principle, that the Venezuelan regime was just thugs. It was just a mafia. The Iranians are thugs, they’re horrible, they’re murderers but they actually also believe in something. They’re genuine religious fanatics and that actually seems to have completely caught Trump and his people off guard.

O’Brien: Exactly. He just thought someone would play ball for him. Some second rate, second ranking leader would be brought in to take control. They’d install him and then they would start cutting deals. He has no idea what he’s doing, and that’s the scariest thing, that there’s just so many things they haven’t thought about because they assumed it would be easy. He’s got a very different kettle of fish in Iran than Venezuela, and he was a fool to think that they were similar cases.

Krugman: I am surprised that the military didn’t manage to get through at least a sense of fear in Trump.

O’Brien: You know, what did Trump do when he first came in? He had an excellent chairman of the Joint Chiefs, General Brown. They got rid of him for no other reason, probably because he was a black guy and he was appointed by Biden. And they went through and they’ve been purging officers. They’ve been getting rid of officers who they do not trust. And yeah, they’ve been doing things like cutting off Ivy League institutions from sending officers there. There is a strong intellectual chill in the US military now, and you get promoted, not because you’re good. You get promoted if you’re considered loyal to the regime. So it will be interesting to see, but I don’t think that the US military is capable now of pushing back because I don’t think the personnel who would do it are near the positions of power to try and have that influence.

So I really think what we’re seeing is something that the Trump administration helped bring about by destroying independent thought in the US military. It’s why they’re sitting there now not knowing what the heck to do. If the generals did have courage, they’d go to Trump now and say, “This is a disaster.” But they don’t.

Krugman: You must have more contact than me, but I’ve known some people in the military. I’ve given talks at West Point, even. This was back in the Obama years, but I was always struck by how smart, well-informed, almost intellectual the US military was. But no sign of that now. I guess you’re saying that it took only about 13 months to undo all of that.

O’Brien: Sadly, there had been a growth of a MAGA officer corps from the first term.

Krugman: I didn’t know that.

O’Brien: There were a lot of pro-Trump officers. And I think they knew who some of them were from the first term. And there were a lot of military people who were backing Trump. And my guess is they are the ones now who have been freed by all this to bring their own ideologies to go higher. I don’t think under any other president we would’ve had an officer say, “This is a holy war where we’re going to crush the infidel,” and that’s what’s happened. That officers are feeling empowered to say that is really scary.

Krugman: Oh boy. That worries me not just about the Iran war, but about domestic stuff.

O’Brien: Yes. There are reports that the Iranians might be about to launch some kind of attack on the west coast, from a ship that has some drones in it. This is now a possibility. And I’m like, do you think Kash Patel’s FBI is up for the job of protecting against a counter-terrorist operation on US soil? I don’t. Kash Patel’s FBI is killing Americans.

Krugman: We should also think about Tulsi Gabbard as our chief intelligence official. Good God. So we’re now in this stage of war where the attempt to, at one stroke change the regime has failed. Also one in which it’s clear that the air superiority ain’t what it used to be. How does this campaign unfold?

O’Brien: I think the real question is shipping in the Gulf. That is the thing that will bring the crunch. If there was no shipping problem in the Gulf, they could keep pounding away for a few weeks and see if they could bring regime change by pounding away. But they cannot have a sustained shutoff of shipping in the Gulf. It just cannot happen. Already oil prices have gone up by 50% and that was even after they thought this might not be a long conflict. If shipping actually stops in the gulf. It’s going to have massive economic ramifications. So my guess is that they are stuck. This is the rock in the hard place, right? They either have to, in some ways, accept they’ve lost and say to the Iranians, “we’re gonna back down now. You just behave and let shipping through.” Or they have to send ground troops into southern Iran to clear out a buffer zone and allow the shipping to go through. Those seem to be the only other options. They have to get the shipping through. And they’re gonna have to do it relatively soon. So it’s either back down or ground troops.

Krugman: I can’t imagine we have that many ground troops.

O’Brien: We certainly don’t have that many in the theater, I think. They built up air power and sea power. They didn’t build up ground power from what we can tell. So they’d also have to have really good intelligence to know where they would put those ground troops ashore. I assume they’d need a port to bring in sustainment, to bring in supplies. It’s a big operation if they’re gonna send in ground troops. But if they just rely on air power, they’re going to really have to hope they have such good intelligence that they’ll be able to hit every Iranian drone before it takes off to hit a tanker, otherwise the tankers aren’t gonna go. They’re simply not going to head through the Gulf. Trump urged them to head through the Gulf a few days ago. And what happened is a lot of them were hit by drones. So I just don’t see it working in the present way.

Krugman: I’m wondering about things like helium. I had not even thought about that. But helium is really critical for the production of I guess semiconductors, right?

O’Brien: Yeah, absolutely. I guess a lot of it goes to Taiwan. And if that trade dries up, there’ll be a helium rush around the world. Everyone will be trying to get helium. The price will double, and that means the price of electronics and computers will go up enormously. Everything’s going to go up if this goes on.

Krugman: We’re already having this massive crunch with semiconductor memory prices skyrocketing because of the data centers and AI and all that. But I was thinking, I actually didn’t know at all about the shipping of helium. One of those things you never thought you’d have to think about. But there are other ways out of the Gulf. There’s even a pipeline that gets you out to the Red Sea, although that ain’t great either. But I was wondering whether maybe you could start somehow or other trucking helium out to the Mediterranean.

O’Brien: I have no idea. I had no idea. The Trump administration never had an idea, right? They simply had not worked this out.

Krugman: So you’re basically saying, the one scenario has been basically, “Let’s destroy Iran, wipe out their power plants, their water systems, basically…”

O’Brien: That’s a war crime too, by the way.

Krugman: That is a war crime. At least the Israelis have definitely committed war crimes on that front and I’m afraid that the US may be doing it too. But the idea that this would be a sustained thing, something like what the Russians have been trying to do to Ukraine, trying to knock out the power systems. But you don’t think that we have time for that.

O’Brien: I think the Republicans face Armageddon in 2026. The longer this goes on, the worse it is for the Republicans. And it’s already March. They’re not that far away from the election. We’re only eight months away from the election. So I can’t see it going on, say, over the summer. Then you’re into the campaigning season and this is already the most unpopular military intervention in US history. No intervention has started with such a low base and all the independents are against it. Basically, Republicans are for it, and Democrats and independents are very strongly opposed to it. So I personally think politically the Republicans are really in a bind here. If Trump had another year, if this was his first year in office, maybe he could continue it for longer, but it’ll be hard politically to keep it up. Now, maybe he doesn’t care and maybe he doesn’t plan to have free elections. But these are issues that they’re gonna face if they’re gonna go in and really try to clear out Southern Iran to allow the shipping through. But it’s not gonna be quick.

Krugman: One of the things I’ve been wondering, and again, this is not original, but it’s not clear that the Iranians would agree to a quick ending, even if the United States basically admits defeat.

O’Brien: That is the real wild card. On the whole, you would think Iran would like some time to consolidate its rule after getting all this bombing. But of course they now have a lot of cards. The Iranians have real cards to play over everyone else in the region by dominating shipping in this way. And so they might demand a lot to stop fighting. If Trump decides to throw in the towel, which he might, I think there’s a chance this is over relatively soon, because Trump just simply can’t sustain it politically. The Iranians might ask for a lot. In fact, they’ll come out of this in a better situation. They’ll make no more concessions on their nuclear program. Why would they? And they’ll demand the end of sanctions. Why wouldn’t they? Trump really needs to get out and get out soon. The Iranians are in a very powerful position.

Krugman: And there’s even the concern that the Iranians may want to see a lot of suffering, just independent of what the United States offers. They just might want to make the point that they can inflict massive damage, and the only way to make that absolutely clear is by actually inflicting massive damage.

O’Brien: Yep. And they also will want to preserve their leader. That is one thing. Having blown up one leadership, they probably don’t wanna lose another, one assumes. I’m not an Iranian expert, so what the heck do I know? Whenever I’ve tried to put my own rationality in a leader’s mind, it’s always wrong. I thought Putin would never invade Ukraine in 2022. That’s such a disastrous decision. Of course, then they go ahead and do it. So I have no idea what the Iranians are going to want. But certainly, objectively, they would be in a very strong position if Trump needs to get out now.

Krugman: Okay. So basically you think the sustained war crime campaign is just untenable from the US point of view. And so then this question of how does an exit happen?

O’Brien: Well, remember what he did last summer. He bombed Iran once, decided it was over, then ordered the Israelis to turn around. So he can actually do something like that. That’s the way he behaves. He doesn’t care about other countries really. And therefore, if he decides he’s gotta get out to save himself, he’ll get out. So there’s some talk he’s gonna say to the Europeans, “You clean up the Gulf, I’m outta there. I made the mess and you’ll be the janitors.” And that might be where we are.

So if he decides to cut and run, he’ll cut and run. That I think is clear. He’ll just get out, but he’ll leave a mess behind. But, he is weakening the United States. This might be one of those moments as a marker in American decline. Making the United States weak, making the United States seem or be less powerful than it was. We could be seeing quite an important historical moment here. The Chinese are laughing.

Krugman: Yeah. And just at the moment when we really need allies. And so in other news we just launched section 301 investigations against everybody. It’s trade sanctions against all our erstwhile allies. It’s really scary. But let’s go back to Ukraine for a few minutes here. What is happening in the Russia-Ukraine war?

O’Brien: What is interesting is that Russian advances basically haven’t stopped, but the Russians are taking less and less, and for a while the Ukrainians took more than the Russians. I think the Ukrainians also are not taking a lot now, but the analytical community was talking about how Ukraine is going to have this massive manpower crisis, and collapse throughout 2025. “They needed more men at the front. They’ll have to draft all these young kids.” They’re really quiet on that now. I haven’t heard a lot of talk about the Ukrainian need to draft everyone and send them to the front. The frontline is what the frontline is now. It is the kill zone. And the Ukrainians can make some advances when they have communications help, so actually the Starlink cut from what we can tell helped, but there was more than that.

But the Russians can only make advances when they sacrifice large numbers of soldiers. And the reality, from what I’m hearing, and this is anecdotal, is that the quality of the soldiers the Russians have is going down. You have to be a pretty odd duck to join the Russian military. If you’re gonna join the Russian military, you are having a bit of a death wish. So we are left now with a land war which probably won’t change a lot for the next few months and it will be this ranged war that we see. The Russian winter campaign did a lot of damage to Ukraine, but the Ukrainians have made it through. The weather will get better. It is getting better. It’s already warmer.

Clearly, Trump helped Putin launch that massive assault by saying, “Oh, Putin’s gonna have a ceasefire.” Remember that? That actually seemed to be a coordinated action where Trump helped Putin go for the big enchilada, and the Russians threw everything into that massive two days of attacks in a short period of time to try and drive the Ukrainians out of the war, deprive them of power. That didn’t work. It was pretty horrible. There were a lot of cold and dying people, but the Ukrainians are making it through.

I think the question is, what happens now in the spring-summer in the ranged war? Ukrainians’ systems are getting better. They’re getting more effective. They still don’t get the big Western systems they’d like, like the German Iris-T. I think the Russians are what the Russians are. They’re going to keep pounding away at infrastructure. So, I don’t wanna say it’s swinging towards Ukraine, but it’s actually better for Ukraine now than it was a while ago.

Now Trump has come to Putin’s aid by attacking Iran and driving up the oil prices. Russia’s making an extra $150 million a day now because of what’s happening in the Gulf. I think the Russian economy would’ve had real problems in terms of generating income over the summer, but now they get help with that. So I think we’re still in a bit of a stalemate.

Krugman: One other striking thing is that—although the US is a net exporter of oil—the US, if you take a national accounting standpoint, is a little bit richer because of oil prices, but the US government doesn’t capture any of that. It’s not there. There is no “we.” There is no United States. There’s only oil companies and there’s everybody else. And in Russia, Putin captures a lot of the extra revenue. So it’s actually a weird thing where this benefits Putin but not the United States. And in a way, the Russians have already tried using the dark side of the force against Ukraine, and that’s the US-Israeli approach to Iran now. “Let’s just knock out the infrastructure.” But it didn’t work. I don’t think they have freezing cold winters in Tehran, but anyway, we’ve certainly done incredible damage. We’ve all seen the photos of the poisonous black smoke covering it. But I don’t think there’s ever been a case where a terror bombing campaign really worked.

O’Brien: No. And a city like Tehran has very tenuous water supplies. If the US and Israel were to go against that, that would create a famine of really quite extraordinary proportions, we could compare it to a drought of extraordinary proportions. But the thing about the Iranian people is they don’t seem to be at all convinced Trump wants to help them. Trump said, “Rise up and I will back you.” And in neither case did he back them. And they understand that. I think what they’re hearing is that he wants to put in place someone from the old regime.

So the Americans didn’t try to actually work with the Iranian people. They didn’t seem to work with any of the opposition to try and overthrow the regime. So the Iranian people for now just seem to be keeping their heads down. Again, I’m not an Iranian expert, but we don’t see signs of an immediate uprising to go along with these US and Israeli air attacks. That does not seem to be happening. And that’s probably because of what Trump has done and how he’s shown them what he stands for.

Krugman: Well, I’m actually a little personally worried—not that I’m gonna be killed by an Iranian drone, but I have plans. I’m supposed to be doing various stuff in Europe in the spring and now, is there going to be jet fuel supplies? How much of the world economy is gonna be really disrupted by this? And I guess you’re telling me that this goes on until, not only Trump cries uncle, but he cries uncle convincingly enough to get the Iranians to go along.

O’Brien: Yeah, again, it might happen soon because I think there must be huge pressure on him now to get out.

Krugman: I’ve never been the kind of person who is constantly checking the markets, but I’m just looking at the price of Brent Crude, which is $101 as we speak.

O’Brien: All right. Now it’s over a hundred again. It was down in the eighties when Trump said the war would be short. And now the markets are figuring out it’s not going to be short. But that’s going to put big pressure on him to end this soon. How much is oil now in America for a gallon? If you go fill up your car—

Krugman: The national average was like $3.65 or something, as of yesterday, and rising. And apparently the real thing is diesel. Diesel has gone up more than a dollar a gallon. And there’s a lot of red-hatted truck drivers who are very unhappy right now.

O’Brien: Yep.

Krugman: I’d say let’s have another conversation, but I’m afraid we only have conversations when terrible things happen. But thanks for the rather grim update.

O’Brien: You know, none of this makes sense to me, Paul. None of it makes sense. What the United States is doing, what it’s become, the lack of professionalism in the US government. It just seems like a farce.

Krugman: I spent a year in the US government more than 40 years ago. It was the Reagan administration. I was just at the sub-political level but I was shocked at the level of ignorance and incoherence that I saw in 1983. But people said, “Oh, this is just the Reagan administration, this won’t happen again.” And these guys make the Reagan administration look like consummate professionals.

O’Brien: Oh my God, I can’t imagine. The picture of the shoes did it for me. Just look at this group of clowns. They’re clowns performing for a ringmaster. Supposedly Trump would just guess their shoe sizes. And if he guessed the wrong size, they didn’t have enough courage to actually get a pair of shoes that fit. They’re wearing shoes because Trump guessed the wrong size. That is a sign of mental illness, I think.

Krugman: Yeah. Brings new meaning to the cliché: “If the shoe fits, wear it.”

So on that note—God help us all.

The latest excuse for imposing tariffs is even less credible than previous excuses.

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At a summit with Latin American leaders over the weekend, Marco Rubio said a few words in Spanish. Then Pete Hegseth popped up to say “I only speak American.” And that’s why we’re facing disaster in the Persian Gulf.

A brief reflection on a bad morning for jobs and a bad week for energy.

A reaction to the latest news on how much this war is costing.

Thank you Sonya Lea, OrientExpress Marga Zambrana, Alex Schneideman, Dirk Paessler, Dixiane Hallaj, and many others for tuning into my live video with Harry Litman! Join me for my next live video in the app.

A short video rather than my usual morning post

Donald Trump doesn’t even have the courage to run away.

Hi, I’m Paul Krugman. I’m not going to do a regular post today — it’s Thursday morning — because I wanted to wait and see what was in the big speech from Donald Trump last night. And I thought I could just do a short video about it.

It turns out that the speech was sort of an anticlimax, although not in a good way. Many people expected Trump to pull the mother of all TACOs, to declare victory and surrender. He did not do that. He declared victory, of course, but he did not actually announce an end to hostilities. On the contrary, he said we’re going to bomb Iran into the Stone Age. So add massive war crimes to your schedule.

There is clearly no strategy here. There’s no endgame. There’s nothing. It’s hard to tell, as always, whether Trump is delusional or just completely unable to admit something that he actually knows.

One of the moments that really struck me in the speech was him declaring that the whole world was extremely impressed by what happened. He said,

the whole world is watching and they can’t believe the power, strength and brilliance. They just can’t believe what they’re seeing. The world can’t believe what it’s seeing.

What it’s seeing is that the world’s greatest military power took on a fourth-rate power. Again, as I said the other day, Iran’s military budget is a rounding error in our military budget. And we lost. For all practical purposes, we’ve left ourselves in a much weaker position and Iran in a stronger position than it was before.

But Trump has to believe or has to claim that he believes that the whole world is extremely impressed. You might say, why do we care? Well, he cares, obviously. His whole thing is about dominance and believing that we’ve got the world awed by our strength.

If you want the real verdict on the speech, well, Brent oil futures were under $100 when Trump started speaking. They are over $108 as I record this. The oil market, I think is a more clear gauge, although the stock market has also reacted.

Basically, everybody said, oh my God, we thought that this was going to be at least the beginning of the end, and instead it looks like an endless quagmire. I still think that people are not fully taking into account the implications for global oil prices and everything else of the Strait of Hormuz remaining closed for the indefinite future.

So this is going to be really bad. But anyway, it was radically disappointing even to people who are, you know, the markets and a lot of people in the world were actually hoping that the United States would give up. I mean, it’ll be terrible. We really don’t want a medievalist theocracy empowered. But since this is heading nowhere except for, again, massive war crimes, better to end it. But we’re not getting that.

What really strikes me, and there’s obviously deeper stuff in here, but it is a question of character. It’s funny, I don’t think there’s a sort of, if you like, native English term for the Yiddish — but it’s effectively English now — word mensch. A mensch is literally a person, but it means somebody who takes responsibility for their actions, who accepts defeats as being defeats and tries to move on, who tries to improve, basically just being a mensch.

It’s hard to imagine somebody who’s less of a mensch than Donald Trump, except maybe for some of the members of his cabinet. It’s incredible that they’re so lacking in the basics of character.

The thing about what this means for America’s role in the world is not only that Trump and company are doing great damage, but the whole world is watching. They saw that this guy, and it wasn’t hard to see what kind of a person Trump was, that America elected this guy twice. It appears that the American public has completely lost sight of what it means to be a responsible, serious person.

I might say, since this masculinity posturing is such a part of it, they’ve forgotten what it is to be a man. Obviously, that applies to all genders. A country that will elect somebody like that twice is not a country anyone can rely on. And that is the ultimate lesson here.

We have Trump lecturing the world and saying, why are you cowards? Why don’t you come in and help us in this ill-conceived, disastrous war that we started without checking with you? But the reality is that the world is looking and saying, my God, what is wrong with America? They may still have a lot of bombs — although not as many as we started with — but it’s not a country anybody can trust for anything. And that, even more than the price of oil, is going to be the legacy of this war.

I guess have a great day.

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Ryan’s internet went down during Part I, so here’s Part II.

Transcript

So the world’s greatest military power went to war against a fourth rate nation whose military budget would be rounding error in our defense spending. And it appears that we lost.

Hi, Paul Krugman with a late night, well, evening update, which I don’t usually do, but I wanted to get this in before who knows what happens in the news tomorrow.

It’s Tuesday. It’s the day that the stock market rallied enormously, that the futures price of oil dropped precipitously, all on the happy news that the United States, at least based on Trump’s Truth Social, appears to be surrendering. Trump put up a Truth Social post saying that, you know, we don’t need to open the Strait of Hormuz. If the Europeans think they need it, they should go ahead and do it. And it’s up to them. And this is pretty amazing.

Of course, the idea that it only matters to the Europeans, that it doesn’t matter to us, is all wrong. And that will be a subject of a Substack post shortly. But it is pretty much a confession. Although it’s framed as we won, now let somebody else do the cleanup, the reality is it’s effectively a confession that, well, we lost. We can’t do this.

How the hell did we manage to do this? I mean, the objective reality is that this was never going to be... Maybe it wasn’t even going to be doable. There were reasons why we didn’t go to war with Iran, particularly why we didn’t go to war in a way that basically became an existential threat for the regime so that they have no compunction about creating lots of damage because the alternative result is annihilation for them personally. But everybody who thought about it even for a couple of minutes, anyone who knew anything, particularly anyone who’d been paying attention to four years of war in Ukraine … we know something about what modern war looks like and about the inability of countries that have conventional superior forces to avoid major damage from drones and missiles. So this was completely, unbelievably stupid.

How did we get there? Well, there was a very good article by Tobin Harshaw in Bloomberg, and mostly I’m just riffing off what he wrote, but I think that it deserves wider circulation. He resurrected a book I had forgotten about, a 1976 book by Norman Dixon called The Psychology of Military Incompetence. It was very British oriented, but the lessons apply; Dixon looked at the great military disasters of British history.

You might think there were many reasons why really bad decisions were made, but he actually said there was a kind of consistent pattern. That what happened was that you had military leaders, or people making military decisions, who for the most part shared two things. First, they believed, they had this atavistic, anachronistic belief that warfare is all about muscles and not about minds. which hasn’t been true for a very long time. And second, he argued that they are just generally anti-intellectual, anti-education.

So in some sense, it’s all about muscles and don’t give me all of these smarty-pants intellectuals who are telling me about why I’m doing it wrong. It’s an uncannily accurate portrait of Pete Hegseth, down to even seemingly minor details. Muscular Christianity is among the defining symptoms of the bad British military leaders that Dixon analyzed. So this is what happened.

This is not about specific bad judgments. It’s not, in a way, about the specifics of the case. It is that we were led into war by people who exemplified in the classic way how really bad military decisions are made. And it all comes down to believing in brute force and toughness and muscles — muscles in the age of drone warfare! — and hate intellectuals, hate learning.

What really gets me is that in a war where the deciding factor is having some intellectual understanding of what you’re doing, that a theocratic regime in Iran, which basically wants to bring back the Middle Ages, mostly got it right.

And the world’s leading haven of scientific thought, or we were at least until the current administration, got it completely wrong. It’s humiliating. It’s awful. And, you know, we will all be paying the price for this incredible defeat for probably for the rest of our lives.

Enjoy the evening.

Thank you Dan Gardner, Peter Kalmus, David Richard Holmquist, Marianne O, CFA, Rajan Menon, and many others for tuning into my live video with Ryan Lizza! Join me for my next live video in the app.

Ryan’ internet went down partway through, so this is Part I. Part II follows.

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As promised, a live chat with Nate Silver without a single mention of either poker or sports — or, for that matter, monetary policy!

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Last week was supposed to be all about a hugely destructive North American trade war. Instead, that’s been put on hold, while other nightmares have come to the fore. But I’ve had numerous request from readers for a sort of primer on international trade flows, to help them parse the various claims about deficits and all that.

So what follows are a set of slides. To be honest, I didn’t have time to write this up fully, so I’ve done an audio narration instead. And I’m making it paid, mainly because those who have taken out paid subscriptions (thank you!) should get something in return.

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A month into the war, and now they’re talking about pointless ground action and/or war crimes.

TRANSCRIPT

Pete Hegseth believes in the lethality fairy, and that’s a very bad thing. Hi, Paul Krugman here.

Most people watching this probably don’t get the reference. In the aftermath of the 2008 financial crisis, a number of governments did what economic textbooks say is exactly the wrong thing. They slashed government spending in the face of mass unemployment. And they justified this in part by arguing that although, yeah, sure, if we slash spending and eliminate a bunch of jobs, that should be bad, could make things worse. never mind because it will improve confidence and that will lead to economic expansion. I, in an essay in 2010, called this believing in the “confidence fairy,” one of the coinages that seemed to stick.

And of course, the confidence fairy never arrived. Countries that created worse unemployment by engaging in austerity policies suffered worse unemployment. There was no rescue from improved confidence.

In this case, our Secretary of Defense, which is his legal title, although he calls himself the Secretary of War, continually argues that if only we get even more violent, if only we do even more damage, that this will somehow translate into success in Iran. He clearly relishes the thought of violence himself. He’s now holding prayer breakfasts, and in his prayer breakfast, he called upon the Lord to support us in “overwhelming violence of action against those who deserve no mercy.”

I think this is deeply un-American, but anyway, aside from the evilness — I don’t think there’s any other way to put it — of the world view, how is this supposed to work? If you look at the plans or ideas that are being bruited for using ground forces now, and that’s clearly very much sort the next step here, for using ground forces against Iran, well, yeah, you can seize Kharg Island, although hanging onto it could be very expensive, but then what?

You’ve cut off Iranian oil exports, we could do that anytime anyway, then what? You can, well, try to occupy some of Iran, but the relevant coastline is well over a thousand kilometers long. Missiles and drones can be fired from deep inside Iran. 10,000 soldiers, maybe, is not remotely enough to secure the Persian Gulf, let alone allow shipping to transit, let alone allow tankers to transit through the Strait of Hormuz. So this doesn’t make any sense, unless you somehow think that the sheer act of violence will shock and awe Iran into submission, which, if it was going to happen, would have happened already. Clearly not on the cards.

Hegseth is all, we are going to kill lots of people. Trump is vacillating. In his Truth Social post this morning, he started out by saying we are on the verge of successful negotiations, and we’ll get the Strait open soon because we’re having extremely good talks with the Iranians.

Other presidents have been accused of negotiating with themselves. Trump is negotiating with his imaginary friends. There’s no reason at all to believe that these talks are actually happening.

But he then pivots midway through the post, to saying, and if we don’t get this, then we’re going to start bombing civilian power plants and water supplies.

So give us what we want or we’ll commit a massive, massive war crime, which I hope is not going to happen. But even if it did, why would you think this would open up the Strait of Hormuz? So it’s this lust for violence with no actual coherent story about how that violence is going to produce results. It’s horrifying.

I really don’t know how this ends, except that it does feel as if this is a quagmire largely in the minds of top Trump officials, Trump himself and Hegseth, who having this utterly unshakable belief that hurting people will produce great results, respond to each failure of violence to produce results by getting even more destructive with no end game in sight.

Have a great day.

If you want to listen to this, I suggest using headphones. For me the volume comes out too low otherwise.

Later this week I’ll be giving a presentation to Markus Brunnermeier’s macroeconomics webinar at Princeton; he asked me to talk about “geoeconomics”, which could mean a lot of things. But I decided to talk about a new view of trade imbalances, associated especially with Michael Pettis, that has been gaining some traction lately. It’s also mostly wrong, and some friends in the international economics community have asked me to take it on. I’ve already prepared a slide show for the presentation, and I thought I’d try talking about that slide show here.

This, by the way, is sort of the real me — or at least who I wanted to be: wonkish and relatively apolitical. Alas, the world had other ideas.

For more like this, check out my YouTube channel

Transcript

Has the US military already been Kudlowized? Hi, I’m Paul Krugman. I’ll explain what I meant by that in a couple of minutes.

It’s Friday morning. The war is continuing. A lot of what’s happened in the Iran war has sadly not come as a surprise. The fact that there was no planning, that there was no plan B in case a decapitation strike didn’t do the job, that Trump’s people didn’t seem to have gamed out at all what would happen if their fondest wishes did not come true — unfortunately, that’s par for the course.

There was a famous book in the Vietnam years about how all that went wrong, about how all of the sort of brains trust around LBJ led us into that disaster, and it was called “The Best and the Brightest.” In this case, it’s obvious: Everybody knows that we’ve got the worst and the dumbest. So we knew that the thinking about strategy was going to be nil, that it was going to be all very ill-conceived.

The surprise, and it’s an unfavorable surprise, is that the U.S. military has not been doing too well either. I mean, obviously, you know, they can blow up anything they want. There’s no question that the U.S. has unchallenged superiority in all of the conventional aspects of warfare. There’s no Iranian Air Force for, you know, there’s no Iranian Navy in any conventional sense. Unfortunately, it’s not that kind of war. The failure to have a prepared response to the modern world of drones and inferior powers which nonetheless have the ability to do a lot of damage, has been a bit of a shock.

Now, admittedly, that is something that I, like I think a lot of people who are amateur followers of military affairs, was worried about watching developments in Ukraine. You couldn’t help but wonder whether the U.S. military, with its emphasis on overwhelming force, with its historic superiority in technology, was actually ready for this new world of kind of democratized ability to inflict damage. And there were some straws in the wind suggesting that we were not, that maybe just the historical record of overwhelming dominance had made the US military complacent. But it still comes as a shock to find that U.S. bases in the region appear to be sort of completely unprotected, unhardened, that the U.S. went into this thing sending, you know, multimillion-dollar interceptors to shoot down multithousand-dollar drones.

It’s been really kind of shockingly overwhelmingly, I’m not sure incompetent, but unprepared. It’s just shocking how unready the world’s greatest military seems to have been for a war that was in many ways prefigured by what’s been happening in Ukraine for several years now. So how did that happen?

I was motivated to do this video by a report in The New York Times about what Pete Hegseth has been doing to the military, about the passing over of promotions for officers who happen to be black or female. It’s just been this shocking sort of anti, reverse DEI, otherwise known as racism and misogyny. But in general, I think it’s pretty clear, not just that Hegseth doesn’t like women, doesn’t like non-whites, but also he doesn’t like smart people. He doesn’t like people who are competent at their jobs. He wants people who are into lethality and dumb shows of force, which is not a good thing in a 21st century military. But I had thought that this would take longer.

And I’m wondering whether this is just Hegseth or whether this is a process that has been underway. And of course, it’s now accelerated drastically under current management.

And so let me explain about Kudlowization. In places where I do know something, do know what I’m talking about, which is economic policy making, economic discussion, there has been a long-standing dumbing down on the right wing, a dumbing down of economic thinking, dumbing down of economic discourse. Which is a little odd because for an academic field, economics has a lot of conservative people, not extreme right-wingers, but kind of small government, low tax, deregulation.

That kind of comes with the territory. It’s not that it’s necessarily right, but the simplified models that we use in economics do tend to point you that way. We like simplified models in which the market is always right, and in some ways the line of least resistance is to say that the models are right, the market is always right. So there are plenty of people who, at least by conventional, by historical standards, would be considered conservatives. And some of them have spent, over the course of my professional lifetime, have spent a lot of time trying to be part of the Republican policy apparatus, have sought appointments in Republican administrations. But more and more, and totally in recent decades, have been frozen out.

It turns out that the modern Republican Party doesn’t want, say, Greg Mankiw. They don’t want moderately conservative, technically competent economists. They want people who have no idea what they’re doing. They want ideologues, not even ideologues, but loyalists, people who will say whatever it is they want, the party wants them to say. They want Larry Kudlow, Stephen Moore. They want the often wildly incompetent but reliable people who are reliable in part because they’re incompetent. Somebody who has a professional reputation, a professional skill set might be tempted to actually someday take a stand on principle, and that’s unacceptable.

So we have this kind of real extreme, not just political extremism, but complete lack of ability to do the job, which is almost, in a sense, incompetence is a job requirement.

And I’m starting to wonder if that hasn’t started to infect the military as well. Certainly the people that someone like Hegseth wants are people who believe in warrior ethos, who believe in lethality, who believe in muscles in an age when war is largely waged by guys staring at video screens. And it’s a technological war in which all of those things matter not at all. But anybody who is likely to think that is not this regime’s, this movement’s kind of guy.

Now, what worries me, I mean, how much damage could they have done in just 14 months? Well, maybe quite a lot, but when I talked with Phillips O’Brien a while back, he said that this rot has been underway for a while, that there’s actually a kind of a MAGA-esque faction even within the professional officer corps.

And we certainly seem to be seeing that. So it looks as if the worst and the dumbest are not just at the top of the political leadership. They’re not just on the diplomacy and strategic policymaking end, but even in the cutting edge of the military. And it’s terrifying. America as we knew it may just not exist, even in our military forces.

On that happy thought, have a great day.

Another day in America’s self-immolation as a Great Power.

More like this on my YouTube channel

Transcript

It’s Monday morning. Donald Trump has, at least for the time being, called off plans to bomb Iran’s civilian infrastructure. He has done so because, according to him, highly productive negotiations are underway involving the government of Iran, an invisible six-foot white rabbit, and his Canadian girlfriend.

Hi, I’m Paul Krugman. What I just said is not strictly true, or it’s not all true. Trump did not say anything about the invisible rabbit or the Canadian, but the gist of it is true. He said that there’s highly productive talks underway. And shortly afterwards, the Iranian government and Iranian state media said, no, they aren’t. This is not happening.

I’m not going to say that Iranian state media is necessarily a credible source, but the odds are that they are in fact telling the truth and the President of the United States is either lying or fantasizing or both. There’s really no reason at all to believe that anything like what he said is happening is in fact happening.

Why do I say that, Aside from the fact that Trump has not exactly been truthful on a lot of things? But beyond that, there are three important reasons to believe he might be making this stuff up.

First, he put himself in a very bad spot with his threat to commit a massive war crime if Iran doesn’t open the Strait of Hormuz. and must be looking for a way out. Another president at another time might say that on careful consideration, We have recalibrated the policy or something like that. Trump doesn’t do that. Trump is always winning, never admits that he’s had a setback, never admits that he’s changed his mind.

So saying that, oh, the Iranians have come to the table, probably big, strong Iranians with tears in their eyes, but anyway, that the Iranians have come to the table and that’s why we’re not doing what I said we would do is a very Trumpian out.

Second, Why would the Iranians be making a deal at this point? We can talk a lot about how the war is going, but it’s pretty clear that as the Iranians are likely to see it, they’re winning. I mean, they’re not winning militarily, but that was never on the cards. They are, they have successfully turned what was supposed to be a lightning decapitation of their government into a protracted contest in relative ability to bear pain and all indications are that the Iranians are nowhere near cracking and all indications are that the United States, although obviously we’re not losing thousands of people, and we are having our whole life disrupted, but the American public really doesn’t like higher gas prices, does not believe Trump. The clock is ticking for Trump on this in a way that it is apparently not for the Iranian regime. So Iran has has the upper hand here. And very hard to see why they would be wanting to make a deal until they basically humiliated us substantially more.

Finally, consider possible motives. Imagine that you were somebody close to Trump, somebody close enough to actually have an influence on his decisions as well as inside knowledge. Here’s what you could have done really just between last night and now. You could have sold a bunch of crude oil futures, at very high prices, Brent was over $112 over the weekend, then bought them back immediately after Trump’s announcement of triumphal progress, but before the Iranians said that is not happening. And you could have turned a very, very nice, very large profit.

To say that insider trading might be driving U.S. policy would have been outrageous. in the past. Who thinks that that’s beyond the realm of possibility now? So all of this could be happening.

Last point to make here. Think about how much America’s position in the world has been weakened, not just by apparent failure to subdue a fourth-rate power, but by the fact that everybody now knows that you cannot trust anything, cannot trust any promises the United States makes, you cannot count on the United States carrying through with promises, with threats, not just promises, but threats are also incredible in the sense of not being all credible, and that the default assumption should be that anything that this administration says is a lie.

That is a really, really bad thing. That is, you know, influence in the world power is not simply a matter of missiles and bombs, although we seem to be running low on those too. It’s very much a matter of people taking what you say and what you promise and what you threaten seriously. And we are not ruled by serious people.

Have a great day.

The willingness of the Trump administration to let Iran keep selling oil shows that we’re not willing to endure pain in a war that it all about enduring pain.

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Transcript

If you want to understand how things are going in Iran and why it looks increasingly likely that the United States is going to lose this thing in every sense that matters, follow the oil money.

Hi, Paul Krugman with another not very happy update Sunday afternoon. Yesterday, Donald Trump threatened Iran with basically a massive war crime, saying that if they don’t open the Strait of Hormuz by 48 hours from the time of the post, which would be tomorrow, that he will order attacks on Iranian power plants, on civilian infrastructure, which is, you know, it is a war crime, not something that has never been done, not something that the United States has never done, but not something that you kind of just openly announce — that we’re going to try and terrorize you with this bombing campaign.

But at the same time, the United States is allowing Iran, and only Iran, to export oil, shipping it out through the Strait of Hormuz. The United States isn’t stopping other countries from doing it, but Iran is, and we are allowing them to grant safe passage only to ships that they approve going through that strait. Now that is wild. Sounds completely crazy. It’s not completely crazy, but what it is is it’s a demonstration of incredible weakness. Why would the United States allow Iranian oil to continue to be exported? Or shouldn’t we be trying to, you know, we’re at war with these people, and their revenue base depends basically on selling oil. So why are we allowing them to do that? It would be very easy as a matter of military force for the United States to just stop those oil exports.

And the answer is that, well, the two million barrels a day or something like that that Iran is managing to export are two million barrels a day of world oil supply. And we’re in a world in which the total supply to the world market is down substantially. down something like 10 million barrels or more per day because of the closure of the straits to everybody but the Iranians. And the United States is afraid to worsen the shortage by stopping the Iranians from selling oil, presumably because the Trump administration is afraid of the political backlash from higher gas prices. It’s already frantic enough to threaten war crimes in order to try and get oil flowing and gas prices down. But they’re apparently frightened enough of gas prices that they’re willing to allow the enemy to keep making money selling oil in order to keep those prices somewhat lower than they would otherwise have been.

That’s an admission, implicitly, of enormous weakness. It’s an admission that the Trump administration is not willing to accept sustained pain as part of this war. They’re willing to drop bombs and all of that, but they’re not willing to accept economic pain in the United States, even enough to shut off the revenue flow to the Iranian government.

And this war is fundamentally about who can stand the pain. It’s the United States doing lots of damage to Iran, but the Iranian government seems to think it can handle that. And the Iranians trying to inflict enough pain through hurting the world’s supply of oil that the United States ceases and desists.

And given the behavior, who would you bet on in this situation? So this is looking, I don’t want to say this, right? I mean, I do not want to see, obviously for domestic political reasons, I don’t want a Trump victory parade.

But a world in which the United States loses this war is going to be really a very dangerous world for all of us. But I’m afraid that that’s the direction we’re heading.

Have a nice rest of your weekend.

For more videos, visit my YouTube channel.

Of war, fertilizer, airlines and force majeure.

Transcript (AI-generated)

So let’s talk for a few minutes about fertilizer. Hi, I’m Paul Krugman. Fertilizer is not usually one of my things, but it’s important in what’s happening right now. And it’s also part of trying to understand just how big a mess we are in as a result of this unplanned, ill-conceived war.

So it’s Saturday, it’s three weeks and one day since the bombing began. Donald Trump is now, the story keeps changing, we’re either going to apply force and devastate Iran or our job is done and it’s up to other countries to reopen the Strait of Hormuz because we don’t rely on it, says the president, which is, first of all, it turns out not to be true. The United States does not import significant amounts of crude oil coming through the Strait of Hormuz, but we do import fertilizer, which I wasn’t aware of. Lots of things that are coming to light now that we’re facing the crisis.

The reason we are getting fertilizer, mostly from Qatar, is that the fertilizer is made, urea and some other things are made from natural gas. Natural gas can be exported, is exported, in large quantities from the Persian Gulf, or was until this war began. That’s expensive. You have to super cool it and liquefy it and ship it out through special terminals and special ships.

And, you know, it can be done and it’s become really critical to a large part of the world. But the other thing you can do with the natural gas that’s available in the Persian Gulf area is convert it into fertilizer, which is a lot easier to ship.

And so a lot of the world’s fertilizer turns out to come from that area and normally get shipped through the strait. And the United States, we’re a great agricultural nation, and we do import significant amounts of fertilizer. We import a large share of our fertilizer, and some of it from the Persian Gulf, a significant share of that.

So this is having a direct impact on U.S. farmers. The price of urea is way, way up. And there’s something that I’ve recently been alerted to, which is quite scary. The planting season is coming up, says somebody who has no idea what agricultural life is like, but that’s what I’m told.

And the farmers have long since contracted for their fertilizer. They’ve already paid or at least signed the contracts. The prices are locked in. But will there actually be fertilizer available? It’s not at all hard to imagine that the suppliers will declare force majeure, say there’s a war on, which is normally a valid excuse for backing out of contracts. and simply fail to supply the fertilizer. That would be a real catastrophe.

By the way, there are other places where that’s going to matter. The airlines quite often, you know, airlines cancel flights all the time, and sometimes they declare force majeure and cancel flights and don’t even compensate, although that I think is less of an issue right now. The price of jet fuel has risen. At last I checked 88% since the crisis began. Airlines, you know, they’re already talking about cutting back schedules, not about canceling. Well, it’s not entirely clear.

And, you know, I’m as insulated as anybody can get from all of this, but Robin and I do have some travels planned starting in late April. A mixture of pleasure and business, and some of it we really need to be in certain places, and it seems entirely possible that flights will be canceled. You know, we may or may not receive compensation, which I don’t really care about, but just not being able to get to the places that I have promised to be. would be a really serious disruption. Now this is trivial compared with farmers are facing potential financial ruin, but this is just an illustration of the disruptions.

And of course, at a fundamental level, saying that because the United States doesn’t buy its oil from the Persian Gulf, that therefore we are insulated, that this doesn’t matter to us. I mean, take a look at your gas station. Gas prices are up about $1 a gallon since the war began.

Wholesale gas prices are up about $1.20 a gallon, so this is going to get worse. Diesel is up even more. So the fact that the United States actually produces more oil than it consumes is pretty much irrelevant.

If you want to ask how does the U.S. economy get affected, well, the economy is people, like Soylent Green.

I mean, the economy is people and most people in the United States are significantly adversely affected by the spillover from this war. Now, oil companies, particularly oil refiners, who seem to be seeing a big explosion in their margins, they’re doing well, but what good does that do the rest of us? It’s not as if the U.S. has any fiscal measures in place to capture those gains. So this is in fact, this is hitting the United States, it’s hitting all of us quite hard, and it may be actually kind of catastrophic because plans, plans to travel, never mind, but plans to plant crops may be seriously endangered by all of this.

Has anybody told Trump about this? From everything we’re reading, the answer is probably not. Basically, we’re in a situation where the courtiers don’t tell the emperor that he has no clothes and don’t tell him that actually war in the Persian Gulf really hurts the United States a lot, too. So, you know, God knows.

By the way, I have no idea how this ends. I don’t even know what I would do at this point. I mean, take a time machine and go back and not do this, but now it’s going to be really, really ugly. And have a nice weekend.

More videos like this available on my YouTube channel.

Also: Substack generates a transcript for these videos, available on the app and the web, but the button doesn’t show up in email. So here’s a cut-and-paste (not edited):

Transcript

Is it time to bring back the 55 mile an hour speed limit? Not going to happen, but it’s actually would not be stupid right now. Hi, Paul Krugman. Update on Friday morning where the Strait of Hormuz is still closed, stuff is burning, futures markets are saying that the, you know, pretty sophisticated money thinks that oil prices are going to stay extremely high for a very long time. And we’re starting to hear some talk about things we could do to conserve oil, with the International Energy Agency actually calling for measures to conserve oil, including driving more slowly, working from home, using electric cookers, all things that would be doable. Let’s talk about what the case is, not because it’s going to happen, but because it kind of illustrates where we are right now.

By the way, my coffee cup has never seemed more appropriate.

I remember the 70s. I’ve been around way too long. And I remember the 55 mile an hour speed limit, which even inspired songs about how people hated it. “I can’t drive 55.” It inspired a lot of sectional tension. Bumper stickers in Texas saying, “drive 100 and freeze a Yankee.” And it inspired Jimmy Carter. who famously or infamously gave a speech from the White House wearing a thick sweater calling upon people to conserve energy and called for energy conservation as being something we should do and he called it the moral equivalent of war. He had really bad acronym advisors because that came out as MEOW but not stupid actually maybe politically stupid but economically not stupid.

Where we are right now is that we have essentially a forcible shutoff of a large fraction of the world’s oil supply. Twenty percent of the world’s oil passed through the Strait of Hormuz before this war. Some of that can get out other ways. The Saudis have a pipeline to the Red Sea, which is good for now and until or unless the Houthis start firing missiles at oil tankers in another strait that leads from the Red Sea to the Indian Ocean. The Iranians are still exporting oil. They are letting their own tankers and tankers headed for China pass through, and the United States is not trying to stop them, at least at this point. But still, we’re still looking at something like a 10% reduction in the amount of oil available to the world market.

And the trouble with oil demand in the short run, there’s lots of things you can do to burn less oil in the longer run. In the short run, really the only thing you can do is drive less.

That’s pretty much... Now, the cooking, natural gas, is also a big issue, especially in Europe, so that’s where that would come in. But basically, oil is used primarily for transportation, and it takes time to switch to change your automotive fleet to more fuel-efficient vehicles. It takes time to just generally shift the way that you drive and the way that you work, but you could simply drive less.

Why do that? Econ 101 says that if you want to conserve, and if you want to reduce the amount of something that is consumed, that raising the price is the cleanest, easiest way to do that. That is actually how it’s going to happen. This is all going to happen through high prices of gasoline and diesel and jet fuel. But there are two reasons why a public effort, a public campaign, maybe even rules to induce people to burn less stuff to drive less and so on would make sense.

One is distributional. Rationing gasoline, rationing oil through price is a big hit to consumers and a big windfall profit to oil companies and also to oil exporting countries like Russia. And if you could do less of that, that would be, might not be maximize economic efficiency, but, you know, what matters is the welfare of the people that we’re trying to deal with.

The second is that there are clear kind of collective action issues. If you were to try to drive 55 on our highways right now, it would be pretty menacing. I mean, there’s a stretch of road in New Jersey heading for the New York Thruway where the official speed limit is actually 55, although nobody does it. And on the rest, where it’s 65, and actually people drive 70 to 75, an individual driver trying to drive 55 would be creating havoc and would be at substantial risk themselves.

And that’s the easier part. I mean, things like working from home, we see that’s very much a collective action issue. And if we could get people, you know, a renewed acceptance post-COVID for remote work, that would help. There’s all kinds of reasons why a conservation strategy would, as a short run measure to deal with this fuckup that we’ve created in the Persian Gulf. Makes a lot of sense.

Not going to happen, not a chance it’s going to happen, certainly under current management in the United States. It’s all been about burn baby burn and drill baby drill and we’re going to have cheap gas and we’re going to be a power in the world, not through self-restraint, but through warrior ethos and all of that. So it would be an incredibly humiliating climbdown, for them to advocate conservation. But it is worth thinking about the fact that this could be an important part of the solution.

I don’t know how this thing ends in the Persian Gulf. I think even if we got better people in charge, now they’ve created a really, it’s a quagmire, and I don’t know how this ends. But one way to mitigate it would be, in fact, to try to burn less gasoline.

Not a chance. Take care.

No time for a regular post today, so here’s a video.

Transcript

When Donald Trump took us to war with Iran, he dismissed warnings from the experts, from the military, from the intelligence community, saying that this was a highly risky proposition. Now he wants to bring that same level of clarity and judgment to monetary policy, and we should all be very afraid.

Hi, Paul Krugman here. Today, I’m going to do a video rather than a proper post because I just have too much stuff going on. I’ve been too busy to actually do the charts and quantitative analysis that would be involved in actually writing a post about this stuff. I’m recording this on Wednesday afternoon.

The news to which I’m reacting is that in the midst of everything else that’s going on, Trump is doubling down on his attempt to turn the Federal Reserve into a personalized institution that will do what he wants, and never mind the fact that it’s set up to have substantial independence, never mind the fact that there’s a long tradition of respecting the Fed’s independence. Trump thinks that he should be, as George Bush would say, the decider on monetary policy.

This would be a bad thing even if Trump was somebody who generally had good judgment. Monetary policy, what the Fed does — control of short-term interest rates, control of the money supply— monetary policy is technical. Doing it right does require that you know quite a lot about what’s going on. It’s something that you really do want, technocrats at least having a strong role in the decision-making process. And in fact we generally leave it up to technocrats.

Part of the reason for doing that is it’s too easy. It doesn’t require legislation to change interest rates. It just requires a phone call to the open market desk in New York City. So it’s really easy for a president who wants to rev up the economy, wants to juice things up before an election or just plain has crackpot economic ideas, it’s just too easy for a president to do a lot of damage.

So we put layers of insulation. Members of the Federal Reserve Board are appointed for long terms. The whole setup is one that is designed to at least take some time. It doesn’t allow a madman in the Oval Office to muck with monetary policy.

It’s especially bad if the guy in the Oval Office is somebody like Trump, who is impulsive, very much short-term reward-centered, and, of course, doesn’t read, doesn’t study, doesn’t listen to experts. And we know that Trump has a bee in his bonnet, that interest rates should be drastically lower than they are now, which is simply not supported by any of the facts about what’s happening to the economy.

Inflation is running hotter than it should be. The Fed has a target of 2 percent inflation on the PCE price index. It’s actually running at around 3.

That’s not good conditions for a rate cut. The economy doesn’t need a rate cut, at least it doesn’t appear to right now. We’re not in a recession. So technocrats at the Federal Reserve will not actually deliver the rate cuts Trump wants unless he’s able to exert personal control.

Now, the way he’s been trying to do that is itself outrageous. His minions at the Justice Department have tried to force Lisa Cook off the Federal Reserve Board based on totally spurious charges about her mortgage applications long before she was at the Fed. And they’re trying to force Powell out over allegations of cost overruns in Federal Reserve construction projects. This is crazy stuff, and nobody takes it seriously. Nobody thinks those are genuine charges. This is all about trying to use the mechanisms of the Justice Department to intimidate monetary policy makers and turn them into instruments of the presidential will.

The presidential will here, aside from being utterly self-centered, is also deeply uninformed. If you read what Trump has had to say about monetary policy, it’s clear that he doesn’t think of interest rates as a tool to manage the economy, as a tool to control inflation, and so on. He thinks of low interest rates as a gold star that you get if we have a great economy. So he keeps on saying that it’s a wonderful golden age, the economy is terrific, none of which is actually true. It’s not a golden age. Inflation is running high.

None of that is true, but in any case, that’s not how it works. Monetary policy is not a reward for good behavior. It’s not a reward for achievement. It’s something that is a tool for keeping the economy on an even keel. If he does get his way, this will be bad.

The Federal Reserve has credibility, the fact that people making decisions, particularly decisions about pricing, believe that the Fed will keep the economy on an even keel, that it will not allow inflation to remain stubbornly too high. It did allow some inflation for 21-22, which was arguably the right thing to do to allow some, but it quickly took the steps needed to bring it back down again. And that credibility, the fact that people believed that the Fed would do the right thing actually helped it to do the right thing, allowed us to have “immaculate disinflation,” a big fall in the inflation rate without a big rise in the unemployment rate.

If Trump gets his way, that will all be gone. The credibility of the Federal Reserve will be shot. Now, I don’t think he’ll get his way there. I don’t think he will get his way on monetary policy. But he might.

And more than that, what the fight over the Fed is telling us is that Trump has learned nothing. You would think that the debacle in Iran would lead to some loss of self-confidence, some dent in the arrogant ignorance, the belief that just because the intelligence agencies and the generals and the admirals say that this is very risky and what about the Strait of Hormuz, never mind, I know this will be a quick, easy war.

And apparently the fact that it hasn’t turned out that way hasn’t led to any questioning of his own impeccable, perfect judgment. So the attack on the Fed is a bad thing in itself, and it’s also a symptom of “this is not a guy who should be in the White House.”

And the fact that he still commands so much deference from his own party and so much timidity on the part of people who should be standing up to him really makes me worried about the future of America and the world.

Thank you Quentin Hardy, Beth Arnold, Jane Trombley, Resistance Media, Victoria Priya, and many others for tuning into my live video with Heather Cox Richardson! Join me for my next live video in the app.

Transcript

HCR: Hey, everybody here from Bonita Springs, Florida and Elgin, Illinois and Portland, Oregon and Seattle, Washington, Fairbanks, Alaska. Boy, it must be getting beautiful up there right now. Newfoundland, Canada, Oak Park, Illinois. Still, we do not have a duplicate Plano, Texas. Then we got I think we got Oak Park, Illinois. That’s two Illinois.

We got Cuyahoga Falls, Ohio, Vienna, Austria. Where is our Facebook? from Albuquerque, New Mexico, Dublin, Ohio. And Kristen is here from Facebook. So welcome, everybody. And here, Dr. Krugman and I go again with Lunch Money. Hey, Paul, how are you?

PK: Hi, I’m good. How are you?

HCR: I’m good. We have spring here, finally, which is unbelievable.

PK: We’re hitting 86 this afternoon in New York.

HCR: Oh, I can be there in about three hours. We’re not going to be 60.

PK: So yeah, here from beautiful New York City, actually more or less across the street from the Empire State Building. This is my academic office.

HCR: Oh, that’s nice. That’s nice. I’m just across from trees. Listen, so the world is changing so quickly that it’s kind of hard to get your mind around it. And one of the things that jumped out to me this week was the degree to which we’re focusing on the loss of soft power. We’re looking at the loss of you know, the idea of American military dominance. That’s another question. But I’m really interested in what it means for the U.S. economy to have taken such a dramatic turn away from dominance around the world.

And what got me thinking was I did an interview the other day with Vanessa Williamson of the Brookings Institution about taxes, right? And she really offhandedly said, well, you know, we have this thing in economics called the resource curse, where if you have a country that has a reliance on an easily accessible resource like gold or oil or whatever, it means that they don’t really the leaders don’t really have to pay any attention to the people, because they can just dig it out of the ground.

And she said, I’ve always kind of thought that maybe America’s resource curse was the fact that we were the world’s reserve currency. So we could borrow as much money as we wanted at really low prices. But that’s changing. And she just kind of threw it out there. And I thought, oh, my heavens, I have never thought about this at all that way. And I thought to come to you and say, I don’t know if she was right. I don’t know if this makes any sense at all, but what are we looking at in terms of the economy with the extraordinary instability of the United States on the world stage right now?

PK: Okay, so let me first of all just say that, one resource curse that we have in the U.S. is an actual resource curse. We would not be rejecting renewable energy, we would not be rejecting electrotech, probably, if we didn’t have all of this oil and gas. That in some sense, our politics are kind of polluted by the power of our own fossil fuel industry. And that’s actually probably ending up being an economic disadvantage. So just to say that we’re not that different from countries that actually have mineral resources that end up to be negatives, not positive for them.

On the dollar: I do need to say that that’s one of those things where the people who have studied it most tend to think that the special role of the dollar is least important. And it’s people who haven’t who tend to think that it must be tremendously important.

So, okay, the dollar is the overwhelmingly dominant currency of international business. If somebody in Brazil wants to do business with somebody in Malaysia, the stuff’s going to be invoiced in dollars. The debts are going to be in dollars. And those private uses of the dollar are more important than the official reserves, although that’s part of it as well.

HCR: Can I stop you for a second there? And for them to do that exchange, it has to go through the SWIFT bank, right? Probably, yes. Can you explain all this stuff?

Yeah. So there’s an interbank market. So if you’re going to exchange reais in Brazil for Malaysian ringgit banks that are going to do the deal. And the interbank markets are all against dollars. There is no market where you can exchange Brazilian currency for Malaysian currency directly. The banks will sell one for dollars and then use dollars to buy the other.

The interbank market is conducted primarily through this thing called SWIFT, which I forgot what the acronym stands for, but anyway, it’s the electronic settlement system based in Belgium, rather oddly, but effectively answering to the United States. There are ways around it, but it’s by far the most convenient way to, to do these transactions. And the role of the dollar gives the U S government a lot of power.

Everything that goes through SWIFT is revealed to the National Security Agency. The United States can effectively veto transactions. Because everybody needs to have an account at a U.S. bank in order to do basically any business anywhere in the world, the U.S. government can blockade transactions. And so this is an extremely powerful lever of power. Actually, I’ll recommend a book by friends of mine, Henry Farrell and Abe Newman, called Underground Empire, which is all about these invisible channels of power, and the currency stuff is a big part of it.

There are ways around it. The United States has tried to embargo Iranian transactions for many years, and the Iranians have costly, kludgy workarounds, but they do have workarounds. The Chinese yuan has done nothing as international currency, but people do make deals that involve using China’s banking system to get around the U.S. blockade. But it’s still a big influence of the United States.

So, okay, this is really important.

Now, some think that the dollar is about to collapse, that people are going to stop using dollars. Yeah, if we are crazy enough, we can do that, but it’s really hard.

I think I’m getting a little nonlinear here, but anyway, the best essay I’ve ever seen on this — the best paper I’ve ever read, but it’s just in the form of an essay, no math, no diagrams, was on the dollar. It was an old article by, my late teacher, Charlie Kindleberger, called The Politics of International Money and International Language, in which he said that the role of the dollar in the world economy is like the role of English. Everybody in the world who needs to communicate does it in English, because everybody else does it. Everybody uses dollars because everybody else does it. And that’s actually extremely hard to dislodge.

Even if United States policy is crazy, it’ll take a lot to change that. Think about what it would take for us to start doing international business in Mandarin. That’s not going to happen overnight.

Sorry, I’m going on too long. I haven’t let you get a word.

HCR: No, no, no. This is great.

Does all of this translate into the United States can borrow without limit?

PK: Well, first of all, we are not the only country that can borrow a lot. It turns out that if you are looking at the ability to run large trade deficits year after year, the United States has done that, but so has Australia. So has Britain.

So it’s not actually the case that the United States has a unique ability to borrow. We are impressive in the ability to borrow in dollar denominated debt. Not that we get free borrowing, but that U.S. borrowers — the government, but also corporations —issue debt that’s payable in dollars, which does give the United States some autonomy. If the dollar plunges on world markets, so do our debts. So we’re insulated from that particular concern. But it’s not unique. We aren’t uniquely able to run big deficits.

Whether we get cheaper borrowing or more borrowing, whatever the effect is, it’s not strong enough to be clear. for the signal to overwhelm the noise. You try and look for, is America able to borrow more cheaply than Britain or Japan? Maybe, but you can’t really see it in the data. It’s not overwhelming.

So at a basic level, I don’t think that the resource curse story vis-a-vis the dollar is especially compelling. I would say that the role of financial services qualifies, although that’s much bigger for Britain than for the United States. I mean, Britain really suffers, everything in Britain except for London suffers from the city of London’s role in international finance, but the United States a little bit.

But I think it’s more a psychological thing, a sense of impunity that the United States tends to have because of the role of the dollar. We don’t think about, nobody ever thinks about a U.S. financial crisis and the IMF having to come in. And maybe we should.

HCR: So that was just sort of a starting point because what that did, whether or not that was something that I should be staying up at night about, was it really made me think about, you know, I look at the politics of where we are and I look at soft power and I look at the cultural norms and so on And certainly I look at individual pieces of the fact, for example, that oil is getting very expensive and therefore we’re going to see inflation, more inflation than we’re already seeing and so on. But on a cosmic level, you know, on a really big level, what does it mean for the what is the instability that we are seeing coming out of the Trump administration? And you can define that however you wish. What does that mean for the American people? I mean, like literally, I don’t even know where to start with that. Does it mean nothing? I can’t imagine that.

Does it just mean inflation? You suggested it doesn’t mean that we have to worry about not any longer being able to borrow. What does it mean?

PK: Okay. So, the U.S. is, less of a trading nation than almost anybody else. We’re less dependent on export related jobs than anybody else. But that doesn’t mean zero. It’s actually quite large. And I’ve been thinking about this a lot. I mean, the United States has really made it sort of dead obvious that we are we’re not reliable. We’re not serious people. You cannot trust the United States to behave. You cannot trust the United States to honor its promises. You cannot trust the United States to behave rationally. Sorry to say that, but that’s where we are right now.

This has to have some negative effects. There’s some sort of almost crude mechanical stuff that people don’t think about. I never looked at this, before, but how much does the US export economy depend on selling arms? Just plain selling military equipment.

It turns out that more than 10% of our exports is military equipment. I had no idea myself, and I should know these things. And Mark Carney, Prime Minister of Canada, just said, we will no longer spend 70 cents of every defense dollar on the United States, right? And around the world, governments must be thinking about that. Should their next fighter plane, should their next anti-aircraft system be U.S.? Partly because the U.S. is not reliable, partly because it turns out that maybe U.S. military technology is not quite as supreme as we thought, given what’s happened the past six weeks.

So that right there, that’s probably millions of jobs in the United States that are directly or indirectly linked to the world, having relied on our weapons, which it probably won’t do to the same extent anymore.

PK: So I’m sitting in my academic office here. One of America’s biggest, biggest exports is higher education.

HCR: Yeah.

PK: Right. We get a a lot of foreign students. We’ve just, we just had Mayor Mamdani here this morning, uh, believe it or not, um, for an event. And we were all talking about how the student, foreign students who are very big here at CUNY, but throughout the U.S. educational system, they’re not coming anymore. We’re having a big hit. And if you think it’s just those academics, but even if you’re not in academia, there’s a lot of jobs, employment opportunities, and also our scientific base that is ultimately dependent on foreign students.

Also, there are some reports this morning that hotels are slashing prices. They were expecting to be able to rent out a lot of rooms for the World Cup, but the world is not going to come to this World Cup because it’s in Trump’s America.

So putting all that together: the U.S. economy is so huge that even all of this it’s very unlikely to subtract even 1% from U.S. GDP.

But 1% of U.S. GDP is $300 billion a year. So this is all, in the end, fairly big stuff.

HCR: So I want to be clear that people understand. When foreign students come to the United States of America, they pay full freight. U.S. students often get discounts through scholarships, through simply rake-offs, through, you know, they pay quite a bit less for their tuition dollars than foreign students do. So increasingly higher education has focused, and sometimes prep schools as well, have focused on attracting foreign students to basically to make their ends meet. So you’re seeing in a lot of universities right now, not only cuts coming from the administration, but also the loss of these foreign students on which a lot of the tuition depended.

So there’s a real crisis going on in higher education. Lots of people don’t understand that this is not just a question of getting widespread good intellectual talent. It’s also dollars.

PK: That’s right. I mean, education is a business, among other things. I mean, it’s a lot of money. There’s kind of synergistic effects as well. I mean, the foreign students... It’s not just that they pay in full and the domestic students don’t. It’s also just having more students.

So we’re able to maintain the size of the U.S. educational system in part because of the foreign students. Advanced degree students are also a large part of the workforce for U.S. research. So it’s all pretty critical.

Now, there’s also foreign tourists. Again, Carney, I think in that same speech where he talked about the defense dollars, he started with a joke: “Has anybody drunk any bourbon lately?” And, of course in Canada, basically no, and they’re also not coming as tourists. So turning yourself into a global pariah, which is what we’ve been doing is, bad for business. There are there are worse things than being bad for business, but it is also bad for business.

HCR: Well, so what about the long term? Because you’re talking about slower growth. You’re talking about a more stagnant economy. But, you know, I’m watching the the Trump administration trying basically to move us back to the 19th century dependence on old technologies, including petrochemical, you know, including fossil fuels.

And watching China and the rest of the world moving forward toward new technologies … I have a sister who’s a marine biologist in another country, and she has been saying to us for years that if the U.S. didn’t get its act together, the next generation of appliances and of technologies and of energy are going all to be keyed to Asia and not to the United States of America. And Biden and his team seemed to be aware of this and to work really desperately with the Inflation Reduction Act, among other things, to try to bring America up to speed and the Chips and Science Act to compete with China and to regain control of that future. And I’m watching us just piss that away and thinking, What does this look like in terms of jobs, in terms of technology, in terms of producing energy and so on in the future? And how long down the road are we looking at that problem? And is it recoverable?

PK: Okay. Some friends of mine who are in the kind of energy future space say that, look, at this point, effectively, the United States and China are offering to the whole world two different visions of what your energy future will look like. China, even though the Chinese themselves still burn a lot of coal, which we wish they would phase out quickly, but China is basically saying the future lies in wind and solar and batteries and electric cars and buy our technology and you can enter that wonderful world. The United States is saying No, none of that stuff. That’s bad. Windmills kill birds or something.

Anyway, we’re saying reject that vision of the future. What we need is hydrocarbons, back to oil and gas. And hey, we have lots of oil and gas, which because we do all this fracking, and we can supply you. You can buy your oil from the United States. you can get liquefied natural gas from the United States, and that’s the route you should go.

Now, that was probably a losing proposition to begin with, because the fact of the matter is that at this point, the sort of clean energy technologies are getting just plain cheaper, even aside from all of the environmental issues and so on.

They’re just getting cheaper. But In any case, would you now trust this America to be your supplier of LNG? Who knows whether Trump or the next Trump-like U.S. president will decide that you’re not our friend and cut off your supplies of resources. We used to be the country that whatever else you could say, America honored its promises. And we are not that country anymore. We’re not reliable. It’s unfortunate but unfortunately, I think it’s true that people consider China a more reliable, rational player than the United States, and this has a direct impact on that choice.

And you can see it’s happening overwhelmingly. The world is not rushing to install new gas-fired power plants. It is rushing to install solar panels, of which 80% are made in China. So, that is bad, although a world in which China produces the equipment that allows us all to have abundant energy is not such a terrible world, but still does mean that the U.S. is losing out on that. But I also worry that the United States will refuse to use this technology. So we will be, in some sense, the last country that still has internal combustion cars and still has fossil fuel power plants when the whole rest of the world has moved on to a better cleaner and cheaper technology

HCR: Well the cost of gas is certainly making a lot of people who loved their big trucks rethink that up here although as you yourself have pointed out it takes about 10 years for the fleet to turn over.

PK: Right, that’s one of those shocking little things i didn’t know. I’ve been around for a while and i remember when you know we used to say, well, cars stay on the road for nine years. It’s now 14 years. And that’s partly because Detroit, the big auto companies kind of made a decision not to sell affordable cars, that they would focus on SUVs and luxury vehicles. And then people who didn’t make a lot of money would rely on secondhand vehicles. So we turn over our auto fleet very, very rarely. And that means that if we don’t start moving to the future, we will be stuck.

And of course, the autos are the visible part of it. But it’s just a lot of our infrastructure that, you know, we’re not doing a whole lot of building in this country. And so that means, among other things, that we are stuck with legacy energy systems, legacy industrial systems. And we’re building that legacy right now. And it’s not the right one.

HCR: OK, so I’m going to ask you this and it’s just an observation. And if you feel like you don’t want to answer it, I totally get that. But it’s a little hard to miss the fact that the countries where Trump has exerted his power are ones that control a lot of oil and and, you know, Iran and Venezuela. And do you and of course, he works very closely with Vladimir Putin, whose money depends on oil and the sale of oil and that internationally. Do you think that that is playing a role in the places that Trump is trying to gain control over?

Or is that just me with a tinfoil hat over here in my study in Maine?

PK: You don’t want to dismiss that sort of thinking, but I think in some ways you may be imputing too much calculation and rationality.

HCR:That’s fair.

PK: If Trump was trying to seize the oil in Iran, then that’s insanity. He sometimes talks as if we can just go in and take the oil, and it’s like, you know, 20 million barrels a day is the amount that flows through the Strait of Hormuz. You don’t just take that, right? And are you really thinking that we can occupy Iran? Now, it’s actually funny. I have to give some, I guess, credit. Venezuela has turned out to be less of a disaster than I expected because it is a completely corrupt regime, and Trump has basically been able to kill off the old capo and install a new capo who is just as bad as the old one, but gives him a cut.

HCR: That’s what Iran was about.

PK: That’s what they thought was going to happen in Iran, and the current management of the United States is continually surprised to learn that other countries are real, have real ideology and nationalism of their own. So that’s not going to happen.

I actually think that the channels here are generally subtler.

It’s not that Trump and Hegseth and executives of the major oil companies sat down and plotted this thing together to seize the oil. But it’s been clear all along that current U.S. government is much more comfortable with petro-state oligarchs, whether it be Vladimir Putin or Mohammed bin Salman, that those are more their kind of people than, you know, basically American workers, and that more, I think, out of instinct than calculation, they do tend to follow policies that are favorable to them.

So one of the many conspiracy theories is that this whole war was about raising the price of oil to help Putin. Well, I don’t think it was, I think that’s been a consequence, but I don’t think it was carefully calculated to do that.

HCR: Yeah. Yeah. I’m afraid I’d agree with you on that one. So here’s another question for you. This has been an issue in the United States. The attempt to wean ourselves off of fossil fuels and to work in renewables, which as you say are now cheaper than fossil fuels. And I’d love to have you explain that a little bit more closely. But then what what can we do? What can ordinary American consumers do to say to the administration or to say to the country, we don’t want to be left back in? All I can think of is the Spindle Top oil gusher, which was, you know, incredible when it happened. But it was also more than 100 years ago versus where we could be going.

So, why is it cheap? What do you mean when you say it’s cheap? Renewables are cheaper than fossil fuels at this point.

PK: Well, literally, I mean, there’s something called levelized cost, which is an estimate basically of how much it’s going to take to generate electricity over the lifetime of a power plant or power facility. And the levelized cost for solar and wind are clearly well below coal fired power plants and they’re sort of about even with or dropping below natural gas fired power plants. So if you are a utility company making a decision now should I build another gas turbine electric generation facility or should I build a solar farm or a wind farm um it’s right now just on the sheer dollars and cents you would probably go for the renewables you go for solar or wind.

There was a critical problem that we used to have, which was that the sun doesn’t always shine and the wind doesn’t always blow. But there’s also been spectacular progress in batteries. So battery technology has become more effective and immensely cheaper. And all of the renewable related stuff, green energy, has had incredible learning curves. As we accumulate experience, the costs just keep falling. So they are now all cost competitive or more so and that will keep on happening. So on a typical day now in both California and Texas — anyway, most of the electricity on a typical day will be generated by solar and wind. Some of it will be fed into batteries during the day and then the lights will stay on at night because you have the batteries. That is where technology wants us to go. So that’s the big transformation.

And of course, electric cars have gone from being cumbersome to actually being, you know, on my Substack I had the other day, I just had a photo of a BYD car and it’s pretty spiffy and the range problems have rapidly diminished. So, you know, this whole the technology of, um, uh, non-fossil fuel future is pretty much already here.

And it works. It works on dollars and cents and it works in terms of reliability. Um, now I’m not, I lost the second half where you were.

HCR: So, so what, you know, I, I suspect most of the people listening here are not going to disagree. And I certainly don’t. And I’m not even talking about the cost of, you know, data centers, which are sending, uh, electric bills through the roof, the cost of diesel, especially right now, which is prohibitive for farmers and fishermen.

I’m just talking about a lot of us would like to see this future and thought we were achieving it. And now we’re looking at an administration and therefore perhaps downstream different kinds of industries that are moving us backward and not forward. And how does one, a normal everyday American put pressure on a country to change their economic behavior, not just their political behavior, that’s my back, but their economic behavior. What do we do? I mean, there’s people who are talking about general strikes. There are people who are talking about at least a May Day strike.

You know, how do we make this future happen for us and not just for the rest of the world?

PK: I’m not sure that I have an answer there. I mean, politically, I think it’s going to take a while before we get back to the Biden era subsidies for the energy future, which is terrible.

But at the minimum, we can really demand that we that the US government not actively block the energy future. What’s been going on under Trump is that they’ve been refusing federal permits for wind farms, for solar farms. There’s really conspicuous cases of offshore wind farms that they’ve been trying to force to cancel midway through construction. They’ve been losing court cases on most of those. But there are just hundreds of smaller developments where more quietly permits are being denied. So we have a government that is actively hostile, not just refuses to spend money on green energy, but is actively trying to suppress it.

And I think that political activism to to say stop getting in the way is relatively likely to succeed. You as an individual, I don’t know. I mean, that’s kind of not how it works. Right. I say I’m not a good role model here. I still drive an internal combustion car, which happens to be 20 years old.

So I guess I’m OK. Am I right? Yeah, it’s 20 years old. So I think I’m forgiven for not ditching it for a new car yet. But as for the power of individual purchases and even boycotts, not sure. I don’t think we’re going to get general strikes over energy policy, but election outcomes will have a huge impact here.

HCR So now we’re back on my turf.

PK Yes, we are. I’m sorry. That’s the thing about living in something that still has at least some of the institutions of democracy is that votes matter.

HCR: Well, amen to that. And we certainly saw that last weekend in Hungary. Listen, I could talk to you forever. Thank you for doing this. And we, and thank you everybody for being here and we’ll do it again. Is it, is it next month?

PK I think so.

HCR I haven’t actually looked at the calendar, so I have no idea, but it’s always a pleasure, Paul. I hope you get a chance to get outside in this gorgeous weather.

PK I think, I think I’m going to take myself out for dinner. Robin’s away, but even though it’s a luxury, I don’t have outdoor seating at my New York apartment. So I think I’m going to go find someplace that does have outdoor seating.

HCR Well, and do you know, I love New York anyway, but one of the things I just, this is so obvious, but just blows me away about New York is you can get any food from anywhere around the world in New York city. It’s just, I mean, I’m in Maine and we’re very lucky for so many reasons here, but like, I can’t get food from Bhutan for, for at least, you know, a long drive.

PK Oh gosh. Whenever you’re here, let’s go to Jackson Heights. If you’ve ever been there, there must be 30 national cuisines on every block.

HCR That’s just so cool.

Anyway, thank you, everybody, for being here. And we will see you again the next time Lunch Money Regroups. Thanks for being here.

PK Take care, all.

HCR Thanks, Paul.

Transcript

What is Hungary to us or we to Hungary?

Hi, Paul Krugman here. A Saturday morning update ahead of the big election in Hungary taking place tomorrow. The eyes of the world are upon Budapest.

It’s a little odd that Hungary is so much the focus of a lot of people, myself included. It has about the same population as New Jersey, about a quarter of New Jersey’s GDP.

It’s not a big place, but it’s symbolic. It is a role model for right-wing authoritarians everywhere. It still formally has the institutions of democracy, but has for the past 16 years been a one party state — ruled by a right-wing authoritarian ethno-nationalist regime that enforces its will partly by rigging elections, partly through an extensive system of crony capitalism that rewards its friends and punishes its enemies.

In other words, it’s a MAGA kind of place. It’s what they would like to do to the United States, although with less sophistication and more brutality.

Donald Trump has been frantically trying to keep Viktor Orban in power, largely in ways that demonstrate that he really doesn’t understand how the world views him. Sending JD Vance to campaign for Orban is not helpful to Orban. It’s a boost to the opposition. Spewing frantically on Truth Social about how important it is that Orban win is, again, a gift to the Hungarian opposition.

The system is still very rigged in Hungary, but there’s pretty good reason to hope that the popular wave against Orban and Fidesz is so large that it will sweep away all of the rigging that they’ve imposed to try and keep themselves in power.

We’ll all be watching the polls eagerly tomorrow. What struck me, however, as something new is that lately, at the very end, Trump is now saying, oh, elect Orban and I will help you out economically. And just yesterday, he put up a post saying that if Orban is re-elected, that the Economic Might of the United States will come in to aid Hungary and its well-deserved prosperity and all of that.

Which is interesting because it’s an illustration of the megalomania, the delusions of grandeur that really afflict the current U.S. administration, a complete inability to have a sense of the limits of American power.

What Hungary is to us or what Hungary is to MAGA is clear, but what are we to Hungary? Look at Hungarian trade. It is a relatively open economy, which depends a lot on its role as a relatively low-cost manufacturing platform, which it has been able to maintain despite the crony capitalism and all of that.

Where does Hungary export to? Well, about 80% of its exports go to either the European Union, or Britain has a little bit on top. So essentially the democracies of Western Europe are where 80% of Hungarian exports go. How much does it export to the United States? 3.5%. Basically, Hungary, for practical purposes, does no business with the United States.

This is mostly about gravity: The “gravity equation” in international trade says among other things that trade depends very much inversely on the distance between countries. Hungary is in the middle of Europe. It’s going to inevitably do a lot of trade with Europe. And that’s even larger because the special role that Hungary has taken is that of being a a manufacturing platform for relatively low-wage pieces of the European manufacturing sector. In a way, kind of like Mexico is for North American manufacturing.

By the way, the fact that German companies in particular have invested a lot in Hungarian production is a large part of the reason that the European Union has been so derelict in trying to rein in Orbán and his destruction of democracy. But in any case, the point is that there’s just no way that the United States is going to be an important economic partner for a small country in the middle of Europe. It’s a complete misunderstanding of how big, how important, how powerful the United States is.

It is in a way kind of the economic counterpart of imagining that the United States can easily effect regime change and bludgeon Iran into submission. This is not who we are. It’s not our role. We are not big enough. We are not the sole global superpower. And in any case, being a superpower isn’t what it used to be. So all of this will be ignored by the Hungarians.

The one thing that may happen is that the clear message that Trump favors Orban may be the straw that breaks the camel’s back, maybe the final, tipping point that removes Orban from power.

I’m not counting any paprika chickens before they’re hatched. There is a kind of a nightmare here about what happens if there’s a clear attempt to simply overrule, defraud the Hungarian electorate, not just the rigging that has worked so far, but something even more extreme. And then will the Europeans ever live up to their own values, their own ideals?

I hope we don’t come to that point. But anyway, whatever is happening, one thing that’s clear is that U.S. economic partnership or lack thereof with Hungary doesn’t make a damn bit of difference.

Lisa Graves is a legal activist and the author of a remarkable and terrifying book, Without Precedent, that documents the assault on democracy via the story of John Roberts. I spoke with her about how America has come to its current state, and what the future may hold:

. . .

TRANSCRIPT: Paul Krugman in Conversation with Lisa Graves

(recorded 4/9/26)

Paul Krugman: I’m speaking today with Lisa Graves, author of an incredibly revelatory and deeply disturbing book called Without Precedent, about the Roberts Court and what it has done to America. And...hi, Lisa. Welcome on.

Lisa Graves: Paul, thank you so much for having me on. It’s an honor to be here with you. And thank you for your kind words about my book.

Krugman: I guess I was first sort of seriously alerted to what was happening at the Supreme Court in 2000, with the stolen election and all that. But I have to say, I don’t think I fully appreciated what Citizens United would do. And so why don’t you give us a little background on what has happened, the court and its role and what’s been happening to America?

Graves: Well, I really appreciate your starting with Bush v. Gore, because that in some ways is the beginning of this period. It’s a precursor in a way to what we’ve been experiencing. And that was when the US Supreme Court, in a sharply partisan decision — although not all the Republicans voted to stop the recount — five Republicans voted to stop the recount in 2000, in Florida. And the effect of that was to give George W. Bush the presidency and with it, not just the power to, in essence, make war with the consent of Congress, but also the power to remake the courts, the Supreme Court in particular.

And by the way, as part of my research for the book, I looked into what was happening at that time, and it turned out that Clarence Thomas’s wife Ginni Thomas was working for the Heritage Foundation on the predecessor to Project 2025 — basically Project 2000. And she was screening people for positions in the potential George W. Bush administration. And Clarence Thomas didn’t recuse himself from that case. By the way, that five-four decision — it would have been four-four. The count would have been allowed to proceed. And the count that actually occurred with news organizations after the fact, after Bush was sworn in, showed that Gore would have won Florida and would have become the president of the United States.

By the way, after Thomas voted to effectively make George W. Bush the president, Ginni Thomas was given a promotion as the liaison from the Heritage Foundation to the White House, and she became the highest paid non-board member of the Heritage Foundation. And so she was rewarded very well for her work and, basically, for the consequence of her husband’s decision to vote to stop that recount.

So that was really a moment where I think a lot of people didn’t understand what was happening. And because that decision happened so quickly, there were no motions for Thomas to recuse himself. It just was a very rapid, very political, partisan decision by the court. And it is really a precursor to what’s happened next, which is that George W. Bush was reelected as an incumbent, or elected anew in 2004. And there were two vacancies that came up immediately. It was for O’Connor’s seat and Rehnquist’s seat. And John Roberts got the role of chief justice, and Sam Alito got the role of associate justice.

And then to fast forward to your question about Citizens United, again, this is a 5-to-4 decision issued by the Roberts Court, where Clarence Thomas sat on that case — the fifth vote, in essence, on that case — even though a billionaire named Harlan Crowe had staked his wife Ginni Thomas with $500,000 to launch a group to take advantage of the decision to come in Citizens United, to allow these so-called C4 groups under the IRS code to spend unlimited money to influence elections. And Clarence Thomas did not recuse himself from that case, and even had the audacity to write a concurring opinion saying that disclosure of money being spent by these groups — who the sources are — would chill speech, meaning money, like the money to his wife, which he did not disclose.

And so that decision unleashed a tsunami of cash into our elections, where candidates are routinely outspent by the outside groups. And this has given a disproportionate, and extraordinarily disproportionate, power to billionaires in our society, in America, to secretly influence elections in order to get people into positions of power to advance their interests, like the huge tax breaks that Donald Trump signed into law at the behest of Charles Koch and his groups in the first term of President Trump. And again, similarly, in this second term of Donald Trump, the extension of those deeply unfair and destructive tax cuts for the richest few.

Krugman: You kind of described what Citizens United is, but let’s talk more about that. Citizens United is the birth of super PACs, right?

Graves: Yes.

Krugman: And it’s basically saying that outside players — but it ends up being largely billionaires — can put lots of money with some basically tissue-thin restrictions on what they can do, but can basically put in unlimited amounts of money to influence political campaigns.

Graves: That’s right. And so Citizens United was a decision that basically asserted that under the First Amendment, money is speech, and that outside groups that were not coordinating with the candidate — so-called independent expenditures — they could spend unlimited money, and they were not subject to the rules that the Bipartisan Campaign Reform Act, BiCRA, otherwise known as McCain-Feingold, sought to put in place to deal with this sort of what they were calling soft money — money that was outside the campaigns that was not required to be disclosed.

So Citizens United and its progeny — a case called Speech Now vs. FEC — that’s what spawned these super PACs, where you have enormous money going into PACs, political action committees. That money can be million-dollar, even $10 million checks. For the super PACs that are operating in a particular way, they have to disclose their donors. But for the C-4 groups, which are these other nonprofits, they don’t have to disclose their donors.

And so what it’s created is a situation in which, on the one hand, a billionaire can now give millions to a super PAC in a way that they could not give directly to the candidate. They couldn’t just write a check to the presidential candidate or congressional candidate. They can do it now in an unlimited amount through the super PACs. And then separately, they can give tens of millions of dollars — unlimited money — secretly to a C-4 group that runs so-called issue ads. Those are the ads that say vote for or against this person, or call them because you oppose their policy. But it’s really obviously about influencing the election, and that’s the dark money that’s being spent in our elections.

Krugman: The Times found that 300 billionaires represented 19% of all campaign financing in the 2024 cycle. But I’m not sure how they know. Are the C-4s even in there? It may be more than that, right?

Graves: It’s certainly more than that. And only under certain circumstances can you actually see some of the funding of a C-4, based on how it’s related — who’s funding it, if who’s funding it is known. So for example, if a foundation gives to a C-4, if it has the capacity through a trust or a foundation to give to a C-4, that sort of giving is required to be disclosed. But if an individual, a billionaire like Charles Koch, writes a check to the C-4, that is not disclosed. It’s only if it comes through a nonprofit entity that you can see just a glimpse of the sources of that funding.

So whenever I talk to reporters who are doing those calculations about how much money is being spent by billionaires, I always tell them that their counts are going to be extraordinarily under the actual reality, because we know that these outside groups, these C-4 groups, are spending hundreds of millions of dollars cumulatively in the election cycle, and the only people who know who’s giving to them are the groups themselves. And probably some of the candidates know who’s giving to those C-4s.

Krugman: Wow. So if we look at someone like Peter Thiel, who basically bought a Senate seat for JD Vance. I don’t actually know the number, but the numbers we see may actually be only the tip of the iceberg.

Graves: That’s correct. There are a couple of rules in states and also at the federal level for certain types of independent expenditures, or if you have what’s known as a 527 group under the IRS code, that is allowed to spend directly in elections. But even then, what you see is a shell game. So for example, the Republican State Leadership Committee, RSLC, has created a subgroup to target state Supreme Court races. And it’s the sole funder of the subgroup. So when the subgroup discloses who funds it, it’s disclosing its parent organization. So it doesn’t disclose how much of that money is from Leonard Leo, or how much of that money is from Charles Koch or Koch Industries or the oil companies that goes into the bigger pool of funds.

And so there are all these ways in which I believe that most of the money that’s being spent in our elections in America is not disclosed. It’s not disclosed under the campaign finance reports of the candidates, of the party, or the super PACs, because it’s the C-4 money that is most potent, because it’s the vehicle that allows them to hide the true funders — the biggest funders of these operations.

Krugman: If we look at issues like energy and climate policy, there’s obviously huge amounts of fossil fuel money flowing into elections, but there’s also huge amounts of money going into supporting pseudo research at think tanks, which is a kind of whole universe. And if they’re already supplying a very large part of campaign finance, then add in all of this stuff, and we really live in a political environment that’s very much determined by big money.

Graves: That’s really true, and while the C-4 spending sometimes is not described as political, it’s obviously political. It’s obviously spent around the elections to influence the outcome of the elections. And it’s often spent on ads, which is why there was a bill that was introduced by members of Congress that was called S1 in the previous Congress, which was designed to basically say, if you’re going to spend money around the elections, it really needs to be disclosed.

But as you point out, in some ways that enormous money that’s coming in around our elections is, in a way, the tip of the iceberg, because there’s this whole other structure where fossil fuel companies and fossil fuel CEOs like Charles Koch and others, are spending enormous sums year after year on these so-called think tanks — or as some people call them, “stink tanks.”

Krugman: Heh.

Graves: But really, these are entities that have been stood up over the past few decades to generate research findings that are informed basically by the funders who are funding that research, in order to assail efforts to mitigate climate change, for example.

And when you look at the nonprofit infrastructure in the United States, the United States has a thing that is known internally, in essence, by the experts as “the independent sector.” We have the private sector, the public sector meaning government, and the independent sector—and that’s the nonprofit sector. And it is an enormous part of the US economy. That’s like churches and hospitals and colleges. But a significant portion of that nonprofit spending is going into policy operations, operations that describe themselves as informing the public, as public education — not public schools, but educating the public.

And the fossil fuel industry has played a big role in funding a number of these groups that are at the forefront of basically “studies” — and I’ll use that term loosely — but studies that then are cited by some members of Congress as a basis for objecting to the reality of climate change, or objecting to government efforts to intervene and try to mitigate climate change. And so it’s a massive distortion machine. We sort of swim in a political environment, a political and social environment, which has been greatly influenced, swayed by the amount of so-called research that these groups are putting out in order to advance the industry’s interests.

And this is part of what’s known as a third-party strategy that the tobacco industry really helped pioneer in America, where they were trying to fend off efforts to regulate tobacco and its cancer-causing effects. And so they didn’t want to run ads, for example, saying “tobacco companies say tobacco is just fine” — although they did say smoking was good for you — but they put forward doctors and, you know, so-called studies saying it was safe, even though the actual independent science was showing that there were carcinogenic effects in some instances of smoking.

And so that third-party tactic is what the fossil fuel industry and its CEOs are using. They don’t think that people would believe them if they ran an ad saying, “Hey, I’m Charles Koch. Trust me, all this fossil fuel money that’s making me the 23rd richest person in the world — it’s great for everyone. The planet isn’t on fire, and we can solve everything.” You know, instead, what happens is they fund these groups that do bus tours and they lobby Congress, or they do all these influence campaigns. And the objective is to protect the industry basically at all costs.

And there was a book that was written a couple of years ago about how in Koch world, both the for-profit part of Koch Industries—which is now known as Koch—and in their nonprofit empire, carbon was job one.

Krugman: Right. And there’ve been some studies— I think by Oreskes and others—that demonstrated how among the alleged scientific papers that disputed the consensus about climate change, the percentage funded by the fossil fuel industry was basically 100. That this is an entirely manufactured thing by special interests. So you place a big emphasis on fossil fuels. Tobacco is kind of where the strategy begins. But fossil fuels are, in your view, at the root of this perversion of the U.S. system.

Graves: Well, I think it’s a key component of it. Other than, I suppose, the war industry.

Krugman: Right.

Graves: Which is related. The fossil fuel industry is the most lucrative field of business in the world. And they’ve made so much money, you know, selling fossil fuels. And there’s a real intolerance for any limit. And in fact, when you look at a lot of the groups that have been funded in the US that are part of attacks on the EPA, attacks on the power of the Environmental Protection Agency to regulate carbon, when you trace those back, you can see money from the coal industry and coal barons. You see money from the natural gas—otherwise known as the methane gas—producers, the frackers and the compressing companies for those fracking for the gas and oil industries.

And you can see within that what’s happened: a number of these big CEOs — for example, the largest seller of compressed gas compressors in the United States for these big fracking operations — they’re paid an enormous amount for running these companies. And then they create a nonprofit that then fuels groups like the Heritage Foundation, American Enterprise Institute, and these other entities that are at the forefront of trying to stop congressional efforts to regulate carbon or to mitigate climate change.

Krugman: So, I mean, we’ve seen a lot of certainly favorable tax treatment for fossil fuels forever. But still, you know, I’ve been around for a while. I remember the 70s when, in response to the oil crises, we did get price controls and windfall profits taxes. They may not have been great policy, but it’s kind of unthinkable that we would do that now. What changed, do you think? Why did the U.S. system become so much more porous to this kind of influence?

Graves: Well, I so appreciate your raising that, Paul, because the timing of that coincides with a memo that was written by a person who became a justice on the Supreme Court. It’s called the Powell memo. It was written by Lewis Powell to the Chamber of Commerce. And that was just months before Powell was nominated by Nixon to the Supreme Court. And in that memo, the Powell memo, he wrote that American businesses needed to play a greater role in American society. And I think this is a laughable assertion. He asserted in 1971 that no one had less influence on public policy in America than the American businessman. That wasn’t true then. It’s certainly not true now.

And that memo helped spawn a new generation of investment in trying to capture these levers of power. And so demi-billionaires like Richard Mellon Scaife and others rose to that call to create this apparatus to oppose government regulation. For example, Scaife helped fund some of these early think tanks in the 1970s. But another key figure in that time was Charles Koch, when he had just inherited his father’s company in the late 1960s. He was very involved in these early right-wing movements. He personally, actively objected to those price controls. He started seeding groups in the Libertarian Party, an adjacent movement, before he ultimately tried to co-opt the Republican Party and move this into the mainstream of that Republican Party agenda, you know, with the help of Reagan, who had deeply antagonistic views toward regulation.

When you look at that period, that’s when Charles Koch, as a young man, claimed that America under Nixon was basically socialist because we dared to have any price controls. And then, in response to the efforts of Congress and the White House to address the oil crisis and the challenges that America was facing in terms of the energy crisis and the like, Charles Koch actually opposed the creation of a Department of Energy for the United States of America. He objected to that. And so those are very early parts of this movement that most people don’t know happened. You know, it’s obviously before Google. It was a bit below the radar. But that helped seed decades now — the 80s, 90s, the 2000s into the present moment — where those initial investments really took hold.

And I guess the key in some ways to their success is that I always describe Charles Koch as being the deepest, longest, most enduring funder of this effort to attack the regulation of carbon and the like. And he’s been at it now for, you know, going on 50, coming up on 60 years, really.

Krugman: Right, so this is going back to the Powell memo in, like, 1970–71. So this is 55 years now. I guess what you’re saying is that the billionaires got smarter and learned to play the long game.

Graves: Yes.

Krugman: It’s the power of long-term thinking, except not on behalf of the human race.

Graves: Yeah. It’s astonishing, because you can see there’s all these different assessments of progressive funding versus so-called conservative funding, and there has not been the type of investment in this infrastructure to push these fringe ideas into the mainstream on the left. It is just not how the funding works on the left. The right has billionaires and families of billionaires and children of children — proto-billionaires, you know, multi-multimillionaires back in the day — whose families have been at this for decades now. You can see it through the foundation work they’ve done, and how the different foundations have spawned other foundations.

And so on the right you see a very deep investment in moving these fringe ideas into reality, into legally binding rules for us, including to the Supreme Court. And on the left — for example, on the Supreme Court, or in the middle to the left there — there was this effort to not capture the Supreme Court, to try to put people on the court who had a reputation for fairness, and not because they were going to be someone who was driving the law to the left. But the right has been really disciplined in this court-capture plan, along with its plan to capture these other levers of power.

Krugman: Yeah. I think to some extent unions used to be the kind of long-term strategic players such as they were on the at least moderate left. But we all know what happened to unions. Although that’s another story.

Graves: But can I add in there? Because part of what we saw was how Reagan came in with this hostility to unions, even though he’d led the Screen Actors Guild. He came in with this real effort to try to break the unions. And then that was met, ultimately, in the longer run, with big funding from these big foundations, including the Bradley Foundation, which had one of the biggest reserves in the country, and it was targeting unions to break unions, but also to break their political power, their political influence.

But when I traced this back, this so-called “right to work” movement — which is not about the right to work, but the right to break unions in these states — what you can see in the historical record is one of the early funders of that effort was Fred Koch. Charles Koch’s father, in the 1950s, was one of the big backers of this long-term campaign to limit the power of unions, the power of people to organize in unions, and also to basically try to break their political power.

Krugman: Wow. So that means these are sort of dynastic efforts. I haven’t really thought about that. But, you know, we talk about the institutions, but it’s actually also these sort of personalized dynasties, which is just amazing.

Graves: Yes, so Dick Scaife and the Mellon fortune. It’s the Mellon Banking Corporation. Andrew Mellon was Treasury Secretary under Coolidge and Hoover, and ended up basically losing his cabinet seat due to a financial scandal. So that Mellon banking fortune became basically Richard Scaife’s fortune. That’s the origin of it.

Krugman: Because back in the day, you know, pre-Citizens United, when you looked at right-wing think tanks and all of that, it turns out there was sort of Bradley or Mellon-Scaife money behind almost all of them. But now I think it’s a bigger pool.

Graves: It is a bigger pool. We have more billionaires now, or more people in that class — that 0.000001.

Krugman: Yeah, I think it’s four zeroes and a one. But I always forget.

Graves: Yeah. And it’s interesting, because I used to occasionally talk to reporters about David Koch when he was alive, and they’d say, “Oh, but he’s given so much money to the theater or to cancer research,” but they’ve given less money, in some ways at the time, to political operations, although that’s now increased. And I would say it costs a lot more money to build a building than it does to actually buy policy, unfortunately, in America.

And so what’s happened is we have this political class of super-elite, super-rich people who have extraordinary sums at their disposal. So, for example, one of the richest men in America and in the world is a guy named Jeffrey Yass. He got rich on TikTok and also on these super-fast trades on Wall Street. He’s the richest guy in Pennsylvania. When he drops $1 million, $10 million in a race — let’s just put that ballpark out — it’s a huge sum, but from the standpoint of a dollar per dollar, the ratio is the equivalent of an ordinary American buying a coffee and a bagel once a week. It’s just nothing to them.

Krugman: I think it’s less true now, but still quite true, that given how much political decisions can influence the wealth of the wealthy, the amount that is spent to influence elections is actually still a pretty small number.

Graves: Yes, it really is. I mean, when Elon Musk was dropping 100 million or 10 million a year in these different races, he has so much money. I think at one point I calculated how much he was making per minute, or how much, in theory, his net worth was per minute. And what he was dropping in the races was nothing. It was pocket change to him. Basically, it would be pocket change to an ordinary American. Their wealth is so vast. And so, interestingly, even though they’ve invested a lot of money — people like Musk and Koch — in our elections, they still, in essence, don’t over-invest. They could spend a lot more and still not have it make a dent into their holdings.

Krugman: One thing I think most people really don’t have a sense of — even if you’ve heard a number, you don’t have a sense of how rich the rich are. You know, this was a time years ago when inequality was a lot lower. But I remember when I was still at MIT — so it’s a long time ago — but I don’t remember who we had. You know, faculty was rolled out for lunch with some rich guy, and the president of MIT whispered, “If only we could get his daily fluctuation.”

Graves: Yeah, that’s how much money. And now it’s incredibly more so.

Krugman: Yeah. Fossil fuels was really, really big. Still is, I suppose. But lately we’ve been seeing a lot from crypto and tech. What’s your sense of what they’ve achieved? I mean, they’ve spent an enormous amount of money and obviously bought a lot into this last election. But where are we on that?

Graves: Well, I will say just briefly, one last note on the fossil fuel industry, there’s a great news story out in ProPublica this weekend about the money behind the effort to give immunity to the fossil fuel industry, to forbid liability, and have Congress do so and have the states try to help with that. And so that piece really details that spending, that includes some significant amount of spending by Leonard Leo, who is the guy who helped pack the US Supreme Court. And so that issue—the fossil fuel influence on policy, the effort to get them off the hook for the liability for the climate changes that are underway—that is an ongoing, active campaign by the industry, or by the industry’s proxies, by the groups that are advancing that agenda.

But you’re right, now with the fossil fuel industry in terms of influence, it is being rivaled by, I guess the new rich in a way, in terms of the tech industry and the tech billionaires. And their influence was enormous in a way. Before this election, they had tremendous capacity, due to their wealth, like the Peter Thiels and others, to spend in our elections or to back certain candidates and get their person in a position of power.

But now that you have this administration that is basically making deals with our public policy — which I personally would describe as bribery, but they have not been charged — where you have industry insiders who are getting benefits: the tech industry, the media industry, getting benefits from kissing up to Trump, from doing favorable coverage in essence for Trump, you have a corruption component, in my view, that is combining the effect of the wealth already. And you have the policy distortion. You have this additional component because Trump is so willing to basically bend policy to favor his friends or people who favor him.

And then the crypto money, that’s the darkest of the dark money. I used to think that the dark money coming in around the election—the money spent by C-4s or their related C-3s—was dark money, but crypto is the darkest money. I mean, it is inherently concealed in terms of who the money’s going to and who holds the money. And we now have a president and his family that is involved in crypto and adjacent to crypto operations in a way where who knows how much money is coming in and from what sources, foreign or domestic? And crypto has also sought to basically influence politicians on a bipartisan basis, giving money to Senate candidates on both sides of the aisle in order to try to limit the regulation of that industry.

Krugman: Yeah, I’ve always thought that we kind of underrated the influence, the importance of sheer actual personal corruption. It’s not just campaign finance, but it’s actually what you yourself get: a bonus for accommodating special interests. But it used to be that led to cushy jobs at think tanks. We used to talk about how if you lost an election, that’s okay. There’d be a Center for Fear and Loathing that would offer you a job. But now it’s actually millions of dollars in the new dark money that somehow flow to you personally. Or in the case of Trump, billions of dollars.

One thing I learned from Rick Perlstein, one of my favorite historians of this whole thing, is that there’s another industry which has always played a large role in funding, which is basically the quack medicine industry. I mean, in some sense, that’s what’s going on with RFK Jr. We think of it as just this crazy guy. But actually, there’s a lot of money there.

Graves: There’s an enormous amount of money there. This so-called MAHA movement —to “Make America Healthy Again”—has really taken advantage of the internet’s access to create these individual communities, where people are getting really selective science. And I use that term loosely. Dressed up as science. Again, it may be funded by industries that are benefiting from it. But you also just see the rise of this influencer culture in the US, where some of them are also paid by these companies to promote their products or promote their lifestyle. And it has become such an influential, distorting thing.

I mean, the notion that we would have a rejection of vaccines and vaccinations for children in the aftermath of eradicating in the US diseases like measles, in the aftermath of a whole period, you know, 50, 60, 70 years, of having a really successful public health policy for vaccination to prevent these childhood diseases that can maim kids or blind them or, you know, basically disable them for life. And yet you can have this surprisingly large number—though it’s still a small percentage of the American population—embrace attacks on that science. And do so despite all of the weight of evidence of how successful these vaccines have been in promoting the health of the American people. It’s extraordinary that this is taking hold.

But as you point out, it’s not just the marketplace of ideas. It’s a marketplace. And that marketplace is profiting from pushing quack remedies and profiting enormously from pushing remedies that don’t work. And we saw that in full scream during the pandemic, when quack treatments, which were not effective at all, were so widely embraced and promoted by some of the people profiting from them, and also by Donald Trump himself or his closest advisers.

And one of the things I looked at at that time — ultimately there was a New York Times story about this — but I took a close look at how RFK Jr.’s wealth himself had increased over time, moving from his role in the Riverkeepers to his role of prominence in this anti-vaccine movement. And you could just see, as he took more and more aggressive positions against vaccines, how much more he himself was paid. I think in 2021 or 2022, he was making half a million dollars a year from the nonprofit group that he was leading, attacking vaccinations. So he was benefiting himself personally from those attacks.

Krugman: You’ve sort of structured your book around John Roberts’ own biography and how that kind of parallels the history of the movement. So tell us about that a bit.

Graves: Yeah. Thank you so much, Paul. It was a labor of love to write this book, because I really think that it’s hard to understand what’s happened to America without understanding what’s happened to the Supreme Court. The Supreme Court under John Roberts has exerted extraordinary power. And has asserted power in ways that the court has not previously done, including when John Roberts orchestrated the destruction of Section 4 and Section 5 of the Voting Rights Act. And he’s now on the precipice of doing the same to Section 2 of the Voting Rights Act in the Louisiana vs. Callais case that the court has heard and will be decided this summer.

But what people don’t realize is that John Roberts cut his teeth on trying to block the extension of the Voting Rights Act, trying to block the repair of the Voting Rights Act after his mentor, Bill Rehnquist, helped destroy a significant component of that act, which was designed to prevent the dilution of Black votes.

Krugman: Right.

Graves: And so you have a person who was chosen for the Supreme Court not because they thought he would be fair, but because they thought he would be a ringer. And he spent his early days in the Reagan administration as a Reagan revolutionary at the top of the Justice Department, trying to block the renewal of the Voting Rights Act with the amendments to overturn a Supreme Court decision. He spent time at the White House counsel’s office for Reagan, trying to block civil rights enforcement. He has devoted his life to advancing this very far-right agenda.

And he was someone who, when he was nominated, was not met with any of the howls of “No More Souters,” which was the sort of campaign mantra from the Federalist Society of not wasting a Supreme Court seat on a fair judge. And so after Roberts was confirmed, Bush nominated his counsel, a Republican lawyer named Harriet Miers, to the bench. Robert Bork and these other right-wing leaders screamed that this was a betrayal of their movement, to appoint a Republican lawyer and not a loyalist. And so her nomination was pulled down and Alito was swapped in, and again, “No More Souters” was not chanted at him.

And so the Republicans were able to secure a court that is now operating like a lever of power, aiding Donald Trump, aiding the Republican Party at almost every turn. And that includes the counter-constitutional ruling John Roberts orchestrated in 2024, giving Donald Trump unprecedented immunity from criminal prosecution. And then he and his fellow Republican appointees married that decision with 24 rulings last year on the emergency docket, the shadow docket, basically telling Donald Trump he could go forward with extreme actions, extreme assertions of presidential power, that were contrary to the Constitution, statutes, regulations, but that he could proceed over the temporary restraining orders that lower court judges had issued. And so this court, in my view, is out of control. It’s in desperate need of reform. And John Roberts is helming this court that is on a path of destruction against our rights.

Krugman: So, shadow docket. I didn’t know what that was until I heard you talk about it. So explain to people what that means.

Graves: Yes. So what most people don’t know is that the Supreme Court has about 8,000 to 9,000 petitions every year, and it only takes about 60 cases. It chooses 60 cases. These are all matters of discretion. They’re not required to take any of these cases unless it’s a state versus state case. And so the court is taking fewer cases, and it’s basically creating a docket where one year it’s about destroying the separation of church and state, another year is destroying reproductive rights, another year it’s destroying regulation of industry and carbon.

And then it has this emergency docket, which typically has been used for death penalty appeals. Someone claims at the last minute, “Please stop my execution,” and the court will issue a ruling, without full briefing, without oral argument, on an emergency basis. That emergency docket has been deployed by John Roberts and his fellow appointees as a shadow docket to basically change the law in America in significant ways over this past year in terms of policies on immigration policy, or allowing these mass firings to go on, allowing the gutting of funding for sciences and more. The court has allowed those things without having full briefings, without having a full opinion on it. They’ve just reversed the decisions of lower court judges.

And it’s significant in many ways because—as Judge Michael Luttig has talked about—this is a huge lack of transparency, a way in which the court is operating outside the bounds. But also, it’s the case that in almost every one of those shadow docket cases — where, again, no oral argument, no real public discussion, no opinion written — the court has intervened and overturned lower court rulings that temporarily blocked Trump, after those lower courts made factual findings that people would suffer irreparable harm and that under the law they were likely to succeed. What the Roberts Court is saying is: “you’re not likely to succeed. We are basically pre-reversing those cases.”

Krugman: So the contrast is that something like the birthright citizenship — where probably they won’t do the most horrible thing, but there are formal arguments — that’s all in the glare of publicity. But a lot of the things they’re empowering — the sort of pogroms against immigrants — are being done just sort of, “Oh, by the way, the Supreme Court has, without any visible deliberation, suddenly said that what Stephen Miller wants is okay, right?”

Graves: Yes.

Krugman: That that’s really quite horrifying. Gosh.So now let’s talk about the immunity issue. There’s been a lot of stuff in this since 2004 that is really horrifying. But the immunity for Trump is kind of the most glaring of them. And just tell us about that for a second.

Graves: Yes. This case that was issued by John Roberts — it was a 6-to-3 decision right before the election in 2024, and it invented immunity from criminal prosecution for a president. That’s never been the law in America. Ever. Not since the beginning. And that’s why there was a reaction to that decision, in part to have the introduction of the No Kings Act, because that immunity decision basically made Donald Trump king-like in his powers, by saying that he and any future president could not be held accountable for any crimes they committed.

When John Roberts wrote that opinion, he basically effectively pardoned Trump for the crimes he had committed. But he larded that opinion with additional assertions, trying to set the pardon power beyond any judicial or congressional review, asserting that there’s no limit on how a president can direct the Justice Department in its prosecutions, even though there have been longstanding limits in order to protect from the weaponization, the politicization, of the Justice Department to go after political enemies.

And so you have a situation now where you have a president who can commit crimes—and has committed crimes, in my view, and in the view of Jack Smith—who can commit crimes under John Roberts’ opinion. Hopefully this will be ultimately repudiated. He can pardon his co-conspirators, which is what he did when he pardoned the January 6th people who were convicted. But in essence, he could pardon any of his cabinet members or others—people on the ground in Minneapolis, for example—if he wanted to. He could pardon people who were engaging in illegal activity at his behest in foreign policy, war crimes, or domestically. And that would be okay under John Roberts. That is the essence of the destruction of the rule of law. If a president can break the laws, and he can order people to break the laws, and he can then give them immunity or pardon them for doing so, basically no law can hold.

And on top of all that, you know, it’s John Roberts who swears in Donald Trump on January 20th, 2025, where Donald Trump takes an oath to uphold the Constitution, to defend the Constitution. And yet John Roberts has just allowed Donald Trump to violate the Constitution in that immunity decision. A lot of people haven’t read the Constitution all the way through. I’m certain Donald Trump has never read more than maybe a sentence of it. But there are two duties in particular of the president in Article Two of the Constitution, and one is to uphold the Constitution. And nothing could be further from upholding the Constitution than breaking the law, than violating our criminal laws. And so John Roberts orchestrated this. It is a truly destructive decision that puts us all at risk.

And I hope that the people will come together to reform this decision, to reject it along with embracing court reform, like I’ve been working on with my work partner Alex Aronson at Court Accountability, and with our allies, to put together a really bold package of reform for the next possible opportunity to reform this court. But also to restore our rights and repeal—in essence reject—this immunity decision, which is counter-constitutional. It’s an anathema.

Krugman: So what would that mean? Hope for the best? Hope that we actually have a fair enough election in 2028 and a mass public revulsion against everything that’s been happening? How do we get out of this? Because the problem is a lot of these justices are still fairly young. So how do we get out of it?

Graves: Well, there are a lot of reforms that we’ve supported. For example, term limits, but also some jurisdictional changes for the court. I personally have been looking into court expansion and intermediate appellate court changes to try to deal with this court’s excesses and the fact that this court needs to be unpacked. The term limits would, if they were applied immediately, have an effect on removing three of the justices.

But I also think we need robust ethics reform, because the idea of taking secret gifts from billionaires, I mean, it’s outrageous. Or having a billionaire or a billionaire-funded group on the right funding a spouse, fueling a spouse’s income that feathers the nest of the justice. That’s outrageous and wrong. But there are so many other pieces that this court has dismantled, including the power to regulate carbon. That effort that the court has engaged in to try to kneecap the EPA [and rollback] voting rights, reproductive rights—there aree so many things where I think most of the American people really want changes. They want to get our rights back and expand them.

And so I’m hopeful that we can put together and be part of a movement that makes those reforms not just possible, but that people perceive how essential they are. Or this court—the Roberts Court—will continue to just dismantle our rights.

Krugman: Okay. Other than that, we’re doing great, right?

Graves: But you know, here’s the thing, Paul. There are more people than ever that are supporting these reforms. There is a growing reform movement. It’s hard to see, given the way Donald Trump captures the headlines and the legitimate controversies over the war and over the Epstein files and more. But beneath that, when you look at the polling, what you see is that people understand that this court is not trustworthy, cannot be trusted, and that we need to reform the court. And they also, on issue after issue, reject this administration’s policies, almost across the board. And so I think that there is a real desire for us to take a different path. A better path.

Krugman: That’s, I think, a hopeful note to end on.Thanks so much for talking with me today.

Transcript

All around the world, big, strong men with tears in their eyes are coming up to Donald Trump and saying, “Sir, you’re a loser.”

Hi, I’m Paul Krugman. A brief update on something that has palpably changed in the world in the last few days.

As regular watchers of Donald Trump and regular readers of mine know, Trump has a thing about insisting that people treat him with immense respect — the big strong men with tears in their eyes thing, “Sir” stories. And in particular about believing that the world despised America under Joe Biden and respects it now under his leadership, which was never true either in the first part or the second.

But it is true that until quite recently, many people in the world at least felt obliged to pretend to respect Trump, felt obliged to flatter him, to stifle the negative feelings that they were having about the course of the United States under current management. And maybe Trump actually took these kind of coerced professions of respect as reality. But in the last few days, suddenly the masks are off.

Volodymyr Zelensky just yesterday tweeted out a part of an interview that he gave in which he said, among other things, “In my view, Russia played the Americans again.”

So it was just saying, basically, that Trump is working with the Russians, which obviously he’s known and has surely thought for a long, long time. But to say it that openly is something new.

Zelensky — not a big strong man — but Zelensky is a tough guy. Keir Starmer, Prime Minister of Britain is, alas, not. But also Starmer just in a statement said that we’re tired of a world in which, I’ll quote, “bills go up or down on energy because of the actions of Putin or Trump.” Equivalence, Trump and Putin in the same sentence, in the same breath, that’s pretty stiff stuff.

And Starmer has been notable in trying to preserve the special relationship, avoid offending Trump, trying to make him get a few points off the tariff rate, whatever. But now Starmer is pretty much openly saying, you know, you are the problem and we don’t trust you.

What’s this about? Well, obviously, the United States went to war with a fourth rate power, Iran, and lost. Exactly how that plays out, we don’t know. But it was truly impressive how poorly the United States military and US strategic thinking has played out here.

The United States has also proved both temperamental and weak, lashing out at our erstwhile allies and veering between threats of war crimes and then what looks a whole lot like abject surrender.

So the world no longer either fears or trusts us. It turns out that our military might is not what it was cracked up to be, and our reliability is essentially zero at this point. We can’t count on the United States to do anything that it has promised. It’s a world in which the hegemon has basically gone AWOL. So that’s a big thing.

There’s another story which I think is important, which has kind of has been overshadowed by the debacle in Iran: The bigger ongoing war, which is Ukraine-Russia, is not going well for Russia. It is, if anything, tilting increasingly in Ukraine’s favor. Now, what’s interesting about that, why is that relevant?

Trump is basically on the side of Putin. He’s been unwilling and probably unable to just openly support Russia but has effectively pulled all aid from Ukraine, There’s essentially no money no military aid, no economic aid flowing from the US to Ukraine anymore — it’s all on the Europeans. The Europeans have still been buying some U.S. weapons and transferring them on to Ukraine, but that’s been largely choked off. And I think the assumption was that Ukraine would be in grave danger, would perhaps collapse without American support.

Not happening. What’s actually happening is that Ukraine appears to be gaining the upper hand in the drone war, which is what this war is mostly about. And Ukraine’s success in adapting to modern warfare has been so great that now it looks like there are a significant number of Ukrainian drones and to some extent maybe personnel already deployed in the Middle East, and that Middle Eastern nations other than Iran are quickly moving to strike deals with Ukraine, to buy Ukrainian equipment.

It’s kind of like, well, if you need help and Iran is still a menace, which it is, don’t count on the Americans, but maybe Ukraine knows how to do these things.

Obviously, that helps empower Zelensky to be open in saying what he really thinks about the United States.

Does this matter? Well, we’re not about to see the whole world turn on us. The United States may have threatened to seize Greenland, but I don’t think that Denmark is going to threaten to seize Alaska or anything like that. But it’s a big comedown, and it will hurt.

It’s a slow erosion, but having countries that trust you, that support you, is a very big asset in geopolitics. Losing all of that is therefore a big liability.

And this is my country. I’m not celebrating all of this, because I’d like to see America, particularly I’d like to see the next president, assuming that we actually have a legitimately elected president, inherit a brand that is not completely damaged and corrupted.

But that’s not where we’re going. It’s really looking pretty bad. And what can you say? We had the worst and the dumbest in charge. We still do. And that’s taking a toll on all of us.

Transcript

This is America’s darkest hour.

Hi, Paul Krugman with an update Tuesday morning. Earlier today, Donald Trump posted on Truth Social,

A whole civilization will die tonight, never to be brought back again.

Not going to be a problem if we ever do get the war crimes trial that all of this deserves. A statement of motive, intent is completely clear.

I don’t need to say how vile it is. It is shocking, although at some level, if you didn’t see this as a real possibility, then you weren’t paying attention. Not much to say here except to talk about how those of us who are not Donald Trump should behave.

First of all, any military commander given orders to start destroying civilian infrastructure in Iran should disobey that order, should say it, should not even quietly resign. This is a time to stand up and make it clear that this is totally unacceptable. This is a violation of everything that the military stands for. It’s a violation of everything that America stands for.

Second, any member of the Trump administration: to continue in your position doing your job as Trump takes America on the course of becoming a criminal nation, a criminal terrorist nation, you cannot continue in good conscience.

Particularly, if you play any role in making this happen, then you are a war criminal too. Then you ought to be brought up someday before an international tribunal. But even if you’re in a peripheral role, even just putting your head down and saying, well, I’m an assistant secretary at the agriculture department or something like that, that’s not good enough. This is not a regime that you can serve in good conscience.

Republican politicians, any Republican, I mean, there are people already saying, “oh, you know, I don’t approve of destroying civilizations, but” — that “but” makes you an accessory to the crime, if you are failing to stand up against it.

And I really don’t like this notion that only Democrats have agency. This is a very common thing. All of this is made possible by the lockstep slavish obedience of Republicans. Nonetheless, Democrats have a role here, too. And this is not a time to attack Trump’s war because it costs too much money or to attack it because it’s bad for energy markets or raises the price of groceries. I mean, it does do all of that. All of that is true. But we’re way past that point now. We’re at the point where you need to unambiguously condemn the immorality and criminality of what’s going on. No mincing of words.

Damned if I know what’s going to happen. I mean, at some level, I think that the civilization that may be destroyed tonight is our own. I mean, are we civilized if we do this kind of thing? If America as a nation doesn’t stand up against this, what are we?

So, God help us. Normal life will continue. It’s going to be a really weird thing to be out there, you know, grocery shopping and taking the subway and all of those things. But this is, in a way, the defining moment. The fate of the whole American idea is on the line.

I have no idea how this ends.

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 way through.

Paul K: Yeah. Yeah, for what it’s worth, I, I’ve had sort of two moments of revelation about trade. One of them, which seemed terribly relevant but maybe a little less so now, was the work early 2010s on the China shock, where we started to realize that, hey, you know, the problems of adjustment and dislocation that come from rapid globalization are a lot bigger than… you know, economists have always understood that there were distributional issues, but they’re a lot bigger. And that, that was, that was revelatory and a bit of a shock. Um, but I think it’s actually not the core of the story now. And, and for me, the, the revelation was, um... It’s a little odd, but I’m gonna give you this, uh, really offbeat point at which I realized that we’re not getting this back, which was actually when Russia invaded Ukraine, when we realized, hey, this rules-based order, not just about trade, but everything.

We, sort of had taken it for granted that, all of the old stuff, all of the old demons had been banished. That we weren’t gonna have outright war in Europe. We weren’t gonna have countries just plain exploiting their power over trade for geopolitical gain. And, we now realize, I think I realized that, hey, all of that, all the things that we thought were fundamentals about the twenty-first century economy were actually basically dependent upon a benevolent hegemon. Not totally benevolent, not totally hegemonic, but still a lot of it depended upon basically the United States, which enforced the rules and obeyed its own rules for the most part. And, well, we’re not in that world anymore, not in Kansas anymore, among other places.

So it’s-- now it’s a much tougher world out there

Soumaya: Can I just add that I think economists have been on a sort of journey as well, right? Um, you know, and, and, and, you know, starting point, the starting point being, you know, your, your theory, right? We thought that one of the benefits of trade was, you know, agglomeration, right?

You know, huge efficiencies, huge economies of scale, that, you know, created these gains from trade and what we’ve seen now, I think, is that those agglomeration benefits are real, but in a world where we’re not friends with everyone and we don’t trust everything, they come with risk.

Where do you feel like economics has, has, has gone?

Paul K: Well yeah. I mean, it’s interesting. In some ways, the models were already there, and we understood that there are big advantages to agglomeration, although I think they’ve turned out to be bigger than we realized. And they, they really do... You know, I’ve been on my own little journey here about Europe versus the United States, and an astonishing amount is driven by, loosely speaking, the fact that Silicon Valley is on the US side of the Atlantic, right?

It’s just that there are some agglomerations that color all of the numbers. But in a world of open markets, agglomeration rules. Texas doesn’t obsess about the fact that California controls a lot of the IT sector. Why should Europe obsess about the fact that the United States controls a lot of it? But that was not the world that we’re living in now, where these things become very real. So the whole, Everything changes once you stop assuming that it doesn’t fundamtelly matter where stuff is produced. We’re talking a lot about high tech, but, if we talk about Chinese manufacturing ... It’s not just that China is good at a lot of stuff. China has a whole industrial ecosystem that gives them tremendous amounts of leverage in the world. I mean, China isn’t the only place that has rare earth deposits, but it’s the only place that has the industrial ecosystem that can process them at this point. And so that altogether, that creates a world where Section 232 and I think Article XXI of the GATT on national security -- I’m always testing my acronyms and numbers, uh, knowledge. But anyway, I thought if you’d asked me fifteen years ago, I would have said, “Well, all this national security stuff, that’s just an excuse. National security is the last refuge of the scoundrel.” But actually not now.

Soumaya: Yep

Paul K: So okay. Any other sort of revelations beyond the fact that, that it, it’s a scary world with nasty people in it?

Soumaya: So I have one which is, you know, you mentioned the, the China shock literature, right?

Paul K: Yeah

Soumaya: So this is this collection of papers showing the effects of, of, of imports from China.

Paul K: Right

Soumaya: And one paper that I thought was super interesting that came up as we were researching this book was, um, was about what happened in Canada, right?

When, when there was liberalization as part of, um,

Paul K: Oh Yeah,

Soumaya: Was it NAFTA or was it

Chad Bown: CUSFTA.

Soumaya: CUSFTA?

Soumaya: Yeah, so the predecessor, to, to NAFTA. Um, and actually, you know, this, this research found that, that the effects when, were really quite dissimilar from those China shock effects. People were able to adjust. There were export opportunities created by that trade deal.

People moved into those, those other industries. There’s also research looking at, um, you know, uh, liberalization and populism in, in Europe, right? And there seems to be this relationship between places that have stronger social safety nets, um, and the switch to right-wing parties. Um, and so, you know, I think one, one point that, that I would want to make is, you know, it’s important not to go to over-interpret what’s going on now and to kind of see it as this idea that, you know, all trade liberalization, you know, has losers and, and there’s just nothing we can do to, to address those, right?

There are cases where actually import liberalization, you know, we, we could cope okay with it, and economies adjusted and social safety nets worked. So I think it’s, you know, it’s important not to kind of over-correct after some of those instances where there was, you know, real pain in the past.

Paul K: I’m trying to remember how much in the book you really talk about the political economy of these-- the protectionist backlash. ‘Cause that is actually-- not as, you know, there was a simple story, “Oh, trade produces lots of losers, and now the public won’t have it.” And that’s not actually the story as far as I can make out. what did you say? I’m trying to remember the actual way you put it.

Soumaya: Chad do you remember, or shall I?

Chad Bown: No. Yeah. I mean, I-- Well, I mean, the, the story is that it’s complicated,right?

Paul K: Yeah

Chad Bown: And voters don’t, you know, kind of respond as cleanly as, you know, one might expect to what the economic implications are for them, right? And so one of the more recent China shock papers, in fact, has looked at the longer run impacts of the China shock and the reapplication of the tariffs in the first Trump administration, and has found that they didn’t really do the job of, you know, helping workers in those regions, right?

Didn’t improve employment or anything like that. But it did help President Trump’s party, in subsequent elections, right?

So there is maybe something to the idea that, well, okay, he may not be helping me, uh, you know, get a better job or, or my employment process, at least he’s fighting on my behalf, right?

And so what that means is it’s really messy to draw these links between all of this stuff in the political economy context.

Paul K: Okay, I didn’t know that. I somehow missed that. I know you did mention it, but it’s not so much if you look at kind of the vector of, of real wage changes or whatever, of employment changes, that that’s not, not really the story. It’s more about attitudes, sense of whether you’re led by somebody who’s standing up to foreigners.

I think in the end, the protectionism in the U.S. and I think in Europe is not really a, a mass public groundswell. There are parties who exploit it, but it’s not really this sort of simple deterministic, you know, losers fight back, and this is why we have a problem.

A lot of it more has to do with, again, the, the complexities of the political process.

Soumaya: Yeah, and so you can see this in, in, you know, both what’s going on in the US and, and also the EU. So if you think about what Trump did, right, he, he had to do this by using and arguably abusing, um, you know, arcane bits of US law, uh, because he didn’t have the support of Congress to, to apply these tariffs, right?

And so he kind of ran roughshod over the, the democratic process there. Um, uh, you know, in obviously in the case of IEEPA, that turned out to be overturned by the Supreme Court. and, you know, during the first Trump administration, companies were complaining quite a lot. I think during the second, those complaints were a little quieter. That’s probably some combination of, you know, worrying about retribution, but also maybe in some cases they adapted, right? And so I think one lesson of that episode could be that you may not have the constituents for protection at the beginning, um, but you could, you could develop those constituents if that protection is there for long enough. And then the contrast is with, is with what’s going on in Europe right now, right? There’s a huge discussion about whether the EU should essentially do more of what the US is doing and protect itself. And it’s just extraordinarily difficult, even though you’ve got these really acute problems, right?

German exporters being, you know, crushed in, in, in third markets. You know, the car industry really struggling to cope with that Chinese competition. and even then, right, even in the face of these really extreme Chinese export trends, even then it’s really, really difficult to get a consensus, right?

And so, it’s a question of, you know, can Europe ever act as decisively as the Trump administration? Maybe there’s a middle ground between kind of hopeless inaction and kind of maybe overaction? But yeah, that just speaks to that issue.

Paul K: Okay, we could go on. I actually just say quickly, the importance of institutional details, including the details of legislation that people wrote ago, uh, that were not intended for the purposes to which it’s being applied. It’s, it’s amazing. I mean, the fact that, that, uh, that Section 121 is written the way it, it is, and that IEEPA is written the way it is, suddenly turned out to be you know, the fate of the world is hinging on more or less accidental wording of decades-old legislation. It’s kind of amazing.

Soumaya: I was outraged when I, an economist, was the economics correspondent of The Economist magazine, started covering trade. I thought this was gonna be all about, you know, big intellectual battles of which model worked best, and actually, I essentially became a lawyer, um, working out, you know, what, what does the Section 301 statute mean?

What’s 232? How is this compatible with the World Trade Organization rules? You know, it’s, it, you, you get stuck in the legalese quite quickly, but as you say, these, these details really, really matter. Apologies for all of the lawyers. I’m not actually a lawyer.

Paul K: I knew somebody who taught a trade policy course long ago, but she would return term papers with, uh, just right at the top, a Y-H-T-M-A-A-I-Y-P, which was, “You have too many acronyms and abbreviations in your paper.” anyway, So, you know, so if we’re talking about Europe responding, taking the extreme constraints on European action, you know, how would you go to the Berlaymont in Brussels, and, and you’re gonna tell the European Commission, “Here’s, here’s what you should do in response to,” I think you said that America is a pirate and China is a warship, but anyway, they have these two quite different but also, but very seriously threatening, aggressive trade policy partners.

Two of the world’s three economic superpowers are not behaving the way they used to, and the most obvious case is, okay, you’re the, you’re sort of running the third power. What, what should you be doing?

Chad Bown: Well, um, engaging, right? And I think, uh, you know, as Soumaya indicated, Europe has been a little bit slow, uh, to engage in the, you know, are we willing to, “can we fight a trade war?” question. But they do seem to be there now. One of the really interesting lines for Europe at the moment is this issue of electric vehicles and the automotive sector.

Um, and what’s fascinating is, is, is the following: they’re essentially trying to see if they can learn from the Chinese model to encourage Chinese firms to build cars in Europe, right? So what was the Chinese model? The Chinese model was forced technology transfer. What made them successful at the time, or partly what made them successful was, you know, back in the early 2000s, there were a lot of Western automakers the United States, Japan, Korea, Europe, that all wanted access to China’s 1.4 billion potential drivers, right?

And China had high tariffs at the time, so exporting into China was really hard. China said, “We want you to build those cars here, and not only do we want you to build those cars here, but we want you to form joint ventures with local Chinese firms, and then teach them effectively, uh, how to make cars themselves,” right?

And partly, and they were successful. And part of the reason why they were successful, you know, we think, is there were lots and lots of these Western automakers competing against each other, all seeking to get access to that Chinese market. So you fast-forward today, and you say, well, okay, can Europe do the same thing, um, with respect to the Chinese technological leaders today in, in battery electric vehicles?

And while there may be, you know, at the moment, lots and lots and lots of EV manufacturers in China, um, BYD is the dominant one. Um, and behind that is the battery makers, which are BYD and CATL, right? And to, to sort of thwart that possibility, right, the idea that, well, maybe Europe could exploit, you know, divisions amongst Chinese firms and negotiate to get them to come into Europe, partner with German automakers, teach them how to make battery electric vehicles better, locate production here, create lots of jobs, the Chinese government has already set up a system of licensing for its technology and saying, “No, BYD, CATL, you know, these companies, you’re not allowed to just go out and negotiate with the Europeans.

We’re gonna be the one. The Chinese government is gonna be the one controlling access to that technology from foreigners, right?” So on one hand, you have the Europeans maybe seeking to learn from the Chinese model, and the other hand, you know, the, the Chinese already going a step beyond and saying, “Yeah, we’re not gonna let you learn from our model and, and get those jobs there in, in Europe.

Here’s how we’re gonna thwart those kinds of things.”

Paul K: Wow. And that’s really instructive because, you know, all of us spent years learning about why government intervention in trade is almost always a bad thing and how, um, uh, letting people buy wherever they want and not, not, certainly not blocking possible profitable opportunities is, is clearly going to hurt your country.

And now we’re sort of saying, “Oh, you know, this dirigiste, overall control.” And in this case, it’s not just geopolitical. It’s, well, you know, China can preserve effectively its technology advantage, even though it’s not fancy technology. And because, because they can close off the technology transfer.

So but you’re, you’re saying that basically, as I understand, that at least the EU, presumably Mark Carney’s middle powers need to be at least a little bit more like the Chinese.

Chad Bown: I think that’s right. I mean, I think, you know, one of the lessons that we took away from the book is we all need to learn a lot from each other, from the other players. But especially, you know, I think in the Western system we need to learn from China. That does not mean we need to adopt the Chinese model, right?

And so please don’t get me wrong But there are elements of what China does when it does industrial policy, when it does, in that earlier example, the transfer of technology, that if you wanna have those similar kind of outcomes be successful, you really do need to see what it was about the Chinese system that allowed them to be successful in those instances.

You may not be able to replicate it, right? So you need to, you need to learn those kinds of lessons as well. But yes, learn important lessons from China.

Paul K: So, I mean, EVs in Europe, I mean, the United States has decided that we’re going to have coal-burning cars or something. But, um, EVs in Europe, there is a question, should they even be trying? Shouldn’t they, say “Okay, if the Chinese are gonna sell you cheap vehicles, why not just drive cheap electric vehicles and, uh, work on your European, uh, comparative advantage, whatever that may be?”

Soumaya: I mean, this is actually a, a debate in the US, right? You’ve got some saying, you know, “Why won’t you let me buy a cheap EV? These, these things are…

Paul K: Right

Soumaya: …karaoke bars on wheels. I want a, I want a piece of that equipment.” Um, and you know, the arguments against are in-- you know, include one, this is actually an area where Chad and I had quite heated debate as we were writing the book, as Chad was much more in favor of banning things than, than I was. Um, and you know, that relates to some of the security risks around, you know, having Chinese software run some of these vehicles, the risks of surveillance, even being able to turn off the car remotely. Um, Chad was more gung ho about banning vehicles because of that concern than, than I was.

I wanted, you know… Surely it’s possible to come up with some kind of technical test, um, because, if we start banning cars on that basis, then, you know, what about smartphones, right? Last time I checked, there was quite a lot of electronic equipment that was made in China that could, in theory, carry the same risks.

So are we, are we really gonna be inconsistent? So there’s the security piece of that. There’s also just the political economy piece of that, right? Which is that, you know, the, the car industry is massively important in Europe. The political consequences of letting all of those smaller companies just shut down would be potentially devastating. And then third, there’s a kind of bigger argument about industrial capacity. When we don’t trust each other, is it really wise to be cutting manufacturing, or accepting the loss of manufacturing? Could there be some connection to innovation? The evidence on this isn’t as concrete as we’d like. But you know, is there something? Do the folks who worry about manufacturing having some kind of national security advantage, do they have a point, right? In some kind of heated conflict, do you actually need the capacity to scale up quickly? So actually having that industrial might is important.

Now, that doesn’t mean manufacturing jobs, but you know, I’m talking about overall manufacturing.

Paul K: You wrote the book obviously before the Iran war, and, but you do talk about supply chains and the threat of cutoffs, and that now seems immensely more real. I mean, how much does that change the way we think about, about trade wars?

Chad Bown: So I think, Iran and, and Strait of Hormuz, right? Obviously, from Iran’s perspective, the war, the physical war, the military aspects of it have to be absolutely devastating. But at the same time, they have been able to weaponize through their export restrictions, you know, imposed on not allowing things through the Strait of Hormuz, in a way that is, you know, orders of magnitude bigger than the size of their economy would otherwise suggest, right?

And so that’s part of the new world in which we live. Sometimes you have those kinds of supply chain disruptions, um, that can come up, um, by, you know, not recognizing just how serious those choke points are. I think there were a lot of folks that probably did recognize how serious those potential choke points were.

But as we have seen, through what’s happened since February, the world is now, you know, facing the consequences of, of those actions.

Soumaya: So just building on that, I think what we’ve seen so far with the Strait of Hormuz is that some of those disruptions haven’t hit yet, and that’s because companies have been doing, you know, one of the policies we, we discuss in the book, which is stockpiling, right? So we’ve had inventories, and they’ve been running them down. When the crisis first started, uh, you know, folks were asking how bad could this get? And the response was, “Well, as long as it doesn’t last for very long, it’ll be okay,” right? Because there are those buffers. And so, you know, the crisis, I think, highlights the importance of having those buffers, but also I think that, you know, there is a point about substitution. So, so, um, if you think about the drop in oil flowing out of the, the Strait of Hormuz, a third of that has been made up with oil flowing out through other ports, right? And so one of, one of the lessons here is that, you know, when thinking about your vulnerabilities, actually there’s always some slack in the system.

There are always some, some opportunities for substitution. They may not be, you know, fast, it may not be easy, but actually one of the lessons from history in extreme situations is that we tend to be a bit more adaptable than we sometimes fear. That said, obviously if this disruption goes on, there’s pain being felt, right?

We shouldn’t then swing too far in the other direction and say, “Oh, well, there’s no point in applying export controls because we can always adapt away.” That’s not true. As we are seeing now in, in, you know, some of the, the poorer countries who are on the front end of this, and as we will be seeing later these weapons are pretty, are pretty impactful and pretty dangerous.

Paul K: What struck me though, I mean, the Strait of Hormuz is a, it’s a, it’s a physical choke point, which is helpful for illustrating the concept, but it turns out there are all of these de facto choke points like rare earths, like, well, semiconductors. I mean, it’s not that so much stuff passes through the Strait of Taiwan, it’s the fact that basically everything runs on chips made in this island. So yeah. And you do talk about this. I mean, right there, there is definitely a case for policies that even at some cost make sure that critical stuff is made in some quantity in places that are, are less subject to this kind of disruption.

Gosh, for many years I was co-author of the bestselling international economics textbook. I don’t think we mentioned supply chains, export controls, any of that. I probably haven’t yet. I’d probably have to get that in the next edition. But anyway,

Soumaya: No don’t worry, you don’t have to. You can just assign our book as the top-up, and then it’ll be fine.

Paul K: That’s right No, definitely. Y-H-S-T-M-A-A-I-Y-P. No, you’re actually very good. I’m not doing the acronyms and, and, and the numbers, but it is something. Actually, I’ll give a quick quiz. Uh, do you know the answer? You probably do, but the, um, you know, all these numbered trade things, what act are they numbers from?

Soumaya: 74? 1974?

Paul K: Well, the answer is they’re from several different acts.

Soumaya: Ok well that was a trick question!

Paul K: So it’s really horrible that we, we’ve got a 122 and a 232 and, and they’re not from the same law, so it’s totally obscure. But anyway.

Soumaya: Should we wrap up here?

Paul K: Let me just ask last question, then I’ll let you go. Do you have a view-- how does this pan out? You’ve given some, some good advice to people who are not Donald Trump, effectively. I mean, maybe Trump would benefit from, but he’s not going to read it. And probably not Xi Jinping, but how do you think this shakes out? It’s, you know, it’s possible that, that Mark Carney and his middle powers or Ursula von der Leyen and the EU leadership will in fact think about these issues and, and quite possibly read your book, as they should. Um, what does the world look like in five years?

Soumaya: Okay. well look, I’m gonna be real. Um, I don’t think there’s gonna be some grand bargain, um, in the next five years, right? Which goes back to my point earlier about the rules aren’t gonna save us. And that underpinned the stability that we had for so long, right? That’s really the only outcome that would reduce the chaos, right?

And so without that, we’re kind of in this messy world where everyone is gonna be following this rule book that we’ve laid out. Everyone’s gonna be trying to stockpile, to subsidize, to, to look to see what everyone else is doing, to see what lessons they can learn. that’s gonna be, you know, pretty chaotic, I think, the chances are that there’s gonna be misinterpretation of, of what’s happening.

So just, you know, take an example, stockpiling is one of the main tools that, that countries are now deploying to try to protect themselves against, you know, weaponized shortages. but you know, there was a hearing too long ago where, where one of the US committee was quizzing experts on, on whether stockpiling was a sign that a country was about to attack, right?

You’ve got China building up massive stockpiles. What if that breeds suspicion, um, that there’s some kind of military preparation? And what if Western stockpiling breeds that suspicion on the other side, right? So you have this real risk of these awful self-fulfilling dynamics. so, you know, do all the nice things, right?

Communicate, try to coordinate with your friends, engage, be as transparent as you can, um, put in the effort, spend the money, subsidize, stockpile, do all of the things that are hard. but you know, you’re gonna have to put in, put in the effort and be consistent about it, because the dynamics are such that in a trade war, your adversary is gonna be taking advantage of any moment of weakness to, to try to strengthen their position.

Chad Bown: And I would say for me,, the only things I would add to that is, you know, to build upon the, please work with your partners and allies, right? It doesn’t make a whole lot of sense to be fighting with them distracting them away from the really hard task at hand of fighting the real trade war that needs to be fought, which is dealing with these challenges with China.

And, every ounce of time that Europe or Canada or Japan or Korea has to deal with American tariffs, demands for, you know, invest here in my energy sector or something like that, instead of focusing on how do we most quickly, at lowest cost possible to deal with the affordability concerns, diversify some of these supply chains away from China while China is actively trying to prevent us from diversifying those supply chains away from us.

We need to do that kind of thing together. So focus on the trade wars that need to be fought, and let’s put the other trade wars to the side.

Paul K: Okay. That’s actually interesting because we’re basically saying that the, if not full on conflict, that trade war with China is basically gonna happen, at least a cold trade war. And that if only the United States would stop doing what it’s doing, that we could actually form an effective or might be able to form an effective precautionary bloc against it, which is optimistic. I guess that means, particularly if we get some better management back on the home front, we might actually be able to resolve this not too badly. That’s, that’s what passes for wild optimism in the year 2026. We’re all optimists now. This is, this great, sunny, uplands await

Paul K: All right. Well, Soumaya, Chad, thanks so much, thanks for the book, which is tremendously enlightening, and thanks for the not totally dire analysis at the end. Let’s, let’s, uh, hope for the best, and the best way to make it work is for everybody to read the book

Chad Bown: Thanks, Paul

Soumaya: Great advice.

Jared Bernstein, former top Biden economist and all-round economic expert, and I bat around the puzzle of persistent negative economic sentiment. Recorded Wednesday.

. . .

TRANSCRIPT: Paul Krugman in Conversation with Jared Bernstein

(recorded 4/22/26)

Paul Krugman: Hi everyone. This week I’ve got Jared Bernstein with me for a talk about economic vibes. We had planned and hoped to have G. Elliott Morris in on the conversation, but he came down sick. So it’s just going to be two economists talking about why people are still so negative about the economy. Clearly this is very important for lots of purposes, but also just kind of interesting. So, hi Jared. Maybe you should lead off by explaining why it’s so compelling and then I’ll chime in. We’ve both done work on this, but you’ve done more.

Jared Bernstein: Yeah, well, to me, it’s personal because I was in the White House—in the Biden administration’s Council of Economic Advisers, as you know—during this period when what began to be called the vibecession arose. I associate that term with Kyla Scanlon. This was a situation where we were posting some good strong macroeconomic numbers. GDP was strong. It was above trend. We got back to full employment very quickly after the pandemic-induced recession. But there was a big spike in inflation. As that spike came down, we were rolling down the other side of inflation mountain in the second half of 2022, we thought that was a pretty good development, given how upset people were. But consumer sentiment, consumer confidence, people’s feeling about the economy—these vibes—just kept getting worse. And it seemed to me at the time that that shock, not just to inflation, but to the level of prices—how much prices went up—was more important than most economists were realizing. As you well know, people in our field think a lot about inflation and inflationary shocks. We think less about the level of prices and sort of take that as a given. So that struck me as quite important at the time. And I began to look into it in ways I’m sure we’ll get into.

Krugman: I mean, what was striking about it was that historically, there’s a pretty good relationship between consumer sentiment and macroeconomics. And way back they called it the misery index, which is the inflation rate plus the unemployment rate. It was designed by Arthur Okun, and it did a pretty good job. And then you added a little more sophisticated version of that, and it has historically done a pretty good job of tracking sentiment. But after 2022, even by these measures that had worked before, it looked like an economy that should have had people feeling a lot happier, but they weren’t. But let’s talk a little bit about price level because what always struck me, even from the beginning, was a question about: what period of inflation are we talking about? You know, why should it be the one-year rate of inflation that enters into the misery index as opposed to a two-year, or three-year, or four-year? That’s how we kind of started. In your recent work, you started by saying, “well, maybe with inflation over a longer period,” but this kind of morphed into this price level issue. So why don’t you tell me about that?

Bernstein: So, a couple of things to amplify points you were just making. My coauthor on a recent paper, Daniel Posthumus, and I made a model of consumer sentiment. And this works both on the Michigan version and on the Conference Board version.

Krugman: By the way, people should know that U. Michigan is the longest-standing regular survey of how people feel. But the Conference Board—I don’t know how far back they go.

Bernstein: It actually goes back to ‘62, and U. Michigan goes back to ‘52. But that’s kind of relevant for what I was about to say. So we built a model to predict the sentiment or confidence indices. We used the stock market returns, real consumer spending, inflation, and unemployment. Very simple. And we ran it from 1990 to 2019. It then predicts very well what the index does all the way back to the 1950s. So even though we ran it from ‘90 to 2019, it tracks the index very well. And then as you said, it breaks down in 2019. And as you well know, the ‘20, ’21, ‘22 inflation shock wasn’t the first inflation shock in our history. But it was the first one in this series where you see this big gap between how people should feel based on those variables, those predictors, and how they do feel.

And I do want to get this down early on: that’s a pretty complicated thing to explain—how people feel about the economy. You know, you ask ten economists what “vibes” mean, or pollsters, whatever; they’ll tell you ten different things. But I think what happened to prices is very important. But I want to be clear— and you’ve underscored this in some of your recent work— it’s not the only thing. So, there’s that.

I guess one other thing I’ll say: I have a particular set of experiences. I used to go out on WHNL, which stands for White House, North Lawn, and that’s where we used to go and talk to the cameras about how things were going. And no matter where we started, no matter what we were talking about, like a good unemployment report: “We just had 250,000 payroll jobs.” You know, “productivity is up, GDP inflation’s way down.” “Groceries had a 12% inflation rate. Now they have a 1.5% rate.” These are the things we were talking about out on WHNL, and it always got back to [the press saying], “Why do people feel so bad about the economy? They’re telling us things are too expensive. What are you going to do about that?” So that really got into my head.

Krugman: So your story is one that I have largely gone with. You did the hard work on the econometrics, which I have not, but again— you or I would say, “Look, inflation is way down.” They said, “What do you mean? Things cost so much more than they did in 2019.” And so you kind of introduced this “excess price level” as a story, which is very widespread. But why not that as opposed to just inflation over a longer period, or is there really a better story there?

Bernstein: Yeah. So, they’re quite similar. Inflation over a longer period is basically asking the question: how much did the level of prices go up over this period? So you raise a fair point. Most of what we talk about on inflation day is the change in the monthly inflation rate or, maybe, the yearly rate. But I think in some senses we’re circling around the same thing, which is people’s memory about prices. And that’s key to this research. It’s something I hadn’t thought enough about but I’ve more recently been kind of obsessed with, which is people’s memory of what things used to cost. And this gets you down an interesting set of questions.

So if that were the only thing in play here, everybody—including me and you—would be walking around totally depressed all the time because when I started driving, gas cost $0.60 a gallon. And, you know, right now it’s a $4 national average, but this increase from $0.60 to where it is now or any other price you want to focus on—that’s salient to the consumer market basket. It tends to go up very gradually. When you have a shock, like we did in ‘21, ’22, people have this set of prices still emblazoned in their head. I used to call it the “personal price vector,” which is this idea that we walk around knowing what the things we buy kind of cost. And when that gets shocked, you know, it’s really quite upsetting to folks, and it takes a while for them to acclimate. The question is, what do we mean by “a while”? And I’m still wrestling with that question.

Krugman: Yeah, I think there has to be a statute of limitations there somewhere. I mean, people aren’t pining for the days of 15-cent McDonald’s hamburgers. I started driving a lot earlier than you did. So, I don’t remember what gas cost, but I do remember a quarter to go to the movies. But obviously, at some point, people stop remembering. I’m probably going to get all nonlinear here, but I mean, we’re now five years on from the big price shocks from Covid. Admittedly, I am more affluent than most of the population, but I don’t remember what ground beef or eggs cost in April 2021, but I’m not sure that many people really do. So how is it that we are still feeling this?

Bernstein: Yeah. So this is something I think about a lot. And I think the answer is that it’s not just that we had that one shock—one and done, done and dusted. It’s that we’ve actually had a series of shocks and that people haven’t had time. A lot of this comes under the rubric of Trumpian chaos or, put differently, horrible crap that the Trump administration has thrown at the economy. You know, just really bad economic policy that has continued to fuel the shock that consumers have been experiencing. So, again, if it was one and done, I think people would be feeling better. But you get the Trump tariffs—that’s the big shock to prices. Now granted, we only import 11% of our GDP in goods. But walk down the aisles of Target and Walmart, and you’ll see a lot of those imports. So that’s in play. And now we have the shock of the war. I think there are some other factors in play. Social media amplifies this stuff in a way that it hasn’t in the past.

And, you know, actually, while I take your point about remembering what things cost—from talking to a few people, looking at some polling— actually, people do still remember at least what eggs cost, which was around $2 a dozen, or $1.50 a dozen. Although it’s not that far from that now, it’s closer to $2.50 or $3, depending on what kind of sale you can get. It wasn’t that long ago that it was four and five because of avian flu. So there’s been a lot of other shocks to prices in the interim. And I think that’s played an amplification role.

Krugman: Let me just say, people hate inflation. I mean, there’s a widespread view among economists—which, if you are not sufficiently cautious and laying it out, can sound condescending—but if you have a big increase in prices, but also a big increase in wages—which is kind of what happened during the Biden years—people should be saying, “Oh, I’m okay. My real income has kept up.” But they don’t. They think that they earned the wages and that the prices were done to them. Are you okay with that view, or do you think there’s something more going on here?

Bernstein: I think that view is correct. And that goes way back to research from many decades ago and has recently been updated by Stefanie Stantcheva, who shows precisely that people, right or wrong, kind of understandably feel like: “If I get a raise, it’s because of my hard work and I deserve it. If something happens to the price, that’s not me. That’s something somebody else did.” And in a world of politically intense partisanship and vicious social media, that “someone” became Biden. So, you get, “I got my raise, but Biden did this to my price.” And so I do think that plays out in both political and economic spheres.

Krugman: Something that I think I was quite wrong about was I thought that the bad vibes would kind of alleviate, or diminish, with the new president, much as I thought that there was a strong element of partisanship in moving those numbers, and that has not happened; if anything, it’s the reverse. And just a few hours before we had this conversation, I posted something about that. But what’s your view on that?

Bernstein: I have a strong view on this. And you captured it in your graphic this morning. I think that what’s happening to Trump—and this is not rocket science, by the way; if Elliott was here, he’d have more authoritative points on this, but I’m pretty sure I’m right. I think there are three groups in the electorate. There is the Never Trumpers, the Always Trumpers, and then this really key group in the middle that’s pretty dispositive in terms of which way they swing and it’s dispositive in terms of determining election outcomes. Some people call them “persuadables.” What I think of them, at least in the context of our conversation, are people who believed Trump when he said, “I’m going to lower prices on day one.” But these are folks, according to my theory which we’ve talked about so far—these are people walking around saying, “Damn it, I want my old prices back. I want my old interest rates back. I want my old mortgage rates back. And this guy not only is saying that he’s going to give them to me, but actually, the last time he was president, prices were lower and interest rates were lower. So let’s put him back and, you know, maybe we’ll get back there.” So they rolled the dice and they bet on the wrong pony. Whoops, I mixed the metaphor. But you get what I’m saying.

And now they understand that they’ve bet on the wrong guy and that their prices are right back to where they were. And in fact, inflation, if anything, has accelerated because of decisions Trump’s made. It’s not just that he’s ignored affordability or called it a hoax; it’s that he’s pushed hard in the wrong direction on these things. And this key middle group—which I think is behind some of the numbers you posted this morning—is very disenchanted by what they’ve seen.

Krugman: Yeah. Again, it’s hard to talk about this stuff without seeming condescending, but the people who swung to Trump in 2024 and swung hard against him now are disproportionately low-information, which—you know—that’s not a pejorative. It’s just a description there. He defines it as people who don’t know which party controls Congress. And I guess the argument is that they may well have actually kind of believed Trump, or at least either believed Trump’s promises, or just remembered that they were feeling pretty good in 2019.

Bernstein: I also want to be very careful not to sort of criticize anybody for being what looks gullible to an economist, because economists know that the only thing that really brings the price level down—meaning broad price deflation—is a deep recession, and nobody wants that. But people are getting jammed with all kinds of signals about how “I’m going to make your life better for you.” And I don’t think the media has distinguished themselves in helping people sort this out. So, you know, why not throw the dice and make a bet on someone who you think is going to do that kind of magic for you?

The problem that a lot of people face—the group that we’re talking about— is nobody ever seems to really help them enough. So that is a very important part of the agenda—what I call the affordability agenda—that I think we need to be working on and delivering on, you know, sooner than later.

Krugman: So, this is me being probably more partisan than you, despite the fact that you were actually in the administration, but I would have said that Biden did a lot to help people, that there were a lot of aid programs. I remember how worried people were about long-term economic scarring from Covid, and instead, we had this roaring recovery. And yet it didn’t seem to penetrate. People didn’t seem to give it any credit.

Bernstein: Well, the roaring recovery was real. I mean, you’ve been writing about this. I know we both admire Arindrajit Dube’s recent book, which is really a great documentation of the wage impacts back then. We wrote a chapter much like what Arin is saying in one of our economic reports for the President, where we documented the benefits of such low unemployment to folks. So, yeah, it’s true that we definitely were delivering some things that improve living standards, but some of them, based on just the political hurly-burly of the time, didn’t last long enough.

So the child tax credit was hugely important and took child poverty down to historically low rates. Cut it in half. And that was amazing. And by the way, it also underscores the point that whatever the child poverty rate is or the poverty rate in general, that’s a policy choice. And Biden chose to make it a lot lower. I thought it was the right policy choice. But, you know, it wasn’t okay with Joe Manchin, and so it went back up when that program ended.

And then when it comes to a lot of the investments, like building our industrial policy, building new computer fabrication plants, and investing in clean energy, that stuff takes a long time to pay off, and folks don’t really see that. And then when it comes to affordability, people were concerned with housing prices, healthcare, childcare, and the price of energy, which you highlighted this morning. And those were areas where we tried but weren’t able to do enough.

Krugman: The consumer price index— the standard measures of price level—do not include interest rates. I mean, the way we measure housing prices is by either rents or an estimate of what your house would rent for if it were rented; “owner’s equivalent rent.” And when I look at different things, one thing that really does stand out, the one thing where prices have effectively risen a lot more than wages, is in fact the mortgage payments. So how much do you think...? I mean, there was a paper by Larry Summers—though that doesn’t discredit the work— saying that was a big part. What’s your view on that?

Bernstein: I think that that is true. I mean, I think the point of that paper and my reference earlier to interest rates and mortgage rates is that this is the price of money. So it’s prices again. You know, “I want my old prices back.” Well, what’s the interest rate? It’s the price of borrowing. And so, yeah, I think that’s in play. But I think where that rubber meets the road is definitely in housing costs. Housing costs really went up very quickly over this period. And a very big part of this sentiment that we’re talking about—and this has been documented—is a lot of young people feeling like they’ll never be able to afford to buy a house. Which is very pervasive. That sentiment and that truth is very pervasive. And how do many young people start building wealth? Through home equity, through buying a home. So that’s a source of a lot of upsetness.

But it’s the rental side of the equation that was really giving folks a lot of problems back in the period when these negative vibes started to percolate—and still do. If you look at the numbers, the share of income that people are paying on rent, it’s 30, 40, 50% in some cases. And that makes it really hard to get by. So I think both the interest rate and housing costs are part of this puzzle. Absolutely.

Krugman: It’s one of those things, because if you look at rents, rents really shot up in ‘21, ’22 and then they really sort of flatlined after that. And I’m not sure that, at this point, rents are any higher relative to 2020 and before. Maybe I’m wrong about that, but I thought rents were actually not looking like that big a problem now.

Bernstein: Yeah, at least in terms of inflation. The shelter, or the housing component of the CPI is back to where it was pre-pandemic. So again, this is a level thing. So, this gets back to something we said before. I would go out to talk to the TV cameras, and I’d say, “Inflation was 9-10%. Now it’s 2%.” And people would kind of hear: “Ok, so the prices that I already don’t like—they’re not falling. They’re going up more slowly. And you want me to stand up and applaud for that?” And I think that dynamic has been in play in rental markets as well.

Krugman: I think that was an old John Kenneth Galbraith line where he said: “When people say inflation has fallen, they’re saying that things are getting worse more slowly.” Which is not really right, but on the other hand, it gets at this.

Bernstein: I would say that’s “not really right,” but just what you said. And I have this theory that I’m working on with some folks. I don’t want to lean too far into something that I haven’t empirically really fleshed out yet. But I think there’s something that goes on in this space when you have a shock to the price level. When instead of gradual movements in something people care about, if something’s getting bad, I guess it’s the boiling frog story. If something’s getting kind of bad, really slowly, you can learn to live with it. You can adapt. And if your income and wages are kind of going up at around the same rate, then you’re not really the boiling frog. You’re pretty comfortable and you’re getting along, or you’re pretty uncomfortable.

You know, you made an important point this morning: a lot of people are just always having a tough time. So you’re either doing okay or you’re doing badly. But at least it’s not a shock. You’re used to what you’ve been experiencing. And I think the interaction of a shock that’s that sharp, that quick, when you’ve had two decades of really low inflation—and this gets into the ‘70s story, which we should probably get into a little bit—that’s really a cluster mess for people’s thinking.

Krugman: Yeah. You did your estimates starting in 1990. So it’s really three decades. I mean, basically, Paul Volcker brought inflation way down in the ‘80s. But we used to think there was low inflation when it was 4%; but by the time he was finished, it got down to around 2% and stayed there for a long, long time. So only old codgers like me even remember a high inflation environment until what happened in ‘21, ’22. So, yeah. The shock aspect, I think, was really clear.

Bernstein: But, you know, first of all, I sat in gas lines in the ‘70s, so... A lot of our conversation, Paul, is two old boomers saying, “Well, I remember when things used to...”

Krugman: Yeah.

Bernstein: But you asked a good question in some correspondence we had, which was, “Why didn’t we have this kind of vibe shock when we had the late ‘70s, early ‘80s inflation shock? Because that was also a big shock.” And, again, that was when people like me were sitting in gas lines, which is pretty uncomfortable and unfamiliar an experience to most Americans. And you just didn’t see the kind of vibes gap that we see in the data now. And I think one of the reasons is because we hadn’t had 20 years with inflation. It was just very quiescent. Inflation below the Fed’s target of 2% for many of those years where we just didn’t have to think about it. We actually had a cascading series of shocks back then. So, I think the way we put it in the paper is that when people have been living with good weather for 20 years, a hurricane is way more upsetting to them than if they’re sort of used to storms.

Krugman: Yeah. And it turns out that the increase in the price level under Reagan’s first term and under Biden were actually shockingly identical. I mean, within fractions of a percentage point, equal. And yet, Reagan runs on “Morning in America,” and with Biden, everybody thinks, “I want the good old days of Trump back.” And that might just be stormy weather. Also, it’s just that people came into the Reagan era expecting [some inflation]. The U. Michigan median expected inflation over the next five years was, I guess, 7.4% or something when Reagan took office.

Bernstein: Right. When you start, it sets off a path dependency that you kind of have to live with. But, Paul, I actually wanted to ask you something about this, which is a little more forward-looking. This gets into some nerdy economic stuff that’s less about the vibes and more about inflation and those dynamics. It gets into the Federal Reserve a little bit, which is topical given that, you know, Kevin Warsh is in the news this week. And Chris Waller, one of the Fed governors, gave a speech that I thought was quite articulate on this point. There is some thinking now that because we’ve had this series of shocks—of course the pandemic, but then, you know, the war in Ukraine, which, by the way, was another energy shock. And now the war in Iran, which is yet another energy shock. And the tariffs, which is another price shock. Because we’ve had all these kinds of repetitive upward pressure on prices, the inflationary anchor— which I’ll let you explain— is at risk of getting dislodged. And that is something that I do worry a bit about. Could you talk about that? But also, you know, maybe clarify what the hell we’re talking about?

Krugman: Yeah. I think you probably have the same underlying model, although I think I may express it a little differently. But when we think about inflation—I guess one way to say this is that inflation is a process of leapfrogging—that a firm sets its prices, and then another firm sets its prices overlapping a bit, and then the next one and so on. And what prices are you going to set? Because you don’t change your prices every day, at least in most things. It’s partly catching up with price increases that have happened before, and it’s partly getting ahead of price increases that will happen. So you’re concerned about the prices that your suppliers will charge. You’re concerned about the prices that your competitors charge; it tells you how much you can get away with. We usually put this as expected inflation. But it’s actually both past inflation and expected future inflation that enter into determining what the current rate of inflation is. And the great, big story that we tend to have is that inflation, if you have a bout of it—even if you have a spike in prices because of something like Russia invaded Ukraine or the United States bombing Iran— it’s not as big a problem if it doesn’t get built into people’s expectations about future inflation.

But we’re always concerned that expectations will get un-anchored or that people will start to do what we think happened in the ‘70s. That people started to build expectations of future inflation into their pricing, and that that was extremely— you know, extremely costly to get rid of it. The severity of the ‘79 to ’82 slump was comparable to the global financial crisis. And the question, obviously, is: are we doing badly enough for that to happen? And, actually, I’d say there’s two forward-looking questions. I mean, we had a great experience, right? That’s part of what I want to get at. In terms of the things that macro economists were worried about, the ‘21-’22 inflation spike turned out to be kind of... everything worked out fine and expectations didn’t get un-anchored; the inflation was transitory, although transitory turns out to be longer than we thought. Slow, but in the end, the definition really should be functional by the time period. And in the sense that we did not need to go through an extended 1980s-style slump to bring inflation down. That was what we had all hoped for. But can we count on that happening again? And that’s the question. I mean, how much do you worry?

Waller, by the way, was a big dove. He was one of the people who basically kind of went after people who were predicting many years of high unemployment, saying, “No. You’re wrong.”

Bernstein: Yeah. So people who are interested in what we’re talking about should go read the speech that Waller gave late last week. It’s very clear and, I thought, incisive on these issues. So I’m worried, Paul, and I’m a historical dove. And when it comes to full employment and inflation balancing the Fed’s mandate. I’ve long worried about the full employment side of the coin. And now I’m worried a little bit more about the inflationary pressure side of the coin. Now, that may be because of my own PTSD from when I was going through this in the administration. But, you know, the Fed has been above its target for five years. That’s a long time. And inflation seems kind of stuck around where it is now.

Krugman: Look, if the target were 3% instead of 2%, the world would be fine. Obviously, wages and incomes would have to catch up to that. But I think that would happen on average. It’s a big statement.

Bernstein: Yeah. But if the Fed can’t get back to its target in a climate with a reckless and unchecked person in the White House whose instincts are highly inflationary—as is true of all authoritarians, regardless of what country they preside over— yeah, I’m worried about it. I’m worried about the anchor.

Krugman: I have turned a little more hawkish than I used to be. I used to be very critical of the 2% inflation target, which in many ways I thought was too low. And if we consult the history of how we ended up with 2%, it’s kind of weird and also kind of funny. I mean, it’s one of the few major things that you can really blame on New Zealand because they were the first to do it. But you know, there were a lot of arguments, particularly during the long slump after the global financial crisis, saying that 2% was too low. But now we kind of say: well, 2% is low enough that people just stopped thinking about inflation and 3% is starting to draw concern. We used to say 4% makes sense, and now I’m not sure that would be okay. And that credibility—the ability to get over the inflation shock, the supply chain, and Ukraine shock— I think had a lot to do with the fact that people really did not expect higher inflation on a sustained basis. I’m worried now that losing 2% unintentionally might be a serious problem.

Bernstein: Yeah, I share that concern. But let me ask you a question. And I should speak to this, too. But I want you to go first, which is: so we’ve talked a lot about what we think are driving these negative vibes. What do you think we should be doing about it? What is the right path? What is the best path forward to realign vibes with where they were pre-pandemic, at least?

Krugman: That’s a really good question. And a part of the answer is: what do you mean “WE,” white man? You know, who is “we” that should be doing what? Well, certainly not me. And at this point, not you unfortunately either.

Bernstein: No, that’s not correct. I’m very ensconced in policy efforts, which I’ll talk about in a minute, but you go ahead.

Krugman: All right. But, you know, a big part of the answer lies with the Federal Reserve. But also, there’s a very good chance that Congress will be in different hands in a few months and that the White House will be in different hands in 2029. But I mean: “don’t do stupid stuff” would be a good start.

Bernstein: That’d be a great start.

Krugman: Don’t launch unnecessary wars. Don’t politicize the Fed. But I do worry. I mean, we’re in the middle of an ongoing discussion in which you and Elliott have been making the point that it is about price levels. And then there’s a lot of people saying, “Does this mean that the vibes are going to be negative for the foreseeable future?” Are we in, among other things, for a political universe in which every president, of whatever party, has a disgruntled public because prices are too high, and so it’s always “throw the bums out” every four years? And I don’t know. I think this is one of the things that actually hinges a lot on what we think really is driving the vibes. And when is the statute of limitations on the price level that people expect? But it is a real concern.

Bernstein: Yeah. I mean, it’s funny. I myself framed this as like, the goal is getting vibes back to some level that they used to ride at. Really, the goal is much more a political economy goal, at least in my head, which is to help people be able to make ends meet in an economy that’s been growing at a good clip for a long time. I mean, we’re actually quite productive. We have good GDP growth. Even the unemployment rate is pretty low, even if job creation has been just about zero.

A lot of people justly feel—and this is not just a low-information sentiment—a lot of people justly feel like they’re just not getting their fair slice of the pie that they’re helping to bake. And so we have to reconnect their living standards to the growth in the overall economy. You said something decades ago that’s always stuck with me, which is: for way too many people, economic growth is a spectator sport, not a participatory sport. So what’s the linkage there? To me, it’s the affordability agenda. And this is what I’m working on at the Center for American Progress and at the Stanford Institute for Economic Policy Research, which is crafting an agenda—a policy agenda—and getting politicians interested in it (which is another part of the problem) that will help correct market failures and flaws in key areas of the household budget: health care policy—something you’re very familiar with. Child care. We have great plans in that space. Housing— we’ve already put out a plan that’s been quite positively viewed in that area. We have a great plan coming out on electricity prices. We tried to do a thing on groceries. That’s a lot harder because it really is pretty much a market good. But that’s the agenda. And I don’t think that people necessarily have to understand all the fine points on the policies. But you got to deliver and, you know, that’s a really heavy political lift. But I think that’s the connection that needs to be made.

Krugman: Yeah. I mean, I would say also that you have to be seen as trying to deliver that. That’s really kind of important.

Bernstein: Yeah, gotta get caught trying.

Krugman: Although there was sort of this question: were you and your colleagues bad salesmen?

Bernstein: Yes.

Krugman: Well, “could you have done something different?” is the question. I’m sitting right now in the heart of the communist, anarchist, Islamic world revolution, or whatever. You know, with the Mamdani administration in New York, which has very limited ability to affect these issues.

Bernstein: Right. Although the area where he does have more impact probably is housing affordability because that is a lot of local policy. But at least 100 days in, he’s been spectacularly successful and visibly trying to do something. I think Mamdani is exhibit A of what I’m talking about. He ran on affordability. And, you know, you can call it sidewalk socialism, but he’s filling potholes as well as delivering child care and working on housing. He is, I think, a model for exactly what I’m talking about. And look, yes, his powers are limited given where he sits. But however many months in, it’s working. Now, it’s way too soon to make any kind of a judgment. And by the way, yes, Mamdani is the most visible example of the model I just described in action, but it’s working as well or better than I could have hoped, at least thus far. But here in Virginia, we have a centrist governor named Abigail Spanberger, and there’s Governor Mikie Sherrill in New Jersey— both centrist Democrats running on similar policies. So this is not just a socialist thing.

Krugman: I know. It’s just, New York is sui generis on every level.

Bernstein: Including pizza and bagels, but that’s a different discussion.

Krugman: Well, it’s even more that I think it’s a lot easier to find Eritrean food, which I had here with friends the other day. But anyway, one of the things that worries me about this whole vibes episode is—aside from the political economy and all of that— it’s: what do we do in the next economic crisis? Because what strikes me is that when the supply chain issues became clear, when it became obvious that some things had been disrupted and that demand was really a very different mix from before, and that you started to see those container ships steaming back and forth, waiting for a berth and all of that, there was going to be a large and inflationary shock coming from that and that the right policy—assuming that you could keep inflation expectations anchored— was, in fact, to accommodate; to have a burst of inflation and then stabilize after that; that a one-time rise in the price level was actually exactly what the optimal policy model said you should allow. And it did happen and people hated it. And now I’m worried that we will do something stupid next time. Is that your concern as well?

Bernstein: Yes, but first of all, the concern about whether we will do something stupid is bearing out in real time. But I guess the way I would frame your question is: has Keynesian stimulus in a recession been discredited by what just happened? And I very much obviously hope that’s not the case. The supply shock, or what you described as the supply chain snarl-up part of the pandemic, was very sui generis, of course, and was a function of a 100-year virus. So that’s a lesson we don’t want to over-learn.

Adding to my worries about this is the reality that our fiscal outlook is actually as bad as it’s ever been, at least in my lifetime. Even though the kind of fiscal interventions we’re talking about—the Keynesian kinds of interventions we’re talking about—you’ll actually be fiscally worse off if you don’t do them than if you do do them because you’ll end up with worse GDP outcomes. But there will be those who will point to the debt and say, “We can’t do anything. Look at the magnitude of the debt.” So, yes, I’m very worried about that. And my only solace is that one definition of a Keynesian is a Republican in a recession. They all get very stimulative-oriented pretty quickly in that situation. So maybe just the power of a rising unemployment rate and its populist impact will drive better policy in that regard. But it’s a concern.

Krugman: Yeah. I would have said that Covid and Ukraine were unique events. Except now there’s Hormuz and you start Googling choke points and it’s not hard to think that maybe it’s not that unique an event right now.

Bernstein: I agree with you. And I do think that one of the things I’m trying to do—and I think you’re trying to do this in some of your work—is to just remind people what good economic policy looks like. It wasn’t that long ago, as you’ve said in numerous posts and in this conversation, where we applied a lot of economic thinking in the Biden years. And if you take away everything we’ve been talking about for the last hour—which is the negative vibes around the inflation and the price level—I think you’d have a good example of really pretty effective policymaking that helped not only increase the economy’s growth in its capacity, but delivered those bigger slices to folks who are helping to bake the pie and, in many ways, are the most economically vulnerable people. Whether it was the advantages to the poverty rate, whether it was lowering the uninsured rate, or whether it was simply helping to maintain a strong enough labor market that wage gains reached the bottom of the scale. So I guess my point is: we know how to do this, or at least we have an idea. We just have to really fight hard for the politics to get back there.

I guess the last point I’ll make on this—and we’ve talked about this as well— resistance is not futile, and people want something different than what they’re getting. That seems very clear.

Krugman: Yeah. And I wonder. A year ago we probably would have said: “Look, the Biden team by and large did good stuff, responded very well to the Covid crisis, and got totally savaged politically for their success.” And that meant that we might be taking all the wrong lessons. I have to say that one small silver lining to all of the crazy stuff now happening is that it does seem to be gradually making people think better of the previous experience and kind of understand a little bit. I’m not sure. I think the public is actually probably ahead of the political universe there... but I don’t know. Do you feel that people are more appreciative of what you all did now than they were before?

Bernstein: Well, it’s a good question. I run in circles that are maybe somewhat similar or adjacent to ones you do. And what I get a lot of, from at least the people I talk to, is, “You guys did a great job, and your messaging was terrible.” And, you know, we sort of referenced that a few minutes ago. I will agree that our messaging was far from optimal in that a lot of times we were talking past people. But I think there’s a difference between talking past people and lying to people. We were honest. But I don’t think there was some magic set of words we could have said that would have made things all that much different. And I think you made a similar comment a while ago.

So I do think that sentiment—“You did a good job, but you didn’t convey it”—is live. I don’t know what people are feeling. I think if you go out and poll people again—as Elliott would know—at this point, they might be saying Biden was better than Trump because Trump has turned out to be such a mess. But they didn’t agree with where Biden was—and they probably wouldn’t agree with where you and I are—on the economics.

At some level, vibes are a function of people’s faith in the government to actually have their back, to get behind them and lastingly help them. And it’s been a long time in the Trump years— Okay, it’s actually been a little over a year, but it feels like decades since that’s been the case. Joe Biden and his administration—which I was proud to be a part of— certainly worked hard to do that. And we can have good debates about how far we got. But we were trying and at this point, we have a government that’s not trying at all. And in fact, when it’s not self-dealing, it’s pushing in the other direction. So I don’t think it’s that heavy a lift to get back to a point where we’re trying to rebuild people’s faith in a government that actually does useful things for them. And that, to me, is a north star.

Krugman: Good place to end. Thanks for talking with me.

Bernstein: Thank you, Paul.