Paul Krugman
Appearances
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
But then along comes this, which is like nothing we've ever seen before. That's a very Trumpian phrase, like you've never seen before. But I can't recall, I don't think there is any case in American history, short of the onset of World War II or something, where there's been so much uncertainty about what really important policy will be even like next week, let alone over the next couple of years.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
You could, we could imagine. If Trump had, I think probably too late to fix it now, but if he had convincingly said, we will now have 20% tariffs on everybody from now on, that might have been absorbed as businesses would start to invest on that basis. And yeah, we pay a price, but those tariffs Stable protectionism is a bad thing, but it probably does less damage than many people imagine.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's one of those things where the more you know about it, the less it worries you. But unstable protectionism, coupled with all the other instabilities out there in policy, you know, how many programs is Doge going to axe? How many federal workers are going to be laid off? What's going to happen to Medicaid? That all creates an environment that is really bad for business.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
I think, I mean... God knows, I mean, the 1930s scenario is always there. I guess my concern would be, first of all, that, yeah, we are really in a completely new space in terms of policy. There's never been anything like this craziness in U.S. history. And so that would make you worry. And then there are other things. I mean, we've had an incredible... boom in tech stocks and AI and so on.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And I have been in the budgeting business since the 90s dot-com bubble. So I do worry that these things can be big and they can lead to years of painful losses.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's always a question, what does Donald Trump actually know? I mean, there's a guy who goes around saying that his approval rating is in the 70s. So, yes, I mean, I'm sure that Scott Besant at Treasury knows that those indicators are all flashing yellow or red. Does Trump know it? Is there anybody who's brave enough to go in and say, Mr. President, this is really working out badly?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's not clear. But he knows the markets. He knows the markets. He can see the stock market. Well, but he may think that they just don't understand the brilliance of his policy.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
I think he's got this very crude view that whenever somebody sells more to us than we buy from them, that they're taking advantage and he's going to end that and people will see that he was smarter than everybody else all along. I mean, there's no indication that there's any deeper agenda, any deeper thought.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
I mean, if nothing else, anyone who thought that there was a bigger agenda, that there was some subtle reasoning going on here, the shape of those tariffs that were announced yesterday should tell you that no, it's just... Donald Trump doesn't like trade deficits, and he thinks that tariffs can cure them.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Wow. I think most people thought it was going to be some kind of across-the-board tariff, the same on everybody, or maybe two or three different types of tariffs. Instead, he announced this whole complicated different tariff for every country at levels much higher than the smart money or the money that thought it was smart was betting, something like 23% average tariff now, which is huge.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah. I think what you need to bear in mind is that the starting point for all of this is Donald Trump wants tariffs. And people around him are going to give him those tariffs. And then everything else is kind of backfilled, trying to rationalize what they're doing. And there's no reason to believe that any of this is actually motivating what they're doing.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
This is just who they are and what they want to do. So, yes, there are multiple layers of internal contradictions in what we're hearing from the Trump administration and its supporters, but not clear that any of that is real. That's just all problems with the stories they're telling. But the fundamental policy is we're going to slap on a lot of tariffs.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
can tariffs really reduce the trade deficit a lot? And the answer is, it's really hard. There's a lot of stuff offsetting forces so that even lots of tariffs won't do much to reduce the trade deficit. But if you put them high enough, if you basically shut off international trade, then yeah, you can't run a trade deficit if you can't trade. So there's a bit of a story there.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
But then there's the second level, which is even if we eliminate the trade deficit, Would we re-industrialize or would we re-industrialize to an extent that you would notice? Germany. Germany runs enormous trade surpluses. And even Germany has seen a large decline in manufacturing as a share of total employment.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
So if we were to somehow raise ourselves to German levels of manufacturing, people would still say, what happened to the industrial nation we used to be?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And then there's a calculation, which I probably won't inflict on our listeners here, but if you try and figure out how much additional manufacturing we'd get if we could somehow eliminate the trade deficit, yeah, it's significant, but it would get us from 10% of employment to maybe 12.5% of employment, but not back to the, 30% of employment that used to be once upon a time.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And basically, the decline in manufacturing employment is mostly driven by automation and productivity growth, not by the trade deficit.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's fine as a principle. International trade is governed by something called the General Agreement on Tariffs and Trade, which goes back to the 40s. And Article 21 basically says forget about everything else we said here. If your national security is at risk, do whatever you feel you have to do. So we can ask whether being so dependent on semiconductors from Taiwan –
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's higher than U.S. tariffs after Smoot-Hawley was passed. And trade is a much bigger part of the economy now than it was in 1930. So this is the biggest trade shock in history.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And I actually think probably not.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, because there would be such a huge cost. So there is just obvious how much it would raise costs. But in fact, well, we have the CHIPS Act, which is supposed to make us more, among other things, more independent on semiconductors. But Trump says that's terrible.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
If you were asking what does our national security-oriented industrial policy that tries to keep production of strategically important stuff in the United States look like, it looks like the CHIPS Act. It looks like what the Biden people were trying to do. Now, probably bigger than that. In an ideal world, we'd be doing substantially more, but that's how you do it.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
The idea, you know, putting high tariffs on imports of clothing from Bangladesh is is exactly what you shouldn't be doing. That's the kind of thing that is disruptive, raises the cost of living for American consumers, does nothing to make us more secure.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
There is a national security rationale for domestic production, but also for friendshoring and for nearshoring, because stuff that's close by is a lot easier to secure. If that's what we're wanting to do, then we would not be levying tariffs on Vietnam and Bangladesh, and we would certainly not be putting tariffs on Canada and Mexico.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, I mean, again, if you go back to the, you know, how did we end up with the trading system that Trump is now demolishing? It was actually, it was partly about economic efficiency, but it was also very much about a kind of enlightened, broad view of national security. Go back all the way to Cordell Hull, FDR Secretary of State. He viewed enhanced economic linkages as,
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
across the free world as a way to draw us closer together, as a way to create greater solidarity among democracies against, at that point, the threat of Stalinism. So what we're doing is tearing up, partially in the name of national security, a policy that was actually partially intended precisely to enhance national security. No question that the U.S.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
is alienating its allies or its erstwhile allies by doing all of this. And in some cases, they're making common cause with our potential enemies.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Okay, that was interesting because on the first thing was, where the hell, sorry, but you know, where the heck are they getting these numbers from?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Well, we have some direct evidence that that's what's happened. I mean, Peter Navarro, who is sort of Trump's trade czar, I don't know if he's still called that, but effectively, at least according to some of the reporting, he was recruited because they basically sent Jared Kushner out to search through Amazon to find somebody who'd written books hostile to China, right?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And so they actually looked for people who would tell the king what he wanted to hear.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
One of the stories I find really interesting, there's this, you know about it, I'm sure, but listeners probably don't, Bob Lighthizer, who's this longtime contrarian protectionist voice in Washington and generally regarded as kind of a, among my friends, as a sort of dark, satanic force in the trade policy debate, but is respected because he clearly knows his stuff.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
It's a podcast. Yeah, but where is this coming from? And in the Rose Garden speech, Trump said, this is all based on, we've examined the barriers that countries are putting up. And this is our calculation of their tariffs plus other things that count as tariffs. And we're trying to figure out where is that coming from? And that's a... I mean, it wasn't inherently a close. Who would be doing that?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And people had sort of assumed that he would play a big role in this administration. And he was passed over. And almost for sure, that's because he is independent. He's his own man. He didn't come to this out of fealty to Donald Trump. And so he might actually say to the king, no, no, not tariffs on Bangladesh. And so this is clearly a kind of courtier-driven thing.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
catering to and Donald Trump has been a you know has had this thing about tariffs going back 40 years so here we are the idea that there's some master plan or some deeper strategy it just it requires torturous ignoring of what's very clearly happening well one of my broader views about this administration I keep meaning to write a piece about this is that you can really tell the story of Trump one and Trump two by which is the other most powerful member of the family and
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, I mean— There was a moment a day or so ago, I guess, when Mike Johnson, the Speaker of the House, was asked about how this tariff thing is going to work. And he said, we must trust the President's instincts. And I was like, this is America? You know, we're not supposed to believe in the mysterious godlike divination powers of the leader.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
There's an essay by John Mayer Keynes in which he says that economics, although no one will believe it, is a difficult technical subject. And, you know, Trump presumably doesn't understand how feedback from your economic policies can come back and bite you on the rear. And left to himself, he just thinks, I know this, I'm a businessman, and God backs me.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And so you get these, without somebody who can say no to him, and everybody who can say no is gone, then he's going to do very strange stuff.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Okay. By the way, this is a topic that is... There's tremendous amount of mysticism about it. And you wouldn't believe how hard it was for me to write a Substack post about the role of the dollar because I kept on wanting to stuff too many things into it. And basically had my editor-in-chief, otherwise known as my wife, say, no, no, that's too many charts and too many tables. So, okay.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
careful assessment of other countries' trade policies, country by country. That's a massive undertaking. And it seemed implausible, basically impossible, that they could have done that. And it turned out that they basically took each country's trade balance with the United States, the bilateral trade deficit that we have with them, divided by the amount of their imports.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Look, the dollar is... Very special. A lot of international commerce is conducted in dollars, even between countries, even trade between non-U.S. countries. A lot of international lending and borrowing is in dollars. And one of the things is that countries that want to hold a stockpile Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And that, we said, was their balance. de facto tariff rate, and then they cut it in half. So it was this kind of weird calculation, not grounded in anything that back in the days when I used to teach trade courses that I would ever put in, but they came up with this sort of out of the blue calculation method that is country by country. And it's certainly original.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Which, believe it or not, is interesting, even if you aren't investing. He's just really a lot of fun. And, oh yeah, I'm just reading the latest book by Phillips O'Brien. He's a military historian, and he has a new book called War and Power. And he is always fantastic writers. He's pretty scathing, actually, even about Biden administration policy. But anyway, it's a really interesting book.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Okay, so every country has stuff that it sells to other countries, has stuff that it buys from other countries. The trade balance with any particular country is what we buy from them minus what we sell to them, there's no particular reason to think that these numbers should be balanced country by country. All kinds of things can go on.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
So there's a whole discussion, there's a whole literature in the research on what explains bilateral trade imbalances, but nothing that says that they are ipso facto evidence of foul play, which is what the Trump people seem to believe. U.S. trade policy has been based upon reciprocity.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
The legal basis for all of these trade agreements that we've had these past 90 years is the Reciprocal Trade Agreements Act of 1934, which is FDR establishing a system where the United States would negotiate that we will cut our tariffs if other countries cut their tariffs. And for the most part, there are a few exceptions, a few countries that actually do have
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
substantially higher tariffs than we do. But other advanced countries, actually, like us, had very low tariffs. So it was really kind of strange that that was the claimed policy because if that was the policy, then there was nothing to do because we'd already done it.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And then they have this other thing which basically says, if you are running a trade surplus with us, then we're going to take that as evidence of bad behavior anyway. We're going to try and kick at you if you do that. And that wasn't at all at least in the selling of this policy, what they said they were going to do.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, so I mean, Terminator, whatever it would be, Terminator 7, the movie would be, actually, Skynet doesn't bother starting a nuclear war. It just gives bad tariff advice. So this is part of the problem in general with what we're calling AI, with large language models, is that they pick up what's out there without necessarily being able to discriminate what's sensible and what is not.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
There's certainly no paper, I would imagine, in any economics journal saying, do this. But maybe some people out there are saying something like this, but it really is not... It's not something you would recommend if you know anything about how trade works, which ChatGPT does not. And so it really is kind of weird that it would come up with this.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And by putting different tariffs for different countries, you create an immediate problem. So we just put a much higher tariff on... goods from the European Union than from Britain. So if something from the European Union crosses the English Channel, spends five minutes in an English port, and then heads for America, is that a British good or is that a European good?
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
You would have to have what we call rules of origin, which are very onerous. The amount of paperwork involved in enforcing rules of origin is huge. So anyone who knew anything about trade would say, wait, wildly different tariff rates on seemingly similar countries. is a big, big problem.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Probably a lot of EU goods transship through Northern Ireland to get the lower tariff rate that applies to Great Britain. And, you know, it's crazy. So this recommendation, you know, if it really is coming from large language models, from AI, this is a kind of, it's more of a cautionary tale about AI than it is something about economics.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah, it's almost as if the markets actually think that the economics textbooks are right. And this kind of protectionism is a really bad idea. And specifically, I mean, there are multiple reasons why this whole notion that tariffs are going to restore U.S. manufacturing are wrong. But one of them is that we've had now decades of of integrating American manufacturing with other countries.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Particularly, there is no U.S. auto industry. There's a North American auto industry, which is sprawled across Canada, Mexico, and the United States. And when you say, okay, we're not going to allow the components factory here to send goods over to the assembly factory there, you're raising the cost of the whole thing enormously. You're creating huge disruption. So it ends up being...
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
bad for the U.S. auto industry, for those auto plants. And there are layers and layers of wrongness here. But the most immediate one is right away, this is actually hugely disruptive to U.S. manufacturing, not a support for it.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah. So there's an old argument that says you should not respond because other countries have rocky coasts should we block up our own harbors. That's the way it's sometimes put. And in straight Economics 101, that is mostly right. But first of all, there is still some hope of swaying Trump from this course. And then look, other countries, this is a problem Americans really have.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
We tend to not think of other countries as real. But they are. They're real. They have their own national identity. They have their pride. Economists have a standard argument for free trade, which does say you should always do free trade regardless. That has never worked politically. We did not get to our world of relatively free trade by convincing politicians to read David Ricardo.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
We got to a world of relatively free trade by actually exactly the thing that Trump is saying to do by reciprocity. I would not advise... Mark Carney, the Canadian Prime Minister. I could imagine. I actually do know him. For once, I actually know somebody who is actually governing a country. And I would not advise Carney to turn the other cheek towards U.S.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
tariffs, even though on a straight cost-benefit position, that might make sense, because you have to respond to that. You have to do something that appeals to Canadian national pride, which very much exists. So I would say that There's a pretty good case for retaliatory stuff. Yeah, if you can target it and go after Tesla, that might help.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
But for retaliatory stuff, partly just to—in some hope of changing U.S. policy, and also with some hope of at least offering some satisfaction to national concerns.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Okay, now there's a funny thing here, which is that ordinarily, I would say that while tariffs are bad, they don't cause recessions. It makes the economy less efficient. You turn to higher-cost domestic sources for stuff instead of lower-cost foreign sources, and foreigners turn away from the stuff you can produce cheaply.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
But that's a reduction in the economy's efficiency, not a shortfall in demand. What's unique about this situation is that the protectionism is unpredictable and unstable. And it's that uncertainty that is the recessionary force. If you were a manufacturing company in the United States, and your next investment is going to be, well, let's say a components plant or something.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
And, well, should you put that components plant in Mexico, where it's cheaper? Well, not if there's a 25% tariff. But should you put it in the United States, where it's more expensive? Well, what if the tariff comes off? And so either way, you run substantial risk of just having stranded investments. And that's happening across the board. So this is the instability of policy.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
The fact that nobody knows what's coming next is, I think, makes a recession certainly a whole lot more likely.
The Ezra Klein Show
Paul Krugman on the ‘Biggest Trade Shock in History’
Yeah. I mean, the arguments were very much in bad faith in the aftermath of the Great Recession. It was just an excuse for somehow saying that this fiscal austerity that Republicans in Congress are forcing is not because of slow recovery. It's all because of Obama and uncertainty and whatever. And that was a Yeah, I became viscerally hostile to anyone invoking uncertainty.