This is an edited transcript of an episode of “The Ezra Klein Show.” You can listen to the conversation by following or subscribing to the show on the NYT Audio App, Apple, Spotify, Amazon Music, YouTube, iHeartRadio or wherever you get your podcasts.
On a scale of 1 to 10, how liberated are you feeling?
We just had Donald Trump’s big “Liberation Day,” when he announced a huge package of tariffs. They were larger, by far, than markets were expecting — which led markets to lose a lot of value in the hours right after. The tariffs were also more confusing than people were expecting.
Trump suggested during his campaign a flat tariff of 10 to 20 percent on all imported goods, and maybe something bigger on China.
But the tariff package he unveiled was very different: There were different numbers for basically every country. And then there was a column listing the tariffs that they had on us, and that column was simply wrong.
So what is going on here? Why is Donald Trump absorbing this much economic pain? Why is he risking a domestic recession — and a global recession — for this package of policies that almost every economist would tell you does not really make sense?
I wanted to talk with my former colleague Paul Krugman about this. Paul is a Nobel Prize-winning economist with a focus on trade. He was a columnist here at The New York Times for 25 years. And he’s been writing an excellent Substack, where he has been tearing into the theory behind this kind of tariff policy, as well as the very strange reality that has now been announced, and trying to understand: What led to this package instead of one that might have more cleanly accomplished the goals that Donald Trump and the people around him say they are seeking?
Ezra Klein: Paul Krugman, welcome back to the show.
Paul Krugman: Hi. Good to be on again.
Let’s start with what Donald Trump actually announced on Liberation Day.
Wow. I think most people thought it was going to be some kind of across-the-board tariff — 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 a 23 percent average tariff now, which is huge. It’s higher than U.S. tariffs were after the Smoot-Hawley Tariff Act of 1930 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.
How does it seem like the tariff was calculated, country by country?
That was interesting. The first thing was, where the hell — sorry, where the heck are they getting —
It’s a podcast. We put the little explicit tag on.
But where is that coming from? And in the Rose Garden speech, Trump said: 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 there we’re trying to figure out: Where is that coming from? It wasn’t inherently implausible, right? Who would be doing that 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, and that, we said, was their de facto tariff rate. And then they cut it in half.
So it was this weird calculation — not grounded in anything that I would ever put in back in the days when I used to teach trade courses. But they came up with this out-of-the-blue calculation method that is country by country. And it’s certainly original. I guess you could say that.
You can understand why you might say a tariff on America is bad — that it’s locking up the goods or services that might flow into another country. But what they’re saying is something subtly different, which is that if we have a trade deficit with anybody, that is bad, and it should be treated as evidence of market discrimination or at least something we want to fix.
So this gets, as you like to say, wonkish. What is a trade deficit? What is a trade balance? And is it a bad thing when we have one with someone else?
Every country has stuff that sells to other countries and 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. So there’s a whole discussion and 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 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 Franklin D. Roosevelt establishing a system where the United States would negotiate that we will cut our tariffs if other countries cut their tariffs.
There are a few exceptions, countries that actually do have substantially higher tariffs than we do. But other advanced countries — actually, like ours — had very low tariffs. So it was really strange that was the claimed policy. Because if that was the policy, then there was nothing to do, because we’d already done it.
And then they have this other thing that basically says: If you are running a trade surplus with us, then we’re going to take that as evidence of bad behavior. We’re going to kick at you if you do that.
That wasn’t at all — at least in the selling of this policy — what they said they were going to do.
One of the things flying around social media has been that if you went and you asked the various leading artificial intelligence programs, ChatGPT and Gemini and Claude: What’s a pretty simple way to calculate tariffs on all other countries? — it will offer you basically the calculation they used.
And I think that raises two questions. One, did we just have a global economic crisis created by some DOGE interns asking ChatGPT how to calculate tariffs? Two, if that’s what these systems — which I’m guessing are trained on the output of what all economists writing online say you should do — is there something to it? Is there some steel-man case that this is a pretty straightforward, simple way to think about tariffs on other countries that the liberals are missing as we point out differences between words and policies here?
In the movie “Terminator 7,” it would be: Actually, Skynet doesn’t bother starting a nuclear war — it just gives bad tariff advice. [Klein laughs.]
This is part of the problem with what we’re calling A.I., with large language models. They pick up what’s out there without necessarily being able to discriminate what is sensible and what is not.
There’s certainly no paper I would imagine in any economics journal saying: Do this. Maybe some people out there are saying something like this. But it really is not something you would recommend, if you know anything about how trade works — which ChatGPT does not. So it really is weird that it would come up with this.
And by putting different tariffs on different countries, you create an immediate problem. 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?
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. Anyone who knows anything about trade would say: Wait, wildly different tariff rates on seemingly similar countries are a big problem.
Probably a lot of E.U. goods transship through Northern Ireland to get the lower tariff rate that applies to Great Britain. And it’s crazy. So this recommendation, if it really is coming from large language models — from A.I. — is more of a cautionary tale about A.I. than it is something about economics.
How are markets responding, and what do you take from their response?
When you listen to the Trump administration’s justifications, they’ll say things like: Well, we’re trying to rebuild American manufacturing. We’ve shipped American manufacturing overseas.
And then I’ll go look at an index of stocks that reflect American manufacturing companies — which in theory are meant to benefit here — and they don’t look like they’re doing well to me. If you look at BYD, the big Chinese electric vehicle car company, they are way up since Trump’s inauguration. They’ve gone from around $70 per share to around $96 per share. Tesla is way down. There are a lot of reasons for that.
I’m not an efficient markets guy. I don’t think markets absorb all information. But I think if the markets were to believe this is going to grow the U.S. economy dramatically, you would expect them to favor some U.S. stocks that they thought were going to grow dramatically. But I’m not seeing anything like it.
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.
There are multiple reasons this whole notion that tariffs are going to restore U.S. manufacturing is wrong. But one of them is that we’ve had now decades of integrating American manufacturing with other countries. 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: OK, we’re not going to allow the components factory here to send goods over to the assembly factory there, you’re raising the costs of the whole thing enormously. You’re creating huge disruption. So it ends up being 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 that, right away, this is actually hugely disruptive to U.S. manufacturing — not a support for it.
How should other countries respond? I’ve seen economists arguing they should do nothing, because to place down further tariffs only hurts them, as well. I’ve heard them say they should do specific forms of tariffing that hurt things that are important to the U.S., maybe Tesla.
I’ve heard people say: No, they should go all out because you’re trying to create an equilibrium where the U.S. can’t bully everyone.
If these heads of state were coming to you saying: What should we do, Paul? — what would you tell them?
There’s an old argument that says you should not respond: Just because other countries have rocky coasts, why should we block up our own harbors?
That’s the way it’s sometimes put. And in economics 101, that is mostly right. But first of all, there is still some hope of swaying Trump from this course.
And then, look, this is a problem Americans really have: We tend to not think of other countries as real. But they are. 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. But that has never worked politically. We did not get to our world of relatively free trade by convincing politicians to read David Ricardo. We got to a world of relatively free trade by actually exactly the thing that Trump is claiming to do — by reciprocity.
I would not advise Mark Carney, the Canadian prime minister — whom I actually do know. For once, I actually know somebody who is governing a country. I would not advise Carney to turn the other cheek toward U.S. 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. If you can target it, if you can go after Tesla, that might help. But there is some hope of changing U.S. policy and also some hope of at least offering some satisfaction to national concerns.
How bad can this tit for tat get? How, likely, at this point, do you think a U.S. recession is? How likely is it that a global recession is kicked off by this trade war?
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. 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, let’s say, a components plant or something — well, should you put that components plant in Mexico, where it’s cheaper? Not if there’s a 25 percent tariff. But should you put it in the United States, where it’s more expensive? What if the tariff comes off?
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 fact that nobody knows what’s coming next makes a recession certainly a whole lot more likely.
I feel like you’re going to remember this with some of the same anger that I remember it. In the years after the Great Recession, when Washington wanted to turn to austerity, when you still had high unemployment, what you began hearing from the Republican Party — Lord, how many words I spilled trying to rebut this — was: Oh, the future deficits were creating so much economic uncertainty that the corporations couldn’t possibly invest. And the way to unlock the economy again was to cut spending or, maybe if you’re more on the centrist side, raise taxes.
It was that certainty about the future path of government fiscal policy that was needed for corporations to hire again. And that turned out to be — and was obvious at the time — not true.
But now you have that same party creating a level of such genuine uncertainty. I can’t imagine being a company right now trying to decide where to place a factory — or whether or not to make investments. Nobody even believes these tariffs are going to be the same in a year as they are right now, as best I can tell.
So I don’t know. This argument got a little bit discredited because it was used in such bad faith. And then all of a sudden the same people who made it, in many cases, are at least accepting or promoting this tariff policy, which has created a genuinely unfathomable level of economic uncertainty.
Yes. The arguments were made very much in bad faith in the aftermath of the Great Recession. It was just an excuse for saying that this fiscal austerity that Republicans in Congress are forcing is not the cause of slow recovery — it’s all because of Obama and uncertainty and whatever.
And I became viscerally hostile to anyone invoking uncertainty. 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 and 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 next week, let alone over the next couple of years.
Imagine if Trump had convincingly said: We will now have 20 percent tariffs on everybody from now on.
That might have been absorbed — businesses would start to invest on that basis.
Stable protectionism is a bad thing, but it probably does less damage than many people imagine. 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: How many programs is DOGE going to ax? 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.
One thing I am getting asked by a lot of people in my life is: Should I buy the dip?
I know you don’t offer investing advice, but I think the intuition is: Look, the stock market goes down at times, up at times. But it always just kind of keeps its march upward over time. So how bad can this really get? It’s just a spat over tariffs. He’s going to back off.
Do you look at the market correction here and say: Well, this is as bad as it can get, we’re probably at the bottom of this?
Or do you look at the history here and say: No, you have no idea how bad something like this can get?
God knows. The 1930s scenario — it’s always there. I guess my concern would be: First of all, we are really in a completely new space in terms of policy. There’s never been anything like this craziness in U.S. history. So that would make you worry.
And then there are other things. We’ve had an incredible boom in tech stocks and A.I. and so on. And I have been in the punditing business since the dot-com bubble in the ’90s.
So I do worry that these things can be big, and they can lead to years of painful losses.
The Trump administration can see all this. They know markets are crashing.
In his first term, Trump was considered to be very sensitive to market reaction.
They know that various indicators of a future recession — forecasts and this and that — are beginning to blink more red. But they’re choosing to take on this pain. This is completely optional.
Why do you think they think they are doing it? Or why do you think Donald Trump thinks he is doing it?
It’s always a question: What does Donald Trump actually know? Here’s a guy who goes around saying that his approval rating is in the 70s.
So yes, I’m sure that Scott Bessent at the Treasury Department 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? It’s not clear.
But he knows the markets.
But he may think that they just don’t understand the brilliance of his policy.
OK, so what do you think he thinks they don’t understand? What is, to him, the brilliance of his policy?
I think he’s got this very crude view that whenever somebody sells more to us than we buy from them, they’re taking advantage, and he’s going to end that. And people will see that he was smarter than everybody else all along.
There’s no indication that there’s any deeper agenda, any deeper thought.
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: No, it’s just that Donald Trump doesn’t like trade deficits, and he thinks the tariffs can cure them.
There’s a deep contradiction in the way it’s getting justified from two sides of the administration — or maybe the Republican Party.
One is that this is about reindustrializing America — if you believe tariffs could do that, which I don’t really. But let’s put that aside for a minute. If you believe tariffs could do that, what you need is a highly stable tariff regime.
And then there’s another justification. John Thune, the Senate majority leader, said something like this: These are all a negotiating tool to get a better deal out of other countries.
This is the reciprocity argument. He lays down tariffs, and you get something on fentanyl trafficking enforcement or you get something on immigration. But if these are all negotiating tools, then they’re not a stable cost structure that companies can use to decide if they’re going to reinvest in America.
And then I guess there’s this third one, which is that the tariffs are going to raise money so they can cut income taxes or pay for Donald Trump’s tax cuts. The Treasury secretary said the money would be used to get rid of taxes on tips and get rid of taxes on Social Security. So really this is a tax cut for the working class. And again, in that case, then they have to stay on and be at a pretty high level if they’re going to finance that.
So these are contradictory policies that require different tariff regimes. But I’m seeing them all invoked, basically constantly.
I think what you need to bear in mind is that the starting point for all of this is that Donald Trump wants tariffs, and people around him are going to give him those tariffs. Everything else is backfill, trying to rationalize what they’re doing. There’s no reason to believe that any of this is actually motivating what they’re doing. 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 it’s 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.
Is it possible in any tariff regime to achieve the reindustrialization of manufacturing that, I think, is the most emotionally resonant of their arguments?
There are two levels to that.
One is: 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 yes: You can’t run a trade deficit if you can’t trade. So there’s a bit of a story there.
But then there’s the second level, which is: Even if we eliminated the trade deficit, would we reindustrialize? Or would we reindustrialize to an extent that you would notice?
Germany runs enormous trade surpluses. And even Germany has seen a large decline in manufacturing as the share of total employment.
So if we were to somehow raise ourselves to German levels of manufacturing, people would still ask: What happened to the industrial nation we used to be?
And then there’s a calculation, which I won’t inflict on our listeners here. But if you try to figure out how much additional manufacturing we get, if we could somehow eliminate the trade deficit: Yes, it’s significant. But it would get us from 10 percent of employment to maybe 12.5 percent of employment — not back to the 30 percent of employment that used to be once upon a time.
Basically, the decline in manufacturing employment is mostly driven by automation and productivity growth, not by the trade deficit.
There are two things you might want to restore in manufacturing.
One, which I think you hear a lot of in politics, is manufacturing jobs. You want to go back to the economy of 1965 or something.
The other is: What you want to restore is manufacturing capacity. My colleague — and your former colleague — Tom Friedman was just in China and was really astonished at the kind of campuses that Huawei is building — the speed with which phone companies there are becoming car companies.
And basically everybody I know who goes to China or writes seriously about their manufacturing sector will now tell you that what they’re doing is not just low-wage labor leading to cheap manufactured consumer goods. They now have incredible levels of supply-chain expertise that allow them to do things we maybe can’t — and at a speed we certainly can’t.
And in terms of the balance of geopolitical power, that is a very dangerous thing for us in the long run. So very high costs are worth paying to rebuild that capacity, even if it’s all automated. Because you do not want the U.S. — or the world — to be so dependent on Chinese manufacturing.
What do you think of that argument?
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 1940s. And Article 21 basically says: Forget about everything else we have 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 was wise. And I actually think: Probably not.
Although those are exempted from the tariffs.
Yes, because it’s just obvious how much it would raise costs. But in fact we have the CHIPS Act, which is supposed to make us, among other things, more independent on semiconductors. But Trump says that’s terrible.
If you were asking what a national security oriented industrial policy that tries to keep production of strategically important stuff in the United States looks like, it looks like the CHIPS Act. It looks like what the Biden people were trying to do. Probably bigger than that — in an ideal world, we’d be doing substantially more. But that’s how you do it.
Putting high tariffs on imports of clothing from Bangladesh 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.
There is a national security rationale for domestic production, but also for friendshoring and for nearshoring, because the stuff that’s close by is a lot easier to secure. If that’s what we were 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.
So if one of the things you’re trying to do is, as a national security play, make our supply chains more robust from China, it seems you wouldn’t want to be tariffing our friends and allies in a way that pushes them to pull away from us and integrate more and move into common economic defense with China.
Yes. Again, if you go back to how we ended up with the trading system that Trump is now demolishing, it was actually 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, F.D.R.’s secretary of state. He viewed enhanced economic linkages across the free world as a way to draw us closer together, as a way to create greater solidarity among democracies against the threat of Stalinism.
So what we’re doing is tearing up — partially in the name of national security — a policy that was partially intended to enhance national security.
There’s no question that the U.S. is alienating its allies — or its worthwhile allies — by doing all of this. And in some cases, they’re making common cause with our potential enemies.
This policy does look to me like what happens when nobody will tell the king no.
Yes.
And worse than that, what happens when, maybe, the king begins to favor the people he knows aren’t suppressing the no.
There are people in any room who you can kind of tell don’t really agree with you and are trying to humor you. And then there’s the intern or the midlevel person who you can tell is really into what you want to do and maybe you charge them with it.
But this just doesn’t feel to me like a constructed policy. And it’s hard, because I think that our tools are usually to try to track back the policy rationale. But there are too many policy rationales — and none of them actually fit.
We have some direct evidence that’s what’s happened. Peter Navarro, who is sort of Trump’s trade czar. I don’t know if he is 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 and find somebody who had written books hostile to China.
They actually looked for people who would tell the king what he wanted to hear. One of the stories I find really interesting: Bob Lighthizer is this longtime contrarian, protectionist voice in Washington. He’s generally regarded, among my friends, as a sort of dark, satanic force in the trade policy debate. But he is respected because he clearly knows his stuff. People assumed he would play a big role in this administration, but 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. So he might actually say to the king: No, not tariffs on Bangladesh.
So this is clearly courtier-driven catering — and Donald Trump 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 requires torturous ignoring of what’s very clearly happening.
One of my broader views about this administration is that you can really tell the story of Trump 1.0 and Trump 2.0, by who is the other most powerful member of the family.
In Trump 1.0, it was Jared Kushner. Kushner brings in very mainstream people — Gary Cohn, who was Goldman Sachs president. H.R. McMaster. People who act as inhibitors of the very disinhibited Donald Trump.
And in Trump 2.0, it’s not Jared Kushner, it’s Don Jr. — who has been marinating in the fever swamps of MAGA in the interim years, who helped bring in people like JD Vance, who said that the real intention of Trump’s second term was: We’ll vet everybody to make sure there’s nobody who’s going to stand in his way.
Elon Musk and Russell Vought are out there trying to traumatize the federal bureaucracy and destroy any deep-state resistance — or frankly, just any deep-state capacity.
So you have people around Trump now who are accelerants, not inhibitors. And this is what you get when you get a bunch of people telling Trump: No, no, no — go further. You’re right. You’ve always been right. You were saved from an assassin’s bullet by God to make this country great again. Follow your instincts. Don’t listen to the markets, the naysayers, the critics, the media. They don’t know anything. If we’ve learned anything, it’s that your judgment is right.
Yes. There was a moment a day or so ago when Mike Johnson, the speaker of the house, was asked 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. We’re not supposed to believe in the mysterious godlike divination powers of the leader.
There’s an essay by John Maynard Keynes, in which he says that economics, although no one will believe it, is a difficult technical subject.
Trump, presumably, doesn’t understand how feedback from your economic policies can come back and bite you on the rear. Left to himself, he just thinks: I know this. I’m a businessman. And God backs me.
And without somebody who can say no to him — and everybody who said no is gone — he’s going to do very strange stuff.
Behind all this, there has been a set of theories that have taken root that are not well expressed in the tariffs but that I think have become increasingly influential in Washington and in the media. I hear talk of this Mar-a-Lago Accord, for example. They have a lot to do with this idea of the dollar and whether or not having the dollar as the world’s reserve currency has led to the deindustrialization of America.
So when I hear people in the Trump administration begin to say: Well, what we’re doing here is a fundamental realignment of the global financial system — while it may all start with Donald Trump’s intuitions, I think it has made a lot of them very ambitious. This idea that maybe they can be part of the next Bretton Woods — that there’s something you can do here.
For people who are confused by it, can you talk through what the role of the dollar is here? How should we understand the relationship between the dollar being the world’s reserve currency and America losing some of its manufacturing base, if there is one?
here’s a tremendous amount of mysticism about this topic. 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, that’s too many charts and too many tables.
Look, the dollar is very special. A lot of international commerce is conducted in dollars, even trade between non-U.S. countries. A lot of international lending and borrowing is in U.S. dollars. And one of the things is that countries that want to hold a stockpile of foreign currency to be able to intervene in the markets in times of need, a lot of that — something like 60 percent of those stockpiles — are held in dollars or dollar assets. So the dollar is reserve currency.
The United States also attracts a lot of inflow of foreign capital. And we have a trade deficit as the counterpart of that. The balance of payments always balances.
So the fact that we sell more assets than we buy has, as its counterpart, the fact that we buy more goods than we sell. Arithmetic tells you that must be true.
Now, how much of that capital inflow is caused by the special role of the dollar? The answer, for most of us who do follow these things, is: A little bit, not much. The idea that the trade deficit is sort of a one-to-one relationship with the dollar’s role as reserve currency is much weaker. It’s maybe a fraction of the story, but it’s really not the main story.
The main story is that America has been an attractive place to invest. And that’s where we have a trade deficit. Foreign companies want to build plants in the United States. Foreign investors want to buy U.S. stocks. And that’s the main reason that keeps the dollar strong. And that also means that we have a trade deficit.
But the idea that you can do a sort of magic fix — that you can somehow tell foreign countries not to stockpile so many dollars, and that will reindustrialize America — is very appealing. I have quoted, on multiple occasions, my old teacher, Charles Kindleberger, who said: Anyone who spends too much time thinking about international money goes a bit mad.
It sounds important. It sounds sophisticated. And it’s also kind of antiseptic. If we could just have an international monetary conference and that would solve the problem of U.S. deindustrialization, that sounds a lot easier than having to muck around with industrial policy and all of that. So it’s a very appealing prospect to a lot of people. But it’s not realistic.
We could undermine the dollar’s role as a reserve currency. We may be doing that as we speak. Because who wants to hold an unreliable, erratic country’s currency as a reserve? But that’s not going to solve any major problems.
When I try to dive into MAGA world’s thinking here, something that I tend to hear is a somewhat contradictory or troubled relationship to American power.
On the one hand, they want America to be stronger, more feared, more dominant. And on the other hand, there’s a broad view that we have overextended ourselves.
Financially, we’ve made the dollar the reserve currency. We’ve allowed all these other countries to buy our assets and buy our money even as our industrial base flowed out.
And then on the military side, we have these bases all over the world, we have all these troops in Europe, we’re part of NATO, we’re spending more as a percentage of gross national product than some of these other countries. But this is part of why we can no longer take care of our people.
And so there’s this feeling: Well, for America to be stronger, it can’t be operating this global umbrella of financial and military protection.
But then you ask: Well, do you want the dollar to not be the reserve currency? And they say: No, no, no, no. We definitely want to keep it the reserve currency.
If you ask: Do you want America’s military to be weak? Do you want people to not be tied to us in the way they are now? They say: No, we actually want more leverage over them.
There’s something here that I think is very strange and very unresolved in this movement that wants both more dominance and somehow, at the same time, to pull back from the actual architecture of that dominance and leverage.
The Pax Americana. We have been a kind of imperial power. Some people say more than kind of — we’ve been an imperial power, in many ways, since the end of World War II.
But it’s not like any previous empire. The Pax Americana starts with the Marshall Plan.
Instead of plundering our defeated enemies, we rebuilt them. And then we built a system of alliances: We have NATO. We have international economic institutions like the International Monetary Fund, which do actually kind of reflect U.S. interests, but at least on paper, we’re at most first among equals. So we are a polite, low-key, relatively generous imperial power.
That is a very hard role for many people to understand. Take Greenland. There are stories under which Greenland could become strategically important. It’s a territory of Denmark, which is an ally under NATO. So we actually have the right and the ability to maintain military bases there. It doesn’t have to be U.S. territory.
But that’s a little too hard for a lot of people to wrap their minds around.
They, on the one hand, don’t want us to be spending resources supporting our allies. On the other hand, they want us to be exercising power. But they want something that’s more direct. They want us to be a lot more like a traditional imperial power.
Which is foolish. The thing that the old U.S. establishment built after World War II, with this soft imperial status, was pretty good. We were able to build a world that was comfortable for us to live in without bloodshed, without a lot of the downsides of empire. But it’s subtle. And subtle is not something that MAGA does.
I’ve wondered if we’re going to see Republicans begin to grow a bit of spine here.
I was surprised to see Chuck Grassley and Maria Cantwell — Grassley being a Republican in the Senate — come out with a bill to restore congressional authority on tariffs.
Then Mitch McConnell tweeted: “As I have always warned, tariffs are bad policy, and trade wars with our partners hurt working people most. Tariffs drive up the cost of goods and services. They are a tax on everyday working Americans. Preserving the long-term prosperity of American industry and workers requires working with our allies, not against them.”
That’s not what we’re hearing from most Republicans. But it seems to me like an early signal — particularly after Republicans lost that Supreme Court election in Wisconsin — that, as the economy suffers here, they may not be all that excited about standing by him.
The thing about everybody you mentioned is they’re all very old and don’t have much of a future political career — just because they’re very old.
Many people have, over the years, over this past decade, kept on waiting for the Republican grown-ups to stand up against Donald Trump. And anybody who has made that bet has been very badly wrong, again and again.
So I don’t think you should count on that. It seems to me much more likely that, in the end, these guys will cave, as they always have.
They’ll cave. Mike Johnson and John Thune control the respective chambers, and if they break with Trump, that will be the end of their leadership.
In both cases, it’s hanging by thread. And look, we’ve seen this: Donald Trump, until the end of his days, will retain the ability to destroy the career of any Republican who opposes him.
We’ve been talking here about MAGA’s case against the global trade regime. And I think it’s pretty easy to pick it apart because the policies don’t make sense, they’re not going to work, and the arguments are contradictory.
As you’ve said a couple times on your Substack, this is a case where Donald Trump has an intuition, and all these people are coming behind him to try to apply theory to it.
But there has been a wider disillusionment with the global trade regime. Jake Sullivan, the national security adviser for Joe Biden, said: “The postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept.”
Is there a version of the critique against the trading regimes we have — an argument for tariffs, maybe truly reciprocal tariffs — that you buy?
I don’t really buy a tariff argument. Again, it is really important to understand that we have reciprocal tariffs.
We have a free-trade agreement with Canada and Mexico. I guess we’ve just ripped it up —
That Donald Trump negotiated and bragged about. [Laughs.]
He took an existing agreement, changed a few semicolons and then called it his agreement. Europe has very low tariffs on our exports, just as we have very low tariffs on their exports. And so on. So we actually have a reciprocal trading regime.
We do have persistent trade deficits. In a lot of ways you could say that they’re actually a reflection of U.S. strength. Money flows to the United States.
Over the past 25 years, as the U.S. has had persistent, large trade deficits, we’ve also had much faster productivity growth than other advanced countries. We’ve really pulled away from Europe in particular. We have better demography, because we have somewhat higher fertility, but also immigration, which has meant that our economy has grown a lot faster.
The U.S. has basically maintained our share of world G.D.P., despite the growth of China, because we’ve grown so much faster than the rest of the advanced world. So if you just looked at economic performance, we’re doing fine.
Now, wages of ordinary workers have not grown as much as we’d like. We’ve had rising income inequality. And some of that is due to imports. And that actually is trade economics 101 — that trade can have effects on income distribution. So yes, there’s something there.
But again, it comes down to: Talking about globalization sounds like it’s sophisticated, it’s important, it’s global. When I was much younger, my parents got me a sweatshirt that said “global schmobal” on it. I asked why, and they said: Well, you are always going off to some conference, and when we ask you what it’s about, you say, “Global schmobal.”
So “global schmobal” is a very appealing story, and people like to talk about it. It’s probably well behind more mundane things like productivity growth and, for that matter, labor policy, in terms of causing inequality.
But yes — I think I can tell this story.
I think you can, too, whatever it is.
I was visiting Oxford about 10 years ago. And it’s extremely rude to step out of a dinner party at Oxford to take a phone call — unless the phone call is from the president of the United States complaining about the Op-Ed you just wrote. [Laughs.]
Because I came out against the Trans-Pacific Partnership, which Obama was advocating.
And I just said: I don’t think this is a really good idea. You really shouldn’t be spending political capital on this.
So a lot of us were feeling unease that the uncritical proglobalization argument had gone too far and were saying we need to step back.
And we did. Again, the Biden administration had some significant nationalistic economic policies. But it’s a far cry between saying: Yes, we do need to think a little bit more about buying American. We need to think about both national security and, to some extent, worker concerns. But there’s a world of difference between that and what we’re getting now.
I think that’s a good place to end. Always our final question — as a veteran of the show, you know it: What are three books you would recommend to the audience?
It’s been out for a while, but I just read Zach Carter’s “The Price of Peace,” which is about John Maynard Keynes and his role in the world. Beyond fantastic book.
My friend, Barry Ritholtz, the fund manager, has a great book called “How Not to Invest,” which, believe it or not, is interesting, even if you aren’t in investing. He’s just really a lot of fun.
And I’m just reading the latest book by Phillips O’Brien, who’s a military historian. He has a new book called “War and Power.” He is always fantastic. Heterodox. He’s pretty scathing, actually, even about Biden administration policy. But anyway, it’s a really interesting book.
Paul Krugman, thank you very much.
Thank you.
You can listen to this conversation by following “The Ezra Klein Show” on NYT Audio App, Apple, Spotify, Amazon Music, YouTube, iHeartRadio or wherever you get your podcasts. View a list of book recommendations from our guests here.
This episode of “The Ezra Klein Show” was produced by Rollin Hu. Fact-checking by Michelle Harris, with Kate Sinclair and Mary Marge Locker. Mixing by Efim Shapiro and Aman Sahota. Our executive producer is Claire Gordon. The show’s production team also includes Elias Isquith, Kristin Lin and Jack McCordick. Original music by Pat McCusker. Audience strategy by Kristina Samulewski and Shannon Busta. The director of New York Times Opinion Audio is Annie-Rose Strasser.
Ezra Klein joined Opinion in 2021. Previously, he was the founder, editor in chief and then editor at large of Vox; the host of the podcast “The Ezra Klein Show”; and the author of “Why We’re Polarized.” Before that, he was a columnist and editor at The Washington Post, where he founded and led the Wonkblog vertical. He is on Threads.
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