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.
Here is how the last week or so went: President Donald Trump unveiled a half-baked package of gigantic tariffs — so half-baked that one of them was a tariff on a group of islands inhabited mainly by penguins — which threw the markets into chaos.
But the chaos was not simply the result of higher expected prices and supply chain disruptions. What markets hate is uncertainty. Financial crises are usually the result of some unexpected, uncontrollable shock that overwhelms the policymakers who are trying to maintain stability.
In this case, Trump was the shock. He was announcing that he was, himself, trying to end this era of stability. He wanted a realignment of the global financial system, and you can’t shift tectonic plates without creating a few earthquakes.
But what an earthquake: Trillions of dollars of wealth were wiped out of the stock market by choice. The Trump people said: Don’t worry about it. That’s Wall Street — not Main Street. All we care about is the American worker.
But then the upheaval hit the bond markets. The market for U.S. Treasuries began to shake — a bad sign, because U.S. Treasuries are the relentlessly reliable asset at the base of the global financial system. Crack that and the whole house can come down. And that seems to be what pulled Trump back from the brink:
Archived clip:
Reporter: Was it the bond markets that persuaded you to reverse course?
Donald Trump: I was watching the bond market. The bond market is very tricky. I was watching it. But if you look at it now, it’s beautiful. The bond market right now is beautiful. But I saw last night where people were getting a little queasy.
But he didn’t pull that far back. He is still tariffing most of the world at 10 percent. He is tariffing China at 145 percent. As for the rest of those tariffs, they are now on a 90-day pause. What happens at the end of that 90 days? What deal is Malaysia supposed to strike with us in the meantime? Who are they going to make that deal with? Nobody knows — not even, I suspect, Trump.
But we can say three things with certainty: First, we are entering an era of much higher prices and unknown levels of supply chain upheaval. We are about to see a massive trade war with China. The global economy is complex. When you put this kind of pressure on the system, things can break unexepctedly.
Second, we are in an era of extraordinary uncertainty. No one, really, knows what any of these tariffs will be in a year. Will Trump get peeved by what countries do or don’t offer him in the next 90 days and return with yet more fury? Trump sees tariffs as ongoing leverage in every policy dispute. Is he really going to give that up?
I’m doing two- to three-day turnarounds on these podcasts, and the tariffs are typically different by the time I release the episodes. If I don’t have enough policy certainty to plan a podcast, how are major companies supposed to plan long-term capital investments?
Third, the king cannot hear no. One of the most appalling parts of this whole fiasco was watching Trump’s advisers fawn over him after he buckled. Bill Ackman, the hedge funder, wrote on X, “This was brilliantly executed by @realDonaldTrump. Textbook, Art of the Deal.”
You heard this again and again. Here is the White House press secretary:
Archived clip of Karoline Leavitt: Many of you in the media clearly missed “The Art of the Deal.” You clearly failed to see what President Trump is doing here.
Only there’s no deal. And there was definitely no art. We learned the outer edge of Trump’s pain tolerance, and so did the rest of the world. So there goes some of his leverage. We saw a slapdash policy fall apart within a week or so. But still Trump’s allies are declaring his genius — not because they expect us to believe it, but because they know he needs to hear it — and he needs to see them saying it in public, aloud. It is part of the structure of humiliation that dictators demand of their servants.
Authoritarianism is not just a mode of governance — it’s a habit of communication. The king is always right, even when he is contradicting what he said a day before. Future influence in the court relies on being in his good graces, and praise is the currency of that grace. Dictatorships are disastrous in part because they restrict the flow of information around the decision maker.
The bond market was eventually information Trump could not ignore. But those who seek his favor and his ear are making sure he learns nothing from this. I suspect we are underestimating how thick the information bubble around Trump now is, how little bad news actually reaches him, how rarely he ever hears serious criticism clearly delivered, how much the sycophants around him praise every utterance that comes out of his mouth.
So I don’t expect Trump to learn much from this. But what should the rest of us learn?
My guest today is Peter Orszag, the chief executive officer of Lazard, one of the world’s largest asset management and global financial advisory firms. He was also the director of the Office of Management and Budget under Barack Obama. So he has served as a policymaker during financial crises and as a market and C.E.O. whisperer in these last few months.
What is he hearing? What is he seeing?
Ezra Klein: Peter Orszag, welcome to the show.
Peter Orszag: Good to be with you.
We are speaking late afternoon on Wednesday, April 9. This morning, markets were in turmoil. Then Donald Trump announced a 90-day pause on nonretaliating countries. As you were tracking the markets and talking to the people at your firm, what were you seeing?
I would say, among C.E.O.s and boards, there was a pause — a kind of: We’re putting decision-making on hold, because we can’t figure out how this is going to play out.
People often say markets don’t like uncertainty and businesses don’t like uncertainty. You saw that play out in real time — a deeply negative reaction to the level of heightened uncertainty that was in the marketplace.
The Treasury market was beginning to shake. Can you describe what is happening there?
Sure. Here’s the backdrop: I will own having been a mistaken fiscal worry wart in 2008 or 2009, worrying about the fiscal path during an era when it turned out not to have been necessary to have those concerns. And over the past 15 years or so, even I, the former budget director, have gotten sick and tired of the endless worrying: The sky is falling. The budget is unsustainable — all of that. I have zoned it out.
But unfortunately, I think we need to get back into that mode because the situation today is much different than it was a decade ago. Deficits today are 6 or 7 percent of gross domestic product. A decade ago, it was 3 percent. Interest rates are roughly twice as high as they were then.
And the final piece, which brings us to your question, is that just under $9 trillion of U.S. debt — Treasuries — is owned by foreign creditors. And the argument has always been that they would never sell that, because if they sold, they’d lose money. Because they’d create a reduction in the price by selling.
And also there’s no good alternative. Everything in life is relative, and there’s no point looking elsewhere, because everything else is more unattractive than anything the U.S. could offer.
The situation could change, though, if frictions between the U.S. and many key allies rise, and those allies then say: Actually, if we’re each imposing pain on one another, maybe I’m willing to tolerate the losses from selling my dollar reserves and my Treasury holdings. That’s one part.
Then there are questions about the most recent turmoil. And what you were seeing was some unusual behavior in the Treasury market along two different dimensions.
Normally, during times of crisis, there’s the exorbitant privilege of being the reserve asset: You’re the safe place to go. So even if it’s something you did — say, there’s a warning over the debt in the U.S., people get nervous, they go into Treasuries. So the interest rate goes down — even if the thing that’s causing the riskiness is your own doing.
So that happened initially here. But over the past few days, what has been happening is interest rates on U.S. Treasuries have been going up, not down, despite the other market turmoil. That’s an unusual thing.
And then there were other aspects of it. Not to get too wonky or too detailed, but when people suffer losses in stocks, they often have to make good on if they borrowed any of that. Treasuries are a very liquid thing that they could sell. So there was a little bit of a feedback loop.
And there were other unusual things involving the bonds versus swap rates. We don’t need to go into all of that, but there were little tremors that were showing up in the debt markets. I would be shocked if they did not catch the attention of senior officials in Washington.
Trump talked about this. He said people were getting “queasy.”
And that, I think, scared people. You can explain why this is the case better than I can: People are OK with the stock market going up and down, but they’re not OK with the bond market beginning to unravel.
That is taken with a different level of seriousness than the equities market, which is volatile. The Treasury markets are not supposed to be volatile.
How I would put it is that you have different exposures. For most Americans, you’ll have some money in the stock market, but the biggest asset you own by far is your house.
And to the extent that mortgage rates are driven off the 10-year Treasury rate, or some underlying Treasury rate, you can see a more direct impact on the financial condition of many people off the bond market rather than the stock market.
But I would say both are important. I don’t know that one is more important than the other.
Don’t forget that in the early 1990s, James Carville didn’t say: I want to come back as the stock market. He said: I want to come back as the bond market.
They backed off on the tariffs a little bit, but the ones that are being proposed are still pretty significant. They’re more or less what Donald Trump was promising during the campaign — a 10 percent tariff on imported goods.
It’s still a little bit unclear — and by the time this comes out, it might have been clarified. But right now, as we’re speaking, the tariff on China looks to be over 100 percent. There are some different tariff rates on a couple other things.
The calculation I’ve been seeing is that this is on the order of a 25-point tariff increase on average because the China tariff is so high.
Given how bad things were getting, this is being treated as a walk back to a moderate position. But during the campaign, when I talked to people who were Trump supporters, they promised me that nothing like this would ever happen — that the tariffs would just be a negotiating ploy he would come down from after he got some deals.
So as somebody who has talked with a lot of different companies and who has a perspective on markets, what does it mean for these tariffs to go into effect? How does that change your estimation of future U.S. growth? How would you advise companies to act, given that there’s been a lot of volatility here? What does this mean for the economy?
I think splitting the world into China and ex-China probably makes sense for this purpose, given the dramatically different tariff rates.
A 10 percent across-the-board tariff rate — and yes, there are some exclusions and this and that, but let’s just call it 10 percent. Remember: We were at 2 to 3 percent. So when I talk about the underlying tectonic plates of the global economy, the tariffs will have an effect.
The China part is more complicated. Because if you ask me to bet a year out, I suspect the tariff on China is not going to be anywhere remotely near 125 percent — or whatever it’s going to land at. Instead, what will happen is there will be some set of agreements with all the ex-China parts of the world and then an attempt to reach some negotiated settlement with the Chinese that involves a higher tariff rate than we had before but nothing like what we’re seeing right now.
There are two forces here. One is the tariff rate. And if anybody believed they were stable, we could simply model that out: a 10 percent tariff here, a 60 percent tariff there. We could think about that like a tax policy.
But then there’s the uncertainty. Like you’re saying, you don’t expect the China tariffs to be what they are today in a year or two. I think a lot of people don’t even expect the bilateral tariffs on a bunch of different countries to be what they are today in a year or two.
So one of the things the Trump administration says they’re trying to achieve is persuading companies to make investment decisions based on these tariffs, and specifically to persuade them to invest in the U.S.
But if companies don’t trust that the tariff environment today is going to be the tariff environment in a year, and these are long-term capital expenditure decisions, it would seem that the obvious thing to do is to just wait.
Yes. In every discussion I’ve been having with C.E.O.s across the globe before this announcement — though I suspect a lot of it will continue because you can wait 90 days and see how it plays out — there were a lot of decisions on hold. And it was for a variety of reasons. You highlighted one — which is that we don’t know the level of the tariffs. But also we don’t know the response of foreign governments.
Many foreign companies are under pressure from their own governments not to invest in the U.S. You saw President Macron say that explicitly, but others have said it more in private.
So most of the corporate decision making seemed to be on hold. And I would suspect that is going to remain largely the case until there’s more clarity.
I’ll give you one example. The administration had come out with a variety of these bilateral reciprocal tariffs. And one problem, along with others, in terms of creating uncertainty is: You couldn’t argue that was the worst case. Even the X percent — say, the 17 percent on Israel — you couldn’t argue that was the worst case, because the administration also said that if a country retaliates, they will raise the tariff rate from the billboard. And that’s exactly what’s happened with regard to China. The Trump administration has shown they’re willing to do that.
So what was interesting is that administration officials, including the Treasury secretary, said: You can now be assured that what we showed you before is the maximum.
There’s some tension — and, I think, some further clarity that needs to be provided — about how that works with the simultaneous thought that if any country were to retaliate, we may go above what was put forward before.
So these are the sorts of questions that, over the coming days, are going to need to be answered, in addition to whatever deals ultimately are cut, before firms are going to feel confident that they can make some investment decisions.
And then the second problem is one that I know you’ve identified and spoken about before: We do have elections in the United States, and the policy structure can change.
I don’t know any company that is making an M&A decision or an investment decision for two and a half years. Companies are making these decisions over a much longer period of time. So the other question is: How much of this will stick thereafter?
And what I’d say — not to do the Lazard advertisement, but just really briefly: I created a geopolitical advisory team a couple years ago, and the demand for that team is off the charts. Because you can’t make a business decision today without taking these sorts of things into account for exactly the reasons that we’re discussing.
But how can you make the decision at all? Because as good as your geopolitical advisory team might be —
And they are excellent.
I’m sure they’re wonderful. But I know the people involved, and I know they cannot tell you what Donald Trump will do in 30 days — or in 90 days. Because the only person who knows is Trump. And he doesn’t know.
Well, I don’t know what he knows and what he doesn’t know. But what I would say is: I agree with you.
What I have been saying internally is that we need to make sure we are not presenting false conviction here in terms of what will happen. Because, fundamentally, people don’t know.
I do think once we get through this stage — let’s assume there is a set of deals — the variance in outcomes may be less extreme. It’s not that businesses can’t decide under uncertainty. They do that all the time — the world is an uncertain place. It’s just that the levels of uncertainty here were so extreme that it was freezing people in their tracks.
So I think what the administration presumably would want to do is bring that level of uncertainty back into a manageable range.
And that’s one interpretation of — with these different factions within the administration — what just happened.
Aside from wait and see, has there been a signal that companies are taking from this reorientation of American policy?
There are investments that you cannot pause forever. As you said, companies have to make decisions under uncertainty all the time. And obviously, Donald Trump has intuitions. People know what those are.
In the decisions that do need to be made, have you seen a pattern around how people are trying to plan for the uncertain policy equilibrium that we are likely to be in, to some degree, for a while?
I’d say it’s too early. It’s been roughly a week —
It has felt very long. [Laughs]
It has felt very long. I’ve done a lot of C.E.O.-level discussions, and most of them just wanted to talk through what might happen, what the scenarios were. And they were just at the beginning of: Let’s put things on hold for now. But not getting to: And therefore this means that. Or what have you.
In general, not always, but there are usually not that many decisions that need to be made in the span of a week. So the question becomes: The longer the uncertainty persists, the more economic damage there would be.
And some of it becomes irreversible — not just on the corporate side but in terms of the foreign investor attitude toward the United States.
So I think right now we’re at another period of peak uncertainty. Because the uncertainty has come down, but we don’t know whether it will persist or not.
One of the reasons I’m skeptical that the 90-day pause is as clarifying of a policy move as I think some are treating it, is that I remember the 30-day pause on Canada and Mexico. There was a market reaction to the announcement of the 25 percent tariffs on Canada and Mexico. Then Trump backed off, and people said: Oh, look. Old Donny Trump is not going to do this. That guy cares about the stock market.
And then in 30 days, he did do it. Then we had another reaction, and it’s been escalating from there. Now there’s a de-escalation — but nobody really knows what he wants from these other countries in the 90-day pause.
There has been a bunch of reporting that there are people in other countries who would happily come and try to make a deal — it’s not exactly clear what we want from Vietnam, but maybe we could get it. But it has not been communicated to them what Donald Trump wants.
And Stephen Miran gave a speech in which he basically said: Well, maybe you can help us with defense spending, or maybe you can buy more of our things. Or you could just make a direct donation to the U.S. Treasury.
But one of the things that has been very tricky about this is: There’s one world where they’re trying to achieve something very discrete. And there’s another where Donald Trump likes tariffs because tariffs are leverage, and he’s a person who works in leverage, wields leverage, and who develops moments of anger at other countries. Maybe we come to a deal with Europe, but then Europe does something he doesn’t like, or France does something he doesn’t like. So this shakiness can persist.
One of my worries for the economy right now is: A 10 percent tariff and a higher one on China is bad, but there can be adjustments made to that. But a world where lots of companies are delaying investments over a long period of time — that’s a secondary effect that will push a lot of investment we need or we’re expecting in the present out into the future. And that does have an effect on jobs. It does have an effect on our industrial base and many other things.
And that just seems very likely to be our world. Or are you more optimistic about it?
The administration now has an opportunity — whether it’s realized or not — to lay out a little bit more of what they’re trying to accomplish and provide what people had hoped would happen on April 2. Which is: OK, this is actually the deal. This is what we’re doing. Go on with your lives.
So you could adjust.
Among C.E.O.s and boards, I think people have some understanding of a change in the dynamic with regard to China. But Canada, Mexico, Europe — that part was a little bit befuddling, because it wasn’t clear what the theory of the case actually was.
Has that changed? Is the theory of the case less befuddling now?
I think there were two parts here. There’s the theory of the case if it’s executed in a particular way — and then there’s the theory if it’s executed in a different way. And I think what we’ve done is shift from Scenario 2 into Scenario 1.
What do I mean by that? One way of thinking about it is, Stephen Miran, the chair of the Council of Economic Advisers, in November 2024, put out a guide to remaking the world trade system. He identified what the underlying objectives of this set of policies are but then also highlighted that there was a significant risk of adverse market volatility and adverse economic effects, unless it was implemented in a particular way.
And what were the key attributes of implementing in a particular way? It was graduated implementation and forward guidance. Graduated implementation means baby steps — step by step, a little bit at a time. And forward guidance means that you signal way ahead of time what you’re doing in those baby steps to give markets and businesses and consumers plenty of time to adjust.
And I think what we saw over the past week is it was not implemented that way. It was not graduated — it was all at once. And it also took effect in a matter of days, not even months or quarters.
I think it’s good for us to discuss the Miran paper for a few minutes. Because something I see people on Wall Street doing — a lot of you all are very smart people and you’re looking —
“You all” — look at this. [Laughs.]
I’m not on Wall Street. [Laughs.] I’m a poor member of the media here, man. But there is a search for a framework that makes sense. And Miran offered people the most sophisticated framework for something that might be Donald Trump’s trade policy.
But Miran just gave a speech, and he was asked about his very important paper. And he said: Look, this paper is not important, because I wrote it before I was in the administration. It’s not exactly Donald Trump’s trade theory.
But I’ve seen people really wanting to make this paper the Rosetta stone. So how do you understand what the paper says? What is the remaking of the global financial order that it proposes? And how well has the administration’s policy decisions and movements tracked that paper’s offerings?
Before we do that, I think we need to step back even further to acknowledge that, over the past two or three decades, the so-called Washington Consensus — the idea that free markets and unfettered competition whenever possible is the best system — has been discredited. Because many people have not experienced the benefits to the degree that people think they should have — or at all. For roughly two-thirds of Americans, life expectancy has been flat to down over the past two to three decades.
So before we get to the what, we have to start with the why. And it’s because there is a deep level of frustration. You’ve written about this. And maybe we can get to some of the solutions that you proposed —
[Laughs.] I don’t think I have a solution to this.
We can flip the table here. [Laughs.] But you have to start there. So you have to acknowledge that there’s a lot of frustration, a lot of anger. And people are searching for a solution.
So the Washington Consensus has been discredited, but there’s been no coherent intellectual framework that has replaced it.
Do you feel that consensus was discredited?
Yes, I do.
Because I don’t buy the connection between trade policy and life expectancy as a one-to-one thing.
No, no, it’s not. And in fact, most of the evidence suggests that most of what was going on had to do with technology and other factors, and not trade per se.
But what I would say is the easy kind of “The market will always solve everything and everywhere” — which is a caricature of what was actually policy over the past couple of decades, so it’s unfair —
You served in the Obama administration. I don’t remember Barack Obama talking about trade as an endlessly unfettered good thing.
When he had that gaffe, where he talked about people in hollowed-out factory towns clinging to guns and religion, what he was talking about were the hollowed-out factory towns. Even then, there was a lot of concern over whether parts of the country were being terribly left behind.
Yes, I think that’s right. It is a caricature. But I think it’s not unfair to present that as being a kind of meme. And I would also point out that China, in particular — as opposed to Canada or Europe — plays a different role in that story. But there’s anger and a vacuum.
Into that vacuum steps Donald Trump, who has believed this since the 1980s and 1990s with Japan.
Correct.
He came to the views he’s proposing now when the antagonist wasn’t even China — it was Japan.
That’s true. But I think it doesn’t change the fact that there was a vacuum. My only point is that he ran on this agenda and won.
So then the question becomes: Well, beyond just saying trade has caused harm to certain parts of the population, what’s the pathway forward?
And that’s where I think the Miran paper is interesting. Because it is putting forward a somewhat deep and controversial perspective that deserves serious debate.
The United States has occupied a place in the global economy. I personally think it has been a benefit — and in fact, it’s been called the exorbitant privilege — that we are the reserve currency. We are the pillar of the global economy. It’s the dollar that’s used for the majority of international trade transactions. It’s the dollar that has been where other central banks hold a disproportionate share of their reserves.
And what Miran is raising in this paper is the question of whether we want to be the reserve currency for the world. So he is taking what has been called the exorbitant privilege and raising questions about whether it’s actually a privilege at all.
Give me both sides of that. What do you understand to be the benefits America gets from being the world’s reserve currency? And what is the cost that it carries?
If we want the world to stop buying anything — Chinese telecom infrastructure or Russian oil or whatever — our ability to influence entities that are not even connected to the United States is dramatically higher because the whole infrastructure runs through us.
In order to move money from Point A to Point B, you typically are going through some intermediary that touches the United States. And boom, we can intercede at that choke point. And that gives us the ability to influence things that otherwise we would have trouble influencing: Companies in Europe or Africa that don’t have anything to do with the United States, but they do have to do with a bank that then has an intermediary that has something to do with the United States. That’s one benefit.
Another benefit is that our borrowing costs are lower than they would be otherwise because the dollar and Treasuries, in particular, are seen as the safe asset — the reserve asset, if you will.
It’s really hard to estimate this, but there’s maybe somewhere between 25 and 75 basis points of lower interest rates. And by that I mean, instead of it being 4.5, it would be 4.25 or maybe 4 percent borrowing costs. So that adds up over time, especially because we now have very substantial debt as a share of the economy. So those interest costs are quite significant. And the list goes on.
Another way of looking at this is that international investors have overindexed on the United States, probably in part because of that fundamental role we play in the global economy. If you look at the share of dollars in stocks that people allocate to the United States, relative to other countries, it’s higher than it “should” be, based on our G.D.P. or other metrics. And that’s in part because of this special role that we play.
So those are at least some of the benefits. What’s the downside?
The downside is that when you are the reserve currency, your exchange rate tends to then be higher than it would be. In other words, the dollar is more expensive than it would be because of that extra demand that other countries have for dollars, as opposed to yen or euros or whatever.
That higher exchange rate then means exports are more expensive. And one way of thinking about it is there’s something that academics call the Triffin dilemma, which is: If other countries need your dollars to do their stuff when they trade, that means you need to be supplying dollars to them. And logically, the only way that can happen is if you’re running trade deficits. Because when you run a trade deficit, you’re effectively importing more than you’re exporting. And the difference is that you’re supplying cash or dollars to the rest of the world as a result.
So the argument that the C.E.A. chair is laying out is: To the extent that you think trade deficits are harmful and decline in manufacturing in particular is harmful, this is a cause of part of that. And so is it really worth the other benefits?
Let me zoom in for a minute on the question of whether or not the dollar is driving the decline in manufacturing employment.
It’s probably true that the dollar’s value has had some effect on that, but every estimate I find is that it’s a fraction of the total. And the driver is more automation, the move to services and a bunch of different things. And it’s probably not going to come back.
You can look at other countries: Germany has a very different trade policy than we do. They’ve existed in more of the world that I think Stephen Miran and Donald Trump seem to want us to exist in. But you also see manufacturing as a share of employment dropping there. There are a lot of arguments people make right now that China has probably hit peak manufacturing employment.
I think Donald Trump is a nostalgic, and I think that he wants an economy of America in the 1950s and 1960s, perhaps. And he’s trying, in his own way, to get us back there. But there’s no “there” to go back to.
So one question I have for you is: If you did everything that Stephen Miran wants to do, and the dollar were no longer the world’s reserve currency — although they say they wanted to maintain its role as a reserve currency. They are contradictory on that. But if it were no longer the world’s reserve currency and it devalued, then what is your view of what that would buy us, given the world we now live in — of automation, cheap global shipping and artificial intelligence coming online very rapidly?
Is the thing they’re trying to achieve actually possible with this mechanism?
I think there are two questions. First: Is it achievable? And it depends on what question you’re answering. But if you’re saying: Could we get back to 30 percent of employment being in manufacturing — as it was in the 1950s — from today’s level? No.
And in fact, I think Paul Krugman on this very show last week pointed out that the math is very difficult, even if you eliminate an entire deficit.
Even if you eliminated that, and it all went into domestic production, you take the manufacturing share of G.D.P. from about 10 percent to let’s call it 15 percent, you’re not going to have 30 percent of employment off 15 percent of the economy — unless you’re doing really unproductive things. Point 1.
Point 2: Is that shift actually something that we want? In this whole trade debate, we have completely ignored the fact that it’s all about trade in goods. But the U.S. is a net supplier of services — net surplus in services — to the rest of the world.
So this raises the question: Are manufacturing jobs actually better than service jobs? Why are we having a trade debate that leaves out, if advertising or some other aspect of this podcast generates revenue abroad, that is an export of a service?
Backbone of the American economy: podcast advertising. [Laughs.]
Backbone of the American economy. It’s actually interesting because once you buy into the thought that trade imbalances can only reflect restrictions or cheating or what have you, then the logical question is: Well, are we running the surplus in services because we’re cheating? I don’t think so. Why is it any different for goods versus services?
It raises a bunch of different questions. I think I am being intellectually generous but realistic.
I think there’s a deep nostalgia in American politics that’s true in both parties for manufacturing employment. And I think there’s a way in which services and also financialization are seen as decadent — in a weird way: unmanly.
We talk about the working class in politics, and the implicit working class — particularly on the right, although not only — is this guy in a hard hat. When a huge amount of the working class now are nurses and teachers. So that’s one piece of it.
I think there’s a sense: These were the good jobs. These were the jobs on which a man could provide for a family and his wife could stay home with the children. And we’re trying to get back there. That’s often said quite explicitly by people on the right.
And then there’s a second dimension to it, which I think is more reasonable: Our industrial base is a mechanism of national strength. And particularly if you’ve adopted the view that we are going to have an increasingly antagonistic relationship with China, having so much of our industrial base dependent on Chinese supply chains, or simply happening in China altogether, is dangerous.
And we need to reshore that. In the Biden administration it was thought about as friendshoring, where you’d want it in an architecture of friendly nations, including ours. For Trump, they’ve often talked about it more intensely, domestically.
But it’s not really about the employment — it’s about the manufacturing might to win the wars of the future or dominate the industries of the future.
A few parts on this. The first is: The boundary between manufacturing and services gets blurred. There’s a whole line of business called industrial tech that involves the gray area between what used to be thought of as manufacturing and services. So that’s Point 1.
Point 2 is that the industries that were crucial to national security from the 1950s may well be different than they are today. I would argue that dominating A.I. and dominating the new payment systems and the new payment stack that is being developed digitally are going to be really important. Maybe more so than whether we can manufacture our own sneakers, for example.
And then the third point I’d make, since you mentioned the previous administration’s ideas on friendshoring, is: I do think, coming back to that point of the intellectual vacuum, there were grasping attempts to lay out a structure that would make sense and hold together, but I don’t think it actually worked. There was nothing that actually replaced the Washington Consensus, the Economics 101 caricature of life, with something that hung together.
So the impression — fair or not — was just: We’re going to throw together a bunch of different things and hope it all makes sense.
You have served in multiple administrations. You were the head of the Office of Management and Budget under Barack Obama. I covered policy processes you were in, and they were quite careful and tedious.
And this has not been that. Among other things, they put high tariffs on an island populated by penguins. And there’s been a way in which it has felt like there were a lot of antitrade intuitions at war with each other simultaneously — that they’re trying to do all of the possible arguments at once.
Something Miran focused on in his paper is: You need to keep your allies on your side to reduce the level of global upheaval.
But that has not been the Trump administration’s approach here. They’ve backed off now on some things, but they’ve pissed off basically every other country along the way.
And they’re saying this is a kind of “Art of the Deal” masterstroke. But my read of the situation is: People are going to be very loath to trust the U.S. And their desire to not be exposed to U.S. financial dominance in an era when the U.S. seems intent on weaponizing that dominance against anybody who might cross us or not give us the concessions we seek is creating an incentive for them to find ways of building some insulation from what we could do to them.
That’s not the Miran theory. That’s something else.
I think there’s a lot to unpack here. We need to go back over, actually, a couple of different administrations.
This has been laid out quite well in two new books — one called “Underground Empire” and the other called “Chokepoints.” We have, over time, taken that ability to project our financial dominance — as you put it — and have gotten what we want, at the potential risk of alienating the people who are subjected to those dictates. And that has been building gradually. And I’d say it’s at a much more extreme level now.
So I do think what we’re seeing is an underlying tectonic plate shift in the global economy, in which the U.S. role at the center of everything is under severe stress. And it’s under severe stress because of that history of gradually building up things in terms of using the tools that we had. It’s under significant stress because of the idea that we’re going to change the overall tariff structure, regardless of whether it’s done gradually or done more suddenly. And it’s under stress because of changing shares of G.D.P. and relative performance in different parts of the world.
So you put all that together and — again, I’ve been traveling throughout the globe and talking to a lot of people. And there is a question being raised. Take digital payments as an example: The existing system involves a lot of old technology to move something from A to B. Even if you’re using a cool app, the back end of that is still very old school, in terms of how the money moves from A to B. And there are new technologies that can do that much more efficiently.
So who is going to own that new payment stack? That is a really big deal. In fact, there’s another book out called “Smart Money” that documents all the ways in which China, in particular, is trying to own that new payment stack.
“Underground Empire” is by Henry Farrell and Abe Newman. And I had a conversation with Farrell recently about this. He said something that I’ve been thinking about since: The U.S. became central to the global financial architecture, and then we began to use that as a way to project something akin to force. Think about the sanctions on Russia or Iran. But we typically did that with at least some international buy-in and around issues for which we were sort of acting as a global policeman. Whether or not you like what we were doing, that was the theory of it.
And what Farrell said was that a lot of what the administration is doing — the tariffs are one dimension of it, but also a lot of what DOGE is doing with payments and government money — is an application of that weaponization of financial power across every layer of the Trump administration’s goals.
Whether they were punishing internal enemies in America — like universities or nonprofits, which they understand to be part of the progressive power base — or they were using tariffs as surplus leverage that could get them concessions from functionally every country on the globe, what they did was take a power we were using somewhat sparingly — though, as you say, with increasing frequency — and made it the cornerstone of this particular administration’s economic theory. That we actually have this power, and if we squeeze, everybody will have to bend the knee simultaneously, and we can get deals nobody else has gotten before.
It’s not that there’s nothing to that theory. But I think the fear or belief many people have had is: If you squeeze too hard and you squeeze on everybody all at once, what it will lead them to do is pull away from the U.S. into other players.
China has its own problems, but they’re quite far ahead on that payment stack, and they would like to be seen as a safe harbor. And I think one of the nightmare geopolitical scenarios for America now is that Donald Trump embarks on this huge global financial reordering on the idea that we will take back manufacturing from China — and instead what he does is allow China to take financialization and financial power from us.
Yes. Look, I think there were probably multiple reasons for what happened in terms of a pause. But I think one plausible explanation — and certainly what I was hearing in Europe and elsewhere — was: We’re not so sure that relying on the United States or investing in the United States is what we want to do in this kind of environment, and we’re reopening the question of whether re-engaging with China is attractive.
In other words, exactly the opposite of what you’re trying to accomplish. I think it’s plausible that — with a scenario in which there are very steep tariffs imposed on China but an attempt to get to “yes” with everyone else — you’re back to a world in which, if your goal is to derisk or isolate from China — and I’ve written about this in the past — what you want to do is have a superbloc with Europe.
You basically want the U.S. and the E.U. and the U.K. to join together, along with Canada and Mexico — North America and Europe together — and reach some common purpose on what you’re trying to do. Because the throw weight of that combined entity is so large that it will affect everything else that happens in the global economy.
There’s a well-known phenomenon called the Brussels Effect, which is: When the E.U. sets a standard, global firms tend to adhere to it, even for stuff that they’re not shipping to the E.U. Because once you’re doing it that way —
Right. That’s why we’re all clicking on cookie pop-ups on every website on the internet. That comes out of an E.U. regulation.
Exactly. So the potential here is for a supercharged Brussels Effect. Because if it were Brussels and Washington together, that’s virtually unstoppable.
So if your goal is to isolate China, that is the most effective way to do it. And when you take on the whole world all at once, as someone put it over the past 24 hours, it tends not to work as well.
You were talking about the need to return to a view that the debt market matters, the debt level matters, and we have some problems here. And that’s something I actually do hear a lot from the Trump team.
I tend to discount parts of it because they’re so intent on doing a giant tax cut that it makes me wonder how serious they are. But taking them at their word, one of the things they often say — to go back to something that’s in the Stephen Miran paper — is that this also reflects our global defense commitments and the way we act as an architecture of security for many countries around the world.
I have heard weirder theories about the tariffs as an effort to bring down interest rates, which would change the long-term value of the debt.
When you look at what is going on here from the fiscal position — given that I think they do believe that our fiscal position is unsustainable and dangerous for the future of the country — how do all of these trade machinations, and the broader set of economic policies you’re seeing from them, fit into your worries or your projection of the relationship between our policy and our debt?
Before this pause, just taking the previously published tariffs by country, the Yale budget team had estimated that the revenue impact would be something like $300 billion a year. So if you want to shave that down and assume everything is just 10 percent outside of China — I mean, maybe it’s $150 or $200 billion a year — that’s something. But relative to deficits that are 10 times that size, it’s certainly not a panacea.
That would be something like $1 trillion-plus over 10 years, which is significantly less than the cost of the tax cut they’re planning.
I do think what you’re going to see on the tax cut is the possibility that something very unusual happens, which is either the Senate parliamentarian rules in a particular way, or the chair of the Senate Budget Committee just goes around the parliamentarian — both of which are possible in a way that makes the extension of the existing tax cuts look like it’s cost free.
However they score the tax cut, it will still require us to pay for it.
Right. It doesn’t matter if you’re six feet because you were at three and you went up, or you just stayed at six feet. You’re at six feet.
So in these efforts to reorder the global financial system, I guess my question here is: Steve Bannon and Stephen Miran, for different reasons, will tell you that the U.S. is badly overextended by its role as a global reserve currency and as a global defense protectorate. Their theory is that if you unwound the role the U.S. is playing, you could solve or significantly ameliorate our debt problems. Do you buy that theory?
You might slightly reduce the debt problems by reducing some of the burden of defense spending and what have you. There would be an offsetting role on the cost of the debt, fundamentally because foreign investors may be less interested in buying U.S. debt in that world.
I think this is a really important debate to be having, which is: Do we want the U.S. to be at the center of the global economy or not? That is, I think, a fundamental underlying philosophical or fundamental debate that is being papered over by the to-ing and fro-ing over tariffs.
But at the heart of it, that is a deep question. I personally think we are better off if we’re at the epicenter of the global economy. But that’s a debate to be had.
Let’s go to that more fundamental debate: No theory stepped into the void that the previous theory of free trade left.
The Biden administration made some points on friendshoring. That didn’t quite do it.
Now you have Donald Trump, and their theory is very aggressive, but I don’t think it’s working out great. I’m a little skeptical that their theory is going to be the theory.
Do you have a contender? I’m not saying it has to be yours, specifically, but is there some vision out there? What do you think this theory needs to consist of? In your view, what are we even trying to achieve?
I will give you an inkling. You’re aware that I was a big part of the beginning of the Hamilton Project.
So going back to a Hamiltonian perspective might be interesting. What are the aspects of a Hamiltonian perspective? It has the recognition — and I think this is something that the Democratic Party has not done a good job at, and it’s something that I’ve tried to live in my own life — people can criticize it — but that fundamentally, there are significant business benefits that come from effective business or effective commerce. And there is no other way of organizing production in society that beats having commercial enterprises doing most of it.
So that is a core part of the Hamiltonian philosophy that significant parts of the Democratic Party seem to have wandered away from — at least in the caricature.
A second part, though, is coming back to trade. It’s not unfettered free trade that’s at the heart of that vision. It’s something that’s a little different. It’s a little mercantilistic, and it might kind of start to stretch too far in that direction.
And then there’s a part on the role of the federal government — and obviously on fiscal matters and what have you — that I think could be the makings of a new vision, but I have not —
That sounds very Bidenesque to me, though. Wasn’t what they were doing turning down the dial a little bit on open trade with China, doing more friendshoring, using industrial policy to protect strategically important sectors — like the CHIPS and Science Act to reinvest in semiconductor manufacturing?
Maybe. But the boundaries weren’t well defined, in my opinion.
This might be an unpopular thing to say with some of my former colleagues, but I would say I think business can be good for society. That part was absent from the rhetorical framework.
Was it absent from the policy framework, though? The semiconductor manufacturing is offering money to private semiconductor firms —
Not entirely. Yes, that’s fair. But as you know, words matter a lot in policymaking —
I always find the business community is more sensitive than I would think it would be. [Laughs.]
Everyone is sensitive. Everyone cares a lot about whether what they’re doing is seen as productive and good.
And yes, I take your point. But it’s not just the business community. I think everyone gets all worked up.
That is fair. Status is maybe the most fundamental currency in human life. I think presidents don’t always realize how much they are doling out status.
Yes. I think that’s fair.
When you have been talking to firms, when you’re thinking about the next couple of years, one question I have had is whether or not we are putting too much weight on trade for your first principle there.
Which is to say: I’m a believer that effective commerce is very important. But something I have heard from a lot of people following this debate is that, even if what you’re trying to do is reshore manufacturing, trade is probably not your most important tool. Tariffs are certainly not your most important.
Both Matt Klein and Michael Pettis, who wrote the book “Trade Wars Are Class Wars” and have been significant figures in the rethinking of trade have said versions of this.
And so a different version of this is: If what you want to do is have effective commerce — some of that in trade, some of that elsewhere — where would that lead you? Let’s say they put down the tariffs. Then they should focus on what? What other barriers exist to the world of American greatness that you think they’re describing in Stephen Miran’s paper or elsewhere?
There’s both the carrot and the stick, or the impediment and the push.
But I think you’re right that a lot of what is going to happen over the next decade, frankly, comes down to technology. And someone at one of the recent gatherings I was at said it this way: Technology trumps tariffs. What happens five or 10 years from now will depend a bit on what we’ve been discussing. But it’s probably going to depend a lot more on the evolution of these amazing new innovations and technology that we’re all hopefully using in our daily life. I know I am.
And so what would matter for that?
There are lots of different pieces that matter for that, and I don’t want to delineate all the different parts. But I would say this — and Alex Karp from Palantir laid this out in a recent book: I think that there is a national interest in having Silicon Valley own the A.I. revolution — a national security interest and an economic security or an economic interest.
And then there are lots of things that follow from that. But the first thing is to recognize that is what you’re trying to do.
And then always our final question: What are three books you would recommend to the audience?
Well, I think I named two or three already in this discussion. But beyond “Underground Empire” and “Smart Money” and so on, maybe I’ll add two.
One is called “The Catalyst” by Thomas Cech. It’s all about the role of RNA, and not DNA, in most of what happens in the human body. I think RNA has been seen as this sidekick to DNA, and it’s DNA that drives everything. And the story he tells is of the central role of RNA. He also won the Nobel Prize for working on RNA. It’s a great read.
The second one is called “Kaput” by Wolfgang Münchau. It’s about the economic malaise in Germany and what has caused it, which goes back beyond just the Russian oil and the reliance on China — back to a question that is almost aligned with what we were discussing earlier about the role of technology in driving productivity in companies.
Final thing I’d say that’s an offshoot of that book is: It has been common to say that U.S. companies are performing the best in the world and are exceptional, and European corporations have been underperforming.
But if you actually look at the data, which I did recently, it’s really astonishing: There is a bit of a gap, but it’s not even remotely what you would think.
So I’ll give you an example. If you look at something called return on invested capital, which is just a way of measuring the efficiency or how good a company is at its operations, and you rank companies in Europe, the 95th percentile European company by that rank is equivalent to the 92nd percentile U.S. company. I think if you listen to a lot of the rhetoric, you’d think the 95th percentile European is the 10th or 20th.
And what has been happening this year is, actually, European stock markets have performed better so far than the U.S. stock market. So the book is all about why German companies are terrible, but there’s also a bit of a broader European story that maybe they’re not quite as terrible as the conventional wisdom suggests.
But isn’t it the case, if you look at the biggest companies in the world, that Europe has far fewer than they used to? They don’t have many frontier technology companies anymore.
It’s very specific to technology.
Productivity has raced forward in America. So it’s specifically the technology sector?
It’s really in technology. The hyperscalers, in particular, are so far beyond what anyone else has accomplished. If you look across other sectors, that’s much less true.
Peter Orszag, thank you very much.
Great to be with you.
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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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