How Paul Krugman Would Fix The Economy: Solutions with Henry Blodget

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Kara Swisher: Hi, everyone. This is Pivot from New York Magazine and the Vox Media Podcast Network. I'm Kara Swisher. We're off for the holiday today, but we have an episode of a new show for you, Solutions with Henry Blodget. Every Monday, journalist, analyst, and entrepreneur Henry Blodget interviews leading thinkers across business, tech, politics, and beyond about their big ideas for how to build a better future. In this episode, Henry asks Nobel Prize-winning economist Paul Krugman about the most pressing problems facing the U.S. economy and how he would fix them. I also recently sat down with Henry for an upcoming episode. We talked about how to be excellent and successful in life and work. Obviously, I have a lot of ideas and a pretty good track record. In fact, I think it's excellent. We also talked about politics, and I told Henry how I think Steve Jobs would have navigated Donald Trump's presidency and terrorist policy. It was a fun conversation. It'll be on YouTube in full, too. Follow Solutions with Henry Blodget to make sure you don't miss it. Enjoy and we'll be back in your feeds on Friday.

Henry Blodget: Our economy is beset with at least concerns and we are being hammered with narratives from two teams about smart policies and stupid policies and evil and good. In the midst of these concerns, we need to talk to somebody who can sort everything out for us and speak in plain language who really knows what they're talking about. And there's nobody better to do that, the Nobel Prize winner, Paul Krugman.

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Henry Blodget: Hello, everyone, and welcome to the first episode of Solutions with Henry Blodget. This show is not going to focus on the doom and gloom that is the very many problems we have in the world. It is going to focus on solving those problems, or at least ideas to do that. For our first episode, huge privilege to have a Nobel Prize winner, currently a professor at City University of New York, a columnist for 25 years at the New York Times, and now an extraordinarily successful Substacker. Paul Krugman does not hide the fact that he often supports the left-leaning team. However, I think what you will find in this interview in particular is that he's actually incredibly credible and he is driven by data. And he says many things that, in fact, undermine the narrative that the Democrats are trying to tell. And to me, that very much enhances his credibility. Without further ado, here's my conversation with Paul Krugman.

Henry Blodget: Paul, let's jump right in. First of all, privileged to have you. Thank you very much. President Trump did not like some job number revisions and within minutes fired the head of the BLS. So let's just start. Is it fair to say that the numbers were not rigged, which I think was the justification for the firing?

Paul Krugman: Yeah. I mean, if you take a look, there's two ways to do this. One is to ask, how does the BLS actually do what it does? And it's a process. It's quite complicated. If they were rigging the numbers, there would be whistleblowers all over the place. There would be all kinds of... we wouldn't know. And there was no hint. And what actually... we've been talking a lot, me and my sort of econ buddies. There was a little bit of dissonance between the soft data surveys, which did suggest that the economy was kind of losing steam — not in recession, but losing steam — and the hard data, which was still looking strong. And guess what? With the revisions now, those things are in line. So this is not like, "Wow, everything was looking great and all of a sudden these Marxists at the BLS say it's terrible." This was actually... we were a little bit puzzled at why the official surveys weren't quite matching the other evidence, which happens. And now the picture all makes sense.

Henry Blodget: And it's nothing new to have political parties fighting over these statistics and claiming that they're biased one way or the other. But stepping back from that, why does the BLS matter to normal Americans? Why do we care that there is a supposedly objective agency looking at these numbers?

Paul Krugman: Okay, first of all, there's a lot of business decisions that actually do hinge on what do we think is happening to the economy. And the BLS is just the scale of what it does is beyond that of any individual. You have purchasing manager indexes. Those give you some clue to what's happening. We have ADP, which processes a lot of payrolls, they produce numbers on, but they don't have anything like the scope of coverage that the BLS has. So if you want to know where the economy is going, the first stop is BLS data. And if you're a business, you want to make plans. But the other thing is that ultimately you want good policy, and policy has to be based at least to some extent on real data. So if you start to politicize this, if you start to have the Bureau of Labor Statistics telling the president what he wants to hear, we've seen that movie. That's how you get something... I think probably the closest parallels out there would be Argentina and Turkey. In Argentina, for years, they faked the inflation statistics, which allowed the government to get away with irresponsible policies until finally they themselves admitted, "We've been faking these numbers," and it's a problem. Turkey, you had Leader Erdogan — kind of in a lot of ways a Trump-like figure — who probably fiddled with the statistics and certainly politicized the central bank the way Trump wants to, and didn't finally start to back off until inflation hit 80%. So... does this really damage business next month? No. Does it damage your prospects? Does it make you think worse of what's likely to happen over the next five years? For sure.

Henry Blodget: And so how does that play out? You mentioned Argentina. Another example that's brought up in a sort of comical way is Italy and Mussolini, who was apparently obsessed with the trains running on time, and so forced the trains to change the schedule and add an hour to every trip. And suddenly all the trains are on time. So how does this play out? Assuming your fears and others' fears are that, in fact, now the numbers are going to be corrupted, they're going to be faked, and we will now have the narrative behind it. How is that likely to play out?

Paul Krugman: Well, there are a couple of scenarios, and it could be both at once. But the one I've been worrying about mostly was that the tariffs — actually tariffs and deportations, which is a really big thing — really start to push up inflation. Mostly, U.S. companies have been eating the tariffs so far. But at a certain point, they say, "Okay, looks like the tariffs are here to stay. We can't afford to do this." So consumer prices start to rise. But what if the BLS, which produces inflation numbers as well as jobs numbers, what if the BLS is told there is no inflation and you are going to report no inflation? Then nothing is done. Then Trump keeps on pressuring the Fed to cut interest rates, even though inflation is accelerating. And it doesn't take... this is the Turkey example, where you do the opposite of what you should be doing, partly because you have decided to buy into crackpot economic theories, partly because you're suppressing the data. And you wake up one day and you realize that you've got double-digit inflation. So that's one story. The other is, what would have happened if we'd had a politicized BLS in 2008 and we were plunging into the Great Recession, and we had a BLS that had been ordered not to report bad job numbers, and a president who insisted that the economy was hot and things were great? We would have been kind of motionless. We probably wouldn't have bailed out the financial system. We wouldn't have had the Obama stimulus, which was inadequate but certainly helped. We would have just been sitting there pretending that everything was fine until things were much worse than they actually got.

Henry Blodget: And so this is a podcast about solutions. We lay out problems and then we talk about what we can actually do about them. One of the things you've written recently is that you yourself will be relying more on private surveys.

Paul Krugman: Yeah.

Henry Blodget: Certainly if you're running a business, you're on Wall Street, you want to have as accurate data as you can about what's happening. It's like the instruments being accurate when you're flying a plane. What should everybody do? If you start to not believe the BLS numbers, are there other numbers out there that we can trust and what will Wall Street and companies do?

Paul Krugman: Yeah. So on inflation, there is something called the Billion Prices Index that was originally Argentine economists devised at basically scraping the internet to produce an independent estimate of inflation. We have one for the United States, which I relied on a lot during the Obama years. Unfortunately, State Street Bank has acquired it. It's now sitting there proprietary behind a paywall. So we don't have... maybe they can be persuaded to make that index available. But there are others. The Atlanta Fed Business Survey asks businesses how much their costs have gone up in the past year. And I'm going to be watching that. We have Purchasing Manager Indexes, which ask companies, "Have your prices gone up in the past month?" And the percentage of companies saying "Yes, they're up" actually is correlated really strongly with actual inflation. And there may be other ways, and maybe we can get to some of the people who put together the original Billion Prices Index to start creating a new independent one. But we're going to probably need independent data sources, if only to check on the official numbers.

Henry Blodget: Terrific. And then last question on the BLS and other agencies and numbers like this. Assuming there is another election and we have another president who has a different view of numbers like this, are these reparable? If these agencies get warped, can we go back and fix them later?

Paul Krugman: Yeah. Argentina eventually admitted that the numbers had been cooked and went back and produced revised series. There are places... Argentine numbers are okay now. Argentina has got its issues, but we don't now think of Argentina as a country that produces unreliable data. So this is not a permanent blow. But wow, it's going to take a lot... and hopefully, I think it'll be really important for an open admission that, "Hey, we were... this was politicized for a while and we're sorry and we won't do it again."

Henry Blodget: That is encouraging to know that it can be fixed. All right, let's talk about tariffs, which is obviously another huge item in the news. So initially, when President Trump came out with his big board, most people assumed that this was just a negotiating ploy. He'd get everybody to the table, he'd get some concessions, real or headline or what have you, and then things would sort of go back to normal. And you've pointed out recently that no, in fact, it seems like President Trump does love his tariffs and that we are now in a regime that you have called Smoot-Hawley 2. What does that mean and what is it going to do?

Paul Krugman: Okay, so it looks as if... there have been effectively no deals. There have been a few things that people call deals, but they're really empty. And basically, the United States has put on tariffs ranging from, for the most part, from 15 to 25 percent on just about everybody with no sign that they're coming down again. And the average tariff rate is something like 18%, which happens to be just about what the average tariff rate was after Smoot-Hawley back in 1930. So we really are back in a world of high tariffs as far as the eye can see. Now, one thing I did right... again, Substack over the weekend... economists are to some extent guilty of overhyping the damage protectionism does. If the damage is real, the insight that free trade generally is good for not everybody, but most people, is right. But if you actually try to plug the numbers into the very models that we use to say free trade is good, they say that the cost of permanent tariffs on this level are a fraction of a percent of GDP. I say 0.4. You can fiddle with it to make it 0.5 or 0.6, but this is not a depression-level event. The whole Smoot-Hawley cause of the Great Depression, that's a legend. It's not what really happened. So this will hurt. It's not as catastrophic economically. If you ask me, actually, I think that the biggest issue is that everything we're doing on tariffs is illegal. It's illegal under international law because we made agreements. We have free trade, signed free trade agreements with Canada, Mexico, and South Korea. We have negotiated tariff rates, binding tariff rates with most of the rest of the world, all of which Trump doesn't even mention why he's violating these. And these were agreements that had to be passed by Congress. These are not just informal handshakes. This is law. It's basically U.S. law as well as international law. And then the president has the right to impose temporary tariffs under certain conditions, none of which are met by the current situation. So everything that's happening is illegal. And the fact that the world's second largest or second largest economy, depending on how you count, has just basically said, "Oh, those agreements that we've made? Never mind. Those laws we passed? Never mind." Basically, we are now... we used to joke about China, that in China, a contract was a suggestion. Well, America is now a place where a contract on the part of the U.S. government is a suggestion, which the U.S. government feels free to ignore. And that's got to have in the long run a real chilling effect on international business.

Henry Blodget: So let's talk a little bit about free trade, because I think what President Trump would say is the reason we have not had tariffs in the past is that all other presidents have been stupid and weak. And free trade means that the United States and Americans are being taken advantage of. Our jobs are being taken away. We are a big market. We should be paid to allow people to sell here. Why is free trade good? Why have we been moving toward free trade until this administration for 70 years, almost 100 years now? And why ultimately is the argument that "No, we should protect Americans first" not as sort of real as it seems? Because it does feel to people when they hear it, "Other countries are taking my job away." There's a very visceral feel to that. And it's no mystery to me, at least, why a lot of Americans say, "Yeah, I finally want somebody who's looking out for us."

Paul Krugman: This is why... part of the reason that economists make such a big deal about free trade, probably bigger than its importance. It is important, but we tend to blow it up partly because there's such a natural tendency to think that it must be a bad thing. "If I buy stuff from foreigners, then that's jobs we don't get at home." So the basic, really important point is that... actually two basic points. Whenever I start to do these, it turns into a Monty Python routine. Nobody expects this from me. But anyway, two things. First, it is... Trump says it should be reciprocal. Well, actually, that's how we got to low tariffs. It all starts with the Reciprocal Trade Agreements Act of 1934, where all of the tariff cuts that we have done have been... none of them were unilateral. They were all, "Let's make a deal. You cut your tariffs, we'll cut our tariffs." And so we got down to a world of generally low tariffs everywhere. European Union tariffs on U.S. manufactured goods were about 1%. Basically nothing. And the reason... now the U.S. runs a trade deficit, but the U.S. also, when Trump took office, we were at basically full employment. We were at roughly a 4% unemployment rate, which is historically very low. It's not like there was a large pool of Americans out of work because imports had taken away their jobs. We were doing different things. And when you import something, that's because it's worth something to you. In fact, a lot of the imports that have been hit by Trump's tariffs are actually industrial inputs. We've now got 50% tariffs on aluminum and steel. We don't import aluminum and steel because it's a pointless luxury good. We import aluminum and steel to make stuff. And if you are saying, "Well, we could produce the aluminum and steel at home," but the fact that you're buying aluminum and steel from abroad at a 50% tariff says that to produce it at home costs 50% more than to buy it abroad. So you're paying a real price in terms of higher costs when you reduce trade. And if you say, "Well, but we're going to get jobs." Well, we were at full employment. If we do manage to create some jobs in manufacturing, which is very dubious, they're going to be pulling people away from other stuff that was also productive. The fact that you needed a tariff to do that is telling you that the stuff that people would have been doing otherwise was more productive than what they'll be doing after the tariff. So this is not... I mean, the phrase "beggar thy neighbor" tariffs and all of that stuff comes from people during the Great Depression arguing that the usual arguments for free trade get a little bit dubious if you have mass unemployment. And if we had mass unemployment... I mean, I was calling for, back in 2010, I wanted a temporary tariff against China for its undervalued currency because we had high unemployment and it was a real problem. But that's not where we are now. Maybe give Trump a year or two and we might have mass unemployment. But at the moment, it's really saying, "Let's take people off jobs that America is really good at and put them to work doing things that America is not that good at." It's like Lutnick, the Commerce Secretary, screwing tiny screws into iPhones. This is not a productive use of American workers.

Henry Blodget: Well, so let's talk about that. I would say that in the business community, a lot of the frustration about the tariff policy is that it seemed very haphazard and emotional and you can't plan because it changes all the time. Maybe he's negotiating, maybe he's not, you don't know what it's going to be. Apple and the iPhone is a great example. Apple has a world supply chain that they've taken three decades to build. You can't just put that on a ship and send it to Texas. Americans don't know how to make those things, do all that work, and so forth. And so we've had this century of comparative advantage. Each country does what they're best at. But the argument for a lot of folks who do support President Trump is, yes, we had full employment, but we had full employment at jobs that suck and they pay little and they don't have benefits. And they're so much worse than the manufacturing jobs that we used to have. And nobody is looking out for us. And finally, President Trump cares about us. He wants to bring manufacturing back. The way to do that is to put up walls and Americans can make their own stuff. We don't need anybody else. Is there anything to that?

Paul Krugman: Not really. It is true that if you go back to like 1970, manufacturing jobs on average... not all, but there were a lot of good jobs in manufacturing. But they weren't good jobs because manufacturing inherently has good jobs. They were good jobs because manufacturing had unions that negotiated for good pay and good benefits. And right now, with unions far weaker than they were, if you actually try to ask, "Does manufacturing actually pay more than other parts of the economy?" There's enough wiggle room in the data that you can say, "Well, maybe a bit more, maybe not." But it's not dramatic. If you actually ask, "Do manufacturing jobs generate middle class incomes?" In general, they do not anymore. If you ask what happened to American workers, it wasn't that we lost manufacturing jobs. It's that we lost worker power. And there are a lot of places... and we can go on about that some... but if you were to ask, "Where does our economy actually generate middle-class jobs?" A lot of it actually would be healthcare, right? And not manufacturing. So the idea that by restoring... even if you could, which you can't, but let's get there... even if you could restore manufacturing back to something like its historical share of employment, given everything else in the U.S. economy, those would not be good jobs. They would probably be, if anything, worse than the jobs that Americans have.

Henry Blodget: And so let's talk about that on manufacturing because I do think there is a general consensus that the decline of manufacturing in the United States is bad and we should do something to rebuild manufacturing. Sometimes it's a security argument. "We should be making chips and all these things that are so strategically important. Shouldn't rely on China for that, our enemy, and so forth." Other times it is the jobs argument. Is there something inherent about manufacturing that does suggest that we should rebuild it as a country?

Paul Krugman: Yeah, well, let's start with... the national security argument properly applied does make sense. I mean, we do need to think. One of the things I think that... my views on Section 232, the clause in U.S. trade law that allows the president to impose tariffs for national security... they're relevant, both domestic and international law. We, 10 years ago, we tended to think of those as being, "Who cared? The world is flat and we don't need to worry about that sort of thing." Now we've learned that the world is a more dangerous place than we thought. And the importance of having domestic capacity in strategic sectors. That is a valid argument. It's actually more of an argument for industrial policy than for tariffs, but it is an argument. But that's a pretty small part of what we're talking about here. And there's no way that a tariff on Canadian aluminum is defending American national security. Everything else, I think the most important thing to say is that the decline in manufacturing is not mostly about imports. It is true. Yes, we run a trade deficit in manufacturing. And our manufacturing sector would be bigger if we didn't run that trade deficit. But you can do the math on that and lose all of our listeners if I tried to go through it. But my back of the envelope is that if we could... right now, about 10% of the U.S. workforce is in manufacturing. Once upon a time, it was 25%. If we could completely eliminate the trade deficit, then manufacturing might go up to 12.5%. So it would be a little bit bigger but not anything like what it used to be. And we can look actually... Germany has a huge trade surplus. Their trade surplus relative to GDP is about twice as big as our trade deficit. And their manufacturing sector is like 17% of GDP. It's still substantially smaller than U.S. manufacturing used to be in the good old days, which is telling you that there's a global decline in manufacturing. Even China, the share of manufacturing in GDP has been declining. And that's basically because we're so good at it. It's like... the United States is an incredible agricultural producer, and there are almost no farmers. And the reason that we have almost no farmers is that we're so good at growing crops that we don't need very many farmers. And manufacturing, to a large extent, has gone the same way. There is a role for trade. It's not zero, but nothing. There is no conceivable way to get manufacturing back to being what it used to be, nor should we want to. We're doing other stuff instead. And even in China, which is exceptional at manufacturing now, there are dark factories where there are no human workers anymore because they're getting so good at it.

Henry Blodget: Yeah. In terms of what robotics, AI maybe... I'm not sure we're using that that much on the factory floor yet, but we probably will... that can replace a lot of workers. When we do open new manufacturing plants in the United States, they tend to be kind of ghost towns. There are a few people watching to make sure the machines don't go crazy. And there are some janitors. And look, that's like... again, farms. We have a lot of farmland and some crops are being harvested still by lines of men, mostly non-American born. But a lot of stuff is just done with farm machinery. And so, which is fine because there are plenty of other things that we need people for. And we have never had a problem of finding new things for employment. But the idea that we're going to go back to having millions and millions of people in factories doing the old kind of factory jobs, we'd have to lose all of our modern technology to do that.

Henry Blodget: And so given that, we still have this problem, which you've written a lot about, and I want to start talking about inequality in a minute, but let me just finish one on China. But we do have this problem that, yes, we have full employment, but there's been a huge decline in the middle class and that's contributed to a lot of the anger that we've seen in politics. And I would say to the division we have now and the sort of declines of old ways of living and so forth. But one consensus these days seems to be that China is our enemy. Is China our enemy? And is it better for the world if we want to have a secure, predictable world where we have prosperity and health and predictability, is it better if our economies are linked or is it better if we build walls and separate completely?

Paul Krugman: Oh, no. You see, I don't think... I think that the Chinese economy and Chinese manufacturing prowess and that whole Chinese industrial ecosystem, by and large, makes the world richer, makes the United States richer. The fact that we trade with China actually improves our lives on a whole. Now, that's not true for everybody. There are some industries, and particularly when there was the big rush of China imports, sort of between the late 90s and the late 2000s, that was disruptive. It came on so fast that it really undermined a significant number of communities. So, suddenly the furniture industry of North Carolina disappeared. And that was hard to cope with. That's the China shock. That's all in the rearview mirror now. If we ask, "Would we be more prosperous if we didn't trade with China?" I think that's a very, very hard case to make. I think almost certainly the opposite is true. What is true is that China is a great power militarily, diplomatically, and is not our friend, does not share our values. So this is having the world's greatest manufacturing power, which China definitely is, be also an autocracy that does not share... I was going to say it does not share American values, or does not share what we used to think were American values anyway. Maybe we're headed for a world where there are two big autocracies. But anyway, the question of what if China tries to seize Taiwan, which would be utterly stupid for them to do, but historically that has never been a barrier. And is the United States well positioned for that kind of conflict or some other kind of conflict? And arguably, we have let some strategic parts of our industrial base that we should have held on to atrophy. So that's the... but it's a much narrower case. But the argument that China makes us poor really does not. It's very, very hard to make that work.

Henry Blodget: And so two questions to finish that. One, with the strategic industrial base, if it's not tariffs that fix that, how do we rebuild a strategic industrial base?

Henry Blodget: Okay. A tariff is a very crude instrument. A tariff raises the possible profitability of companies, but it also raises the cost to consumers. We have – you can subsidize, you can do industrial policy. It's gotten forgotten here, but under the Biden administration, we had really two policies: the Inflation Reduction Act, which had nothing to do with reducing inflation, but was mostly about green energy; and we had the CHIPS Act, which was about technology. Both of those were subsidizing manufacturing production in certain areas that we thought were important, either for environmental or for strategic reasons. And they did a lot. Manufacturing construction doubled under Biden. It's now been falling off under Trump because tariffs are a very crude, ineffectual way to promote industry. Literally just subsidizing manufacturing, production, and investment is a much more effective tool. We can do it. We've demonstrated we could do it during the last administration. Other countries have done it. The Chinese don't have a whole lot of tariffs—they do have some—but mostly they have industrial policy. Japan did industrial policy. So we can do this. And tariffs are not the answer. Especially, putting a tariff on bananas does not help. This is really... Trump loves tariffs, likes the idea. But if you actually try to do any kind of economic analysis, what it really says is that to the extent that we have issues—and we do—subsidies and industrial policy are the way to go.

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Henry Blodget: And on China, so much more comprehensive industrial policy. Certainly, China has subsidized and plays companies off against each other, and the government invests in companies. There's been a lot of discussion recently of how it is that China has vaulted past the United States in a lot of technologies and where we missed it. But just one philosophical question when I listen to the arguments about China: there seems to be this conceit that if we can only get our China policy together, we can somehow keep America number one, keep China down. When I look at the world from a very clueless position or lay position, I would say there was a moment 100 years ago when a lot of countries in Europe were number one—the British and so forth. The United States blew past a lot of the countries in Europe. So we're number one now. But you visit Europe. You know what? People still have pretty nice lives. They have jobs, they have prosperity and peace, and it looks pretty good. Yet Americans seem incredibly concerned with this idea that we have to be number one forever. That means keeping China down, keeping everybody else down. Is that realistic? And is it really going to matter if ultimately everybody in the world agrees that China is way more powerful economically than the United States?

Paul Krugman: Okay, from this point of view of prosperity, not at all. I wish more Americans would sort of... we talk about old Europe and declining Europe—a lot of that's overstated. But it's true that they've lacked some. But try walking around Copenhagen or Amsterdam and ask yourself, does this look like a terrible place? Hell no. Actually, particularly what's funny is Denmark. Denmark in some ways does it better than anybody else. In Denmark, they do have lower GDP per capita than we do. And the reason is, unlike Americans, the Danes take vacations.

Henry Blodget: How lazy are those?

Paul Krugman: So, no, from that point of view... and look, we are not going to be able to keep China a second-rate power or a significantly inferior power to the United States for the simple reason that there's a lot of Chinese. And they don't have to be as good as we are to have a bigger economy. They probably do have a bigger economy now if you adjust for purchasing power, with probably about a quarter of our productivity, but they've got four times as many people. So the only reason to be concerned is that there's possible geopolitical conflict. You do want to at least maintain some kind of parity in terms of overall power, if only because, I hope, given rational leadership in China, any kind of military conflict would be really stupid. But again, history tells us that's no necessary bar. Look at the parallel: the rise of Germany before World War I. The German economy grew substantially more than the British economy. Did that hurt Britain economically? Almost certainly not. It almost certainly made Britain richer. But it did mean that Britain's ability to maintain the balance of power in Europe and avoid war kind of went away because Germany got too powerful. And so we do worry a little bit that a really powerful China might be a threat to world peace. Now, I would have said as opposed to the United States, which has been kind of a benevolent hegemon, but I'm not sure we're that country either. But some kind of balance—that's all that we would look for. If you think that we can push China back into second-rate status, that's delusions of grandeur. We don't have that ability.

Henry Blodget: Yes. And one of the things that was unnerving to me after a lot of the initial tariff announcements is the way the rest of the world immediately started rerouting around the United States. And suddenly we get left out. It turns out China can do business with everybody else directly. They don't need us in the middle. So one of the questions that I have is, what are we doing to our own place in the global supply chains and economies?

Paul Krugman: Yeah, I mean, this is the whole thing. We are no longer the essential country. We are a big player. We have a big market. But the idea that we can dictate stuff to the world is no longer there. The late Joe Nye talked about soft power. A large part of America's ability to still have a disproportionate influence on the world came from the fact that in a variety of ways—everything from technology, but also stuff like culture and a reputation of the United States as being a place with rule of law, a place you could go to do business and not be worried that the secret police might arrest you. And what we're busy doing is throwing away our soft power. We are much weaker relative to China than we were six months ago. And not because of industrial production numbers—you find it in the fact that I have European academic friends who still come on visits to the United States, but they leave their mobiles behind and take burner phones because they're afraid—it's not very likely—but that they might get pulled over and somebody will find that they sent some texts critical of Donald Trump. This is not the America we were supposed to be.

Henry Blodget: Let's talk about inequality. You wrote an amazing series on your Substack and published elsewhere on inequality. It really advances a lot of the work I've seen on this. In your series, you start with this observation: in the 1920s, we had the robber baron era and enormous inequality. We went through the Great Depression and we actually had a period in the middle of the century of relatively reduced inequality. And now we've come out and we're this big U-shape over the century where we've gotten right back to the levels of the 1920s. So what is going on there?

Paul Krugman: Well, okay. So there's some things that are kind of normal, invisible hand stuff—the markets. No question that technological change increased to some extent the premium on high education, although that's mostly an '80s and '90s thing. Globalization contributed at least a little bit. There were some labor-intensive jobs that were eliminated, and that reduced the demand for labor. But the more you study it, the more you realize that politics and institutions are really the big drivers of changes. I grew up in that middle-class era. My father was a middle manager, and our street had a mixture of middle management and elite blue-collar workers—plumbers and things—all on the same street, all with similar incomes. That was the world we lived in. Well, that middle-class society did not evolve gradually. That's one of the great discoveries. Claudia Goldin, who won the Nobel recently for labor economics, showed that the sort of middle classification of America happened not over the course of decades, but basically in about six years during World War II and the New Deal. Then suddenly, the Great Compression. What happened there was partly that under wartime controls, new norms of equality were established, and also unions became vastly more powerful. Unions ended up being a big force for equality—just expectations of how much you would pay CEOs. And that lasted. You might have thought once the war and the wartime controls were over that would go away, but in fact, it lasted for 30 years and then gradually unraveled and then really accelerated post-Reagan. You have the busting of the unions and, actually even more important, aggressive tactics that stopped unionization of the new big firms. So we went from a world in which General Motors, unionized, was the big employer, to a world in which Walmart and Amazon, not unionized, are the big employers. There's no inherent economic reason why Amazon and Walmart couldn't be unionized. In fact, in Europe, big box stores and so on are unionized. So all of that means that the forces that held inequality in check were demolished pretty much politically. There's a lot more to it—the rise of finance, which is both a source of high incomes and something that pressures companies into harsher policies towards their workers. But I think you want to say that there's a lot more wiggle room. The invisible hand of the marketplace does not tell you how unequal your society is going to be. There are limits—you can't have 100% top marginal tax rates—but there's a lot of room for differences in levels of inequality. If you look at Scandinavian countries now, they're competing in the same global economy we are. They're using the same technology we are. Their levels of inequality look more like the United States I grew up in than like the United States we have now.

Henry Blodget: And you've done a lot of great work showing that it's not the 1% and the 99%, but in fact, it's really within that 1%. It's the 0.01% who are running away with just an extraordinary percentage of the assets of the country. Extraordinary. 10%, I think. But it's also U-shaped. And so we're back in that area. It's a very small sliver. But let me, before we really get into how we can address this, why is that bad? Because when I talk to people who are in the 0.01%, who often are very good people and care about other people and are not rapacious robber barons, they will say, "Why is it bad if I am particularly rich? When the society gets richer and I create jobs and companies, why is this extreme inequality bad?"

Paul Krugman: Well, first of all, you might say, if the country gets richer... we have not grown. The U.S. economy has grown actually a little bit slower since the big rise in inequality began circa 1980 than it did before. So it's not like we're growing faster. And a significant amount of the growth has been siphoned off to a handful of people at the top. So just in mechanical, arithmetic terms, in some sense, your wealth is coming at the expense of the other 99.9%. But it also distorts our politics. I think I started that series by quoting Woodrow Wilson, of all people, who said, "If there are men big enough to own the U.S. government, they are going to own the U.S. government, and we need to stop it." And we've kind of seen that. Well, Musk has had a falling out. But the idea that somebody who has really no claim to political influence—certainly hasn't won an election—gets to lay off thousands of workers and close down government agencies just because he's extremely rich... that's not a healthy situation. Then you get subtler things. This is just subjective, but I think people do feel it. High levels of inequality mean that an amazing fraction of Americans feel like they're losers, that they are left behind. It does take some toll. You can say people shouldn't be envious or whatever, but look, we're human beings. If you see that it does appear that a few people have made it and not me, that hurts. I sometimes say that American society now is like those old Army or Marine movies where the guy says, "Look at the man to your left, look at the man to your right. Only one of you three is going to make it." It's kind of like that, but on a much expanded scale. It's a weird thing. I actually find living in New York City is oddly relaxing in financial terms. Because no matter how much money you make, there's somebody a mile away who makes so much money that whatever you make is ridiculous. So it just does not make sense to measure yourself that way. And the other way, there's somebody who makes so little money that you feel incredibly fortunate. But for the most part, that's not how it is. We are a society where it's just very clear that there are winners and losers, and in which people with a great deal of influence don't live in the same material universe as the rest of us. If you've been watching, Howard Lutnick, our Commerce Secretary—an endless source of comic relief—saying, "Well, people are worried about disrupting Social Security. But if my mother-in-law missed a Social Security check, she wouldn't complain." It's like, yeah, because her son-in-law is a billionaire. Most people don't have that. This complete inability—when people have a great deal of power, they have absolutely no idea how normal people live. That has got to be corrosive for the society.

Henry Blodget: Let me just ask you, okay, so here we are. It seems to me that the current administration's policies are actually designed to increase inequality, make it even easier to make massive fortunes. What could we do to actually make things less unequal? One thing I think which we saw in 2008 is if the stock market crashes, that actually rejiggers things on the wealth side a little bit. But in a happy way, what could we do as a society?

Paul Krugman: Well, the old-fashioned, rather boring tools—progressive taxation and social safety net programs—are a pretty big deal. A lot of people on the left start saying, "Oh, Obama didn't change anything." He didn't change the fundamental trajectory of American society, but he did give us something a lot closer to universal health care, and he paid for it largely with capital gains taxes on the wealthy. If you go back, there was this whole phenomenon of Obama rage. People just hated him on Wall Street. Some of that was because they felt he didn't respect them, but a lot of it was just, hey, they were paying somewhat higher taxes and it was being used for a good purpose—to provide health care. Now, if you ask how we got from there... There was a great old article in Fortune in 1955 about CEOs. It was comparing CEOs with the way they lived in 1955 with the way they had lived in 1935, and saying their lives are a lot more modest. It basically said they're just as happy as they used to be. But it also said, how did we get there? It was taxes and unions. So you don't have to have a revolution. You don't have to have the Soviets and expropriation. Just restoring estate taxes, restoring high tax rates on top incomes, and spending the money to help ordinary people. And then unions, where they flourish again. Unions have almost disappeared from American life. In Scandinavia, generally 60 percent of the workforce is unionized. And it matters. So nothing is the obstacle except how do you get there politically. I think we have the tools. A lot of us kind of thought that 2008 would be a turning point, would be like the second coming of the New Deal. And it turned out to fall a long way short of that. It's also true that the New Deal—a lot of the equalization actually took place during World War II. And I'd like to see us become a more equal society, but not at the cost of a world war. But you push on it. The important thing to understand is that this is largely a political problem. It's not as if we don't know how to do this. We do know how to make a substantially more equal society. We just need to figure out a way to get it through Congress.

Henry Blodget: On two of those points, certainly from the perspective of somebody who has built a business, I think for a long time there was a lot of rhetoric about unions highlighting the problems. And I think there are problems. If you go back to the 1970s, it's possible that unions contributed to our car companies and others not being as globally competitive as they could have been, not as nimble. So there was a lot of pent-up frustration with that. And we went to this, "OK, let's just free everything, fewer unions." One thing that's been very disappointing to me is that more companies haven't voluntarily basically said, "Look, we are an incredibly rich global company. We generate tens of billions of dollars of operating income. Nobody who works for this company full time is going to be poor." And yet, for some reason, we seem to have thought that that's OK in this society. "Someday you'll work your way up and you won't be poor." It's disappointing to me that our sense of fairness and the remembrance of stakeholder capitalism—the idea that it's not just about the shareholders, it's about customers and employees, and a great company takes care of all of them—I think we went way, way too far away from that. But one of the points that you made about unions that I had not seen that I thought was fascinating is that it's not just the people in unions who are helped. It's that everybody else adjusts to those wage levels.

Paul Krugman: Yeah. When we had 30 percent of the workforce or 25% unionized, even non-unionized companies kind of said, "Well, if we are utterly rapacious, we're going to get unionized." So they set a norm. There's a lot more—again, we think of the invisible hand and the laws of economics, but economics is about people and senses of what you should do. CEOs have always basically... there's a compensation committee typically that's basically appointed by the CEO. So for all practical purposes, CEOs have set their own pay as far back as the eye can see. But in the '60s, that meant setting their pay at sort of 20 or 30 times what the average worker made. And now it's 300 or 350. What changed? Well, partly they used to worry about what the union would say, but mostly it was just that there was a sense that it was sort of uncouth and looked bad to basically hand yourself an enormous paycheck. And we lost that. Now, things that were... if you ever read the old *Barbarians at the Gate*, Ronald Reagan called up the people who were involved in enriching themselves through the buyout to express his misgivings and say, "I'm worried about how this looks." Ronald Reagan. And you can't imagine that—certainly not going to see Donald Trump calling somebody up and saying, "Isn't that pay package looking kind of excessive?" So there are these changes, and the norms have really changed in ways that I think make us a worse society. There's a brutality about America right now that we didn't used to have.

Henry Blodget: It is definitely true that the norms have changed. And I will say, knowing a lot of CEOs and having been a CEO, I don't think that all CEOs are greedy people who want to treat everybody bad. In fact, a lot of the way they look at compensation is, "Yeah, OK, but I didn't design the system. There's no reason that I should be paid in the bottom 20 percent of my peers when I'm good. I should be paid at least in the top half." And then they go out and get consultants, and the consultants say X, and then everybody in the top half, and off we go. I don't know how to stop it. But you did mention one other thing that I thought was great on progressive taxation. Again, I'm not crying here, but I do know a lot of people in New York and California who are not oligarchs by any means—lawyers, bankers—who make a few hundred thousand dollars. In New York City, you find that you're taking home maybe 45 cents on the dollar. Again, not crying here. It's incredible privilege. But what does smart progressive taxation look like? I'll add one more thing: when I was a kid, I remember being persuaded that whatever the marginal tax rate was at that point on top incomes—something like 90 percent—Reagan very effectively said, "I don't have any incentive to earn any more money because it's all gone." That was persuasive. So what does a good progressive tax scheme look like?

Paul Krugman: The answer actually is 73 percent. There was this funny thing where AOC said the top tax rate should be 70%, and people thought, "Oh, ignorant lady. She doesn't know." Well, she'd been talking to Joe Stiglitz, who referred her to the classic paper by Diamond and Saez that estimated the optimum top tax rate at 73%. On what level of income? That's very, very high levels of income. So one of the things about that, it doesn't exactly tell you where. But I actually take New York as telling the opposite story. In New York, I live in New York, I've got my textbook royalties and my Substack.

Henry Blodget: Your Substack is going to be pumping out real money pretty soon at the rate you're going.

Paul Krugman: It was never the plan, but it is. So which means that I am actually in the class—you can go back to the movie *Wall Street*, "400 a year working Wall Street," inflation adjusted—I'm in that class. And I do pay effectively a marginal tax rate of more than 50% between the federal, state, and city tax. And it's funny—the oligarchs, the private equity guys, don't pay that. But the highly paid white-collar workers in finance and some other fields are in that class. So this must mean that New York is full of lazy, slow-moving people, because what's their incentive? And that's not what New York is like. New York is actually a clear demonstration that you can have marginal tax rates in excess of 50% and people still work very hard. Now, when it was 90%, that could have been a really serious disincentive, except the way things were structured, nobody paid it. There were tax shelters. But you look at European countries that have a combination of value-added and income taxes and collect 45 percent of GDP in taxes. Two things: one, people still work. Labor force participation in Denmark is higher than it is in the United States, although they do take vacations. But also, people get something for it. If you ask the Danes, they say, "Yeah, I pay a lot in taxes. But on the other hand, I've got good health care. I've got good public services. There's a level of security." So I don't think that there is a... if somebody wanted to have an Eisenhower-era tax rate in the United States and actually make it effective without all the tax shelters, I would say that's too high. You do need to have some incentives in the system. But I think New York is an excellent demonstration that we could have as a nation considerably higher top tax rates and things would go fine.

Henry Blodget: And then last question on that, and then we go right to the debt and the deficit, which is another topic I love to ask you about. Just on taxation, one thing that happens in New York and California every time a politician talks about raising rates a little bit is that a lot of people who are doing really well say they're moving. From what I can tell, a lot of that actually does happen. A lot of people have moved out of California to Wyoming and other places that are very low tax. People have left New York for Miami and New Hampshire where they have low income taxes. So it seems like one of the challenges for the United States is that we do have a state system where there is a big difference and money can move. Does that affect your thinking on that at all?

Henry Blodget: I mean, the optimal tax rate in New York City set unilaterally is lower than for the United States as a whole because people can move. Although my understanding is that if you actually start to dig into it, there are a lot fewer people moving. It's not nothing, but there are a lot fewer people moving. And we're starting to accumulate stories. Miami is not actually turning into Wall Street South. Some people have moved, but some people have moved and moved back. One of my favorite quotes was from a Bloomberg article where somebody said, "The trouble with moving to Florida is that you have to live in Florida." Or there's a real story about the Austin tech boom. It seems to be kind of fizzling, not imploding, but it turned out that the advantages of actually being either in Silicon Valley or, for some of the AI stuff, being in New York, outweigh the lower taxes and all of that.

Henry Blodget: So it is an issue, and it's even an international issue. Britain has had these tax breaks for non-doms. I still don't quite understand what it means to be living in the country but not be domestic. But anyway, they did have tax breaks for billionaires in Britain. They still do to some extent, but some of those people have moved. But it's actually one of those things that gets overstated. Again, because think of it... they would say that, wouldn't they? And the extent to which it actually happens is not zero, but it's not as big a deal as people imagine.

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Henry Blodget: All right, so let's talk about debt and deficit very briefly. First, let me start by going back to 2008, middle of the financial crisis. There was enormous fear and very confident predictions, including from people like me, who said this incredible stimulus is going to cause runaway inflation. We're headed for Zimbabwe or at least the 1970s. It's terrible. We can't be doing this. We're bailing out Wall Street, all this stuff. You very strongly came out and said, respectfully, people, you have no idea what you're talking about. Inflation is a wage phenomenon. Until we see it start to bleed into wages, there's going to be no inflation. You were 100 percent right. You were also 100 percent right that the U.S. debt capacity was a lot bigger than people like me thought at that time. And we've done fine as our debt to GDP has more than doubled over time.

Henry Blodget: But a lot of people, including some people who were optimistic and thought that it was fine to take on more debt in the financial crisis, have recently begun to say, OK, whoa, it is too much now. And we have gotten into this policy where in a good economy, we are running a wartime or emergency stimulus deficit. And that's going to be as far as the eye can see. And we have these entitlement programs and health care and we are getting into real trouble. And we've also started to see interest rates move. Lots of fear around that with tariffs and so forth. So where are we on debt and deficit? Is it sustainable? And if it is not, how do we address it?

Paul Krugman: Okay. So, I am much more worried about debt now than I was in 2008, partly because the debt is bigger, but actually in some ways for more intangible reasons. Advanced countries with stable governments have enormous debt-carrying ability. Britain came out of World War II with debt that was 250% of GDP, and there was no crisis. The reason they have that ability is that investors basically assume that they have both the capacity and ultimately, at least, the seriousness to bring things under control. And that advanced countries are able to raise taxes. They can collect taxes. They don't suffer from massive tax evasion if they choose to enforce the law. And they typically have some room for more taxes and maybe some spending cuts. And they can not pay off the debt, but grow out of it, which is what happened to post-war debt around the Western world.

Paul Krugman: And the capacity stuff is still true. Look, if the United States were to impose a 5% VAT, well below the 20% or more that lots of European countries have, if we imposed a 5% VAT and were to try to control the big item on entitlement spending, which is healthcare — and actually, miraculously, we've been doing pretty well on that front. Medicare outlays have been growing much more slowly than the old projections said they would. So if we can control healthcare costs and raise a modest amount more revenue, we're fine. We have no problem technically in dealing with the current level of debt.

Paul Krugman: The problem is, what are the chances of that kind of program actually being enacted by Congress? Obviously, under the current administration, even if by some miracle Congress passed significant revenue-enhancing measures other than tariffs, which are not going to do the trick, he wouldn't sign it. And even if we imagine an actual sensible Congress and an actual sensible president, it's still a very steep climb to persuade people to do this. But it's like inequality. The problem with debt is political. We have run up enough debt and we have high enough deficits that we don't have the luxury of putting it off for another 20 years, probably. So we would need to act. And then we have a political deadlock. Even people on the left want to raise taxes, but only on $400,000 a year plus, which is not a trivial amount, but not enough. People on the right are happy to slash social programs, but only social programs that help the poor. They're not ready to take on the middle class entitlements, which is where the money is. So it's the political deadlock.

Paul Krugman: So essentially, a first world advanced country with a stable, reasonable government can easily deal with the kind of debt levels that we have. Are we still a first world country with a competent, reasonable government? And that's where I really have my doubts. We will see.

Henry Blodget: So from your perspective, the best way to return to sustainability is a combination of tax increases and spending cuts? Or are the spending levels fine? I'll just add some context there. One of the justifications for DOGE, and I think the hope of some in Silicon Valley and the business community, is pointing out that spending has gone well above trend thanks to the COVID stimulus and has not actually gone back to its range of GDP. Government spending is significantly higher. And that's why they're saying we do need to cut spending. So what is the Paul Krugman answer there?

Paul Krugman: Look for savings. I mean, if the generic, let's look for savings in government, that's right. But DOGE systematically went where the money isn't. It was Willie Sutton in reverse. They went for government payroll. Federal payroll is actually a tiny part of the budget. They went for discretionary spending. Non-defense discretionary spending is a pretty small part of the budget. And they, I would say inexplicably, except we understand it perfectly well — I can tell you right away where we can probably save $80 billion a year. That's by eliminating overpayments to Medicare Advantage plans. It's a scandal. We know that the insurance companies are upcoding and making their clients look sicker than they are so as to extract money from Medicare. So there's $80 billion a year that we could save, somehow never even made it into DOGE's sights, right?

Paul Krugman: And look, we've already had substantial success in containing the growth in Medicare spending. But U.S. healthcare is vastly more expensive than other countries without delivering better results. So clearly, real reforms in healthcare could save significant money. I used to joke that the solution to the U.S. debt problem was sales taxes and death panels. That's something — an additional revenue source, which probably does have to include in the end some middle class taxes. And it's probably not so much inefficient. We have some plain rip-offs, overpayments to insurance companies, but also we spend a lot of money on medical procedures that are probably not actually doing any good. So there are significant healthcare savings that could be achieved.

Paul Krugman: So it's not that hard. Again, if you could shave 2% of GDP off spending, mostly with healthcare efficiencies, and raise 2 or 3% of GDP through higher taxes, mostly but not entirely on high-income individuals, then we're fine. Then the U.S. budget situation is fine. So it's not a really heavy lift economically, fiscally. It's just a heavy lift politically.

Henry Blodget: Well, I am tremendously encouraged to hear that at least it's not a heavy lift fiscally. All right, Paul, you've been incredibly generous with your time. Let me just ask you one more topic that I know you've spent a lot of time thinking about. We recently had somewhat of a political earthquake in New York City that was cheered by a lot of the city and sent a lot of other folks to be aghast and worried. A mayoral candidate, Zoran Mamdani, who has been called a socialist and who certainly the moneyed class in New York wants to brand a socialist, won the primary and is in a good position to maybe become mayor. This has triggered a national debate about whether this is the future for the Democrats. Should they embrace the AOC wing of the party and go full left and much more socialist? Bernie and AOC are being bandied around as a presidential candidate team, perhaps just in fun. Or should the former adults in the party, the Clinton-Obama centrists, retake control? They were the pro-business party and that coalition worked.

Henry Blodget: So first of all, two questions. One, is the potential next mayor of New York a socialist and will that hurt New York City's economy? And second, what should the Democrats do? Which way should they go?

Paul Krugman: Okay, so what we call socialists in America, even the people who call themselves socialists, they look slightly left of center by European standards. Nobody is talking about seizing the commanding heights of the economy or anything like that. So I kind of wish he didn't call himself a socialist. But from my point of view, he isn't. Mamdani is kind of a socialist. She also calls herself a socialist. And we don't know how he would govern. Some of his ideas look good. Some of them may be not so great, but nothing that is really outrageous.

Paul Krugman: And I think AOC is an interesting case because it was all this crazy leftist, but she's actually been a pretty effective member of Congress. When you actually listen to her on policy, she gets her economic ideas from talking to the likes of Joe Stiglitz. She's actually quite sophisticated and turns out to be a serious political talent with a good reality sense. She knows when to compromise. And if Mamdani can be like that as mayor of New York, he'll do fine. I think this panic is telling you more about the stodginess of the Democratic establishment. It's nice to have the same ideas coming out of a heavyset white guy named Joe Smith. It probably would be easier politically, but I don't find it at all alarming. And I do find that the hysterical reaction is really saying more about his opponents than about him.

Henry Blodget: And do you think the Democrats will eventually just rally around that economic position?

Paul Krugman: Well, this economic position, again, he's a social Democrat. And the fact of the matter is the Democratic Party as a whole is becoming and has moved to the left a little bit, not nearly to the extent the Republicans moved right, but Democrats. And the Democratic Party right now, and you can actually quantify this, the Democratic Party now looks like a European Social Democratic Party. And Mamdani would be sort of on the lefter part of that, but not that far off. And I think the Democrats need to stand for something. I think that's what's really important. Saying we're basically like the Republicans, only less so — to some extent, that's been the Democratic brand. That's not going to work.

Henry Blodget: Great. Paul, it's a privilege and a pleasure to talk to you, as always. Thank you so much for your time and your Substack, which is remarkable.

Paul Krugman: Thank you. I'm having fun, although I'm working too hard.

Henry Blodget: All right. Well, keep it up, please, because it's terrific. Thank you again.

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Narrator: Solutions is produced by Megan Cunane. Jim Mackle is our video editor. Our theme music is by Trackademics. Special thanks to Manolo Moreno. Nishat Kurwa is Vox Media's executive producer of podcasts. Thanks for listening to Solutions from the Vox Media Podcast Network. I'm your host, Henry Blodget. We'll see you soon.