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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: We start strawing today with Paul Krugman. I'm going to

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Speaker 2: say I've known him for years, and I want to

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Speaker 2: say this right now. He has been a political pinata

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Speaker 2: with his courageous writing in the New York Times.

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Speaker 3: You love him, you hate him, but.

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Speaker 2: All can agree that his absolute foundational wheelhouse is our

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Speaker 2: international economics. He is a lone Nobel Prize winner from

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Speaker 2: Oslo for this analysis of trade patterns and location of

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Speaker 2: economic activity. Paul Krugman, thank you so much for joining

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Speaker 2: us US again. Paul, I want to go back to

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Speaker 2: when you are twenty five years old. You wrote it

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Speaker 2: was a joke, But it wasn't. It was a serious

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Speaker 2: idea about time and space and interstellar planets and all that.

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Speaker 2: The final sentence of Krugman at age twenty five.

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Speaker 4: Those of us.

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Speaker 2: Working in this field, I'm going to pair phrase of

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Speaker 2: international economics and trade are still a small band, but

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Speaker 2: we know that the force is with us, doctor Krugman.

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Speaker 3: Where is the force for morning?

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Speaker 1: Professor Bowie off steam with a paper about interstellar trade?

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Speaker 4: So what the hell?

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Speaker 3: Where is the force this morning for this nation?

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Speaker 4: Oh boy, this is really really bad. I mean, you

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Speaker 4: want to say, this.

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Speaker 1: Is we're talking about, you know, assuming the Rose Garden,

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Speaker 1: anything like what Trump announced in the Rose Garden is

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Speaker 1: actually going to be where we land. We're talking about

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Speaker 1: tariffs that are significantly higher than smooth Holly, and of

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Speaker 1: course starting from very low. So this huge jump and

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Speaker 1: tiphrates with a US economy that's three times as open

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Speaker 1: to an international trade as it was in nineteen thirty.

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Speaker 1: So this makes smooth Holly look like a rounding error.

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Speaker 1: And it's so that's really bad.

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Speaker 4: And it's also it's highly uncertain. Never had a situation where.

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Speaker 1: Really you have no idea but within you like twenty

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Speaker 1: points where the tariff average parapherate's going to be a

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Speaker 1: few months from now. So this creates an impossible environment

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Speaker 1: for business. It's it's hard to imagine a worse trade

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Speaker 1: policy than wile we're getting in.

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Speaker 2: The cacophany, Paul Krugman, we have nations acting. Last night

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Speaker 2: at nine point fifteen, I picked up my phone and

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Speaker 2: there was China acting. China just says no, Trump lives

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Speaker 2: on negotiation, folks. Bloomberg's Tim O'Brien owns a high ground

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Speaker 2: on this. He lives on negotiation. John Bolton, writing in

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Speaker 2: the Telegraph, says he lives on negotiation. If the Chinese

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Speaker 2: don't negotiate, what happens to Paul Krugman's trade economy?

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Speaker 4: Oh?

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Speaker 1: I mean at the starting point here again, is that

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Speaker 1: negotiate about what Now China you could conceive of have some.

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Speaker 4: China is not a free trade economy.

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Speaker 1: And you know, they might be able to make some concessions,

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Speaker 1: but they ain't gonna their their their back is up,

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Speaker 1: and they have national pride, and their economy, by some measures,

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Speaker 1: is as big as ours so or bigger. So you

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Speaker 1: don't want to They're they're not removing and the other players.

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Speaker 1: I mean, think about the Europeans. Europe had an average

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Speaker 1: tariff of about one point seven percent on US good

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Speaker 1: has still about.

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Speaker 4: One point seven percent on US goods. What can they give? What?

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Speaker 4: What concessions can they make?

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Speaker 1: It's not as if Trump is, you know, is asking

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Speaker 1: them to do something.

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Speaker 4: Is asking them to remedy some real sin.

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Speaker 1: He's sort of made up a story about how they

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Speaker 1: must be doing something wrong, but they aren't actually, and

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Speaker 1: so they they even if he wants concessions, they can't

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Speaker 1: give them professor.

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Speaker 5: I think one of if we just step back a

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Speaker 5: little bit, one of the I think the basis of

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Speaker 5: the Trump administration tariff pl see is that they're trying

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Speaker 5: to reorder the world economic order. Is there something fundamentally

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Speaker 5: broken about the world economic order that disadvantages the US?

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Speaker 1: Actually no, I mean, when all is said and done,

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Speaker 1: it's yeah, the US runs an overall trade deficit, but

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Speaker 1: that's mostly because you know, the balance of payments always balances.

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Speaker 1: If you attract inflow so foreign capital, then the math

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Speaker 1: says that you have to have a trade deficit. That's

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Speaker 1: the I know mathmax has a progressive bias, but still

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Speaker 1: that's what the math says. And the US is an

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Speaker 1: attractive place when investor was until you know now, so

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Speaker 1: the idea that there's something fundamentally wrong just doesn't make sense.

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Speaker 4: And it's worse.

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Speaker 1: I mean that Trump Trump and his people think not

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Speaker 1: only that the US shouldn't run a trade deficit, but

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Speaker 1: that we shouldn't run a trade deficit with any country,

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Speaker 1: that everything should be bilateral.

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Speaker 4: Balance trade, which is just crazy.

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Speaker 1: I mean, you know, if you think about people, if

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Speaker 1: you work, if you work for somebody else, well you

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Speaker 1: run a surplus with that person because they pay you

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Speaker 1: and you probably don't spend much of your income on

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Speaker 1: their products. On the other hand, you run a bilateral

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Speaker 1: deficit with your supermarket because you buy from them and

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Speaker 1: they don't buy stuff from you. And so you know,

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Speaker 1: the same applies to country. So it's just crazy.

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Speaker 4: And I don't know.

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Speaker 1: I think all of this stuff about remaking the international

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Speaker 1: order is window dressing. It's the fundamental thing is Trump

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Speaker 1: wants tariffs, and then everything else is people trying to

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Speaker 1: explain why, you know, reckconning explanations of why he wants tariffs.

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Speaker 2: Jason Furman in the Ft this morning, really writing up

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Speaker 2: this complete focus on getting tariffs in to go back

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Speaker 2: to the fifties, the thirties or maybe nineteen oh five.

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Speaker 2: We welcome Paul Krugman, of course at Knick at Princeton University.

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Speaker 2: You know him from the New York Times. He just

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Speaker 2: went out the door. He has a sub stack. It's

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Speaker 2: a value.

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Speaker 3: I got two substacks for you.

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Speaker 2: I got to mention Paul, Adam Twos is killing it

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Speaker 2: out on substack. But Adam Twos subscribe. Paul Krugman subscribe on.

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Speaker 3: Substack as well.

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Speaker 2: We welcome all of you across the nation on YouTube

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Speaker 2: worldwide with the laureate Paul Krugman.

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Speaker 5: Paul, is localization from an economic perspective? Is that dying

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Speaker 5: as we see it?

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Speaker 4: Oh?

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Speaker 1: I mean, well, you know, the truth is we don't know,

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Speaker 1: which is part of the problem, this enormous uncertainty. But yeah,

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Speaker 1: I mean, we have built up this very integrated world

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Speaker 1: economy with all of these you know, supply chains that's

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Speaker 1: on which cannot survive a twenty three percent to you

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Speaker 1: at average US tarafreate. So this is going to really

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Speaker 1: start us up.

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Speaker 2: I think, Paul, that people are understanding the jump condition

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Speaker 2: in tariffs. I'm going to go back to Trump one.

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Speaker 2: You did a wonkish Paul. You should read the wonkish

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Speaker 2: Krugman in the Times. You'll age Paul, you did the

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Speaker 2: like a wonkish trade. You got a chart on the

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Speaker 2: yxes's price of imports on the X axis is the

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Speaker 2: volume of imports. Now with Trump two, that chart is

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Speaker 2: just simply just shattered. There's no other way to put it.

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Speaker 2: You have a welfare loss if we explode the price

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Speaker 2: of imports, if we have the volume of imports decrease

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Speaker 2: a lot slower. Real GDP slower nominal, slower investment. How

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Speaker 2: big can that welfare loss be? And who listening right

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Speaker 2: now loses?

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Speaker 1: Okay, the yeah, I mean, the thing that we're always

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Speaker 1: to realize is that, roughly speaking, we think that the

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Speaker 1: damage done by terror is not proportional to the tariff,

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Speaker 1: is proportional to the.

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Speaker 4: Square of the tariff.

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Speaker 1: So you know, a twenty percent tariff is something like

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Speaker 1: four times as bad as a ten percent tariff. Now

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Speaker 1: putting numbers to it, I mean, I long run, it's

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Speaker 1: finding the long run impact of these terraffs is probably look,

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Speaker 1: it's it's going to be.

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Speaker 4: Worse than Brexit.

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Speaker 1: So in Brexit you tend to think it was three

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Speaker 1: or four percent of British GDP. Maybe, uh, this could

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Speaker 1: easily be more than that, though there's a limit to

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Speaker 1: it deep.

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Speaker 4: It's hard to get.

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Speaker 1: It's not you know, in itself, it's it's a serious

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Speaker 1: hit to the economy. But the funny thing is in

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Speaker 1: the short run it can be worse. And the reason

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Speaker 1: it can be worse is that is the extreme uncertainty

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Speaker 1: that we're creating. And so you know, once you know,

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Speaker 1: even with these high tariffs will settle down eventually, business

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Speaker 1: will find ways to cope. Costs will be higher, GDP

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Speaker 1: will be lower. But that's you know, we'll make that transition.

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Speaker 1: But right now, well if you I mean, I can

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Speaker 1: only imagine that a lot of manufacturing managers are if

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Speaker 1: they aren't drinking.

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Speaker 4: The more powerful them, because they should be the.

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Speaker 1: Anything any move you make may turn out to be

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Speaker 1: disonstrous because God knows what the tariffs will be, what

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Speaker 1: time the investment matures.

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Speaker 2: Well, you just what you just heard there from Paul

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Speaker 2: Krugman Folks is absolutely critically. I want to translate it

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Speaker 2: a little bit. He mentions some math, the square of

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Speaker 2: the tariff. This goes back to littlely Newtonian physics. Think one, two, three, four, five, No,

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Speaker 2: maybe exponential two four eight, sixteen thirty two. That's an exaggeration,

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Speaker 2: but you get the idea. Paul, let's bring it right

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Speaker 2: over to America. Are we going to have a square

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Speaker 2: the unemployment rate? Are we going to see different labor metrics,

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Speaker 2: including the four point x unemployment rate explode higher.

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Speaker 1: Okay, I think we will, but that's not not in

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Speaker 1: the long run.

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Speaker 4: That's the thing.

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Speaker 1: Tariff's you know, what is the impact of tariffs on

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Speaker 1: the unemployment rate under normal conditions.

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Speaker 4: The answer is not much. It makes what labor.

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Speaker 1: Less efficient, but it doesn't cause a doesn't cause a slump.

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Speaker 1: It just means that people do different things, they do

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Speaker 1: worse things, but they.

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Speaker 6: Stay employed, so that it's not really unemployment rate. It's

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Speaker 6: it's productivity that will suffer. It's real incomes that will

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Speaker 6: suffer in the long run. But we may very well

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Speaker 6: now I think better than even odds that we are

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Speaker 6: going to have a recession this year, which is not

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Speaker 6: the standard effective terroists normally. If you ask me do

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Speaker 6: tarsts cause recessions? I would say no.

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Speaker 1: The whole story about smooth Holly caused the Great Depression,

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Speaker 1: that's basically.

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Speaker 4: A wrong story.

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Speaker 1: It's smooth Holly was a bad thing, but not for

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Speaker 1: that reason. But the uncertainty which makes means that if

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Speaker 1: you invest you, should you invest more in your Mexican

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Speaker 1: component's plant?

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Speaker 4: Well?

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Speaker 1: Not if we're going to have twenty five percent tariffs

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Speaker 1: on Mexico. Should you invest in US production instead? Not

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Speaker 1: if those tariffs might not stay in place and you

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Speaker 1: really wish that you had invested in Mexico.

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Speaker 4: So there's gonna be a.

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Speaker 1: Lot of just playing cash sitting on the sidelines while

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Speaker 1: business is wait for similarity, which it doesn't seem to

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Speaker 1: be coming anytime soon.

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Speaker 5: Professor was just as recently as the beginning of the

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Speaker 5: year that Tom and I were having discussions with our

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Speaker 5: guests here in Bloomberg Surveillance about US economic exceptionalism. Boy,

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Speaker 5: that seems quaint now is that still the case here?

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Speaker 5: How do you think about that visa the US and

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Speaker 5: the rest of the world.

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Speaker 1: Well, we were, I mean, if you wanted to kill

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Speaker 1: us exceptionalism, this is kind of what you would do,

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Speaker 1: right the.

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Speaker 4: I mean, and that there's there's much more. It's not

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Speaker 4: just the terrorists.

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Speaker 1: But yeah, the US from about two thousand on, the

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Speaker 1: US have much faster productivity growth than other advanced countries.

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Speaker 4: We just outprefermed.

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Speaker 1: And we also have uh, somewhat better demography than other

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Speaker 1: advanced countries.

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Speaker 4: So we just had a.

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Speaker 1: Much better growth picture than anyone else in the advanced world.

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Speaker 1: And all of a sudden, uh, you know, the uh,

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Speaker 1: we're disrupting our trade, although we're disrupting other people as well.

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Speaker 4: That's a bad thing.

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Speaker 1: Should bear in mind that in the background, this isn't

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Speaker 1: the only radical departure in policy that the Trump administration

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Speaker 1: is pursuing. Look at what is happening to scientific research.

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Speaker 1: Enormous cuts and in mass layoffs. I mean they're the

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Speaker 1: the CDC is laying off medical scientists so fast that

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Speaker 1: they're actually that samples are being left in resers with

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Speaker 1: nobody to look after them. And since ultimately US technological

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Speaker 1: progress relies a lot on the spool overs from government research,

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Speaker 1: we're actually crippling, you know, make America not great again.

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Speaker 4: I mean, if this is really amazing Paul Krugman.

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Speaker 2: With us, he continues with this salaureate. Of course, I

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Speaker 2: can't say enough. This is this moment you're in in America,

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Speaker 2: the questions you have in the living room, the kitchen table.

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Speaker 3: This is what Krugman was.

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Speaker 2: We done years ago at Yale and on to Princeton

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Speaker 2: as well. Look to his sub stack out. I can't

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Speaker 2: say enough about it. Really subscribe to that as a

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Speaker 2: huge value, add Paul Krubman. I've got to go over

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Speaker 2: and I guess this goes Mondel and on the Jacob

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Speaker 2: Frankel and Ken Rogoff and the rest to the currency

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Speaker 2: you studied under the guy who invented modern foreign exchange,

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Speaker 2: Rudiger Dornbish dorn Bush.

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Speaker 3: We lost him tragically years ago of cancer.

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Speaker 2: What would Rudy Dornbush say right now where Paul Krugman

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Speaker 2: say about the idea of the China's solution is to

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Speaker 2: depreciate the Renman be well, yeah.

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Speaker 1: I mean really would have some choice phrases that would

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Speaker 1: be more colorful than anything I can come up with.

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Speaker 1: But yeah, I mean they this is a look if

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Speaker 1: one of the things we've done is we've displaced China

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Speaker 1: as being the prime bad actor in the world economy.

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Speaker 1: China has been a bad actor. They have run and

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Speaker 1: kept an undervalued currency. They have failed. China has a problem,

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Speaker 1: which is they don't consume enough. They have excess saving,

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Speaker 1: They're running out of investment opportunities at home. They've tried

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Speaker 1: to close that gap to square that circle by running

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Speaker 1: big trade surpluses, which they can do because the Apple

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Speaker 1: controlled and undervalue currency, which you know, but the blowback

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Speaker 1: from that has been growing even you know, if if

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Speaker 1: Trump weren't there, if we had a sane person as

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Speaker 1: President of the United States, that sane person would be

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Speaker 1: taking a very hard line on China because the Chinese

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Speaker 1: are in fact not good they're not team players in

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Speaker 1: the world economy, and the Chinese are still trying to

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Speaker 1: do that, which is insane because it's the United States. Clearly,

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Speaker 1: you know, it's not going to be a market and

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Speaker 1: the Europeans the rest of the world is not going

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Speaker 1: to take their stuff either, so they are not helping.

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Speaker 3: Right, Paul.

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Speaker 2: One final question, and it's a fun question because the

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Speaker 2: Republicans love to go after you. There's a primal scream

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Speaker 2: including a senator from Massachusetts, Elizabeth Warren and others.

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Speaker 3: Republicans do something.

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Speaker 2: You're at a breakfast coffee with Thune of the Dakotas

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Speaker 2: this morning in the Senate.

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Speaker 3: What do you tell John Thune to do?

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Speaker 1: Yeah, I mean, look, all of this is happening because

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Speaker 1: us the Congress seated control over trade policy to the president.

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Speaker 1: They did it a long time ago, they did more

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Speaker 1: more than fifty years ago. And because presidents were assumed

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Speaker 1: to be more interested in the international position in the

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Speaker 1: United States.

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Speaker 4: Then then individual Congress people would be.

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Speaker 1: Congress can take that back, would take and there's actually

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Speaker 1: a lot of bipartisan support for that. There is. I

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Speaker 1: think people in Congress they're not idiots, not all of

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Speaker 1: them are.

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Speaker 4: Idiots. Anyway, they do realize that this is being that

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Speaker 4: this is crazy.

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Speaker 1: And all they need to do really is restore You

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Speaker 1: make trade policy like the rest of policy, something that

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Speaker 1: you have that Congress has to vote on.

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Speaker 4: There are reasons why we didn't do that.

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Speaker 1: But so you know, a no truy it might be

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Speaker 1: vot a.

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Speaker 4: Change in legislation, but he but he's.

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Speaker 1: Uh, that would put him on the spot and if necessary,

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Speaker 1: you know, overrule him. Just make this a well, you know,

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Speaker 1: take take take away an authority to do this crazy stuff.

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Speaker 3: Okay, Paul, we got to leave it at that.

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Speaker 2: Thank you for starting in morning with us, paulsuit and

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Speaker 2: the whole team thing. Krugman for his effort, looked to

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Speaker 2: his sub stack, which is really lighten up.

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Speaker 3: I can't say enough about it. It's really quite It's

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Speaker 3: more heated than it was with The New York Times.

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Speaker 3: For the years of you that love and disagree with

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Speaker 3: Professor Krugman,