Paul Krugman Podcast

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Ro Khanna represents a large part of Silicon Valley, and not surprisingly is a very smart guy. Perhaps more surprisingly, he’s also a very interesting progressive, who has drawn considerable ire from the tech lords, with Elon Musk most recently calling for his imprisonment. I caught up with him Friday:

TRANSCRIPT: Paul Krugman in Conversation with Congressman Ro Khanna

(recorded 6/26/26)

Paul Krugman: I’m talking again to Rep. Ro Khanna, the Representative for Cupertino, as it were, representing the heart of Silicon Valley in ways that don’t always please the tech oligarchs. I had planned to ask about AI, but there’s so much going on and Ro is right in the middle. So, welcome to this interview.

Ro Khanna: Well, I’m honored to be back on. I usually just read you to learn, but I’m glad we’re going to get to have another conversation.

Krugman: As it happens, tech-related politics is really central now. And you seem to be in the middle of at least three big issues: Elon Musk, AI generally, and the California Wealth Tax Initiative. I want to talk about all of those, but maybe let’s start with Elon Musk, who has called you evil, which is a great honor. Do you want to talk about that controversy and where you came in here? Because I think it’s very interesting.

Khanna: Well, he’s called me evil, he’s threatened to sue me, and he’s threatened to jail me. I have this quaint idea, Paul, that in a democracy, Elon Musk should have one vote. He doesn’t seem to think that, and the reason he has been so triggered is that I not only cited a Lancet study—which said that his USAID cuts could potentially lead to the deaths of 4.5 million children and over 10 million adults—but I also cited an Atul Gawande/ Boston study showing that some of these deaths have already taken place. This triggered him, not just because I cited these studies, but because I said he’s going to have to come before the House Oversight Committee when we take back the majority; we’re going to have the power to subpoena him. And, of course, defying a congressional subpoena could lead to contempt of Congress and penalties. And so he’s been spending the last few days obsessively tweeting about me. You would think if you had $1 trillion, you’d have better things to do, but this is what’s occupying him.

Krugman: Yeah, let’s back up a bit. One of the things that I found really kind of astonishing in the whole discussion—and obviously, SpaceX went public and there was amazingly little discussion of Musk’s role at DOGE where he was a quasi-government official. I guess it was kind of weird what the legal basis for all of that was—but this had immense impacts. And as you say, one of them was that he just, more or less by personal fiat, eliminated USAID, which is our premier aid agency. Do you have any thoughts just generally about what Musk did at DOGE? I think it’s a hell of a story, so let’s start with that.

Khanna: The keywords you used were “by personal fiat.” I mean, he literally went there, didn’t consult Congress, didn’t report to Congress, and just started cutting programs that Congress had explicitly authorized. And no one stopped him. We voted to subpoena him, but he defied coming in and explaining anything to Congress. By some accounts, he cut 83% of the programs that were at USAID. And some of these programs are to feed some of the poorest people in the world; some are to provide medicines to some of the poorest people in the world. So, you literally had the world’s richest person hurting the world’s poorest people. And he was doing it with no accountability, in defiance of Congress.

Congress then fortunately restored some of these programs, so he was not able to end all of them. But the USAID programs are a shadow of their former self. They now are scattered in administration, and many were so disrupted that these academic studies have shown that it potentially could—or in some cases already has—led to the deaths of some of the poorest people and children in the world.

Krugman: Yeah, the important thing is what he did. But the attitude also at the time... I think he said something like, “Oh, I just fed USAID to the wood chipper, and I could have gone to some great parties instead,” as if it was, you know, annoying that he had to go out there and cut off medical aid for millions of children.

Khanna: Yeah, it was total arrogance. He said it was all fraud, but of course, he then didn’t have the guts to come before Congress or the American people and explain where he found fraud. He didn’t consult any of these programs. It’s not like he was on a plane to Africa or a plane to other parts of the world where these programs were being administered. And for someone who was going to go after cuts to the federal budget, instead of starting at the Department of Defense, which is 65% or so of the discretionary federal budget, he decides to start with an administration with less than 1% of the federal budget. It was a purely ideological agenda that, turns out, has real-world consequences—especially with this Ebola outbreak. I mean, one of the things he cut was the oversight and testing in places like the Republic of the Congo, and now we’re seeing the consequences.

Krugman: And his reaction has been really quite over the top, considering, you know, if you’re any kind of public figure, you expect to be facing criticism.

Khanna: It’s just denial, right? I think he said that not a single person has died because of his cuts, which is totally implausible. He said, “there’s not a single documented case.” And he said that everything he cut was simply a fraud, and that these academic studies are totally fraudulent. Granted, the Lancet study is a model of what could happen, but the Atul Gawande study is actually a documentation of actual deaths that have taken place. And there are a lot of anecdotal statements which Nicholas Kristof and a lot of people have reported on.

Krugman: And now he’s threatening to sue you. Presumably, I don’t think we’re that far gone that there’s any chance that such a suit would prevail, but how much of that is an actual burden on you?

Khanna: Well, I put it into Grok to see how strong a case Elon has, and Grok doesn’t think he has a very strong case. So there’s that.

Krugman: In case anybody doesn’t know, Grok is Elon Musk’s or xAI’s LLM. It’s a competitor to ChatGPT and Claude, except it’s not really a competitor because it’s awful, right? But yeah.

Khanna: I would have a better case of defamation given what he has said about me. But, of course, I believe in free speech, Paul. I thought he did, too, and I would never think of suing someone for calling me a robber or calling me names. That’s the First Amendment. But I’ll tell you what it does: it creates a doubt in other people who are on the Oversight Committee—you know, “Is this really worth the bother? Should we really criticize Musk?” So that’s one thing.

Obviously, Musk has more than one vote. He’s got millions of dollars that he can spend on candidates, but now it turns out it’s not enough for him to just have the ability to support Super PACs; he also wants to be able to intimidate any public official who dares to go against him. It’s not just that he would spend money against them, but that he could actually sue them. And so if you’re a member of Congress, you’re thinking, “Well, do I really want this fight? Or maybe we could just focus on the hundred other issues.” So, it’s less about the headache for me and more about the signal he’s sending to other elected officials.

Krugman: So you aren’t trying to do a GoFundMe for a legal defense or anything like that? Because I know people who have faced other spurious lawsuits and it’s actually cost them money, even though there’s no chance of it prevailing. They feel that they do need to hire people, but you’re not in a position where you are personally feeling liable? Or are you just well-positioned to …

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A short talk in lieu of a post. Back on full duty tomorrow.

Transcript:

Hi, Paul Krugman here.

I’m recording this on Tuesday afternoon. I just won’t have time to write a normal post for tomorrow when you’ll see this. And I would take the day off, except it seemed to me as if people might want some reaction to the carnage that’s been going on, at least in part of the tech sector and stock markets around the world, which has been pretty remarkable.

It’s really tempting to say that it’s deeply meaningful. But in general, you want to be very cautious about putting too much stake in stock market events. I’ll come back to that in a minute. But it is striking enough that it does seem to be worth commenting on.

So what’s happened? There’s been a fall in tech stocks very much concentrated in semiconductors. The Philadelphia Semiconductor Index was down almost 8%. on Tuesday. The KOSPI Korean Index, which is largely a semiconductor index, was down just about 10% sort of the previous day or the same day, you know, time zones. And there was a 2.2% fall in the NASDAQ. We’ve seen a lot of decline in tech stocks, things related above all to chips. What’s going on there?

Part of the answer is that trying to understand why the market does what it does is, generally speaking, a mug’s game. In this case, however, it does seem that part of what’s happening, probably a large part of what’s happening, is that the tone, the rhetoric surrounding use of AI, and hence the demand for compute, has really shifted quite a lot just very recently.

All of a sudden, we have a spate of studies that seem to show that, yeah, AI models allow people to churn out a lot more stuff, but the actual payoff to that stuff is much, much smaller than the volume of stuff that they’re churning out, most obviously lines of code, but just in general. AI lets you do much more, but how productive that is in terms of the ultimate goals of a business, let alone economic growth and quality of life is much more doubtful.

On top of that you have a rather abrupt, jarring turn in business strategy. Up until just the other day a lot of businesses were more or less whipping their workers into using AI — you know, we’re going to judge you on how much you’re using AI whether or not you really want to whether or not you yourself think it’s valuable. We’re actually going to score you, we’re going to require that you do tokenmaxxing.

And then, with compute getting scarce and with the price of chips having gone through the roof, suddenly the AI companies began charging and the marginal cost of using a lot of tokens became really, really very high. And suddenly companies were saying, oh wait, stop. We want you to economize on your use of tokens and hence to ultimately reduce the demand for compute. And that’s a sudden U-turn.

This is part of a broader phenomenon, which I’m going to write about very soon, which is that there is a kind of lack of organicness to the AI boom.

There are people who are using it because it looks great. They’re using it because it’s fun. I have colleagues who are just mucking around with Claude and finding some uses for it. But there’s also a large amount of Corporate America that thinks that this is the way it has to go. Fear of missing out, not by the individual investor, but by the corporate bureaucracy. And then pressure from the financial markets, saying, you know, your company better be on the cutting edge of AI or else. All of which is very fragile. It’s a kind of a bubble, but not in the normal sort of asset price form. It’s more of a kind of fad, almost a social delusion. And that, it seems likely, certainly got ahead of itself.

Now, I’m reading way too much into these stock prices. And so let me give you a little bit of a caution on all of that. So yeah, the Philadelphia Semiconductor Index was down 8% in a day, which is one hell of a drop. But it was up 157% over the past year.

So you want to have some perspective here. This is a stunning setback, but the fact of the matter is that over the course of a year, these stocks have been incredibly high-performing. The KOSPI, the Korean index, was down 10%, strictly speaking, 9.99%. But anyway, it was down 10%.

But after that 10% fall, it was up 172% over the year. So we’re not talking about a catastrophe. We’re not yet talking about, we aren’t even talking about a Bitcoin level of disappointment for investors. But okay, it’s a break in the trend.

The other thing we should say: the famous old line by my teacher and colleague, Paul Samuelson, was that the stock market had predicted nine of the last five recessions. There’s many more than that now. In fact, just over the course of the past year and a half, we’ve had two major stock market declines that turned out to be false alarms.

There was a big decline in April of 2025 after Liberation Day, the Trump tariffs, because there was a lot of people just sort of, it’s chaos, terrible things may happen. While the tariffs have been a bad thing, they did not cause an economic catastrophe and stocks recovered the losses that they experienced then.

And then there was another round of major stock declines associated with the Iran war. Of course, the Iran war has been a complete debacle and a disaster, and we’ll be paying a price for that for a very long time. But the consequences for short-run macroeconomics were more modest than many people, myself included, expected. And it appears that the Strait of Hormuz is going to gradually open because the United States basically said, okay, you win. It won’t literally say that, but in practice, that’s what we’re doing. So that is going to be over.

So it’s not that uncommon for the markets to react as if something terrible is about to happen and be wrong.

And so you really don’t want to assume — there’s a real temptation to assume — that because there’s so much money involved, a big decline in markets must be signaling that something is really very much amiss in the fundamentals, that where there’s smoke, there’s fire. And sometimes, no, there’s just smoke, no fire.

So this might not be that big a deal. But it comes at a moment when the rhetoric really has shifted. You can see that there’s just a kind of a walking back.

There was a really striking interview just the other day with Satya Nadella of Microsoft. Microsoft is actually a consumer of AI, rather than a producer. They have tools you can use within Microsoft products, but I think they run basically off OpenAI.

And Nadella was pretty scathing about saying, you know, we can’t give all of this power and all this money to the big AI companies, and we should be using cheaper models. And hinted that Microsoft may start making use of DeepSeek, the Chinese model, which is less comprehensive. In general, the Chinese models are less comprehensive, but immensely cheaper, and among other things, just do a lot less computation. That’s kind of the core of why they’re cheaper.

And in that case, the picture changes a lot.

What bearing does all of this have on AI and the future of the economy and AI and the future of humanity? Well, part of what we’re seeing may not be so much disappointment in what AI can do as realizing that this extremely compute-intensive AI is not essential.

And maybe you can still get whatever the big productivity benefits are and still possibly the big labor-displacing effects without quite so much compute. But it’s not entirely separate either. I think we need to be saying that this is what a quasi-bubble quasi-bursting might look like.

Take care.

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I often think of labor economics as a role model for the field: a subfield in which theory is disciplined by evidence and (most) researchers are willing to listen to that evidence even when it challenges their preconceptions. And hardly anyone does modern labor economics as well as UMass Amherst’s Arindrajit Dube, who has an excellent new book out. I talked with him about that book and the state of labor more generally.

. . .

TRANSCRIPT: Paul Krugman in Conversation with Arindrajit Dube

(recorded 6/18/26)

Paul Krugman: One of the most satisfying parts of economics, which doesn’t get as much attention as it should, is labor economics. It’s obviously important. Most of us work for a living, or at least pretend to work for a living. But also it is a field, a subfield you might say; more scientific than almost anything else in economics, really evidence-based. You’ve had multiple revelations where the data have actually changed the way people, myself included, have thought about stuff. And among the most effective, prominent practitioners of modern labor economics is Arin Dube, who has a new book called The Wage Standard. And I thought we’d take a break from all the other stuff going on and talk about Arin’s work. So hi, Arin.

Arindrajit Dube: Hi Paul, nice to see you.

Krugman: Yeah, welcome to my virtual studio. Why don’t you talk just a little bit about The Wage Standard and what you’re trying to do, and then we can get into the broader labor economics issues?

Dube: Yeah. So, I wrote a book. Here it is.

Krugman: By the way, we mostly don’t do that in economics; we write 5,000-word articles.

Dube: Exactly. Paul, of course, you’ve written many amazing books. But economists don’t usually write books. We publish articles.

Krugman: That’s right.

Dube: And so it was actually a big deal for me to sort of think about, did I want to write a book? And I kind of went for a number of years and I said, like, “Oh, well, I’m not writing this book for other economists as a main audience,” though of course, I’m very happy for other economists to read it, but I wanted to try to have a broader conversation, and I needed to be clear that I wanted to know what I was going to say in that conversation.

And so here’s basically the main point of the book. The main argument is that Americans deserve a raise, that most American workers actually could get paid more and should get paid more. And there are really good reasons to think that. You know, the market has not delivered what could be a sustainable but higher wage for those in the bottom and lower part of the income distribution. So that’s basically the core idea. And I try to bring in what we know about the research that I think has really blossomed in the last decade or two decades on a bunch of topics when it comes to understanding the labor market.

I was writing this book at the beginning of the pandemic and especially 2021. And it was really interesting because this was one of the more remarkable episodes in the labor market that really highlighted a lot of things that I was actually talking about in the book. Of course, it did it in a very messy way, because there were lots of things happening during that time. But it made for a very interesting process where I felt like I was writing the book and the world was writing itself outside, which was both exciting and challenging.

Krugman: Okay. I said that labor economics has been revelatory. When I was not young, but younger, I think most economists circa 1990 would have thought of the labor market as just being a market of supply and demand. And where they crossed determines wages, and there’s nothing much you can do about it. And if you try to change it, you do so at your peril; bad things will happen. And as you say in the book, and in many of your writings that I’ve been following on all this stuff, that’s something that really, really changed. You want to talk about what happened?

Dube: Yeah. So, one really interesting thing is to think about how wages are set. And we could start with the basic supply and demand story, which basically is that there’s demand for workers of different skills and then there’s supply. And depending on the supply and demand conditions, you’re going to have different wages, a different skill price. And let me be clear, I think there’s a lot of important aspects of that that actually matter, but it’s also incomplete. Because here’s the thing: if the market really worked like the textbook supply and demand story, basically workers of a particular type would just get paid the same—that’s the skill price. But in reality, it turns out companies have a substantial degree of discretion in setting pay. And you can start to see this by just looking across companies hiring similar workers, but choosing to pay someone different.

One simple example to start with is FedEx and UPS. Workers may be driving very similar routes delivering similar packages, but it turns out FedEx pays lower than UPS. UPS has maybe 37% of the workers; a few years back, they were paying less than $20 an hour. For FedEx, it was more like 60%. And so, of course, that’s just one example, but you have others. Like, look at Walmart versus Target. It turns out that Walmart tends to be paying somewhat lower than many of its other similar, large retail competitors. And the list goes on. But this is not a new observation. Labor economists who were studying this in the mid-20th century had gone and collected surveys and understood that, you know, factories in the same labor market could be paying different wages.

But here’s what was not fully convincing: how do we know that it’s not maybe somewhat of a different skill mix? Maybe these companies are similar, but they’re hiring somewhat different types of workers the pay difference reflects that. So that argument held sway for decades until we had better data. And this is where what you say about labor economics, I think, really is right. And part of that has been our ability to really get much more granular and high-quality data, including administrative data linking pay for virtually most people in the labor market. And you can track them as they go from company to company. So you could say, “Hey, actually, what happens if the same person moves from Walmart to Target? Do you see they’re getting a higher pay?” Because you’re holding their skill set constant there. And so this kind of data and this sort of research design helped establish that actually, no, it turns out there is a substantial amount of variation in pay that comes from companies choosing different types of pay policies. And that’s a big part of the argument in my book, more broadly, that there are choices we have made.

You know, if we wanted to go back and look to see what’s happened to productivity and what’s happened to wages since 1980, productivity has grown much more strongly than wages—maybe not as strong as it did in the postwar era, but nonetheless, it grew a lot more than the pay for the typical worker, certainly pay for those at the bottom. And one of the arguments that I make is that this reflects choices made in a variety of places, and that starts from choices at a corporate level, different companies choosing different pay policies, all the way to policies that are being made by state and federal government. But the core part of it is like, why does that make any sense? It doesn’t make much sense to talk about companies choosing pay policies if the market is just your supply and demand. There’s no role for saying, “Are you doing the high-wage strategy or a low-wage strategy?” That’s a nonsensical question in a perfectly competitive market. But it’s an absolutely sensible question to ask when companies have some degree of wage-setting power.

You know, economists have a funny word for this, right? Monopsony. It’s a funny word. But the basic idea is really straightforward. You know, companies are making a choice there. You could go for a higher …

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Transcript

Hi everyone. Instead of a regular post today, I’m going to put up a video. There are a number of reasons why I feel like doing that instead of the usual. One of them is that this is a dry run for a talk that I will be giving virtually later today.

There’s a conference on the economics of digital transformation taking place in Croatia, although I’ll be doing it remotely. And they have asked me to talk about global power, geoeconomics, and Europe. Those are all themes that I’ve been thinking about quite a lot. And today’s miniature talk is an opportunity to try talking through those themes.

And the way I want to structure it is as what has changed, at least in the way that we all now understand the world, since, well, basically since Donald Trump returned to power. That’s an American-centric point of view, if you like, but it’s kind of a natural bracket.

And of course, everything really has changed, mostly not for the better, under Trump. And it has, as it turns out, big implications for Europe as well. So let me just try to get into that.

Start by talking about the world as it seemed to be at the beginning of 2025.

There were, and still are, three great economic superpowers in the world: China, the United States, and the European Union, in that order. If we measure GDP in 2024 at purchasing power parity, which is basically just adjusting for differences in national price levels, you had China with a GDP of something like $37 trillion, the United States with something like 29 trillion and the EU with something like 28 trillion. That last bit may be a bit of a surprise — maybe all of it is a surprise to some people — but yes, in terms of the actual amount of stuff it produces the Chinese economy is now substantially bigger than the US economy. And the European economy is almost the same size as the US economy. If you think that Europe is backward and poor and helplessly dependent, it’s not. It is an economic superpower.

And in fact, by this measure, Europe has basically maintained this position of being about comparable to the United States for a long time. This is a whole other topic that I’ve been writing about and will continue to write about in the future.

In that world, basically, two things were really kind of striking. One is that the United States seemed to perceive itself as being a dominant power, even though China was bigger and even though Europe was about the same size, and Europe acted as if it seemed to perceive itself as not being in the same league, as being not a superpower at all. All of that may be changing, and events are part of the reason, so let’s talk about the events.

Now, the most obvious: the United States just lost a war. Just lost it bigly, as Trump used to say. It’s an astonishing story. We went up against Iran, which was definitely not a major military power or a major economic power, a sort of middle-ranked power, if that, and utterly failed to achieve our war goals.

In the process, we inflicted a lot of damage on the world economy and depleted our stocks of high-tech weapons that will take years to replace. Altogether, immense damage was inflicted on Iran, but Iran has clearly emerged stronger. The United States has emerged humiliated.

The attempts by Trump and minions to pretend that it was a victory don’t help. They only make the United States look not just humiliated but delusional.

So that’s a big deal. It has large implications for US power and influence going forward as well. To explain those implications, it’s helpful to talk about one of the other things that really dramatically changed with Trump coming back into office, which was trade policy.

The United States began really seriously trying to throw its weight around. Liberation Day, the tariffs on everybody, basically trying to pressure all of the world into giving us various kinds of concessions. Give us what we want or we won’t let you sell in our market and everybody needs to sell in our market.

Okay, what we learned from now well over a year of trade war is that U.S. power in that dimension is substantially less than certainly than Trump appeared to believe it was. And just in general, trade, leverage and trade negotiations, leverage in trade disputes has less to do with market access than a lot of people assumed and more to do with supply chains, with getting stuff that you use in your economy, means of production, not in the sense of capital, but intermediate inputs or just inputs in general. The nation that has more ability to strangle its rivals by cutting off supply chains is the one that has the upper hand.

So it turns out, and we had already learned this from the trade stuff, that China with its dominant position in rare earths and some other crucial industrial materials actually had a stronger hand than the United States. Yes, we have a big market, but loss of a market can be offset to some extent by domestic stimulus, domestic support programs. Not having crucial industrial materials is not so easy to make up for. So we learned that the power in international trade disputes in a fundamental sense reflects power over supply, not power over demand, which is something economists have always tried to say.

The point of trade is not to sell. The point of trade is to get stuff. You sell as a way to pay for things that you get from other countries. But now we have it demonstrated very obviously in real life. So that in itself meant that we’ve had a blow to the perception of US power. It turns out the US market is not almighty; access to the US market is not anything like as powerful a tool as we thought and Chinese strangleholds over key inputs are much more important.

And then of course we’ve seen that even more graphically demonstrated by war with Iran and it turns out that Iran’s ability to disrupt traffic through the Strait of Hormuz was a really huge empowering point, and it was the kind of thing that the United States really didn’t think about, and certainly the Trump administration didn’t think about.

And it shows the true rules of global economic power, because largely Iran was able to win this war through economic power rather than strictly military action, the rules of economic power are not what a lot of people thought they were.

Who benefits from that? Well, obviously China. What we’ve seen now is that in terms of a global power competition, China has demonstrated that they have substantial power over supply chains. They’ve also demonstrated that they can weather a cutoff of oil pretty well.

And global power is a zero-sum game. So the United States, by weakening itself, by showing that we don’t have the ability to impose our will militarily, we don’t even have the ability to keep international shipping routes open, has emerged as just a much less formidable player, which means that China by comparison looks better. Add to that the fact that the United States has been erratic and unreliable. Our current leadership just doesn’t understand that a reputation for doing what you promised, honoring your agreements, is itself a source of power, and we have done an enormous amount to undermine that. Not news to anybody.

Trump looks much weaker. America looks much weaker. To a certain extent, China is the beneficiary of all that, at least in terms of power.

Now, of course, life is not all about power. And in the end, you don’t run a country to maximize global power. Maybe the Chinese do. I’m not sure about that. But in any case, it’s not a zero-sum game in terms of living. But in terms of power, it is a zero-sum game. And the United States share of that power, however you measure it, is clearly down as a result of the war.

Europe is a little bit interesting here. Europe played essentially no role in any of this. Europe wasn’t involved, obviously, in the war. Europe didn’t do very much at all except to suffer. Still, one thing that is kind of important is that Europe — at least to some degree, not really through emergency responses but just through …

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Thank you Michael Scarmack, Scotland Explained, Oakbridges.ca, Kim G, Cathy Stein, and many others for tuning into my live video with Heather Cox Richardson! Join me for my next live video in the app.

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I last spoke with Azeem, the proprietor of Exponential View, 18 months ago — ancient history on this subject. So we revisited the state of AI.

.

TRANSCRIPT: Paul Krugman in Conversation with Azeem Azhar

(recorded 6/12/26)

Paul Krugman: Hi everyone. Paul Krugman back on my usual schedule of recording interviews. And today I’m talking with Azeem Azhar, who I spoke to in January 2025, basically centuries ago in AI time. And with AI on everybody’s mind, I thought it would be good to revisit. I should say Azeem is an independent researcher and founder of Exponential View, which is one of the top tech Substacks out there.

So hi, welcome to another conversation.

Azeem Azhar: Yeah, thank you, Paul. And it has been eighteen months, also known as one and a half centuries in AI time since we spoke.

Krugman: Yeah. Let me ask sort of the dumbest question: what is this thing called AI? How does it do what it does? I mean, even skeptics have to admit that it’s really impressive how it’s sort of leapt over all of the previous barriers. How is this happening?

Azhar: You know, I think we’re still figuring it out. I think of AI ultimately as a machine that does certain things, and it’s been built by passing first millions, then billions, then tens of billions, hundreds of billions of trillions of words of human output through a neural network to give it some sense of how humans have thought about the world. And because it operates at dimensions well beyond the form of space and time, it seems to be able to find relationships between quite complex concepts. And I think we’ve all had that experience, whether we’ve been using Chat GPT or Claude over the last two or three years, that it seems to be able to recognize things that are quite deeply related that don’t immediately spring to mind.

And in the last year and a half or so, the labs have started to train the AI models not just on words in books, but actually on tasks, like, “what is the set of things that you do to write a piece of code that does something?” “What is a set of things you do to use a piece of software in an enterprise?” And they’ve tried to train those models on those particular tasks. Essentially it’s aping what we do, and they use various mathematical tools like reinforcement learning where the model notionally gets a reward. Of course it’s not a reward the way you and I think of it because it’s a machine.

Paul Krugman: Right.

Azhar: And so that’s what it is. It’s sort of reflecting back, but also I think discovering some really deep relationships in the world that we might not spot, you know, prima facie as humans.

Paul Krugman: Brad Delong calls it “a vast stew of linear algebra,” which makes some sense to me because I think that Pagerank with Google was the last thing I actually understood. And that’s the eigenvector with the largest eigenvalue. Not that anybody needs to know that, but this is like a million times bigger, right?

Azhar: That’s basically it. Yeah.

Krugman: But it’s sort of not what artificial intelligence was supposed to be, right?

Azhar: No, not at all. I mean, I sometimes go back and look at the TV series of the seventies that I grew up with as a child, and they’ll always have an AI in the spaceship. Space 1999 had an AI you could talk to. And it was very precise, it was very clipped, and it did things and got things right. And there was a sense that you could trust it. But you’d never think to say, as I sometimes do now, you know, “Find me five analogies to help make this point.” I use it as a brainstorming partner, or I give it tracts of my book, the book that I’m writing, and say, you know, “How would Paul Krugman criticize this argument?” And I get suggestions that I then work through by hand? I don’t think we really imagined it would look like that.

Krugman: Yeah. In sci-fi it would talk in a monotone and would be relentlessly logical. And in fact these models are unpredictable, they’re sometimes temperamental, they’re not reliable. That’s probably one of the big problems. It’s not at all what we imagined.

Azhar: It’s not at all and this point about reliability is so complex. A couple of months back, one of the versions of Anthropic’s Claude came out and I found it so sycophantic that it became unhelpful because I like these things to help me on hard problems and to challenge me. So I switched back to Chat GPT, which has always been a little bit less friendly. And what’s going on there, Paul, is that because we don’t really have a good theory about how to build these. They are developed almost like in a petri dish and nudged in particular directions so they take the shape that we expect them to take. And to use an economist term, they improve non-monotonically with every release. So you’ll see the latest release of an Anthropic model, and there are maybe twenty or thirty public benchmarks that they’re measured against, like how well they summarize text and how well they write software code. And the next version of the model won’t necessarily be better at everything than the previous version, because you lose something in order to get it. And that’s the complexity that the labs are wrestling with.

Krugman: Wow. Okay. Second naive question. I don’t think I’m a Luddite. I’ve always been happy to adopt technologies, but maybe I’m incurious on some of these things. I tend to pick up things like mathematical techniques, as needed, because I see something that could be useful. Now, I’m using NotebookLM to extract tables from PDFs, that sort of thing. But what should I be doing? I have friends who are using Claude a lot, but I can’t quite figure out what particularly agentic AI should be doing for me.

Azhar: You know, I’m really sympathetic to that because I have the same issue. These tools have been developed by software developers in a really particular part of the world, which is Silicon Valley, where the culture really revolves around the art of the programmer. And so if you have a programmer’s day and you think in coding terms and you have programming workflows, it becomes really obvious what you do with a really advanced AI tool. I do a lot of research, some of it qualitative, some of it quantitative, and in such a world, those workflows don’t match the way that I think through problems. And so the way that I get around this is that I do look at things on Twitter or X as it’s called because people are sharing tips. And I often just ask the models, you know, “What could I do with you given that I’m trying to do this thing? I’m trying to solve this problem.” And it will come back and give me a suggestion.

And I have had some success with agents. So I have an agent called R. Mini Arnold. So R is a play Isaac Asimov’s robots. They’re all called R. Arnold is after the good Terminator in Terminator 2, played by Arnold Schwarzenegger, who protects humanity. And R. Mini Arnold is available on my WhatsApp and it’s available on email.

Krugman: Okay.

Azhar: And it has access to a whole set of resources. It can browse the web, it can access LinkedIn, it can access Twitter, it can look at my library of PDFs of research that I’ve downloaded. And I can throw tasks to it a little bit like I would say a pretty decent but slightly temperamental graduate student. So sometimes it just disappears for six or seven hours at a time. And one of the differences between using an agent like that and using Claude is that R. Mini Arnold has a lot of my life’s context. It knows the music I like, it knows the book I’m working on, it knows the investments I’m making, it knows the essays I’m doing, it’s got the calendar of speeches that I’m about to give. And so when it goes off and does a task, it tries to figure out what in my world is this going to be relevant to and where can I draw threads from? And when it works, it is really sublime and it does feel a little bit like science fiction.

But I would say it’s incredibly brittle. I mean there’s breaks every four or five…

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A quick video, thankfully not from Midtown Manhattan

Hi there. Paul Krugman with a very quick update.

I haven’t done a regular post today because I’m jet-lagged out of my mind, but I just wanted to weigh in on something that will be happening a few minutes after I record this. Which is that a significant piece of Midtown Manhattan — the area surrounding Madison Square Garden — is about to be closed to all pedestrians.

This is because of the Knicks game which is in Madison Square Garden. And Donald Trump is attending the Knicks game. Which means that the game entry itself is going to require enormously strict security. People are forbidden from bringing any kind of bag in there. It means that what should be an exciting joyous occasion is going to become quite hellish with long lines and who knows what else.

But what really may not be obvious to many people — you might not know if you’re not a New Yorker — is that Madison Square Garden sits on top of Penn Station.

That’s a story in itself, but there it is. And Penn Station is the busiest transit hub in America. It is where 600,000 or so people pass through on their way to and from New York by way of the Long Island Railroad and New Jersey Transit. I’ve spent a lot of my life waiting for trains at Penn Station.

And it’s completely insane to ruin people’s day like that. You could say, well, what else are you going to do if you’re going to have to provide security for the President of the United States? And the answer is, Why does he have to go to this thing? The simple way to make several hundred thousand people’s lives noticeably better, at least for today, would be to just not go to the damn game. He can watch it on TV. He can go have a cage match in the ripped up White House lawn, if he likes.

It’s not such a small thing. It shows a kind of contempt for ordinary people and a kind of self-aggrandizement — I want this so I’m going to make other people’s lives miserable just to indulge my whim — that is part and parcel of everything else that’s going on. It’s a small thing but my god I would actually have had a problem if I went into my office today because my office is not that far from Penn Station. It’s not in the banned zone but it’s going to be nightmares all around.

All right, just another message that the people in charge do not care about people like you.

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Hi everybody. I’ve been having an extremely busy week, so no two talking heads conversation this week. Just my head talking alone for a relatively short time.

Hi, I’m Paul Krugman. I’m winding down some travel, and I’ve been meeting all sorts of people face to face, so virtual interactions are down. So just to give you some kind of Saturday video, I thought I would talk a little bit about latest economic news, markets — things that I don’t normally weigh in very much because that kind of market commentary is usually something that is best done by business economists who are focusing on the day-to-day stuff talking to market participants. But I think that the latest stuff is interesting enough to warrant some discussion and maybe a way to think about where we are economically right now.

So okay, if you’re paying attention to this stuff you probably know that yesterday was a job report day. The report was unusually strong, certainly stronger than almost any of the professional forecasters expected, 172,000 jobs.

Predictably, Trump first boasted about this with a lot of talk about how you know we didn’t have this kind of prosperity under Joe Biden. It is kind of odd given how well things are supposedly going how much Trump and his people talk about Biden. If it was really that much better would you need to be constantly comparing yourself and making claims about how much better you’re doing?

For what it’s worth you know how often during his 48 months in the White House did Biden preside over job reports that were as good as yesterday’s in terms of job creation? The answer is 37 times.

Now, there are reasons why the rapid job growth of the early Biden years, which was coming out of the COVID slump, can’t be replicated. And the fact that immigration is way down means that a normal jobs report is going to be a lower number.

But still this was unexpectedly high job growth but not really something that should alter your fundamental view about how the economy works, although the near-term outlook looks stronger than you might have thought.

One thing I should say, since there are some people wondering, can we trust these numbers? And particularly pointing out that the unemployment rate did not fall, even though we had a unexpectedly big job creation number and wondering how does that add up, are these books being cooked? The answer is no. You’re not helping by saying that.

I’m not saying that the books might not be cooked at some time in the future, but we will know. It will be obvious that this is happening. And it would basically be impossible to do it without there being lots of warning bells, without there being lots of whistleblowers.

So far, the Bureau of Labor Statistics is still apolitical, professional — under-resourced, which is becoming a problem — but these are the best numbers they could do.

If you’re puzzled by how we can have strong job growth and no change in the unemployment rate, the answer is that these are two different surveys. The unemployment rate is based on a survey of households. The job creation number is based on a survey of employers. Those numbers don’t have to match up. I mean, in an ideal world, they would always tell the same story, but there’s statistical noise, there’s sampling error, there’s just conceptual differences.

So this kind of discrepancy is not that unusual. And what it really tells you is, well, is the economy, is the labor market really sort of flat, which is what the unemployment numbers suggest, or are we seeing at least a mini boom in employment, which is what the

nonfarm payroll numbers suggest? And the answer is who knows? Time will tell. Over the course of a year there’s not usually a significant discrepancy in the stories these numbers tell; month by month, well, it’s noisy and you shouldn’t overreact.

Okay trying to make sense of what is going on — why is the labor market as strong as it appears to be? One important point about the economy right now is that there are three big forces that are hitting us. It would be really great from the point of view of professional economists if just one thing would happen at a time. But unfortunately, that’s not how it works. So there are three things happening. First, we are still feeling the effects of Trump’s erratic tariff policy, which has had a depressing effect on employment — not so much the tariffs themselves as the uncertainty. It’s very hard for businesses to make plans, very risky for them to sink money into new ventures when they have no idea what the tariff regime will be a few months down the road. But that uncertainty probably did a one-time hit to employment which is mostly probably behind us because yeah we have crazy erratic trade policy, but that’s now just a piece of the landscape which affects the level of employment, maybe, but not the rate of growth. The second thing is AI. So we have this enormous boom in spending on data centers, a large surge in investment, big rise in stock prices because of hopes about what AI might return. There are not that many people who benefit from high stock prices, but these are people with a lot of money and a lot of spending power. And if they go out and spend more, that boosts the economy. So that’s a sort of force that operates in opposition to the effects of the tariffs.

And possibly the AI-driven spending is coming on now while the tariff effect is sort of closing out.

About oil: For what it’s worth, prediction markets are by and large evil things, but they do give you a quick way of summarizing conventional wisdom. And just about a week ago,

Kalshi said that the probability that the Strait of Hormuz would be open by August 1st was 60%. It’s now 26%. So people have justifiably gotten very skeptical of White House pronouncements that this is just about over. They should have been more skeptical before.

But anyway, it just does not look like it’s going to open. And there’s a still huge remaining uncertainty about what does this imply? Through all of this there’s been a dichotomy between people in financial markets — including people in the futures market for oil who are presumably more professional, less vibes driven than a lot of investors — and what people who actually study the physical market for oil have to say.

And right now futures prices are way up from where they were before the war, but they’re still under $100. Yet the oil industry people are basically hair on fire, saying, we’ve been meeting the loss of supply from the closure of the strait by drawing down inventories and the inventories are very close to critical critically low levels — there’s a certain amount you need to just sort of function — and there were a lot of warnings that really bad things would happen if the strait wasn’t reopened by June 1st. Well guess what here we are, it’s June 6th, D-Day, and the strait is not open. So is there a really severe oil crunch just a few weeks down the pike, or is it kind of manageable?

So are we going to be hovering around current oil prices? I still find the physical oil argument quite persuasive, but I do wonder, again, it’s not like there are a lot of meme stock investors speculating in oil futures. That’s not a market that you would expect to be

highly emotional. We know that there are insider traders who seem to know what Donald Trump is going to do a few minutes before he does it, who are in the market, but they’re probably not enough to be seriously, on a sustained basis, distorting the price. So I don’t know what’s happening on the oil scene except that it is a source of worry.

Other objective economic facts: that jobs report also showed wage growth slowing, which it has been doing for a while, at the same time as inflation has been accelerating. Inflation was first pushed up by the tariffs, and now has been pushed up further by oil prices and prices of other goods, fertilizer, helium, that were transiting the Strait of Hormuz. That hit to prices is not all the way through the system. There’s a lot of effects, pa…

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Transcript

The President of the United States is mentally ill, but everybody knows that. So while we should continue to focus on this degeneration taking place in front of our eyes, we should also, beyond that, ask what we can do about the powers, the interests, the system that put this horrifying person in a position of power.

Hi I’m Paul Krugman. First video update in a while.

It’s May 31st. If you have been following some of the news you may know that Trump’s mental deterioration, which has been obvious for quite a while, got even more extreme in the past few days. Tellingly, the things that are really driving him into more obvious dysfunction are things that are blows to his ego. I was especially struck — I was rattled actually — by his reaction to the wave of artists canceling out on the self-glorifying concert series he’s holding on the mall.

So, if you haven’t seen it, here’s what he said on Truth Social: That artists are “getting the yips” and

I am thinking about bringing the number one attraction anywhere in the world the man who gets much larger audiences than Elvis in his prime, and he does so without a guitar, the man who loves our country more than anyone else, and the man who some say is the greatest president in history, Donald J. Trump.

Oh my god. I would not want to trust this guy alone in a room, let alone running the world’s formerly greatest power, although he’s doing a lot to run that into the ground.

Okay, but we knew that, right? It’s not really a surprise to find out that he has lost his mind, what was left of it. And yet, he is in power. People who did a lot to put him in power did so, knowing this — the billionaires who contributed vast sums of money to his campaign, the Supreme Court which gave him immunity back in 2024 — they all knew who they were doing this for. They understood what they were doing. Now, maybe, even they are getting a bit of cold feet as as he goes over the edge and as we’re starting to see in Iran and elsewhere what happens when you have a lunatic running the United States, a lunatic who has far more power than a previous president because all of the normal institutional safeguards have been short-circuited or dismantled.

Still, they are continuing to support him, and they are continuing to do so not just in concrete ways, but verbally, which matters. They continue to cover for him.

Just the other day, Jeff Bezos — who is not an idiot; he has to know what he’s looking at — but he said, oh, Trump is much more mature than he was in his first term, which is obviously a complete lie. That is not what Jeff Bezos thinks. And it’s telling you that he is still providing cover.

The Supreme Court, although it’s been knocking back a few things, is for the most part continuing to give Trump treatment that it would never have accorded, not just to any Democratic president, but to any previous Republican president.

Okay, this is not coming out of thin air. These people — I’m not talking about Trump but people who are empowering him — are not stupid. Some of them are weak but they are also acting because they think there’s something in it for them.

All of this at some level is about money and power for people beyond Trump. And it’s made possible by the fact that there is so much money in the hands of a few people, many of whom turn out, not too surprisingly, to be terrible, insensitive, anti-democratic people themselves.

Obviously, we need to defang Trump as much as possible and make sure that neither he nor anybody who follows in his footsteps has power after the next two elections. But beyond that, we really need to do a thorough purging of the United States. We need a deMAGAfication. And I’m not going over the top by using a word that’s very similar to the denazification that we pursued successfully after World War II in Germany.

And it’s not just the MAGA ideology, but the whole structure of hugely unequal power, hugely unequal wealth that made this horrific moment possible.

It’s not going to be easy, and maybe it’s not going to be doable, but we have to try because this is a nightmare. This is a nightmare beyond, I think, even the worst fantasies of progressives, beyond the worst fantasies of conservatives who still have a conscience. (There still are plenty of those, but they’re no longer MAGA.)

This has to be turned around and we should not, above all, whitewash or forget this moment. This is where a lot of forces in America have been leading and if we don’t do something beyond just getting rid of Trump, it’s going to happen again.

Have a good rest of your weekend.

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Chad Bown and Soumaya Keynes have a terrific new book with that title — a breezy survey of our chaotic new world of international economics, couched as advice for nations trying to get the upper hand. The book is here.

I spoke with them last week about their book and the world in general. Fun stuff in a slightly grim way, and I hope we kept the acronym level tolerable. Transcript provided by the Financial Times, lightly edited to remove the ums and ahs. u

TRANSCRIPT

​

Paul K: Hi everybody. I’m Paul Krugman, professor at the City University of New York, and an independent newsletter writer on Substack. You might have noticed that I’m not Soumaya Keynes, host of The Economics Show podcast. I’m here with Soumaya, as well as her longtime collaborator, Chad Bown, who is a senior fellow at the Peterson Institute for International Economics, formerly chief economist at the US State Department. Together, these two have just written a book called ‘How to Win a Trade War’, and today we’re going to be asking just that. How do you win a trade war? Soumaya, Chad, hi.

Chad Bown: Hi, Paul!

Soumaya: Hi!

Paul K: So maybe I can start by asking a slightly funny question, which is, who are you? I know you’re Chad and Soumaya, but when we talk about how to win a trade war, who is this? You know, who’s the audience? Presumably not actually Donald Trump. It’s probably not Xi Jinping. I mean, everybody should read it, but who do you think might, in some sense, read it or at least be briefed on people who’ve read it?

Soumaya: Well look, if Donald Trump wants to read the book, then we are very willing to sign a copy. We’ll hand deliver it however he wants. The conceit of the book is that you, the reader, are really interested in fighting a trade war, right? And we are the two nerdy kind of reluctant guides saying, “Uh, if you really want to do it, then, you know, we’ll give you the evidence that you need. We’ll tell you everything there is to know,” You know, it’s not easy to fight and win a trade war. Um, and so, you know, at least arm yourself with the evidence of what’s happened in the past, what works, what doesn’t work. We kind of acknowledge that most readers may come to this not actually wanting to fight a trade war, right?

Um, so the point is it’s for... You know, it’s to help people understand, how to navigate this world of economic conflict as I feel like, you know, many people have become unwilling participants in these massive, massive geopolitical conflicts. It can be a bit bewildering. So the book is really supposed to be for everyone, right? To understand how we got here and where we go next.

Paul K: Okay. Because yeah, I found myself thinking that it was easier somehow to follow the line of argument is to think of myself yeah, still a little bit of delusions of grandeur, but imagine myself to be Mark Carney, Prime Minister of Canada, or to imagine myself as Ursula von der Leyen, uh, uh, making policy for the EU.

But basically, you’ve got these two powers. We’ve got the United States, which is basically Donald Trump, and we’ve got China, which is a little bit more of an institutional thing. But they are certainly waging something that they consider trade wars.

Let’s talk a little bit about, how did we get here? How did we get to this point? I think, if we were holding this conversation around ten years ago, it mostly would have been, “Well, we’re economists. We understand free trade is great.” Uh, maybe fifteen years ago, even more so.

And, so you know, the answer is just, “Don’t do this, free trade.” So I think all three of us probably have had some visions on the road to Damascus about why that isn’t an adequate approach. Anybody want to start off on that?

Chad Bown: Maybe I’ll take a stab first. Um, so I guess to answer the question, we have to talk about what trade war we could or should be fighting because there are, I think, arguably multiple trade wars happening right now. You’ve got President Trump doing a lot of things. Um, but beneath, behind that, there’s another really big trade war that’s happening, and that’s the one having to do with China.

So let me start there. Um, I would say, and it’s not as if I noticed this at the time, but say in 2015, when China rolled out its Made in China 2025 strategy, industrial policy that said, you know, we’re gonna have these market share targets to dominate certain important sectors of the future, that was kind of a sign that China was thinking about things differently than I think other, other, traditional, the United States and others had been.

And then you fast-forward a couple of years with, Xi Jinping and his “dual circulation” strategy more clearly articulating the idea that China did not want to be interdependent with the rest of the world. It wanted the rest of the world to be dependent on China for their supply chain, so the United States to be dependent on China for sourcing stuff, but China to not have dependencies on the rest of the world.

When you start to think about a functioning trading system, as we’ve lived in for the post-war period since the, the late 1940s, it requires rules, all those things, but it also fundamentally requires a willingness to be interdependent, right? And to trust that I’m gonna export to you, you’re gonna import to me, and, and yeah, there’ll be sometimes some frictions, but by and large, that will be okay.

And China was saying, “No, we wanna have an asymmetric relationship, we wanna do what we wanna do, but we’re not all that interested in what you wanna do.” So for me, it was kind of seeing those things that really made me think that, ah, the world has changed. We’re in some sort of trade war, and really China is the part that’s driving this.

Soumaya: So my journey, I think, um, you know, there was an important moment for me in the first Trump administration, right? And so, you know, Trump, ran onto the scene, during his first term and started throwing tariffs at China predominantly. And you know, Chad and I had this podcast about trade, and we were the loudest voices saying, you know, “What are you doing? You gotta play by the rules, why not try to use the rule book to solve these underlying structural problems that we have with China?” Um, and you know, I was covering trade full-time at that time, and, you know, something that was happening behind the scenes, um, was that there were efforts to try and get some kind of coordinated plan to save the rules-based system, to try and solve some of the structural problems between China and the US by writing new rules.

So you had these trilateral discussions between the US, Japan, and the EU, and the idea was, okay, well why don’t we just write out the way in which we want China to behave, limits on subsidies, um, you know, new, new ways of protecting ourself against China’s subsidies. And the idea was, you know, they would agree on that common plan, then they might go to China and say, “Hey, look, we’ve got some new rules. You sign up to these, and look, President Trump will drop his tariffs.” That was the hope of some involved in that process. It certainly wasn’t Donald Trump’s plan. And I think, you know, a very fundamental way in which I have moved on from that is I just don’t believe that the solution to these problems lies in a new set of common rules that everyone is going to sign up to, right?

In fact, the Trump administration did go to the Chinese government with a list of requirements or requests in terms of, you know, China’s subsidy behavior, and the Chinese, you know, shredded it, right? They weren’t gonna change their system. and that’s really the backdrop to where we are today, which is, you know, the Trump administration, I think, pretty much most everyone else, has given up on the idea that the rules are gonna save us.

And that is kind of scary. It’s a bit, you know... It means that we can’t rely on the rule book to predict what’s going to happen next. It’s a much more chaotic power-based world, and we’re kind of feeling our …

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