Paul Krugman Podcast

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I’m away but alas staying in touch with political news at home, and thought I would check in with one of the best public opinion quants about where we stand right now …

TRANSCRIPT: Paul Krugman in Conversation with G. Elliott Morris

(recorded 5/13/26)

Paul Krugman: Hi everyone. Returning today to G. Elliott Morris, my favorite polling and public opinion analyst. We’ve had an eventful time with redistricting and there’s a lot of stuff going on, so we’ll see where this goes. The big news is, of course, the Court leaving Democrats stunned by overruling the referendum with Virginia redistricting, which now gives Republicans a substantial lead. You’ve been doing some analysis. How should we think about how this changes November?

G. Elliott Morris: Yeah. Big picture is: as long as Democrats are still winning the popular vote by four points, they’re still taking back the House of Representatives. A lot has changed over the last three weeks. First, the Supreme Court has invalidated section two of the Voting Rights Act. This was the portion of the law that prevented state legislatures or other state bodies from diluting the power of black voters.

Krugman: Right.

Morris: This, of course, matters for our partisan calculations, because black representatives in the South tend to be Democrats. Now the Supreme Court has said states can divvy up their votes. Republican-led states in the South, including Tennessee, Alabama, and Louisiana, have since passed, or are about to pass, maps that will take away three Democrats at least, and potentially five. So that is quite a few seats. On top of that, there has been other redistricting news. Virginia voters had passed a constitutional amendment to adopt a Democratic gerrymander that has been struck down. So Democrats in Virginia are going back to their old map, and they will lose two seats because of that—two seats that they would have otherwise gained. So, if you’re catching up on the math here, that’s three seats lost from the Democrats. It would have only been one; now it’s three.

But then we have redistricting in Texas, Florida, North Carolina, Ohio, and Missouri. If you add up all of those Republican states, they have taken away about 13 seats from the Democrats, and Democrats have gained only five or so out of California, the only state they have really redistricted. If you add up all this, then Democrats are down about six seats from the gerrymandering wars that Donald Trump started last year. And that could be potentially decisive in a close race.

Krugman: My very informal impression was that prior to all of this stuff, the kind of Republican bias of the voting was largely gone, and that the House majorities tended to more or less reflect the popular vote. But now we’re in a situation where we’re back with probably the biggest ever Republican lean there.

Morris: Yeah. So the 2024 congressional map was technically still biased toward the Republicans. If in a perfectly average year with perfectly average candidates—and that is the big “if”—if 2024 had been rerun, we would have expected Democrats to lose the majority of seats, even if they had won the popular vote by about a point. The big benefit in 2024 was that recruitment by Democrats in close seats was really, really good. So they beat expectations. But if you rerun it, it still would have been slightly biased towards Republicans. Now we’re at around a Republican bias of four points, which is close to the bias right after the 2010 redistricting. What happened in 2012? So this is pretty bad. We’re getting to the point where the structural bias in basically every electoral institution at the federal level is significantly overweighting Republican votes, just by the fact of where they live or who’s in charge of drawing the maps.

Krugman: A few weeks ago, I talked with Kim Lane Scheppele, my old friend from Princeton, about Hungary. And, you know, a lot of what Orbán did was, in fact, basically whatever the Hungarian word for gerrymandering is, but on a heroic scale. She said that they basically weighted rural voters by about 3 to 1 over urban voters. But of course, that was overtopped by a huge wave election. And you would still think that the most likely scenario, given the current polling, is probably still that the Democrats are going to probably crest.

Morris: I think the 2026 election will be significantly pro-Democratic, and that the gerrymandering won’t matter. It won’t matter in terms of who wins the majority of the seats. Democrats will still be down six seats, at least, from where they should be. But if they’re gaining twelve, then, you know, they’re still managing to recapture the House because it was so close last time. Republicans only had three extra seats at the last election. So it’s a pretty easy wave election for the Democrats. But they’ll still be down seats, like they’re still deprived of representation in the South. And more importantly, in 2028, when we’re not expecting Democrats to have such a large wave—unless the country comes to its senses. I know you talk a lot about tariffs here. That’s a big example. Then we’re expecting a much closer election. And in that 2028 scenario, this gerrymandering could give Republicans the majority, even if Democrats win the popular vote.

Krugman: Just a quick, amateur question on this stuff: to what extent is there the possibility of a “dummy-mander”? I was just thinking about the Hispanic vote—that the Republicans may have drawn these districts on the belief that the 2024 Hispanic vote was going to remain. And they seem to have really lost that, at least if the polling is at all right. Does this mean there’s a possibility that the Republicans have essentially diluted their own support in order to wipe out Democratic districts, and that they’ve opened the possibility of losing a lot of normally red seats?

Morris: So, it’s a great question. I’ve done some math on this. My own simulations of election outcomes, where I assume rationality. But Republicans basically went after five districts in Texas. Maybe two or three of those are highly susceptible to a dummy-mander. In which case, if you do the math and Latinos move 20 points toward the Democrats, and everyone else only moves ten points to the Democrats—assuming Latinos are moving twice as much as everyone else, which is pretty close to what happened in the 2025 elections—then Republicans only gain two seats out of Texas, but they’re still gaining seats. So there is a possibility that they have drawn themselves too thin in the case of a big Latino backlash. But they’re just subtracting some seats that they could have otherwise gained. So it’s not the fact that they’re going to lose overall in terms of the overall gerrymandering. In other words, they’re still coming out ahead.

Krugman: Okay, that’s slightly depressing, but I’ll take it. I find myself wondering: if we really have a very clear, massive, public backlash against Republicans, but these maneuvers keep them in control of the House, how much damage does this do to legitimacy and feelings about the government?

Morris: I don’t know how much worse feelings of legitimacy or approval of the government could get. I mean, approval of Congress is 20%, SCOTUS is 20%, and Trump’s approval rating is 35%—only by virtue of that question being really partisan-polarized. If you actually ask Americans how they approve of Donald Trump’s handling of stuff like prices and tariffs, then it’s closer to 25%. So, it would be very striking to have lower confidence in the US government to solve the problems of everyday people. Basically, this might make an impact on how Americans view the functioning of their democracy or what have you. And actually, from my point of view, that type of education could be useful for stuff like electoral reform or proportional representation. But we don’t have to get into that for now. But it’s pretty bad out there. It’s pretty bleak out there, Paul.

Krugman: The unpopularity of Donald Trump is really extraordinary, and the unpopularity of the policies. Things have really gone downhill. Things were really going downhill, I think, even before the Iran war.

Morris: Yeah. If I’m telling the story of the Trump administration, I’m looking at five main events besides his inauguration, which is itself a sort of negative signal to the American people. I’m looking at the Liberation Day tariffs in April of last year, which caused a drop in Donald Trump’s approval rating and then mostly trickled along, slightly dipping as every day people are realizing what the administration is doing. They tend to react negatively to the president regardless of what he does. This was true for Biden as well, by the way. It’s just a sort of weird factor of political psychology here. And then the next event I’m looking at is a sort of confluence of immigration events that happened from May to June of 2025. So you have the deportation of Kilmar Abrego Garcia. Donald Trump sends the National Guard to LA and to Chicago. And this creates a lot of negative press attention for him. And you see his approval rating on the economy and deportations overall drop again by about 5 or 10 points. And then he trickles around; he’s losing support. And then over the next six months, really not much happens in his approval rating. And then the government shutdown happens, and a lot of Americans come around to the news that Donald Trump has basically defunded a lot of Medicaid and premiums are going to increase. That, of course, sets in in January of this year. And then I would be looking at the Iran war. You would also want to add the killings in Minnesota as well. That was a big signal to Americans about the negative outcomes of Trump’s deportation agenda and militarization of U.S. cities, essentially. So those events are about immigration and prices. The health care thing is still kind of a price anxiety. And you can see his approval rating dropping. His approval rating was positive when he started. He’s at -25 or so now in our polling; he’s closer to -30. So it is worth emphasizing: very few people like Donald Trump. If you walk down the average American street, you will encounter between three out of ten or four out of ten people who actively support what he is doing. And that’s very low for a president of the United States historically, and in absolute terms, it is just worth emphasizing that people do not like this period.

Krugman: Yeah, I had forgotten that he did have a positive approval briefly.

Morris: He did have a bit of a honeymoon when he started. But it really deflated very fast.

Krugman: And it’s extraordinary, actually. It feels like much longer ago than it was.

Morris: There seems to be an awful lot of enabling of Donald Trump on the part of congressional Republicans. A lot more than you would expect based on his approval ratings overall and his approval ratings in their districts. Now, in my opinion Trump reacts to public opinion only from a narcissistic point of view. He shares the polls when they’re good and he calls them fake news when they’re bad. He’s constantly talking about how much the public loves him. That is the type of thing a narcissist would do. But in terms of reining in political actions from the White House, I do think we’ve seen rather little evidence that the polls are meaningfully moving him.

Now, there are a couple of cases. The big one is the retreat from Minneapolis after the killing of Rene Goode and Alex Pretti there. There was a dramatic increase in support for abolishing ICE and a dramatic decrease in approval ratings for ICE and the president’s immigration and deportations agenda right after that. So it seemed to matter in terms of public opinion. But look, I think we’re in an environment where most legislators, especially on the right, are insulated from general electorate opinions, especially the opinions of the average person who might not turn out to vote. And that is enabling an awful lot of bad behavior on the part of the president. And partisanship is really an overwhelming force for bad on the right, given the president’s proclivities. So I think you are right here to say, you know, the polls are the polls. And it is important to say that people don’t like this. But Trump is not necessarily the type of actor you would expect given that information.

Krugman: I just wonder, because the papers are full almost every day with some scandalous or just outrageous behavior. Kash Patel’s personal brand of bourbon and all of that stuff. But one of the things I learned from you about swing voters, and you have a very straightforward definition of being badly or poorly informed, which is just: do they know who controls Congress? But I wonder whether any of this stuff even reaches a lot of voters.

Morris: Yeah, I doubt the average person knows about the Kash Patel whiskey—the “cash money” whiskey. By the way—I’m a big fan of whiskey, and that seems like a real betrayal to all the whiskey fans. Yeah, there’s a problem here, which is that most legislators just really don’t care what the public thinks, including in their district and including overall. And really, nowhere is that clearer than in the Republican Party when Donald Trump is passing tariffs that will cause inflation or asking for $1 billion for his ballroom, etc. And the voters who aren’t really paying attention to the news might not hear about that stuff, but it doesn’t mean it doesn’t matter. And they are getting signals of the president’s incompetence from stuff like gas prices going up. And just a general news environment being bad about the President of the United States. So some of this does filter through to them.

Krugman: Okay. Let’s go on to the vibecession. There’s a lot of payoff in the economics and business punditry world for turns of phrase. And Kyla Scanlon with the vibecession, as I think she said.

Morris: Yeah, she should get a Nobel Prize for vibecession.

Krugman: Yeah, she’s set for life on just that one term, although she’s actually very good on other things. But it is quite amazing, right? Just before we recorded this, the latest survey of household economic dynamics from the Fed came out, and so even leaving aside the approval ratings and so on, public views about how they’re doing—most people still say we’re doing okay—but the views about the state of the economy have just fallen off a cliff. As we might expect, people are incredibly negative. The first question is: do we think that, in some sense, people are more negative than the reality? But do you have a different take on that?

Morris: I will just respond directly to the last thing, which is yes, there is a vibecession. The vibes are still lower than you would expect. Even fundamental indicators and even this one that Jared Bernstein has proposed—that I’ve sort of back-tested in some modeling: the excess inflation number. Even if you account for excess inflation, or just price levels being higher than people expect, consumer sentiment as measured by the University of Michigan is still about 10 to 15 index points lower than you would expect. So there is still some level of anxiety out there that is breaking from our historical understanding of economic anxiety.

Krugman: Okay. So you think that there is, in fact, still a mystery component, at least based on the consumer confidence index.

Morris: Yeah, I guess the other way to say it is that those historical models that predict consumer sentiment are still missing something. Maybe they’re missing that people are reacting more to inflation now than unemployment or other structural variables than they were in the past. And you have to find some way to account for that. I mean, I’ve tried every way possible. Even if you P-hack it, you really can’t get there.

Krugman: People may not know, but P-hacking is essentially playing with variables until you get something that is statistically significant.

Morris: Except that it isn’t really, because we’ve tried all the alternatives to find the thing that seems to work. By random chance, you would have arrived at an answer. But what I’m saying here is, even by random chance, you cannot arrive at a prediction of consumer sentiment that is perfect. There’s some fundamental break around two years ago in the vibes about the economy. And it’s lower even if you account for stuff like excess prices. And that’s got to be an important part of our story.

There’s a subset of internet commentators, mainly on Bluesky, who insist that the economy is actually good and the vibes are just wrong for no reason. I don’t think that is right, but I wouldn’t go so far as to say there’s no vibecession. I think it’s somewhere in the middle.

Krugman: Okay, so I guess there should have been a break two years ago. But you think that things are worse now relative to the fundamentals than they were in 2023?

Morris: Yes. If you predict consumer sentiment with excess inflation via the S&P 500, economic growth, and such—you can get a very good prediction—almost perfect out-of-sample until December 2024 or January 2025.

Krugman: Which is an awfully convenient result if you are focusing on Trump-related sources of economic pressure.

Morris: But it also is around the time when the president started passing inflationary policies. So it could just be that people, after January 2025, were hyper-aware of inflationary policies like tariffs, or just the “horse in the hospital” aspect of this presidency. Maybe they’re mapping that onto their economic sentiment. I am still searching for answers for the last year or so. But if you include excess prices in your model of consumer sentiment, this basically fixes, I think, the original vibecession aspect through the end of 2024. But now we’re in a sort of different vibecession environment, perhaps related to Trump. I’m not sure.

Krugman: Okay, so “Vibecession II,” which is to go along with “Trump II.” So, you really are saying there is basically a “Vibecession II,” which is interesting, and that there’s something that goes beyond all the solutions that we’ve tried to find to explain why people were so depressed in 2024. Now, even with all of that, something else has happened now.

Morris: Yeah. I think I can explain the vibecession of 2022, 2023, and 2024 very well as an excess price shock.

Krugman: Alright.

Morris: I don’t think we have a good explanation, economically or otherwise, for the 2025-2026 vibe session—”Vibcession 2: Electric Boogaloo.”

Krugman: Yeah. Well, of course, people are feeling really bad because we have crazy tariffs, we have cuts to health care. And you know Trump is so terrible. So, of course, people are feeling something terrible. But I don’t think that’s what’s going on in the minds of the average American. So, there is something going on there.

Morris: If I were putting on my political scientist—maybe political psychologist—hat, it is very possible that the amount of coverage about the Biden economy in derogatory terms, and inflation and the blame of the president for inflation in 2022 and 2023, caused voters to think about the president more and then think about the direction of the national economy. And therefore, if that is true, then getting a figure like Trump into office would cause a pretty negative backlash in overall economic sentiment, even if it’s not causing this negative backlash in their personal financial situation, as you know.

Krugman: Yeah. I mean, it probably doesn’t matter for the public views, but in my view, Biden bore very little responsibility for that inflation. It was supply chain disruptions in the aftermath of COVID, and European Union inflation was basically identical to U.S. inflation. But this time around, you really have to say, well, the 3.8% inflation that we just got is—

Morris: Yeah, you could definitely put a “Trump-flation” label on it, at least for the time being. Jerome Powell said so. “Daddy” said so. So you gotta listen.

Krugman: Yeah. No, it’s pretty amazing. So for listeners, in all of these discussions, economists like to talk about inflation, which is the rate at which prices are rising. And the conventional approach to understand consumer sentiment is to talk about inflation and then unemployment and maybe some other things as well. But if you talk to actual people, they talk a lot about what things cost. And so there’s this argument that says people are upset because even though inflation came way down from its peak in 2022, prices didn’t. The level of prices leveled off rather than coming down. But this split raises a lot of problems. So why don’t we talk about the excess inflation?

Morris: So, this work is based on the theory that voters react negatively to a shock in prices, or really a shock in inflation. Especially if inflation had been low for some amount of time—20 or 30 years in the most recent case. To measure excess prices, I’ve built on economist Jared Bernstein‘s work. So our model for this is to predict what prices would have been today using inflation from the last 20 years or so. And then we measure the residual between actual nominal prices and the prediction of prices. And at least in my work, when I say “prices,” I mean the index price of vehicles, shelter, and of food. But the results are actually the same if you use PCE.

Krugman: Personal Consumption Expenditure, as the Federal Reserve calls it.

Morris: Which is like the CPI, Consumer Price Index, but it’s arguably a little bit better, and the Federal Reserve relies on the PCE.

Krugman: Yeah.

Morris: So it really doesn’t matter what goods you’re looking at. Today, prices are about 15% higher than they would have been given 2% inflation over the last six years or so, basically since COVID. And if you add that variable to some model of consumer sentiment that has traditional measures of economic activity like inflation, the S&P 500, and unemployment, then you do get a much better prediction of consumer sentiment over time, including in the 1970s when the change in the price level was even worse than it was over COVID.

Krugman: There’s what I think of as the “Morning in America” problem. You may think people are upset now because things cost a lot more than they did before COVID, but, well, that was also true in 1984 under Ronald Reagan. It turns out that the increase in consumer prices in Ronald Reagan’s first term was almost identical in percentage terms to the increase in prices under Biden. But of course, Ronald Reagan ran as a triumphant rescuer of the U.S. economy. “It’s morning in America”. And Biden was deeply unpopular. And the explanation, which I think all of us working on this have come to, is that at the beginning of the 1980s, people were expecting lots more inflation. And at the beginning of 2021, they were not. And that’s kind of what you’re measuring.

Morris: Yeah. And this isn’t just me talking, either. If you look at the political scientists’ voter psychology work on what they call “retrospective economic perceptions” and predict those ratings based on changes in economic indicators, then inflation causes a much more negative impact on economic evaluations after a period of what they call “good times” when inflation is low. So psychologically, this works, too. If people are primed to see increases in prices of 10-15% for a decade and then they see it again, they react less negatively than they do in, say, your COVID-era price spike after 30 years of low inflation.

Krugman: Yeah. Although what is kind of interesting—and I know that you’ve been doing statistical modeling and I’m just pulling stuff out of my—

Morris: Well, I’m not an economist and I don’t have a Nobel laureate.

Krugman: Well, yeah, but that was a long time ago. But anyway, in the mid-’70s, people were still completely shocked. I mean, I’m also an old guy, and I remember the ‘70s, and we were all really, really shocked. And yet, consumer sentiment, even in the Ford administration, was not as negative as it has been lately. And still, times were really good in the ‘60s and up through about ‘73. I’m still kind of shocked at just how bad perceptions are now. But your models seem to track the ‘70s okay.

Morris: They do. Yeah. And they do because of this adjustment for the good times versus the bad times. So if you take our excess price measure, which again is just the percent difference between expected prices and actual prices in nominal terms, and you adjust for the average inflation in the CPI over the last decade, then you essentially decrease the excess price measure for the ‘70s and hold it about constant for the post-COVID period, mainly 2023 being the peak. And you get a much better fit in the model. So this is built on our voter psychological theory that people react more negatively to higher prices after a period of good times than bad times. So things are being triangulated here in our overall story of the impact of excess prices, even if, as I said at the beginning, this isn’t a complete explanation for the vibe session here in 2026, which is somewhat different somehow.

Krugman: Just an interjection—I’m a garrulous old guy here—but I associate stagflation with the taste of Hamburger Helper because I was working summers as an undergraduate as a research assistant, and my friends and I, in our dreadful shared apartment, were using a lot of Hamburger Helper because we didn’t know how to cook. And also meat was really expensive, or seemed so at the time. So, yeah. But it’s interesting that people were not as depressed. And I think that maybe they had already kind of internalized that the economy can be tough or something.

Morris: That’s, in effect, what we’re saying here. They weren’t as surprised. They’d internalized high prices as something that could happen in their lifetimes. You know, I was but a twinkle in my daddy’s eye in 1970. But you can do a lot worse than Hamburger Helper. Hamburger Helper is a good staple food for your working-class person.

Krugman: Well, I had some roommates who insisted on soybeans with everything, and that I could have done without. But anyway, it was the ‘70s.

So this question of what do we think are the prices that people expected—and you’ve been basically fitting a trend to recent price movements, right? And projecting forward? I think you’re using something like the average inflation rate over the past five years to project forward? Or how are you getting that?

Morris: For excess prices? I mean, it’s the trend in prices. So that is mathematically equivalent to the average inflation from the 15 years prior to whatever date you are predicting on. 15 years prior to the five years prior. So the idea is that people have formed their expectations for inflation over some period of the last ten years on average.

Krugman: So, we have direct measures, supposedly, of what inflation people expect. There are surveys. There’s University of Michigan. And some surveys, but especially University of Michigan, do ask people what they expect the inflation rate to be over the next 5 to 10 years, which kind of gives you a medium-term expected inflation. And you can get an implied inflation forecast out of the bond market—the TIPS spread, the break-even inflation, whatever jargony stuff. But there is an implied inflation forecast. So those are not necessarily congruent with lagged—

Morris: Just the excess price measure.

Krugman: Yeah. So here’s my question: let’s say consumer expectations of inflation over the next five years are somewhat elevated now. They’re higher than they were. This is not, I think, the way it comes out in your analysis, but I would have thought that would make it easier to end the excess price stuff. Because if you want to have prices lower than what people are expecting, given that they’re expecting higher inflation at this point, then they’ll be pleasantly surprised if we only have 2% inflation. But I think that is not how you’re seeing it, right?

Morris: No, I’m not using the survey measure of what you would expect your inflation to be over the next five years.

Krugman: So what you’re doing is sort of saying that people’s expectation of inflation is something like inflation over the last five or ten years. And you have actually used the expected inflation of the survey, which says, “What if inflation is actually that high, and then it’s going to be really bad ?” But I would have turned that around and said, “Well, people are already expecting pretty high inflation, so they’ll be pleasantly surprised if it’s lower than that. And that should make it easier to get back to a price level that people find acceptable.” But I don’t know if I’m making sense.

Morris: Yeah, you’re making some sense. But we are not using a psychological measure of excessive prices, and that is different from a survey measure. We are using an actual mechanical level of excess prices from the residual of the trend. So one way to reconcile the fact that the objective measure of excess prices, rather than the survey-based measure, is more explanatory—you could say people are bad at predicting prices in the future, just in general, which would be true. Or that the survey isn’t picking up on anxiety about the price level with that variable as well as you would expect. And one thing to mention here is that the University of Michigan’s measure of what I’ve called “price anxiety”—which is just the percent of people who have a bad opinion of the economy—the percent of those people who attribute it to worse personal finances is at an all-time high. And it surged in 2021 and 2022 and stayed there; it never came back down. Which is similar, you’ll notice, to the trend on consumer sentiment through the University of Michigan. I don’t have the Conference Board data in front of me or memorized.

So it is possible that people are bad at predicting what prices should be. One idea would be if we took the expected change in prices over the next year and divided it by average CPI—overall inflation—over the ten-year period preceding. I wonder if that number would be at an all-time high. That’s a very easy check after the fact. I bet it would be near an all-time high.

Krugman: Probably getting too meta, but what we’re trying to predict is a variable that is consumer sentiment, which is not a behavioral thing. It’s like asking, how do people answer a questionnaire? And this is a question: should we also be using questionnaire-type answers to predict it? Obviously, at some level we’re interested in objective economic stuff, but I wonder whether we should inherently prefer the objective economic stuff as a way of predicting. I’m not making a whole lot of sense here but—

Morris: No, this is making sense to me because I spend a lot of my time thinking about the difference between our perceptions of objective reality and these survey-based measures which, for whatever reason, can deviate from that. And my argument would be that we should be using the survey-based measurement of anxiety in addition to our “economic fundamentals”—our structural variables—because our models and our job as modelers is fallible. And we can’t rely on the people when they tell us in surveys that they are anxious for whatever reason, instead of pouring cold water on it because our models don’t line up.

Maybe this is just my opinion, but you are right. Of course, we want to know how people are reacting to objective conditions on the ground. And the only way we can really do that is by looking at the match between executive positions lying around and some other outcome variable. So, I’m acknowledging it’s tricky. There’s no clear answer, I guess.

Krugman: So, two questions left. S&P 500, and again, if people don’t know, that is the broad index of the stock market—that really shows up as something that explains how people feel.

Morris: Yeah, the annual change in the S&P 500 is pretty direct to consumer sentiment, even after controlling for stuff like your annual change in CPI, PCE, etc.

Krugman: So that’s really kind of interesting, because the vast majority of Americans own very little stock, so the impact of the S&P 500 on most people’s economic position is really kind of small. I’m wondering whether that’s more like a signal. People like me are always saying the stock market is not the economy. But it’s not clear that’s how people see it.

Morris: Yeah. The S&P 500 impacts media coverage quite a lot. And in our models, we try to control for negative media sentiment. But again, our empirical analysis of media sentiment is often different from how people are interpreting this. So I tend to really land on one answer here, which is, if you look at the polling on price anxiety—the percent of people who are saying their situation is worse because of personal finance issues—that’s at an all-time high. And if you trust the people, that is pretty explanatory of consumer sentiment on its own. But it requires some hurdles to get there.

Chart 7A in the University of Michigan shows the percent of people whose finances are worse and who say personal finances is the reason why.

Krugman: Yeah. So I mean, at some level, if our numbers say that personal finances are actually better, but people say they’re worse, at some level, customers are always right.

Morris: Yeah. Exactly. But that leaves us at a loss for an explanation. It does leave us putting our shoulders up.

Krugman: Last thing. And again, I’m just throwing stuff out there because I’m puzzling over this stuff myself. So a lot of these issues are in some ways harking back. I still always think that “Morning in America” in 1984 is in many ways a crucible for making sense of all this stuff. But 1984 as a year was closer to the end of World War II than it is to today. And it was a very, very different country then. And I always wonder, are we trying to get a model that fits a society that has changed immeasurably over time?

Morris: Yeah, absolutely. I mean, so much of the vibe session discourse—not necessarily Kyla Scanlon, but I believe Nate Silver wrote this article for the New York Times Opinion Page that was about how the consumer sentiment index broke down. This was after The Economist had done something similar, I believe. Much of the discussion of that was based on the idea that you could build a model of consumer sentiment historically. And now it’s breaking down. And one conclusion from that is that people aren’t thinking about the economy rationally anymore. But another conclusion is that they’re thinking about the economy differently than they have been previously. And that seems entirely legitimate to me. And if that is the case, then we should be looking at the polling data and the perceptions data more and the fundamentals indicator less to explain consumer sentiment.

Krugman: Okay, but the big news to me is that we really are seeing sort of a second downward leg in the vibecession.

Morris: “Vibecession 2.0,” yeah.

Krugman: Which is really quite remarkable. It’s going to matter enormously in many ways, obviously in the elections. So that’s news to me and actually worth highlighting.

Morris: Well, now you have a headline.

Krugman: Now I do. Hey, gotta feed the beast on Substack, as you know.

Morris: Yeah. Right. Well, look, in terms of consequences, and maybe to go back to where we started: Donald Trump’s approval rating on prices is like 30% or less, and from 70%—it’s down -40 or so. And that was the last time I looked at this, which was a week and a half or two weeks ago. And he’s been losing ground very fast. That is congruent with an electorate that is very upset about prices, even if the objective data don’t explain why to us. So there’s some triangulation of the anxiety in terms of evaluations of the president. And if that number stays as low as it is, then we should expect the type of rout in the midterms that is large enough to overcome, basically, effectively, the Republican cheating through gerrymandering over the last decade or so. That might be where I would leave it.

Krugman: Yeah.

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Transcript

My president went to China, and all I got was even higher gas prices.

Hi, Paul Krugman here. Recording a video today rather than one of my usual posts,.I just feel like I’ve been too immersed in charts and wanted to do something shorter, simpler, whatever.

It’s Friday. The summit between Trump and Xi Jinping has wrapped up. Hard to say what exactly was accomplished, but at least Trump is saying that China is going to buy more US oil. That’s the headline on at least some of the financial sources that I look at. And in fact, crude oil prices in the United States have risen at least a little bit in response to that announcement.

The odd thing is that Trump seems to think that China buying more US oil is a good thing, which it is probably not from the point of view of the United States and definitely not for him. So let’s walk through what all of this means.

Background: The United States, which used to import a large part of its oil, is now a net exporter of oil. That’s what shale oil did. Since about 2020, we’ve been selling more oil to the rest of the world than we buy.

Now that’s a net number. It’s actually a fairly complicated picture because there are different kinds of oil and the geography of oil creates some complications. So we have the upper Midwest importing oil from Canada, Texas exporting oil to Europe and it’s a bit of a mix of of where the oil is produced and where it goes so that there are actually quite large gross flows underneath that net transaction.

But, okay, that’s not all that relevant here. What is relevant, you might think, is that the United States overall produces more oil than it consumes. And you might think, in fact, some people still seem to imagine, that this insulates the United States, that when the Strait of Hormuz is closed and global oil prices skyrocket, well, America, which is actually selling more oil than it buys, should be a net winner, which arguably is true for the economy as a whole, although as I’ll say in a minute, even that’s not entirely clear.

But it’s definitely not true for most of the U.S. public. Most of us have little or no stake in the oil industry, but we buy gasoline and diesel and we buy products whose price ultimately includes the cost of gasoline and diesel. So higher oil prices hurt most Americans.

And it’s the global situation that has led to higher prices in the United States. If you look at net exports of oil and petroleum products before the Iran war started the United States was exporting about 2.9 million barrels a day on net of oil. Now we’re exporting about 5.8 million barrels a day.

That’s a response to the very high prices that buyers in Europe and Asia are willing to pay for oil now that the Strait of Hormuz is closed. That’s how markets work.

That’s a significant contributor by the way to easing the impact of Hormuz on the world economy outside the United States. There were something like 20 million barrels a day of oil being shipped through the strait. Some of that is being routed around through pipelines across Arabia to the Red Sea. But a significant part of it, something like 15% of that shortfall is being made up by increased exports from the United States.

We still have a looming crunch because a significant amount of oil demand is being met by drawing down inventories and we’re kind of getting to crunch point there but that’s a whole other issue.

Now the downside for the United States is that more oil shipped abroad, unless we have a large increase in US production— which is not happening and won’t happen any time quickly — that means more oil being shipped abroad means less oil for the US market so prices have risen.

And so here we have the United States which is self-sufficient and more than self-sufficient in oil, we’re nonetheless seeing gasoline prices $1.50 or $1.60 a gallon higher than they were before the war started and diesel prices up even more than that.

So this is not a great thing for, this is a bad thing for most Americans and having the Chinese buy some more oil — hard to know what if anything is going to come of this — but having the Chinese buy even more US oil is going to enhance the negative effect. It’s going to drive gas prices even higher.

Now there are beneficiaries. Basically, oil producing companies are getting a windfall. They’re getting a much higher price for their product. West Texas Intermediate, the benchmark price of the United States, was around $65 a barrel before the war started. It’s around $102 as I record this. So that’s a pretty big benefit in terms of profits for a select group of oil companies.

Who benefits from that? Because in the end, corporations are not people, they are ultimately owned by people. Well, okay, people who own stock in oil companies are the ultimate beneficiaries of these higher profits. So who are those people? We don’t know exactly. If you look at it, it turns out that oil industry stuff is largely owned by institutional investors who in turn have other investors and it’s a more than a little bit not transparent exactly who the beneficiaries are here.

But in general what we know about US stocks is two things: A significant fraction are owned by foreigners. There’s a little bit of dispute on this, but I’ve seen estimates that run as high as 40% of U.S. equities being foreign owned. If that’s the case then of these excess profits something like 40 cents on the dollar might be going to foreigners.

Not totally sure about that number but what we do know is that among U.S. investors, among the U.S. public, stocks are basically held by a small fraction of the population, about half by the richest 1%, another 37%, according to the latest numbers I’ve seen, by the next 9%. So 10% of the US population, and this by the way includes mutual funds, it includes pension, it includes your TIAA — sorry TIAA, that’s only what academics have — it includes your 401ks. So US stocks are overwhelmingly held by a small fraction of the population. The great bulk of the U.S. population has very little stake in the stock market. For all the talk about it, it really is not something that’s terribly relevant to most people.

On the other hand, almost everybody has to fill up their tanks and even if you don’t, even if you are carless in New York City, which is not very many people but anyway, even so, the price of almost everything you buy is affected by the price of fuel. And it’s affected by the price of fertilizer, which also is very much petroleum related.

So, on balance, certainly 80, 85% or more of the US public is a net loser from higher oil prices and hence a net loser from increased US sales of oil abroad.

Okay, you can think of a couple of ways that you might be able to change that conclusion. It would be more beneficial to the US public at large if oil companies paid a lot of taxes on their profits. Well, I can stop right there. Obviously the oil industry has historically been famous for not paying very much in taxes.

It could be a good thing for the American public if wealthy investors who have capital gains as a result of this surge in oil prices pay a lot more in taxes. But again we can stop right there. The U.S. system in general gives people who derive their standard of living, their wealth, their income from capital gains a much, much lower burden than ordinary people. I mean, the income tax system is progressive. The income tax rate on — my favorite line from the movie Wall Street, $400,000 a year working Wall Street stiffs — they pay quite high personal tax rates, especially of course if they live in New York City. But the people who are getting their money from stocks and from gains in stock prices pay much lower tax rates. So this is not going to be a significant source of revenue and therefore it’s not going to ease the burden of paying for government on the rest of us.

So very hard to see how you can treat increased Chinese purchases of oil as a win for America. It’s a win for people who benefit from higher oil prices, but that’s a small group of people, and it’s a loss for people who are hurt by higher oil prices, which is almost everybody.

Why we should think of this as a positive outcome, well, obviously, I’m tired of pointing out things that Trump doesn’t understand, but what you would think is a little peculiar is that this is bad politically. I mean the price of gasoline has become a real flashpoint in the US political debate.

You could argue that it’s looming larger than the actual share of gasoline in people’s budgets can justify. But in this case: historically, presidents have had very little impact on the price of gasoline. It’s always been a kind of a standing complaint among political observers that this price that presidents really don’t control should play such a large role in politics.

Except this time around the price of gasoline is higher because Donald Trump decided to start a war. End of story. So in this case to the extent that it’s a negative — and the approval of Trump on prices in general and gas prices in particular is incredibly negative — you would think that he would know that getting China to buy more US oil is not something that you want to do now. It’s certainly not an achievement that you want to trumpet, but here we are.

In the end I I actually don’t think this is going to happen. I think that the Chinese will in practice do what they’ve done on previous trade agreements, which is just say that they’re going to do stuff and not do it and it’ll all get kind of lost in the shuffle.

But to the extent it happens, this is not a gain. If this was the major consequence of the summit, the United States scored another own goal.

On that note, have a great day.

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Transcript

What’s good for Elon Musk is not necessarily good for America. In fact, it may go the other way around. So why did Donald Trump take Musk and a bunch of other top executives to China with him?

Hi, Paul Krugman, again from a cafe, a little noisy behind me, but I hope it’ll be tolerable.

So Donald Trump has gone to Beijing. I wrote something about it earlier today, about the economics and about the generally pathetic state of the United States in geopolitics right now. But I want to focus for this video on the remarkable decision of Trump to bring a bunch of wealthy executives, in the case of some of them, like Musk, extremely wealthy executives, with him on a trip that is supposed to be something about serving the interests of the United States.

America’s corporations are not America. They really have very distinctive differences in interest from those of the general public. You may have heard the old line that what’s good for General Motors is good for America. That’s not exactly what the CEO of General Motors said. What he said is that what’s good for America is good for General Motors and vice versa.

But in any case he said that a very very long time ago, when corporations’ role in American life was not what it is now. General Motors at the time was a “stakeholder” corporation. That is, it did not see itself as solely serving the interests of stockholders. It viewed itself as having multiple groups that had a stake in the company.

There was the workers who were represented by a powerful union. There were customers who were considered to be part of the story. They played a role in the wider community.

Today corporations ruthlessly maximize value for stockholders, unless they do it for the founder who is considered to be the owner. (It’s not entirely clear that Tesla is run in the interest of Tesla stockholders. To a large extent, it’s run just in Elon Musk’s interest, but it’s certainly not run in the interest of U.S. workers or U.S. national security or anything like that.)

Why then should we care? It’s probably worth knowing that to the extent that corporations are run in the interest of their stockholders, the stockholders of an “American” corporation are by no means necessarily American. We think that something like 40% of US equities are owned by foreigners. So anything that enhances the profits of corporations, you should think of 40 cents on the dollar of that gain actually going to other countries.

And among Americans, stock ownership in the United States is extremely concentrated in the hands of the top 10% of the population, a large fraction just in the hands of the 1% or less. and most Americans have very little stake in stock prices. They may have some stake in the success of business in the United States, but that doesn’t have to be what we consider American corporations.

It’s not really right to think of Tesla or NVIDIA, whose Jensen Huang also went to China, as being somehow America going to China. These are corporations that serve stockholders around the world, serve some tech bros who have a special control over them. What they want is profits . What they want is access to the Chinese market, including being able to sell China stuff that from the US national point of view maybe we shouldn’t be allowing them to sell — you know, highly sophisticated equipment that on national security grounds we should actually try to restrict the access of fundamentally unfriendly powers.

Anyway, we know that’s what’s good for Nvidia is definitely not good for America. What’s good for Elon Musk is more problematic but there’s very little reason to think that any business advantages that Tesla might gain out of this, or xAI, or whatever whatever enterprise is he’s hoping will realize some gain, that this is going to redound significantly to the benefit of US workers.

T,o the extent that it benefit redounds the benefit of these guys the people who are on the plane, why should we care? An extra billion dollars in the hands of Elon Musk or Jensen Huang doesn’t do anything for the great majority of Americans.

And yeah, it does something for them, but not very much, right? When you have that much money, a billion here, a billion there, and what’s the difference? So this is a really peculiar group to be taking. unless you try to think about what does Donald Trump want?

Well, from Trump’s point of view, his son Eric, who runs the family business, was on the plane. They claim it’s just it’s just a family thing — yeah, right. He might as well have been walking around Beijing with a sign that says — in block capitals, of course, this is Trump — BRIBE ME. That’s very clearly what that’s about and as for the rest, well, you know, these corporations are in a way Trump’s base or at least they gave him a lot of money both in campaign funds and directly in one way or another.

I’m still wondering, by the way, why do we need a billion dollars for that ballroom? I thought the corporations were were paying for the ballroom by bribing Trump. But maybe I don’t know where that money is going.

Anywa,y whatever the story, these are not U.S. national interests being represented here. The whole visit — aside from the fact that it’s humiliating, that it’s really a pathetic display of U.S. weakness and Chinese strength — the whole visit is also yet another spectacular example of the corruption that now pervades everything about U.S. governance.

And we should be angry. We should be outraged. We certainly shouldn’t allow Trump and company to spin whatever comes out of this as a victory. We mostly defeated ourselves here, but we certainly aren’t getting anything for us. Maybe something for Elon Musk comes out of this, but there’s nothing for the rest of us coming out of this essentially tributary visit to China.

Take care

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Remember tariffs? They have not gone away.

Hi, Paul Krugman with another video update from another cafe. You may remember that back in April 2025, which was seven years ago — well, actually just about one year ago, but it feels like longer — Donald Trump shocked us all with massive tariffs on basically everybody. It was an extraordinary policy move.

It was also clearly illegal. It was also clearly really very stupid from the point of view of any kind of rational economic strategy. All of that seemed like the biggest thing in the world at the time.

But of course it’s been overshadowed in the last 70 plus days by something new which was also illegal and massively stupid and even more so because it’s war. So the tariff issue has kind of receded in our perception. But it has not gone away.

Since the initial imposition of tariffs, we’ve had a lot of action. Again, it would be the biggest thing in the world if it wasn’t for everything else that is going on.

The whole legal basis of the tariffs was tossed out by the Supreme Court after having been ruled illegal by lower courts in several different hearings. The basis of the original tariffs was an obscure law called the International Economic Emergency Power Act, which clearly did not apply to the situation as of April 2025. When those tariffs were tossed, Trump responded or his people responded by invoking “Section 122.”

I know there’s a lot of section numbers in all of this stuff and one question is what law are they sections of. and the answer is mostly they’re all different laws but anyway, 122 is for a balance of payments emergency. It allows a 10% tariff — lower than the IEEPA tariffs — but that was also clearly illegal, and a court has just ruled that it was illegal too. So now that will be appealed and there will be a couple more stages and we’ll see what the Supreme Court does.

In many ways I think people kind of tuned this out because there’s a time limit on 122 tariffs —150 days — so by the time the courts reached a decision that story would probably be over anyway and the Trump administration would have turned to other tariffs.

But it turns out to actually not be good to ignore these tariffs because one thing we have learned — actually we should have known if we thought about it — was that when the administration imposes illegal tariffs and they are eventually ruled illegal, that is a machine for ripping off the American public. When the tariffs are imposed they get passed on to consumers in the form of higher prices. When they are ruled illegal many of the companies that were importing goods get refunds — which is slowly getting underway for the original tariffs and will eventually happen, probably, for the new tariffs — but they don’t pass that on to consumers. And as I’ll explain in a minute, that’s not a result of conspiracy. It’s basically a policy failure, given the way this works. There’s no reason to think that consumers would benefit from the refunds on the past tariffs.

But in any case, what we’re seeing now is really, really destructive policies, although it takes a lot of bad economic policy to do as much damage as a war, especially a stupid failed war, but that’s where we are.

Let’s talk for a second about the tariffs. The crucial point for the immediate effects is this. When a tariff is imposed, the tariff is paid by importers, which is either companies that specialize in import-export or fairly often U.S. companies or retailers that are buying stuff from abroad and arranging for it to be shipped, either to be used in production or to be sold on to US consumers.

From their point of view, the tariff is a cost per unit sold. It’s a marginal cost, to use economic jargon. And so, of course, they have every incentive to pass the tariff on to consumers, unless foreigners bear the tariff, which actually doesn’t happen, although Trump insists that it does.

When the tariff is eventually ruled illegal, you can’t say oh well sorry about that but water under the bridge. If you’ve collected taxes from somebody and you didn’t have the right to do that then rule of law at the most minimal level says you have to pay it back. Which is in fact going to happen to a lot of a lot of the Trump tariffs. But that is not a marginal cost. The amount that an importer gets as a refund from illegal tariffs that were imposed in the past doesn’t depend on how much they sell now.

So it’s not a marginal cost, again, to use the economics jargon. Some people have been saying that the fact that there’s no sign that the tariff refunds will be passed on to consumers is somehow monopoly power or collusion or something. Well, I’m not saying there isn’t monopoly power and collusion, but you don’t need that. That’s exactly what you would expect even if there was lots of competition among the importers. The refund doesn’t affect the price that a company needs to charge to make back its expenses. It doesn’t affect the price they need to charge to stay in line with their competitors.

So we have created a machine which rips off consumers when the tariffs are imposed, then hands a bunch of money to corporations when the tariffs are ruled illegal.

So this is really not great stuff, and it’s pretty big. The Trump tariffs have been something like 1% of GDP, and most of them illegal and therefore a ripoff of consumers. That’s a big deal. That’s hundreds of billions of dollars that were taken for no good reason.

It almost seems beside the point to point out that the tariffs have also failed. All of the things that they were supposed to do rebuild manufacturing — manufacturing employment is down — reduce the trade deficit — the trade deficit isn’t down — haven’t happened. So this was all a really large burden on the US public completely without any payoff.

What happens from here? Well, you might think that maybe at least Trump and maybe at least the people around him have learned a lesson and they’ll stop doing such stupid things.

Not going to happen. Nothing is learned here. The latest is that Kevin Hassett, the administration’s chief economist, more or less, says that we’re going to have 6% growth this year. Which is, doesn’t happen except when you’re coming out of a deep, deep recession. The last time it happened, except for recovery from COVID, was in 1984, Morning in America. There is no reason at all to think that we’re going to have Morning Under Trump.

So another policy disaster, although it’s overshadowed by the war.

But this is really, really bad. Take care.

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Transcript

The super rich are different from you and me. They are pettier and more self-centered than most of us can easily imagine.

Hi, Paul Krugman here. This video is partly me trying to show that yes indeed I am on vacation, sort of, although on my laptop too much of the time.

But anyway, I’m at least working on the laptop sitting in cafes. But I also wanted to do a follow-up on a post earlier this week in which I talked about Jeff Bezos feeling now that he needs to sell his ostentatious, bad taste yacht because people are paying attention to the ostentatiousness and the bad taste — which is, kind of, what did he expect. But it is news that rich people are feeling some of the heat, that some of the backlash is starting to get to them.

Today I want to talk about a story that’s a couple of days old but is more along the same lines and has some other resonance I think is worth talking about.

So, Ken Griffin is a hedge fund billionaire. was a big Trump supporter, although not a reliable one, and he happens to be the owner of the most expensive apartment ever purchased in America, at least as far as we know, a $200-something million place on Central Park South.

Zoran Mandani, New York’s very interesting mayor, has called for a pied-à-terre tax, a tax on luxury residences exceeding $5 million that are owned by people who are not residents of New York, who are therefore not paying New York City income taxes. It’s a wealth tax, but a limited one. It would definitely raise some money, but of course has got people irked. And he put out a video which featured a shot of the building in which Ken Griffin has his apartment.

Griffin went wild. He said this is a personal attack on me, it’s putting me at risk. He even compared himself to Donald Trump facing assassination attempts and just in general went wild, as if this was the most evil horrible thing ever.

First of all the sheer again self-centeredness and pettiness is kind of amazing. Griffin has also threatened — I’ve actually written about him before when he made a big splash of moving his firm from Chicago to Miami and then fairly soon started renting a lot of space in Manhattan because it turned out that New York was a better place to do the hedge fund business. Now he’s saying he’s going to pull out of or threatening to pull out of New York because of this.

You know, Griffin has investors. They should care about him locating his operations where it makes sense as a business proposition, not about where he feels like pulling them out of personal spite. His feeling that Mamdani dissed him is not a reason to to move his business to a place where it can’t be done as well. so that’s kind of a bad thing in and of itself, but also again the self-centeredness is quite amazing.

But this apparently is what great wealth does to people. F. Scott Fitzgerald said that they’re careless people, but there’s more than. They’re people who put their minor discomforts on a level with matters of life and death for normal human beings.

Let me also say something that is not terribly rigorous but still substantive. I do not understand why someone with that much money would want to have a residence in Manhattan. Certainly why they would want to live in Manhattan, which Griffin sort of presumably does only part-time.

New York City is not at this point a city for the working class or or the middle class. It’s expensive. Things cost a lot. Real estate costs an awful lot. I saw a an article in a local West Side publication saying that the Upper West Side is a haven for independent minds. My immediate thought was, yeah, independent minds who can afford to pay $1,700 a square foot.

But it is a paradise basically for the 5%. The city has never been safer. It has never offered a greater diversity of cuisine, of culture. It’s a great place. Not quite the same as places with cafes where you can sit for hours and no one will bother you; they’re kind of scarce in New York. But anyway but it’s great for the affluent.

But if you’re super rich, if you spend your time being driven around in a car with tinted windows, if you don’t go anywhere without an entourage and probably at the upper limits of wealth with bodyguards, then you lose the whole the life of the streets.

New York is a place to to wander around. It’s a place to try out an ethnic restaurant that you haven’t been in before. (Everything in New York is an ethnic restaurant.) Basically, the random happenstances of life are a big part of what makes the city worth living in.

I knew somebody who had an upper floor apartment on Central Park South. It wasn’t his. He had a position at an institution where the apartment came with the job. And his family actually hated it despite the vast panoramic view of Central Park because there was no neighborhood. Many of the apartments were vacant most of the time because they were owned by oligarchs, princelings, and sheikhs. People didn’t support local stores, didn’t support any of the things that make urban life worth living.

So I’m not even sure what the point is if all you’re going to do is be chauffeured around, if you’re going to eat only at see-and-be-seen high-profile restaurants. I used to say you might as well be living in Dubai. Well, New York has the advantage of not being hit by cruise missiles currently. But still, what is the point?

But anyway, there it is.

And the extent to which America’s oligarchs put their personal foibles, their pettiness, their small senses of discomfort or lack thereof on a par with major issues is a huge source of evil right now. Elon Musk, who doesn’t feel that people give him enough credit, got to take his personal obsessions to the Trump administration and played them out in DOGE cuts. Among other things, the current estimate is that his destruction of USAID has killed 600,000 people, mostly children, so far. This is awesome.

I have to say, if displaying Ken Griffin’s apartment building helps win support for a progressive agenda, fine. Griffin and people like him should look at themselves in the mirror and ask, who are we? What are we doing with our lives?

Take care.

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Transcript

According to press reports, Jeff Bezos is planning to sell his 417-foot yacht, the one with a carved figurehead of Lauren Sanchez, his second wife, at the front. According to these reports, he’s unhappy at the attention that the yacht is getting. Funny how that works.

Hi, Paul Krugman with a bit of an experiment.

I am recording this in a cafe, a cafe that is not in New York, as you could probably guess. Let’s see how the noise level works with the headphones.

OK obviously playing the world’s tiniest violin . We’re not going to weep for Jeff Bezos’s discomfort and yes there’s a certain amount of just plain satisfaction at seeing him taken down a peg.

But I think there’s a little bit more to it. This is not just invidious comparison and hostility towards people who have acquired great wealth, although there’s nothing wrong with that. This is about the role of moods, vibes, and the motivations of the malefactors of great wealth that play such a large role in the US political system now.

As everybody should know, we have seen an extraordinary concentration of wealth at the top, probably bigger than the concentration that took place in the Gilded Age. And it’s gone along with something which is, I think, different from what we had in the late 19th century. In the late 19th century there were certain proprieties that people of great wealth felt that they had to observe. They had to maintain a certain pretense. The Victorian virtues were honored at least on the face of it.

Extremely wealthy men had conventional marriages. Presumably very many of them had mistresses as well; the strictures of conventional morality were not actually obeyed nearly as much as people wanted you to think — but they wanted you to think. They wanted to pretend to be good family men, all of that. A kind of hypocrisy was part of the package, and hypocrisy is the tribute that vice pays to virtue.

Now we have a very permissive culture, which is not on the whole a bad thing. There’s a lot of openness, there’s a lot of misery that is avoided by not having to maintain the pretense that all marriages are happy, that people don’t have whatever motivations they have in reality. But one of the things that’s happened is that we have now a plutocracy, a concentration of incredible wealth and power at the top, without even the hypocrisy of morality, the hypocrisy of pretending to be virtuous.

Now there was, politically, some back pressure against that until Trump was elected the second time. And I think we have to bear in mind, we have to take seriously the idea that an important reason that we are in the state we’re in, an important reason that we have a would-be fascist regime in power — I don’t think they’re quite managing to pull it off, but they definitely would if they could — is that a handful of incredibly wealthy men wanted all restraints off.

They wanted to be able to live the privilege of their great wealth. They wanted to be able to just flaunt their wealth, performatively display their dominance, not have to worry about people chiding them for being politically incorrect just because they were abusive towards other people because of their gender or their whatever, their race, anything.

There was a Financial Times article just after the 2024 election with Wall Street people celebrating the fact that they were now free to say pussy and retard again. This is a pretty big deal. And I think if you look at the first year or so of the second Trump administration, the people at the top, Elon Musk, Jeff Bezos, Mark Zuckerberg, they all were acting as if OK, no need to apologize, no need to pretend to be good.

By the way, charitable giving has dropped way off. The super wealthy are just not doing the kind of reputation enhancing philanthropic giving that their predecessors in the Gilded Age engaged in. So this is a completely amoral elite, I got it, you don’t, I’m in power, I’m friends with the people who hold ultimate power, I don’t have to worry, I don’t care what you think.

But it’s not lasting. It turns out, and this is why I think this is somewhat important, it turns out that the backlash is powerful enough, scary enough at least to worry them.

I don’t think that people like Bezos are actually scared that the torches and pitchforks are coming for them, but they are starting to realize that maybe they haven’t purchased themselves total immunity the way they thought they had. And this is, I think, a good sign. We need more hypocritical billionaires.

OK, we need fewer billionaires and we need to work on that. But in the meantime having them feel at least somewhat disciplined by the public opprobrium that outrageous behavior brings is a good thing. More ostracism, more boycotts, sneering at and yelling at giant yachts and people who own them is a good thing.

Now, of course, Jeff Bezos choosing to spend his infinite billions on something other than a yacht, doesn’t actually free that wealth up, although maybe even maybe he might be persuaded to spend a little bit on good causes.

But in any case I think there’s something culturally going on. I think we are seeing a turn and we’re seeing that the collapse of all standards in favor of the belief that wealth is the only thing that matters is not complete and may even be reversible.

So, this is a silly story but I think not an entirely trivial one.

Anyway, let’s find out if this recording is actually audible given the cafe noises behind me.

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Jared Bernstein, former top Biden economist and all-round economic expert, and I bat around the puzzle of persistent negative economic sentiment. Recorded Wednesday.

. . .

TRANSCRIPT: Paul Krugman in Conversation with Jared Bernstein

(recorded 4/22/26)

Paul Krugman: Hi everyone. This week I’ve got Jared Bernstein with me for a talk about economic vibes. We had planned and hoped to have G. Elliott Morris in on the conversation, but he came down sick. So it’s just going to be two economists talking about why people are still so negative about the economy. Clearly this is very important for lots of purposes, but also just kind of interesting. So, hi Jared. Maybe you should lead off by explaining why it’s so compelling and then I’ll chime in. We’ve both done work on this, but you’ve done more.

Jared Bernstein: Yeah, well, to me, it’s personal because I was in the White House—in the Biden administration’s Council of Economic Advisers, as you know—during this period when what began to be called the vibecession arose. I associate that term with Kyla Scanlon. This was a situation where we were posting some good strong macroeconomic numbers. GDP was strong. It was above trend. We got back to full employment very quickly after the pandemic-induced recession. But there was a big spike in inflation. As that spike came down, we were rolling down the other side of inflation mountain in the second half of 2022, we thought that was a pretty good development, given how upset people were. But consumer sentiment, consumer confidence, people’s feeling about the economy—these vibes—just kept getting worse. And it seemed to me at the time that that shock, not just to inflation, but to the level of prices—how much prices went up—was more important than most economists were realizing. As you well know, people in our field think a lot about inflation and inflationary shocks. We think less about the level of prices and sort of take that as a given. So that struck me as quite important at the time. And I began to look into it in ways I’m sure we’ll get into.

Krugman: I mean, what was striking about it was that historically, there’s a pretty good relationship between consumer sentiment and macroeconomics. And way back they called it the misery index, which is the inflation rate plus the unemployment rate. It was designed by Arthur Okun, and it did a pretty good job. And then you added a little more sophisticated version of that, and it has historically done a pretty good job of tracking sentiment. But after 2022, even by these measures that had worked before, it looked like an economy that should have had people feeling a lot happier, but they weren’t. But let’s talk a little bit about price level because what always struck me, even from the beginning, was a question about: what period of inflation are we talking about? You know, why should it be the one-year rate of inflation that enters into the misery index as opposed to a two-year, or three-year, or four-year? That’s how we kind of started. In your recent work, you started by saying, “well, maybe with inflation over a longer period,” but this kind of morphed into this price level issue. So why don’t you tell me about that?

Bernstein: So, a couple of things to amplify points you were just making. My coauthor on a recent paper, Daniel Posthumus, and I made a model of consumer sentiment. And this works both on the Michigan version and on the Conference Board version.

Krugman: By the way, people should know that U. Michigan is the longest-standing regular survey of how people feel. But the Conference Board—I don’t know how far back they go.

Bernstein: It actually goes back to ‘62, and U. Michigan goes back to ‘52. But that’s kind of relevant for what I was about to say. So we built a model to predict the sentiment or confidence indices. We used the stock market returns, real consumer spending, inflation, and unemployment. Very simple. And we ran it from 1990 to 2019. It then predicts very well what the index does all the way back to the 1950s. So even though we ran it from ‘90 to 2019, it tracks the index very well. And then as you said, it breaks down in 2019. And as you well know, the ‘20, ’21, ‘22 inflation shock wasn’t the first inflation shock in our history. But it was the first one in this series where you see this big gap between how people should feel based on those variables, those predictors, and how they do feel.

And I do want to get this down early on: that’s a pretty complicated thing to explain—how people feel about the economy. You know, you ask ten economists what “vibes” mean, or pollsters, whatever; they’ll tell you ten different things. But I think what happened to prices is very important. But I want to be clear— and you’ve underscored this in some of your recent work— it’s not the only thing. So, there’s that.

I guess one other thing I’ll say: I have a particular set of experiences. I used to go out on WHNL, which stands for White House, North Lawn, and that’s where we used to go and talk to the cameras about how things were going. And no matter where we started, no matter what we were talking about, like a good unemployment report: “We just had 250,000 payroll jobs.” You know, “productivity is up, GDP inflation’s way down.” “Groceries had a 12% inflation rate. Now they have a 1.5% rate.” These are the things we were talking about out on WHNL, and it always got back to [the press saying], “Why do people feel so bad about the economy? They’re telling us things are too expensive. What are you going to do about that?” So that really got into my head.

Krugman: So your story is one that I have largely gone with. You did the hard work on the econometrics, which I have not, but again— you or I would say, “Look, inflation is way down.” They said, “What do you mean? Things cost so much more than they did in 2019.” And so you kind of introduced this “excess price level” as a story, which is very widespread. But why not that as opposed to just inflation over a longer period, or is there really a better story there?

Bernstein: Yeah. So, they’re quite similar. Inflation over a longer period is basically asking the question: how much did the level of prices go up over this period? So you raise a fair point. Most of what we talk about on inflation day is the change in the monthly inflation rate or, maybe, the yearly rate. But I think in some senses we’re circling around the same thing, which is people’s memory about prices. And that’s key to this research. It’s something I hadn’t thought enough about but I’ve more recently been kind of obsessed with, which is people’s memory of what things used to cost. And this gets you down an interesting set of questions.

So if that were the only thing in play here, everybody—including me and you—would be walking around totally depressed all the time because when I started driving, gas cost $0.60 a gallon. And, you know, right now it’s a $4 national average, but this increase from $0.60 to where it is now or any other price you want to focus on—that’s salient to the consumer market basket. It tends to go up very gradually. When you have a shock, like we did in ‘21, ’22, people have this set of prices still emblazoned in their head. I used to call it the “personal price vector,” which is this idea that we walk around knowing what the things we buy kind of cost. And when that gets shocked, you know, it’s really quite upsetting to folks, and it takes a while for them to acclimate. The question is, what do we mean by “a while”? And I’m still wrestling with that question.

Krugman: Yeah, I think there has to be a statute of limitations there somewhere. I mean, people aren’t pining for the days of 15-cent McDonald’s hamburgers. I started driving a lot earlier than you did. So, I don’t remember what gas cost, but I do remember a quarter to go to the movies. But obviously, at some point, people stop remembering. I’m probably going to get all nonlinear here, but I mean, we’re now five years on from the big price shocks from Covid. Admittedly, I am more affluent than most of the population, but I don’t remember what ground beef or eggs cost in April 2021, but I’m not sure that many people really do. So how is it that we are still feeling this?

Bernstein: Yeah. So this is something I think about a lot. And I think the answer is that it’s not just that we had that one shock—one and done, done and dusted. It’s that we’ve actually had a series of shocks and that people haven’t had time. A lot of this comes under the rubric of Trumpian chaos or, put differently, horrible crap that the Trump administration has thrown at the economy. You know, just really bad economic policy that has continued to fuel the shock that consumers have been experiencing. So, again, if it was one and done, I think people would be feeling better. But you get the Trump tariffs—that’s the big shock to prices. Now granted, we only import 11% of our GDP in goods. But walk down the aisles of Target and Walmart, and you’ll see a lot of those imports. So that’s in play. And now we have the shock of the war. I think there are some other factors in play. Social media amplifies this stuff in a way that it hasn’t in the past.

And, you know, actually, while I take your point about remembering what things cost—from talking to a few people, looking at some polling— actually, people do still remember at least what eggs cost, which was around $2 a dozen, or $1.50 a dozen. Although it’s not that far from that now, it’s closer to $2.50 or $3, depending on what kind of sale you can get. It wasn’t that long ago that it was four and five because of avian flu. So there’s been a lot of other shocks to prices in the interim. And I think that’s played an amplification role.

Krugman: Let me just say, people hate inflation. I mean, there’s a widespread view among economists—which, if you are not sufficiently cautious and laying it out, can sound condescending—but if you have a big increase in prices, but also a big increase in wages—which is kind of what happened during the Biden years—people should be saying, “Oh, I’m okay. My real income has kept up.” But they don’t. They think that they earned the wages and that the prices were done to them. Are you okay with that view, or do you think there’s something more going on here?

Bernstein: I think that view is correct. And that goes way back to research from many decades ago and has recently been updated by Stefanie Stantcheva, who shows precisely that people, right or wrong, kind of understandably feel like: “If I get a raise, it’s because of my hard work and I deserve it. If something happens to the price, that’s not me. That’s something somebody else did.” And in a world of politically intense partisanship and vicious social media, that “someone” became Biden. So, you get, “I got my raise, but Biden did this to my price.” And so I do think that plays out in both political and economic spheres.

Krugman: Something that I think I was quite wrong about was I thought that the bad vibes would kind of alleviate, or diminish, with the new president, much as I thought that there was a strong element of partisanship in moving those numbers, and that has not happened; if anything, it’s the reverse. And just a few hours before we had this conversation, I posted something about that. But what’s your view on that?

Bernstein: I have a strong view on this. And you captured it in your graphic this morning. I think that what’s happening to Trump—and this is not rocket science, by the way; if Elliott was here, he’d have more authoritative points on this, but I’m pretty sure I’m right. I think there are three groups in the electorate. There is the Never Trumpers, the Always Trumpers, and then this really key group in the middle that’s pretty dispositive in terms of which way they swing and it’s dispositive in terms of determining election outcomes. Some people call them “persuadables.” What I think of them, at least in the context of our conversation, are people who believed Trump when he said, “I’m going to lower prices on day one.” But these are folks, according to my theory which we’ve talked about so far—these are people walking around saying, “Damn it, I want my old prices back. I want my old interest rates back. I want my old mortgage rates back. And this guy not only is saying that he’s going to give them to me, but actually, the last time he was president, prices were lower and interest rates were lower. So let’s put him back and, you know, maybe we’ll get back there.” So they rolled the dice and they bet on the wrong pony. Whoops, I mixed the metaphor. But you get what I’m saying.

And now they understand that they’ve bet on the wrong guy and that their prices are right back to where they were. And in fact, inflation, if anything, has accelerated because of decisions Trump’s made. It’s not just that he’s ignored affordability or called it a hoax; it’s that he’s pushed hard in the wrong direction on these things. And this key middle group—which I think is behind some of the numbers you posted this morning—is very disenchanted by what they’ve seen.

Krugman: Yeah. Again, it’s hard to talk about this stuff without seeming condescending, but the people who swung to Trump in 2024 and swung hard against him now are disproportionately low-information, which—you know—that’s not a pejorative. It’s just a description there. He defines it as people who don’t know which party controls Congress. And I guess the argument is that they may well have actually kind of believed Trump, or at least either believed Trump’s promises, or just remembered that they were feeling pretty good in 2019.

Bernstein: I also want to be very careful not to sort of criticize anybody for being what looks gullible to an economist, because economists know that the only thing that really brings the price level down—meaning broad price deflation—is a deep recession, and nobody wants that. But people are getting jammed with all kinds of signals about how “I’m going to make your life better for you.” And I don’t think the media has distinguished themselves in helping people sort this out. So, you know, why not throw the dice and make a bet on someone who you think is going to do that kind of magic for you?

The problem that a lot of people face—the group that we’re talking about— is nobody ever seems to really help them enough. So that is a very important part of the agenda—what I call the affordability agenda—that I think we need to be working on and delivering on, you know, sooner than later.

Krugman: So, this is me being probably more partisan than you, despite the fact that you were actually in the administration, but I would have said that Biden did a lot to help people, that there were a lot of aid programs. I remember how worried people were about long-term economic scarring from Covid, and instead, we had this roaring recovery. And yet it didn’t seem to penetrate. People didn’t seem to give it any credit.

Bernstein: Well, the roaring recovery was real. I mean, you’ve been writing about this. I know we both admire Arindrajit Dube’s recent book, which is really a great documentation of the wage impacts back then. We wrote a chapter much like what Arin is saying in one of our economic reports for the President, where we documented the benefits of such low unemployment to folks. So, yeah, it’s true that we definitely were delivering some things that improve living standards, but some of them, based on just the political hurly-burly of the time, didn’t last long enough.

So the child tax credit was hugely important and took child poverty down to historically low rates. Cut it in half. And that was amazing. And by the way, it also underscores the point that whatever the child poverty rate is or the poverty rate in general, that’s a policy choice. And Biden chose to make it a lot lower. I thought it was the right policy choice. But, you know, it wasn’t okay with Joe Manchin, and so it went back up when that program ended.

And then when it comes to a lot of the investments, like building our industrial policy, building new computer fabrication plants, and investing in clean energy, that stuff takes a long time to pay off, and folks don’t really see that. And then when it comes to affordability, people were concerned with housing prices, healthcare, childcare, and the price of energy, which you highlighted this morning. And those were areas where we tried but weren’t able to do enough.

Krugman: The consumer price index— the standard measures of price level—do not include interest rates. I mean, the way we measure housing prices is by either rents or an estimate of what your house would rent for if it were rented; “owner’s equivalent rent.” And when I look at different things, one thing that really does stand out, the one thing where prices have effectively risen a lot more than wages, is in fact the mortgage payments. So how much do you think...? I mean, there was a paper by Larry Summers—though that doesn’t discredit the work— saying that was a big part. What’s your view on that?

Bernstein: I think that that is true. I mean, I think the point of that paper and my reference earlier to interest rates and mortgage rates is that this is the price of money. So it’s prices again. You know, “I want my old prices back.” Well, what’s the interest rate? It’s the price of borrowing. And so, yeah, I think that’s in play. But I think where that rubber meets the road is definitely in housing costs. Housing costs really went up very quickly over this period. And a very big part of this sentiment that we’re talking about—and this has been documented—is a lot of young people feeling like they’ll never be able to afford to buy a house. Which is very pervasive. That sentiment and that truth is very pervasive. And how do many young people start building wealth? Through home equity, through buying a home. So that’s a source of a lot of upsetness.

But it’s the rental side of the equation that was really giving folks a lot of problems back in the period when these negative vibes started to percolate—and still do. If you look at the numbers, the share of income that people are paying on rent, it’s 30, 40, 50% in some cases. And that makes it really hard to get by. So I think both the interest rate and housing costs are part of this puzzle. Absolutely.

Krugman: It’s one of those things, because if you look at rents, rents really shot up in ‘21, ’22 and then they really sort of flatlined after that. And I’m not sure that, at this point, rents are any higher relative to 2020 and before. Maybe I’m wrong about that, but I thought rents were actually not looking like that big a problem now.

Bernstein: Yeah, at least in terms of inflation. The shelter, or the housing component of the CPI is back to where it was pre-pandemic. So again, this is a level thing. So, this gets back to something we said before. I would go out to talk to the TV cameras, and I’d say, “Inflation was 9-10%. Now it’s 2%.” And people would kind of hear: “Ok, so the prices that I already don’t like—they’re not falling. They’re going up more slowly. And you want me to stand up and applaud for that?” And I think that dynamic has been in play in rental markets as well.

Krugman: I think that was an old John Kenneth Galbraith line where he said: “When people say inflation has fallen, they’re saying that things are getting worse more slowly.” Which is not really right, but on the other hand, it gets at this.

Bernstein: I would say that’s “not really right,” but just what you said. And I have this theory that I’m working on with some folks. I don’t want to lean too far into something that I haven’t empirically really fleshed out yet. But I think there’s something that goes on in this space when you have a shock to the price level. When instead of gradual movements in something people care about, if something’s getting bad, I guess it’s the boiling frog story. If something’s getting kind of bad, really slowly, you can learn to live with it. You can adapt. And if your income and wages are kind of going up at around the same rate, then you’re not really the boiling frog. You’re pretty comfortable and you’re getting along, or you’re pretty uncomfortable.

You know, you made an important point this morning: a lot of people are just always having a tough time. So you’re either doing okay or you’re doing badly. But at least it’s not a shock. You’re used to what you’ve been experiencing. And I think the interaction of a shock that’s that sharp, that quick, when you’ve had two decades of really low inflation—and this gets into the ‘70s story, which we should probably get into a little bit—that’s really a cluster mess for people’s thinking.

Krugman: Yeah. You did your estimates starting in 1990. So it’s really three decades. I mean, basically, Paul Volcker brought inflation way down in the ‘80s. But we used to think there was low inflation when it was 4%; but by the time he was finished, it got down to around 2% and stayed there for a long, long time. So only old codgers like me even remember a high inflation environment until what happened in ‘21, ’22. So, yeah. The shock aspect, I think, was really clear.

Bernstein: But, you know, first of all, I sat in gas lines in the ‘70s, so... A lot of our conversation, Paul, is two old boomers saying, “Well, I remember when things used to...”

Krugman: Yeah.

Bernstein: But you asked a good question in some correspondence we had, which was, “Why didn’t we have this kind of vibe shock when we had the late ‘70s, early ‘80s inflation shock? Because that was also a big shock.” And, again, that was when people like me were sitting in gas lines, which is pretty uncomfortable and unfamiliar an experience to most Americans. And you just didn’t see the kind of vibes gap that we see in the data now. And I think one of the reasons is because we hadn’t had 20 years with inflation. It was just very quiescent. Inflation below the Fed’s target of 2% for many of those years where we just didn’t have to think about it. We actually had a cascading series of shocks back then. So, I think the way we put it in the paper is that when people have been living with good weather for 20 years, a hurricane is way more upsetting to them than if they’re sort of used to storms.

Krugman: Yeah. And it turns out that the increase in the price level under Reagan’s first term and under Biden were actually shockingly identical. I mean, within fractions of a percentage point, equal. And yet, Reagan runs on “Morning in America,” and with Biden, everybody thinks, “I want the good old days of Trump back.” And that might just be stormy weather. Also, it’s just that people came into the Reagan era expecting [some inflation]. The U. Michigan median expected inflation over the next five years was, I guess, 7.4% or something when Reagan took office.

Bernstein: Right. When you start, it sets off a path dependency that you kind of have to live with. But, Paul, I actually wanted to ask you something about this, which is a little more forward-looking. This gets into some nerdy economic stuff that’s less about the vibes and more about inflation and those dynamics. It gets into the Federal Reserve a little bit, which is topical given that, you know, Kevin Warsh is in the news this week. And Chris Waller, one of the Fed governors, gave a speech that I thought was quite articulate on this point. There is some thinking now that because we’ve had this series of shocks—of course the pandemic, but then, you know, the war in Ukraine, which, by the way, was another energy shock. And now the war in Iran, which is yet another energy shock. And the tariffs, which is another price shock. Because we’ve had all these kinds of repetitive upward pressure on prices, the inflationary anchor— which I’ll let you explain— is at risk of getting dislodged. And that is something that I do worry a bit about. Could you talk about that? But also, you know, maybe clarify what the hell we’re talking about?

Krugman: Yeah. I think you probably have the same underlying model, although I think I may express it a little differently. But when we think about inflation—I guess one way to say this is that inflation is a process of leapfrogging—that a firm sets its prices, and then another firm sets its prices overlapping a bit, and then the next one and so on. And what prices are you going to set? Because you don’t change your prices every day, at least in most things. It’s partly catching up with price increases that have happened before, and it’s partly getting ahead of price increases that will happen. So you’re concerned about the prices that your suppliers will charge. You’re concerned about the prices that your competitors charge; it tells you how much you can get away with. We usually put this as expected inflation. But it’s actually both past inflation and expected future inflation that enter into determining what the current rate of inflation is. And the great, big story that we tend to have is that inflation, if you have a bout of it—even if you have a spike in prices because of something like Russia invaded Ukraine or the United States bombing Iran— it’s not as big a problem if it doesn’t get built into people’s expectations about future inflation.

But we’re always concerned that expectations will get un-anchored or that people will start to do what we think happened in the ‘70s. That people started to build expectations of future inflation into their pricing, and that that was extremely— you know, extremely costly to get rid of it. The severity of the ‘79 to ’82 slump was comparable to the global financial crisis. And the question, obviously, is: are we doing badly enough for that to happen? And, actually, I’d say there’s two forward-looking questions. I mean, we had a great experience, right? That’s part of what I want to get at. In terms of the things that macro economists were worried about, the ‘21-’22 inflation spike turned out to be kind of... everything worked out fine and expectations didn’t get un-anchored; the inflation was transitory, although transitory turns out to be longer than we thought. Slow, but in the end, the definition really should be functional by the time period. And in the sense that we did not need to go through an extended 1980s-style slump to bring inflation down. That was what we had all hoped for. But can we count on that happening again? And that’s the question. I mean, how much do you worry?

Waller, by the way, was a big dove. He was one of the people who basically kind of went after people who were predicting many years of high unemployment, saying, “No. You’re wrong.”

Bernstein: Yeah. So people who are interested in what we’re talking about should go read the speech that Waller gave late last week. It’s very clear and, I thought, incisive on these issues. So I’m worried, Paul, and I’m a historical dove. And when it comes to full employment and inflation balancing the Fed’s mandate. I’ve long worried about the full employment side of the coin. And now I’m worried a little bit more about the inflationary pressure side of the coin. Now, that may be because of my own PTSD from when I was going through this in the administration. But, you know, the Fed has been above its target for five years. That’s a long time. And inflation seems kind of stuck around where it is now.

Krugman: Look, if the target were 3% instead of 2%, the world would be fine. Obviously, wages and incomes would have to catch up to that. But I think that would happen on average. It’s a big statement.

Bernstein: Yeah. But if the Fed can’t get back to its target in a climate with a reckless and unchecked person in the White House whose instincts are highly inflationary—as is true of all authoritarians, regardless of what country they preside over— yeah, I’m worried about it. I’m worried about the anchor.

Krugman: I have turned a little more hawkish than I used to be. I used to be very critical of the 2% inflation target, which in many ways I thought was too low. And if we consult the history of how we ended up with 2%, it’s kind of weird and also kind of funny. I mean, it’s one of the few major things that you can really blame on New Zealand because they were the first to do it. But you know, there were a lot of arguments, particularly during the long slump after the global financial crisis, saying that 2% was too low. But now we kind of say: well, 2% is low enough that people just stopped thinking about inflation and 3% is starting to draw concern. We used to say 4% makes sense, and now I’m not sure that would be okay. And that credibility—the ability to get over the inflation shock, the supply chain, and Ukraine shock— I think had a lot to do with the fact that people really did not expect higher inflation on a sustained basis. I’m worried now that losing 2% unintentionally might be a serious problem.

Bernstein: Yeah, I share that concern. But let me ask you a question. And I should speak to this, too. But I want you to go first, which is: so we’ve talked a lot about what we think are driving these negative vibes. What do you think we should be doing about it? What is the right path? What is the best path forward to realign vibes with where they were pre-pandemic, at least?

Krugman: That’s a really good question. And a part of the answer is: what do you mean “WE,” white man? You know, who is “we” that should be doing what? Well, certainly not me. And at this point, not you unfortunately either.

Bernstein: No, that’s not correct. I’m very ensconced in policy efforts, which I’ll talk about in a minute, but you go ahead.

Krugman: All right. But, you know, a big part of the answer lies with the Federal Reserve. But also, there’s a very good chance that Congress will be in different hands in a few months and that the White House will be in different hands in 2029. But I mean: “don’t do stupid stuff” would be a good start.

Bernstein: That’d be a great start.

Krugman: Don’t launch unnecessary wars. Don’t politicize the Fed. But I do worry. I mean, we’re in the middle of an ongoing discussion in which you and Elliott have been making the point that it is about price levels. And then there’s a lot of people saying, “Does this mean that the vibes are going to be negative for the foreseeable future?” Are we in, among other things, for a political universe in which every president, of whatever party, has a disgruntled public because prices are too high, and so it’s always “throw the bums out” every four years? And I don’t know. I think this is one of the things that actually hinges a lot on what we think really is driving the vibes. And when is the statute of limitations on the price level that people expect? But it is a real concern.

Bernstein: Yeah. I mean, it’s funny. I myself framed this as like, the goal is getting vibes back to some level that they used to ride at. Really, the goal is much more a political economy goal, at least in my head, which is to help people be able to make ends meet in an economy that’s been growing at a good clip for a long time. I mean, we’re actually quite productive. We have good GDP growth. Even the unemployment rate is pretty low, even if job creation has been just about zero.

A lot of people justly feel—and this is not just a low-information sentiment—a lot of people justly feel like they’re just not getting their fair slice of the pie that they’re helping to bake. And so we have to reconnect their living standards to the growth in the overall economy. You said something decades ago that’s always stuck with me, which is: for way too many people, economic growth is a spectator sport, not a participatory sport. So what’s the linkage there? To me, it’s the affordability agenda. And this is what I’m working on at the Center for American Progress and at the Stanford Institute for Economic Policy Research, which is crafting an agenda—a policy agenda—and getting politicians interested in it (which is another part of the problem) that will help correct market failures and flaws in key areas of the household budget: health care policy—something you’re very familiar with. Child care. We have great plans in that space. Housing— we’ve already put out a plan that’s been quite positively viewed in that area. We have a great plan coming out on electricity prices. We tried to do a thing on groceries. That’s a lot harder because it really is pretty much a market good. But that’s the agenda. And I don’t think that people necessarily have to understand all the fine points on the policies. But you got to deliver and, you know, that’s a really heavy political lift. But I think that’s the connection that needs to be made.

Krugman: Yeah. I mean, I would say also that you have to be seen as trying to deliver that. That’s really kind of important.

Bernstein: Yeah, gotta get caught trying.

Krugman: Although there was sort of this question: were you and your colleagues bad salesmen?

Bernstein: Yes.

Krugman: Well, “could you have done something different?” is the question. I’m sitting right now in the heart of the communist, anarchist, Islamic world revolution, or whatever. You know, with the Mamdani administration in New York, which has very limited ability to affect these issues.

Bernstein: Right. Although the area where he does have more impact probably is housing affordability because that is a lot of local policy. But at least 100 days in, he’s been spectacularly successful and visibly trying to do something. I think Mamdani is exhibit A of what I’m talking about. He ran on affordability. And, you know, you can call it sidewalk socialism, but he’s filling potholes as well as delivering child care and working on housing. He is, I think, a model for exactly what I’m talking about. And look, yes, his powers are limited given where he sits. But however many months in, it’s working. Now, it’s way too soon to make any kind of a judgment. And by the way, yes, Mamdani is the most visible example of the model I just described in action, but it’s working as well or better than I could have hoped, at least thus far. But here in Virginia, we have a centrist governor named Abigail Spanberger, and there’s Governor Mikie Sherrill in New Jersey— both centrist Democrats running on similar policies. So this is not just a socialist thing.

Krugman: I know. It’s just, New York is sui generis on every level.

Bernstein: Including pizza and bagels, but that’s a different discussion.

Krugman: Well, it’s even more that I think it’s a lot easier to find Eritrean food, which I had here with friends the other day. But anyway, one of the things that worries me about this whole vibes episode is—aside from the political economy and all of that— it’s: what do we do in the next economic crisis? Because what strikes me is that when the supply chain issues became clear, when it became obvious that some things had been disrupted and that demand was really a very different mix from before, and that you started to see those container ships steaming back and forth, waiting for a berth and all of that, there was going to be a large and inflationary shock coming from that and that the right policy—assuming that you could keep inflation expectations anchored— was, in fact, to accommodate; to have a burst of inflation and then stabilize after that; that a one-time rise in the price level was actually exactly what the optimal policy model said you should allow. And it did happen and people hated it. And now I’m worried that we will do something stupid next time. Is that your concern as well?

Bernstein: Yes, but first of all, the concern about whether we will do something stupid is bearing out in real time. But I guess the way I would frame your question is: has Keynesian stimulus in a recession been discredited by what just happened? And I very much obviously hope that’s not the case. The supply shock, or what you described as the supply chain snarl-up part of the pandemic, was very sui generis, of course, and was a function of a 100-year virus. So that’s a lesson we don’t want to over-learn.

Adding to my worries about this is the reality that our fiscal outlook is actually as bad as it’s ever been, at least in my lifetime. Even though the kind of fiscal interventions we’re talking about—the Keynesian kinds of interventions we’re talking about—you’ll actually be fiscally worse off if you don’t do them than if you do do them because you’ll end up with worse GDP outcomes. But there will be those who will point to the debt and say, “We can’t do anything. Look at the magnitude of the debt.” So, yes, I’m very worried about that. And my only solace is that one definition of a Keynesian is a Republican in a recession. They all get very stimulative-oriented pretty quickly in that situation. So maybe just the power of a rising unemployment rate and its populist impact will drive better policy in that regard. But it’s a concern.

Krugman: Yeah. I would have said that Covid and Ukraine were unique events. Except now there’s Hormuz and you start Googling choke points and it’s not hard to think that maybe it’s not that unique an event right now.

Bernstein: I agree with you. And I do think that one of the things I’m trying to do—and I think you’re trying to do this in some of your work—is to just remind people what good economic policy looks like. It wasn’t that long ago, as you’ve said in numerous posts and in this conversation, where we applied a lot of economic thinking in the Biden years. And if you take away everything we’ve been talking about for the last hour—which is the negative vibes around the inflation and the price level—I think you’d have a good example of really pretty effective policymaking that helped not only increase the economy’s growth in its capacity, but delivered those bigger slices to folks who are helping to bake the pie and, in many ways, are the most economically vulnerable people. Whether it was the advantages to the poverty rate, whether it was lowering the uninsured rate, or whether it was simply helping to maintain a strong enough labor market that wage gains reached the bottom of the scale. So I guess my point is: we know how to do this, or at least we have an idea. We just have to really fight hard for the politics to get back there.

I guess the last point I’ll make on this—and we’ve talked about this as well— resistance is not futile, and people want something different than what they’re getting. That seems very clear.

Krugman: Yeah. And I wonder. A year ago we probably would have said: “Look, the Biden team by and large did good stuff, responded very well to the Covid crisis, and got totally savaged politically for their success.” And that meant that we might be taking all the wrong lessons. I have to say that one small silver lining to all of the crazy stuff now happening is that it does seem to be gradually making people think better of the previous experience and kind of understand a little bit. I’m not sure. I think the public is actually probably ahead of the political universe there... but I don’t know. Do you feel that people are more appreciative of what you all did now than they were before?

Bernstein: Well, it’s a good question. I run in circles that are maybe somewhat similar or adjacent to ones you do. And what I get a lot of, from at least the people I talk to, is, “You guys did a great job, and your messaging was terrible.” And, you know, we sort of referenced that a few minutes ago. I will agree that our messaging was far from optimal in that a lot of times we were talking past people. But I think there’s a difference between talking past people and lying to people. We were honest. But I don’t think there was some magic set of words we could have said that would have made things all that much different. And I think you made a similar comment a while ago.

So I do think that sentiment—“You did a good job, but you didn’t convey it”—is live. I don’t know what people are feeling. I think if you go out and poll people again—as Elliott would know—at this point, they might be saying Biden was better than Trump because Trump has turned out to be such a mess. But they didn’t agree with where Biden was—and they probably wouldn’t agree with where you and I are—on the economics.

At some level, vibes are a function of people’s faith in the government to actually have their back, to get behind them and lastingly help them. And it’s been a long time in the Trump years— Okay, it’s actually been a little over a year, but it feels like decades since that’s been the case. Joe Biden and his administration—which I was proud to be a part of— certainly worked hard to do that. And we can have good debates about how far we got. But we were trying and at this point, we have a government that’s not trying at all. And in fact, when it’s not self-dealing, it’s pushing in the other direction. So I don’t think it’s that heavy a lift to get back to a point where we’re trying to rebuild people’s faith in a government that actually does useful things for them. And that, to me, is a north star.

Krugman: Good place to end. Thanks for talking with me.

Bernstein: Thank you, Paul.

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Some quick thoughts about yesterday’s hearing.

Transcript

Kevin Warsh, the next chairman of the Federal Reserve, is Donald Trump’s sock puppet. But we knew that. The question during yesterday’s confirmation hearing was whether he was sufficiently brave, sufficiently good at acting to pretend that he was more than that. And the answer is no.

Hi, Paul Krugman here with a Wednesday update. I didn’t watch or write about the Warsh hearing because it seemed there wasn’t really that much at stake. He’s going to be confirmed pretty much regardless and there’s a whole lot else going on in the world. But I thought I should weigh in a bit on what we actually learned from the hearing.

Now about Warsh, he is smart. He is very good at saying things that sound thoughtful and impressive, but he is also, and it’s really very clear, a partisan hack. He’s for tight money when a Democrat is in the White House and for easy money when there’s a Republican. He has managed to claim that he was part of the great economic rescue that took place after the global financial crisis. But at the time, although he was on the Federal Reserve Board, he basically trashed his colleagues for trying to do their job.

And he has made a lot of criticisms over the years, but they’re always very selective.

Often when he makes a statement, you wonder, what exactly did he say? Because there tends to be lots of complex verbiage that sounds sophisticated, but when you try and distill it down to what it was all about, it’s very hard to figure out, except that, again, it’s always tight money if there’s a Democrat in the White House, easy money if there’s a Republican.

Recently, Employ America, which is a group that I follow, wrote about Warsh. They aren’t very partisan. They do mostly inflation analyses and inflation nowcasting, trying to predict what the next number will be. But they had a scathing survey of his positions over the years, which says that he is a partisan who has chosen to align conveniently with the current president, that he is someone who abandons his principles “for whatever might suit his personal and partisan interests.” That’s not very nice, but it seems to be quite accurate.

So there was a hearing, and everybody knows pretty much who he is.There are people, sort of centrist Democrats, who claim to find some virtues in him. But I think that’s all positioning. I think everybody understands what we’re getting with Warsh. The question in the hearing was, could he put on an act? Because he is usually a pretty slick customer. He’s not someone who simply rants and raves and spouts MAGA propaganda.

And he was asked a a question which isn’t about monetary policy, but is very much exactly a kind of litmus test for, not really for who he is, but what he’s willing to say, at least in the interest of appearing to be not a complete sock puppet. He was asked who won the 2020 election. which is not a question that is remotely in doubt. This is not something about which reasonable people can disagree. There is nothing to the claims of a rigged election except the fact that Donald Trump can’t admit that he lost that election.

And Warsh evaded. He said, well, this body certified that election, which is not the question. The question is basically, are you willing to challenge Trump on a completely obvious grotesque lie? And it would have been in Warsh’s interest, you would think, to say, well, no, I believe that Joe Biden won that election. But to do that would be to show some independence, even not in action, but some independence, at least rhetorically, from Donald Trump. And he wouldn’t do that.

He was also asked about the spurious prosecution of Lisa Cook, asked about the spurious charges being brought about Jay Powell and refused to take a stand in support of people who will be his colleagues once he gets to the Fed.

So what we got was not a test of how he will behave, not a test really of his policy views. I mean, there were no interesting policy arguments going on here. There are some discussions we could have about shrinking the Fed’s balance sheet and all of these things, where I do think that Warsh’s expressed views are quite wrong. But that’s kind of not what was on trial here.

What was on trial was, can he at least pretend to be not a total hack? And the answer is no. He’s afraid to even show a little bit of verbal independence without substance when it comes to Donald Trump, which is bad.

It should be utterly disqualifying for the position because being the Fed chair is important. It requires a lot of independent judgment and requires a lot of credibility because the Fed is mostly needed in moments of crisis. And in those moments of crisis, people need to believe, markets need to believe, but the general public needs to believe that we’re talking about people who are serious experts and seriously have the interests of the nation at stake rather than their partisan political views.

He failed that test with flying colors. And he will be confirmed anyway.

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Transcript

When you’re losing a war, but it’s not an existential defeat, your country, your government can continue pretty much as before. Aside from the humiliation, there’s a well-established technique, which is to declare victory and pull out. But it appears that Trump can’t even pull that off.

Hi, Paul Krugman with a Saturday update on the situation in the Strait of Hormuz and all of that. It’s been clear for a while that the United States has basically lost this war. The goal was to achieve regime change, possibly to take Iran’s uranium. Neither of those is going to happen. The Iranian regime is harder line than it was before. Iran has ended up strengthened because it’s demonstrated its ability to shut off traffic through the Strait of Hormuz. No way the United States, even under current management, is going to commit ground troops to attempt to really do in Iran’s nuclear program on a sustained basis.

So the indicated strategy was to essentially give up, but claim that something wonderful was accomplished, and that’s certainly something that Trump is good at doing. But he hasn’t been able to pull that off, I think because he himself is incapable of facing reality.

So the Iranians said that they are willing to allow free passage of shipping through the strait, by which it turns out they mean basically passage that stays close to the Iranian coast and pays a toll along the way. Well, what’s our alternative to that? What is it that we want to get?

The United States has started imposing a blockade on Iran, which hurts the Iranians. It does give them a reason to seek a deal, but only if they get something out of it. So if allowing ships to start carrying oil and LNG and fertilizer and helium out of the Gulf allows them to sell their own oil again and to import food, which apparently is an important issue for Iran, then that’s a deal that can be done. It will, in practice, be a strategic defeat for the United States, but something that the Trump administration could try to spin as a victory.

But in order to get that, you have to actually deliver on that deal. You can claim that you’re winning and that they’re surrendering, not us, but you have to actually deliver on the deal. What Trump tried to do was to say, great, they’re opening up the strait, but meanwhile, we’re going to continue our blockade. And also, they have promised that we can have the uranium, which they had not.

That doesn’t work. It’s just basic logic. Why would the Iranians agree to a deal if they don’t get a lifting of the US embargo, don’t get their ability to sell oil and their ability to import food back? If that’s what’s going to happen, then you might as well keep the strait blocked. So what was this supposed to be? What was the idea? What was the thinking?

Well, as best I can tell, and this is all speculation now, I don’t think that Trump has taken on board, maybe he’s emotionally incapable of taking on board the reality that he screwed up, that he took us to war and lost, that he, in his mind, still thinks that America has the upper hand and that the Iranians are cowering in fear over the might of the U.S. military, and that he doesn’t need to make any concessions,

Does he really believe that? Do we even know? Is really believing a thing that makes sense in his case? Probably not. But to some extent, he is at least incapable of accepting as a basic proposition, never mind in public, but at least in terms of actual policymaking, accepting as a proposition that, well, the U.S. just found the limits to its power, and they turn out to be closer to our goal than they are to the Iranians’ goal. So we basically have to cut our losses by making a deal that leaves the Iranians with some stuff that they didn’t have before.

He can’t seem to do that. But if he doesn’t do that, then the Strait of Hormuz will remain closed. In fact, it’s more closed than before because the Iranians are not managing to export oil, which is new. They were exporting oil before, and now that little bit of supply to the world market has been cut off. It’s about 2% of world oil supply. Not huge, but in a very tight oil market, it is significant. And I have no idea where it goes from here. Once again, we’re in a situation of total uncertainty.

Now, I might be willing to say, maybe I’m misunderstanding, maybe the United States does have, in some sense, more leverage. But, you know, we do have markets. The futures markets are closed for the weekend. So let’s see what happens when they reopen Sunday night. But the prediction markets are open, and for all the problems with the prediction markets, they show very clearly that the perceived probability that the strait would reopen by June 1st spiked last week and is now back basically to where it started. All of a sudden, we’re down to a 30% or so probability of getting the strait open anytime soon, which looks about right. Maybe that’s even a bit high.

But, my God, like I said, we are led by people who not only can’t plan a war right, they can’t even successfully execute a surrender. And that’s a really bad omen, not just for the Iran conflict, but for everything else.

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More than a year ago I interviewed my old friend and colleague Kim Lane Scheppele, a constitutional scholar who speaks Hungarian and knows Hungary, about the march of autocracy. Now, suddenly, a much happier occasion. I found her account of how this happened startling — a lot I didn’t know, even though I’ve been following the news obsessively. And some of it is wild. Here’s a transcript:

. . .

TRANSCRIPT: Paul Krugman in Conversation with Kim Lane Scheppele

(recorded 4/16/26)

Paul Krugman: Going back after a number of months to Kim Lane Scheppele, my former office neighbor at Princeton and I think we can safely say America’s leading constitutional scholar who also knows Hungary and speaks Magyar, although you’re probably the only one.

Kim Lane Scheppele: Sorry to interrupt you, but the language is Magyar nyelv, and Magyar, the name of the person we’re going to be talking about, who’s also the new prime minister, means Hungarian. That’s your Hungarian lesson for the day. Ha!

Krugman: Oh, wow. Thanks. I would have gotten that all wrong. All right. Well, anyway, as you say, it’s been quite a week. You were on this case on my blog starting in 2010, but I think we want to just talk about first reactions to this extraordinary election on Sunday.

Scheppele: Well, yeah. It’s been hard to even comprehend the magnitude of this. I mean, not only did Péter Magyar win this election, but he won the election overwhelmingly in a rigged system. And so that’s the miracle magic of it. It turns out that Viktor Orbán had rigged the election rules so that only he could win. And the shortcut of what he did was that essentially a vote in the countryside counted three times as much as a vote in the cities. And what he counted on was that usually, if you get a challenger to a right-wing autocrat, they’re all going to be liberals, right? They’re all going to get their votes from the cities, from the educated populations. And Orban had a lock on the countryside. And then he put all the weight of the system on counting his people more than others. So Peter Magyar spent the last two years going out to villages, just meeting all of these people in person and getting around the fact that Orban also controlled all the media. So the media was rigged, the election system was rigged. And when the vote came in on Sunday, he was at 15 to 20 points ahead in the polls.

Krugman: Right.

Scheppele: But that did not guarantee he was going to win. And it did not guarantee that he was going to win by the majority. And so when the numbers started piling up, like I was watching the early returns and the early returns were coming in from villages that should have been the Orban vote. And it was a Tisza vote, it was a Peter Magyar vote. And so you knew just from the first 2 or 3% of the vote that it was going to be overwhelming. And sure enough, the whole evening the results came in and Peter Magyar won. It might shift a little bit, 1 or 2 numbers now, but about 138 seats out of the 199 seats in the parliament, and Orban had to concede. There was just no way that he could even claim fraud or try to do anything to change it, because he just didn’t have votes come in from anywhere.

Krugman: Okay, it’s funny but that’s the first clear explanation I’ve gotten of how the rigging worked. Because the reporting has been pretty vague. And, you know, there’s still a fair number of people saying, “oh, it can’t really have been rigged, because after all, he lost.”

Scheppele: Yeah. No, it was so rigged. I mean, literally, Orban rewrote all the rules in 2015. And, Paul, I need to give you a shout out here because, you know, Americans didn’t know anything about this. And I live in my head in Hungary. And I would come in every day to campus and see you in my office next door and go on whining and complaining about how Orban had been building a dictatorship starting in 2010. And you said, “Well, how come The New York Times isn’t covering it?” And I said, “Well, no one’s covering it because no one can see it.” It was all legal. It was all technical. It was really hard to see how Orban was nailing things down.

And then you called me up on a Sunday and said, “Okay, I’m going to do tomorrow’s column on Hungary.” And so, remember, we scrambled around, I was translating documents. The fact checkers were calling me up, and you wrote that blog post on a Monday, and then you said to me, “Look, you know, it’s more complicated than I could say. You can put something up on my blog.” And then we did that for like 3 or 4 years. You were putting all my commentaries up on your blog, and I was the only one covering it in English at that time. So, you know, if it wasn’t for your venue, it would have been impossible to get this on the radar screen of Americans. So, Paul, it’s your victory, too.

Krugman: I hope it is. I mean, I feel like I was facilitating your victory, it’s obviously the Hungarian people’s victory. But actually one of the things that strikes me here is that, we talk a lot about how Orban muzzled and controlled the media in Hungary, but, effectively, there was an international muzzling coming out of a couple of things.

Scheppele: Yeah.

Krugman: I remember you saying that basically even big international news organizations sort of had one stringer in Budapest who often turned out to be somebody affiliated with Fidesz. So.

Scheppele: Right. Well, there were a whole bunch of ways that he muzzled the international press. So one was just that, if you were a domestic journalist reporting for the international press, you were under surveillance, you were under threat. The international news organizations, including, by the way, the New York Times, had to start providing physical security for the reporters because they were really being threatened with death threats and the whole nine yards. And, you know, I got death threats, too, sometimes through the comments section on your blog. Right? So, everybody commenting on it was really under threat in some sense.

But the other thing that happened was once the international press pulled out because they couldn’t pay for the security anymore, they’d hire Hungarian stringers and then the Hungarian stringers would have other things happen to them, like they’d get doxxed and there’d be mobs outside their apartment and they’d have to move out of their houses. And really, it was a huge campaign. And then the final thing, and maybe not the final thing, but at every single Hungarian embassy in the world, the ambassador was told, “Your job is to keep negative news about Hungary from appearing in the press.” So every time there was a story criticizing Orban, the embassy would call the editors and say, “You’ve got to give us equal time,” or “you can’t trust those journalists,” or “you should never use those sources again.” Going back, this was during your days at the Times, there was a Hungarian-American reporter who was writing for the Times, and the Hungarian government called the Times and said, “we don’t trust this guy.” And they stopped putting his byline on stories until they did a full check on him.

Krugman: Okay.

Scheppele: So that was happening to the international press. So it’s not just the domestic press that was muzzled, but the international press as well. And so it took a very long time. I mean, Orban had the whole system locked down in just three years, and it took until five, 6 or 7 years later before the rest of the world caught up to the fact that a dictatorship had been constructed in plain sight.

Krugman: What’s also extraordinary is that even now — I mean, this is the first time I’ve heard anyone, and I’ve been reading the news reporting obsessively, but the first time I’ve had as clear an explanation of how the rigging worked and how Magyar broke it. And, you know, the eyes of the world have been on Hungary a lot, if only because Hungary has been the star of CPAC for years now. And you would think that by now reporting would have gotten it right.

Scheppele: Yeah. Well, I’ll tell you, part of the problem is that Orban and his circle are lawyers, and they pioneered this sort of 21st-century version of dictatorship where you don’t shut down the media. You just regulate them or you threaten them or whatever. Everything was done technically by law. And I think most Hungarians didn’t understand how the law was rigged. I wrote a quite detailed article about this in the Journal of Democracy after the last election, going in detail step by step through all the stages of exactly how Orban rigged things. So, it was gerrymandering. It was things like, the districts expected to vote for Orban had 30,000 voters, and the district expected to vote for the opposition had 90,000 voters.

Krugman: Right, right.

Scheppele: And then there were all kinds of other election tricks that Orban borrowed. For the 2014 election, I wrote about this on your blog in five parts. Remember? You put up five parts. “Election in Question, part one,” “Election in Question, part two.” There was just every single which way [they could change the rules]. So just another example. Orban said, “we have all these minority groups in Hungary. They should be represented in the parliament.” Everybody’s cheering, like minority representation—what a good thing. So there was this possibility of the Roma having a separate representative in parliament and the Germans and other ethnic groups. And it turns out if you registered to vote on that party list, you only needed 20,000 votes to get a seat. So all those seats got colonized by Orban’s people. The Roma guy was a Fidesz person. That’s Orban’s party. The German guy was a Fidesz person. So all these little things gave Orban one seat here, four seats there and so on. And if you look at Orban’s popularity in Hungarian opinion polls going back to 2010, he never got above 35% in his personal popularity. And in elections, he would struggle to get 45%. But then he would get 67% of the seats in the parliament, and that two-thirds threshold mattered because the Hungarian Constitution can be amended with a single two-thirds vote of the unicameral parliament. And if he could get two thirds, he put himself above the law. So it’s 199 seats in the Hungarian Parliament, 133 is two thirds larger. Magyar just got 138. That’s what’s so stunning.

Krugman: One immediate thought is thinking about the extreme unequal representations, rural versus urban. The closest equivalent I can think of is the US Senate.

Scheppele: Yeah. The Electoral College, too, right?

Krugman: The Electoral College somewhat. But the Senate, where California has two senators and Wyoming has two senators, exactly like that. It over-represents the rural areas. And when you get this urban-rural, educated-uneducated split, it guarantees that the right always has an advantage. And you said Magyar’s been campaigning about two years, right? He was in Fidesz. He had actually been part of Orban’s government.

Scheppele: Yeah. So here’s the good news and the bad news about Peter Magyar. So he came of age and was attracted to Orban’s party because he’s basically a center-right kind of guy and Orban’s is the center-right party. So he went into the party machine sort of right after school, and he stayed in the Orban machine for 20 years. He was posted to Brussels. He was in what’s called the Hungarian Perm Rep, which is the big embassy that every member state of the EU has in Brussels, which handles the state affairs with the EU. He was there. Then he came back and he held a variety of positions in the state-owned companies that Fidesz ran. So he was in the system. He benefited from the system. And then there was this really funny event that brought him to public attention. He had this acrimonious divorce.

Krugman: Okay.

Scheppele: And, like, you can’t make this stuff up. Wait till we get to zebras.

Krugman: Okay.

Scheppele: But his wife, who was always a trailing spouse with all of his appointments, and also a very clever lawyer, really smart. Orban had named her the justice minister of Hungary. Her name is Judit Varga. And she presided over, really defending Orban’s interests at the EU. And she’s kind of a pit bull like Orban. She and Peter had this acrimonious divorce. But it happened around the same time that —probably Orban, we don’t know for sure—but she approved a pardon of a guy who ran an orphanage in which the orphanage had had state employees who engaged in sexual abuse of children, in other words, a pedophilia scandal.

Krugman: Right.

Scheppele: And the principal had known about it and cooperated. She issued the pardon for this guy, and there was this huge firestorm of objection. A pedophilia scandal. I mean, you can think of the American parallels, right? And so Orban insisted that she be fired. So she left the cabinet. And that was the moment when Peter Magyar, having just divorced her, popped out of the woodwork and said, “How dare Orban hide behind women’s skirts?” And then he said, “And because I was married to her, I know where all the corruption happened, where all the bodies are buried.” And he had, it turns out, made audiotapes of his conversations with his ex-wife during the acrimonious divorce. I mean, that’s why you can’t make it up. I have to tell you this because this is something that’s not really making the headlines in the U.S. but he actually had the tapes through which she had talked about some of the corruption scandals inside the Orban government. And so he pops out, accuses Orban of hiding behind women’s skirts, then goes on this YouTube channel.

Krugman: Okay.

Scheppele: So by this time the opposition has no TV, no radio, hardly any major newspapers. The opposition started a YouTube channel. So Peter Magyar goes on the YouTube channel with the audiotapes from his ex-wife, and gives this big interview about how much corruption there is inside the Orban camp. This makes him an instant superstar, right? Because everybody kind of knew it, but nobody knew precisely how. And so he then starts going around the countryside and giving speeches about all the corruption. He attracts a crowd, then he attracts a bigger crowd. This is all a few months before the last European election. I think he begins to get the idea, like “maybe I could form a party and run for the European election.”

The European election rules require strict proportional representation, not rigged. So he had a much better chance of getting elected to the European Parliament than he would have getting elected to the Hungarian Parliament but it’s too late to register a party. Okay, so he looks around and he finds that there’s this little party called Tisza, which is the name of a river in eastern Hungary. And he goes to the people who took out the party name and said, essentially, “Can I kidnap your party?” And so that’s how he gets a party, cobbles together who knows who to run on the party list. And he gets actually a pretty big vote to put himself into the European Parliament. Okay, now that matters, because first of all, it’s a clap-a-meter that shows you the guy actually has a real chance of standing up to Orban. But second of all, he becomes a member of the European Parliament and that gives him parliamentary immunity.

Krugman: I was about to ask that.

Scheppele: And at first he said, I’m not going to take my seat. I’m going to give it to somebody else. I’m going to stay here and work for Hungarian liberation here. And then I think somebody said to him, yeah, but you get parliamentary immunity. So I’m not sure he ever showed up in Brussels, but he did get parliamentary immunity. And so when Orban came after him with sort of—pardon the expression—trumped-up charges to try to sideline him, the government technically had to go to the European Parliament and ask that his parliamentary immunity be lifted. And the European Parliament said, no.

Krugman: Right. Like you have to know he got a lot of help. But it’s just too complicated and too detailed. Right.

Scheppele: But it tells you how many things had to fall into place for him to overcome how rigged the system was. Okay, so then he figures out that if you don’t win the countryside, you can’t win at all. And he comes out of the countryside, actually, and he’s a center-right guy, which is to say that on left-right issues, he’s unlikely to be very different from Orban. You know, it’s fine. It’s a center-right country. On democracy-dictatorship issues, he’s entirely different from Orban. And that’s what we need, right? And that’s what he’s promised to do, is really restore democratic institutions.

Okay, so Peter Magyar has this acrimonious divorce. He was known for wearing these highly, shall we say, form-fitting clothes. He got the nickname “Slim Fit Jesus,” because, you know, he’s pretending to save the masses. But all of his clothes were so tight-fitting that, shall we say, it was almost embarrassing to look at him. And so he gets this kind of name, but of course, he’s also auditioning for girlfriends, right? Because he’s a 45-year-old guy who no longer is married. So the Orban intelligence services send him a girlfriend who then tapes all their recordings. Just what he did to his ex-wife, right? And she comes out with these recordings in which he calls members of his own party idiots because he doesn’t know them. I mean, he just sort of cobbled together the party. That doesn’t affect his popularity.

And then actually, during the election campaign, the government did this thing where—I mean, they didn’t say it came from the government, but where else? It goes to the government media. They release a still photograph of a bedroom with a rumpled bed and some white powder on the side table. And it’s got a camera, sort of from the ceiling angled down on the bed. And the media is told: “coming soon.” So you think it’s going to be a Peter Magyar sex tape. He comes out and he says, “I’m a healthy 45-year-old man who has consensual sex with women.” Like, so there.

Krugman: As in, regarding the tape.

Scheppele: And this is like the brilliant thing that starts happening. He’s got these crowds. He’s got people who are so thrilled to discover that they’re not alone in hating the Orban regime because they’d been threatening people. They’d been separating people. There was no public space in which to figure out that you weren’t the only one who hated Orban. And Magyar’s rallies had become the place where you could do that. So he’s got all these young people who have joined the campaign. And when this still photograph of the bedroom comes out, suddenly all these Hungarian computer whizzes start doing AI-generated videotapes of Orban in bed with Trump and Putin in bed with Orban. And like all of these things. So if they were going to drop a sex tape, it would be indistinguishable from, you know, two dozen or so of these AI fake videos of everything else that might have happened in the bedroom. And so the government never released the sex tape.

Krugman: By the way, one of the things that I didn’t really realize, actually, until the craziness of South Korea, is that we were all focused on X, formerly Twitter, and BlueSky was down this morning and I was quite upset—but YouTube is a tremendously important medium for political communication around the world.

Scheppele: Exactly. And that’s how the opposition has been communicating. So, for example, on election night, I couldn’t go there, but I was just watching the Partizán channel and they just had all these commentaries. They had good graphics and actually the funny thing was that they had in their studio a spinning head where one side of it had the face of Orban and the other side had the face of Magyar. And the whole evening it was spinning. And then when it became clear, it stopped and you saw only Magyar. So it was fun to watch Partizán this time. But the campaign had turned out to be fun. This was the thing we’ve all missed. Like the rallies were just occasions to find out that everybody didn’t want Orban. And they got bigger and bigger. There were rock bands, there were speeches, there was humor, and then there were the zebras. I promised you, zebras.

Krugman: So, the zebras. I know a little bit, but tell us about the zebras.

Scheppele: Yeah. So it turns out that Peter Magyar became this sort of rock star because of his exposure of corruption. There were some great investigative journalists and some anti-corruption campaigners. And one of the anti-corruption campaigners discovered this palace that was being built outside of Budapest, allegedly by Orban’s father. So we know his father and it was Orban’s money, right? And next door is the palatial estate of Orban’s best friend, the blue-collar worker who is now the richest man in Hungary. Everybody knows that’s Orban’s money, right? And somehow they got a picture over the fence of a little—I keep saying I’ve got to look up the collective noun for zebras.

Krugman: Okay.

Scheppele: But they found a gaggle, a flock, a herd of zebras, and took pictures of zebras. And suddenly this became the symbol of Orban’s corruption. So people are turning up at the rallies with zebra heads and zebra costumes and little zebra pins wearing black-and-white striped t-shirts and all this kind of stuff. So the zebra became the meme. But the reason why I mentioned the looking over the fence is that this anti-corruption campaigner, Ákos Hadházy is his name, sponsors tours where he takes a ladder and a bunch of people, and he puts up the ladder on the fence and everybody climbs up and looks over and sees for themselves. And that’s also been part of the anti-corruption campaign.

Krugman: Right. So I think the original picture may have come from drones, but then other people are climbing over the wall to look at the zebras. And just a quick thought, I mean, actually it reminds me a bit of the fall of communism when people were going on about the luxury in which the East German leadership lived. And I was thinking, yeah, that’s not luxury by US standards. Even then, with US inequality being what it was. I saw the photos of the Orban estate and it’s very nice, maybe particularly since we know it’s all stolen money. But my God, it’s not something that Mark Zuckerberg would find remotely impressive.

Scheppele: Exactly. It’s got one of those one-lane lap pools instead of a giant kind of private lake like Yanukovich had in Ukraine, which had his own yacht in his private lake. It’s not that kind of estate, right? But in Hungary, it’s shocking, because Hungary had one of the most egalitarian distributions of wealth after communism. Not so many visible oligarchs. So the oligarchs have only become that rich more recently and under Orban. That’s also what’s happened. And this is, like, “it’s the economy, stupid.” I mean, I’m sure you were watching this. The pandemic hit Hungary very hard because it exposed that the hospital system had been chronically underfunded for years. So another meme that Peter Magyar used very effectively was toilet paper. The hospitals don’t have toilet paper.

Krugman: My God.

Scheppele: And of course, when I lived there in the ‘90s, the hospitals also didn’t have toilet paper, but never mind. But he would go into hospitals with a camera crew and look for the toilet paper. Just look at the peeling paint on the walls and stuff like that. So the pandemic exposed the underfunding of the health care system, and the death rate from Covid in Hungary was actually quite high. And they put the military in charge of the hospitals so that the information wouldn’t leak out about how bad things were. That was, you know, 2020-2021. So then what happened, of course, was the post-pandemic inflation that hit the world. And you’ll know what that was in Hungary, right? It got to 20% a year.

Krugman: Yeah. I’m not quite sure I fully understand that. I mean, that’s supposed to be my department. But why inflation was so bad in Hungary was always a bit of a puzzle.

Scheppele: Yeah, I was hoping you’d explain that to me. But there were, I think, a couple of things going on. One was that Orban was both spending well beyond his means and spending corruptly. So it wasn’t actually benefiting the economy. Like, more and more money was going to private pockets. So the whole economy was sort of teetering on the brink. I think that’s part of it. And you’ll know better how that feeds into inflation. But I was trying to get the EU to cut their money ever since 2012.

Krugman: Right.

Scheppele: And so I got together with a group of wonderful friends, academic scholars. We first wrote the law review articles that explain why they could do it under EU law, then lobbied for the laws so they had a structure for doing it, then had to lobby the European Commission to actually do it in the courts to uphold it. And anyway, it was a ten-year process. And in December 2022, the EU cut almost all the funds to Hungary overnight. So this is cohesion and a lot of other funds. Remember, there was a big recovery fund where the EU had gone to the markets to make up for the budget hole caused by Covid and the UK departure. The total EU budget was sort of half the usual budget, and that was half the recovery fund. But they had built so-called conditionality into both those streams of funding. So Hungary lost about €36 billion in a sharp cut overnight. And that was on top of inflation creeping up. But I think the markets were also anticipating this was going to happen.

Krugman: Okay. And you know, Hungary has the same population as New Jersey, it turns out. And much poorer than New Jersey. So €36 billion is a lot of money for Hungary.

Scheppele: Right. Exactly. And Orban had been siphoning off about a quarter of that money just straight off the top into private pockets. And the EU knew that. So when the EU cut the funds, it was a huge hit. And it was the disposable income that Orban used to hold his party together. And, you know, frankly, I’d been saying, at least to you, I mean, we used to have these conversations. “If we can just cut Orban’s money, his crony system will fall apart because they’re all on the take. That’s what holds him together.” And if you cut off their source of funding, think of it as like a resource curse problem, right? Where the resource curse is EU money. It was the only money really coming in. So, yeah.

So sure enough, that happens in 2022. Peter Magyar jumps out of the woodwork in February 2023 or a little bit later that year. But it doesn’t take long for the inside of the Orban machine to start to crack. And I think that’s one of the things that gets Peter Magyar to jump out, because he can see that the ship is going to sink if it doesn’t have the EU funds. And the EU was pretty serious about all of that. So, I do think that was a contributing factor, but there were all these other things too. I mean, just the exposure of corruption. And it was the high inflation. It was “the economy, stupid.” You know, just everything. The growth rate had flatlined. So the economy was just in serious trouble.

And Peter Magyar’s through line was “Orban is corrupt. And that’s why public services are underfunded and that’s why the economy is mismanaged. And this is why your lives are miserable in the countryside.” And so that was his pitch. And I think that’s not a left or right pitch exactly. You know, that’s something everybody can get on board with. So as it became clear he was going to really be able to run in the Hungarian parliamentary election, all the small center and center-left parties just collapsed and stood behind him, even though they knew he was not one of them at one level. But the campaign was about the elimination of corruption and the restoration of democracy. It was not about the usual left-right issues.

Krugman: Yeah. I noticed a number of people were saying, “Well, Magyar will be Orbán-ism without Orbán,” but that is referring to more left-right issues.

Scheppele: That’s right. So for example, I think he’s going to carry on with most of Orban’s policies about things like immigration or about, you know, support for families as opposed to single people without kids. All these kind of center-right things. But he has already said he’s going to lift his veto on UN sanctions against Russia and on money for Ukraine.

Oh, by the way, I should mention one other thing that came out during the campaign, which was, again, not surprising, but it’s different when you hear the tapes. Probably European security services—that’s my guess about the source—were taping Putin and Lavrov, the Russian foreign minister. Now, there are tapes that came out a couple weeks before the election of Viktor Orban, talking to Vladimir Putin and saying things like, “Well, you are the lion and we are the mouse.” Like, “How can we be helpful?”

Krugman: Wow, I hadn’t seen that.

Scheppele: Yeah. And so again it came out through the Hungarian investigative journalists, but they said they had been talking to European security services. And what also came out were these other tapes in which Peter Szijjarto, who was the foreign minister of Hungary, had been calling Sergei Lavrov, the Russian foreign minister, after every European Council meeting and disclosing what happened behind closed doors as the EU was trying to decide how to counter Russian aggression in Ukraine. And those tapes came out too. And so the slogans then started to be, “Ruszkik, haza!” which means “Russians go home.” And then actually, the final little bit of Russian intrigue here was that Orban’s campaign was floundering and failing. I mean, he was trying to run this as a foreign policy campaign but he just wasn’t getting any traction. He was sinking in the polls. So about a month and a half before the election, he invited in the Russian disinformation team that had rigged the Moldovan election by running Russian bots, by taking over Facebook feeds and just swamping the thing with disinformation. They had to move to Hungary because they can’t do it in Hungarian the way they can do it in Russian from Moldova. And so they were literally there. The investigative journalists figured it out and Orban didn’t deny it. And everybody could see their Facebook feed slowly getting taken over by Russian bots. So again, Hungarians take to this and they start labeling and flagging and making fun of and meme-ing the Russian bots.

It was just incredible how many people were online fighting this thing. I mean, maybe Peter Magyar organized some of it, but some of it was probably a spontaneous reaction. Like, “We’re fed up with Orban thinking we’re still part of the Soviet Union.” Right?

So, “Ruszkik, haza!“ was one of the main chants at the rallies and at Magyar’s election victory, because Orban had so tilted toward Russia and so far away from the EU. Peter Magyar’s slogan was, “We will rejoin Europe and I will get the money back.”

Krugman: This is something I was thinking a lot about. The role of the EU. If somebody tried to lean a ladder up against the fence at one of Putin’s estates to take a look, you know, I don’t think they’d come back to tell the tale. And then in general, just sort of the willingness to just plain use violence as opposed to legal stratagems.

Scheppele: Yeah. That surely has a lot to do with the fact that Hungary was still in the EU and under restraints.

Krugman: Yeah.

Scheppele: I think that the EU puts a floor underneath how far the government can sink to using coercive measures. And so they never really resorted to violence against Hungarians. Now of course immigrants—that was a different story, right? And that was sort of with a wink and nod from the EU, as well. But in terms of actually assaulting journalists, you’ll probably recall because this happened when I was guest blogging on your blog, but I had a source that was feeding me a lot of information from inside Hungarian institutions. And that person was beaten up and left for dead on one of the main streets of Budapest.

Krugman: Yeah.

Scheppele: And he went and reported this to the police. I think we talked about this at the time, and the police said to him, “Oh, it just so happens the CCTV cameras were turned off at that time.” And he and I both interpreted this as they knew he was the one feeding me a lot of sensitive information. And he was getting beaten up and I got death threats. And as you know, the last time I went to Hungary, which was before the pandemic, I was literally met at the plane door inside the jet bridge by six uniformed police. So it’s not that they were above using coercion, but they wouldn’t have shot someone on a ladder looking over the fence, right? They’d harass you. They’d arrest you. You’d suddenly discover that you needed a tax audit or, you know, it was that kind of stuff instead of overt violence.

Krugman: Given all that, it’s still kind of astonishingly brave that people were willing to stand up in this campaign.

Scheppele: Absolutely. And Peter Magyar developed into this role, right? Because he came out of Fidesz circles. I don’t think he imagined himself as the opposition. He spent 20 years in the shadows. This is not what most leaders do. So he kind of grew into the role as people projected onto him a role he should play. And so one of the things he started saying at his rallies is “We shall not live in fear ever again.” And so it was the fear thing. And he would travel. I mean, Peter Magyar never had security. I’m sure he had death threats. I’m sure that they had a target on his back. He was clearly bugged and wiretapped. They would occasionally release conversations between him and close associates. Like I said, they sent him a girlfriend from the security services. I mean, they had him on their radar but he never traveled with security. He’d dive into crowds to shake hands and so forth, and he would say, “This is our country. We cannot live in fear.” And then crowds were chanting like, “We shouldn’t live with fear!”

And today, actually, I was just in tears this morning reading this. One of my close friends wrote to me and was trying to make sense of everything. He’s also a sociologist, I might add. And he said, “What just happened can be expressed in the most beautiful way by the word “awakening.” I felt the country is waking up to self-consciousness as we wake up every morning. Hungarian society woke up from an unbearable world into a normal and livable world. It took time, but I feel like in the last two years, people’s attitude toward each other and toward politics has changed step by step. I just had to follow the events of the Tisza Party. [Magyar’s Party] Because whoever saw these events could testify that not only more and more people came out to the streets to listen to Peter Magyar, but people were smiling more and more and became more intimate, more joyful, more confident. And they were increasingly connected to the community with a sense of belonging. On the day after the election, Peter Magyar put it simply: ‘What happened was this is the end, and what lies ahead is change and creation.’”

I mean, that’s what those rallies were. More than what he actually said, you showed up and saw how many other people felt the same thing you did. And then the fear went away as the crowd expanded.

Krugman: That’s it. I mean, at one point I talked to Erica Chenoweth, who’s at Harvard, on the importance of the revelation that you are not alone being a very big deal. I mean, obviously it’s something that’s happening here.

Scheppele: Absolutely. All the “No Kings” demonstrations are meant to achieve that kind of sense, right? That it’s your neighbors, it’s people you know. You see who turns up at the demonstration, and then you realize who are your allies in this political fight.

Krugman: Yeah, but still extraordinary to see that happening when—it’s not quite a mailed fist inside the glove because they were restrained. I mean, none of this would have worked in Putin’s Russia, but it’s still kind of amazing.

Scheppele: Yeah, but now I think this week is euphoria week. And then we have to start looking ahead because even though Peter Magyar has this overwhelming supermajority, Orban’s system is still in place.

Krugman: Right.

Scheppele: I feel like you see the yellow brick road heading to the Emerald City, but between here and there is a swamp full of alligators, right? So, first of all, he met with the President of the Republic yesterday, who is sort of a figurehead but the President of the Republic has to sign all the laws. The President of the Republic is a Fidesz holdover. You can expect him to veto reform laws. And then the Constitutional Court is packed. And so you get a case to the Constitutional Court but it’s all packed with Orban people. They can veto whatever Peter Magyar does, right? And then it’s the audit office. It’s all these different things. And so he has to get rid of these people, and has to recover the offices. And he can change the offices by law, but not through this set of veto points, unless he finds a way to fire the people. And that won’t be a legal step, you know.

And so then how does he do that? So far, one of the disappointing things is that there’s a European advisory body called the Venice Commission which reviews laws for their compliance with European standards. And they were very important in a lot of these transitions. But in the last couple of years they’ve gotten hugely formalistic about things. So this problem recently came up in Poland, where the Tusk government came in, swept away the aspirational autocrats. They had a president who was a veto player associated with the past regime who vetoed all the laws, the Constitutional Court had been captured and declared everything else unconstitutional. The government can’t do anything. It may get voted out of power because it’s been ineffective, right? Because of the veto.

At Princeton we just had Adam Bodnar who was the justice minister in the Tusk government, who came out with a plan about how to sort of get rid of all the veto players. He sent it to the Venice Commission, which is usually the gold standard on legal advising. Basically, is it compliant with European norms? And the Venice Commission said, “No, all these people were lawfully appointed. You can’t fire them.” And I finally lost it. I’ve worked with the Venice Commission for 35 years. I’ve really appreciated their work. I broke with them and wrote an article called “Blinded by Legality.” And I said, look, the laws under which these people were appointed, that you’re now saying is a lawful appointment, were laws you told the Polish government they shouldn’t pass because they violated European standards. Right? So they passed the law that you told them not to pass, and now you’re telling them they have to follow the law you told them not to pass. What kind of advice is that?

Well, it was slightly embarrassing because I’d been invited to be the keynote speaker at their 35th anniversary, and that was after I’d come out with the broadside. So I had a very frosty reception for my keynote address. But they’re still doing that. So, you know, Peter Magyar is going to have to figure out a way through this. And it’s a little unclear how he’ll conquer the alligators before he gets to the clear path ahead.

Krugman: Well, I have to say, when I’m feeling down about the European idea, it’s that kind of thing. The Euro pettiness. Beyond the alligators, although that may be the big story, what do you think he’s going to try to do? I mean, again, this is no liberal.

Scheppele: Yeah. No, it’s true. But again, as I keep saying now, there’s a left-right political spectrum which is perfectly consistent with democracy, European values and everything else. And, you know, you and I would be on one part of the spectrum. Peter Magyar would be in another part of the spectrum, and I wouldn’t vote for him in an ordinary election, okay? But then there’s another political spectrum which runs from democracy to dictatorship.

Krugman: Yeah.

Scheppele: And on that, we’re all on the same side, right? And Peter Magyar has signaled, and I hope he follows through, that he is really in favor of restoring democratic institutions, fighting corruption. And he’s come up with two concrete proposals. The first two are pretty good. And this is where, again, the EU can be petty and it can be very helpful. So the European Union set up something called the European Public Prosecutor’s Office. And the European Public Prosecutor’s Office is just—for the EU law people in your audience—it’s an “enhanced cooperation mechanism.” That means that a number of states got together and said we want to integrate even more than the EU allows us to integrate. And so we want to do this thing. The EU says “Fine, as long as everyone can join it.” So a number of states got together, created the public prosecutor’s office. And the only two countries that hadn’t joined were Poland and Hungary. You know, they were the dictatorships, right?

So Peter Magyar promised—and he could do it by himself, actually—on day one, Hungary will join the European Public Prosecutor’s Office. Members of the Hungarian Prosecution Service is like the current DOJ, right? It’s totally in the pocket of Orban. So now he has a spare set of prosecutors from the EU who can come in and investigate the mis-spending of EU funds. And since most of Orban’s corruption came out of EU funds, that will go a very long way, and that’s he’s already said “we’re doing this day one.” And then the second thing is, he said, “The first constitutional amendment we want to pass is to limit the Prime Minister to eight years in office, and no more, starting with me. Including me.” And if that passes, it also disqualifies Orban from coming back.

Krugman: That’s an interesting backdoor way of doing it.

Scheppele: Exactly. So that’s the first constitutional amendment, he says. So that’s not bad, right? For a start. I mean, I think he’s just getting his mind around it all. He knows because he’s been inside the system and he’s a good lawyer so he’ll know how many obstacles there are, and a lot is going to depend on timing. So, like yesterday, he had a meeting with the President of the Republic, Tamas Sulyok, who used to be President of the Constitutional Court. He’s a Fidesz guy. And they came out. They posed for pictures, both looking severe. Not the best pictures of either of them. They’re full of gloom because Peter Magyar called on the president to step down. And again, just since you love the legal detail, Paul, and you’ve listened to me for so long, let me tell you one more little legal detail. I could tell Orban knew he was going to lose the election back in December because he pushed through the Parliament an amendment to the Act on the Presidency, and they changed the system for impeaching the president to make it impossible for the Parliament to impeach the president.

Krugman: Okay.

Scheppele: So my thought was, okay, that’s the office they’re going to rely on if Peter Magyar wins the election and Orban loses. So here again, you’ve got this guy in power. And actually he said yesterday he might step down. But everything depends on when he steps down. If he steps down, even with Orban’s parliament, as a lame duck, his two-thirds Parliament is still there for another few weeks.

Krugman: I was wondering about that.

Scheppele: Yeah, if Sulyok steps down, Orban’s Parliament can elect somebody. And the reason why they might do it is because Sulyok’s term expires before Magyar’s term is over. And if they reset the clock, the presidency lasts five years, the government lasts four years, they would have somebody who would be there through the whole Magyar term. And I thought that was going to happen regardless. So that may still happen. But they came out and they said, “Well, look, maybe what we should do is change to an elected presidency, because right now the parliament elects the president.” And Peter Magyar said, “Well, maybe that’s a good idea.” And everyone listening is going to say, “Yeah, what a good idea.” And here’s the caution: we had the same debate in 1989. The outgoing communist parliament knew it was going to lose the election. And so they said in the new constitution, “what we want is an independently elected president,” because what they knew was that the only people that had public personas were all the communist guys. And the communist reformers, they were probably going to put up somebody like that, whereas the opposition had all these people who had been denied access to public media. Nobody knew who they were. And it was a ploy by the communists to keep control, even though they were going to lose the election. Here we go again, right? It’s the same thing. Who would run for president? It could be Orban, right?

Krugman: Wow.

Scheppele: He might be disqualified from being prime minister, but he’s not disqualified from being president. Who else do people know? It’s like this echo of 1989. It’s the same debate. So the way they solved it in early 1990 was that the Constitution left that space open, and the two sides agreed that it would be decided by a public referendum. And the public voted, having heard this was the debate, for the Parliament to elect the president to keep the communists out.

So it’s here we go again. And just one last thing while we’re on 1989 and the echoes of communism. I like the way Peter Magyar talked about the Hungarian government—not to say the “Orban kormany“ which would be the government or, like, administration, like we say, “Trump administration.” He would say it was the “Orban rendszer,” which means the Orban regime. And so his motto toward the end of the campaign and the big slogan behind him at the big rally where he declared victory on Sunday night was, “Most, Rendszervaltas,” which means NOW, SYSTEM CHANGE. And that was the slogan from 1989.

Krugman: Wow. I mean, I think it’s really important to understand this is not over. On the other hand, I have to say, it does sound, with the role of the Europeans and probably European security services—probably meaning the French and the British— in some ways the whole argument made by JD Vance that “the European globalists are plotting against us,” it was sort of true.

Scheppele: Well, they cut the money and the security service provided the information. They have this European public prosecutor’s office ready to go. And I think it was always aimed at Hungary. So that’s also ready to go. They’ve sort of recognized Peter Magyar. They may—and I have mixed feelings about this—but they may just give him all the money back now. I mean, there’s all these frozen funds. They haven’t made the changes yet that would deserve getting the money back, but theoretically, they could give at least some of this money back now, because Orban has overspent. Orban has spent 85% of the 2026 budget already.

Krugman: Yeah. So this could be a significant boost. They could have a “morning in Budapest” or whatever if these frozen EU funds are coming back.

Scheppele: Yeah, but since I know you follow the money, here’s one more money thing to follow. So in the last round of EU budgets, they had this recovery fund to overcome Covid. And this time they’ve got this huge amount of money that they’re raising on the markets to fund what’s called the SAFE fund, which is to fund the European defense build-up that’s coming.

Krugman: Okay.

Scheppele: So again, I think Orban’s known for a long time he would lose. I don’t think he thought he would lose this big, but he would lose. So what they’ve done is they’ve rapidly privatized the whole Hungarian defense sector. So if and when that money comes to Hungary, it’s going to go straight through the government into the pockets of Orban’s cronies, because all of the defense sector in Hungary is now privatized with his friends.

Krugman: Interesting.

Scheppele: Yeah. So, you know, it’s not over yet. You can’t get rid of 16 years of this with one election.

Krugman: But they got rid of at least some of it.

Scheppele: Oh yeah. It’s a necessary but not a sufficient condition, as the philosophers would say.

Krugman: Congratulations above all to the Hungarians. But to you. You’ve been on this case since the beginning, and at least some good has prevailed.

Scheppele: I couldn’t have done it without you, Paul, because you were the only one willing to post all the kind of legal detail about how this stuff was happening. And really, it was a team effort at the beginning, and I really appreciate all you did.

Krugman: Well, it’s trivial compared with this. Anyway, so great to talk to you. And we may come back on in a few months when hopefully we know a little bit more about how this is playing out. But wow, what a revolution.

Scheppele: I know. I mean, people were dancing in the streets. Just the euphoria and the number of young people. We didn’t lose that generation and they didn’t forget what democracy could be, even though they’d never experienced it. Right? I mean, it’s just amazing. And, you know, we could do that here, right? We can do that.

Krugman: Here’s hoping.

Scheppele: Okay, Paul. So we’ve got our next task cut out for us.

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