Oren Cass, Paul Krugman & Mariana Mazzucato on Trumponomics

Speaker 1 Looking at my image here and realizing that I've got a gin bottle. That's good.
In honor of Pete Heckseth, I guess, but maybe I should move it out of the frame.

Speaker 2 Starting hot.

Speaker 1 No, what the hell.

Speaker 2 Hi, everyone, from New York Magazine and the Vox Media Podcast Network. This is on with Kara Swisher, and I'm Kara Swisher.

Speaker 2 The Trump administration is taking Washington by storm again, and their shock and awe campaign against the federal government is so intense that it's easy to lose sight of how their policies will impact the American economy.

Speaker 2 The price of eggs is up, people. Inflation is also up, which Trump said he would take care of on day one.
Well, we're way past that, and prices are still high. We'll see what happens.

Speaker 2 And since I don't know anything, I've gathered three brilliant economists to discuss tariffs, tax cuts, deregulation, industrial policy, AI, and of course, Doge, which I'm now calling Doggy.

Speaker 2 Warren Cass is the founder and chief economist of American Compass, a conservative think tank and a contributing opinion writer for the Financial Times and the New York Times.

Speaker 2 He was a key advisor to Mitt Romney's 2008 and 2012 presidential campaigns, and he's a leading thinker of the New Right, which challenges conservative free market orthodoxy.

Speaker 2 I think he's a really great thinker, even if sometimes I don't agree with him, and it's important to get people you don't agree with into great discussions.

Speaker 2 Paul Krugman is a Nobel Prize-winning economist who teaches at the City University of New York's Graduate Center.

Speaker 2 He also writes a newsletter on Substack, which I recommend you subscribe to, and he wrote an op-ed column for the New York Times from 2000 to 2025.

Speaker 2 Mariana Mazzucato is a professor of economics at the University College London, where she was a founding director of the UCL Institute for Innovation and Public Purpose.

Speaker 2 She's the winner of multiple international prizes, including Italy's highest civilian honor, and she advises policymakers around the world.

Speaker 2 I've interviewed before, and you'll really be impressed with her. This episode was recorded on Monday, February 10th, and it's sharp, substantive, and full of insightful disagreements.

Speaker 2 Also, I'm excited to announce that On and Pivot will be returning to South by Southwest this year as part of the official Vox Media podcast stage presented by Smartsheet.

Speaker 2 On Sunday, March 9th, Scott and I will be doing Pivot in the morning, followed by an episode of On with guest Chelsea Handler in the afternoon.

Speaker 2 Visit voxmedia.com slash SXSW to learn more and see everything else happening on the Voxmedia podcast stage. We'll be back with my panel of brilliant economists.
So stick around.

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Speaker 1 It is all.

Speaker 2 Oren, Paul, and Mariana, thanks for being on on.

Speaker 1 Hello, thanks for having me. Thanks for having me.

Speaker 2 So, normally, I would kick off an economics panel with questions about interest rates or tariffs, and we are going to get to that, but these aren't normal times.

Speaker 2 So, I have to start asking about Elon Musk's efforts. Some people call it a hijacking, other people call it a resetting of the federal government.

Speaker 2 So, I'm going to go straight to the heart of the matter. What are we seeing here with these private actors?

Speaker 2 And I know he's a special whatever employee, but it's unprecedented, certainly, in public policy. Let's start with Oren,

Speaker 2 Mariana, and then Paul.

Speaker 1 Sure.

Speaker 1 Well, I think what we're seeing is a sort of Republican or conservative backlash to the way that the Democratic Party has attempted to operate the federal government, really since the start of the Obama administration.

Speaker 1 You know, I was reflecting on

Speaker 1 how long have we really had this sort of thing going on? And it seems to me it's best understood as something that began during the Obama administration with the

Speaker 1 infamous kind of, I have a pen and I have a phone, or whatever the exact comment was, an effort to really use the executive branch of the government,

Speaker 1 not just in the places where the extent of its authority was always really pushed in foreign affairs especially, but to really essentially ignore Congress and use every law written to the to the most creative interpretation possible to accomplish whatever the person in the White House might want.

Speaker 1 And I don't think that's the way we should want the government to operate.

Speaker 1 But I think what we are seeing for the first time from the right of center is the sort of thing that has always been hypothesized, which is sort of, you know, it's all fun and games to do this until the other side is in power.

Speaker 1 And now the other side is in power.

Speaker 1 And I think we're seeing essentially taking every one of those authorities that were used as creatively impossible in one direction and now doing the same in the other direction.

Speaker 1 And some of it is a very useful corrective. Some of it, I would say, is a further erosion of checks and balances that ideally we could put back in place at some point.

Speaker 2 So what did the Obama administration specifically do that compares to what Trump is doing?

Speaker 2 They didn't have a private actor closing off federal buildings, shutting down governments in this way, correct?

Speaker 1 Aaron Powell, I think the private actor piece, too much of it is made because you can obviously appoint whomever you want in these various positions.

Speaker 1 Again, I don't know that Elon Musk is the best person to appoint to do any of this, but I think the question is to what extent is the executive branch actually going to operate on the basis of the statutes written by Congress versus to what extent is it going to operate as a free-for-all in line with what the White House wants to operate?

Speaker 1 And we have been in a free-for-all environment for quite some time now.

Speaker 1 You know, obviously on a number of fronts, the Biden administration pushed that envelope as well.

Speaker 1 And unfortunately, when you say we're going to have a free-for-all and then you lose the election, you end up up with a free-for-all you probably don't like as much.

Speaker 2 Mariana?

Speaker 6 Right. I mean, maybe just a different slant on this.

Speaker 6 If the question is, you know, what do we think about making government more efficient and even having some sort of a organization that's been tasked for it?

Speaker 6 You know, every country around the world talks about having a more efficient government,

Speaker 6 you know, less bureaucracy, so on and so forth. That's not what we're seeing.

Speaker 6 What we're seeing is a very explicit, but also idiosyncratic, dare I say random attack on specific organizations within government. It's not necessarily going to make government smaller, right?

Speaker 6 Because if you do it without being really strategic, with an eye on what is government for, you might actually create a mess along the way that then has to get picked up by government later, ex post, with the government budget.

Speaker 6 I mean, what you need to look at is what is the size of government?

Speaker 6 How is government actually using its funds in a strategic way to solve the problems of the people living in that that country who have voted for that government, as opposed to just an ideological swipe at government agencies, which again might look good in terms of the ideological kind of theatrical side of it, but whether it's even eventually going to reduce government spend is completely, you know, we'll see.

Speaker 1 Got it. Okay, Paul? Okay, so I think Arin is giving us a completely misleading picture of symmetry here.
Okay. This is nothing at all.
Look, what we have, all right, the U.S.

Speaker 1 government is a very complex institution, and Congress cannot specify it in its actions in all details. So in many cases, it grants agencies a lot of freedom to interpret what the law means.

Speaker 2 Unspecific power.

Speaker 1 Well, I mean, the example that I think is probably most relevant to democratic governments using that discretion would be environmental policy.

Speaker 1 The EPA has sort of a broad mandate to regulate pollution, but exactly what constitutes pollution

Speaker 1 can't be fully specified because the science is constantly changing.

Speaker 1 And they did use it to take action against climate change because they couldn't get that stuff through Congress.

Speaker 1 Obviously, I think that was a good thing to do, but that was simply pushing the envelope. But saying, okay, here's an entire agency created by law, USAID.
This is an agency.

Speaker 1 Congress has created that agency. You cannot, or we didn't think you could, just say, by decree, we abolish that agency.
We cut off all of its funding. We stopped all of its activities.

Speaker 1 And there's also a very explicit ideological tilt in what's going on here. You know, if you look at what Elon Musk said about killing USAID, he didn't say we think that we have some discretion here.

Speaker 1 He said, this agency is... completely staffed by left-wing Marxists who hate America.

Speaker 1 And you cannot,

Speaker 1 I defy you to find anything like that happening under a democratic administration. So the idea that this is kind of tit for tag, well, they did it, so we'll do it.
Or the idea, by the way, that if

Speaker 1 Obama and Biden had been more restrained in their use of executive power, that the current administration would be acting with restraint.

Speaker 1 That's ludicrous. Come on.
Who are we kidding here?

Speaker 2 Orin, would you like to respond?

Speaker 1 Well, I enjoy Paul's comments because this is exactly what happens when your side loses, right? I understand that this looks different in some ways.

Speaker 1 There are also ways in which, from certainly a scale of impact on the United States, what the Obama administration was doing was far more dramatic and egregious.

Speaker 1 I mean, I think climate is a perfect example where it was, you know, Larry Tribe himself essentially accused Obama of setting the Constitution on fire for specifically recognizing that Congress did not support what he wanted to do, vis-a-vis climate change.

Speaker 1 Nobody believes that the laws passed by Congress in the 1970s

Speaker 1 were intended to impose a cap and trade system on carbon emissions to go after climate change. But that's what the Obama administration wanted to do.
And so that's what it did.

Speaker 1 And whether you're talking about that, whether you're talking about the Biden administration's approach to the border and essentially saying we simply do not want to enforce our laws or maintain a secure border, allowing millions into the country in four years.

Speaker 1 And then you say, oh, and look at that, the Trump administration wants to defund USAID.

Speaker 1 Now, I absolutely agree with Paul that there are all sorts of problems with the way that they are going about doing that.

Speaker 1 But I completely disagree that you get to have your side in power and cheerlead along with a series of policies that completely disregard the actual constitutional authority and, for that matter, the interests of the American in pursuit to one ideological agenda.

Speaker 1 And then somebody else comes into power with a different ideological agenda, and you set your hair on fire and say, this is unprecedented and can't be happening.

Speaker 1 This is exactly what you get when you don't actually think through the consequences of how we are running the government.

Speaker 1 We could have a big argument on the facts there.

Speaker 1 It just ain't so. But I think that'll derail us completely.

Speaker 2 I did a panel last week on must take over and tech's embrace of Trump. Ann Apple made a great point.
It makes sense for tech CEOs like Mark Zuckerberg, Jeff Bezos, Sam Altman to acquiesce to Trump.

Speaker 2 In the long run, though, investors want to put their money in a country where they know the rule of law applies, an economy where the leader picks winners and losers like Hungary usually does poorly.

Speaker 2 Mariana, first, you see another dimension to this. You've said that people like Elon Musk act like parasites because they want to destroy the public investments that helped them build their companies.

Speaker 2 Tesla, for example, has received $4.9 billion in government support by 2015 and much more since then and his other companies, some of which are for services rendered, some of which were to help the car company itself.

Speaker 2 Talk a little bit about those dynamics and then I'd like the others to weigh in.

Speaker 6 Yeah, I mean, more than a parasite, he should have even just said thank you,

Speaker 6 right? So

Speaker 6 you mentioned different billionaires there.

Speaker 6 And if you look at all the technologies that allowed them to amass the wealth that they have, and I'll get to the tax issue in a second, that couldn't have happened not only without the government investments that got us the internet, GPS, touchscreen, Siri, but also, as you mentioned, the Tesla investment, part of that government subsidy was through a DOE guaranteed loan, of which the same amount, just a bit more, went to Solyndra.

Speaker 6 And any venture capitalist will tell you that for every success, you need to bear with, you know, six or seven or more failures. So that was true also for that government portfolio.

Speaker 6 So this idea that you want to, you know, get rid of waste in that particular case, had the government thought, you know, let's do this waste free.

Speaker 6 And so that, you know, in goes an input and out comes an output for sure without any risk, we would have never, you know, gotten to the moon.

Speaker 6 All the investments that actually got us to the moon and back in a short amount of time required lots of government risk-taking.

Speaker 6 So, the question is not so much, you know, should government be investing or not? Had it not invested, we wouldn't have anything smart in our iPhones.

Speaker 6 The real question is, how do we actually structure these investments in the public interest to socialize both risks and rewards?

Speaker 6 And especially then getting the companies that are massively benefiting, benefiting, and again, Google and Amazon and so on, to pay not only their fair share of tax, which they don't, and you don't need me to tell you that, everyone knows that, but also, you know, there's no reason that in the grants, for example, the grant that Google got for the algorithm, that we don't embed some pre-distributive kind of justice, right, to make, you know, if all things, you know, if things go badly, no worries, it's guaranteed.

Speaker 6 If things go well and you earn X billion, then a share of those profits comes back into the public coffer.

Speaker 6 Yazma, which I've written about since 2013 when I wrote the book, The Entrepreneurial State in Israel, does that, right? They've retained royalties. If the government in the U.S.

Speaker 6 continues to fund health innovation, which I think they should through the NIH just last year, over $40 billion, why are the prices of the medicines not reflecting that taxpayer contribution?

Speaker 6 There's all sorts of different ways, also with intellectual property rights.

Speaker 6 There's nothing wrong with patents, but if we abuse them, and many pharmaceutical companies have, where those patents are too wide, too strong, and too upstream, that's a bad deal for the public purse that has made that investment.

Speaker 6 And I think that's where the discussion should be. It's not whether the public sector should be making those investments.

Speaker 6 Because in health and energy and digital, without those public investments in the early, high-risk, capital-intensive phase, we would not have had almost any of the general-purpose technologies.

Speaker 2 Absolutely. Now, Paul, this is not what looks like what's happening here with them there at the inaugurations.

Speaker 1 Well,

Speaker 1 it's some question about how much they are trying to curry favor and how much they're just on defensive actions.

Speaker 1 Because the interdependence between these

Speaker 1 tech billionaires and government is so great,

Speaker 1 a government that

Speaker 1 feels that it's okay to award contracts to people it likes,

Speaker 1 tilt regulations to people it likes, punish people it dislikes, needs to be appeased. Warren? I certainly agree with Mariana's point about

Speaker 1 the importance of public research and funding even at early stages. The Israel example is a fascinating one that we've done a case study of at American Compass as well.

Speaker 1 And with Elon in particular, we make the point, he is, I think, literally humanity's greatest subsidy farmer. And subsidy farming can sound disparaging.
It's a descriptive term.

Speaker 1 Government creates subsidies for things we want more of and when people then take advantage of those and do things accordingly that is sort of what we want what we don't want is pulling the ladder up after you and saying and now we don't need any subsidies and i think you know it's an interesting tension right now among these tech folks that on one hand you have someone like elon who frankly i don't think exhibits a very good grasp of public policy generally

Speaker 1 uh and is is not pursuing uh a focus in in a lot of those areas we just talked about that's consistent with the things that were good for his businesses that would be consistent for other businesses.

Speaker 1 On the flip side, I think this is one of the places where a lot of the folks in the tech community have actually been most constructive.

Speaker 1 You know, somewhere that you hear others really making a stink is saying, wait a minute,

Speaker 1 this is where we actually do need state capacity at places like NIH, NSF,

Speaker 1 higher education research funding, and making the exact same point that Mariano was. So I think it's a lot more complicated than, oh, the tech guys are all coming in here to cut off tech.

Speaker 1 I don't think that's what's happening.

Speaker 2 Oh, no, they're all different. So let's go to the policy.
We're going to bounce around a lot. We'll start with tariffs.

Speaker 2 Trump said he's going to announce 25% tariffs on steel and aluminum later today, or you like tariffs, but you mock economists who say they cause prices to go up.

Speaker 2 What are critics getting wrong from your point of view?

Speaker 1 Look, my view of tariffs and of international political economy generally starts from the perspective that making things matters.

Speaker 1 That whereas a lot of formal economic analysis assumes that all GDP is equal, it doesn't matter if you produce any particular thing, it doesn't matter if you produce anything at all.

Speaker 1 In fact, for the long-run health of the economy, for the strength of communities, for the opportunities available to workers, you actually do need a strong industrial base, and you actually do need to be a leader, particularly at an economy like the U.S.,

Speaker 1 in leading edge technologies and actually producing them, not just designing them and sending them off where to be made.

Speaker 1 If you take that to be true, then I think it's quite obvious that free trade, as we have tried to pursue it in the past few decades, has not worked very well, that we have ended up in a system where we have sort of tied our hands behind our backs and said, we'll just let the market work.

Speaker 1 And other countries, China being an obvious example, have said we will use aggressive policy to attract the types of investment and industry that we care about.

Speaker 1 And the result has been an asymmetry that has hollowed out significant parts of the U.S. economy, that has harmed U.S.

Speaker 1 workers and is now translating to lower productivity growth, lower economic growth, slower innovation.

Speaker 1 And so then the question is, okay, what would you do about it?

Speaker 1 And I think tariffs are certainly not the entire solution, but they are an important part of the solution, essentially putting a thumb on the scale and saying we do have a preference for things being produced domestically over being imported in a situation where we have a massive trade deficit like we do.

Speaker 1 And so alongside the kinds of things that Mariana talks about that I entirely agree with about how to boost U.S.

Speaker 1 capacity to be more effective, I think you also have to counter the sorts of distortions that other countries are creating and that a tariff helps to do that.

Speaker 2 Okay, Paul, I'd like you to go first. Warren has criticized you for saying that trade deficits are self-correcting.
In fact, the U.S. trade deficit has never been higher.

Speaker 2 Address this idea of trade imbalances are inherently bad and tariffs are a way to solve them.

Speaker 1 Okay, so the first thing to say is when Oren says we have low productivity growth, I don't know if he's streaming in from another planet here.

Speaker 1 I mean, if you look at the rest of the advanced world, they're almost in a panic over how fast the U.S. productivity has grown relative to theirs.
We've vastly outpaced the rest of the advanced world.

Speaker 1 Where China is still still playing catch up, although China's productivity growth has not been that great in recent years.

Speaker 1 But America, if there's one thing that we are a real success story, it is, is aggregate productivity growth. What we have had is deindustrialization, which to some extent has happened everywhere.

Speaker 1 And that's where the trade deficit plays some role. And you could argue, although even if we completely eliminated the trade deficit,

Speaker 1 you know, I've done the math here. Instead of being 10% of GDP, manufacturing might be 13% of GDP.
It's not going to go back to being a quarter of GDP the way it once was.

Speaker 1 There is a case. Sectors matter.
There are strategic,

Speaker 1 I'm an industrial policy supporter, sophisticated industrial policy. The Biden administration was trying to do industrial policy with a nationalistic bent, no question.

Speaker 1 We were saying there are certain industries we have to have.

Speaker 1 But there's generations now of analysis by trade economists of suppose that there an industry really is strategic for whatever reason, whether it's technology,

Speaker 1 well, you know, or military capacity, whatever,

Speaker 1 and you feel that you really need to have production in that industry. A tariff is

Speaker 1 a blunt instrument. A tariff is, one way to think of it, is a production subsidy combined with a sales tax.
And even if you think that you want to encourage, why not do it with the production subsidy?

Speaker 1 Why link that to the tax on consumers?

Speaker 1 That's an extra burden. You can say, well, it has to be paid for some way, but why not some other way?

Speaker 1 And if you say that just subsidizing the industry is too expensive, well, saying doing it through a tariff is every bit as expensive or more so than financing it from some other revenue source.

Speaker 1 I mean, the lesson, again, this is many, many, economists are not. naive free markets are always right.
At least good economists aren't.

Speaker 1 They are definitely, there are lots of cases for intervention, but the argument is always that the intervention should be targeted for purpose.

Speaker 1 If what you want is to encourage production of something, then encourage production of it.

Speaker 1 Don't throw up tariff barriers and especially tariff barriers against everything, which is what Trump at least keeps on saying he's going to do, which makes no sense at all.

Speaker 1 And among other things, is...

Speaker 2 Warren wrote tariffs can provide powerful leverage. Was there anything that?

Speaker 1 I, you know, tried, we just imposed, or threatened to impose, and I don't know if we're about to impose again, tariffs on Canada to stop them from smuggling fentanyl, all of the 40 pounds of fentanyl that cross the border from Canada each year.

Speaker 1 I mean, the negotiating demands make no sense. You know, it is not the case that there's a world out there where everybody but us is being protectionist.

Speaker 1 China is a special case, and I do think I've been actually pretty hard lying on China, as were the Biden people. The European Union is not doing bad stuff.

Speaker 1 Canada's trade surplus with the United States is entirely caused by the fact that the Athabasca tar sands are close to the Midwest. And so it's entirely accounted for by them selling us oil.

Speaker 1 So you want to think about this and be concrete. I would say that it's very easy to make a kind of blanket.
Foreigners are doing stuff without specifying which foreigners and which stuff.

Speaker 1 And if you start to break it down, most of what this current administration is doing is just dead stupid.

Speaker 2 We'll be back in a minute.

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Speaker 2 Mariana, Trump has said he will definitely slap tariffs on the EU and he's called for EU's trade policy and atrocity.

Speaker 2 You've served as an economic advisor to both the European Commission and multiple government agencies within the EU. How should the EU respond to these threats?

Speaker 6 Yeah, I mean, can I just back up a bit just because I also had the honor to advise the Biden administration around the CHIPS Act.

Speaker 6 The Secretary of Commerce, Jean Eddamonde, actually called me a year before CHIPS came into being to think about how to actually structure it.

Speaker 6 And precisely going back to my previous point, let's not socialize just risks, but also rewards, making sure that government support to strategic sectors like CHIP, so that we don't over-rely on the ones made in Asia, have to have conditionality attached to it, right?

Speaker 6 Making sure that the corporate sector in the United States, which has and continues to benefit until these recent events from government support, subsidies, guarantees, loans, so on and so forth, do their bit, right?

Speaker 6 Because the big problem in the U.S. is not really the foreigners.

Speaker 6 It's the type of corporate governance that we've had, which one could even call profits without production, just this ultra-financialization.

Speaker 2 Okay, I'm going to get you to these tariffs on yeah.

Speaker 6 I mean, tariffs don't get us competitiveness. So we can, you know, have a tariff war.
But as many have been saying, that's not, you know, that's going to be a lose-lose strategy.

Speaker 6 So what Europe should do is definitely to negotiate.

Speaker 6 But also, in order to actually be able to produce the goods that the world wants to buy, they need a proper European-wide industrial strategy, which we haven't had.

Speaker 2 So let's keep moving.

Speaker 1 Well, I'm sorry, Karen,

Speaker 1 I was hoping we could just pick up briefly on the tariffs thing again. I just taking Paul's comments, I think it's really important to notice what's happened here, which is that

Speaker 1 economists, frankly led by Paul through the 90s and 2000s, delivered this kind of absolutist rhetoric that said that free trade was always the right solution. In fact, a country,

Speaker 1 Paul said, should pursue free trade regardless of what other countries should do. He said trade deficits are self-correcting.
He said, this is what we have to teach students.

Speaker 1 I appreciate hearing Mariana talk about competitiveness. Paul dismissed the concept of competitiveness as essentially irrelevant to an understanding of globalization.

Speaker 1 And by the way, he said the way to deal with anyone who disagreed with all of this was ridicule.

Speaker 1 And I think it's a real problem that we've gone straight from that to now, I'm very glad we're talking about sophisticated industrial strategy, recognizing that sectors matter, recognizing that the relationship with China is unsustainable.

Speaker 1 But we've skipped a step here.

Speaker 1 We need economists to actually acknowledge that they were wrong, why they were wrong, and then make sure that we're now adapting policy to this new way of thinking and not just going straight ahead to declaring the next thing deeply stupid because they don't like it either.

Speaker 1 Go ahead, Paul. Go ahead.

Speaker 1 No, I mean, I think I have written about what I got wrong about globalization. And what I will say, the biggest thing that has changed my perspective, there were two things.
There was one,

Speaker 1 I don't think anyone had fully appreciated the extent to which rapid import surges could disrupt communities. And that just wasn't in any of our models.
And that's the China shock story.

Speaker 1 But then what's really changed things, and I think has had a big impact on all of us, is that the world is a much more dangerous place. than we thought.

Speaker 1 I mean, there's a clause in the General Agreement on Tariffs and Trade, which does say that, you know,

Speaker 1 you can ignore everything else we've said here about if national security is at stake. And we all kind of thought that was a dead letter,

Speaker 1 that the age of wars of conquest was over. And guess what? It's not.
Now, in terms of

Speaker 1 now,

Speaker 1 I still don't see a way to make the U.S. trade deficit a problem.
That is just, I mean,

Speaker 1 we have full employment. We're not suffering from loss of jobs.

Speaker 1 The

Speaker 1 trade deficit, the counterpart of it is that a lot of foreigners are investing in the country because your trade balance plus net inflows of capital equals zero.

Speaker 1 So if foreigners are going to find America an attractive place to invest, then we're going to run trade deficits. What is a problem is that we have,

Speaker 1 are at risk or have been at risk of losing some strategic sectors. So it's not about the trade deficit.
And that in a way is the fundamental misconception of everything that Trump does.

Speaker 1 He thinks of it as trade surpluses, I'm winning, trade deficit, I'm losing. And that's not how the world works.

Speaker 1 What matters is do we have sufficient capacity in the things we need to have capacity in, which is very, very loosely linked to the overall trade balance. But we've skipped a step again.

Speaker 1 So the initial argument was that trade deficits are self-correcting.

Speaker 1 I don't think I ever said that. I think I said that trade deficits are not a problem.

Speaker 1 No, you wrote a piece for the American Economic Review in 1993, in fact, titled What Do Undergrads Need to Know About Trade?, in which you said we need to teach them that trade deficits are self-correcting.

Speaker 1 Okay.

Speaker 1 If I did say that, that was naive because we knew from history that, look, the United States ran a trade deficit through most of the 19th century.

Speaker 1 Britain ran huge surpluses through much of the 19th century for very good reason. America was a place that attracted lots of capital.
And Britain was a mature economy that had...

Speaker 1 more capital than it could use productively. So trade deficits are not the issue.
And

Speaker 1 if you are thinking that the U.S. trade deficit as opposed to U.S.
industrial capacity and strategic sectors, if you think that the trade deficit is the problem, you are part of the problem.

Speaker 1 You are misunderstanding where we are. And in fact, the success, I mean, I would say that the U.S.
technological success is the most important reason that we have a trade deficit.

Speaker 1 It's the fact that we have better productivity growth than the rest of the advanced world, and to a certain extent, better demography, that makes us a magnet for foreign capital.

Speaker 1 And it's just accounting. If foreign capital is going to be coming to America, then we are going to run a trade deficit.
Right.

Speaker 1 But the problem is that the foreign capital that's coming to America isn't actually coming to America because it wants to make essentially new greenfield investments in ways that benefit the U.S.

Speaker 1 economy or expand our productive capacity. Virtually all of the foreign capital coming to America is either buying up U.S.

Speaker 1 Treasury debt, it's buying up corporate debt, it's buying up equities, it's buying up real estate, even among foreign direct investment.

Speaker 1 What share of that is actual expansion or greenfield? Four or five percent.

Speaker 1 And so this phrase that, quote, the world is investing in America is just a very nice way of saying that what's actually happening is that rather than trade goods made elsewhere for goods made here, what we're doing instead is trading stuff from other places for our assets, for future claims on our economy.

Speaker 1 And that is a deeply unwise way to build an economy, and that is why the trade deficit is a very large problem. Okay.

Speaker 2 Republicans are keen to extend the 2017 tax cut, which would cost somewhere between $5 and $11 trillion in lost revenue over 10 years and lead to higher deficits,

Speaker 2 despite Trump's all-caps balanced budget post on True Social. Oren, you're one of the few Republicans who favors raising taxes as part of a plan to shrink the deficit.

Speaker 2 They're currently stuck in the mud as they negotiate internally over how much spending to cut along with those tax cuts.

Speaker 2 Republicans tend to be fiscal hawks when they're out of power, but usually melts away when they regain power. We've seen this movie before.
Are we about to see it again?

Speaker 2 And if so, what happens to our economy?

Speaker 1 Well, I think it's a huge problem. And I think the funny thing from my perspective is that it is a relatively recent phenomenon that Republicans behave this way.

Speaker 1 I always remind people that Ronald Reagan raised taxes five times after his initial tax cut delivered lower revenue than his supply side advisors predicted. George H.W.
Bush, of course, raised taxes.

Speaker 1 It is a sort of post-Reagan phenomenon that the party decided it it would never consider raising revenue.

Speaker 1 And that's just fiscally irresponsible. And so, you know, I certainly have no problem saying that and making that argument.

Speaker 1 If, you know, if there is cause for hope, it is actually that this current debate is already as big a mess as it is. I think there was an assumption

Speaker 1 a year ago, oh, if Republicans actually win, well, obviously they'll just extend TICCHA, the Tax Cut and Jobs Act. Who cares what it costs? And the reality is we're clearly not there.

Speaker 1 There is a quite widespread acknowledgement that this thing does not pay for itself.

Speaker 1 There's a recognition that we are now, we're not talking about a fiscal crisis someday. We are in one and the deficit does matter.

Speaker 1 And so you're at least starting to see some folks, more so in the House than in the Senate, actually say, wait a minute, how are we paying for this? How much of it should we actually extend?

Speaker 1 And even at the margin, some folks, you know, Jody Arrington, chair of the House Budget Committee, Chip Roy, who's the policy chair of the Freedom Caucus, saying,

Speaker 1 you know, we actually do need to think about the tax side of how we pay for it. Chip Roy has said maybe the corporate tax rate should go back up to 25%.

Speaker 1 And so that's by no means the consensus now, but it means we're in for a very interesting few months to a year of negotiation.

Speaker 2 Trump wants to cut the corporate tax rate to 15%.

Speaker 2 Paul, you've written that Treasury Secretary Scott Besson's 333 plan, which among other things calls for raising economic growth 3% through tax cuts, full on magical thinking.

Speaker 1 Thoughts? Look,

Speaker 1 there are a number of dirty little secrets in economics, and one of them is that raising the economy's rate of potential growth,

Speaker 1 the economy's capacity. Nobody really knows how to do that.

Speaker 1 We have things that we believe will move it in the right direction, tax cuts not being one of them, because there's absolutely zero evidence that that does the job.

Speaker 1 But any economic plan that is premised on I can raise the economy's growth rate sustainably from the 1.8% that the Congressional Budget Office thinks we're going to do to the 3%,

Speaker 1 that's just pure fantasy. There's nothing

Speaker 1 in any of our experience that says that we know how to do that. So that's magical thinking.

Speaker 1 There's a lot of other stuff in there that's magical thinking as well. And I think it is critical to understand.

Speaker 1 So I'm often, I didn't invent this, but I've seen people seem to give me the credit that the federal government is an insurance company with an army. If you ask, where does the money go?

Speaker 1 It goes to Medicare, Medicaid, and Social Security, and a few other safety net programs plus defense.

Speaker 1 And Medicare and Social Security are largely untouchable.

Speaker 1 If they ever actually try to go after Medicaid, they're going to discover that 70 plus million Americans depend on it, a lot of them in red states. So we're going to need more revenue.

Speaker 1 And it's not a whole lot. The U.S.

Speaker 1 fiscal position is not nearly as dire as, first of all, as we used to think it was because we've been much more successful at controlling health care costs than anyone expected.

Speaker 1 How much of the credit for that goes to Obamacare? How much it's just, you know,

Speaker 1 something went right.

Speaker 1 And we have better demography. than other advanced countries, although that's partly because of immigration.

Speaker 1 So we're not actually all that deep in the hole in terms of the long-run fiscal. But

Speaker 1 we cannot.

Speaker 2 We don't need these tax cuts.

Speaker 1 We can't afford further tax cuts. We actually need, you know, you can possibly make the case that another

Speaker 1 2% or 3% of GDP and revenue might be enough to basically get us through the next 75 years or whatever is your time horizon. But

Speaker 1 if you say that we're in a crisis, I mean,

Speaker 1 the markets don't think so, right? No, they don't.

Speaker 1 There's no hint that markets think that we're going to default or that we're going to inflate it away.

Speaker 2 Okay. Mariana, you've been one of the most prominent champions of using industrial policy to kickstart innovation and revenue.

Speaker 2 But Besant is talking about ending Biden's industrial policy, which saw massive public investment through the Inflation Reduction Act and the CHIPS Acts. He wants to cut back on state subsidies.

Speaker 2 With this focus on tax cuts, what do you think the problem will be?

Speaker 6 Well, as Paul was saying, I mean, what really matters is expanding the productive capacity of the economy. And what's very interesting is that those periods in history where the U.S.

Speaker 6 actually had strategic industrial strategy of the kind that got us DARPA and NASA, which, you know, again, don't forget that it wasn't technology policy, right?

Speaker 6 It was, you know, on the way to the moon and back, we got camera phones, foil blankets, baby formula, using outcomes-oriented procurement for all those different problems that the astronauts might have.

Speaker 6 including how to go to the bathroom, what to eat, so on and so forth, that stimulated huge amounts of innovation. And that was with a top marginal taxation rate of over 90%.

Speaker 6 You know, Eisenhower was not a communist. He was a Republican military general.
And so there's very little evidence, right, that just lowering or increasing taxes is going to solve the day.

Speaker 6 But what we definitely know is that in order to finance these strategic investments, of course, we need the revenue.

Speaker 6 I mean, there is, of course, the whole MMT debate, which we don't have to go in here, which is true, though, right? Like anytime there's a war, money appears out of thin air.

Speaker 6 But, you know, that's a separate debate.

Speaker 6 But when we have big problems, like fighting climate change, making sure we have health for all and getting good relationships with the pharmaceutical companies instead of the parasitical relationships, that actually can stimulate huge amounts of investment in innovation.

Speaker 6 And what we need for that is a tax policy that also rewards long-term patient investments. It's not just finance that we need.
We need long-term patient finance. That's what gets us innovation.

Speaker 6 Instead, as long as we have a taxation system, for example, the structure of capital gains tax, which actually rewards short-termism, and we have the trillions being made globally or made just almost at the millisecond level in terms of just assets, existing assets being moved around instead of actually productive capacity, that should be the biggest question of our time.

Speaker 6 What is the tax change that we need to drive those long-term investments and reward also those companies that are making those investments instead of just buying and selling existing assets?

Speaker 2 So, Oren, unlike most Republicans, you actually believe in industrial policy and you think they should be used to bring back manufacturing jobs.

Speaker 2 Trump said he's going to bring back manufacturing jobs since 2016. He's had little success on his first go-round.
But what do you think Trump 2.0's approach should be to manufacturing?

Speaker 2 Why should it prioritize manufacturing jobs over other types of work?

Speaker 1 Well, I guess there's a couple of different questions in there. With respect to a focus on manufacturing, I think there are a few reasons why it's a particularly important area for focus.

Speaker 1 One is just that it is sort of the odd man out right now, that to Mariana's point about patient capital and so on and so forth, actual investment in capital-intensive, labor-intensive, takes time to build, takes time to deliver return types of economic activities are just disfavored in our financial system today, right?

Speaker 1 And, you know, and this is more a problem in the right of center where you have a free market ideology that says, well, whatever people are allocating capital to is going to be the most productive thing.

Speaker 1 that's simply untrue. And Adam Smith wouldn't have believed it.

Speaker 1 There's nothing in economics that says it's true.

Speaker 1 And so I think what we're looking for is places where the actual social value and value to the macroeconomy is going to be significantly higher than the return that financial markets are currently offering.

Speaker 1 uh to investors and that's where you know manufacturing and i think kind of industry is a useful term a little bit more broadly because uh when it comes to energy, natural resources, agriculture even, it is that activity in the physical economy that we're talking about generally.

Speaker 1 And one reason we care about it, to Paul's point, is the national security dimension, is the national resilience piece of it.

Speaker 1 Another area is I think it actually really is fundamental to innovation and sort of development of technology and engineering and so forth.

Speaker 1 I also think historically it is where you actually expect to see a lot of productivity growth. You know, I take Paul's point that economy-wide productivity at least looks on trend.

Speaker 1 Productivity in our manufacturing sector has actually been declining for more than a decade.

Speaker 1 Not productivity growth, absolute productivity has been falling so that you need more labor in an American factory than you did a decade ago to generate something.

Speaker 1 That shouldn't even be possible in a capitalist economy. And it is not good, I think, for the overall health of the economy.
It's not good for the types of jobs we're creating

Speaker 1 in the broad range of communities for the broad range of workers who aren't going to be doing tech and finance in a coastal city.

Speaker 2 We'll be back in a minute.

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Speaker 2 So I'm going to finish up to talk about AI, which sort of dovetails into this, which many people think will end up destroying more white-collar jobs and blue-collar jobs.

Speaker 2 It can reshape the world economy in ways we haven't conceived of yet. That's the overall.

Speaker 2 Mariana, you're currently in Paris for the AI Summit, and you've written that it's crucial for Europe to step in right now and regulate AI in a dynamic and adaptable way, in part because America isn't doing that.

Speaker 2 So before I ask about AI and America, how will Trump's AI deregulation affect the rest of the world?

Speaker 6 So first of all, I don't think you can just regulate AI. You need to create it from the start with the right direction.
And I think that's what we learned from the whole Silicon Valley experiment.

Speaker 6 Had we actually thought in a more pre-distributive way to actually get the relationships between all these public funds and the private sector right from the beginning, we wouldn't have to be in this kind of regulatory mess now where we have to defend all sorts of issues, for example, around privacy.

Speaker 6 So actually bringing together at the government level, both in the U.S.

Speaker 6 and in Europe and anywhere, really, those that are in charge of kind of innovation policy and industrial strategy with those thinking about competition policy.

Speaker 6 Currently, these are different types of economists, different types of practitioners, and thinking about competitiveness for what, but also AI for what.

Speaker 6 Again, all the big technological changes we got in the past were not by obsessing about technology. The internet did not come about because someone had an internet policy.

Speaker 6 The internet was a result because we needed the satellites to communicate. GPS was the result of needing to know where the ships were by the Navy.
So a big question today is AI for.

Speaker 6 And, you know, what we should actually be asking is, you you know, how it can be incredibly useful for all these urgent problems that the world has around health, around water.

Speaker 6 The global hydrological cycle is at risk, and there's all sorts of data and AI-specific

Speaker 6 solutions that we need.

Speaker 6 But as soon as we just have, for example, an AI industrial strategy where we put a money figure against it, as the United Kingdom is doing right now, it's just not how kind of technology evolves.

Speaker 6 And it looks actually quite insecure also because they will be outspent by others.

Speaker 6 But I think what Europe does do do well and has done well is thinking always about regulation for kind of people and planet.

Speaker 6 So, the GDPR rules in Europe, I think, are progress in terms of civilization.

Speaker 6 But, you know, one of the questions is how do you design regulation so it stimulates innovation instead of hurting? Yes.

Speaker 2 So, Paul, I have two one for question for Orton and one for you. But, Paul, first, you've pointed out the recent deep seek news shows there might be an AI bubble.

Speaker 2 And you've written, if the bubble bursts, there might be a tech bro bailout. How would Americans react to this crash and a tech bro bailout if that was the case?

Speaker 1 Yeah, so I mean, on the whole AI thing, by the way, I mean, this is one of those situations where I have zero expertise in it, so I could go to people who really know something.

Speaker 1 And it's one of those situations where I can find somebody who will tell me whatever I want to hear.

Speaker 1 It's all from this is a minor blip that will add 1% to GDP to

Speaker 1 we're going to have artificial general intelligence any day now, and then Skynet will kill all of us.

Speaker 1 So

Speaker 1 it's very hard to assess. What is definitely true is that companies are investing like crazy in this without, I think, a clear sense of what it's going to do for them.

Speaker 1 And the market is putting huge valuations on it without a huge sense. And the sociology, if you like, of

Speaker 1 this AI boom feels. a whole lot like like 1999.
It really feels like the internet bubble.

Speaker 1 And so I think it's a good bet, not a certainty, but a good bet that a lot of people are way overvaluing this stuff and that there's going to be a crash. Now, what is really different is that

Speaker 1 for the most part, the 90s bubble, these were small, scrappy upstarts and

Speaker 1 they had nothing to do with Washington. This time, it is the Silicon Valley oligarchs who were sitting in the front row at the inauguration, which leads you to believe that

Speaker 1 if, as I think they probably will, but I'm not sure, but if things go bad, that we're going to be seeing a lot of a bailout.

Speaker 2 Trevor Burrus, Jr.: All right. Warren, you've been underwhelmed by AI, I know.

Speaker 2 So instead of asking about the topic, or maybe you want to talk about this, but there is a movement in antitrust with the Trump's picks for key antitrust enforcement, like Gail Slater at the DOJ, Andrew Ferguson and Mark Meder at the FTC.

Speaker 2 They will go after big tech. And in fact, J.D.
Vance,

Speaker 2 antitrust is one era where J.D. Vance was strong on.
So

Speaker 2 what do you see happening here with relating to the tech sector around AI and antitrust in general?

Speaker 1 Well, I think with respect to AI,

Speaker 1 we've found a point of agreement for me and Paul, which is good.

Speaker 1 I think that is very similar to my own impression.

Speaker 1 I think the point, I guess, just at the end about whether it leads to bailouts, I guess would depend on sort of what the impact of the blow-up is likely to be.

Speaker 1 One of the great things about these sorts of bubbles from the railroads once upon a time to

Speaker 1 the broadband build out in the late 90s to potentially this is you actually get the infrastructure, which is enormously socially valuable.

Speaker 1 And then you have a bunch of folks who committed an awful lot of

Speaker 1 capital to equity and so forth who don't get the return they were looking for.

Speaker 1 The nice thing about something like the tech sector is you don't have the sort of systemic exposure that you do in a financial sector that motivated a lot of those bailouts.

Speaker 1 You don't certainly have the same level of employment that affected the Detroit bailouts.

Speaker 1 The flip side is you may just have so much stock market valuation tied up.

Speaker 1 And so I think that is

Speaker 1 just how I would think about it is recognizing there's definitely a problem here. I don't notice that it is the same problem that we've seen elsewhere.

Speaker 1 Just with respect to antitrust, quickly, I think you're right.

Speaker 1 One of the things I've been most encouraged by in terms of the Trump administration's initial appointments is Gail Slater at DOJ and Mark Mehter at FTC. He had those two positions to fill.

Speaker 1 Those two names were the two names on the wish list of those of us sort of on the new right who would like to see a much more aggressive approach on antitrust.

Speaker 1 Both of them in both, I think, sends a pretty strong signal.

Speaker 1 And I think therefore what you're likely to see

Speaker 1 when it comes to a lot of these tech companies is,

Speaker 1 first and foremost, just a lot more scrutiny of mergers going forward, as opposed to an assumption that mergers are always wonderful, why not?

Speaker 1 And then I think you're likely to see a lot more pressure for some sort of regulatory response where they are basically operating like public utilities.

Speaker 1 And I think there's a lot more openness to a recognition that, you know, certainly Chicago school, you know, Robert Bork, Milton Friedman economics simply does not apply to how these markets are operating, how these businesses operate within them.

Speaker 1 And so, you know, what that means in terms of concrete, so what, what you do, I think is very much an open question. But it is a good thing that we're at least starting from a position now,

Speaker 1 recognizing that you might have to do something.

Speaker 2 Do you see Trump doing that after the bear hugs he's been getting from them?

Speaker 1 I think it's it's certainly possible. I think Trump himself has never made these kinds of things a priority beyond sort of complaining about big tech when it had sort of political salience.

Speaker 1 You know, we obviously have all of this headline, very disruptive first hundred days activity. We also have a four-year administration of an entire federal government operating ahead of us.
And so

Speaker 1 what those folks put in position and given authority to do are then able to do, I don't think we know yet. And I am more optimistic than I would have been in Trump one.

Speaker 1 I think appointment by appointment in these political economy roles, the people in them are better than the people last time around.

Speaker 1 But there's obviously also a lot of, there is no shortage of contradictions in a Trump administration and

Speaker 1 predictions are, as with AI, I would say predictions with respect to Trump are usually unwise.

Speaker 2 Okay, last question. Can you, each of you, say what you think the most important things from an economic perspective to pay attention to?

Speaker 2 And what would be your

Speaker 2 warning thing that you're most worried about? First, Mariana, and then Paul, and then Warren.

Speaker 6 So I think that one of the most important things in terms of global capitalism is how to debunk this idea that it's going to be either socialism or full-blown dysfunctional capitalism.

Speaker 6 There's a way to actually shape the capitalist system to be much more inclusive than it currently is and more sustainable.

Speaker 6 So ultimately, it's about shaping markets, not fixing them, and having a pre-distributive lens on how to get those relationships right from the start.

Speaker 6 When people are not benefiting from the wealth creation that an economy produces, when the value that's being created is not getting reinvested back in, but it's getting financialized, you know, this doesn't help workers.

Speaker 6 And when people feel left behind, unfortunately, what we see from the history of populism is that it's just easier then to kind of follow the sway of those that come with easy answers, blaming immigrants, blaming in the U.S.

Speaker 6 case, the Mexicans, the Chinese, as opposed to really addressing the core root of what's causing the structural reasons for that inequality.

Speaker 6 What's also interesting, I think, with the Trump administration is, of course, they get some things right in terms of their analysis of the symptoms of the problems, but they get completely wrong the diagnosis of what to do about them.

Speaker 6 And so, I think what should be done is to really hold to account what's being said in terms of this very easy, kind of populist way, again, of just blaming others, whether

Speaker 6 those who are against those policies can actually make sure that they really highlight why we need the right diagnosis, just like with the doctor.

Speaker 6 If they don't know why you're sick, you shouldn't trust the medicine that they're giving you.

Speaker 1 Okay, Paul. Oh, wow.

Speaker 1 Yeah, I mean, I don't think we're looking.

Speaker 1 in spite of the fact I think that we have probably a serious AI bubble, I don't think it's big enough to pose major economic risks. And

Speaker 1 it's not systemic the way that the banking problems were.

Speaker 1 And tariffs, although I think they're bad and are going to make us poor, it's not huge numbers. The thing that worries me most is actually immigration and deportation.
That is

Speaker 1 just,

Speaker 1 first of all, I think if you try to do some numbers about what really large-scale deportations would do to the economy, that's a bigger deal than trade policy.

Speaker 1 And it's also, of course, in human terms, a really big deal. And it's something that if it gets going, I think runs out of control.

Speaker 1 It's not, you know, tariffs are just dollars and cents, and Trump can turn them on and off. If a serious crusade against immigrants gets going in America, then I don't think he can turn it off.

Speaker 1 I don't think that's a policy variable. I think there are going to be abuses.
There's going to be fear. People will

Speaker 1 self-deport or at least self-remove themselves from the labor force. And you try and think about how dependent key sectors, agriculture, construction are on immigrant workers.

Speaker 1 undocumented but I'm not sure that if this thing gets going that that that distinction is going to matter very much

Speaker 1 then you know if you ask me what could really really screw up the US economy over the next few years it would be

Speaker 1 anti-immigrant sentiment run amok. Okay, Oren?

Speaker 1 Two things I'm watching, and we've talked about them both already, U.S.-China in particular, I think, you know, a much sharper decoupling between those economies on both the trade side and the investment side

Speaker 1 has been argued for and embraced on a pretty bipartisan basis at this point.

Speaker 1 The most important element, I would say, is do we actually withdraw permanent normal trade relations, which is, you know, that what what started all this rolling 25 years ago welcoming china to the wto um doing that is a a bipartisan recommendation of the house china committee of the u.s china security and and or economic security commission uh it was in the trump platform at the convention uh if that actually moves forward and that would require congress um that's that's a sort of different order of magnitude you know that is yeah i just will note you said the u.s must break from china or else become irrevocably corrupted by it.

Speaker 1 Yeah, I think it's certainly something we've been working on pretty intensively. There's also very good now bipartisan legislation to do it.
And so

Speaker 1 that is sort of the big kahuna trade action in a sense. And if it moves forward, I think ultimately it would be very much for the good, but it will be a very dramatic shift.

Speaker 1 And then the other one I think to really keep an eye on is this tax fight. Because on one hand, I take Paul's point that the U.S.
is perhaps closer to

Speaker 1 a healthy

Speaker 1 fiscal position than certainly a lot of other places.

Speaker 1 I also think the interest rate picture is a real problem at this point. We are seeing even as the Fed tries to cut rates over the last year or so, Treasury rates have been going up, not down.

Speaker 1 We are at a point where interest itself on the debt is at this point driving ever higher deficits.

Speaker 1 And I think if Congress goes in a direction that shows a fundamental lack of seriousness and an intention to take the share of GDP that's just government borrowing, you know, up north of 2 trillion indefinitely, I think that has very serious macroeconomic risks.

Speaker 1 Whereas conversely, if there's even the faintest glimpse of seriousness about getting some of it under control, I think that would be hugely encouraging. All right.

Speaker 2 Thank you so much. I know we jumped all over the place, but I do appreciate it.
And that you actually agree on things and disagree, which I always like to hear. Thank you.

Speaker 2 On with Kara Swisher is produced by Christian Castor-Rousselle, Kateri Yoakum, Dave Shaw, Megan Burney, and Kaylin Lynch. Nishat Kerwa is Vox Media's executive producer of audio.

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