Title: Paul Krugman on Tariffs

[MUSIC]

Brian Lehrer: It's the Brian Lehrer Show on WNYC. Good morning, everyone. You know the old comedy, the Keystone Cops, the police officers who bumbled and bungled their way through their jobs? Maybe we are now seeing a strain of the Keystone Dogecops or the Keystone Downsiders, or less charitably, the Keystone Authoritarians doing this in ways that grab more power from other branches of government more than they save the taxpayers' money.

What's the context for all this? There is an ever-increasing list of blunt instrument chainsaw-type firings that are being reversed. The latest, which came yesterday, maybe you've heard this, is a court has ordered the administration to reinstate 6,000 Agriculture Department employees. Why? They all got letters saying they were being fired for poor performance, when actually no performance reviews went into those dismissals. It was just a firing of everyone in their employment category.

Imagine if that happened to you, fired with a paper record that says you performed poorly when you weren't evaluated that way at all. It's not a one-off. NBC News notes the ruling affects only the USDA, but other agencies have carried out similar mask firings of probationary employees, meaning the order could have a wider impact. Here's another one, also from NBC News, "Trump admin is rethinking Guantanamo immigrant detention plan amid cost issues and power struggles."

Cost issues and power struggles, so maybe that doesn't turn out to be a good deal for the taxpayers either. Add those to the list, which already included this from Politico, "Trump administration backtracks on Forest Service firings," and this from Reuters two weeks ago, "Federal workers responsible for America's nuclear weapons, scientists trying to fight a worsening outbreak of bird flu, and officials responsible for supplying electricity, just those little things, are among those who have been accidentally fired in President Donald Trump's rush to lay off tens of thousands of workers."

"In and about face," says Reuters, "The Trump administration is now rushing to rehire hundreds of those workers." To make another old pop culture reference, maybe it's the gang who couldn't fire people straight. At the same time, here are two new reports from the last day. From the New York Times, "The Department of Veterans Affairs is planning to eliminate more than 80,000 workers, according to an internal memo," says the Times.

From the AP, "The IRS is drafting plans to cut as much as half of its 90,000-person workforce." All of this comes as, once again, President Trump has announced new tariffs, then started to unannounce them, maybe because the Dow lost like 1,300 points in two days when they took effect this week, among other reasons, but he added this new tariff agenda in his address to Congress on Tuesday night.

President Trump: April 2nd, reciprocal tariffs kick in, and whatever they tariff us, other countries, we will tariff them. That's reciprocal, back and forth.

[applause]

Brian: Let's talk tariffs, the good, the bad, and the theater of them, and the keystone downsizing with Paul Krugman, the Nobel Prize-winning economist, economics professor at the CUNY Grad Center, author of the book, Arguing with Zombies: Economics, Politics, and the Fight for a Better Future, now out in paperback, and recently retired as a New York Times columnist, but now writing a Substack newsletter, and writing more than ever. I know because I'm on his list, and he's in my inbox practically every day. Dr. Krugman, glad you're still coming on with us post-New York Times. Are you feeling your oats because you have more to say than a once or twice weekly column would have allowed?

Dr. Krugman: I'm certainly having more flexibility. I get in there more than twice a week, and I can do a little bit more stuff. I don't need to worry too much about offending people anymore, and my God, a lot of what's going on is up my alley. It's terrible times for America and the world, but great times to be writing about international economic policy.

Brian: Here's one more news headline, this one from ABC News yesterday afternoon, "Stock market surges after Trump permits car makers one month tariff exemption." Can you explain what Trump took back just a day after he put it into effect?

Dr. Krugman: I have to say, even I didn't see this coming. Trump began his trade war with very high tariffs on Canada and Mexico, which are our neighbors, our allies, and are very, very integrated with the US economy, above all automobile production. There is no such thing as a US auto industry. There's a North American auto industry with different pieces of the production process all across both our northern and southern borders. The parts in an individual car may cross borders seven, eight times before you end up with a finished automobile.

Suddenly you slap on 25% tariffs on that industry, and it's catastrophic. Auto industry executives have been saying, "I don't see actually how we continue to produce under these circumstances. At the very least, our prices need to go way up." After first doing it, then Trump said, "Oh, actually, I'm going to postpone it for a month." That's almost worse, because how do executives plan? There's one set of things you would do as a crash program to prepare yourself for the dissolution of this continent-wide industry.

There's another set of things you do if you think that we're actually going back to the old days of, we have a free trade agreement which Trump is just violating. If you think that agreement is going to hold, you do something different, which course of action do you take? If I were an auto industry executive, I would first of all probably be drinking, but I'd also be sitting on my hands. Who's going to invest? Who's going to make any commitments to production when day by day the story keeps changing?

Brian: That's why I tied it to the firings of nuclear weapon safety workers and then having to rehire them. All this lurching forward and then back now seems to apply to the tariffs as well. What's your take on the big picture?

Dr. Krugman: The big picture is that you have some people bringing-- In many ways, this is the Musk administration rather than the Trump administration. Trump has some fixed ideas about tariffs, but then he's brought in Elon Musk, who seems to be actually doing most of the active stuff. In general, these are not people who know anything about how policy works, about how the US government works. Musk has brought in various names, the Musk and Yugen, whatever you want to call these kids, into this--

The federal government has 2 million civilian employees. A lot of them are doing very important things. You bring in a bunch of people with zero experience in the area, zero knowledge, who think that they can ask ChatGPT to solve their problems, and they start firing people without any sense of what these people do, whether it's important. Then they start discovering, "Oh, we just fired the people who keep our nuclear weapons secure." They tried desperately to rehire them, except they can't reach them because they've been shut out of their government email accounts.

Brian: As we learned in this court ruling, thousands were fired for poor performance when there was actually no performance evaluation. Then it went in, it was just a categorical employee cut. Trump, however, does seem to really believe tariffs are largely a good thing for the economy, maybe if they were more predictable than this lurching back and forth he's doing, but especially for growing or reclaiming manufacturing jobs. Here's one more clip from Tuesday night's speech in which he claims the prospect of tariffs for automobile imports is already having a positive effect.

President Trump: Already, numerous car companies have announced that they will be building massive automobile plants in America, with Honda just announcing a new plant in Indiana, one of the largest anywhere in the world.

[applause]

Brian: Dr. Krugman, number one, do you know if that Indiana Honda plant is real as he described it? We always have to fact check claims like that. More broadly, why wouldn't it happen the way he says, to really have the conversation, the purpose of tariffs is to make it more profitable to make your product in this country and create jobs here to do it? Why would that not work?

Dr. Krugman: First thing to say, whether this stuff is real or not, and whether it was already in the works before Trump came along with his tariff plans, we've been burned on that a number of times. I think there's every reason to be skeptical. Look, the item that is subject to the tariff, the price goes up, which makes it more profitable to produce in the United States, but everything that's downstream of the tariff becomes more expensive. Some of that hits consumers.

What's actually interesting, in comments, I find interesting, a lot of trade these days is not in final goods. A lot of trade is in stuff that is at some point along the chain of production, which is especially true, the auto industry trade with Canada and Mexico. A large part of what we buy from those countries is actually stuff that goes into, it's parts that go into manufactured goods, it's raw materials. When Trump puts tariffs on steel and aluminum, which he's done, that raises the cost of manufacturing anything that uses steel and aluminum, which is basically anything.

We have a number of estimates of the tariffs Trump put in the first time, and all of them say that they actually reduced the number of manufacturing jobs because the cost increases for manufacturing production in the United States outweighed any effect you had of encouraging-- Yes, he encouraged people to produce stuff in the United States, but you also make it way more expensive to produce stuff in the United States. There's every reason to believe that that will be the case here, and that doesn't even get into the secondary effects.

We sell a lot to Canada, we sell a lot to Mexico. Do you think that they are not going to retaliate? The Canadians have already announced a set of retaliatory measures, the Mexicans say they are going to announce stuff on Sunday. The countries that we trade with are not just-- It's mutually beneficial trade, but also they're furious with us. The idea that this is going to be positive for US manufacturing, it's not living in the world I'm living in.

Brian: There's a larger concept here too, though. I think it's fair to say that both the Democrats and the Republicans have now started walking away from the free trade models of the last 30 or 40 years. The idea was, as you well know, that a no-tariffs global economy or a neoliberal economy is, I think, another word for it, lifts all boats, but we see how the US middle class has suffered. The left opposed it before the right did. Is any of that wrong?

Dr. Krugman: There's a little bit of truth to it. It turns out that some of the downsides of globalization were bigger or at least different from what we understood. I personally have said that I didn't understand quite how much some communities would be disrupted by surging imports. The Biden administration had a-- They certainly weren't free trade purists, but they weren't exactly protectionists either. What they believed in was that there are some industries that are strategic, that we need to preserve either for national security or because they were playing a particularly important role in environmental policy. For the most part, they did not do tariffs. For the most part, they did subsidies.

If you want to produce something, if you want more of something produced in the United States, a tariff which raises costs to consumers is a very blunt instrument, and it may actually backfire because of retaliation, because it raises costs to other industries. If you want more of something, then subsidize it, pay to have more of something, which is what we were doing under the Inflation Reduction Act, which is what we were doing under the CHIPS Act. I think it's very wrong to conflate.

There was a blanket globalization is always good view that some people held, Davos Man, and that's not widely held in either political party. There's a world of difference between believing that we need some strategic interventions to support particular industries, and believing with Trump that you can impose tariffs on everything. Somehow or other, that won't raise consumer prices, and somehow or other, there won't be any blowback on US industry, which is what he seems to believe.

Brian: Interesting. Few more minutes with Dr. Paul Krugman, the Nobel Prize winning economist, CUNY Grad Center, economics professor, now a Substack newsletter writer. Almost every day, I have to start a whole separate file for you in my inbox now that he's retired from the New York Times. You wrote in the newsletter that despite everything so far, everything you've been discussing, everything that others have documented, the lurching Dow, most business leaders seem to have faith in where Trump and Musk are taking us economically. Why do you think that is? Since they have big investments in the game, and uncertainty is always considered an investment killer, why do they have faith, and why do you doubt their judgment if they do?

Dr. Krugman: I think they have faith or this is being shaken a little bit in the last few days. They say, we've got business people. Trump is a businessman, Musk is a businessman. They have our interests at stake. They're not going to care about little things like environmental regulation or financial regulation. They're going to cut our taxes. That's all great. Surely, they don't mean all of this crazy stuff, seriously. There's a lot of insulation. In some ways, I've seen this a lot. I mingle with various kinds of people.

Sometimes being wealthy and powerful and important can actually make you less informed because people tell you what you want to hear. The average person listening to NPR or reading the New York Times may actually be better informed about the world than some CEO in a corner office. It's a weird thing, but it's actually true. What I think, in particular, they fail to understand is just how ill-informed, aside from everything else, bad intentions is a given here, but lack of information.

The thing about Musk, the fact that CEOs think that Musk is doing a good job, when so far we've had two progress reports from Doge about what it's been doing to save money. The first report was full of crazy, ludicrous errors. They misread $8 million as $8 billion. They triple counted one contract. They retracted that report, and then issued a second report, which was much smaller, and it's also full of ludicrous errors. As I said in my Substack, if you had hired an efficiency consultant who did that kind of thing, you wouldn't praise him and keep him on the job. You'd have security escort him out of the building and change the locks, but I don't think that CEOs are ready to believe this yet.

Brian: With all these firings that turn out to be, even by their own lights, wrong, and sometimes by the lights of a court, and rehiring people. You write in your newsletter, one of these days they're really going to break something important. Yet, now we have, and we'll end on this, these stories about cutting 80,000 people from the Department of Veterans Affairs, that just out yesterday, and this other one just out yesterday, up to half of the 90,000 IRS employees. I don't know how closely you've ever looked at the IRS, but what would you say to a listener who hears that and thinks, "Gee, does it really take more than 45,000 people to process our tax returns? 45,000 people?"

Dr. Krugman: Yes, it does. The problem is not you and me, and it's not the person in the street. The problem is mostly actually wealthy people who do a lot of tax evasion. If you're a salary-earning regular guy, then your income is reported by your employer, and there's really no difficulty. It's very easy to collect your taxes. If you're a wheeler dealer with fingers in dozens of different pies and moving money between accounts, then it takes actually quite a lot of auditing and careful policing to make sure that you pay what's owed. What we're doing here is we're crippling our ability to crack down on tax evasion.

These cuts at the IRS, they're not going to save money. They're going to actually balloon the budget deficit because we won't have the resources. It's really important-- I have a second. We've had anti-government ideology running things in Washington for decades now. The federal government is not a bloated bureaucracy. The federal government is a very stingy operation with old equipment and inadequate staff and stuff held together with scotch tape and paper clips because the Congress doesn't allocate enough money to run it.

It's kept going only by the fact that we have a lot of dedicated civil servants who are trying to make it work. Now these people are being fired for bad performance when they haven't even had a performance review. What do you think that's going to do to the effectiveness of our government?

Brian: We will leave that rhetorical question as the last word. Paul Krugman, thanks. You can promote your newsletter if you like. How can people read you in your new writing life?

Dr. Krugman: Paul Krugman is the name of the Substack. Just Google Paul Krugman Substack and you'll find it. I've been busy.

Brian: Thanks for continuing to come on with us. Let's keep talking for the benefit of our listeners.

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