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J. P. Dwyer's avatar

Dr. Krugman, Good clear explanation. I’m convinced you had to be a really good teacher with lucky students who would walk out of one of your lectures delighted that they now understood a complex economic theory that they had not understood previously. Clear explanations of complex things are not easy to do, and you continue to do those explanations well. Thank you for not just taking up golf or bird watching when you left the Times but instead exploring SubStack. Now, not just your young students benefit from your expertise and writing skills. We all enjoy your posts and learn something from the enjoyment. Stick with it.

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LHS's avatar

I've been reading Dr. K since I was an undergrad ECON major in the mid-1980s. He just keeps getting better.

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Al Keim's avatar

I'm with you J.P. That the Volker sweating at the end of the Carter administration made the US a hot property is a revelation. Coupled with the conservation of mass/energy the trade of goods and service balance is a beautiful concept. This is fun, no?

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Pam Birkenfeld's avatar

Yes, I feel like a student again

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Barbara Bell's avatar

1. Ditto what commenter J.P. Dwyer said. I look forward to your Part II.

2. Also, could I make a request here for a tutorial on another topic?

I've read arguments supporting Trump's economic "policies" (I wouldn't characterize them as policies, just gut obsessions that others try to dress up with Big Boy pants) on the evidence of what Argentina's new autocratic ruler, Milei, is doing.

Could you compare/contrast Milei's actions on the economic front with the actions of our own new autocrat?

I'll speak for myself in saying I know next to nothing about the situation in Argentina.

(If you've already written on this subject, please give me a reference. I'm fairly new to Substack, although I read your NYT column when you were there.)

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Vefessh's avatar

Argentina is... special. After a military junta released power in the 1980s, there were multiple instances of hyperinflation, followed by IMF bailout and currency replacement. Milei got elected because people were/are sick of it, and his policies are intended to break that cycle. They're tailored to Argentina, so I wouldn't try them in more conventional economies.

Of note:

* Before venturing into politics, Milei was an economics professor. Public persona aside, he might have his head on straight.

* His vow to dismantle the state was made in context of 20% of Argentinians being government employees, compared to 2% in the U.S..

* Milei promised the electorate pain up front, for gain later. Argentina's poverty rate hit 53% last year, so we'll see how long they're willing to tolerate that phase.

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Barbara Bell's avatar

Thank you! That helps in a couple of different ways, one of them being that Milei was an economics professor in a previous life.

At any rate, I appreciate yr help in seeing how Argentina isn’t comparable to US.

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Jorge Ghiglino's avatar

Milei is not autocratic, you can have discrepancies with him, but isn’t breaking any argentinian law, which you can’t say about Trump.

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Barbara Bell's avatar

Thank u for that reply, Jorge—

Do u know anything abt Milei’s economic policies? Do they have anything to do w tariffs? R they redistributive or based on trickle-down ideas? R they working to benefit a broad spectrum of Argentinians? Can his policies validate trump’s policies, as Reps argue?

Etc.

I don’t think Paul is going to answer my question, as he said he was going off on a bike trip for 6 wks, so mayb u have more info u to share?

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Jorge Ghiglino's avatar

Milei is a libertarian that believes in free trade and free markets, low taxes, few public services, etc. He doesn’t believe in tariffs.

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Stuart Kenney's avatar

Well said!

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CyndiT's avatar

This is why as an AP Economics teacher, I always recommend his textbook

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Hiro's avatar

Where is the moving exchange rate comes in?

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Jack Carter's avatar

Von trump does not understand much but he knows how to cheat, lie and become richer and richer. He does not care for people at all. They are slaves / cows to be milked. Like Pascal Lamy (previous head of world trade organisation) mentioned a few days ago: tariffs war is medieval and idiotic. How long you will keep this convict corrupt traitor president/dictator? Get rid of him pdq!

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John Laver's avatar

Yes, to grasp current US White House "actions" on economics and immigration one needs to understand they're completely the refracted immoral murk of Trump's profound personal ignorance and prejudice. And this, tacked onto the former Republican Party's epistemic closure begun by Arthur Laffer's "tax theory" way back. In other words, all bullshit all the time. There's no reasoning with these malignant sophists.

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Frau Katze's avatar

Trump knows how to attract the true believer MAGA cult. They carefully repeat all his ideas about other countries “ripping America off.” He’s going to stop it! They believe him.

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Julie Tebo, PhD's avatar

The issue is the MAGA cult would never read an economic article by Professor Krugman or any other economist. They literally swallow his lies whole and then regurgitate them.

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Paul Padyk's avatar

In addition to making America a less desirable place to invest by deporting immigrants, if Trump defaults on US debt then the trade deficit will likely melt away as investors sprint away from the US. Of course, we will truly be on our own then. Who ever thought that allowing someone who has bankrupted his companies so many times would not do the same to our country?

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Kristine Abshire's avatar

Well put.

He throws people under the bus from ego. He will throw the economy under the bus from stupidity.

Resist!

Defeat!

Replace!

2026!

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Derelict's avatar

Trump is deeply concerned over the trade deficit, just as his is deeply concerned over the federal budget deficit. He's taking care of the first by working to eliminate trade. As for the second, well, he'll figure out how to handle the federal deficit after he pushes through another trillion in tax cuts for the rich, wipes out the government's only funding mechanism (the IRS), and shrinks the economy by 40% or so.

He's a genius that way.

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John's avatar

So, like everything else he screws up, this can be boiled down to its three essential words; trump is stupid. Thanks for the clarity on trade imbalances, Paul.

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DaveinNH's avatar

These primers are definitely worth the price of admission. In fact, they're a steal!

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Ronnie Klein's avatar

As an aside, about 25 years prior to writing “The Wealth of Nations”, Adam Smith wrote another book heavily reminiscent of David Hume, “The Theory of Moral Sentiments”. It is very interesting to re-consider Smith’s economic assumptions in light of his assumptions about human nature.

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Porlock's avatar

He was a moral philosopher who got into economics (pretty much inventing the subject in the process) because he needed to understand this stuff in order to think clearly about his main ideas. Kind of like Karl Marx in that respect.

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Jerry Place's avatar

Excellent explanation of a complex topic, but I take one exception. As the holder of two degrees in finance and accounting, I take umbrage at your phrase "It’s just accounting."

Without accounting, there would be no structure on which to hang your explanation. Accounting can be as complex as economics, and, as you have just shown, essential in providing the basis for understanding complex situations.

By the way, Trump and his minions appear to be just as ignorant of accounting as they are of economics.

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Cranmer, Charles's avatar

Great comment. I think that the almost total ignorance of accounting (and a more fundamental ignorance of how business really works) has driven economics off the rails. This is especially true of their outrageously erroneous theories about money and banking.

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Donald Leonard's avatar

Accountants are what my boss used to call “financial historians,” i.e., they rely on book values which represent historic costs and seldom use market values for various reasons. Most investment analysts restructure financial statements that are based on GAAP to get at the underlying economics; after all, revenue recognition criteria are very stretchable, e.g., look what Enron did with front-loading the income from long-dated contracts, not to mention the “hiding” of off-balance sheet debt. As one of our consultants said, cash flow is a fact, but accounting-derived earnings is an opinion.

Two more accounting stories: we were restructuring a joint venture and in so doing were giving put options to our partner, and in evaluating the various exchanges of value we were told, by accountants, that the put options don’t cost us anything “because we don’t have to book them.” The conservation of value principle tells us that if a financial instrument is of value to the recipient, then it’s an (economic) cost to the donor. And then there was the time when our foreign subsidiary created millions of dollars of ”income” by de-consolidating a money-losing subsidiary just below 50%. Sarbanes-Oxley turned out to be a full-employment law for public accountants, and unfortunately in my view, they often dominate financial decision making in corporate America over the smaller cohort of people employing finance and economics, probably because there’s so many of them.

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Patricia Kvill's avatar

I apologize in advance if this is a silly question. Trump goes on about a trade deficit with Canada. In reality, USA is purchasing oil and gas from Canada and that is what drives up the trade deficit. Regarding all the other items - the trade deficit is the other way - Canada buy more from USA.

So to correct that trade deficit why doesn’t Trump just stop Americans from buying oil, gas and electricity from Canada? Or if he wants Canada to stop selling those items to USA then why not impose the 25% tariff on those items? Surely the American businesses who are purchasing those items from Canada are making a profit by manufacturing or selling these resources either abroad or to Americans. So what’s Trump’s problem? OOOOHHHH. He wants to own those resources.

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Derek C Polonsky's avatar

Let's not forget the basic lie --- immigrants and fentanyl pouring in from Canada.

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Frau Katze's avatar

There are refineries in America set up to handle Alberta oil.

I think they sell the refined product in the US. Trump wants to “drill, baby, drill” so the US can produce all the oil it needs.

The oil companies aren’t enthused because it would drive down the price of oil. We’ll see what happens.

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James Barth's avatar

Thank you, Dr. Krugman, for the timeline covering trade surplus to trade deficit, interest rates during the Reagan years, and your calming voice on economic matters in general. I also remember two recessions during the eighties under Reagan, with 1987-90 in the banking industry being the deepest (it went on in my NYC small Art Market business from the summer of 1990 - 1995). The seventies, complete with our Viet Nam undeclared war chickens coming home to roost, the two oil supply crises, Nixon and Agnew resigning their POTUS and VICE-POTUS offices in scandal, subsequent "stagflation", and other causes, had its' own economic issues. Reagan's economic policies, however, were the driving causes of the economic problems during the eighties through 1992, when in a famous phrase during the general election, it was still "the economy, stupid". Of course, that's my opinion from having lived through those times, while, in 1987, buying a basic Honda Civic wagon in which I paid 10% interest on the car loan, and, looking for a house and property within a 2 1/2 hour drive from NYC. It was a volatile, uncertain real estate market with high interest rates. I write all this because millions of Americans still idolize Ronald Reagan, and believe his "voodoo economics" to be genius, while loudly complaining about inflation of 9% and interest rates at less than 7% during the post Covid health crisis. Those last beliefs have resulted in...DJT as POTUS, and, our current slide into Autocracy, and fast track to chaos. Ignorance is not bliss.

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Somewhere, Somehow's avatar

The house that we still live in was bought in 1988. Interest rate was about 12% on that loan. It took a number of years before we refinance and at that point we said to hell with vacations and nice things so we could pay that loan off as quickly as possible. Once that loan was paid, we diverted that money into our retirement savings. It has only been since we retired that we take a trip or two during the off seasons when prices are not quite as high. My hope is we will continue to be able to do so but not sure we will. I see these two not only destroying the gov by the people for the people but also destroying our investments. I moved mine into cash and foreign funds for the time being.

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James Jordan's avatar

James Barth, this was a beautifully written, accurate description of the Reagan Administration's history and the insanity of the Laffer curve voodoo economics. I had a ringside seat and followed the restart of the income and wealth inequality that has persisted to the current day. You would think that we and our media would see the similarities in the opening rounds of the Reagan/W.R. Grace "War on Waste" and the Trump 2.0/Project 2025.

I hope you will keep posting. Your memory of current history is important.

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GH's avatar

If I buy goods from America, no problem. They are mine and I consume them. At the moment if I buy assets from America, no problem. I obtain my return and can sell my asset when I need my money back.

What happens when an American president tells me he really doesn’t like subsidising me and that I am cheating hard working Americans through exploiting their higher productivity? After all, the only thing I have is a bit of paper telling me I have rights over something in another country and that country’s law to protect those rights. I also have that country’s moral backdrop and the fear it might damage itself if it damages me.

I am most likely OK. Yet I’m less OK than I thought I was. Recent days have shown it doesn’t much matter the subsidy argument is wrong, it’s not clear the law matters much, the moral backdrop is difficult to have any faith in and even self interest is not absolutely clear.

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Al Keim's avatar

I think of the dilemma in terms of the ones and zeros mentioned in the article. Before the digits we had coins and paper. Before that shiny metal that was hard to find. Then I suppose saber teeth. All of them are based on the agreement of perceived value. If somehow those perceptions can be manipulated value can be extracted from the system. The process of manipulation is what has been referred to as the art of the deal.

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Fred WI's avatar

I'm wondering when Paul will take the discussion to alternate currencies, given the faith given presently to 1s and zeros registered an an accounting worksheet...or computer bank/server. Is currency an abstraction or is deficits and surpluses merely artifacts of the balanced model Paul is explaining to us? As I said, I wondering because our teacher has caused this 83-year old student to think.

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Al Keim's avatar

Like the crypto fraud Fred? Sorry sometimes I can't resist. Behind the methodology of value representation is whether or not Og digs big pointy teeth as much as Ug does and further trusts that his fang won't dematerialize in a wave of smoke and feathered amulets. As to the sum totals of trade and balances which song of our youth had the line "When you ain't got nothin, you got nothin to lose."?

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Porlock's avatar

The folks with plenty o' plenty

Got a lock on their door,

Afraid somebody's a-gonna rob 'em

While they's out a-makin' more---

What for?

Learned that at a tender age from listening to the family's old 78s of Porgy and Bess, original cast. Along with It Ain't Necessarily So.

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Al Keim's avatar

Gershwin was the greatest. Thanks for the lyric :-)

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Thomas Hupy's avatar

Apparently, I have a horrible trade deficit with the grocery store. Any suggestions?

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Sarora's avatar

Lol! That's a good way to downplay the "deficit" scare. It is mere accounting. I have a deficit with my utility company, too. In trade, the "grocery store" happens to be abroad. Always helps to remember that the trade deficit is made up of essentially consumption and investment, but merely labeled as "imports" and "exports," for accounting purposes. The imports in your comment could be, say, the two Italian wines that you bought from the grocery store.

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Thomas Hupy's avatar

I’m partial to Chardonnay. 🫤

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Sherry H's avatar

Wasn't too long a post. Helped me understand beyond my Econ 101. I think you could add, " if it ain't broke (mostly), don't fix it."

Last mention, we (anyone with half a wit sense) are all all exhausted from this idiocy. Reading your posts helps me cope, even when I have to think too hard to understand them. So thank you. Have a good Sunday everyone, keep fighting this monster.

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Orin Hollander's avatar

To be fair, Reagan wasn't the sole, or maybe even the primary, cause of the shift in trade.

After WWII the production capacity of every major industrialized nation was devastated, except for the United States (Canada too). Essentially, Europe and Japan had nothing to sell. Of course, they also had no money with which to buy. So we gave them the money in the form of the Marshall Plan.

Remember the pictures of grain silos bursting to the seams, and flowing onto the ground? Farmers were being screwed by those surpluses. So we subsidized the sale, or outright gifting, of all that grain to SUPPORT OUR FARMERS, not to primarily be generous.

But by 1980 most of those countries had fully recovered from the War. Now they had plenty of money to buy our grain, and voilá, grain silos emptied out.

But we continued to subsidize those countries in the form of military spending. We bore the main costs of defending our allies, freeing their budgets to provide better social services. But it wasn't all altruistic. We paid for the right to be in control. Our allies had to defer to our foreign policy decisions, which were almost always U.S.-centric.

DeGaulle, famously Francophile, understood this, and insisted on a go-it-alone military policy. Consequently, France often irritated our presidents because they wouldn't fall into line.

So, WWII and its aftermath played a big role in the trade surplus/deficit picture.

But nothing in this contradicts Krugman's explanations, just a supplement.

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Todd Warren's avatar

Since the election, foreigners have been selling U.S. bonds by the billions. And my take on the stock market activity lately is that some of the selling is also foreigners taking their chips and going home. This will lower the deficit, and the tangerine tyrant will claim some great accomplishment, but in reality it will be a negative for the U.S. population. Making us all poorer so he can claim to have “solved the deficit” is idiocy. But as Hume correctly pointed out, these things do cycle and correct at some point. It is early, but the signs are there for Europe to start receiving major inflows, borrowing to expand their economy and defense ability. Could the Euro replace the dollar as the world’s reserve currency? I won’t predict that yet, but who knows.

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Pam Birkenfeld's avatar

I mentioned this in a different comment, I think when the euro first came out there was some US fear that the euro would become the reserve currency and we would lose our influence. Of course that didn’t happen but as I recall it was a thought at the time

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Somewhere, Somehow's avatar

I can see it happening.

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Mark McIntyre's avatar

How could we forget the "Laffer Curve & supply-side economics?" It was a Laff alright because Reagan raised taxes 11 times to make up for shortfalls. I don't think Trump's tariffs are really about reducing trade deficits. He believes revenue from tariffs can replace the federal income tax that would greatly benefit Elon, Donald and his billionaire golfing pals.

Trump hasn't been honest (surprise!) how tariffs work. He's given the impression China and other countries pour money into U.S. coffers but that's not how tariffs work. They're mostly paid at port of entry by American importers and businesses. Tariffs are just a tax on U.S. consumers hitting our most vulnerable citizens the most.

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Frau Katze's avatar

I think you’re right about the tariffs. They’re simply a source of revenue. Paid by the consumer but who’s counting? Not MAGA.

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Porlock's avatar

I tend to think that he really believed (insofar as the word can be used of an empty-headed narcissist) that China was going to balance the US budget with all the tariffs they'd pay. And somebody half-sane (or a regiment of such) finally got the facts to him, and he dropped some of that rhetoric after a while - without, of course, modifying his policy 'ideas'.

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