From Bidenomics to Trumponomics: A Talk with Jared Bernstein

Or, we used to have reasonable people in government

A few days ago I recorded an interview with Jared Bernstein, former chair of the Council of Economic Advisers and before that a stalwart of the progressive think-tank world. We talked about the past — the miracle of immaculate disinflation and why it wasn’t enough — and the future — the prospects (not good) for reindustrialization.

TRANSCRIPT: Paul Krugman in conversation with Jared Bernstein - 3/24/25

Paul Krugman

Hi, everyone. Paul Krugman again with the latest video interview. This week I’m talking with Jared Bernstein, who was the head of the Biden Administration’s Council of Economic Advisers in its later stages and someone I've known forever. Part of that's kind of a world of progressive, practical think tank economists that is definitely part of my world. I thought that this might be a good time to talk as Jared is now a free man. I think probably, he wishes he weren't, but I thought that this would be a good time to talk a little bit about the past, a lot about the present, and also about the future. Jared's just one of the best economists who pays attention to stuff and he and I have been from different pedestals addressing many of the same issues. I think this will be a little bit more of a conversation and less of an interview than some of what I’ve done lately, although I do want to do a fair bit of interviewing.

So, hi Jared.

Jared Bernstein

Hey, Paul. Thank you for that nice introduction. And it's a pleasure and a privilege to be talking to you. And I want to just thank you publicly for, well, you did a lot of writing that was helpful to us in the Biden administration. But you also were very responsive whenever I had a question. And that meant a lot to us at CEA.

Paul Krugman

Yeah, and vice versa, by the way. I mean, I wasn't quite embedded with the administration, but obviously there were a lot of people like you that I felt I could talk to and help out. It's very different now, let's put it that way. I thought a starting place would be to ask about the U.S. economy on the eve of the inauguration. Here we were finishing out four years of Biden. You and I both thought that the economy was actually in a pretty good place. Except for the fact that the election had gone the way it did—some of us would have felt kind of exuberant almost about how things had worked out. But obviously, a lot of voters didn't agree. So what would you say about where we were, you know, on January 19th, 2025?

Jared Bernstein

I think we had very solid macro data, some of which was even close to approaching some remarkable kinds of zones and really, very deeply negative vibes. And I spent a lot of time thinking about that gap, analyzing it, trying to figure out its magnitude and what was behind it. I think one piece, which actually I was just writing about this morning, remains a compelling issue.

It’s the fact that even though inflation had come down significantly, the price level, of course, was still very high. And that was really annoying to people. Whether it was GDP growth, whether it was a very low sacrifice ratio (to get slightly technical), meaning that we got a lot of disinflation without higher unemployment, which tony economists said we couldn't do, or GDP growing above trend. Or in some ways, most importantly, if it should stick, higher productivity growth, although it takes me five years to be convinced that there's a trend. I think you would agree that’s kind of a holy grail. So a lot of things were pushing in the right direction: real wage growth—very important as well—strong consumer spending, and yet very negative vibes.

Paul Krugman

I want to come back to sacrifice ratios and all that in a little while. But yeah, I mean, the economy by just about every measure looked really good, except that things were more expensive than they had been four years ago, and yet people had very negative vibes. So you seem to be going with the story that says even though inflation—the annual rate of change of price—had come way down, that people were still thinking about what things cost in 2020. So is that your main story of the disconnect with the good economy? And then I want to delve into that if it is.

Jared Bernstein (5:00)

Yeah, that's a big part of it. I mean, there's a Venn diagram between what you're talking about and a big discussion of why Harris lost. And I do think that there you need three I's, not just one I: Inflation, or really the price level. Immigration, I think those flows, particularly in ‘21, ‘22

were problematic and challenging, and then three, Incumbency. So, you know, there's kind of a broader discussion about the political fallout from those problems. But yes, I continue to believe that the price level was and is an important determinant of vibes.

Paul Krugman

I have some questions about this because the increase in prices over Biden's term was about the same as the increase in prices over Reagan's first term. The inflation rate on election day was actually higher in ‘84 than it was in 2024. So I mean, I have a story about why, but why were people clinging to the memory of what things used to cost for so long?

Jared Bernstein

Well, first of all, one of the problems that we faced was when we took office, the inflation rate was 1.4%. So if you're there for the upswing, that's going to hurt you more than if you're coming in and enjoying the benefits of the downswing. There's obviously a lot more media about this kind of thing now than there was then.

Paul Krugman

Yeah.

Jared Bernstein

There's actually been some research about this, as I know you know, you've cited some of it, showing that the negativity of the economic media was, in fact, higher than it's been in the past. All I know is that people—you said it a minute ago, but I want to underscore it—people remembered what things used to cost and, damn it, they wanted their old prices back.

Now, look, if you could have explained to them that the only way you're going to get your old prices back is to have a deep recession, perhaps they would have thought differently. But that's a lot to ask of folks. And so one of the things that we struggled with is, I could legitimately go out in front of the cameras and say, “American, we just got a CPI report that's 2.5%, and we had peaked at 9%. And that's a good thing.”

Now, I would also then stress, as did everybody all the way up to Biden who would stress, “We know that prices are still too high, but at least inflation is lower.” And to the normal person, that was kind of an argument saying, “Hey, guess what? Your egg prices or your grocery prices, they're now growing more slowly than they were.” And they were, like, “No.”

So I don't know exactly the political economy of why it bugged people as much as it did, but I'm pretty sure it did.

Paul Krugman

Yeah. It was John Kenneth Galbraith, I think, who said that when people say that inflation has fallen, they're saying that things are getting worse more slowly, which is actually, you know, not at all the way economists generally think, but it is kind of a public perception.

Jared Bernstein

To me, Paul, this raises a very important and interesting question which we can get into if you want, which is: what can the government do about the price level? Which actually is a really important argument that's being joined by Klein and Thompson and the Abundance book, and by Annie Lowry and her work on the affordability crisis. And, you know, I think sometimes when we talked about it, definitely when Trump talked about it, we'd sometimes give the impression that we can do more than we can on crisis. It's not that we can't do anything. It's just that what we can do is constrain.

Paul Krugman

As we record this, I'm about to do an event with Zach Carter, who has a book about Keynes, which is largely about how revolutionary an idea it was for him to suggest that maybe we don't need to get back to 1913 prices. Maybe it's better to just sort of stabilize prices where they are now in 1920, and how shocking people found that.

Jared Bernstein

I read it. It's an excellent book.

Well, so we did a ton of thinking about this back at CEA. And we came up with a theory of PPVs, personal price vectors. And this is the idea that everybody walks around with a list of prices in their head. They're different for everybody. My wife does gardening, so she knows what a lot of that stuff costs. And I buy a lot of music, and I know what that stuff costs. And you know, we have a set of price expectations and when that gets shocked, that's really disturbing to us. And it takes a while for us to acclimate to the new price level for a couple of years. And one of the things that helps is if you have rising real pay. You can't get there without that. So you need lower inflation. That's actually very important. It's necessary, but not sufficient. You need lower inflation and rising real pay in order to help people recalibrate their PPVs and we've been going through that, but I think we're not there yet.

Paul Krugman (11:00)

Yeah. I put a lot of weight on the idea that the numbers were being skewed heavily by partisanship and that I was expecting that the first few months, maybe even the first two years of Trump, people would be exuberant about exactly the same economy that existed before he took office, but that he would be getting credit for the good stuff, which does not seem to be happening. Instead, the vibes have gotten worse, which is really kind of an interesting thing. I don't know if you have a take on that.

Jared Bernstein

Yeah, well, first of all, let me just clarify for the listeners that when you say the numbers were skewed by partisanship, you're talking about the sentiment and the confidence numbers, not like the measures of inflation. Nobody was jiggering those numbers.

Paul Krugman

Well, no, that's right. Nobody…not yet. I think the word is, no one was skewing. No one was cooking the books and they aren't yet. Give them time. But I am wondering. There's obviously a lot going on with tariffs and all of that. But I also wonder whether we may have just kind of transitioned to a bad vibes nation where people feel lousy about the economy, sort of regardless of who's in charge and whatever the real numbers are.

Jared Bernstein

I think this is a deep and obviously important question and I think it has to do with affordability. I think it has to do in the Trump case—you know, it’s just one own goal kick after another. Dean Baker and I have a piece on this coming out in the Wall Street Journal. One thing you see is the market going up and down on a daily basis, including today as we speak, to the extent that the Trumpians put on or suggest they're taking off more tariffs. So what's interesting there is that at least in Trump I, markets were kind of a disciplinary force against the administration. They saw markets go down, they got nervous about it and might even alter policy to change that.

There's been less of an elasticity there in Trump II. They're less elastic to markets. I think they're even less elastic to the rule of law, which is existentially really very scary. But I think that they've done a lot of damage to vibes through basically by doing the following. A lot of people, I know you know this, I know all our viewers know this, but it bears saying again:

A lot of non-MAGA Trump voters voted for them to improve their living standards and instead they're pushing pretty hard the other way in terms of living standards while, you know, renaming bodies of water and sharing the board of the Kennedy Center, making it easier for rich people to evade taxes and so on. We can get into the list. But that seems to me to be a serious negative vibe in general.

Paul Krugman

Yeah. I'm not especially wanting to rehash, but just knowing what you know now, what particular

administration policies do you wish had been done differently? I don't want to spend a lot of time on this because there's too many people dwelling on all of that.

Jared Bernstein (15:00)

Well, getting ready for today’s conversation, there's this calculation that I've been wanting to do and I did it last night. I'm going to share it with you. It's adjacent to your question. I will get to your question. So one of the things that peopl might expect me to say is that the rescue plan should have been smaller. And I think there is a very coherent argument in support of that.

Paul Krugman

By the way, for listeners, the rescue plan is the Biden stimulus plan, although it wasn't exactly intended as stimulus, but that was the big Biden spending package right at the beginning of the administration.

Jared Bernstein

Absolutely right. And it came after a big Republican package and there were a few people arguing at the time that that was too large. But there's become a very deep, broad economic debate to the extent to which that contributed to inflation. So there's no question, by the way, in my mind, that it did contribute to inflation. And I've seen estimates that look about right to me that say maybe inflation would have peaked at 7% instead of 9% had the rescue plan been smaller. So last night, and this connects to the first part of our conversation, I asked myself, what would cumulative inflation have been if inflation peaked at 7% instead of 9%? And instead of being 21%, it would have been 19%. And so what that tells you in maybe a sort of arcane way, is that if you believe that the price level of the cumulative increase in inflation was as problematic as I believe it was, I don't think that a smaller rescue plan would have saved you.

So, I am sympathetic to the argument that the plan ended up being too large. But whenever you're putting a plan like that together, it's not just pure economics as anyone who's worked in government ever knows. You don't just look at the output gap, build in a multiplier and say, here's the number. You have to deal with Congress. And at that point, the Democrats were in charge and they had an untapped list of things they wanted to get to, et cetera, et cetera. To answer your question, Paul, we're economists so I'm going to do this in economic terms.

Paul Krugman

I may have to translate, but okay.

Jared Bernstein

And you're just the guy because nobody does that better than you do. I think many of us who have worked particularly on the demand side of the economy and who have thought a lot about output gaps and who believe that the idea of, U-star, the lowest unemployment rate consistent with stable inflation, who thought that that was set too high for many years, the work that we've done on that—we believe that the relationship between inflation and unemployment was pretty flat. What we failed to envision was that a supply shock along with a strong demand—the collision of strong demand and constrained supply—led that flat curve to go quite vertical.

Paul Krugman

So yeah, basically, experience had suggested that even if you overstimulated the economy, that it wouldn't lead to that much inflation and there would be time to pull it back or whatever and that it wouldn't lead quite as rapidly into 9% inflation but this time it did. And the guess is that what happened was that this slug of money came in the aftermath of a time when COVID supply chains were snarled, labor markets were disrupted, and there were very high numbers of unfilled job vacancies. I did similar calculations at the time and said, you know, this might lead to some inflation, but it won't be that bad. And historic experience turned out to be misleading.

Jared Bernstein (20:00)

Correct. Thank you for clarifying. The cause of the inflation was strong demand colliding with constrained supply. It was that intersection. Sometimes my friend Jason [Furman] downweights the constrained supply part, but that was very much real. And [Ben] Bernanke is right about that. That was part of it. But so is the strong demand. You know, Jason's right about that. Larry Summers is right about that.

So you need both to explain what happened. And what would I have done differently? I would have been more cognizant of the impact of just how constrained supply was and how that collision, that intersection, would have generated faster inflation. Now, look, it became clear to us pretty quickly that that was happening. And we quickly organized something (probably somewhat underappreciated) called the Supply Side Disruption Task Force, of which I was a card-carrying member. And we did a lot of work. We sent people out to the ports in LA to work with that. We did a lot of work with the private sector to unsnarl supply chains. It was actually pretty successful. And you saw inflation go down the other side of the mountain pretty quickly.

Paul Krugman (20:58)

OK, maybe I'm a little even more pro-Biden than you are on this, because what strikes me is that if you look at the cumulative inflation since sort of the eve of the pandemic, it's been practically the same all across the world. I mean, Europe didn't have as much stimulus as we did. And yet, if you use a common price measure, Europe had about the same inflation as the US. It started later and then came down earlier here, but the European inflation curve looks just like the US inflation curve shifted by about a year. So, ultimately it’s not clear that those policies actually did much at all.

Jared Bernstein

Yeah, I've tried to analyze this and I've read, I think, all the econometrics on it. And I think you can assign a point or two to the excess demand relative that you could blame on fiscal policy. But yeah, I mean, obviously, Europe was faced with the war in Ukraine. And that made a difference for them later in that graph. We showed that graph all the time.

And I think one of the reasons I'm emphasizing what I am is because we got into this from a vibes perspective. And trust me when I tell you, if you explain to people it's just as bad in Europe, that does not assuage the situation.

Paul Krugman

I'm actually writing a piece, as we speak, about Canada. Until Donald Trump started talking about the 51st state, it was headed for a blowout defeat of the Liberal Party in Canada, which is incredible, because at this point, apparently, the modelers—the Nate Silvers of Canada—give Poilievre, the conservative candidate, a 1% chance of becoming prime minister now.

Jared Bernstein

Amazing. Trump is the best thing that happened to Canadian liberals, I guess.

Paul Krugman

I know. But the interesting thing is everybody blamed Justin Trudeau for Canadian inflation. And of course, it's Canada. Their inflation track looks exactly like the US track. I know that we don't know that other countries exist, but the Canadians know that we exist. And you would think that there, at least, the argument that it was an external phenomenon would work, but no, politically it didn't work at all.

Jared

So clearly it was Biden's fault, not Trudeau’s.

Paul Krugman

[laughs]

Jared Bernstein

Let me say one other thing about what we did badly or what we did well, because you mentioned being a Biden fan. One of the things that the president and I worked on, and I was his chief economist when he was vice president, is full employment, and the importance of getting back to full employment as quickly as possible to avoid potential scarring and to help families and businesses.

The importance of getting back to full employment as quickly as possible was something that loomed large for us and that we were and remain quite proud of. That's very important. Obviously, it wasn't just us. The Fed played a role there. But I want to say something. I think we get a lot of negative feedback about the messaging around the economy.

I understand that. I think there are ways in which we were talking past people. We often felt that if we didn't tell some of the good news that was happening in the overall economy, nobody else would. But at the same time, people just didn't want to hear how things were better than they thought. And I understand that…

Paul Krugman (25:00)

Okay, so while we're on the topic of things being better than we thought, in 2022 there was this extraordinary consensus among just about everybody—except I think maybe you and me and a few other of our friends—that getting inflation back down was going to be extremely costly, that we were going to go through years of high unemployment. And then this miracle in which inflation came down quite close to, long run, the 2% target, which is another story, but at no cost at all, as far as we could tell.

Why do you think people were so pessimistic? Now we're talking again about Larry Summers, Jason Furman, but Larry in particular, they made the big mistake of actually giving specific numbers. So three, whatever it was, five years of 7% on them, something like that, which obviously didn't come true at all. Where do you think that was coming from? I mean, I know technically where it was coming from but…

Jared Bernstein

I think a lot of what Larry Summers, Jason Furman, Olivier Blanchard, others who were writing about this, were very much operating from a perspective of this time is different. I think Larry was right about a lot of what he said early on. I mean, he may have focused more on demand than constrained supply, but he was looking at the amount of dollars that were being spent and just looked at the output gap and said, based on simple macro, you know, this is going to be highly inflationary. And so they were operating from the same kind of flat relationship between unemployment and inflation that you and I talked about a minute earlier. And the reason I thought they were probably wrong is because I knew that we had slid up this very vertical part of the Phillips curve so we could slide down it without sacrificing much unemployment. By which I mean, I knew that constrained supply was a big part of the story, so I understood that unconstrained supply, unsnarling, would work the other way.

Paul Krugman

Okay, I think that might come across as having been in Klingon to some of our listeners. So let me say, I think what you were saying was that we knew that on the way up, the inflation surge wasn't at all what you would have predicted from recent historical relationships. You had to invoke the disruption associated with coming out of the pandemic. And that there was no reason to believe that the way back down would be a standard disinflationary episode either, that getting those, unloading those container ships and all of that would help. And there was a very specific issue, which I probably shouldn't even bring up, but a lot of those forecasts of fairly high unemployment involved looking at the high ratio of vacancies to the number of people unemployed and saying, “This might represent the fundamental shift and the beverage curve and…,” God, I am not going to explain that.

Jared Bernstein

Yeah, so let me say a couple things here, Paul. First of all, let me point out that it'd be great if you could come live with me for a few days, because when I'm talking with my spouse, you could say, “Well, what Jared really means to say here,” and then you could explain it in ways that would work better for us.

So I had an experience in the White House, because we learn about some granular things that you wouldn't learn about out in the world, that is useful here. At one point in 2021, a factory that makes semiconductor chips in Malaysia closed down for two weeks because of COVID. North American auto production also shut down for about two weeks. All right? That was kind of a mind blower to many of us. That's not exactly the world's most diversified supply chain.

Paul Krugman

Yeah.

Jared Bernstein

And so it stood to reason that when that supply chain got back to normal, you know, production would resume.

Paul Krugman (30:00)

Yeah. I have to say, the one revelation to me about the whole immediate post-COVID period is that economists tend to think that there's this aggregate GDP, and it's fungible, and you can use GDP, and you can shift among different goods and shift to different kinds. We don't tend to think of it as being an intricate machine with lots of potential bottlenecks, because most of the time you never notice the intricacy of the economy's plumbing. In the long run, probably, the plumbing doesn't matter. But in the long run, we’re all dead. The blockages and just very specific pipes turned out to be a far bigger issue.

Jared Bernstein

You are so right. I used to come to work every day and look at how quickly containers were moving in and out of the ports. And that's something I never thought about my whole career. And I suspect most people doing our work hadn't thought about that, but that kind of throughput became super important.

Paul Krugman

Yeah, I didn't have access to that data. It probably was out there somewhere, but I was looking at shipping rates. It never occurred to me to pay attention to the cost of getting a standard container from Shanghai to Los Angeles, but that was suddenly a tremendously important economic indicator. It isn't now, but it was then.

Actually, I was just rather weirdly talking with people in the shipping industry and the issue of the Houthis and the Red Sea came up. They're all avoiding the Red Sea, and they're saying, “But if we were going to have violence in that area, this was a good time to have it, because at the moment, there happens to be a surplus of shipping capacity in the world.” Again, this is the kind of thing you would never have thought of worrying about, but it turns out that in these troubled times, we need to think about these things.

Jared Bernstein

Right. Obviously, like a lot of Keynes-oriented economists, I've thought a lot about output gaps and demand shortfalls. It doesn't mean that we ignored the economy supply side, but it wasn't as big a focus of our work. And yes, logistics and all that.

It's interesting that we're talking about this now. I'm working my way through this book, Abundance, as probably many of our listeners are, which is very much about this part of the argument, really improving the economy's supply side. It’s profound.

Paul Krugman

Yeah, I would say it wasn't exactly what we think of as supply chain disruptions. But one of the things that happened is that COVID sort of jump-started remote work. The technology was there, but it required a sufficient number of people to jump on it. Even what we're doing right now was something that was quite rare. And with more people working from home or spending more time working from home, people wanted more home to work from. So you had this step increase in the demand for housing, which has not gone away, which drove up housing costs. And that still has lingering effects on the inflation rate. Certainly part of the rise in the cost of living is higher housing costs.

Jared

Yep. Absolutely, and it's something we worked on and thought about a lot at the White House. I would say the two areas where we were just not able to get our agenda across the legislative goal line in ways that were really important to the two biggest pieces of unfinished business were affordable housing and affordable child care. By the way, speaking of this abundance agenda, I was thinking yesterday that if I were president, Elon Musk would be gone immediately and I would appoint Ezra Klein and Derek Thompson, the authors of Abundance, to a new department called the Department of Abundance, but I'd have to workshop the acronym.

Paul Krugman

Yes, a little bit. Well, DOA, is what would actually happen to the agenda.

I've read substantial chunks of that Project 2025 manifesto. You know, it's all deregulate, deregulate, but then there's a spirited defense of NIMBYism, saying that communities should have the right to prevent construction of housing. So that's going to be one of the last things to go.

Jared Bernstein

Huh.

Paul Krugman (35:00)

Rather oddly, I would have thought that the Trump administration would have waited for the economy to actually get bad before telling stories about why it's OK for it to be bad, but instead they are talking a lot about how we're in this, it's gonna be a painful transition but to a better future. Do you have a take on that?

Jared Bernstein

Yeah, I definitely have been writing a lot about this on my own Substack. I think of the old [South Park] underwear gnomes meme. You know, I think it's:

1. Steal underwear

2. ?

3. Profit.

And I'm kind of reminded of that these days, except it's a lot more disturbing. I do not see the gain on the other side of the pain, by a long shot.

Paul Krugman

Yeah.

Jared Bernstein

And I think that they're mistaken in profound ways about what they think they can do to make America better off if that's really the goal. You know, I like to look at revealed behavior, what people do, not what they say. And what they're doing is making America, particularly middle income and working class America, a lot worse off in a list of ways that we can go through. They're really profound. I wrote the other day about how they recently just rescinded an executive order that my team worked on a lot along with the Department of Labor to raise the minimum wage for workers on federal contracts. And they got rid of that. So clearly, helping low wage workers is not part of the agenda.

The way I've talked about it is the folly of this re-industrialization goal. You've done very nice work on that as well, and I kind of want to engage you here. You're thinking about that. But the idea behind the broad sweeping tariffs… I actually believe there's a role for targeted tariffs, but this tariff over everything strategy is very much oriented on the belief that if you get the trade deficit down, you will re-industrialize this country and you'll have a lot more manufacturing, blue collar jobs and that'll make the working class a lot better off. That's wrong on many important and profound levels. It ignores where most jobs are growing, which is the service sector.

Paul Krugman

Yeah.

Jared Bernstein

And that if you really wanted to help working class people, you would actually need to improve the quality of service jobs. I think the trade and manufacturing piece is important. And I want to get back to that. I want to ask you some questions about that. But that's my kind of first run here at a take as to why it's pain now and probably pain later.

Paul Krugman

It's interesting because they seem to be running two stories in parallel and sort of smushing them together. One is the idea that we have too many people working in government and we're going to move them out of government into the private sector, which requires not actually firing up Fred and looking at how many people are actually working in government.

But the other is that we're going to have tariffs to address the trade deficits and rebuild manufacturing. First of all, tariffs probably don't actually reduce the trade deficit unless they're extremely high. And second, even if you do have a big impact on the trade deficit, there's not a good argument to say that you'll actually bring back very many manufacturing jobs, even if you manage to reduce the trade deficit. Finally, there’s the assumption that only manufacturing jobs are good jobs. I don't know which is your sticking point on this.

Jared Bernstein (40:00)

So, it's really important for people to understand that tariffs don't reduce the trade deficit. And that's for a number of reasons. One is they may depress imports because you're making them more expensive, but also, other countries will retaliate. And so that will hurt you on the export side. They can raise the value of the dollar and that makes your exports less competitive. That is, it makes them more expensive to people from other countries. Third, if you look at the history even of broad tariffs—like, just go back to Trump I—they bragged that they reduced the trade deficit, but in fact the data show otherwise. Trade flows have been pretty robust throughout this period of tariffs up to what we're going through now. We'll see where that lands. So that's part one.

Part two is countries—and Germany's the poster child here—countries that have persistent and large trade surpluses also have a declining share of manufacturing employment. So that pushes the wrong way. And then in terms of manufacturing employment, it's something that we in the Biden administration thought was important and we worked on through our industrial policy to try to stand up new and important and often under-invested industries here, particularly in clean energy, microchips, things like that. But that's not going to change the sweep of history where the share of manufacturing jobs in any advancing economy just tends to be on a downward trajectory.

Paul Krugman

At the risk of losing everybody here, I'm just going to share the comparative perspective. Germany, runs an enormous trade surplus in manufactured goods. Yet, they've also deindustrialized, not as much as we have, but hugely from where they used to be. But even if you just do a kind of back of the envelope calculation, and eliminate our trade deficit in manufactured goods, and look at how much does that add to domestic value added, it's not dollar for dollar because manufacturing firms actually buy a lot of services. But it's something like 60 cents on the dollar to manufacturing. And if you did go the whole way, you could expand manufacturing by maybe 20% if no other side consequences arise. Considering that manufacturing is now 10% of unemployment and used to be 35%, that’s getting you only a very small part of the way back, maybe to 12 or 13% of employment at the best. It's crazy stuff.

Jared Bernstein

That's exactly right. And Dean and I have a calculation just like that in the piece coming out in the Wall Street Journal. And it argues that all of what we're going through, if really what they're about is ‘pain now, re-industrialization later,’ you're not gonna get the latter. You're just not. And in fact, again, I think this is so important and you raised it and I just keep amplifying it: where the jobs are gonna be growing continuously is in services and that's where we have a real job quality problem if you want to help working class people look there.

But I did want to talk a little bit about an issue around trade. Not everybody knows that this is where you cut your teeth, but I want to take advantage of having this opportunity to talk to you about this.

Paul Krugman

Okay.

Jared Bernstein

I think that the impact of what was called the China shock in the 2000s when trade with China, imports from China really soared, and it really did hurt a lot of workers and communities here, is something that we shouldn't ignore and something that really happened and something that has really heavy political implications. You know, people still like to hear about tariffs. It’s one of the reasons Trump is successful. Actually, I don't know if that's true anymore because now they’re kind of associated with higher prices. But one of the reasons Trump has been so successful is because all of this “America fortress, “going alone,” and, “other countries are ripping us off,” resonates with a lot of people in communities who've been hurt by trade. I don't dismiss that and I know you don't either. I think that especially if you're gonna work in political economy, you have to understand both the reality and the sentiment behind those feelings.

What I think is really missing from this debate any recognition of the benefits of trade flows. A lot of economists that I grew up with just took that for granted and you never had to really talk about it because obviously trade was all benefits and no costs. And then the Trump thing is ‘trade is all costs and no benefits.’ And the truth is somewhere in between.

Paul Krugman (45:00)

Yeah.

Jared Bernstein

But in your view, have Americans lost or maybe never had or just intensely devalued some of the benefits from globalization and trade?

Paul Krugman

My take is that we had this enormous trade liberalization starting in the ‘30s under FDR, but then a globally enormous trade liberalization from the immediate postwar period up until just the eve of Trump. But that was not achieved because we managed to convince voters or that we went around and explained the comparative advantage to voters. It was not even because we got politicians to understand what economists would consider the gains from trade. It was actually a highly clever political strategy, which I call enlightened mercantilism, where we continue to say “exports good, imports bad. But, more exports outweighs more imports.”

That meant you were able to harness special interest politics in the defense of actually fighting special interests. The exporters became part of the coalition that allowed you to lower tariffs. In some sense, it has always been thus. But the shock of China's rapid expansion into our markets, the shock also of the United States becoming a persistent high trade deficit country, which it wasn't always, gradually undermined the foundations of that.

There was a lot of nationalistic components of Biden administration policy, strong components in the Inflation Reduction Act, which was basically a climate act, and the CHIPS Act, which is about technology. I have a version of why this was done. What's your version? I mean, I know some of our mutual friends were horrified, saying, “Why isn't Biden making the case for globalization?” But why were we doing this?

Jared Bernstein

I think there was a firm belief that if we were going to win elections, we needed to get voters who were very skeptical of globalization to support us. And so to these voters, tariffs sound good, beating up on China sounds good. And to go out there as I did when I was at CEA, and I did speeches where I had to clear them with folks internally and, to their credit, they believed what I'm about to say and they cleared these speeches. That message was, in fact, trade has costs and benefits. And talking about the benefits was important to us, especially given that we were going through a period with supply constraints. So that was all the more reason why you'd want to be more open to trading with your friends while, yes, pushing back against unfair trade policy and excess capacity. Those kinds of arguments, which is another thing I wanted to talk to you about, some of the Pettis arguments. But the costs are real, but so are the benefits. And it's a both/and kind of situation. And I think there's a view that it's pretty hard to communicate both/and arguments to a public, especially around globalization, where people want to see you get tough.

Paul Krugman

That's basically what I would have said. For people who don't know, Michael Pettis is an economist. He's based in China, although he's a Westerner, who's been making these arguments about the dollar's role as reserve currency and how this leads to all kinds of distortions. At least your replacement as CEA chair has this white paper which kind of makes similar arguments. You probably want to know what I think of all of that.

Jared Bernstein

I do.

Paul Krugman (50:00)

The argument here is that because the dollar is the reserve currency, that a lot of international capital flows are not driven by the private sector seeking the highest return, it's foreign governments accumulating reserves in what we call dollar reserves, but that actually means buying U.S. government debt. They're sending money into America because the dollar is what people want to hold if they want a reserve. This in turn keeps the dollar strong, which leads to trade deficits, which leads to less manufacturing, which is presumed to be a bad thing. That's kind of the argument. So the argument is we're going to sort of stop this from happening, although somehow preserving the dollar as the reserve currency, which I don't quite understand that part, but leaving that aside.

So, alright. I start at the end point, which is there's a presumption here that manufacturing is central, that more manufacturing is good. That's hardly even questioned in this stuff. It's just taken as a good thing. And yet the reality is actually these days, with the unions largely busted, manufacturing isn't that much better than service sector jobs. It's still somewhat better, but it's not clear how important that is.

But the more important point is, there's this weird sort of antique 1960s vibe in this discussion.

There really wasn't a whole lot of international movement of capital other than official flows back then. There were still lots and lots of capital controls in place. In fact, it was difficult in most cases to invest abroad in much of the world. If foreign governments were out there buying U.S. bonds, then the U.S. had to supply them somehow or other. It's often said the only way we could do that was by running persistent trade deficits which isn't actually true. We didn't actually run persistent trade deficits, which is also a little bit funny. If we look at the current arguments, they do talk as if this is the known story, and it wasn't even true in the days when that was really the only form of capital movement.

But now we have a situation in which there’s a lot of capital movement going on. Foreign governments are still buying U.S. bonds to add to their reserves. At the same time, there's a lot of investment coming into the United States that is not foreign governments buying U.S. bonds. It's just foreign investors who think that America is a good place to invest, or did until last week or something. Then there's also substantial outflows of capital from the United States. Capital flows in both ways, which was even true in the ‘60s when U.S. corporations were investing abroad, even though the other more hot money was much more restricted. Then there's a trade deficit. These things all have to add up, but there's certainly no reason to believe that a billion dollars of U.S. debt bought by China necessarily translates into a billion dollars of U.S. trade deficit. It can go in all kinds of directions. I can't buy any of this.

Jared Bernstein

Well, let me see if you buy the following because I'm actually a little more sympathetic to the Pettis argument than I think you are, but in a recent piece, you said something that led me to believe that maybe you would agree with the following. So, the trade economists will always tell you that trade imbalances are just benign reflections of macro relative conditions in different countries and the savings investment identity. And, you know, back in my Economic Policy Institute days in the early ‘90s when we began to worry about what later was called the China shock, economists like us were criticized as just, you know, dopes who didn't understand that the current account balance in your trade deficit is simply your savings minus your investment. And that's the full story. If you want more balanced trade, then you just have to save more. And I had arguments with people, you know, I won't name names, but you can figure out who they are. So then you have Michael Pettis, but also Ben Bernanke wrote an influential piece in 2005 saying that, in fact, when other countries suppress their own spending, their own consumption,

and they export their excess savings, which can be the capital flows you just talked about, that can inflate bubbles, that can undercut domestic manufacturers, and that was some of the unfair trade we talked about in the Biden era. That can create big problems here, which is as much those competitors’ doing as our own. And so what I think you might agree with around this is that, it may be too simplistic to say that your individual enclosed country determines your balance of trade. But I do think that Pettis et al helped bring that to the conversation.

Paul Krugman (55:30)

Yeah, I'm basically of the view that it's there. I mean, I just can't make the numbers work to believe this is at the core of anything.

Jared Bernstein

I agree with you. And then when you see where the Trumpies are taking it, it's to a very distortionary and harmful place. So we're aligned on that.

Paul Krugman

Yeah. Okay. We could go on and on. We could start talking about why is the dollar a reserve currency and what does that mean and all of that and we will lose everyone. So I think I'm going to say this has been really interesting and I dread in many ways what the next year or two will bring in. Most of them not economic, but God help us on the economics, as well.