Thank you Quentin Hardy, Beth Arnold, Jane Trombley, Resistance Media, Victoria Priya, and many others for tuning into my live video with Heather Cox Richardson! Join me for my next live video in the app.
Transcript
HCR: Hey, everybody here from Bonita Springs, Florida and Elgin, Illinois and Portland, Oregon and Seattle, Washington, Fairbanks, Alaska. Boy, it must be getting beautiful up there right now. Newfoundland, Canada, Oak Park, Illinois. Still, we do not have a duplicate Plano, Texas. Then we got I think we got Oak Park, Illinois. That’s two Illinois.
We got Cuyahoga Falls, Ohio, Vienna, Austria. Where is our Facebook? from Albuquerque, New Mexico, Dublin, Ohio. And Kristen is here from Facebook. So welcome, everybody. And here, Dr. Krugman and I go again with Lunch Money. Hey, Paul, how are you?
PK: Hi, I’m good. How are you?
HCR: I’m good. We have spring here, finally, which is unbelievable.
PK: We’re hitting 86 this afternoon in New York.
HCR: Oh, I can be there in about three hours. We’re not going to be 60.
PK: So yeah, here from beautiful New York City, actually more or less across the street from the Empire State Building. This is my academic office.
HCR: Oh, that’s nice. That’s nice. I’m just across from trees. Listen, so the world is changing so quickly that it’s kind of hard to get your mind around it. And one of the things that jumped out to me this week was the degree to which we’re focusing on the loss of soft power. We’re looking at the loss of you know, the idea of American military dominance. That’s another question. But I’m really interested in what it means for the U.S. economy to have taken such a dramatic turn away from dominance around the world.
And what got me thinking was I did an interview the other day with Vanessa Williamson of the Brookings Institution about taxes, right? And she really offhandedly said, well, you know, we have this thing in economics called the resource curse, where if you have a country that has a reliance on an easily accessible resource like gold or oil or whatever, it means that they don’t really the leaders don’t really have to pay any attention to the people, because they can just dig it out of the ground.
And she said, I’ve always kind of thought that maybe America’s resource curse was the fact that we were the world’s reserve currency. So we could borrow as much money as we wanted at really low prices. But that’s changing. And she just kind of threw it out there. And I thought, oh, my heavens, I have never thought about this at all that way. And I thought to come to you and say, I don’t know if she was right. I don’t know if this makes any sense at all, but what are we looking at in terms of the economy with the extraordinary instability of the United States on the world stage right now?
PK: Okay, so let me first of all just say that, one resource curse that we have in the U.S. is an actual resource curse. We would not be rejecting renewable energy, we would not be rejecting electrotech, probably, if we didn’t have all of this oil and gas. That in some sense, our politics are kind of polluted by the power of our own fossil fuel industry. And that’s actually probably ending up being an economic disadvantage. So just to say that we’re not that different from countries that actually have mineral resources that end up to be negatives, not positive for them.
On the dollar: I do need to say that that’s one of those things where the people who have studied it most tend to think that the special role of the dollar is least important. And it’s people who haven’t who tend to think that it must be tremendously important.
So, okay, the dollar is the overwhelmingly dominant currency of international business. If somebody in Brazil wants to do business with somebody in Malaysia, the stuff’s going to be invoiced in dollars. The debts are going to be in dollars. And those private uses of the dollar are more important than the official reserves, although that’s part of it as well.
HCR: Can I stop you for a second there? And for them to do that exchange, it has to go through the SWIFT bank, right? Probably, yes. Can you explain all this stuff?
Yeah. So there’s an interbank market. So if you’re going to exchange reais in Brazil for Malaysian ringgit banks that are going to do the deal. And the interbank markets are all against dollars. There is no market where you can exchange Brazilian currency for Malaysian currency directly. The banks will sell one for dollars and then use dollars to buy the other.
The interbank market is conducted primarily through this thing called SWIFT, which I forgot what the acronym stands for, but anyway, it’s the electronic settlement system based in Belgium, rather oddly, but effectively answering to the United States. There are ways around it, but it’s by far the most convenient way to, to do these transactions. And the role of the dollar gives the U S government a lot of power.
Everything that goes through SWIFT is revealed to the National Security Agency. The United States can effectively veto transactions. Because everybody needs to have an account at a U.S. bank in order to do basically any business anywhere in the world, the U.S. government can blockade transactions. And so this is an extremely powerful lever of power. Actually, I’ll recommend a book by friends of mine, Henry Farrell and Abe Newman, called Underground Empire, which is all about these invisible channels of power, and the currency stuff is a big part of it.
There are ways around it. The United States has tried to embargo Iranian transactions for many years, and the Iranians have costly, kludgy workarounds, but they do have workarounds. The Chinese yuan has done nothing as international currency, but people do make deals that involve using China’s banking system to get around the U.S. blockade. But it’s still a big influence of the United States.
So, okay, this is really important.
Now, some think that the dollar is about to collapse, that people are going to stop using dollars. Yeah, if we are crazy enough, we can do that, but it’s really hard.
I think I’m getting a little nonlinear here, but anyway, the best essay I’ve ever seen on this — the best paper I’ve ever read, but it’s just in the form of an essay, no math, no diagrams, was on the dollar. It was an old article by, my late teacher, Charlie Kindleberger, called The Politics of International Money and International Language, in which he said that the role of the dollar in the world economy is like the role of English. Everybody in the world who needs to communicate does it in English, because everybody else does it. Everybody uses dollars because everybody else does it. And that’s actually extremely hard to dislodge.
Even if United States policy is crazy, it’ll take a lot to change that. Think about what it would take for us to start doing international business in Mandarin. That’s not going to happen overnight.
Sorry, I’m going on too long. I haven’t let you get a word.
HCR: No, no, no. This is great.
Does all of this translate into the United States can borrow without limit?
PK: Well, first of all, we are not the only country that can borrow a lot. It turns out that if you are looking at the ability to run large trade deficits year after year, the United States has done that, but so has Australia. So has Britain.
So it’s not actually the case that the United States has a unique ability to borrow. We are impressive in the ability to borrow in dollar denominated debt. Not that we get free borrowing, but that U.S. borrowers — the government, but also corporations —issue debt that’s payable in dollars, which does give the United States some autonomy. If the dollar plunges on world markets, so do our debts. So we’re insulated from that particular concern. But it’s not unique. We aren’t uniquely able to run big deficits.
Whether we get cheaper borrowing or more borrowing, whatever the effect is, it’s not strong enough to be clear. for the signal to overwhelm the noise. You try and look for, is America able to borrow more cheaply than Britain or Japan? Maybe, but you can’t really see it in the data. It’s not overwhelming.
So at a basic level, I don’t think that the resource curse story vis-a-vis the dollar is especially compelling. I would say that the role of financial services qualifies, although that’s much bigger for Britain than for the United States. I mean, Britain really suffers, everything in Britain except for London suffers from the city of London’s role in international finance, but the United States a little bit.
But I think it’s more a psychological thing, a sense of impunity that the United States tends to have because of the role of the dollar. We don’t think about, nobody ever thinks about a U.S. financial crisis and the IMF having to come in. And maybe we should.
HCR: So that was just sort of a starting point because what that did, whether or not that was something that I should be staying up at night about, was it really made me think about, you know, I look at the politics of where we are and I look at soft power and I look at the cultural norms and so on And certainly I look at individual pieces of the fact, for example, that oil is getting very expensive and therefore we’re going to see inflation, more inflation than we’re already seeing and so on. But on a cosmic level, you know, on a really big level, what does it mean for the what is the instability that we are seeing coming out of the Trump administration? And you can define that however you wish. What does that mean for the American people? I mean, like literally, I don’t even know where to start with that. Does it mean nothing? I can’t imagine that.
Does it just mean inflation? You suggested it doesn’t mean that we have to worry about not any longer being able to borrow. What does it mean?
PK: Okay. So, the U.S. is, less of a trading nation than almost anybody else. We’re less dependent on export related jobs than anybody else. But that doesn’t mean zero. It’s actually quite large. And I’ve been thinking about this a lot. I mean, the United States has really made it sort of dead obvious that we are we’re not reliable. We’re not serious people. You cannot trust the United States to behave. You cannot trust the United States to honor its promises. You cannot trust the United States to behave rationally. Sorry to say that, but that’s where we are right now.
This has to have some negative effects. There’s some sort of almost crude mechanical stuff that people don’t think about. I never looked at this, before, but how much does the US export economy depend on selling arms? Just plain selling military equipment.
It turns out that more than 10% of our exports is military equipment. I had no idea myself, and I should know these things. And Mark Carney, Prime Minister of Canada, just said, we will no longer spend 70 cents of every defense dollar on the United States, right? And around the world, governments must be thinking about that. Should their next fighter plane, should their next anti-aircraft system be U.S.? Partly because the U.S. is not reliable, partly because it turns out that maybe U.S. military technology is not quite as supreme as we thought, given what’s happened the past six weeks.
So that right there, that’s probably millions of jobs in the United States that are directly or indirectly linked to the world, having relied on our weapons, which it probably won’t do to the same extent anymore.
PK: So I’m sitting in my academic office here. One of America’s biggest, biggest exports is higher education.
HCR: Yeah.
PK: Right. We get a a lot of foreign students. We’ve just, we just had Mayor Mamdani here this morning, uh, believe it or not, um, for an event. And we were all talking about how the student, foreign students who are very big here at CUNY, but throughout the U.S. educational system, they’re not coming anymore. We’re having a big hit. And if you think it’s just those academics, but even if you’re not in academia, there’s a lot of jobs, employment opportunities, and also our scientific base that is ultimately dependent on foreign students.
Also, there are some reports this morning that hotels are slashing prices. They were expecting to be able to rent out a lot of rooms for the World Cup, but the world is not going to come to this World Cup because it’s in Trump’s America.
So putting all that together: the U.S. economy is so huge that even all of this it’s very unlikely to subtract even 1% from U.S. GDP.
But 1% of U.S. GDP is $300 billion a year. So this is all, in the end, fairly big stuff.
HCR: So I want to be clear that people understand. When foreign students come to the United States of America, they pay full freight. U.S. students often get discounts through scholarships, through simply rake-offs, through, you know, they pay quite a bit less for their tuition dollars than foreign students do. So increasingly higher education has focused, and sometimes prep schools as well, have focused on attracting foreign students to basically to make their ends meet. So you’re seeing in a lot of universities right now, not only cuts coming from the administration, but also the loss of these foreign students on which a lot of the tuition depended.
So there’s a real crisis going on in higher education. Lots of people don’t understand that this is not just a question of getting widespread good intellectual talent. It’s also dollars.
PK: That’s right. I mean, education is a business, among other things. I mean, it’s a lot of money. There’s kind of synergistic effects as well. I mean, the foreign students... It’s not just that they pay in full and the domestic students don’t. It’s also just having more students.
So we’re able to maintain the size of the U.S. educational system in part because of the foreign students. Advanced degree students are also a large part of the workforce for U.S. research. So it’s all pretty critical.
Now, there’s also foreign tourists. Again, Carney, I think in that same speech where he talked about the defense dollars, he started with a joke: “Has anybody drunk any bourbon lately?” And, of course in Canada, basically no, and they’re also not coming as tourists. So turning yourself into a global pariah, which is what we’ve been doing is, bad for business. There are there are worse things than being bad for business, but it is also bad for business.
HCR: Well, so what about the long term? Because you’re talking about slower growth. You’re talking about a more stagnant economy. But, you know, I’m watching the the Trump administration trying basically to move us back to the 19th century dependence on old technologies, including petrochemical, you know, including fossil fuels.
And watching China and the rest of the world moving forward toward new technologies … I have a sister who’s a marine biologist in another country, and she has been saying to us for years that if the U.S. didn’t get its act together, the next generation of appliances and of technologies and of energy are going all to be keyed to Asia and not to the United States of America. And Biden and his team seemed to be aware of this and to work really desperately with the Inflation Reduction Act, among other things, to try to bring America up to speed and the Chips and Science Act to compete with China and to regain control of that future. And I’m watching us just piss that away and thinking, What does this look like in terms of jobs, in terms of technology, in terms of producing energy and so on in the future? And how long down the road are we looking at that problem? And is it recoverable?
PK: Okay. Some friends of mine who are in the kind of energy future space say that, look, at this point, effectively, the United States and China are offering to the whole world two different visions of what your energy future will look like. China, even though the Chinese themselves still burn a lot of coal, which we wish they would phase out quickly, but China is basically saying the future lies in wind and solar and batteries and electric cars and buy our technology and you can enter that wonderful world. The United States is saying No, none of that stuff. That’s bad. Windmills kill birds or something.
Anyway, we’re saying reject that vision of the future. What we need is hydrocarbons, back to oil and gas. And hey, we have lots of oil and gas, which because we do all this fracking, and we can supply you. You can buy your oil from the United States. you can get liquefied natural gas from the United States, and that’s the route you should go.
Now, that was probably a losing proposition to begin with, because the fact of the matter is that at this point, the sort of clean energy technologies are getting just plain cheaper, even aside from all of the environmental issues and so on.
They’re just getting cheaper. But In any case, would you now trust this America to be your supplier of LNG? Who knows whether Trump or the next Trump-like U.S. president will decide that you’re not our friend and cut off your supplies of resources. We used to be the country that whatever else you could say, America honored its promises. And we are not that country anymore. We’re not reliable. It’s unfortunate but unfortunately, I think it’s true that people consider China a more reliable, rational player than the United States, and this has a direct impact on that choice.
And you can see it’s happening overwhelmingly. The world is not rushing to install new gas-fired power plants. It is rushing to install solar panels, of which 80% are made in China. So, that is bad, although a world in which China produces the equipment that allows us all to have abundant energy is not such a terrible world, but still does mean that the U.S. is losing out on that. But I also worry that the United States will refuse to use this technology. So we will be, in some sense, the last country that still has internal combustion cars and still has fossil fuel power plants when the whole rest of the world has moved on to a better cleaner and cheaper technology
HCR: Well the cost of gas is certainly making a lot of people who loved their big trucks rethink that up here although as you yourself have pointed out it takes about 10 years for the fleet to turn over.
PK: Right, that’s one of those shocking little things i didn’t know. I’ve been around for a while and i remember when you know we used to say, well, cars stay on the road for nine years. It’s now 14 years. And that’s partly because Detroit, the big auto companies kind of made a decision not to sell affordable cars, that they would focus on SUVs and luxury vehicles. And then people who didn’t make a lot of money would rely on secondhand vehicles. So we turn over our auto fleet very, very rarely. And that means that if we don’t start moving to the future, we will be stuck.
And of course, the autos are the visible part of it. But it’s just a lot of our infrastructure that, you know, we’re not doing a whole lot of building in this country. And so that means, among other things, that we are stuck with legacy energy systems, legacy industrial systems. And we’re building that legacy right now. And it’s not the right one.
HCR: OK, so I’m going to ask you this and it’s just an observation. And if you feel like you don’t want to answer it, I totally get that. But it’s a little hard to miss the fact that the countries where Trump has exerted his power are ones that control a lot of oil and and, you know, Iran and Venezuela. And do you and of course, he works very closely with Vladimir Putin, whose money depends on oil and the sale of oil and that internationally. Do you think that that is playing a role in the places that Trump is trying to gain control over?
Or is that just me with a tinfoil hat over here in my study in Maine?
PK: You don’t want to dismiss that sort of thinking, but I think in some ways you may be imputing too much calculation and rationality.
HCR:That’s fair.
PK: If Trump was trying to seize the oil in Iran, then that’s insanity. He sometimes talks as if we can just go in and take the oil, and it’s like, you know, 20 million barrels a day is the amount that flows through the Strait of Hormuz. You don’t just take that, right? And are you really thinking that we can occupy Iran? Now, it’s actually funny. I have to give some, I guess, credit. Venezuela has turned out to be less of a disaster than I expected because it is a completely corrupt regime, and Trump has basically been able to kill off the old capo and install a new capo who is just as bad as the old one, but gives him a cut.
HCR: That’s what Iran was about.
PK: That’s what they thought was going to happen in Iran, and the current management of the United States is continually surprised to learn that other countries are real, have real ideology and nationalism of their own. So that’s not going to happen.
I actually think that the channels here are generally subtler.
It’s not that Trump and Hegseth and executives of the major oil companies sat down and plotted this thing together to seize the oil. But it’s been clear all along that current U.S. government is much more comfortable with petro-state oligarchs, whether it be Vladimir Putin or Mohammed bin Salman, that those are more their kind of people than, you know, basically American workers, and that more, I think, out of instinct than calculation, they do tend to follow policies that are favorable to them.
So one of the many conspiracy theories is that this whole war was about raising the price of oil to help Putin. Well, I don’t think it was, I think that’s been a consequence, but I don’t think it was carefully calculated to do that.
HCR: Yeah. Yeah. I’m afraid I’d agree with you on that one. So here’s another question for you. This has been an issue in the United States. The attempt to wean ourselves off of fossil fuels and to work in renewables, which as you say are now cheaper than fossil fuels. And I’d love to have you explain that a little bit more closely. But then what what can we do? What can ordinary American consumers do to say to the administration or to say to the country, we don’t want to be left back in? All I can think of is the Spindle Top oil gusher, which was, you know, incredible when it happened. But it was also more than 100 years ago versus where we could be going.
So, why is it cheap? What do you mean when you say it’s cheap? Renewables are cheaper than fossil fuels at this point.
PK: Well, literally, I mean, there’s something called levelized cost, which is an estimate basically of how much it’s going to take to generate electricity over the lifetime of a power plant or power facility. And the levelized cost for solar and wind are clearly well below coal fired power plants and they’re sort of about even with or dropping below natural gas fired power plants. So if you are a utility company making a decision now should I build another gas turbine electric generation facility or should I build a solar farm or a wind farm um it’s right now just on the sheer dollars and cents you would probably go for the renewables you go for solar or wind.
There was a critical problem that we used to have, which was that the sun doesn’t always shine and the wind doesn’t always blow. But there’s also been spectacular progress in batteries. So battery technology has become more effective and immensely cheaper. And all of the renewable related stuff, green energy, has had incredible learning curves. As we accumulate experience, the costs just keep falling. So they are now all cost competitive or more so and that will keep on happening. So on a typical day now in both California and Texas — anyway, most of the electricity on a typical day will be generated by solar and wind. Some of it will be fed into batteries during the day and then the lights will stay on at night because you have the batteries. That is where technology wants us to go. So that’s the big transformation.
And of course, electric cars have gone from being cumbersome to actually being, you know, on my Substack I had the other day, I just had a photo of a BYD car and it’s pretty spiffy and the range problems have rapidly diminished. So, you know, this whole the technology of, um, uh, non-fossil fuel future is pretty much already here.
And it works. It works on dollars and cents and it works in terms of reliability. Um, now I’m not, I lost the second half where you were.
HCR: So, so what, you know, I, I suspect most of the people listening here are not going to disagree. And I certainly don’t. And I’m not even talking about the cost of, you know, data centers, which are sending, uh, electric bills through the roof, the cost of diesel, especially right now, which is prohibitive for farmers and fishermen.
I’m just talking about a lot of us would like to see this future and thought we were achieving it. And now we’re looking at an administration and therefore perhaps downstream different kinds of industries that are moving us backward and not forward. And how does one, a normal everyday American put pressure on a country to change their economic behavior, not just their political behavior, that’s my back, but their economic behavior. What do we do? I mean, there’s people who are talking about general strikes. There are people who are talking about at least a May Day strike.
You know, how do we make this future happen for us and not just for the rest of the world?
PK: I’m not sure that I have an answer there. I mean, politically, I think it’s going to take a while before we get back to the Biden era subsidies for the energy future, which is terrible.
But at the minimum, we can really demand that we that the US government not actively block the energy future. What’s been going on under Trump is that they’ve been refusing federal permits for wind farms, for solar farms. There’s really conspicuous cases of offshore wind farms that they’ve been trying to force to cancel midway through construction. They’ve been losing court cases on most of those. But there are just hundreds of smaller developments where more quietly permits are being denied. So we have a government that is actively hostile, not just refuses to spend money on green energy, but is actively trying to suppress it.
And I think that political activism to to say stop getting in the way is relatively likely to succeed. You as an individual, I don’t know. I mean, that’s kind of not how it works. Right. I say I’m not a good role model here. I still drive an internal combustion car, which happens to be 20 years old.
So I guess I’m OK. Am I right? Yeah, it’s 20 years old. So I think I’m forgiven for not ditching it for a new car yet. But as for the power of individual purchases and even boycotts, not sure. I don’t think we’re going to get general strikes over energy policy, but election outcomes will have a huge impact here.
HCR So now we’re back on my turf.
PK Yes, we are. I’m sorry. That’s the thing about living in something that still has at least some of the institutions of democracy is that votes matter.
HCR: Well, amen to that. And we certainly saw that last weekend in Hungary. Listen, I could talk to you forever. Thank you for doing this. And we, and thank you everybody for being here and we’ll do it again. Is it, is it next month?
PK I think so.
HCR I haven’t actually looked at the calendar, so I have no idea, but it’s always a pleasure, Paul. I hope you get a chance to get outside in this gorgeous weather.
PK I think, I think I’m going to take myself out for dinner. Robin’s away, but even though it’s a luxury, I don’t have outdoor seating at my New York apartment. So I think I’m going to go find someplace that does have outdoor seating.
HCR Well, and do you know, I love New York anyway, but one of the things I just, this is so obvious, but just blows me away about New York is you can get any food from anywhere around the world in New York city. It’s just, I mean, I’m in Maine and we’re very lucky for so many reasons here, but like, I can’t get food from Bhutan for, for at least, you know, a long drive.
PK Oh gosh. Whenever you’re here, let’s go to Jackson Heights. If you’ve ever been there, there must be 30 national cuisines on every block.
HCR That’s just so cool.
Anyway, thank you, everybody, for being here. And we will see you again the next time Lunch Money Regroups. Thanks for being here.
PK Take care, all.
HCR Thanks, Paul.
