My Head Talks on Bloomberg

On tariffs, housing and more

I’m very busy here in Europe, with limited time for writing. So for today I’m going to just give you video from a recent appearance on Bloomberg TV, talking with David Westin. I’m in two segments: the first 12 1/2 minutes, and then again after minute 36. Scrappy transcript of my segments follows:

David Westin: This is "Wall Street Week." I'm David Westin, bringing you stories of capitalism. China and the United States are playing a high-stakes poker game over rare earths. We go to South America to see whether Brazil may provide the U.S. with a winning hand. Plus, we're used to tracking prices in capital markets moment by moment. Why not the same for our groceries? A supermarket chain in Norway points the way to dynamic pricing for all sorts of goods and services, and Trump's cuts to federal agencies hit the people who oversee safety for mine workers and firemen. Are we going too far even for those being overseen?

But we begin with a conversation with Nobel Prize-winning economist Paul Krugman, former "New York Times" columnist and a professor at the City University of New York. We spoke to him about the American economy and the costs and benefits of the Trump administration's policies.

Trump: Starting the day I take the oath of office, I will rapidly drive prices down, and we will make America affordable again.

Krugman: In the campaign, the big promise by Donald Trump was that he was gonna bring down prices and make America affordable again, and everything he's done is the opposite of that. Imported goods are going up in price. We're gonna see a lot more of that, but, you know, vegetables are going up in price, and a little bit of that is tariffs, but a lot of that farmworkers are making themselves scarce because they're afraid that ICE will pick them up. If we're worried about housing costs, a lot of the construction industry is immigrant workers, and particularly, the actual physical jobs, the guys actually up there on the roof, tend to be immigrants, many of them undocumented, and even the ones who are legal are afraid. Ultimately, I think what really matters is the standard of living.

Westin: For Americans across the board: What are we doing to the standard of living? Are we improving it, or are we actually turning it down?

Krugman: This is clearly all negative for the standard of living. You're making-- when you put a tariff on -- one way of putting it, the sort of standard economist econ 101 thing is you're taking things that we do relatively badly and other countries do relatively well, and we're making-- and we're insisting that those things be done here, which raises costs, reduces our standard of living. If we look at the immigration policies, the really important thing about immigration in America is that the immigrants do not do the same jobs that native-born Americans do. They're very concentrated in a limited number of industries and occupations, which are very much complementary to the jobs that native-born Americans do, and by driving out the immigrants, we are reducing the productivity, reducing ultimately the living standard of the native-born workers.

Westin: Trump tariffs are a part of the story that Krugman knows well. His Nobel Prize was awarded in 2008 for work on trade patterns, but he says the tariffs themselves might not be the biggest problem. –

Krugman: Consistent tariffs are bad but not as bad as legend has it, right? You know, everybody's told that Smoot-Hawley caused the Great Depression. That's not remotely true, and if you run even Trump's tariffs as they stand at the moment through a sort of standard model, they will reduce GDP by something like half a percentage point in the long run. It's serious. It's bad. It does terrible things to U.S. credibility because we're breaking all of our agreements, but it's not a huge thing. What we've never had before is tariffs where nobody knows what the tariff rates will be next month, let alone, you know, a year or two years from now. It's complete, utter chaos. It's sort of the whims of the president, and then the question of whether the courts even allow him to do what he's doing, which wreaks havoc with business. Any investment that business makes right now has a good chance of turning out to be a really bad investment because the tariff rate isn't what you thought it would be.

Westin: What about margins for corporations? Because typically, you might see it show up there. It's suggested that part of the reason we're not seeing it with tariffs is some of it's being absorbed by exporters, some by importers, and some by consumers.

Krugman: The exporters are not absorbing very much. We have independent data on prices actually charged by foreign countries for their exports to the United States, and those have not gone down, so it does not look as if foreigners are absorbing a significant amount. It does look like U.S. businesses have so far absorbed a significant amount. Partly that's because they rushed inventory in. They rushed imports in to front run the tariffs. Partly because they're not sure if the tariffs are here to stay. They don't want to raise prices and alienate consumers until they have no choice, but, no, it looks quite significant, and it's really important also to understand that, you know, this is not William McKinley's world economy. This is not what Trump thinks it is. This is not a world in which you import manufactured goods and you export farm goods, and that's it. This is a world of supply chains, complicated structures, and very many of the tariffs are actually being levied on inputs into U.S. manufacturing, so this is doing a lot to actually raise costs of U.S. businesses, as well, so there isn't a lot of slack in the end. I'm enough of a--you know, I may be kind of center-left, but I don't believe that businesses are making massive profits that can just be legislated away, so in the end, businesses won't be able to absorb them, and it's consumers.

Westin: What about the stated goals of President Trump, whether he's achieving them or not? One of them is actually to protect or bring back manufacturing jobs onshore of the United States. Is that a sensible goal, and by the way, how is it affecting the auto industry? Because the auto industry supposedly is one of the beneficiaries of all this. –

Krugman: Yeah, the auto industry actually is sort of case in point for, you know, this is not actually working, and for the auto industry, a lot of it has to do with the fact that there isn't a U.S. auto industry. There's a North American auto industry. It's very integrated with Canada and Mexico. Parts of an individual car may cross a border 7 or 8 times before you end up with a finished vehicle, and all of this stuff is adding cost, so the auto industry is particularly ill-suited. You know, steel and aluminum. What do you make cars out of? And we have tariffs on steel and aluminum.

Westin: Could there be an ironic, unintended effect, which is actually, as you put more and more pressure on the costs for manufacturers, they automate more so it doesn't turn into jobs? It might turn into GDP, doesn't turn into jobs. –

Krugman: Well, just in general, even aside from the cost pressures specifically, if you ask yourself which industries might be induced to come back to the United States, it'll be industries where the labor cost disadvantage is not too large. We're not gonna be bringing back apparel. There's just no way unless you have just hundreds of percent tariffs that we're gonna bring clothing manufacture back from Bangladesh to the Carolinas. What you can bring back conceivably are industries where they're very capital intensive, robots do a lot of the work, so we may be creating more jobs for robots but not a whole lot of jobs for U.S. workers.

Westin: There is the effect apparently-- we hear from Secretary Bessent-- on the deficit, that, in fact, we are putting a lot more money into the Treasury because of these tariffs. Is it helping us on the debt and deficit?

Krugman: -Well, in the direct effect, look, tariffs are basically a tax. They're a sales tax that are levied on selected goods. It's a sales tax on goods that we import, and sure, if I put on a national sales tax, it would raise revenue and reduce the deficit, and, you know, a lot of economists have said the United States really should have a value added tax, which is basically a sales tax, and, you know, most other advanced countries do that. and we kind of could use the money, so through a backdoor route, Trump is making America a little bit more like Denmark with a sales tax paying for part of the budget. But it's really not gonna be enough money. Secretary Bessent has said it's like $300 billion. It's extremely unlikely that we'll get that much, although it's possible. If we're increasing tariff rates by around 15 points that could get you to several hundred billion dollars, but the idea that if you impose a tax, it raises money, that's not an exotic-- that's not a policy triumph.

That's just how budgets work.

Westin: Are you concerned about the long-term, permanent effects of what's happening right now, rather than just the ups and downs, the vicissitudes of an electoral system? –

Krugman: What people don't, I think, fully realize is that on tariffs, almost everything Trump has done is probably illegal under U.S. law but definitely a violation of international agreements. I mean, we have--we built the world trading system, and we built-- I say, "we," because that's the United States. The U.S. created this thing, which is a system of rules and laws. We've just ripped up a whole system of trading agreements, a system that we built over 90 years because this really goes back to FDR. You don't put that back together. Even if the next president says, "OK, everything-- my first act is to undo everything Trump did," the United States will never be trusted again. We used to be a country where if we made an agreement, that was an agreement. I mean, you know, I was in the Reagan administration working on trade things, and there would be meetings in which some proposal would be floated, and the guy from the U.S. Trade Representative's office would say, "That would be GATT illegal,” General Agreement on Tariffs and Trade, which binds this, and end of discussion. In the Reagan administration, if it was a violation of our international agreements, we didn't do it. This administration doesn't care. They don't even try to justify violating these agreements.

Westin: Even as the Trump administration charts a very different economic path for the U.S. overall, Krugman's home city of New York is facing its own potential shift as the self-proclaimed democratic socialist Zohran Mamdani is ahead in the polls for the mayoral race.

Krugman is more sanguine about what that could mean. –

Krugman: What we call a socialist in America, it would be just kind of a social democrat in Europe. It's really not extreme. Some of his proposals might be a little dubious. I'm not sure about the rent stuff. I actually don't think that opening some city-run groceries is a problem, and in practice, he would almost surely govern pretty much just a slightly more populist version of what we have. I don't think we need to worry about radical change.

Westin: But the rent stuff, as you called it. If the problem is affordability of housing in New York, really freezing rents is not traditionally the way to get more housing stock built.

Krugman: Yeah, but what he's talking about is not freezing all rents. He's talking about stabilizing stuff that's already rent controlled, and so it's really-- it's a policy at the margin. It's probably not likely to have much effect on housing construction, and it does sound from other things he said that he really would try to get a lot of housing built, and that's the important thing. I’m not really worried about that, and it's--the panic over what really wouldn't be very different from the way New York City has been governed is all wrong, and it would take a lot to really ruin this city. The resilience of New York City has just been amazing over the years.

Krugman on housing

Westin: Affordable housing is an issue facing Americans across the country. Treasury Secretary Scott Bessent has suggested that

President Trump may declare it a national emergency. Nobel Prize-winning economist Paul Krugman

says he has a point. You've written that one thing the Trump administration is getting right is a housing crisis.

Krugman They're right say that there is one.

Westin: Exactly. There is a housing crisis. Why is there a housing crisis, and how do we know? -

Krugman: Well, just look at the price of houses. It's gone up way faster than overall inflation, and there are different measures, and if you just look at the price of houses, it's very clear. If you look at various measures of the implicit rent, it's not up quite as much, but it's still up quite a lot, and it's really interesting. We had a housing bubble in the 2000s, which was limited. There was a housing bubble on the coasts but not in the interior.

Places like Atlanta and Dallas and Houston did not see housing prices skyrocket because they could just build more housing. They just sprawled further. This time, it's across the board. It's all of America experiencing rapidly rising housing prices, and what it looks like-- you know, the same stuff. We're sitting in New York, and in New York, you know, getting anything built is really hard. There's a lot of regulations. In Atlanta, there's a lot less regulations except for one thing. In most places you cannot build anything but single-family houses, and what Atlanta was able to do for a long time was you just keep sprawling further and further, and you build more single-family houses out at the edges of the built-up area. We've now reached a point where the sprawl has reached its limits, where the available land for greenfield housing developments is so far from the center of the metropolitan area, and the traffic is so bad that you might as well not be in metropolitan Atlanta at all, and so all of a sudden, these places that were easily able to accommodate rising demand by building more houses can't.

You can build housing even in a dense environment. Tokyo is surprisingly cheap, believe it or not, but you have to allow it, and we've reached a situation where for somewhat different reasons, but the zoning land use restrictions basically prevent America from building remotely enough housing, and this is becoming a big problem.

Westin: When the Trump administration has found an emergency, they haven't hesitated to have some fairly powerful, some would say draconian actions. If they go forward on housing, what could those actions look like? –

Krugman: Well, that's the problem, right? I mean, they--if you look-- ask seriously why is housing so expensive, well, a lot of it is land use, especially now, single-family restrictions, and then there's construction costs, so if you really wanted to do something about it, you'd say, Let's have a federal intervention to prevent localities from blocking construction of more housing, of multifamily dwellings, whatever, and let's also try to increase the supply of construction labor and reduce the prices of construction materials, and what we actually have is, if you read the Project 2025 manifesto, it's absolutely pro NIMBY, single-family housing is what America is about, and the federal government should not at all interfere with localities that want to block housing, so that's out. We've imposed tariffs, 35% tariffs at the moment on Canadian lumber. That's not great for housing construction, and we're trying to expel immigrants who make up a lot of the construction workforce, so everything they're doing is kind of wrong. Now what I'm afraid of is they'll say, "Well, the reason housing is so expensive is because all these immigrants are taking up the space," which would be a disastrous response because the impact on housing demand would be minimal while the impact on housing supply would be really bad,. But they may use this as yet another excuse to crack down on immigration.

Westin: We've also heard suggestions out of the administration the real problem is the Fed, that if they would just bring down interest rates, then it would affect mortgage rates, and people would have more money to invest in housing. We'd get more housing built.

Krugman: Well, the Fed can certainly reduce interest rates in the short run, and if we were the kind of country where people typically had floating rate mortgages that keyed off treasury bill rates or something like that, like Britain, where the rates vary month by month depending on market interest rates, then they could do that, But we are a country where-- I think it's a good thing-- where by and large people get 15- or 30-year mortgages, which are not indexed to interest rates, and the thing is, if you pressure the Fed to cut interest rates, basically to print money, that will reduce short-term rates for a while, but in general, it will actually increase long-term rates because people will start to expect more inflation, and so if Trump succeeds in politicizing the Fed, it probably means higher mortgage rates. It probably makes housing actually less affordable.

Westin: You've self-identified, as a, I think, slightly left-of-center economist. Do we still have right-of-center economists, credible academic economists, like the Milton Friedmans of years past? –

Krugman: Economics is full of reasonable, professionally reputable center-right guys, what used to be center-right. I mean, it's a selection thing. It's not like sociology or something where the profession is pretty left-of-center. Economists teach about the virtues of free markets. There's a lot of talk about the dangers of excessive inflation, so there's a lot in economics that is appealing to someone who has got a kind of center-right political orientation. And I could easily run through and find you plenty of people who are reputable economists, good publication records, you know, high rank on Google Scholar, who would have been considered conservative 20 years ago, put it that way.

But they are not...wanted.

I mean, it's a little old now, but consider John Taylor of the famous Taylor Rule. John Taylor is definitely a conservative. Has always backed Republicans. He's also a very fine economist who really made his mark on macroeconomics. I think he spent a lot a long time thinking, "I could be the next chairman of the Fed." Never happened, and what's happened now is the modern Republican Party-- this predates Trump, although it's become even more extreme-- they actually want people who are not reputable economic scholars. They want the Art Laffers, the Larry Kudlows, the Stephen Moores. They want the people who are, as Greg Mankiw, a center-right economist, once called them charlatans and cranks. They want the people who tell you that tax cuts pay for themselves and are partisan loyalists,

And it looks like actually having a professional reputation is actually a negative from the point of view of our current political leadership because somebody who has a serious professional reputation might be tempted to take a stand on principle. You never know. You can't trust. I mean, actually, that kind of happened. When I was in the U.S. government, I worked for Marty Feldstein, who was a traditional center-right, highly reasonable, good economist. You know, I disagreed with him about some things, but we it wasn't a huge gulf, and he became totally persona non grata with Republicans because he was too reasonable.

Westin: That does it for us here at "Wall Street Week." I'm David Westin. See you next week for more stories of capitalism.