This is an audio transcript of The Economics Show podcast episode: ‘The Wolf-Krugman Exchange: The economy in an uncertain world’
Martin Wolf
So what did you do this weekend, Paul?
Paul Krugman
I went to the “No Kings Day” march in central Manhattan and hung out with a bunch of people with many quite creative signs. One of them says, “No Kings, Yes Queens”, which is a very New York thing. Except that it turns out Manhattan is officially Kings County.
Martin Wolf
Is that right?
Paul Krugman
Yeah.
Martin Wolf
Isn’t Queens where Trump came from?
Paul Krugman
Yes, it is.
Martin Wolf
Oh, wow. Well, I can see that it is a double entendre there.
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So, this is the third in our series The Wolf-Krugman Exchange. I’m Martin Wolf, chief economics commentator at the Financial Times.
Paul Krugman
And I’m Paul Krugman, a professor at the City University of New York and author of an independent Substack newsletter.
Martin Wolf
Today, we’re going to talk about the world economy at a period of great uncertainty. So world events have been moving at some remarkable speed. Since we last sat down to speak, there’s been a devastating plane crash in India; President Trump took the extraordinary step of sending the National Guard and the US Marines on to the streets of Los Angeles; Washington was the site of the country’s first military parade in decades; at the same time, millions of people took to the streets to protest the assaults on democracy being carried out by Trump and his administration; and a Democratic lawmaker was murdered in Minnesota, which is truly horrifying. But dwarfing these headlines at the moment is the new war in the Middle East between Israel and Iran. As we speak, these two countries are fighting each other for what they both claim is their very survival.
Paul Krugman
So timestamp is especially relevant today because we’re having this conversation as the leaders of the G7 countries are meeting for the second of their three-day annual meeting in Alberta, Canada. So for the record, it’s 2pm in London and 9 in the morning in New York on Monday, the 16th of June.
Martin Wolf
We’re going to focus our discussion on what’s going on globally and particularly what this G7 meeting is about and why it might matter and how it should or does fit into the general discussion of the global environment.
But before that, I’d like just to very briefly, Paul, to get your sense of these rather remarkable political developments in America. What happened in LA, these protests, what do they leave you feeling about your own country?
Paul Krugman
We are in a very strange, if I may say, very un-American state of affairs where an attempted crackdown on people who might or might not be immigrants, might or might not be legal, being basically rounded up in parking lots in Los Angeles, and then the president attempting to militarise the response, which is of dubious legality, and I guess we’ll get that sorted out, and it’s a very strange thing. It looks much worse on TV than it is in reality. The fact of the matter is that there are 13mn people in greater Los Angeles and the vast, both of them are not experiencing anything as a consequence, but that’s pretty amazing.
And then this was the weekend, you know, Trump held a military parade, allegedly for the Army’s anniversary, but in fact on his birthday. So a real sort of Red Square-type military parade in Washington, which was supposed to glorify him. And at the same time, there were protests around the country, the “No Kings Day” protests. The results were, let’s say, not what Trump would have wanted. Hardly anybody seems to have showed up for his parade. Even the VIP stands were mostly empty and it looked kind of pathetic. And we don’t have a hard count, but it looks like probably 5mn or more people protested across America. So if we were another country, you might say this looks like the beginnings of a colour revolution, right? It was a really massive outpouring. How this affects the political situation going forward, nobody knows.
Martin Wolf
One thing that I noticed was a comment from his education secretary. A bit puzzled by that because I thought the Department of Education had been abolished. But anyway, she said that, apropos Harvard and the administration, that it was the duty of the university to align its teaching and its objectives with the policies of the administration. This is about as clearly fascist a point of view as I’ve ever read, and there doesn’t seem to be quite as much excitement about this remark as I would have guessed, but I suppose by now everybody’s used to this. Quite extraordinary set of ideas.
Paul Krugman
Yeah, we’re pretty kind of accustomed now to the idea that whatever Trump believes in certainly doesn’t believe in what we’ve considered to be traditional American or traditional democratic values. He views it as l’État, c’est moi. I mean, pardon my horrible accent, but you know, it’s all supposed to be on his behalf and I guess we are kind of desensitised to it because it is absolutely routine in the US right now.
Martin Wolf
I’m still abroad, and of course I still have expectations and views about what the US stands for and of course, I have a personal family background in Germany and Austria during the ‘30s, as some people know, and I find it pretty amazing and pretty horrifying that Americans can get desensitised to such quite extraordinary views.
Paul Krugman
Yeah, so you do want to bear in mind that we just had truly massive demonstrations, possibly the biggest mass demonstrations in American history.
Martin Wolf
Well, that’s encouraging.
Paul Krugman
Yeah, it does say that, you know, America is not yet lost, is the way I would put it.
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Martin Wolf
Well, let’s turn our perspective on something which is more within our professional areas of competence. The G7 is meeting in Canada, and the G7 is the meeting of the major industrial countries, so the US, Canada, Japan, and the larger European states, UK, Germany, Italy, France, and they’ve sort thought of themselves as collectively guiding the world economy, even after the Group of 20, a much bigger group, was created after the global financial crisis. And so here they are meeting in Canada and you’ve got Trump on one side and engage in a trade war with all the others. So what on earth is this for?
Paul Krugman
Well, I mean, the question all along really has been, what is the G7 for? I mean does G7 grows out of the G5? And then they added a couple of countries. And what exactly do they do? It has always been a real question. We know what the purpose of the World Trade Organization is. We definitely do need or did need, we’re breaking it up, but co-ordination on international trade policies, co-ordination on international macroeconomic policies. Hundreds and hundreds of papers have been written by my colleagues in academia, including myself, desperately trying to find good reasons why we must co-ordinate macroeconomic policies. And it’s not an easy case to make. And the G7 has kind of inserted itself into a bunch of other issues. But it’s an ill-defined purpose. It’s maybe a chance for world leaders, and in this case, the leaders of democratic countries get to meet each other, build some level of personal trust, less about actual policies. And of course, at this point, I don’t think there’s a whole lot of personal trust gonna be coming out of this meeting.
Martin Wolf
By the way, this could well be wrong because, not as young as I was, but I think the initial G5 was started in the mid-70s during the oil shock.
Paul Krugman
It could be. We think of this as mostly coming out of 1985 and the Plaza Accord on the dollar. And that’s when this notion of regular consultation came on and then there was a whole period. I was very much young academic on the make and everybody wanted to be the one who wrote the definitive paper explaining what the purpose of these groupings was. And we never actually come up with a good answer.
Martin Wolf
So, one obvious problem with this meeting is lots of important countries aren’t there. In this case, I think the Mexicans are coming. I’ve been told the Brazilians, South Africans, but the Chinese aren’t there, for example. So if you are going to have a sort of committee to run the world right now, at least the world economy, pretty obviously would need these people there, wouldn’t you?
Paul Krugman
Yeah. In fact, you know, even the way you put it, it’s the industrial countries. But you know, these days, China is the workshop of the world. I mean, China, I don’t know the numbers, but I wouldn’t be surprised if Chinese manufacturing production is pretty much comparable to the entire G7. So depending on how you measure it, the world’s biggest or second-biggest economy is not at the table and very hard to imagine any kind of global economic strategy emerging if the most important players are not there. So I actually have no idea what they’re going to be talking about.
Martin Wolf
Well that’s a very good question. I understand, I’ve been told that they’re not going to bother to produce a communiqué probably because it would only register their profound disagreements and the fact that they are actually in the middle of a trade war.
Paul Krugman
Can I break in with what, maybe a slightly funny story? I mean, there are multiple groupings of countries that gather together and produce communiqués. And many, many, many years ago, I spent a year with the US government, and I would go to meetings at the OECD, the Organisation for Economic Cooperation and Development. Basically, all the world’s rich countries and a few ringers are members. It has no line responsibilities. No power really except that it does a lot of data collection and reports and sometimes it is quite influential. And I would, as the senior staffer accompanying my principal and the United States being still top dog, I would actually write the minutes, not the communiqué exactly, but the minutes of the meeting. The thing was that the minutes of the meetings had to be written on the last evening of the conference, which meant that there was a whole day of talks still ahead. And I would have to write the minutes based upon a forecast of what would be said the next day. And then there would be a sub-meeting, which at that point was just the US, Germany, and France, where they would negotiate the minutes line by line to eliminate phrases that one country or another found objectionable. And, you know, it really was kind of a silly exercise. And by the way, it wasn’t at all hard to predict what would be said the next day, which in a way, again, tells you what’s like. So I have a pretty cynical view of what all of these meetings are about.
Martin Wolf
I tend to the view that, as Winston Churchill once said, meeting jaw to jaw is better than war. So, people should at least meet, have some idea of what other people are interested in, what their bottom lines are, and it’s better than having complete ignorance of one another. And if it just achieves that, it’s better than nothing.
Paul Krugman
Exactly what, well, I guess better to have them meet than to have complete silence, but wow.
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Martin Wolf
Let’s talk about some of the real economic agenda at the moment, and in the longer term. I mean, one of the pretty obvious issues is that the 90-day, quote unquote, suspension of the “liberation day” tariffs of April the 2nd is due to expire fairly soon, not much more than a couple of weeks. So what’s going to happen then, and what might it mean, any sense of this? My colleague Robert Armstrong has coined this wonderful acronym Taco, Trump always chickens out, and it’s gone viral as I can see. And of course, the implication is that July the 2nd or whatever it will be will just pass and nobody will notice. But is it possible, really possible, that we’ll suddenly see all those horrifying tariffs imposed by the US in two weeks, starting Trade War II?
Paul Krugman
Well, it’s very important to understand that the trade war never went away, that Trump modified those April 2nd tariffs on April 9, and then modified tariff on China after that. But by no means have we gone back to anything resembling the tariff levels that prevailed before. Depending on which estimate you use. But the average US tariff rate is now on the order of, let’s say, 17 per cent, up from less than 3 per cent before Trump began his stuff. So we’ve gone from having the highest tariff levels in a hundred years to having the highest tariffs levels in 90 years. That’s where we are now.
So if this is chickening out, boy, we’re still in an extremely protectionist regime. And all that we’re really talking about is whether sort of the little bits of it that got chipped away will come back or whether there’ll be some reorientation. I guess for some countries, it’ll make a big difference. If you’re Bangladesh, you’re currently facing 10 per cent, which on the original tariffs will go back up to 34 per cent. But if you’re China or even the EU, I mean, it’s currently 10, it was 20 under the original plan. These are still very, very high tariff rates. So I mean it’s conceivable that Trump will say, OK, we got what we wanted and back to the trade regime as of April 1st, that seems extremely unlikely.
Martin Wolf
I think that’s a very, very important point. Obviously, the trade regime of the world has been changed quite profoundly under almost any plausible assumptions. And of course, this sword of Damocles is unquestionably still hanging over the world because Trump has made it very, very clear he’s not bound by anything. All the international agreements that the United States has reached over many, many decades with bound tariffs and all the rest of it, which I think we discussed in our first episode have gone and so we are in trade policy anarchy.
Paul Krugman
Yeah. It is probably worth pointing out. Look, the core, the whole international trading system that existed until a few months ago was built on the idea of non-discrimination, that on any given good, the same tariff applies to everybody. And the United States has completely ripped that up. So the Trump administration has violated all of our existing trade agreements with what it’s done. So why think that whatever handshake deal, whatever takes place in Alberta is going to matter?
Martin Wolf
That raises quite an important question which I addressed last week in my own column on the world economy, which is what should the rest of the world be doing about this situation in trade policy? Not just vis-à-vis America, but vis-à-vis one another. Should they say, OK, we are going to stick to the agreements we have reached. We are going to stick with non-discrimination. Except where there are very clear exceptions for free trade agreements or customs unions. We will follow the rules of the Gatt-WTO and we will continue to abide by the rulings and arbitration process within it. And indeed, we might go beyond that and try to reach serious agreements in other areas that really matter to us. After all, they are still the bulk of the world economy, the bulk of world trade, certainly the bulk of global carbon emissions, or the other collective action problems that we clearly understand and say, OK if the US is going to do this. Well, that’s your problem I won’t get into whether they should retaliate. Though I think that’s also important. What would you advise them? And then if you go there and this is what I think the rest of the G7 should be thinking about. They should say OK, we’re going to put most of our effort into other groupings with countries that look more co-operative and in economics for sure, well, maybe China looks not so bad now.
Paul Krugman
Yeah, I mean, it takes some work, I have to say, for a US administration to make the Chinese look like reliable, trusted partners, but compared with recent US behaviour, they are. China does a lot of stuff that you can complain about. It’s an old line that in China a contract is a suggestion, but the Chinese have been a lot better at adhering to agreements in the last few months than the United States has.
There really is no good case for the rest of the world to emulate the United States. The fact that the United States is imposing all of these “liberation day” tariffs, there’s no reason for Britain or the EU to do the same thing. We’re already seeing some rapprochement between the UK and the EU. You know, Canada has this unfortunate, say, it’s the Mexican line, but it applies to Canada too, you now. So far from God, so close to the United States. China, there are long-standing issues there, but those issues don’t have to become worse just because the United States is behaving erratically. Retaliation against the US, that’s an interesting question.
Martin Wolf
That is the question. What do you think?
Paul Krugman
Yeah. Well, I think the Chinese are doing it. I mean, the Chinese are actually playing significant hardball and they’re doing it in an intelligent way. The Chinese seem to understand, which I don’t think the US administration does, that ultimately, trade is not about exports, it’s about imports, it is about what you can get. And the Chinese have been limiting exports of rare earths, specialised batteries, things that the United States does not have the industrial base to produce at this point, you know, give us time, but right now we don’t. So the Chinese are in a position to actually inflict significant damage in the trade war. They also take it because America is an important market for them.
But the Chinese seem to be actually engaged in an active strategy of calibrated retaliation. The EU has not, and I don’t think it’s going to. I mean, there’s a case for doing it, but I don’t think they’re going to. But as for the rest, yeah, the possibility, the world trade system goes on as before, but without the United States, it’s certainly technically possible. In fact, simply honouring existing trade agreements would cause that to happen. What we don’t really know is the political economy. We’ve always relied upon the United States as providing, you know, to use the international relations jargon hegemonic stability. The US is the big player and it’s the United State’s commitment to the rules that helps keep everybody else obeying the rules. The EU is a pretty big player too, and if the Chinese want to be good guys on this, they can be, but it is gonna be tricky and one of big questions out there.
Martin Wolf
I think the really big question is indeed, well, a big question in the trading scene is whether the fragmentation that has now come from the US will be, as it were, replicated on an ever finer scale in the world, in which case the costs are going to increase. And for some countries, smaller countries, likely to be really high. Or will other major powers, and we’ve discussed some of them, actually say, well, it’s not really in our interest to do this. Yes, we have some bilateral problems the EU does with China, no doubt, but blowing up the entire edifice is not in our interest. I think that’s what the EU thinks. I think it’s what China thinks, though China’s relationship with these rules, as you rightly said, is a sort of bit open to interpretation. And if the US wants to go away, let it do so.
I am inclined to think that really for demonstration effect, the larger powers in Europe and China in particular should be retaliating. And I also agree with you, the Chinese are doing it very sensibly, very intelligently. It seems as though they’ve been planning for this. Surprise, surprise. After all, they did have a trade war with Donald Trump not so long ago, and I suspect they have been thinking about it. The constraints are just their unwillingness to use fiscal and monetary policy in standard ways. They have a huge external surplus, they’re a net creditor of the world, and nothing constrains them from getting round this problem if they want to. So I think one of the things that interests me is why has the US been so overconfident about its hand in this trade war they’ve started?
Paul Krugman
Well, yeah, and I don’t know if you said it or somebody said it, but on US-China, it’s a lot easier to pursue Keynesian policies to offset some job losses than it is to stand up an industrial base that you don’t have.
Martin Wolf
Exactly. It’s a beautiful way of putting it. No, that wasn’t me, but it’s the same point, essentially.
Paul Krugman
And if you ask about US overconfidence, well, look, this is a general American problem that we tend not to really believe that the rest of the world exists. And to the extent we do, we tend to think that we have much more power over it. And this is not unique to Trump, though this may be an especially ill-informed group of people we’re talking about now. But the idea that the United States could shape the world in its interests was very prevalent at the time that we invaded Iraq, and it was crazy. Even then, just obvious if you looked at them, not remotely, that we have that kind of sway in the world and even less so now. But if we have a president of the United States who believes that every time that some country runs a trade surplus with the United states, that means that we are subsidising them, then he’s going to have a view of the world that does not correspond very much to actual economic realities and probably a rude awakening coming quite soon.
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Martin Wolf
I would like just to briefly move to another vulnerability before I go back to a bigger macroeconomic issue, which is connected to what’s going on in the Middle East right now. When the October 7th massacre occurred, I wrote one column, the only column I’ve written on this, about what it might mean for the wider world economy. I have personal interests here, but I didn’t think they were suitable for columns. But if it ended, and I argue this now quite a long time ago, in a war between Israel and Iran and Iran felt cornered, there had to be a danger that Iran would act, essentially, to close the Strait of Hormuz and close the Gulf. And since it’s right there and has lots and lots of missiles and tankers are very, very vulnerable, that could happen. And I’d be very surprised by how confident people seem to be — though the oil price, of course, is rising — that that won’t happen. Now, of course, we’re not as vulnerable to oil as we were in the ‘70s, but an awful lot of the oil production of the world does go through the Gulf still. It’s still the largest reserves in the world. So this seems to me potentially it could happen, that this will be another big shock in a whole series of big shocks.
Paul Krugman
Yeah, and it is worth pointing out the technology of war has changed in ways that often seem to give smaller powers more ability to inflict harm than in the past. The United States basically fought a war with the Houthis in Yemen, and basically we lost. No, it wasn’t dramatic, but the attempt to suppress their ability to fire missiles at passing ships, we didn’t manage to do it. And we lost quite a lot of hardware in the process. And Iran is immensely bigger than that. And so the idea that this could cause major disruption, and yeah, the world’s a lot less oil dependent than it was in 1979 when the Iranian Revolution precipitated a global economic crisis, but still the ability of Iran to disrupt flow of oil from other places, not just themselves, is much bigger than it was then. So yeah, this is among the big sort of tail risks out there, maybe not that far in the tail.
Martin Wolf
That’s very much what I think, and that’s why it’s very dangerous. I sort of understand some of the logic that to corner this regime and tell them actually what we’re after is your destruction. If you corner somebody who’s right there and has lots of drones and missiles with all the Gulf oilfields within range and the Gulf itself, seems to be pretty dangerous.
Paul Krugman
Yeah, and you do kind of wonder, who’s thinking this through? I get too American, but if you start to ask what’s been happening to the US intelligence community in the last few months. Think about what’s been happening to the US Pentagon and state department during the last two months. Are there any adults left in the room?
Martin Wolf
Well I remember one adult who I was very much impressed by at the time. Colin Powell in Gulf War 1 and he used to say I think he said it several times: you should never start a war if you’re not absolutely clear how it’s going to end. That seems to me given history including the last six . . . or 70 years of American history that’s pretty good advice.
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Martin Wolf
So let’s move back. We’ve discussed this oil risk, which is obvious, and it remains there. I want to discuss something rather different, which I’ve been thinking about for quite a long time. We agree, obviously, the trade war as prosecuted is impossible to justify. And that’s particularly noticeably true for this concern the Americans have had now for a long about imbalances, structural, current account deficits and all the rest of it.
Now, on that point, I don’t know whether we disagree or not, but I just want to say, it does seem to me there has been an issue about the role of the US, as it were, in balancing the world economy’s demand and supply by being, in some sense, the demander of last resort. I mean, savings is an investment, have to balance across the world. Basic Keynesian economics, the world economy is a system. Lots of countries, very important countries, have set up their policy regimes, pretty obviously, to create very large current account surpluses, trade and current account surpluses, which are structural, they’re investing for that. Their financial systems are designed to produce that. And if you’re going to have balance at something notionally like global full employment high activity, then somebody else has to run the counterpart deficits and clearly the US is far and away the best suited country. And of course, if the US is going to play that role, by definition, some institutions in America are going to run deficits, very large deficits. And since the financial crisis, that’s basically been the government. I think having the US government run deficits in this situation is better than the alternative, but it’s not ideal.
So the US demand that savings and investment balances should be changed and current account surpluses should be changed in countries like Germany, China above all, has always seemed to me perfectly reasonable and the question is how we have the discussion and what we should do about it. What is your view on this, on both the importance of the issue and what, if anything, can be done about it?
Paul Krugman
Well, there’s an interesting question here, which is whether the US runs a trade deficit, which is the necessary counterpart of the surpluses being run abroad. It’s not at all clear that that per se is really a problem. We have a somewhat smaller manufacturing sector than we otherwise would, but not as big a deal as many people think and not as especially big deal for things like the overall level of wages, but the political economy is bad. It certainly feeds into protectionist sentiment in the US.
We have a large budget deficit, which I don’t think is actually being forced upon us. I think the reason that we were on a large budget deficit is it’s a kind of a political impasse in which everybody wants somebody else to make sacrifices. And that is starting to reach the point, I’ve long been very much a deficit dove, don’t get too worried about it. But at this point, the deficits are getting extreme enough and the US, you know, all our ability to ride with these deficits runs ultimately on the belief of the world that, well, look, this is America. It’s rich. It’s stable. It can get its act together when it becomes necessary. And do we still believe, at least in the stability part, for America? So I think that’s a real problem.
Now, I don’t think you can blame the Chinese for our budget deficits. But the Chinese trade surplus is disruptive. You can argue that the rest of the world should just be happy to accept cheap money from China. Why not? Except that that’s not how it works. It is, in fact, a source of major political tension. And one of the negative miracles of world policy has been the apparent inability of China to decide that, OK, we can’t continue to invest 40 to 50 per cent to GDP each year, which means we have to have more consumption. And instead trying to export their problem through trade surpluses. And if it wasn’t for Donald Trump and all of that, China’s continuing refusal to really address its structural trade surplus would be the biggest source of conflict in the world economy today.
Martin Wolf
I agree very much with most of that. I’ll add one point and then I’ll make an argument against you if I may. The . . . that at the point that in my view is very much in a book I wrote on the crisis that Germany’s very similar structure though it operates in a different way was a root cause of the Eurozone financial crisis and that links with the way in which I disagree with you but I must put this in a very clear and nuanced way because it’s important to get my perspective right. I agree with you completely the fact that the Chinese run a huge current account surplus with the US bilaterally and a huge global one doesn’t necessitate a huge fiscal deficit. There were many other possible outcomes, but if you think, given that China is so big, it has to be a creditworthy global borrower. That is the counterpart, it sort of has to be the US at least in significant part. There isn’t any other set of countries that could run counterparts to Chinese surpluses. And then if you look at the history of the domestic counterparts to those external deficits, by definition, if the US runs huge current account deficits, then in its government sector, its private corporate sector and its household sector, someone has to be running large counterpart deficits. But if you go back to the early 2000s, and I remember writing a lot about it then, at that stage, the huge counterpart deficits were being run in the private sector, particularly the household sector. And that, of course, as you knew very well and you wrote about, was the counterpart of this huge housing boom and this huge credit boom, which blew up pretty spectacularly.
So I do think that the Chinese policy did diminish US options in a certain respect. Either you run large fiscal deficits and/or you run large private sector deficits and if the corporate sector actually is getting enough funding from its point of view, so it’s roughly in balance which it is now in terms of savings and investment. That ends up with the household sector and when the household sector goes on a huge borrowing boom as we saw in the US, UK, Spain before the crisis, it ends up horribly, so one way or another, it does leave the net borrowers in the system in some trouble.
Paul Krugman
Yeah, I mean, I think that the causal links with the United States are pretty unclear, but the principle is right. And yeah, and look, the world’s two largest economies seem to be unable to have coherent macroeconomic policies in different directions. The United States is unable apparently to basically raise taxes, fundamentally to the US, the solution to the US problem, we’re a low-tax country and we need more revenue, but we can’t seem to do it politically. And the Chinese, even more weirdly, it should be fun to spend money and boost consumers, but they have weird political constraints. I mean, listening to Premier Xi talk about aiding Chinese households, increasing consumption, and he actually sounds like a right-wing Republican worrying about encouraging a culture of dependency and so on. So the Chinese have got their hangups, the United States has got a political deadlock. Not a good thing. So many things going wrong in the world, but this is an enduring problem that is not going to end well.
Martin Wolf
Yes, I think it’s a background irritant and if the Chinese didn’t feel this was the way of solving their domestic problems which I agree with you are completely incomprehensible. I’ve been writing about this for a quarter of a century and it seems to me very puzzling that a still relatively poor country can’t get its consumption share of GDP public and private above 60 per cent. It’s pretty weird but they don’t seem to be able to do so. And the US ends up as the counterpart. But if I look at global economic problems in the macro trade field, this is the one that they ought to have been able to work out a path to fixing in the last 20 years. And it’s absurd, it seems to me, and it’s so much linked with this irritation in America that we haven’t been able to fix this because it’s not that difficult.
Paul Krugman
And by the way, this is a kind of thing, to circle back a little bit, this is the kind of thing where a grouping like the G7 could be helpful, not in the sense of actually dictating policies to China. Nobody can do that. But in the since of possibly offering China’s own leadership a little bit of cover to do things that one hopes they understand they should be doing. I mean, way back, I go, you know. Though we could both have been around this for a long time, but the Japanese used to have this phrase, I think, gaiatsu, which was about essentially exploiting US pressure to do things that their leadership, in fact, wanted to do and knew they needed to do, but it was helpful domestically to be able to say, well, we have to do this because of the Americans. And in some ways, China could be doing the right thing, saying, well, we have to do this because the other members of the G7 say we need to act. And so this could be a minor positive if we had a different set of, well at least one person of the G7 was different from who he’s actually going to be. By the way, the other thing to backtrack there is when we talk about the possibility of kind of a sustained global economic trading system without the United States. One of the big obstacles to that is the fact that China is running these disruptive trade surpluses. And we’re not going to be able to really construct a World Trade Organization minus US system if China doesn’t resolve this enduring imbalance.
Martin Wolf
I have to say that one tiny bit of optimism I have is that a couple of months ago I was in China for a week and I was talking to a number of officials and the sort of and I made some arguments on these lines in columns too, which is: Well, the US has really become very unfriendly to your surpluses and you must have worked out by now that the claims you’re accumulating on the US in the process in various ways are not quite as sound and solid as you would like them to be. So in this situation, surely you will really want to get rid of these surpluses or at least only invest them in really safe countries. It’s not quite clear who those are now. And many of the Chinese policymakers I met among economists are pretty clear that’s right. I mean, I’ve never met so many people who really want to get consumption going. And I think when the Chinese really decide to do things, they do do them. So I’m a little more optimistic at the moment about this because they look at the world, they can work out what’s going on, they’re not completely crazy. You might see more change at the moment than we have been expecting.
Paul Krugman
It’s certainly possible. I mean, it’s one of those things, you know, the world’s two greatest economies are both gerontocracies run by old men whose views of how the world works are decades out of date, and it may be that waiting just behind them are people who are willing to think differently. So yeah, I have some hopes. It’s just hopes. I know nothing.
(MUSIC PLAYING)
Martin Wolf
So we should move to our cultural coda, and I’ve done something perhaps mainly influenced by what’s been going on in the last week in Los Angeles and sort of frightening realities of America which matter so much to us all. So I’ve gone to what is both one of the most magnificent poems I know and this bit of a cliché, but I think the cliché is so right that I’m prepared to do it. So it’s William Butler Yeats’ The Second Coming, which there will be a YouTube link, and it’s a magnificent poem. It was written in 1919. He was Irish. It was the time of the fight for Irish independence. And it was, in some sense, looking towards the catastrophes the following two decades. And I’ll just quote a few lines from the poem because they are the core of what he said and I think just frighteningly truthful today:
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Paul Krugman
Well, in a way, not that different. I actually found myself going to an old Peter Gabriel song, Games Without Frontiers. And the verse is:
If looks could kill, they probably will
In games without frontiers, war without tears
If looks could kill, they probably will
In games without frontiers, war without tears
There’s, again, this kind of mindless nationalism, to the extent, you know, it’s a song, and songs shouldn’t actually be too literally interpreted. But it really felt kind of appropriate listening to it now. It’s . . . things haven’t changed much, except that we used to have a relatively benevolent hegemon over here on my side of the Atlantic and with the hegemon abdicating, I’m not sure what happens.
Martin Wolf
And of course the relevance to that though this is not I think quite what Yeats was writing about was just after America’s entry into the world in the last couple of years of World War I with some pretty controversial effects in the Versailles Treaty, the United States then withdrew completely for more than two decades. And pretty terrible things happened of course and America got dragged back in 1941 and that’s the beginning of the hegemonic period. So it does seem sort of relevant to where we are now, because in a way that’s where Yeats was, though it’s a wider issue.
Paul Krugman
I suspect that Yeats had no idea just how prophetic his poem would be.
Martin Wolf
Yes, but I’ve often thought that the very greatest poet seemed, intuitively he was a very great poet, to understand reality in a way that a conscious mind was not aware of, and that’s one of the great values of these sorts of creative people.
Paul Krugman
Aha. Well, maybe the creative people will save us.
Martin Wolf
I hope so. Somebody has to.
Paul Krugman
Yup.
Martin Wolf
It’s lovely to talk again and till the next time.
Paul Krugman
Talk to you soon.
Martin Wolf
On that note, thank you very much for joining us for part three of The Wolf-Krugman Exchange. We’ll be back with you again next week when we’ll be discussing artificial intelligence and the impact it’s having on the world in which we live.
