The Economy Is at a Hinge Moment
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Before we start the episode today, I wanted to give another quick announcement about the coming New York Times audio paywall. This will not be the last of these you're going to hear. I dropped a small episode down the feed a few days ago. It was called About the Coming Paywall. All the details are there. But in case you missed it, in the next couple of weeks, the archives of the show are going to become subscriber only. This will happen for all New York Times audio shows. The most recent episodes will still be free. But to access any older episodes, you're going to need a time subscription. And I'm going to show you how to do that.

For more details on how all that will work, why it's happening, why I actually think it's a good idea and want to persuade you that it is too, you can see that episode from a few days ago about the coming paywall. And now to today's episode. From New York Times Opinion, this is The Ezra Klein Show. We are at a hinge moment in the economy. For the past few years, there has been one problem on economic policymakers' minds. One problem obsessing the Fed, obsessing the Biden administration, obsessing everybody.

inflation. But in mid-September, the Federal Reserve officially called an end to that era when it cut interest rates by 50 basis points. Inflation, it was saying, is no longer the problem. It's come down from around 9% to around 2.5%, but now unemployment is creeping up again. There are signs of economic stress. Having spent the last years cooling the economy down, the Fed now feels it is both safe and necessary to heat it back up at least a bit.

The fact that inflation is over, at least for now, as an economic problem doesn't mean it's over as a political problem. Prices remain high, right? Inflation going down means prices are no longer rising at that rate, but it doesn't mean that the prices themselves have gone back to their previous levels. And people remain pissed. And the inflation crisis, as we talked about in a past episode with Annie Lowry, it's focused attention on the long building and completely unsolved problems

affordability crises, the cost of homes, of childcare, of healthcare, of education, of elder care. And so the 2024 election is still very much about the cost of living. But that is not all that the next administration is going to have to deal with. So what does it mean to fight the next economic war rather than the last economic war? What's coming that we have to prepare for?

Jason Furman is a professor of economics at Harvard Kennedy School. He's the former chair of the Council of Economic Advisors for Barack Obama. He served in a number of other roles in government as well. He has been very closely tracking the inflation crisis over the past few years, and we talk about both what he got right and wrong there.

But he's just incredibly knowledgeable about the ins and outs of how economic policy actually gets made. What happens in the room, what tools are in the toolkit, what can go wrong. So I wanted to see what he thought the next administration would be dealing with and what he thought of some of the big policy ideas that Vice President Kamala Harris and former President Donald Trump have proposed. As always, my email is reclineshow at nytimes.com. ♪

Jason Furman, welcome to the show. Great to be back with you. So the Fed just cut interest rates by a half percentage point. You thought the Fed would and should cut rates by a bit less. Why? I don't feel particularly strongly. The important thing here is that inflation is down a lot. The unemployment rate is up a lot. And so the Fed should not just move once, but make it clear that they're going to keep moving. And that's exactly what they did.

I didn't think the data was so overwhelming that they should start out in a different place than they usually start. They usually start with 25 basis points. I don't think things are so bad, deteriorating so quickly, that there's a reason to do a jumpstart on that. But the path is pretty much almost exactly what I would have wanted to see. But when they worry that it's deteriorating, what are they seeing that makes them worry about deterioration in the economy?

As always, there's just different economic indicators telling very different stories. And the one that got their attention, that got my attention, is the unemployment rate has been steadily rising. It was a low of 3.4%, and now it's up to 4.2%. And the worry is that historically, every time you see a small increase in the unemployment rate, you see a large increase in the unemployment rate, and no one would want to see that.

But that's just one piece of data. If you look at consumers, for example, they're spending like crazy. Businesses are investing at a high rate.

Home building, which had been quite low, is starting to make a rebound. And so overall GDP growth is at about a 3% rate, which is incredibly fast, at least on a sustained basis. So that's what I mean by different indicators telling different stories. Yeah, I was looking at the social network formerly known as Twitter today, and Mark Zandi, the economic forecaster, wrote, I've hesitated to say this at the risk of sounding hyperbolic, but with last week's big GDP revisions, there is no denying it.

This is among the best performing economies in my 35 plus years as an economist. Economic growth is rip roaring. I mentioned real GDP up 3% over the past year. Unemployment of 4%, inflation closing in on the Fed's 2% target. Corporate profits robust, stock market hitting record highs.

Are we at a point now with inflation much more under control where you feel like that, too, that this is a sort of historically good economy? I think the economy is pretty amazing. I mean, first of all, you go around the world and I do. I have meetings with economic officials in other countries and

And they all would love to be the United States. They'd love to be us in the short run in terms of where our growth is right now. They'd love to be us over the medium or longer term because of our productivity growth, because of where some of the world's leading companies, fastest growing companies are located. No, you never want to relax too much. But right now, yeah, it feels very, very good.

This has been on my mind, and maybe you have an answer to it. When I began covering economics in like the early mid-2000s, there were these books about how the Eurozone is going to be a bigger economy than we were. You would talk about productivity numbers in France and German manufacturing. Just over the couple of decades, we've really pulled very far ahead of Europe. I mean, the UK is quite poor compared to us now, right?

What went so wrong for them or what went so right for us? For us, there's two halves to that. The thing that didn't go as right as you'd like it to go is productivity growth. It's been fine, but it hasn't been that great.

Europe, in contrast, has had terrible productivity growth. And the big difference between the two economies, and Mario Draghi has a terrific recent report about all the things Europe should do, and he emphasizes this point, the big difference between the U.S. and Europe on productivity overall is the technology industry. We have one other than Spotify and a few other things. Europe basically doesn't.

So we've had decent productivity growth while Europe has had terrible productivity growth. And then our stock market has done even better than you would think from our productivity growth. And that's because there's all this extrapolation forward.

about how much they're going to be able to make in the future when, for example, AI all comes together and pans out. Because hopefully it's forward-looking and knows what it's doing. Of course, it might be forward-looking and over-optimistic, and we'll eventually find out which one of those it is. I think one of the things that really struck me preparing for this podcast with you is that we call six or seven economists on different sides of the ideological spectrum, and

And the question we kept asking, and I'll ask it of you in a minute, is to sort of talk through what problems they were worried about in the next couple of years. And not one said inflation, not one. So is that done? Where the inflation war is at one and we can relax and the Fed is cutting interest rates and whatever that was, it is actually gone and tamed? Or do you disagree and see it as a burbling risk in the background?

So I hope you didn't call seven Fed governors to get that answer because they should never think the inflation job is done. The beauty of a fiat currency is you have a lot of control over the economy. The downside is if you create too much of it, you know, inflation is always lurking around the corner. And the only anchor you have is the seriousness of monetary policymakers. So I think the Fed should continue to be nervous. I think almost everyone else, though, does not need to be.

So when you think of the inflation story over the past couple of years, when it begins rising, you have this whole talk of keep transitory. People like this is just a pandemic supply kink. It's going to go back down quickly. Don't worry about it. There are people like Larry Summers famously, but also you who begin really raising the alarm and saying, no, this is going to be worse than you think. There's more, you know, we've overheated the economy. There's more pressure building up. It's going to spread, you know, from used cars elsewhere. And that proves out to be right.

But then these same folks say that it's going to be pretty tough to get it back down. In 2022, you said we might need to have unemployment as high as 6.5% for a few years. Larry Summers famously said you might need unemployment above 5% for five years. And we're able to get a soft landing without that. We bring inflation down, and even now we're only up around 4% unemployment rate.

So what did Team Transitory get wrong in your view, right? Why did inflation get so much worse than people thought? And then why was it easier to bring down than the more inflation hawkish among us, yourself included, assumed? Yep. So first of all, I'm thrilled to have been wrong on that. So that's a great thing. In terms of Team Transitory, they really were predicting inflation was going to go away right away.

Not in two or three years, but literally in two or three months. I think they incorrectly thought it was all on the supply side. The fact that it's gone away does not change my view that an awful lot of it was demand. And it sort of defies the imagination to think that you can give so much money out to people and it won't have any impact on how they behave or what they do. So

What I think has brought inflation down is a combination of three things. The first is some of it was a supply shock. That was most clear with Russia's unprovoked invasion of Ukraine and what that did to energy and food prices. And that just went away. Second of all, the labor market really has loosened quite a lot, but it's loosened in an incredibly pleasant way.

My single favorite indicator for the labor market is to compare the number of job openings to the number of unemployed. At the peak of labor market tightness two years ago, there were two job openings for every unemployed worker. And you didn't just need to look at the Joltz series to see this. You could just walk down the block and you'd see help wanted ads or we're short of people ads, you know, no matter where you went. That was an incredibly hot labor market.

That has since fallen down from two job openings per unemployed to 1.1. Now, here's where the good part comes in, though. That big improvement in the labor market, at least loosening of the labor market, happened almost entirely because job openings fell sharply, not because unemployment rose. Governor Chris Waller on the Fed basically called that correctly. He, in effect, said the reason for these job openings is not just a huge amount of demand,

It's also that everything's been reshuffled. We've had a reallocation throughout the economy. In 2021, maybe your business didn't have work from home and you wanted to work from home, so you left it and went to look for a work-from-home job or vice versa. So there was just a lot of reshuffling going on. But once that reshuffling finished, you would return to some more normal relationship between job openings and unemployment.

And if we can lower demand a little bit, we can get those job openings down a lot and loosen the labor market in this really pleasant way. And so when people looked at the inflation rate and thought we would need really sharp unemployment, was that built on a sort of theory from the 70s? You would have to break sort of expectations about the future? Or was it really just a sort of direct calculation that you would need that much less demand? Yeah.

to get prices down. Yeah, so that's the third one. The first was the supply shock got better. The second is the labor market loosened. The third is expectations stayed really well anchored. And that was hugely different from the 1970s and early 1980s. Back then, businesses thought inflation was going to be 10%. So they raised prices by 10% and they raised wages by even more. And then they raised prices by 10%, raised wages by even more. And it became self-fulfilling.

and it took a recession to break that expectation. This time around, there was tons of criticism of the Fed on the Wall Street Journal and CNBC, but if you looked at what the market was pricing in terms of expected inflation in the future, that never got much above 2%, which is a measure of how the Fed, at least with financial markets and people betting their own money, kept its credibility.

I would argue, and I can't prove this at all, that the Fed saying, you know, we're obsessed with inflation, we're going to raise rates a lot. If we need to have pain, we're going to have pain, helped keep those expectations anchored and made it much easier for them to do their job. And again, had they followed the transitory advice, inflation expectations might have gone up, in which case it would have been much, much more painful to bring this down. But I can't prove anything that I just said.

So now if you're imagining writing the textbook that will be taught in economics classes like yours in a couple of years, does our understanding of what happens in inflationary periods or what modern central banks are capable of doing, has any of it really changed given everybody's models were at least a little bit wrong going through this? Yeah, no, no one got this right from beginning to end. Very strongly agree with that. I think this

the importance of expectations has been, to some degree, the most important lesson. And so on the one hand, you can sort of relax a little bit more about inflation, knowing you can bring it down. But I think the only reason you can bring it down is if you're willing to raise rates quite a lot and, you know, risk what happens in the economy. And so for me, I

I come into this with a little bit more respect for some of the central banker conservatism trying to do their main job, which is keeping the price level stable. But, you know, you can also look at this just as easily and say, hey, this all would have gone away on its own. The Fed did nothing. And next time around, let's not worry. Let's just be a bit patient.

I know people who got very used to the low rates, pretty low mortgage rates of the past pre-inflation 10, 15 years. And some of them are practically now that they saw the rates cut by 50 basis points, they're

I kind of see them saying things like, I'm going to wait to buy a home because, you know, the Fed is going to get interest rates back down to where, you know, I can get a 3% or 2% mortgage or I'm going to wait to refi until I get there. Do you understand rates as on a inexorable or at least intended march down to where, say, mortgage rates were?

four years ago or five years ago? Or should people who want to buy a home not be expecting that interest rates will be in a very different place in 2026 or 2027, or at least not a predictably different place than they are now?

So it's hard. I'm not sure how much more mortgage rates are coming down. Now, if you told me you had a friend who is a banker and they wanted to borrow money overnight in a securitized basis, I'd say, great, they should just wait because they're borrowing at what's called the federal funds rate. That's what the Fed controls. And that is definitely coming down.

The problem is mortgage rates are based not just on where the federal funds rate is today, but where it's expected to be tomorrow and the year after that and the year after that. And so mortgage rates already come down by about a percentage point, but they're still very high.

And they're high in part because of an expectation that rates just aren't going to come down that much on a permanent basis. And in that sense, they're a little bit like the stock market, which famously is a random walk. And at any point in time, the stock incorporates all the information. And if you ask me whether NVIDIA is going to go up or down, I have no idea because that's already priced into the stock.

Mortgage rates aren't exactly like that, but they have some of that characteristic. And for all you know, people will be kicking themselves. They didn't get the wonderful 7% mortgage when they could. Do you worry this will keep the housing market somewhat frozen for a long time? I mean, I know folks who would like to move, but they got one of those 2.5 percentage point rates and they're not going to have that if they move.

And there's a lot of places where people are worried this has been making it harder to get housing supply onto the market. Do you think that is a real problem? I worry about that some. I mean, first of all, it's a terrible thing about monetary policy that you wish you had a tool that spread itself evenly over the whole economy. And this tool doesn't. It disproportionately hits the housing sector. And then it has to do even more to make up for all of the parts of the economy that it doesn't have as big an effect on.

I do think a lot of the freezing up of things is based on an expectation. If everyone thinks mortgage rates are going back to three, they're not going to move right now. Five years from now, if it becomes clear they're never going back to three, you're not going to stay in your house forever as your family shrinks, your family grows, you get a new job or whatever it is. So I think some of this is the degree to which people expect

it will be transitory as opposed to what the rate actually is itself.

I have a pet economic theory idea. Great. That I want to run by you, given that answer, which I've had other economists yell at me about this. Maybe even you were one. I don't remember who sent me which mean email when I wrote about this. I recently did another podcast, and I think I eventually started yelling at the host, and I realized that wasn't the best strategy to win anyone over to anything, especially winning them over to liking economists, which is my ultimate goal. Well, we've known each other a long time. You're welcome to yell at me on my podcast. So,

It is annoying, as you note, that when we need to bring down inflation, we use this very blunt but also strange interest rate tool.

And it's always seemed to me that you could use things like a progressive consumption tax, so some kind of tax that was on spending. But, you know, given you're worried about hitting the poor, you could orient it so it was higher or really only hitting, you know, wealthy Americans and turn that up during periods when you needed to cool off demand such that, you know, if you're wealthy, you have a little bit of a disincentive to spend that much right then.

And it seems like that would be one more tool in the sort of economic management arsenal. And it would spread itself in ways that at least were differently uneven than interest rates. And I'm curious what the holes in that are. You know, we've talked about that before, Ezra. I like that. I'm just not sure how many other people you're going to be able to sell on it. But you can sign me up.

You'd want to figure out some way to make it somewhat automatic. So it's not that Congress's response to people having a hard time affording stuff is to raise taxes on them. But if your way of managing demand is getting people to postpone a purchase by a year and, you know, it's more expensive this year, but, you know, if you wait, it'll be cheap again.

That's a pretty appealing way. And conversely, when you need to stimulate the economy, it'd be great to do the opposite, get people to take purchases they were going to make one, two, three years from now and to pull them forward. So I appreciate you signing on to that. And I guess you were not one of the economists who emailed me angrily after that column. So one of the difficulties that any incoming administration faces is not fighting the last economic war.

And we're still in this place where inflation is low as a measured rate of price change, but prices are high and people are annoyed. And so a lot of the election is taking place in the context of inflation and having things to say about how you're going to bring down prices is important for both candidates. But some of their economic teams have to be thinking about what the coming problems are or the existing problems more than how to bring inflation down from its current, you know, as you said, roughly two and a half percentile.

So if you were, you know, if the Harris and Trump economic advisors came to you and said, what should we be worried about, you know, in 2025 and 2026? What should we be thinking about in our plans? What kinds of crises should we be most alert to or alert to heading off? What would you tell them are the most pressing current or next wars?

First of all, I would just focus on the stuff that happens outside of a crisis. What can you do to have more productivity growth? What can you do in things like the housing sector, improve job mobility, productivity, inequality, just your main staple things year after year?

I don't think the debt is coming anywhere close to a crisis right now, but it's definitely unsustainable. It's definitely in a place that makes me somewhat queasy. And so I don't think everyone needs to drop everything to have a grand bargain, but to at every step of the way, make sure you're making it a little bit better rather than a little bit worse. And then in terms of crises, my biggest fear is

is that we're too shy to do as big a response to the next crisis as we need to do because we overlearned the lesson of this one and think we did too much this time and next time end up making the opposite mistake and doing too little. My hope is that as somebody who does think we did too much this time around, that I'll have some credibility the next time to explain, no, no, you know, it's not the same thing. Don't worry about it. We're not going to get inflation or whatever the situation is.

So one thing we know is coming is that in 2025, a bunch of President Trump's 2017 tax cuts are set to expire. To start this, how would you describe with the evidence we have now what the Trump tax cuts did for the economy, or at least were intended to do for the economy, and how well they worked? So there's two parts of the Trump tax cuts. One was the corporate tax cuts, which were permanent.

And there was a lot of ex-ante research. I did one paper with a colleague of mine in the economics department at Harvard, who's probably the single most conservative person in that department. And we teamed up to do a paper to figure out if we could sort of go back and forth and converge on a growth estimate. And we did. And that it was that would add after a decade, 0.2% to the level of GDP.

And just understand that's cumulative over a decade. So each year, that's something like 0.02 percentage point, something you wouldn't even see in the rounding of the growth numbers. Other economists who have looked at the corporate tax cuts have seen similar numbers, you know, maybe even as high as adding half a point to the level of output. Again, the growth rate is much lower because it's spread out over time.

Those tax cuts, though, those corporate ones are permanent and they're in the system. The ones that are expiring are mostly on the individual side. I think a reasonable guess is that they added about 0.000% to economic growth. They had them going away because, first of all, they thought it would be politically hard for anyone to let them go away. And second, they thought it wasn't completely tragic if they did go away because they weren't really about economic growth so much as they were about the distribution of income.

What happens if Congress does nothing in 2025 and does let them go away? What is the magnitude of tax increase? And when you say it doesn't have any effect on the economy, I think people's natural assumption here is that whatever else you do, cutting taxes puts more money in people's pocket and they spend it. So how can that have no effect one way or the other on the economy? Yeah. So when analyzing a tax cut, you have to separate the analysis of the demand side from the supply side.

The demand side is putting more money in people's pockets. If you're in a recession, that really matters and that really helps. In normal times, including over the medium and long run, it doesn't matter because the Fed is going to adjust interest rates to get demand to where it wants to be.

The second thing tax cuts do is the supply side of the economy. And if they're well-designed, they'll lead businesses to invest more or people to work harder or whatever it is, and the economy will grow more. It'll have more supply. And the corporate tax cuts, I think, added a tiny bit to supply and basically nothing very much to demand. The individual ones were the opposite. They added some to demand, but basically nothing to supply.

So now if they went away, the magnitude of that would be, if our economy is still strong, something that we could easily handle.

The Fed could lower interest rates if it needed to. It would be subtracting demand from the economy, but this is not like 2010 or even 2012 when you had an unemployment rate of 7%, 8%. And we were really too afraid when I was in the Obama administration to let those tax cuts go away. That was not a credible threat to go over the fiscal cliff because we were looking at the Eurozone crisis, worried we might go into another one.

If our economy is in the shape it's in today, a President Harris or a Speaker Hakeem Jeffries, I think, could credibly threaten that if we need to go over that cliff, we can. This is not must-pass legislation. The individual tax code was perfectly fine in 2016. If it goes back to the 2016 tax code, so be it.

Are Democrats too afraid of making that argument? Vice President Harris has picked up President Biden's pledge to not let taxes increase on Americans making, I believe it's any less than $450,000. It's something right around there.

And if the Trump tax cuts did expire, that would be an instant tax increase on those Americans, which might be fine. I mean, something you didn't mention there, but is the impact there on budget deficits. And at some point you have to pay for this stuff potentially. And, you know, the Trump tax cuts are not well, at least the individual side are not well designed. So, you know, that might be a pretty straightforward way to help make the budget a little bit better.

But Democrats are still pretty afraid of being blamed for raising taxes on anybody who's anything less than pretty rich by American standards. Are they making a mistake there? Before I get to the politics, let me do a tiny bit of substance.

A lot of the structure of the individual tax cuts that were done under Trump were quite good. A larger standard deduction makes taxes easier for people. A larger child tax credit is great for families. I like the limitation on the state and local deduction and the mortgage deduction, even if they're not popular with everyone. So if it were up to me, I actually would take all of that and make it permanent. What we can't, in my view, afford to do is take the lower rates on the individual side that were in that

And make it permanent. That's where the real cost came from, not some of the structural changes, which actually were simplification, pro-children, and the like. The rates were a huge amount of money, not just at the top, of which there was a lot of money going to the top, but also a decent amount going to the middle as well. And that's where things, as you note, get difficult politically.

Second of all, just to do some magnitudes on all of this, we're talking 1.5% of GDP. To put that in perspective, the entire shortfall of the Social Security program for the next 75 years is only 1.2% of GDP.

So whatever you're doing on taxes here is actually much more fiscally consequential than whether you even save Social Security or don't save Social Security. So it's actually quite a big fiscal issue. In terms of the politics, yeah, it's obviously not easy.

What you'd have to sell is the notion that you didn't raise taxes on anyone. That's where taxes were scheduled to be in 2026. That's what Donald Trump, how he wrote the law, how his Congress passed the law. Could Democrats get away with that? I don't think it's easy. But the other alternatives for this magnitude of deficit reduction are even harder than this option would be. I don't get the sense that when Democrats look at this fight, what they see is an opportunity to...

to get deficit reduction, maybe a little bit. But I think they see it as an opportunity to bargain for tax changes they actually want. And when you go through the various pieces of policy that Vice President Harris has proposed in the campaign, you see a couple of big ones that at least I could imagine being in a tax fight like this. So bringing back the expanded child tax credit that the Biden administration passed during the pandemic, making that permanent.

Creating this new $6,000 credit for families of newborns. So you'd get that in the first year of a child's life. There's an expanded or an income tax credit for childless adults. There's making permanent the expansion of Affordable Care Act subsidies.

There are others if you read her whole plan, but I'm curious what you think of these, like which you would like to see Democrats really try to bargain for and which maybe you think should not be as high of a priority.

So number one for me would be making the child tax credit fully refundable so that right now it's a $2,000 tax credit. Middle class families get $2,000 per child. Lower income families don't get that full $2,000. And in fact, some families don't get anything for each child. Ideally, you'd get to a flat $2,000 per child. That is incredibly high bang for the buck. Possibly

poverty reduction in the short run. And there's a growing amount of evidence that it helps mobility and opportunity in the medium and long run too. Second, the earned income tax credit, especially for workers without children, is really inexpensive. Paul Ryan was in favor of it a decade ago. Barack Obama was in favor of it a decade ago. I think that should have been sufficient for it to have become law a decade ago, but it wasn't. So here we are, might as well do it now.

Third would be the $6,000 for the first year. I think there really is good evidence for front-loading the child tax credit. And it's not incredibly expensive because I believe the child tax credit is for 16 years. So it's one-sixteenth the cost of an expansion because it's only for one of those 16 years. The last one, which is the most politically attractive, is increasing the child tax credit to something like $3,000 or more for everyone.

I just don't see how you can afford that right now, given where our deficit is. Ultimately, it's impossible to figure out a sustainable fiscal solution without higher taxes on middle-class households. And it's incredibly hard to see how you get there. And in the interim, to do lower taxes on middle-class households is just going to make it that much harder to get to the solution everywhere. So sadly, I just...

That, to me, feels not just like a low priority, but maybe even a negative priority if you think it's going to end up crowding out the resources we're going to need to sustain the type of government that at least I would like to have and you too, probably, Ezra.

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When I look at Kamala Harris's policy proposals, probably the first set she brought out, which was a sort of vague plan to build 3 million homes, although we'll talk about some of the details that have been released there in a minute. That $3,600 child tax credit expansion, I mean, that's been in there from the beginning. So you're saying you think that's a little big given the fiscal position? Yeah, I just don't see how you can go ahead and

legislate something like that, given that the United States does have a debt equal to 100% of GDP, that debt is growing. Again, you know, with interest rates where they are, am I panicked about this? Absolutely not. But

I do think a do no harm principle is in order. And a, you know, what's the end game of all of this? You have to write down something that you could imagine lasts and is sustainable over 10, 20, 30 years. I mean, I love more tax increases on the rich. There is more space there.

But there's just a limit to how much you can do. You can basically do enough that you could either solve the deficit problem or pay for the tax cut extension or pay for things like

paid leave, child care, and the like, but you can't really use it for all three things simultaneously. Let me ask you about the budget deficits. The deficit right now is running at about 7% of GDP. In fiscal year 2024, I think 17% roughly of federal spending is just paying off interest on the debt. When I download my latest congressional budget office, Long-Term Budget Outlook, they have that in

interest payments as percentage of GDP or percentage of federal spending goes up quite a lot in the coming years. You seem very chill about this, right? It's a problem, probably not a big problem, make things a little bit better where you can. What level of work to make things better are you actually at here? What percentage of federal spending should we not want going to interest payments? Yeah, so I don't love the interest payment

Which I view more as a talking point than an analytically serious point. And maybe your mind has been infected by some of the deficit hawks on this one, Ezra. Well, you know, I've been around Washington a long time, man. It's hard to not pick up the occasional brain worm. I remember I used to hang out with Paul Ryan. You know, the issue is that every year we pay interest on the debt, but every year inflation erodes some of the value of our debt, too.

which is why I focus on something called real debt service, which is the actual burden of carrying your debt forward, taking into account inflation and interest rates. That right now is below a threshold that Larry Summers and I proposed of not rising above 2%, but it's rising and it will eventually get above that.

If you ask me what the magnitude of adjustment we'd need to stabilize everything, I think it's about 2.5% of GDP. Just to put that in perspective, in 1990 and 1993, there were budget deals that totaled 3.5% of GDP. So those two deals together were larger than what we're doing, would need to do now. So I think it's a very doable thing for the American economy.

political system once upon a time. I don't think it's a doable thing right now. Part of why it's not a doable thing right now is it's not as pressing as it was in the early 1990s. Back then, interest rates were really high. People wanted to get them down. Deficit reduction was part of how to do that. So in some sense, the political system is not highly motivated to take this step. But eventually, I think things will change. And when they do, I think the political system will change. And

It's within sight of a doable adjustment to get from where we are now to where we need to be. So I haven't talked to Paul Ryan in a minute, but I still do know a budget hawk or two. And the thing they seem to me to worry about is a political economy issue, which is that in their view,

The structure of the parties that would occasionally give you budget deficit deals is just gone. And I think the sort of clear-eyed way to look at it was that Republicans didn't really care about debt or deficits when they were in power, but they developed – you can call it opportunistic or you can call it a –

flexible and fast way of changing opinions, but they did care about it a lot when Democrats were in charge. And Democrats cared about it a lot when some mixture of their economists and wonks and the media yelled at them enough to care about it. But now Donald Trump has, I think, annihilated the budget hawk

class in the Republican Party and sort of ended that fig leaf almost entirely and made it, you know, non-Republican to care about Medicare spending and Social Security spending. So much of the things they wanted to cut, they can't even really talk about any longer. I think there's a lot of anger in the Democratic Party still about the turn to budget reduction in 2010, 2011, when the economy was still weak.

And so the political interests that were once there, where you could imagine, you know, if you have President Kamala Harris and some Senate Republican leader, whoever follows Mitch McConnell, getting some kind of deal aren't there anymore in a way that creates structural conditions for budgets to rise quite a bit without anybody really being at the table carrying money.

about bringing that down. So when you look at the alignment of forces that might get people to pay attention to this, do you agree with this narrative that is materially different in a way that might make this a problem? Or do you think this is kind of epiphenomenal or not something worth worrying about? Yeah, I think you nailed it. In game theory, you have these two sides. And if one of them does a dollar of deficit reduction when they're in power,

and they think it's going to lead the other side to do a dollar of spending or a dollar of tax cuts when they're in power, maybe even worse, by the way, a dollar fifty, because it just catalyzes everything, then why would you ever do it? And so maybe both Bill Clinton and Barack Obama made mistakes with the amount of deficit reduction they did.

And both of them teed up tax cuts from George Bush and Donald Trump, respectively. And we've learned the lesson that that fairy tale was never true. What's the only way to end this cycle where you never want to do anything because you're sure the other side will undo it if you believe they're motivated by some sort of restraint? And that restraint, I think, is entirely, almost entirely absent on the Republican side right now and is mostly absent otherwise.

on the Democratic side as well. I do think if you look at public opinion polls, people do seem less worried about the deficit than they were about a decade ago. So it's not like voters are demanding that the two candidates talk about their deficit and debt reduction.

And why might the voters have changed? Well, you know, interest rates are lower than they used to be. Federal interest payments looked at the correct way, which is the way I look at them, are also on the low side. And maybe people aren't totally crazy to be less worried about the deficit now than they were once upon a time. How would we know if there is a problem? And one of the reasons I ask is that

One thing that has been true in other budget deals is the problems have been speculative. So when there were these fights, you know, with Paul Ryan and Barack Obama and Mitch McConnell and those deals, there's a lot of talk about us becoming Greece. But we were not at that moment Greece and we were probably never going to become Greece. And so when I say parts of this politics have been discredited, I mean, one thing that has been discredited is that

Republicans really care about this. I mean, one of the fun things about Donald Trump is he didn't just cut taxes without paying for it. He also increased spending quite a bit with a Republican Congress without paying for it. So the degree to which Democrats felt like suckers on that after, you know, being harangued about budget deficits for years was pretty significant.

But also there's a feeling that some of these scare stories just don't happen. And that this, you know, fear of, you know, what used to be called bond vigilantes coming one day and ceasing to buy, you know, treasury bonds is pretty unlikely. So when you think about what is a warning sign that would try to get you to take things more seriously, is it just this, you know, watching these real payments you're talking about?

Or is there something else you look for that might signal instability in our fiscal position? So I would say interest rates are the main thing I'm looking at. And so right now, the 10-year treasury is at around 3.75%. That is higher than it was a couple of years ago, but pretty low in historical perspective.

If that went above five and it seems sustained there, that would get a lot more of my attention than it's getting right now would be one thing. And the higher the debt is, the bigger the adjustment you might eventually have to make. So there's the commonplace that the sooner you deal with it, the better. For me, one big question is we do have this forcing event in the Social Security Trust Fund is exhausted, which is supposed to happen about a decade from now.

That's entirely sort of accounting convention. We could choose to pass a law that said ignore that accounting convention and just keep sending people checks, don't raise anyone's taxes, don't do anything, and that would be a perfectly valid law. But it would be, I think, a real shame to lose that forcing event because that's a much better forcing event than a fiscal crisis would be to get us to deal with our house problems.

So I'm going to admit that I am one of these people who does not wake up in the morning and worry a lot about budget deficits. But like a good Californian, I wake up in the morning and I worry about housing. So I want to spend some time before we talk about the current set of housing policies being debated, talking a bit about how we got to here. I think people who listen to podcasts like this one have heard a lot about zoning and regulation. But if you look at a chart of housing construction,

New housing starts fall off a cliff after the housing crisis and never really recover. We're still below the level we had. So you were in the Obama administration during the housing crisis. What happens here, right? What happens to bring housing so low and why does it never fully recover? Because that's not a story of zoning and regulations, I don't think, right? It's not like we invented that in 2008, right?

How do you tell that story? So I don't exactly know. Certainly when I was in the Obama administration, we had forecasts that basically said, look, we overbuilt on houses, but now we've been way below normal for several years. We've made up for that overbuilding. Here's what the demography is. And, you know, people need houses. So we'll get back up to that higher level of home building. And we never got it.

I don't love when people talk about housing shortages because I don't know exactly what it means. I mean, there are more than enough structures for every American to live in. We have a homelessness issue, but that isn't that there isn't enough houses in San Francisco. It's a very, very different issue that causes homelessness. So I don't think it's that we don't have enough houses. Well,

What we do have is a very big problem of enough housing in the places that people most want to live and most want to live and are probably most productive for the economy as well. When you say that homelessness in San Francisco isn't because there aren't enough houses there, or at least housing structures, what do you mean by that? Oh, I mean, first of all, literally, there's like...

enough spare apartments or houses or whatever it is in the area for people to move into. So you don't, it's a little bit like

Amartya Sen used to study famines and pointed out in almost all of them, there was enough food. There were just a set of people that didn't have enough money to buy that food. So I don't think you want to think of homelessness as, oh, if we just had more houses. It's a real inability to have the money to afford a house, to manage your life in a way to have it. And if you lowered all house prices in San Francisco by 20%, which would be a

massive, miraculous amount for a public policy lever to accomplish, I don't think that would change homelessness very much. Do you buy the basic argument that more housing leads to lower housing and rental costs? Yes, I do.

And so match those up. I think I could probably tell a story in between the two things you're saying here. But when the Yimby's are saying, look, like we just need to build more or housing is a homelessness problem, which is a book I quite like, says, you know, the way to think about this is that it's like a game of musical chairs. And if you have a game of musical chairs with 10 participants and one of them has a broken leg, right?

and you have 10 chairs, everybody's going to get a chair. But if you have only nine chairs, then the person with the broken leg is not going to get a chair. And that housing is really like that. The individual circumstances only matter because there aren't enough homes. We're in West Virginia, which is a lot more poverty than California. You have a lot less homelessness. So sort of walk through why then if there's enough structures, you don't have, and even if you got more structures, like you wouldn't get to a place where

you could solve homelessness. Give me the Econ 201 here. Cities are very attractive. Even though they're much more expensive places to live, they're attractive for rich people because of all the amazing amenities they have. They're also attractive for poor people. They would, in a lot of cases...

rather locate in a city for a whole variety of reasons. And so I think it's largely should be thought of a little bit more as more attractive housing. And I think that's the better way to think about housing is how can you get the cost down, the quality up, so people can live where they want

and live more in the ways that they want, as opposed to literally there just aren't enough homes. I think in some sense there aren't good enough and cheap enough homes. And by the way, maybe this all leads us to the same exact policies. I'm not sure. I guess one question this raises before we get back into the policies is something that I do see coming up a bunch in arguments over Yimbyism, which is

Is it in any way plausible to imagine policies that would lead to sufficient levels of home construction that places like San Francisco, like Boston, like Los Angeles, like, you know, much of New York City would

would become quote-unquote affordable. It's not that you can't imagine more homes, apartments, etc. being built. I think everybody can imagine that. But one argument is that at any of the levels you can imagine that, even pretty high levels, there are so many people waiting, people who live somewhere else and would like to move closer to where they work or closer to a fun and interesting and culturally vibrant city, people who are doubling up right now, people who are living with their parents right now.

The demand is functionally inexhaustible at any level of plausible building. So you can make things a little bit more and a little bit less affordable. But this idea that, you know, you'll have the firefighters who protect the city of San Francisco able to live in the city of San Francisco is just not that plausible, at least not without the government or someone else doing something that forces a lot of this housing into the affordable category.

Look, I think it would help. It's not, you know, let's say it costs $4,000 a month for a place for a family in Cambridge.

Are there an infinite number of people that would come in if you lowered that to 3,995? No, you get some additional ones at that, some additional ones at 3,900, etc. I think there is some sort of downward sloping demand curve here, not just an infinite number of people that are willing to pay $4,000 a month to live in Cambridge.

And right now we have a situation in Cambridge where most of the housing stock was built before we had zoning laws. And my hope is that we're on the cusp of a really, really big radical change where you can build six stories anywhere in Cambridge and a bunch of other rules would be waived as well. And, you know, I think that'll mean lower rents in Cambridge and I think it'll mean more people.

All right, fine then. We'll talk about zoning. So Democrats have had a bit of an intellectual revolution here. You hear Kamala Harris talking about increasing supply, Barack Obama at the DNC. But you were the chair of the Council of Economic Advisors in, I think it was 2015, when you released, I think, the first of these big reports on land use policy and housing prices out of a Democratic administration report.

What was the argument you were making then and how, in your view, has the situation or the evidence changed between now and then? Yeah, so I was an enthusiast back then and our administration did things that were basically I'd describe as bully pulpit. We put out a toolkit for what local areas could do if they wanted to improve their zoning.

And largely the argument was that these types of rules were limiting supply. They were limiting supply in some of the most attractive areas of the country. So there was an economic growth case of having more people agglomerated into especially the coasts is attractive for growth. There was part of an anti-rent-seeking theme of part of why you have these rules is they protect some of the existing incumbents at the expense of everyone else's

that is not there. And when I talk to the people on city council in Cambridge,

They saw the types of things that we were producing, that others were producing, arguments that people like Matt Iglesias were making, and they were really taken by them and persuaded and excited. And that's why they started to write down these types of reforms. So I do think the bully pulpit and putting this idea out there really has mattered and probably mattered more than I would have thought a couple of years ago.

Kamala Harris just released a lot more detail on her housing policies. A bunch of different credits for building certain kinds of affordable homes, usually, or homes for new buyers, etc.

A tax credit for people who are buying a new home for the first time that, you know, is a bigger tax credit if your parents didn't own a home. A $40 billion grant program for cities that have a sort of plan to change regulations and construct housing. And if you can sort of persuade the federal government that what you're going to do here might work, they give you money for it.

What have you thought of her policy announcements? And do you think they add up in a plausible way to the 3 million new homes promise she's made?

I haven't quantified it, so I can't tell you whether I think it hits the goal or not. I think on balance, it moves in the right direction. You'd be unsurprised to know from everything we've just been talking about. I think the bully pulpit can help with zoning reform. I think $40 billion can help even more. And that type of money could really catalyze some bigger changes in this space. So I'm very excited about that.

The homebuyer cracks credit, I'm less excited about. First of all, if you know the person has a homebuyer credit, you're going to raise the price of the house. And so some of this will make housing more affordable, but some of it will also increase demand and drive up house prices. Moreover, it's a very expensive credit, and they say they're only keeping it for a couple of years, but it's hard to put these in place for a couple of years and then not continue them. So to me, that's a much...

lower priority that could even be counterproductive. And then finally, there's a whole set of things on antitrust and restraining private equity in the space and the like. And

Some of those I like and some of those I'm less sure about. I like things like what the government is doing now on basically price fixing in some of these automated algorithms. I think that could really be real and is worth really bringing to court and exposing and seeing whether that's the case. Private equity?

It's big, but it's still really small compared to the size of this market. It's still really not a very concentrated market. And by the way, they can help with the supply. So when you're cracking down on them, I get it. I've read some of the horror stories. I'm worried that that might get more in the way of supply than it does to help bring the price down.

There are a number of tax credit proposals in there to try to incentivize the building of new housing directly, particularly housing for new homeowners, housing that might be affordable. What did you think of that side of the policy? I guess I'm skeptical of that, too. When I've looked at studies of like the low income housing tax credit, an awful lot of it ends up going to developers. There's not a

huge evidence that it's going to the people you want it to go to. So I think it's much easier if you want to help lower income people, give them a larger tiled tax credit, give them an EITC, give them something where I'm 100% sure that every dollar you're sending to the person is basically showing up in their benefit.

So I'm a pretty big housing guy, and I guess I felt mixed. I have been very excited by how much bully pulpiting Vice President Harris has been doing here to see her putting a $3 million home pledge as, I think, the first bullet point on her first policy announcement. That was great to hear her talk about that every time somebody says, what are you going to do to bring costs down? I think that's great. I think this stuff actually really matters, moving its salience to the center of the agenda, which

in the way she has feels like an important thing. And then the policy just struck me as really underpowered. I mean, the reason I asked you that question about 3 million homes is that I don't think this policy is going to get anywhere near there. The housing experts I've spoken to don't seem to think it'll get anywhere near there. And I was particularly struck by how just targeted everything was, right?

credits to build these homes, but only if the person who buys them has never owned a home before. Well, how is the home builder supposed to know that? And don't we just need more homes? And isn't it okay if somebody moves into that home and then opens a home they've been living in for a first-time buyer? I'm all for affordable housing, but there's just a lot of

You know, you got to submit your tax receipts and, you know, show that you've been paying your rent for two years and in the tax credit for buying a home, show that your parents didn't own a home. And it struck me as this way Democrats endlessly overcomplicate policies in order to show they're helping the right people and none of the wrong people.

And then finally, I mean, the best part to me is this $40 billion grant program. But the government gives, the federal government gives a lot of money to states and cities already. And you can tie that money to things, to whether or not they are seeing housing starts go up, to whether or not they have ended single-family zoning. You don't need $40 billion new dollars. You can also use

some of those tens and hundreds of billions of dollars you're already using. It felt to me like a place where the rhetoric is outpacing the policy solutions.

You might be right about that. I guess I'm just so excited about the rhetoric that maybe I let myself get a little bit carried away and you can talk me down. Well, the first times I've been more, you've been more excited than I've been about something. So maybe you're talking me down here, Ezra. But yeah, on all the different rules and all those tax credits and everything, I guess it seems to me a little bit like you're talking about how the portions are too small and we need to decide if those

food was good or not. If that food was good, then all those different rules are a problem. On the other hand, if you think a bunch of that was misguided and will show up in higher prices because it increases demand and doesn't do anything for supply, then all of those rules might actually contain the cost of

frustrates some people along the way. I should say there are two types of these tax credits, which I think are just to note, there's a $25,000 credit for people to buy, but then there are a bunch of tax credits for people to build. And the build tax credits also have a bunch of rules on them. That's sort of what I'm pointing at, which surprised me. Oh, but even then there's this question of, you know, who's the beneficiary? Would the house have been built anyway? You know, what's the bang for the buck cost per house, et cetera. ♪

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It can be hard a bit to talk about the Democratic and Republican campaign proposals in relationship to each other because there's this tendency to be like, well, I read Kamala Harris's almost 80-page economic policy booklet. And on page 36, I don't like bullet point number four. And meanwhile, in Donald Trump's all caps truth social post on this issue, it just talks a lot about illegals.

In this case, that's more or less what their plan is. They do not have a detailed housing plan that we can look at. My Times colleagues talked to the Trump campaign. They were told that the theory is about stopping the, quote, unsustainable invasion of illegal aliens, which is driving up housing costs. This is something, by the way, that J.D. Vance has talked about in terms of Haitian immigrants to Springfield, that, you know, if you really want to understand why housing has gotten bad, he talked about this at the RNC.

There was underbuilding after the financial crisis. We've talked about that. But then there was an invasion of illegal immigrants, and that's led to high housing prices. And they've also talked about pushing the Fed to bring down mortgage rates.

What do you think of those two arguments? One, that the pressure here is coming from immigration and that if we cut immigration or deported a lot of immigrants, we would have lower prices, right? You can either build more homes or get rid of people. They want to get rid of people. And two, that they have been, and Trump has been very clear, that he wants the Federal Reserve more under the president's control in order to bring interest rates down on a more rapid path.

So on your first, you know, if a lot of immigrants move to an area really quick— Donald Trump's first, I want to be very clear.

If your manufacturing starts turning around, you're making more stuff in your place, you're also going to see house prices and rents go up. Over the medium and long run, though, and in a lot of cases, maybe even in the short run,

Immigrants just look around. They're building a lot of houses. They're repairing a lot of houses. They're installing a lot of stuff. And so you're getting both demand and supply. And by the way, in a place like Ohio, the issue is not land. There's enough land. There's enough space for houses. And the issue is who's going to build those houses. So I think the immigration housing thing is almost a complete red herring.

On the Fed, if you want the Fed to lower interest rates, do some deficit reduction. Part of why interest rates aren't going back to where they were before COVID is that the debt isn't going back to where it was before COVID. And when the Fed sets interest rates, it has essentially this sort of upward pressure on what economists call the neutral rate, which is coming from debt. So if anything, one of the bigger housing differences between the two candidates is

is that Donald Trump is proposing a lot more deficit increases. No matter what he does to the Fed, yelling at them, screaming at them, that is going to result in higher long-term interest rates and higher mortgage rates and will make the housing issues worse, not better.

So I've asked you about at least one of the issues that Vice President Harris is front loading. So now I want to flip this. And I was saying a second ago that it can be hard to know what Donald Trump wants to do on many policy issues, but at least on trade, it's a lot clearer. And he's proposed this big universal tariff. We'll talk about that in a second.

I want to talk about where the trade question starts. If people tune into the presidential debate between Harris and Trump, they heard talk about the trade deficit and who's responsible. Trade deficit is one of those things

I think people hear in politics and have, you know, some kind of hazy ideas about, but it doesn't get explained that often, or at least its implications don't. So how do you explain the trade deficit and what different levels of it might mean? So right now, the United States imports more than it exports. By itself, that is neither good nor bad.

Imports are a wonderful thing. We all love buying them. And, you know, by the way, we still export an awful lot.

There's this notion that somehow the trade deficit is taking our jobs, but that's just false. I mean, we had a trade deficit a year and a half ago, and we had a 3.4% unemployment rate. We still have in the grand scheme of things quite a low unemployment rate. And by the way, it's not like the unemployment rate moves up or down with the trade deficit. In fact, if anything, it's the opposite of what you'd think. Times when the unemployment rate goes down, Americans buy more stuff and the trade deficit goes up.

and vice versa. So for almost no economist is the trade deficit on the thing they'd look at. Something you will hear from the J.D. Vance world of Republican economic theory is that it's much worse than it looks because we import

goods. We import things people make and we export a lot of money and financial services. And so there's this sense among, I would say, like the Orin Cassis of the world that we are importing real things and we export fake things. How do you think about that? So this idea that like the stuff you can weigh is real and the stuff you can't is not, it's just nuts. Look at how most of us spend most of our money.

Most of us spend most of our money on services, not on goods. There's just a limit to how many cars that you want to buy. And there's a very steep limit on how many refrigerators you want to buy. But eating out in restaurants, traveling, all sorts of services, there's much less of a limit on. So as we get richer, that's what we want. That's what we like.

In terms of jobs, once upon a time, not only were there a lot of manufacturing jobs, but they were among the best paid jobs in the economy.

Those statements are just not true anymore. There's a lot fewer jobs. And outside of people with graduate degrees who are helping to set these factories up and run them at a high level, they're not actually much better paid than many of these service sector jobs. So I think it is just...

sort of fanciful nostalgia, maybe a plan for 1% of Americans to get better off at the expense, by the way, of higher prices for the other 99%. But there's not a plan here to help 10, 20, 30% of Americans, let alone all Americans.

So Trump's tariff plan, which we've talked about on the show before, depending on when you hear him talk about it, 10% or 20% tariff on all important goods. When you get to China, it becomes much higher, I think in the 65-ish percent range. How do you think about that in theory, right? When are tariffs a good idea and when are they not? And then how do you think about that particular plan were it to become fact?

So in theory, for the most part, never like tariffs. The British got rid of the corn laws, not as part of a trade negotiation, but because they recognized that they were making the prices that British people had to pay to eat corn, you know, much higher. And they were doing it for the benefit of rich landlords and, you know, had nothing to do with foreigners. So I'm sort of low tariff guy pretty much across the board.

Where I would make a very, very limited set of exceptions is national security with a high bar for what counts as national security. So, you know, should we have drone factories in the United States? Because in the event of war, we'd want to be able to, you know, repurpose them and make military drones. I think the answer is probably yes. And it's possible that tariffs would be part of the toolkit for that.

As a legal matter, if you're responding to another country's tariffs with your own, I think you're probably hurting yourself more than you're hurting them. But at least there's some limiting principle and legality underlying it. And it doesn't lend itself to a spiral. So I guess I'm OK with it in a case like that. For President Trump, what is completely nuts is there's just no theory around it other than just enthusiasm for tariffs.

It will go on friends like Germany and Australia. It will go on products that we don't have any plan at all to make in the United States and have nothing to do with our national security, like ballpoint pens. If you're genuinely convinced that the foreigners are paying the money and not the Americans paying the money, why would you even ever end these? Why would they even be a negotiating tactic? They would just be a permanent part of the arsenal.

And when it comes to China, I think this administration rhetorically had it exactly right when they said we want to have a high fence and a small yard. The small yard would be the way you protect all the things that are vital to our national security. And you don't just do a small tariff on them. You basically ban trade in them. You ban the export of them or whatever it is you want to do. Every single thing made in China, toys, clothing, furniture, why would we want to raise the price of those to one end?

So here's the end, I guess. So Oren Kass of American Compass, who's been influential in this argument on the Republican side, and people can hear him on the show from a couple of months ago, put that in show notes. He wrote a piece for The Atlantic defending this, saying the economists are not telling you all the truth about this. And he says basically the tariffs address an externality. Quote, the basic premise is domestic production has value beyond what market prices reflect.

A corporation deciding whether to close a factory in Ohio and relocate manufacturing to China or a consumer deciding whether to stop buying a made-in-America brand in favor of cheaper imports will probably not consider the broader importance of making things in America.

And he goes on to argue that, you know, those decisions add up to a collective set of questions. And those are about partially national security, that it increases our national security to make things here. Partially innovation. We innovate more if we make things here. And there are things like semiconductors where I think we've really come to realize that and are now spending a lot of money to try to onshore the supply chain and the manufacturing industry.

And that there's just better spillovers from having more manufacturing domestically placed. How do you think about that? First of all, I don't think you get any more manufacturing from tariffs. So when you put a 10% tariff on everything coming in from the rest of the world, Americans aren't going to need to buy as many euros as they used to. They're not going to need to buy as much renminbi from China anymore.

as they used to. And that will lead those exchange rates to get weaker because there's not as much demand for that currency. So the dollar-euro exchange rate will change. What that means is it will be more expensive to export other stuff. Europeans will have to pay more euro in order to buy and export from the United States.

The second step is other countries aren't going to stand still. They can place tariffs on us as well. The third thing are our intermediate goods that are used in other sectors of manufacturing. So you raise the price of steel in the United States, and all of a sudden, it's much harder to have a competitive car industry in the United States. And there's just huge linkages throughout the supply chain that

And so I'm not at all convinced you get more manufacturing if you follow all of the advice that's here. And even if you did, I'm not convinced that that would lead to more spillovers in innovation, except in some very targeted places like semiconductors. I think the place some of this thinking comes from, I'm not exactly sure if this is true for Donald Trump himself, but when I talk to other people on the sort of Trumpian right,

A lot of it comes from feeling that we got sold, we being America here, a bill of goods on China. And that the economists all said this is going to work out totally fine and it's going to work out great. And now, you know, David Otter is probably, you know, the leading economist and is very well known for his work on the China shock about how much more damage the sort of movement of manufacturing to China causes.

than people predicted. And they look around and now China, you know, owns a lot of, you know, the renewable energy sector and we don't really like that. And we are now putting, in fact, the Biden administration is putting huge tariffs on Chinese electric vehicles and we're worried about that. And our semiconductor industry is gone and we're worried about that and we're trying to bring it back. And you can kind of go down a list like this, but even some really celebrated economists will say, yeah,

actually the deals we made had a much more significant effect and negative effect on particularly a lot of communities in America than we were told. So I guess what's your answer to them? And how does that affect even what Democrats believe now? Because I do think there's been also shifting, you know, Democratic views on trade. So my views probably haven't shifted very much at all. And

I am much more unapologetic than what you just laid out. Let me just go through a few things. First of all, there was a really big increase in inequality from 1980 to 2000. Since 2000, depending on what data you're looking at, inequality has been up a little or down a little bit, but it's much, much less of an increase than before 2000. And that's important because there wasn't much of an expansion of trade with China until 2000.

Second, most of the expansion of trade with China was not about the WTO and lowering the tariffs. It was that they grew and they're, you know, a big country and they grew. Third, if you do the full distributional analysis, you want to look at the impact it had on inequality in the United States, which even in David Autor's numbers is

aren't that many people relative to the monthly job loss. This was a period of generally quite low unemployment in the wake of this China shock. And most importantly, the biggest, most progressive thing that much of this analysis misses is that lower-income households spend a higher fraction of their spending on imported goods and imported goods from places like China. So it's mattered the most to them.

Now, in terms of what I'm worried about, I am worried about microchips, but we didn't lose microchips to China. Microchips became a global supply chain, and we've lost part to the Netherlands and part to Japan and part to Korea, part to Taiwan. And by the way, that's a good thing. Every one of those countries I just said is a friendly country, but you don't want 90% of the world's advanced microprocessors coming out of an island off the coast of mainland China. And so...

The CHIPS program, I think, has been a terrific thing. It goes against the standard economic recommendations, but there's a good national security reason. I think so far it's working quite well. But the microchips is not a China issue. The solar panels, I'm thrilled about what China's done there. Cheap solar panels, bringing down carbon emissions, electrify everything. We're closer to that goal today because of China.

Do you think that the Democratic consensus on trade has moved too far in the Trumpian direction? Yes, I think it certainly has. If you look at the Harris 80-page policy book or whatever it is, it doesn't look that different from the Obama book or the Clinton book. But trade does look different. So yeah, I think Democrats have gone too far. And if anything...

You know, insofar as there was a China shock, which there was, by the way, it's one that was 15 years in the past. It's not continuing in the present. So if anything, we're in a very different place right now. This is a place where I feel very myself unsettled and feel like there have been some very big moves that feel like they have tradeoffs that are not being well articulated. So the Biden administration put a, I think it was 100% tariff or something like that.

on Chinese electric vehicles. And so on the one hand, we want this huge transition to happen really, really rapidly on electric vehicles. And on the other hand, we have these very cheap Chinese ones, which we are functionally going to make it impossible for people to buy, at least to buy cheaply.

And there's a lot of things like that happening right now that seem to me to pit a view of I can't always tell if it's national security or just our competitiveness against what is, you know, the climate threat. Right. And the difficulty of having a low cost rapid transition. Right.

How do you think about both where the Biden administration has ended up there? And just how do you think about that in theory? So I'm not sure what I think about where the Biden administration has ended up. I don't like a lot of the way it's discussed publicly and frankly, even privately, because, yes, I think this is all really difficult tradeoffs. And if it wasn't a difficult tradeoff, the answer would be really obvious.

If you come to me and say we're going to place limits on Chinese solar panels, and because of that, Americans are going to figure out how to make solar panels, and our solar panels are going to be way better and cheaper than the Chinese ones ever would have been, and so it'll be much cheaper to deal with climate change because we did this, and we're going to get lower emissions reductions, more jobs, et cetera, et cetera, I don't think you've done the analysis right. I think you've gotten the sign wrong on one key part of it, and so I don't really trust

Your benefit-benefit analysis, you're not going to persuade me that way. You'll only persuade me if you go through the cost-benefit analysis. And for the most part, I haven't seen it. So I don't know where you get to with the correct reasoning. I don't think it's where we are right now. It certainly isn't where Trump was, where you're putting tariffs on washing machines and all sorts of things that have nothing to do with national security. But I don't know what the right answer is.

This picks up on something. You just gave this speech. It was, you called it a defense of the dismal science, which is in this case economics.

And you sort of described what you think of as the liberal vices on economics and the conservative ones. And the liberal one you described is that there's a tendency to deny trade-offs. And I would say, in a way, a growing tendency to deny trade-offs. And I'm not 100% sure why, but I will say that in my experience reporting with Democratic policymakers and economics types, I feel like there used to be more of a culture of

of almost like delighting like larry summers was always delighted to tell you five or ten different ways your policy idea or somebody else's policy idea could go wrong in unexpected fashions and that's just not the culture among democratic policymakers right now so i'm curious how you think this question of trade-off denial has evolved

And I'm curious also what you think of then as the leading and growing conservative vices. Yeah. So let me just state what I think these two vices are with the caveat, lots of liberals and conservatives don't suffer from these vices. And by the way, some of them cross and suffer from the opposite vice. On the liberal side, it's getting the sign wrong. It's taking something that may just be even a small cost,

and thinking instead that it's a benefit. So dealing with climate change, dealing with inequality, dealing with national security, you know, whatever it is, that's the smart thing to do, and it's going to help the economy, etc. For conservatives, I think the vice is getting the magnitude wrong. It's taking whatever regulation you're going to do to deal with climate change or poverty or whatever it is, and think that'll kill growth,

kill jobs and the like. When you're suffering from the liberal vice, you think all good things go together. And so you're going to not do cost-benefit analysis. You're going to do benefit-benefit analysis. And the whole point of your analysis is really just propaganda to get done what you wanted to. When you suffer from the conservative vice, you're just going to do cost analysis because the costs are infinite. And that too is propaganda. And

Now, if the liberal vice were simply coming up with arguments that aren't totally true for something that's a good idea, then, you know, there's no reason to be overly bothered by it. I think it does lead to some real problems. First of all, if you did your analysis right, you would actually rule out all sorts of things. During COVID, for example, part of the argument for, you know, shutting things down at some point was,

was that you were saving lives even if you were doing it at the expense of the economy. And if you weren't willing to do some things at the expense of the economy, you actually weren't going to be saving enough lives. Second, I think you often end up getting the analysis wrong and contorting yourself. But finally, a lot of things end up not happening. If you don't recognize that your policy does actually create some losers, those losers will sort of come out of the woodwork and stop your policy from happening.

I guess I have two questions about this. So let me start on the liberal side, because I do think I've seen culture change here. You described it as getting the sign wrong, right? You'll have an hour, you'll be talking to somebody and, you know, they'll be telling you about why we need to do X on climate and also telling you that'll be really good for the economy, right?

I buy that. The bigger thing that I see is denying that there are costs to things at all. And like maybe this is me talking about the things I'm thinking about in my book. I've called this at times things like everything bagel liberalism. But you sort of layer on a lot of goals and don't admit that having all those goals or all those processes all at once is

will make it harder to do something, make the thing more expensive. I see this a lot in infrastructure, right? On the one hand, we want infrastructure to be fair and we want it to be fast and we want to have a lot of community input and we don't want to be too expensive, but we want to make sure like all the jobs it creates are really good and it's either union work or prevailing wage work.

And these things don't all work. And I think there's a bit of a denial about, say, how bad infrastructure cost has become under Democrats. My view a bit is that because it's become harder to pass legislation, people want to do things, do more things than any individual project. You can't pass a big bill.

bill that changes, say, the laws around union organizing. So instead, you put a lot of union laws in union regulations and rules into any given project, which is sort of a different idea. But I'm not really sure what the answer is. And I'm curious sociologically what you think it is. Yeah. So first of all, I think you have it exactly right. I do think your everything bagel is incredibly memorable, even if many people have pointed out that everyone loves everything bagel. So what are you complaining about?

I think child care in the CHIPS Act is a good example. The administration went out and announced they were including child care in the CHIPS Act. And their argument was, oh, if these factories have better child care, they can attract more workers and then they can make more microchips and they'll do the whole job much better. You know, with all respect to people in the government, they don't know. These factories, if they could set up a child care facility and that was going to help them attract better workers and make microchips, I think they'd do it.

If some amoral consultant came along and told them to do it, you know, maybe they had missed out on something and they'd learn about it so they could do it. If the government, which is extremely biased and cares deeply about child care, comes along, I don't trust that prescription at all. Now, if you said they should do child care, we're going to get to raise the costs on them. We're going to get fewer microchips, but it's worth it.

Then again, we could have the conversation. In that case, I think you'd have a very, very hard time persuading me because as important as I think child care is, people will only remember the CHIPS program for one thing. Did it increase the production of advanced microchips in the United States or not? And no one's going to

look back and say it revolutionized child care or anything like that. It is this goal, and this goal is a hard enough one on its own not to add extra things. Now, in this case, I think the good news was it looks like that was more rhetorical than reality. So it didn't get in the way of the program. I think there are other rules, though, that do. And, you know, you have to look hard. Infrastructure in this country, this administration put a lot of money into infrastructure.

the cost of infrastructure has gone up even more than the money they put into it. And the answer is you have to look at how much it costs to build stuff, not just how much money do you have to put into the building. So let me ask you about the conservative side, because what struck me when you said that is I would almost describe it the opposite way. I think there was a long time when conservatives would tell you that the cost of any liberal program would be infinite.

I don't get the sense they even pay attention at this point to the cost of liberal programs in any real way that now it's at the magnitude on anything they're doing is almost infinite. Right. I mean, I think the hallmark of Donald Trump's rhetorical style, but I hear it now all over the right.

is, you know, if we do these tariffs, you know, you'll never see an economy like this. If we kick out all the immigrants, you can't believe what will happen. The right seems to have moved into a place, I mean, it's just not a place of policy analysis whatsoever. I think there was a time you might have said that the right was about overstating the harms of liberal policies and then overstating the benefits of tax cuts.

But I think one of the difficult things about policymaking right now is I don't know if there is a policy process at all that holds water on the right. So, I mean, there's a question as to whether conservative is the word we use for whoever happens to be the current Republican nominee or whether it's a coherent set of ideas. And I don't know the answer to that. And we're probably not going to settle it right now. But when it comes to regulations, you know, increasing corporate taxes, increasing capital gains taxes, whatever.

The Republican political system does describe those in almost apocalyptic magnitudes relative to anything that the academic literature, whether that's a conservative reading of the academic literature or a liberal reading of it, would have you believe. So I do think that's there. But then the flip side of that, and I agree with you, especially with Donald Trump, I

He forecast 3% growth, which was even lower than the 4% he was talking about, at a time when every private sector forecaster was at about 1.5 to 2%.

And the gap between what private sector forecasters were saying and what his budget was saying was the largest that I found in any budget going back to Ronald Reagan. So he just was really disconnected from, you know, at least professional opinion, I would argue, reality as well in those numbers. And that was in a budget where the numbers were much smaller in terms of the claims than even he was claiming rhetorically. So, yeah.

Yeah, analysis doesn't seem to be the strong suit right there, right now. I think that is a good place to end. Always our final question. What are three books you'd recommend to the audience?

My first book is How the World Became Rich by Mark Koyama and Jared Rubin. It's just an amazing synthesis of the amazing research in the last 20 years that looks in a deep way at the role that institutions, culture, geography, and other factors have played in just the enormous transformation of humankind.

Second one is outside of my discipline, and it's the goodness paradox by Richard Wrangham that gets at the question of why humans can be so good to each other, but also can be so bad. And when we're bad, we plan it meticulously and execute it over a long period of time rather than just do it spontaneously the way animals do to each other. And it helped open my eyes to a new way of thinking about that.

The final book is a novel by Emile Zola called The Lady's Paradise. And I picked that because it's a pretty good 19th century novel, but it's a fantastic exposition about capitalism and competition in which it portrays small businesses losing out to the growth of the first department store in Paris, the terrible things that happen when you use advertising to manufacture taste, or

but also the real benefits you get from lower prices and, in fact, the higher wages and benefits that people get in the department store because it needs to compete with other department stores for jobs. So pretty much everything you want to know about capitalism is contained in Emile Zola's The Lady's Paradise. Jason Furman, thank you very much. Thank you.

Thank you.

The executive producer of New York Times Opinion Audio is Annie Rose Strasser. And special thanks to Tyler Cohen, Veronique de Régis, Desmond Lockman, Lindsay Owens, Nathan Tankus, Isabella Weber, and Sonia Herrera.