This is an audio transcript of The Economics Show podcast episode: ‘The Wolf-Krugman Exchange — Trump’s ‘vibecession’’

Martin Wolf
So, Paul, hello. How are you?

Paul Krugman
I’m good. How are you, Martin?

Martin Wolf
I’m feeling pretty good, all things considered. I’m actually doing this podcast from my home, which is in south London. And where are you?

Paul Krugman
I am, I’m slightly ashamed to admit, in the Virgin Islands, ducking the closing in of winter in New York.

Martin Wolf
Let’s talk about where we are with our favourite villain, Donald Trump. Or President Trump, as he should be called. Now, we’re getting towards the end of the year and I get the impression from reading your Substack that you’re feeling that things are going so badly, as it were, and the American people have really begun to notice this. And maybe things aren’t quite as grim. At least they’re grim, but their grimness implies maybe things will get better in the not-incredibly-distant future. And we had these really rather encouraging political results, so . . . Certainly for me and of course, even more for you, with how well the Democrats did in these recent special elections.

Paul Krugman
Well, I’m less terrified than I was. I mean, this is not a normal presidency. This is not normal politics in the United States. What we have is a group of would-be authoritarians trying to speed-run a transition into one-party non-democratic rule. It’s clear that the goal was to buy, you know, before anybody had a chance really to stand up to them, to end US democracy, more or less permanently. I mean, that’s not hyperbole, that’s just kind of where we are. And the good news is it does not seem to be going well, or at least it’s not going according to schedule.

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Martin Wolf
Hello, I’m Martin Wolf, chief economics commentator at the Financial Times.

Paul Krugman
And I’m Paul Krugman, professor at the City University of New York, and author of a Substack newsletter.

Martin Wolf
And welcome to the second series of the Wolf-Krugman Exchange here on The Economics Show.

In four episodes running over the next four weeks, Paul and I will be taking stock of the global economy after almost one year of Donald Trump’s second term as president.

Paul Krugman
We’ll be talking about economics, but also politics. Gonna start with the United States, where things continue to be alarmingly interesting, and the future episodes move on to the rest of the world. Since things move quickly, in this age of Trump . . . 

Martin Wolf
 . . . So let’s kick off with something we often do on The Economics Show, where we put something on a scale from one to 10.

So after a year of Trump, how healthy in one number — scale one to 10 with one, terrible and 10, everything is great — do you feel the US economy is now and perhaps also in comparison with where it was in January?

Paul Krugman
OK. It’s clearly in worse shape than it was in January and maybe it’s a five. The normal indicators — unemployment rate, inflation rate — are worse than they were in 2024. Unemployment is a few tenths of a percentage point higher, inflation — which had been on a downward trajectory — is now up. It’s not a catastrophe, we’re not in a recession. But then there are weird shadows in the economy that make it, in some ways, considerably worse, probably, in terms of how it’s experienced than these conventional numbers would say. And also huge risks because so much is being driven by highly speculative investments in AI.

Martin Wolf
What would your number between one and 10 be for the state of American democracy at the moment?

Paul Krugman
Oh, I mean, we’re below that. We’re at a four or a three, but not a zero, and maybe trending up. There just has been a lot more pushback. Things are happening on a routine basis now that were completely unthinkable.

I mean, if your worst fantasy, did you imagine that masked government agents would be kidnapping people off the street? And that’s now a routine occurrence in our major cities. So, gosh, this is not a fully functioning democracy. And we look, you know, enviously at places that know how to do democracy seriously, like Brazil. Pretty humiliating for an American.

A lot of institutions just folded, but the public has not. And so I’m just vastly encouraged by the fact that we did have, just gubernatorial elections, but they were blowouts for what is clearly a referendum on Trump. And if you look underneath, it’s in some ways even better. It really does look as if the idea that there was a Maga coalition that was going to rule is not gonna happen unless they basically use force and intimidation, which is not out of the question.

Martin Wolf
Let’s just go a bit deeper on the economy. My view had been that what has happened has very dire long-term consequences, but I wasn’t clear that there was going to be some crash, at least on the actions he’s taken so far. So what’s been happening to the economy hasn’t really surprised me. I see about a protection of this kind is more likely to have longer-term, medium to long-term effects than short-term effects. Have you been surprised in any way by what you’d describe as the number five economy? Is that more or less what you would’ve guessed?

Paul Krugman
I think I’m pretty much on record as saying that this idea that protectionism causes a recession is not really right. It’s not borne out by history. It’s not borne out, actually, by basic economic (inaudible) . . . 

Martin Wolf
Economics doesn’t suggest that’s right.

Paul Krugman
Yeah. Tariffs degrade long-run efficiency. They hurt long-run performance. Now, what was special and is visible in some of the numbers is the uncertainty. It’s one thing if Trump had, you know, just sort of permanently imposed tariffs that were 1934 level. I wouldn’t have said that would be recessionary at all. Be a terrible thing for the long run, but not recessionary.

But it was the uncertainty, the constantly changing tariffs. How’s a business going to invest when it has no idea what the trade regime will be next month? Now, even that, you can see it a little bit more subtly in some of the numbers, but at the same time, you know, unfortunately, history doesn’t serve us controlled experiments where just one thing happens at a time. So we have simultaneously this radical break with 90 years of US trade policy; at the same time, this vast boom in artificial intelligence.

And so most investment is kind of weak. Most businesses are not hiring. But on the other hand, they’re spending enormous amounts of money on data centres, and that in some ways has masked whatever the effects of Trump’s policies might be.

Martin Wolf
Now, you’ve written quite a bit recently I think about the “vibecession”, the sort of vibes. Is that to you, a significant part of why it’s not doing as well as you would expect despite this huge AI investment boom, but somehow the mood, if you look at the confidence measures of various guides, the Americans really do seem rather gloomy. Is that what you are talking about?

Paul Krugman
Yes. Now it’s not . . . By the way, we should say that consumer spending has not fallen a lot despite the fact that people say that they’re quite unhappy with the economy. So in some sense, this is if we look at what people do rather than what they say, it’s a little bit out of kilter. But yeah, I mean, many people have made the analogy with the late ’90s — both the dotcoms, but even more important, the telecom investment boom, which ended in grief for a lot of companies. You and I are old enough to remember 1999 and the thing was that at that time, that boom bubble, people were giddy. The ordinary person was fielding that they were part of this great adventure of prosperity. Now, it didn’t last, but they . . . And there’s been none of that now. There’s nobody out there who is thinking: well, you know, Nvidia is doing well, and that means that anybody can make it, you know. That’s not how it’s playing now.

And if you look at the standard numbers, I mean, the Michigan survey runs all the way back to the ’50s and consumer sentiment is at its lowest point ever. It’s lower than it was in the aftermath of the 2008 financial crisis. It’s lower than it was in 1980 when we had 14 per cent inflation.

That’s, you know, people are really, really down on the economy. I had thought that Trump might have, if only because of partisanship, that Trump might be getting better ratings on the economy than Biden did. But in fact, the “vibecession” has, if anything, intensified.

Martin Wolf
I was just thinking as you were talking that I recognise this contrast with the late ’90s. Well, I think the overall economy seemed to be doing better. Was part of it — with the dotcom bubble, everybody felt they could sort of get in on it. But here, what we are seeing is booming expenditure by a really small number of gigantic companies, which is quite different from the sort of players in that they are real businesses, there’s no doubt about that. But they look like a bunch of incredibly powerful oligopolies and that doesn’t really excite ordinary Americans ’cause it doesn’t really have anything to do with them.

Paul Krugman
Yeah. I mean, the dotcom stuff was sometimes silly, often silly — people even kind of recognise the silliness — but it was kind of nice. I mean, you know, that the feeling of that there were opportunities. Everybody . . . I think everybody understood that some of these things were really not gonna work, but yeah.

And now, yeah, it’s the same. I mean, having Google and Mark Zuckerberg, you know, leading the charge into the future does not give you a lot of confidence that the future is gonna be very good for the common man.

Martin Wolf
You think there’s some sort of awareness that some of these businesses aren’t really quite the businesses we want to be so big and powerful? Is that actually . . . is that part of the vibe before we go back to the economics?

Paul Krugman
Yes, I think it is. And I think people do have a sense, first of all, that these businesses are very heavily built on basically hacking your brain to, you know, indulging and encouraging your worst instincts. You know, not a day goes by without some horror story about ChatGPT encouraging people to do something stupid or self-destructive.

Martin Wolf
Yeah. Even suicide.

Paul Krugman
And also that . . . Yeah. And if we have a government that clearly . . . basically, is a, you know, government of by and for predators. In ways that . . . including ways that I probably . . . we won’t get into. But the . . . And that does filter through. Everybody has a kind of sick feeling about where we are right now.

Martin Wolf
Do you think that one of the factors here — which you’ve written a lot about and seems to me very important for the ordinary American’s sense of themself — is that this government is so obviously in bed with a very small number of immensely wealthy plutocrats. And to a degree, which of course, this is the famous story back in the beginning of the last century, in the great Gilded Age period. But this seems in practice to be more egregious. Is this part of the vibe Americans are having? Is that part of what they’re reacting against?

Paul Krugman
Well, it’s very hard to pin that down, and I suspect that fewer people than you think are really aware of that. One of the things we’ve learned — and I’m following the political scientists and poll analysts and so on — is that it’s very difficult for people like you and me who are immersed in this stuff to appreciate how tangential much of the news is to ordinary people. And I’m not sure even if you did a poll and you asked, are you aware that Elon Musk gets a lot of his money from government contracts? I would guess that many people are not. But I think there is a general sense that it’s unfair. Inequality doesn’t actually have as much traction politically as you might expect, but unfairness does, and the sense that we’re in a regime of unfairness everywhere, really does.

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Martin Wolf
Now, we’ve been reading a lot over here about this affordability idea. It was obviously what Mr Mamdani campaigned on in New York. And he’s only won a pretty spectacular victory and an encomium from Donald Trump, which I must say must be one of the most surprising meetings I’ve ever seen in my fairly lengthy life.

But is he on to something here, that somehow, this links perhaps with their feeling about what happened with the inflation under Joe Biden, that there are really important things that have become sort of unaffordable for ordinary people? You’ve written about housing rents and so forth. How live is that really as an issue and do you think it’ll last?

Paul Krugman
We had a bout of inflation, really, from 2021 to 2023. And people, I think, were . . . people are upset about the jump in the level of prices, especially because we’d had, you know, three-plus decades of very low inflation before.

Martin Wolf
They expected 2 per cent a year, so 6 per cent over three years, and they got roughly 20. And that sort of, they say, we got cheated.

Paul Krugman
Yeah. And although wages went up a lot, and contrary to what many people believe, actually wages rose more towards the bottom of the wage distribution. So we actually had equalisation. So, struggling families on the whole were better off in terms of purchasing power, but it’s a natural thing. You feel that you earned your wage increase. And then it was snatched away by the inflation.

Martin Wolf
Yeah, of course.

Paul Krugman
So that’s a big part of it. Wages have risen more than grocery prices over the last five years or so, but wages have not risen more than housing prices. And so there’s some real affordability stuff.

Martin Wolf
The price effects of the tariff, as I see it, are still coming through because a lot of the price effect was clearly absorbed by business, but it’s not gonna be absorbed forever, is it?

Paul Krugman
That’s right. Although one quirk is that it’s turned out that the effective tariffs are not as high as the posted tariffs. And part of the reason there is, it’s not really, we think, a lot of illegal tariff evasion, but there were a lot of things that businesses could do to avoid paying tariffs that weren’t worth doing when we had 2 per cent tariffs and are worth doing when we have 17 per cent tariffs.

So there . . . yeah, we’re probably looking . . . we’re probably seeing something like half of the eventual price impact of tariffs on consumer prices, and the rest is working its way through the pipeline. I think what is special, the one part of the reason that the rage over affordability has persisted. I think that might have started to fade if we’d had some kind of continuity, except Trump ran a campaign all about I am going to bring prices down. I’m gonna cut the price of energy in half. I’m gonna make your groceries much cheaper, and then obviously hasn’t delivered on that and hasn’t even made an effort to deliver on that. And people feel betrayed, which is, you know, coming back to where we started there, I’m glad that people feel betrayed. This is important.

Martin Wolf
Well, obviously, he works on the assumption that the promises I made have nothing to do with what happens six months later. People shouldn’t hold me to account for something I said six months earlier — that’s just unfair.

Paul Krugman
Yeah, I mean, this is Trump’s whole modus operandi, is that he . . . a promise from Trump is a suggestion at best. You know, that kind of works when you’re dealing with, I don’t know, university presidents and . . . but it doesn’t work when you’re dealing with the American public.

Martin Wolf
Just one final thing on the tariffs. We’ve got this really rather important case in front of the Supreme Court — which of course, you follow very closely and I’ve been very interested in — of whether what he’s done is legal. And my own reading of American trade law — and I know a few experts — is that it isn’t. But my confidence that the Supreme Court will decide that it’s illegal isn’t very great, given some of the other things they’ve decided. What do you think the Supreme Court’s gonna do?

Paul Krugman
My guess is that this may be a step too far, even for the Supreme Court. The president can do some special things to deal with economic emergencies. But when Trump imposes tariffs on Brazil ’cause they have the temerity to try Bolsonaro, that I don’t think fits the definition of an economic emergency.

And two lower courts have already ruled that the tariffs are in fact illegal. We have betting markets. The prediction markets say that there’s only a 26 per cent chance as of this morning that the court will uphold Trump’s tariffs, which looks about right to me. So . . .

Martin Wolf
Can he get around that? Can he ignore it?

Paul Krugman
Well, just blatantly ignoring it, I think, does become a problem. I mean, if you’re a customs and border patrol agent and you collect the tariff that the Supreme Court has ruled illegal, I think that you are personally liable. You have yourself broken the law. So this is a . . . it’s serious.

Martin Wolf
And they . . . he couldn’t pretend that quote-unquote, breaking the law is an official act which the Trump . . .

Paul Krugman
Well, probably not.

Martin Wolf
Which the Supreme Court, in an earlier judgment, decided was actually completely kosher.

Paul Krugman
Yeah. Well, and, you know, there are other routes around. The president has a lot of leeway to impose tariffs to protect national security as Section 232. And Trump has been doing that quite a lot. But not all of it is under this Emergency Powers Act. But there too, I would imagine that the potential legal challenges are huge. I mean, he’s imposed national security tariffs on bathroom vanities. God help us if we get into an international conflict and we depend on China for our bathroom vanities.

Martin Wolf
If I remember correctly, he imposed a tariff on Canada because the governor — is it a governor of Ontario? — showed an advertisement in which, from which it was quite clear that Ronald Reagan didn’t like tariffs, which everybody who followed trade policy at the time — and you were one and I was one — knew damn well was true, but he still imposed a tariff. How did he manage that? Was that an emergency?

Paul Krugman
I think he may have used the Emergency Powers Act on that one. But yeah, no, it’s all, you know, on any reasonable standard, almost everything he’s done on trade is illegal, but we do not live in an age of reasonable standards.

Martin Wolf
If they do come out against him, that’s an important judgment on what is, after all, for him and for the world, his signature policy.

Paul Krugman
Yeah, and it’s humiliating if the court rules that his signature policy was, is illegal. And it’s less certain, but it does look hard to see how you can rule that the tariffs were illegal and avoid giving the money back. So quite a scene.

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Martin Wolf
So let’s talk about the labour market, and I want to also talk about the stock market, bitcoin, the sort of the froth factor around AI. But let’s talk about the labour market, which seems sort of not completely clear to me, a significant factor for this “vibecession” as it were; more than that, sort of anxiety about prospects for jobs.

Paul Krugman
Yeah, so what we see, and this is measurable and very clear, we have not yet had mass lay-offs, large job losses. But what we have seen is . . . 

Martin Wolf
Not a lot of hiring.

Paul Krugman
Very low hiring. It’s a frozen labour market. Probably, at least in part because of tariffs and general uncertainty. But businesses are not hiring, they’re not firing a lot either. So, if you’re in a job, then you’re reasonably secure, but should you lose your job, or if you’re a young person entering the markets for the first time, it’s actually very grim. You know, long-term unemployment, overall unemployment isn’t up by very much but long-term unemployment is because once you’ve lost a job, it’s very hard to find another one. And this does reflect back, even people who have jobs have the sense correctly that . . .

Martin Wolf
Of course, it’s frightening.

Paul Krugman
I’d better not get sassy with my boss because, you know, if I’m laid off, then I’m in big trouble. And so this does colour people’s, you know, colours people’s perceptions. It’s also, it’s a tragedy. I mean, we’ve had previous information, previous studies. What happens if young people starting their careers enter into a weak labour market and have a hard time finding a job? You know, how long does it take them to recover from that bad start? And the basic answer is forever. If the labour market is poor when you’re starting out, you never get as far up the ladder as you would have otherwise. And so this is a big deal.

Martin Wolf
I think this actually is what we’re seeing in Britain, have been seeing. We have had a really rather weak labour market in exactly this sense, even compared to our European peers, since the pandemic. And I think it’s become a very deep source of anxiety for young people, percolates through to their parents, ’cause they’re concerned about them too. And I think it’s a big source of worry and I think it’s considerably worse than in the US from what little I know. So I recognise this concern, but so what’s causing it? It would suggest that employers are being very cautious. They don’t wanna hire because they don’t know what’s gonna happen next.

But it also would suggest that basically, underlying demand is quite weak and that seems to sort of justify the Fed to cut rates. And some people on the Fed are saying they should. At the same time, well, inflation is pretty damn sticky. So how do you read that? If you were sitting on the Fed board, what do you think they should be doing?

Paul Krugman
Yeah, I mean, I’m glad I’m not sitting on the Fed board anymore.

Martin Wolf
Yeah, I agree.

Paul Krugman
I actually do know people who are and are, you know, they go around muttering, dual mandate, dual mandate ’cause it’s really hard because of the . . . 

Martin Wolf
Yeah, I know quite a few too and I think it’s a very tough job at the moment, particularly because Trump in the (inaudible).

Paul Krugman
The thing is if it’s weak demand, you would expect more lay-offs. So it is a little . . . I mean it, it might be weak demand, but it might be also just this freezing effect of uncertainty. And possibly AI. There’s at least some straws in the wind that suggest that early business applications of AI are reducing hiring particularly of college graduates, or simply that companies are kind of waiting. Waiting for AI that if you’re Amazon, you’re applying to replace a lot of your workers with robots a year or two down the pike, you might not wanna hire a lot of people now.

So, you know, it’s a little bit of a mystery. I don’t . . . I’ve never seen anything like it. You know, we normally have a pretty one-to-one relationship between the unemployment rate and hiring rates. And this situation of not especially high unemployment but very weak hiring is really quite novel.

Martin Wolf
That could be, of course, as you say, the uncertainty. That could be tariff-generated or tariff policy-generated. And is the sticky inflation, despite what seems not a very strong economy, also related to that?

Paul Krugman
Actually, you could say that the tariff uncertainty has slowed the pass-through of tariffs into consumer prices. If you are a retailer, you know, raising prices does piss off your customers, to use the technical term. And if you think the tariffs might go away, I mean, if you think that sometime in the next few weeks the Supreme Court might rule that all those tariffs that are making your products expensive may disappear in a puff of smoke, then you may choose to eat the tariffs until that’s resolved.

As I said, you’re thinking about being a Fed . . . member of the Federal Open Market Committee. And you say, so what is happening to the economy? And the answer is, God knows. It’s, you know, how do you make an interest rate call in that situation?

Martin Wolf
So let’s look at the other area of really big uncertainty. You just mentioned AI’s impact on the jobs market. Is there gonna be a jobageddon, as it were, as a result of AI? Are we going to suddenly start seeing really dramatic effects on the employment of relatively educated young workers, which I’ve always thought would be a nightmare politically for all our societies? If you can’t give these people good prospects, well, these are the people who start revolutions. They did that, you know, young, unemployed people who have got educated degrees and so that’s how the 1848 revolution started. So that’s . . . This is a big deal politically. Is this what we might be seeing?

Paul Krugman
It’s possible. I mean, so far, again, it’s all pretty modest, as far as we can tell. It’s so difficult to interpret the various studies.

Martin Wolf
Yeah, I agree.

Paul Krugman
Most businesses report that they have not actually succeeded in making productive use of AI, but some have, and then there’s some, you know, it’s all over the place.

And there’s also this weird thing, which is that a number of businesses are telling their employees, you must use AI. And when they can’t actually figure out what good it does them. So we’re in this kind of liminal space where it’s all potential and hype. I mean, what it can do is, there are a lot of things I followed artificial Intelligence stuff sort of marginally for decades. And you know, it used to be that there were lots of things that were, you know, simple common sense things that we just couldn’t do, like recognise the same object seen from different angles. And all of a sudden, all of that is a solved problem.

Translation. Translation by computer was a joke. And all of a sudden, it becomes actually pretty damn good. So there’s no question this is a powerful, productive technology, but we don’t know yet. And then of course, I guess, there’s the sort of short-run macroeconomic impact, which is that this is driving a lot of business investment and it’s driving the stock market. And quite possible, as was the case with the . . . in the late ’90s, that you have a genuine, productive, important technology and everybody who invests heavily in it loses their shirt.

Martin Wolf
So there are two aspects of this. One, the stock market is incredibly buoyant because of this, or has been. And maybe it’s filtering over into some other speculative bubbles. I think you just wrote about bitcoin. That may also be related to the deregulation going on, the encouragement of cryptocurrencies more broadly. I mean, that may be really separate from AI, but it’s noticeable. So there must be a wealth effect, I mean, at least among relatively well-off people because stocks have gone through, or these major companies gone through the moon. And second, associated with that, there’s a huge investment boom, which the stock market must be funding to some degree.

Now, if it turns out that the investment doesn’t really get a decent return — which is perfectly plausible given that we don’t see business models — then two things will happen: the stock prices will fall and the investment will fall. They will have all this stuff which will have been built, data centres and so forth, but it really will be very low return, though perhaps quite useful in some way. But this is bad for the future of the economy. And the administration has sort of shot the macroeconomic bolts except for the monetary policy ones. And then there is a concern out there that actually, they’re beginning to borrow more. It’s not all funded out of profits. There are marginal companies borrowing a lot. There is a lot going on in private credit, which we don’t really understand. There are financial risks.

So what’s the downside here? How bad could it get? I don’t have any real reading on this, but there are these negative stories you can tell about where we are.

Paul Krugman
Yeah. The . . . a lot of talk about the circular financing of the AI-related companies are all kind of taking in each other’s washing, making the bottom lines look sort of artificially good. A year ago, you could say, well, you know, this AI boom is being financed out of retained earnings. And so, you know, yeah, Meta may lose a lot of money, but who cares?

But now there’s a lot of borrowing. And you know, markets are taking note. Oracle, you have credit default swaps. Feel young again. It’s like we’re going back to 2008. But the credit default swaps on Oracle have just blown out, suggesting that people do think there’s a significant risk that one of the big players here might end up defaulting on some of the debt it’s taken on.

So, nobody knows, right? The financial stability is always . . . it’s a game of whack-a-mole. You’re always trying to knock down financial risks and you’re often at risk of fighting the last war. So you cope with, you know, we dealt with a lot of the old shadow banking stuff, but now we have private credit. That creates a whole new set of risks that are, at some level, at a metaphysical level, similar to the old shadow banking stuff.

I don’t think we’re at the edge of another financial crisis. But then, to be honest, I didn’t think that in 2007 either.

Martin Wolf
Well, I didn’t then, but I was more worried than I am now because I tend to think this is narrower. It’s not related to housing, which is a classic asset class to create problems; we saw that all over Europe. And the big companies involved in this are, in cash flow and profit terms, basically about as solid as a company can possibly be. So there are obviously marginal players, which are, but Microsoft, Google, Meta, these are pretty solid companies. So if you succeed in getting a colossal financial crisis out of this, I think that would be quite a major achievement. It’s gonna be astonishing.

Paul Krugman
Yeah. A financial crisis is not high on my list of things to worry about, but then again, we, you know, our track record. The IMF once did a systematic study of how successful are economists at predicting recessions, and the answer is a zero success rate.

Martin Wolf
Yeah. Well, what does worry me is that when this happens, it could well be under another Fed chair. And that might not be a very sensible person.

And I think, on the whole, Jay’s been a pretty sensible person. And by and large, actually over the last 20, 25, 30 years — I’m equivocal a bit about some of them — you’ve had pretty sensible Fed chairs. And that might not be true a year from now and that could make a big difference. The Fed chair really matters if there’s problems.

Paul Krugman
Yeah, I mean, and without getting, you know, into the individuals, people on the short list range from somewhat weak to absolutely horrifying. Now, what saving grace to some extent is that the Fed chair is not a chief executive who can just make the decisions. It’s monetary policy, it’s a committee. And the committee seems likely to remain sensible, at least for a couple of years. So yeah.

And one thing by the way, I would say is that the . . . you’re saying that these investments will leave us with useful stuff. That’s one of the things that’s unclear. The ’90s investments, you ended up with a lot of fibre optic cable in the ground that didn’t get used right away, but was eventually useful.

But the data centres probably depreciate quite fast. And so in some ways this is more like the companies that got over their skids on shale, which turned out that shale wells depreciate much faster than conventional oil and gas wells. And so we might have a big waste of resources that is really lost. We may be just burning up real resources on stuff that won’t get used, especially if they’re kind of taking the wrong approach.

One of the things that we’re worrying about now is that, you know, the Chinese have been focusing on smaller models that are less comprehensive, that apparently can achieve about 90 per cent of the effectiveness of the big models at far lower cost. And so this thing may, you know, aside from the inherent questions about AI, there’s also the question: are we doing AI wrong?

Martin Wolf
That is, I think, a really interesting possibility, and that would certainly justify a pretty big collapse in stock prices and investment. I’ve just been to China and they certainly do feel that they’ve got a more sensible approach. And when you look at the amounts being spent on these data centres and the dubious benefits in terms of improvements at the margin, yeah, you can ask that question.

Let’s put this all together: people aren’t very happy about the economy, you’ve still got the Epstein files — they should certainly seem to be an amazingly hot topic — Trump’s approval is remarkably low. So coming back to where we started, could we begin to feel that not only we passed peak Trump, but that we should really begin to feel that the American system will be able to get through this? So I’m beginning to feel maybe this will work out. How optimistic are you of that?

I mean, I thought of it, it was two to one on at this stage about 10 months ago, eight months ago, that Trump would get away with it and he would’ve created a dictatorship. But now I’m beginning to think it’s less than evens.

Paul Krugman
I think that my view is that it’s more likely than not that the autogolpe, the self-coup will fail, that Trump and company will not succeed in installing permanent autocratic rule in America. And it tells you something about where we are that they . . . Believing that they probably won’t do that makes me optimistic. So it’s still very scary, but it’s really looking like they may not be able to pull this off.

That doesn’t mean that we’ve gotten through it safely even if we have, even if that’s how it works out. For one thing, an enormous amount of damage has been done.

Martin Wolf
Of course! To America and to the world.

Paul Krugman
To us, to the world. I mean, the United States was the essential country, and we are now completely unreliable. Nobody will trust America for decades, even if it ends. And then there’s this longer-term question: even if we get through and we end up with a Democratic Congress the next year and then we end up with a Democratic president in 2028, winning every election is not a reliable strategy for safeguarding democracy.

So, you know, the fact that if we don’t end up not just holding back this bum’s rush from Maga. But if we don’t end up having a truth and reconciliation commission of some kind, some accountability for all of this, then we’re still in very, very bad shape.

Martin Wolf
The thing that particularly worries me — and I follow this very closely, and perhaps it’s partly because of my family background; my history of my family is refugees from Hitler. There seems to be a remarkable amount, I mean, an astounding amount of genuine, clear fascism, even Nazism, circulating around on the extreme right. And even three or four years ago, I wasn’t aware of that. It’s possible if the Republicans are in opposition, that’s where they’re gonna go. And these people only have to win once and you really have a problem. So it remains very, very scary, I think. But I certainly will feel better if it looks as though they haven’t pulled this one off.

Paul Krugman
Yeah.

 [MUSIC PLAYING]

Martin Wolf
So in next week’s episode we’re gonna talk about the economics of Maga Man, and on the other hand, well, what does the newly elected New York mayor tell us? What does that mean about the future of the Democrats? And look at it from the economic point of view. And meanwhile, I think it’s your turn to tell us about your cultural coda.

Paul Krugman
Yeah. Well, what I can say is that I always put a musical coda on my Substack and I think it works here as well, is Pink Floyd, “The Great Gig in the Sky”, where the lyrics consist of nothing but an extended wordless scream. And if there was ever a time when a primal scream seemed appropriate as a reaction to the world around us, it’s now.

 [PINK FLOYD’S “THE GREAT GIG IN THE SKY” PLAYING]

Martin Wolf
So when I was asked to do this I found it, I think, much more difficult than you do. But as I said before, I’m a sort of opera person. And I was thinking about the best things about tyranny, which has, after all, been the theme. Last time I think I had Fidelio from Beethoven. This one is more direct. It’s from Puccini’s Tosca, which is about the evil ways of an Italian police boss, who’s really a gangster called Scarpia. And the song is by Tosca, who’s the heroine, whose lover has been tortured, and she sings this absolutely magnificent song, “Vissi d’arte”: I lived for art. I was a peaceful, loving, decent and honourable human being. Why God, have you inflicted this upon me?

 [“VISSI D’ARTE” PLAYING]

I know it’s a very dramatic scene and the aria is absolutely magnificent. So that’s my coda for this week.

Thank you very much. I think we’ve had a very good overview of why we’re feeling a little bit more cheerful. And we’re feeling a little bit more cheerful because things are going rather badly wrong, but we don’t quite understand fully, entirely, why the economy is going as it is, but I’ll take it anyway.

Paul Krugman
Well, I can say is our cultural references are not very much like what you expect from a couple of economists, but here we are.

Martin Wolf
Well, even economists are human beings sometimes.

Paul Krugman
Some of us, some of the time.

Martin Wolf
And that’s it for the Wolf-Krugman Exchange on The Economics Show for this week, and we’ll be back here at the same time next week.

[MUSIC PLAYING]