Arindrajit Dube on Wages

Catching Up With Ro Khanna

Ro Khanna represents a large part of Silicon Valley, and not surprisingly is a very smart guy. Perhaps more surprisingly, he’s also a very interesting progressive, who has drawn considerable ire from the tech lords, with Elon Musk most recently calling for his imprisonment. I caught up with him Friday: TRANSCRIPT: Paul Krugman in Conversation with Congressman Ro Khanna (recorded 6/26/26) Paul Krugman: I’m talking again to Rep. Ro Khanna [https://khanna.house.gov/], the Representative for Cupertino, as it were, representing the heart of Silicon Valley in ways that don’t always please the tech oligarchs. I had planned to ask about AI, but there’s so much going on and Ro is right in the middle. So, welcome to this interview. Ro Khanna: Well, I’m honored to be back on. I usually just read you to learn, but I’m glad we’re going to get to have another conversation. Krugman: As it happens, tech-related politics is really central now. And you seem to be in the middle of at least three big issues: Elon Musk, AI generally, and the California Wealth Tax Initiative. I want to talk about all of those, but maybe let’s start with Elon Musk, who has called you evil, which is a great honor. Do you want to talk about that controversy and where you came in here? Because I think it’s very interesting. Khanna: Well, he’s called me evil, he’s threatened to sue me, and he’s threatened to jail me. I have this quaint idea, Paul, that in a democracy, Elon Musk should have one vote. He doesn’t seem to think that, and the reason he has been so triggered is that I not only cited a Lancet study [https://www.thelancet.com/article/S0140-6736(25)01186-9/fulltext]—which said that his USAID cuts could potentially lead to the deaths of 4.5 million children and over 10 million adults—but I also cited an Atul Gawande/ Boston study showing that some of these deaths have already taken place [https://www.foreign.senate.gov/press/dem/release/the-dangerous-consequences-of-funding-cuts-to-us-global-health-programs]. This triggered him, not just because I cited these studies, but because I said he’s going to have to come before the House Oversight Committee when we take back the majority; we’re going to have the power to subpoena him. And, of course, defying a congressional subpoena could lead to contempt of Congress and penalties. And so he’s been spending the last few days obsessively tweeting about me. You would think if you had $1 trillion, you’d have better things to do, but this is what’s occupying him. Krugman: Yeah, let’s back up a bit. One of the things that I found really kind of astonishing in the whole discussion—and obviously, SpaceX went public and there was amazingly little discussion of Musk’s role at DOGE where he was a quasi-government official. I guess it was kind of weird what the legal basis for all of that was—but this had immense impacts. And as you say, one of them was that he just, more or less by personal fiat, eliminated USAID, which is our premier aid agency. Do you have any thoughts just generally about what Musk did at DOGE? I think it’s a hell of a story, so let’s start with that. Khanna: The keywords you used were “by personal fiat.” I mean, he literally went there, didn’t consult Congress, didn’t report to Congress, and just started cutting programs that Congress had explicitly authorized. And no one stopped him. We voted to subpoena him, but he defied coming in and explaining anything to Congress. By some accounts, he cut 83% of the programs that were at USAID. And some of these programs are to feed some of the poorest people in the world; some are to provide medicines to some of the poorest people in the world. So, you literally had the world’s richest person hurting the world’s poorest people. And he was doing it with no accountability, in defiance of Congress. Congress then fortunately restored some of these programs, so he was not able to end all of them. But the USAID programs are a shadow of their former self. They now are scattered in administration, and many were so disrupted that these academic studies have shown that it potentially could—or in some cases already has—led to the deaths of some of the poorest people and children in the world. Krugman: Yeah, the important thing is what he did. But the attitude also at the time... I think he said something like, “Oh, I just fed USAID to the wood chipper, and I could have gone to some great parties instead,” as if it was, you know, annoying that he had to go out there and cut off medical aid for millions of children. Khanna: Yeah, it was total arrogance. He said it was all fraud, but of course, he then didn’t have the guts to come before Congress or the American people and explain where he found fraud. He didn’t consult any of these programs. It’s not like he was on a plane to Africa or a plane to other parts of the world where these programs were being administered. And for someone who was going to go after cuts to the federal budget, instead of starting at the Department of Defense, which is 65% or so of the discretionary federal budget, he decides to start with an administration with less than 1% of the federal budget. It was a purely ideological agenda that, turns out, has real-world consequences—especially with this Ebola outbreak. I mean, one of the things he cut was the oversight and testing in places like the Republic of the Congo, and now we’re seeing the consequences. Krugman: And his reaction has been really quite over the top, considering, you know, if you’re any kind of public figure, you expect to be facing criticism. Khanna: It’s just denial, right? I think he said that not a single person has died because of his cuts, which is totally implausible. He said, “there’s not a single documented case.” And he said that everything he cut was simply a fraud, and that these academic studies are totally fraudulent. Granted, the Lancet study is a model of what could happen, but the Atul Gawande study is actually a documentation of actual deaths that have taken place. And there are a lot of anecdotal statements which Nicholas Kristof and a lot of people have reported on. Krugman: And now he’s threatening to sue you. Presumably, I don’t think we’re that far gone that there’s any chance that such a suit would prevail, but how much of that is an actual burden on you? Khanna: Well, I put it into Grok to see how strong a case Elon has, and Grok doesn’t think he has a very strong case. So there’s that. Krugman: In case anybody doesn’t know, Grok is Elon Musk’s or xAI’s LLM. It’s a competitor to ChatGPT and Claude, except it’s not really a competitor because it’s awful, right? But yeah. Khanna: I would have a better case of defamation given what he has said about me. But, of course, I believe in free speech, Paul. I thought he did, too, and I would never think of suing someone for calling me a robber or calling me names. That’s the First Amendment. But I’ll tell you what it does: it creates a doubt in other people who are on the Oversight Committee—you know, “Is this really worth the bother? Should we really criticize Musk?” So that’s one thing. Obviously, Musk has more than one vote. He’s got millions of dollars that he can spend on candidates, but now it turns out it’s not enough for him to just have the ability to support Super PACs; he also wants to be able to intimidate any public official who dares to go against him. It’s not just that he would spend money against them, but that he could actually sue them. And so if you’re a member of Congress, you’re thinking, “Well, do I really want this fight? Or maybe we could just focus on the hundred other issues.” So, it’s less about the headache for me and more about the signal he’s sending to other elected officials. Krugman: So you aren’t trying to do a GoFundMe for a legal defense or anything like that? Because I know people who have faced other spurious lawsuits and it’s actually cost them money, even though there’s no chance of it prevailing. They feel that they do need to hire people, but you’re not in a position where you are personally feeling liable? Or are you just well-positioned to sort of weather this? Khanna: Well, he hasn’t sued yet. If he does sue, it will be a drain on resources and we would have to raise funds. We would. But I don’t want to have people do something before there is an actual lawsuit. We’ll see what he does. But that’s exactly what his strategy is, whether it’s against someone like me or just a message to others that he has unlimited resources and he can make your life very, very difficult. Krugman: Okay. And he’s also called for you... I guess there was nothing specific about why, but for you to be put in jail, which is even more amazing. Khanna: Yes. And ordinarily you would kind of laugh it off because he’s a private person with no power. But of course, in this administration, him calling for that and the way the Justice Department works—there are political motives to how they’ve been operating. I mean, they have the governor of California and his wife that they’re threatening along with Adam Schiff... the list is long how they have operated. Krugman: Yeah. I’m a friend of Lisa Cook at the Federal Reserve and for her, this has been much more. She was, in fact, targeted and all of that by essentially the same gang. So yeah, it’s quite something. Just the last bit: Musk has also then gone out with this claim that USAID somehow is responsible for COVID, and also went full-in on the conspiracy theories about COVID. Do you have any comment on that, just since it came up in this context? Khanna: It’s so nonsensical. I don’t even understand what he’s talking about. I think what he is trying to argue is that the lab that some people believe was the testing ground for the virus somehow is connected to USAID, but he just puts these things out there with no evidence and for ideological reasons. The reality is the large part of USAID was to help poor people with food and medicine, and it had support from everyone from George W. Bush on. Krugman: Yeah. I’m pretty sure that USAID doesn’t actually spend money creating labs in China. Khanna: I’m 99% sure that’s true. I mean, Paul, you and I usually check things before we say something definitively. Elon doesn’t have any of those filters, so he’s just throwing these things out there. Krugman: Yeah. It’s pretty terrifying. The world’s richest man with a very strong political in with the U.S. government and... just, wow. Well, that was in the news so I thought I’d ask. Khanna: He does have a huge platform, right? I mean, he has 240 million followers. So him saying, “Okay, I’m going to sue Khanna. Khanna is a horrible, evil human being,” you know, has more reach by far than when I go on Meet the Press or ABC News. And he’s putting out basic falsehoods, so it’s a real danger. Krugman: Yeah. Okay, let’s move on. So the technology of the moment is AI. Last time we talked, which is a while back now—I mean, a while back in tech time, anyway—we were talking about crypto, and there’s a little bit of the distracted boyfriend thing where people are looking now at AI instead of crypto. But AI does look really much more substantive. You can actually almost start to see its impact on productivity, maybe on layoffs. So it looks like a serious technology. And you’ve been staking out a position which is calling for a lot more intervention and regulation. Do you want to talk about what you think is happening and what needs to be done? Khanna: Well, so far, AI has been enriching tech lords and tech billionaires, but it’s caused deep anxiety with ordinary Americans. And I would argue that there are four things we need to do. We need to first care about jobs. Now, here’s the good news, Professor Krugman: it used to be that the people who cared about a jobs program were folks in de-industrialized communities—blue-collar, or people who had lost factory jobs. Now you have kids at Brown, kids at Yale who are worried about whether they’re going to have a job. So I think there’s an opportunity for a broad coalition to have the most ambitious jobs agenda in a generation. And what does that look like? I would say first, it means taxing agentic AI more than we tax human workers. This is not my idea; it’s Daron Acemoglu’s idea [https://news.mit.edu/2020/3-questions-daron-acemoglu-us-tax-system-automation-1015], which is basically that the tax code is biased towards capital. If you have to hire someone, you’ve got to pay their health insurance and you’ve got to pay a payroll tax. If you want to have an agentic AI worker or a robot, you don’t have to pay that. So, neutralizing that tax code. Second, we should—and I’ve argued this—have a “Work for America” program, a federal jobs program for young people out of school, out of trade school, or out of college to rebuild communities, maybe to come to the federal government. Maybe they go to a community that they didn’t grow up in. This can be akin to military service and can help rebuild not just the physical infrastructure of America, but the social infrastructure. Third, bargaining power for employees. So, not just go retrain them, but give them an actual say in the company if there are going to be layoffs. What role will they have? If there’s going to be displacement, what jobs would they have? Are they going to get a share of the profits from the increase in AI productivity? Are they going to get time off with the increased productivity? And finally, a sense of ensuring that jobs are there, that there’s intervention in having humans in the loop in various jobs—whether that’s the four million truck drivers and thinking about their role, or whether it’s jobs making decisions about people’s healthcare or making decisions about their finances. Krugman: So, yeah, I mean, a few things to unpack here. One is, obviously, nobody really knows what this is going to be, but we are starting to see, or we think we’re seeing, real job impacts and income impacts from AI. Probably. If you had to say, where would we be seeing these things first? It would be kind of in your district, right? So, what do we actually see? What are you hearing from your own constituents? Khanna: First, it’s much harder to get hired into these tech jobs. There’s a lot of anxiety from 21-, 22-, and 23-year-olds and their parents. The job market used to be, even at a place like Stanford, “Okay, I’m going to get 10 or 15 offers before I’m done with my senior year.” Now, they’re lucky to get a job, or it’s much harder to get a good job. Second, there have been a fair amount of tech layoffs. Now, some people are arguing that was because they overhired in the pandemic and they’re correcting for that, but it’s hard to imagine that AI is not at least part of the factor in that, and that it’s not just a correction for overhiring. And then third, just the sense of what the new jobs in these tech companies are going to look like in terms of being able to implement AI or use AI, and what computer science is going to look like in different schools. Krugman: Yeah, it is interesting what you just said, which is that we have a better chance of getting action because the jobs at stake here are sort of high-education rather than blue-collar work. In a way, that’s an indictment of our politics—that in some sense, we think Stanford graduates feeling aggrieved carry more weight than ten blue-collar workers in Ohio. But on the other hand, it is really striking, right? Obviously, you’re hearing from people who are just seeing that entry-level jobs are not there. To what extent is this actually manageable? Can we channel this, or is this technology just going to sweep away efforts at, particularly, job retention? Khanna: I do think it’s manageable in that there are a lot of human tasks, in my view, that can’t simply be automated: goal setting, team building, and the origination of customized new ideas for settings. And there’s a lot of work, public work, that can be done—whether it’s opening new parks, whether it’s helping represent people who are underserved, whether it’s making government services better, whether it’s providing counseling, whether it’s providing teaching, or whether it’s providing childcare. So, in my view, there is a role for a robust federal jobs program, and it could help in de-industrialized areas and for factory jobs. And we should keep in mind, we wanted to do this years ago when we saw the devastating effects of globalization, but our politics, for whatever reason, didn’t allow it. And now you have a much broader set of people with anxiety. Of course, it’s not the Great Depression when FDR had 20 to 30% unemployment and a total collapse in demand, but it is one where you meet an average person who’s concerned about it. And I think there is polling showing 30 to 40% of Americans are anxious about jobs. That seems to me to provide a moment where a politician coming with a jobs agenda or intervention in the free market would have a reception which, in a lot of the last 30 or 40 years, has been very hard to get. People just say you’re interfering in the markets. Krugman: Just to say—I mean, you kind of implicitly said this—but in effect, you’re calling for something like a WPA (Works Progress Administration) or CCC, ‘30s-style, but at least in part for tech workers, not just for people with shovels, but people doing skilled—I hate that word—but high-education-content work. Have you put any kind of numbers to this, or is it just a general outline at this point? Khanna: I wrote an op-ed called “Work for America” in The Wall Street Journal, and it was about $50 billion a year, which I said you could fund through an AI token tax. And it would be hiring anyone out of high school or out of college for jobs to open a park, to help with their local community, to teach, or to come to the federal government to do something. What I was particularly excited about is that kids growing up in Fremont, in my district, could go to Middletown, Ohio, to do something there so that you’re building things. And it would help for folks who may be displaced. And I explicitly said it was inspired by FDR’s Works Progress Administration, which hired 8 million people. Of course, that’s where the “boondoggle” idea came from, because some people back then said some of those jobs weren’t real—they were criticizing it. But my understanding, and you’re a better student of history, is that it did work in creating meaningful employment and many meaningful projects, and certainly helped the social infrastructure of the country. Krugman: I want to come back to jobs in a second, but you’re basically at least accepting as a strong possibility that this technology is biased towards capital and away from labor. Are you seeing that? Is that really what’s happening? Khanna: We’re certainly seeing it in terms of the explosion of wealth in my district and with billionaires. And we’ll get to the idea of a billionaire tax, but I mean, they have reaped massive amounts of benefit from the AI revolution, and we haven’t been seeing that for the average worker or even the average tech worker. They’re not reaping the rewards in the way that a few people have. And you’re seeing this also in terms of, certainly, the difficulty in entry-level jobs. I mean, when I was at Suffolk University and giving one of the commencement speeches, the line that got the most applause was when I said we need to tax agentic AI more than human workers. Young people are concerned about AI, and I don’t think their fears are totally irrational; I think they’re finding the job market to be harder. And I have a lot of cases in my district of people at these tech companies who are being laid off or told that they need to be let go. Now, you talk to the tech leaders and they’ll say there are other factors too—they’ll cite overhiring in the pandemic, they’ll say they’re just adjusting. So, I don’t know if there are academic studies that show it’s correlated completely to AI, but I certainly think it is one of the variables. And I think there was one study at Stanford showing that for young people in automatable jobs, AI had contributed. Krugman: Okay, you gave a commencement talk and got a positive response, unlike Eric Schmidt and, there have been multiple instances, but I guess Eric Schmidt is the famous one, the former CEO of Google, giving a commencement address in which he started to talk about AI and immediately got massive boos from the students. Khanna: I took the opposite tack. I said AI is not doing your generation a good service, and it’s something that we need to be tackling—not preaching all the benefits of AI. And it was a surprise to me because that was not the place where I expected to get applause. It was not the central part of my address, but the two places that got the most applause were calling for a billionaire tax and calling for a jobs program and taxing AI, which I was almost going to keep out of it because I thought, “Is that too political?” But the students, actually, that’s what resonated with them. Krugman: And so, at least conceptually, there are two separate issues. There’s a wealth tax, which I want to get to in a bit, but you’re talking about essentially—you call it a token tax—a tax basically on the use of AI. Are we able to implement that? Do you think it can be done reasonably well? Khanna: I do. It seems to me that’s the easiest thing because right now there’s a cost, of course, to the use of AI. And there’s a large debate, by the way, about what that cost is because it’s fairly expensive. It turns out it’s fairly expensive in terms of the energy consumption of AI; it’s expensive in terms of the capital expenditure for data centers, which is a whole separate conversation. And so, the question of labor displacement, I think, also depends upon how much AI costs actually come down or don’t come down. But right now, companies are paying a lot for the use of these tokens, which is basically the output of AI when you type something into ChatGPT. And so, if you just put a tax on that, that would both disincentivize automation and would raise revenue. Krugman: I’m not aware of an earlier parallel where there was something—sort of an output of machinery at some level—that could be compared in a way with labor. And of course, aside from income taxes, the FICA on every paycheck shows that we tax labor. And you’re just saying that we should do something for the stuff that’s coming from AI capital, right? Khanna: Yeah. That’s exactly right. And simply put, the idea right now is that it’s not just that people have a higher degree of variability because you could get sick, you need to be with your kids, or you have to pay health insurance. We’re not taxing what these tech people are saying is labor-replacing, and so we should tax that. Krugman: Okay. Now, people’s immediate reaction is, “Oh, but we’re in a competitive race with China.” What’s your answer to people who say, “Oh, you know, if we start to tax this stuff, we will forfeit the lead to other countries. It’s a great international race.” Khanna: Well, first of all, even China is changing its policies. I read recently that some of the court decisions in China are saying you can’t lay off people based on AI, and they have almost 18% youth unemployment. When I went there, a lot of the young folks didn’t want to work in the factories, and they’re concerned about losing jobs. So, I think China itself is realizing that having just unregulated AI is not healthy for society. The second thing is we want to compete with excellence. That’s always been the American aspiration—that we want to have products that have the highest standards. We want to have high safety standards, the highest set of standards in terms of privacy. So, if we’re producing AI that is safe, where agentic AI isn’t going to go do crazy things and isn’t going to engage in surveillance, then that should be something that we can export and be a model for the world. I don’t think we have to have a race to the bottom in the type of AI we produce. Krugman: Okay. And AI that’s safe, which, of course, is one of the big concerns. Any thoughts on the runaway models? Grok, which you mentioned, apparently was used for targeting in Iran with not-very-good results. Are you hearing anything, or is there any movement on intervention—basically congressional action to try and avoid some of these dangers from AI? Khanna: There hasn’t been, because this administration has basically said, “Let the tech billionaires do whatever they want.” The only time they’ve shown any interest in regulation is with Mythos, Anthropic’s latest model, which could detect cyber vulnerabilities. And it’s unclear whether their concern is simply motivated by the unsafety of Anthropic’s model or is retribution because Dario Amodei got into a fight with Pete Hegseth. But other than that issue, the administration has basically said, “Do whatever you want.” And it’s really scary because usually, even by these tech leaders’ own worries, they say, “This is transformational. This is going to change the world. This is the most important technology since fire.” Well, if that’s really the case, we have a federal agency for electricity, we have a federal agency for nuclear weapons and nuclear power—why wouldn’t we have a federal agency for AI, on your own terms? And yet there’s been no effort to do that. Krugman: Okay, for listeners, by the way, Amodei is the CEO of Anthropic. The two big models out there are OpenAI’s ChatGPT and Claude, which is Anthropic. Most of the buzz that I’m hearing about usability involves Claude, but Anthropic is politically not that aligned with the administration and has particularly said that it will not allow its AI to be used for autonomous weapons, and that has made them on the outs. And it’s really very hard, right? When the administration lays down rules or policies on AI, you can never tell whether they’re really concerned or whether they’re just trying to punish a company that isn’t on their side. That’s what you’re saying about Mythos, right? Khanna: Exactly. And I mean, given the administration’s history in general on retribution across so many places, but also in this explicit retribution against Anthropic... there, Amodei basically said that he didn’t think technology should be used in a way that would violate privacy. He didn’t think AI should be used to make decisions about what to strike without human judgment. Hegseth didn’t like that; they had a whole fight. And so now that they have Mythos, it may be that there really should be regulations and export controls because this technology is explosive and could cause cyber vulnerabilities. The problem is we don’t know, because the administration also has a motive for retribution, and they’ve lost the credibility of any independence. Krugman: Yeah, that makes it especially hard now. All right. It’s actually amazing how much impact Anthropic’s products are having. I’ve been talking with senior financial types on stuff, and it’s amazing how often I hear, “Well, I was thinking about that, so I asked Claude.” It really is shocking how—you know, we’re not talking about saying, “I had my staff go and look it up,” it’s, “I went and asked Claude myself.” So, like it or not, this is the world we’re in now. Okay, it seems to me that your whole vision is a step beyond. I mean, if you go back to actually quite early on when they were still making apocalyptic warnings and Sam Altman was saying, “Oh, well, given AI, we’re going to have to have something like—” I don’t think he exactly used these words, but something like, “We’re going to have to have taxes on capital to pay for universal basic income.” And that’s kind of the Silicon Valley vision. But your idea is more that we should have taxes on the wealth that’s been created to help provide for job programs. So, it’s not just that we’re going to give people money so they can sit at home and let the machines do stuff, but we’re going to subsidize ways that give people work. Khanna: Absolutely. And that work could be childcare, it could be home care, it could be new types of industry, it could be helping provide better government services, or it could be doing something meaningful in the community. I believe we have the need for productive work, and that the federal government should play that role. And by the way, the hypocrisy of some of these tech folk saying, “Just tax me so we can have universal income”—well, they’re not willing to pay the tax. I mean, when you look at Sam Altman’s proposal on universal basic income, which is, “Take a 2% tax on my company every year in terms of equity shares,” if you just did the math on that, after five years, maybe every year, each American would get about a $1,000. That’s not exactly universal income. So, I’m not for just taxing and giving everyone a check and saying work doesn’t matter. I don’t think that’s a healthy society, but they’re not even willing to do the first part of that, which is pay the tax. It’s just empty rhetoric. Krugman: Yeah. I always had a problem that these proposals for UBI—even if they raised enough money—the amounts are not enough to live on, and also just collecting what we used to call welfare is not a substitute for actually having meaningful work. So, let’s talk first about the California proposal for a one-time wealth tax, which you are supporting, but is amazingly controversial even within the Democratic Party. Tell me about the proposal and some of the criticisms. Khanna: There are three million people in California who risk losing their healthcare because of the big, ugly bill that Trump passed, which everyone acknowledges cuts Medicaid and cuts the subsidies in the Affordable Care Act. So, that’s a fact that everyone acknowledges—that these folks are going to lose their healthcare. The second fact that people acknowledge is that there are about 200,000 healthcare workers—nurses, aides, hospital workers—who are going to lose their jobs. And what this program, this ballot initiative, says is: let’s have a one-time 5% tax on billionaires. There are about 250 of these billionaires. Their worth, as Gabriel Zucman’s work shows, is about $2 trillion. That is the equivalent—and I’m not saying it’s the same thing—but it’s the equivalent of about half of California’s GDP. There are 250 people who are worth that. And if you tax them one time at 5%, you could literally raise about $100 billion and make sure that we cover all of these Californians, and that we don’t lose 200,000 jobs. The ballot designers went and said, “Okay, let’s just do 2%,” and that proposal was rejected. That would have raised $40 billion and staved off the crisis for two years. And so now we’re going to the ballot on this. These 250 billionaires, by the way, have made about 150% over the last three years. Their wealth has increased 150% largely because of AI, and yet they’re not willing to pay a 5% one-time tax to make sure that Californians don’t lose healthcare. Krugman: It always astonishes me how small the number of people that we’re talking about is, right? It still annoys me when people talk about the 1%, because we’re talking about a tiny, tiny fraction of 1%—just 250 people in California. But it’s a quite significant amount of money that could be raised by such a tax, right? So, the first question people ask is: won’t they all just decamp, leave? What would be the possibilities for avoidance—not evasion, since evasion is illegal, but avoidance is not—so that everyone won’t just pull up stakes? Khanna: So, first of all, we have actual data on this. We know that in Q1 of 2026, 85% of venture capital in America went to California—the highest ever. And this is months after the state ballot initiative was announced, and when you’re seeing reports of Sergey Brin and others leaving. So, in terms of capital investment into California, it has only increased since the announcement of the ballot initiative. And that’s obvious; no one thinks that the AI revolution is happening in Miami or happening in Austin. It’s happening in Silicon Valley. It’s happening in my district and the surrounding areas. So, you may be losing some individuals, but you’re not losing the capital into Silicon Valley, and that’s just what the data shows. The second thing is, okay, maybe you lose some of these individuals, but as Zucman’s work has shown, these billionaires are only paying about 2.5% of the total general fund in California. And the reason they’re paying so little is because they basically weren’t being taxed—I mean, they don’t have income. And so, if you lose a few people, it’s not some devastating blow to the tax revenue of the state, and you’re not losing the capital investment. And the final point is, if you haven’t moved already, you’re subject to the tax the way it was designed: it’s one-time, and it’s based on whether you were in the state by the end of last year or not. Krugman: Okay, that’s really important. It’s a retroactive tax, in a way. It is a levy, but that’s kind of okay, so there would be no possibility of people avoiding it. But I guess one criticism has been that while they can’t avoid this tax, they won’t pay income tax in the future. But you’re saying that they basically weren’t paying income tax before. Khanna: And the irony of it is, what’s the point of making money? Part of it is you get to do things that you want to do. One of the most basic things that people want to do is live where they want to live. And the idea that you would be a billionaire and then not want to live where your family is, or where you like, or where you grew up, or where you find it most fulfilling simply because of tax considerations seems to be quite ironic. And the truth is that there are a lot of billionaires who will grumble and say all of that, but aren’t going to be leaving California. Krugman: One of my favorite lines was about the attempts to turn Miami into the new Wall Street. There was some Wall Street guy who told Bloomberg, “The trouble with moving to Florida is that you have to live in Florida.” There’s a California version of that. So, this would be a one-time California thing. Do you have a vision for what an attempt to kind of make AI and just general technology less of something for a few hundred people would look like? What would America 2035 look like if we could have a Ro Khanna vision of policy? Khanna: We would have a new social contract. We would be taxing these billionaires and trillionaires, and that would raise about $4 trillion if you did it at 5% a year. You would have other basic taxes—have an actual effective corporate tax rate that is at least 28%; right now, they’re not even paying 21%. You would have capital taxed the same as ordinary income. You would have a step-up in basis. You’d raise that revenue rate— Krugman: We should mention “a step-up in basis.” Why don’t you explain what it means? Khanna: Well, that’s when these people die and their kids get their estate. But if they had huge stock appreciation in their lives, their kids don’t have to pay taxes on that stock appreciation. Krugman: Yeah. We’ve got a system in which a large part of capital income is basically never taxed. So you’re talking about eliminating that. Khanna: Why would we have a system that’s already capital-biased, where basically, if you have this capital, you’re making money in your sleep and you’re paying less taxes than someone who’s a doctor or nurse or a factory worker who pays ordinary income tax? That should be leveled. And when people say, “Do billionaires deserve what they make?” I don’t deny that they have built something often of value, and that they’re hard-working, and that they’re entrepreneurial. I’m just saying that the system—because of the way we tax capital less, because of the way that corporate taxes aren’t really collected, because of the fact that we don’t have a wealth tax, because of the way we have allowed the estate tax to operate—has allowed for the accumulation of extraordinary wealth beyond what a system with a rational tax code would allow. And so if we had a rational tax code, we’d have all of this revenue, and then you could do things like having universal childcare at $10 a day, having a thousand new trade schools, having free public college (which we had in California in 1960, and in many places as well), having a jobs program, making sure that we had a livable wage and union bargaining power, and expanding healthcare. I mean, I’m ultimately for a single-payer, Medicare-for-All system, but at least expanding it, doing things like dental, vision, hearing, and making sure that we had drug negotiation. All of this is to say something very simple: when I go around the country and I say Elon Musk has become a trillionaire, I’m met with huge boos. And when I talk about these tech billionaires, huge boos. That was not always the case in America where people would just boo successful business leaders. It should be a wake-up call that most people don’t think that their lives are improving, even though we’re generating more wealth than ever before. And my view is: why can’t we have a society, if we’re generating all this wealth, where most Americans feel like they have more economic security? And how do we do this? And the last point I would say is, I’m the nice guy. I’m 49 years old, about to turn 50. You know, the folks in their 30s, the folks who are winning in New York, they’re not as nice as me saying, “Okay, let’s just have a new social contract.” They want to rip the total system down. They’ve had it. They want a total revolution. And so, either we’re going to have this transformation, or we’re going to have a far more radical new generation that is totally upset at society. Krugman: So, you’re basically saying you can do these reforms, you can do something that will spread the benefits, create societal sharing, or the pitchforks and torches will be coming for you. Is that a good way to summarize it? Khanna: [Laughs] That’s my message. I’ll say pay it as an anti-revolution tax. But you know what? Even in my district, Paul, when I have town halls and I say, “What do you think of a billionaire tax?”—and I remember in one of the most affluent districts in the world—90% of folks will raise their hand: “Yes, it’s a good idea.” To your point, this is not talking about the 1%. I can’t do the math, but the 0.0001%. Everyone wants them to pay taxes. The doctors do, the investment bankers do. And then there will be people who say, “No, Ro, I disagree.” I say, “Why is that?” And they’ll say, “Well, why is it just 5%? I want 20%.” I mean, they’re not thinking of the wealth tax necessarily and what consequences that would have. But this is the sentiment, not just in Pennsylvania, Michigan, or Ohio; this is the sentiment in my district. And I think a lot of people are oblivious to the anger and the anxiety young people have. They can’t buy a house, they have huge debt, they don’t think their lives are going to resemble their parents’, and don’t understand why that’s the case in a nation that’s producing so much wealth. I mean, you’ve done a lot of work on this, and I’d ask you, in development economics and often in the developing world, there’s a trade-off between economic development and economic fairness, right? But it seems to me what’s so ironic in our case is that trade-offs don’t need to exist. We’re producing all this wealth; it’s simply a matter of values that we’re not allowing most Americans to have economic security. Krugman: That might be a good coda here. I mean, it is an extraordinary thing that we don’t seem to be facing a trade-off. It really is the case that in almost every respect except the wealth of a few hundred people, this kind of fairness agenda looks positive. So, how are you feeling about the politics of it? Do you think you’re getting traction? Khanna: I do. You know, they poured in $1 million-plus against me with my primary opponent [a Democrat who opposed the wealth tax]. And California’s a weird system: Democrats, Republicans, we all run together. I got 62%, my challenger got 6%, and the Republicans got the rest. So, I think that was a bit of a wake-up call for some of these folks that, you know, democracy still works. And I’m very, very optimistic heading into the midterms that this central idea of fairness is one that’s resonating with many people. And I am confident we’re going to take back the House. Krugman: Okay. The congressman from Silicon Valley says democracy may still work. I think that’s a really optimistic punchline. Thanks so much for talking with me. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe [https://paulkrugman.substack.com/subscribe?utm_medium=podcast&utm_campaign=CTA_4]

The Chips Are Down

A short talk in lieu of a post. Back on full duty tomorrow. Transcript: Hi, Paul Krugman here. I’m recording this on Tuesday afternoon. I just won’t have time to write a normal post for tomorrow when you’ll see this. And I would take the day off, except it seemed to me as if people might want some reaction to the carnage that’s been going on, at least in part of the tech sector and stock markets around the world, which has been pretty remarkable. It’s really tempting to say that it’s deeply meaningful. But in general, you want to be very cautious about putting too much stake in stock market events. I’ll come back to that in a minute. But it is striking enough that it does seem to be worth commenting on. So what’s happened? There’s been a fall in tech stocks very much concentrated in semiconductors. The Philadelphia Semiconductor Index was down almost 8%. on Tuesday. The KOSPI Korean Index, which is largely a semiconductor index, was down just about 10% sort of the previous day or the same day, you know, time zones. And there was a 2.2% fall in the NASDAQ. We’ve seen a lot of decline in tech stocks, things related above all to chips. What’s going on there? Part of the answer is that trying to understand why the market does what it does is, generally speaking, a mug’s game. In this case, however, it does seem that part of what’s happening, probably a large part of what’s happening, is that the tone, the rhetoric surrounding use of AI, and hence the demand for compute, has really shifted quite a lot just very recently. All of a sudden, we have a spate of studies that seem to show that, yeah, AI models allow people to churn out a lot more stuff, but the actual payoff to that stuff is much, much smaller than the volume of stuff that they’re churning out, most obviously lines of code, but just in general. AI lets you do much more, but how productive that is in terms of the ultimate goals of a business, let alone economic growth and quality of life is much more doubtful. On top of that you have a rather abrupt, jarring turn in business strategy. Up until just the other day a lot of businesses were more or less whipping their workers into using AI — you know, we’re going to judge you on how much you’re using AI whether or not you really want to whether or not you yourself think it’s valuable. We’re actually going to score you, we’re going to require that you do tokenmaxxing. And then, with compute getting scarce and with the price of chips having gone through the roof, suddenly the AI companies began charging and the marginal cost of using a lot of tokens became really, really very high. And suddenly companies were saying, oh wait, stop. We want you to economize on your use of tokens and hence to ultimately reduce the demand for compute. And that’s a sudden U-turn. This is part of a broader phenomenon, which I’m going to write about very soon, which is that there is a kind of lack of organicness to the AI boom. There are people who are using it because it looks great. They’re using it because it’s fun. I have colleagues who are just mucking around with Claude and finding some uses for it. But there’s also a large amount of Corporate America that thinks that this is the way it has to go. Fear of missing out, not by the individual investor, but by the corporate bureaucracy. And then pressure from the financial markets, saying, you know, your company better be on the cutting edge of AI or else. All of which is very fragile. It’s a kind of a bubble, but not in the normal sort of asset price form. It’s more of a kind of fad, almost a social delusion. And that, it seems likely, certainly got ahead of itself. Now, I’m reading way too much into these stock prices. And so let me give you a little bit of a caution on all of that. So yeah, the Philadelphia Semiconductor Index was down 8% in a day, which is one hell of a drop. But it was up 157% over the past year. So you want to have some perspective here. This is a stunning setback, but the fact of the matter is that over the course of a year, these stocks have been incredibly high-performing. The KOSPI, the Korean index, was down 10%, strictly speaking, 9.99%. But anyway, it was down 10%. But after that 10% fall, it was up 172% over the year. So we’re not talking about a catastrophe. We’re not yet talking about, we aren’t even talking about a Bitcoin level of disappointment for investors. But okay, it’s a break in the trend. The other thing we should say: the famous old line by my teacher and colleague, Paul Samuelson, was that the stock market had predicted nine of the last five recessions. There’s many more than that now. In fact, just over the course of the past year and a half, we’ve had two major stock market declines that turned out to be false alarms. There was a big decline in April of 2025 after Liberation Day, the Trump tariffs, because there was a lot of people just sort of, it’s chaos, terrible things may happen. While the tariffs have been a bad thing, they did not cause an economic catastrophe and stocks recovered the losses that they experienced then. And then there was another round of major stock declines associated with the Iran war. Of course, the Iran war has been a complete debacle and a disaster, and we’ll be paying a price for that for a very long time. But the consequences for short-run macroeconomics were more modest than many people, myself included, expected. And it appears that the Strait of Hormuz is going to gradually open because the United States basically said, okay, you win. It won’t literally say that, but in practice, that’s what we’re doing. So that is going to be over. So it’s not that uncommon for the markets to react as if something terrible is about to happen and be wrong. And so you really don’t want to assume — there’s a real temptation to assume — that because there’s so much money involved, a big decline in markets must be signaling that something is really very much amiss in the fundamentals, that where there’s smoke, there’s fire. And sometimes, no, there’s just smoke, no fire. So this might not be that big a deal. But it comes at a moment when the rhetoric really has shifted. You can see that there’s just a kind of a walking back. There was a really striking interview just the other day with Satya Nadella of Microsoft. Microsoft is actually a consumer of AI, rather than a producer. They have tools you can use within Microsoft products, but I think they run basically off OpenAI. And Nadella was pretty scathing about saying, you know, we can’t give all of this power and all this money to the big AI companies, and we should be using cheaper models. And hinted that Microsoft may start making use of DeepSeek, the Chinese model, which is less comprehensive. In general, the Chinese models are less comprehensive, but immensely cheaper, and among other things, just do a lot less computation. That’s kind of the core of why they’re cheaper. And in that case, the picture changes a lot. What bearing does all of this have on AI and the future of the economy and AI and the future of humanity? Well, part of what we’re seeing may not be so much disappointment in what AI can do as realizing that this extremely compute-intensive AI is not essential. And maybe you can still get whatever the big productivity benefits are and still possibly the big labor-displacing effects without quite so much compute. But it’s not entirely separate either. I think we need to be saying that this is what a quasi-bubble quasi-bursting might look like. Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe [https://paulkrugman.substack.com/subscribe?utm_medium=podcast&utm_campaign=CTA_4]

Arindrajit Dube on Wages

I often think of labor economics as a role model for the field: a subfield in which theory is disciplined by evidence and (most) researchers are willing to listen to that evidence even when it challenges their preconceptions. And hardly anyone does modern labor economics as well as UMass Amherst’s Arindrajit Dube, who has an excellent new book out. I talked with him about that book and the state of labor more generally. . . . TRANSCRIPT: Paul Krugman in Conversation with Arindrajit Dube (recorded 6/18/26) Paul Krugman: One of the most satisfying parts of economics, which doesn’t get as much attention as it should, is labor economics. It’s obviously important. Most of us work for a living, or at least pretend to work for a living. But also it is a field, a subfield you might say; more scientific than almost anything else in economics, really evidence-based. You’ve had multiple revelations where the data have actually changed the way people, myself included, have thought about stuff. And among the most effective, prominent practitioners of modern labor economics is Arin Dube [https://substack.com/@arindube], who has a new book called The Wage Standard [https://arindube.com/the-wage-standard-book/]. And I thought we’d take a break from all the other stuff going on and talk about Arin’s work [https://arindube.com/published-articles-and-book-chapters/]. So hi, Arin. Arindrajit Dube: Hi Paul, nice to see you. Krugman: Yeah, welcome to my virtual studio. Why don’t you talk just a little bit about The Wage Standard and what you’re trying to do, and then we can get into the broader labor economics issues? Dube: Yeah. So, I wrote a book. Here it is. Krugman: By the way, we mostly don’t do that in economics; we write 5,000-word articles. Dube: Exactly. Paul, of course, you’ve written many amazing books. But economists don’t usually write books. We publish articles. Krugman: That’s right. Dube: And so it was actually a big deal for me to sort of think about, did I want to write a book? And I kind of went for a number of years and I said, like, “Oh, well, I’m not writing this book for other economists as a main audience,” though of course, I’m very happy for other economists to read it, but I wanted to try to have a broader conversation, and I needed to be clear that I wanted to know what I was going to say in that conversation. And so here’s basically the main point of the book. The main argument is that Americans deserve a raise, that most American workers actually could get paid more and should get paid more. And there are really good reasons to think that. You know, the market has not delivered what could be a sustainable but higher wage for those in the bottom and lower part of the income distribution. So that’s basically the core idea. And I try to bring in what we know about the research that I think has really blossomed in the last decade or two decades on a bunch of topics when it comes to understanding the labor market. I was writing this book at the beginning of the pandemic and especially 2021. And it was really interesting because this was one of the more remarkable episodes in the labor market that really highlighted a lot of things that I was actually talking about in the book. Of course, it did it in a very messy way, because there were lots of things happening during that time. But it made for a very interesting process where I felt like I was writing the book and the world was writing itself outside, which was both exciting and challenging. Krugman: Okay. I said that labor economics has been revelatory. When I was not young, but younger, I think most economists circa 1990 would have thought of the labor market as just being a market of supply and demand. And where they crossed determines wages, and there’s nothing much you can do about it. And if you try to change it, you do so at your peril; bad things will happen. And as you say in the book, and in many of your writings [https://arindube.com/published-articles-and-book-chapters/] that I’ve been following on all this stuff, that’s something that really, really changed. You want to talk about what happened? Dube: Yeah. So, one really interesting thing is to think about how wages are set. And we could start with the basic supply and demand story, which basically is that there’s demand for workers of different skills and then there’s supply. And depending on the supply and demand conditions, you’re going to have different wages, a different skill price. And let me be clear, I think there’s a lot of important aspects of that that actually matter, but it’s also incomplete. Because here’s the thing: if the market really worked like the textbook supply and demand story, basically workers of a particular type would just get paid the same—that’s the skill price. But in reality, it turns out companies have a substantial degree of discretion in setting pay. And you can start to see this by just looking across companies hiring similar workers, but choosing to pay someone different. One simple example to start with is FedEx and UPS. Workers may be driving very similar routes delivering similar packages, but it turns out FedEx pays lower than UPS. UPS has maybe 37% of the workers; a few years back, they were paying less than $20 an hour. For FedEx, it was more like 60%. And so, of course, that’s just one example, but you have others. Like, look at Walmart versus Target. It turns out that Walmart tends to be paying somewhat lower than many of its other similar, large retail competitors. And the list goes on. But this is not a new observation. Labor economists who were studying this in the mid-20th century had gone and collected surveys and understood that, you know, factories in the same labor market could be paying different wages. But here’s what was not fully convincing: how do we know that it’s not maybe somewhat of a different skill mix? Maybe these companies are similar, but they’re hiring somewhat different types of workers the pay difference reflects that. So that argument held sway for decades until we had better data. And this is where what you say about labor economics, I think, really is right. And part of that has been our ability to really get much more granular and high-quality data, including administrative data linking pay for virtually most people in the labor market. And you can track them as they go from company to company. So you could say, “Hey, actually, what happens if the same person moves from Walmart to Target? Do you see they’re getting a higher pay?” Because you’re holding their skill set constant there. And so this kind of data and this sort of research design helped establish that actually, no, it turns out there is a substantial amount of variation in pay that comes from companies choosing different types of pay policies. And that’s a big part of the argument in my book, more broadly, that there are choices we have made. You know, if we wanted to go back and look to see what’s happened to productivity and what’s happened to wages since 1980, productivity has grown much more strongly than wages—maybe not as strong as it did in the postwar era, but nonetheless, it grew a lot more than the pay for the typical worker, certainly pay for those at the bottom. And one of the arguments that I make is that this reflects choices made in a variety of places, and that starts from choices at a corporate level, different companies choosing different pay policies, all the way to policies that are being made by state and federal government. But the core part of it is like, why does that make any sense? It doesn’t make much sense to talk about companies choosing pay policies if the market is just your supply and demand. There’s no role for saying, “Are you doing the high-wage strategy or a low-wage strategy?” That’s a nonsensical question in a perfectly competitive market. But it’s an absolutely sensible question to ask when companies have some degree of wage-setting power. You know, economists have a funny word for this, right? Monopsony [https://www.aeaweb.org/articles?id=10.1257/aer.20200678&from=f]. It’s a funny word. But the basic idea is really straightforward. You know, companies are making a choice there. You could go for a higher wage strategy or you could go for a lower wage strategy. Now, if you’re paying lower wages, you are going to have some more people quit and you’re going to have a somewhat harder time recruiting new workers. But the key thing is, it doesn’t mean that if you pay below a hypothetical market wage, everyone bolts, right? So you actually face a meaningful tradeoff of exactly how much more to pay or how much less to pay, and different companies end up choosing different amounts. And this is also where—and this is even more recent, really in the last, you know, 5 to 7 years—we have seen a really big increase in research on the topic of monopsony, so we can really better understand exactly how much wage-setting power companies have. And it just sort of turns out that if a company’s choosing to pay, let’s say, a 10% lower wage, they’re going to have higher quits. Maybe about 14% higher quits. I just finished doing a review for the Journal of Economic Literature, and that’s basically where it sort of lands, and the quit rate is just not super sensitive to wage. So this gives employers a degree of discretion. And they’re going to do a couple of things that are important. First, different companies may choose different strategies. That is what creates these differences across companies. And the way companies have made those choices has really been different in the arc of history. Krugman: Okay. So that’s where actually I came in on this topic, which was a classic paper by Claudia Goldin and Bob Margo [https://www.nber.org/system/files/working_papers/w3817/w3817.pdf]. You know, I grew up in a world very different from the world where you grew up, with much more equal wages than we have now. But it turns out that wasn’t something that gradually evolved. It happened in a few years, basically during the New Deal and World War II: the Great Compression. Dube: Absolutely. Yeah. And so that’s a story that has been told. But I also tell it with sort of a labor market focus. And a key part of that was actually creating a set of collective bargaining institutions, starting with the National Labor Relations Act; we had an upsurge in union organizing. And I highlight some more recent work that has been really careful to try to actually understand the causal effect of that unionization, for example, on the wage structure—work by Henry Farber and coauthors that really documents this very carefully. And it’s not just in the National Labor Relations Act. It’s also during the war. The Roosevelt administration actually helped encourage an increase in unionization. And that had a lasting impact on pay setting. So this is basically where, after the end of the war, we had what is called the Treaty of Detroit, which was the landmark agreement, as coined by Fortune magazine, between United Auto Workers and the big three automakers, which spills over into the nonunion sector and other parts of the economy through this pattern bargaining process. But all of that created something very different than we had in the early 20th century. It basically created a set of mechanisms that helped ensure wages stayed relatively well tethered to overall productivity. And wages, both at the bottom and the middle, stayed tethered to the top. There were lots of issues. I don’t want to romanticize the 1950s or early 60s. But when it came to how wages were determined, it just meant you had broader based prosperity. Krugman: So in the wage structure there are social institutions that set norms and so that’s part of it; the thing is much more sort of a surface on which you can move back and forth based on institutions. That was one of the lessons I took from the Great Compression. And now you’re saying that there’s much more of that. And also that you can get away with it. I would say that if somebody now proposed something like what happened during the New Deal and the war, The Wall Street Journal would be running nonstop, fire-breathing editorials about how this will destroy the economy and lead to mass unemployment. And your point is that it doesn’t, because of the range of discretion that companies have in setting wages. Dube: Exactly. And those range of discussions in some cases evolved and were forged in the fire of union organizing and militancy in the ‘30s and ‘40s, and other times. There are ones that come up in an era where it’s largely nonunion workplaces that are expanding—for example, Walmart in the 1980s—and in an era when there’s very different ideologies about how businesses should behave. So the entire shareholder primacy revolution that sort of happens in the ‘70s and ‘80s, turns out had a real impact on how wages were set. I talk about this in the book. Research by Daron Acemoglu from M.I.T. and coauthors find a really interesting fact. So it turns out that actually, most businesses are not run by people with a business school degree. I actually didn’t know that. Even today, that’s actually the case. But the share that actually have a CEO with a business school degree has been rising quite, quite steadily. So what happened, for example, in the ‘80s or the ‘90s, when a company moved for the first time to a CEO with a MBA? Sometimes it’s because maybe someone retired or even died, you know? It sounds kind of grim, but actually it makes for a good natural experiment where, almost like by random, you introduce a CEO with a MBA for the first time. And what’s really interesting is that it leads to a very clear reduction in pay: about a 6% reduction in pay for workers overall, and about a 9% reduction for blue-collar workers. So the labor share falls by about five percentage points. That’s the amount of money going to workers versus owners. And of course, CEO pay rises. Now you may say, well, maybe that happens, and that’s just like the cost of running the business better, right? MBAs probably raise productivity. Wrong. It has no effect on productivity compared to comparable businesses. So it’s purely a rent transfer, as we say. Meaning, you’re taking money from one group and giving it to the other. In this case, the money is going towards owners of capital and high-income managers, and away from the workers, especially blue-collar workers. Krugman: Wow. I always thought that the Harvard Business School was evil, but I didn’t realize it was quite that evil. So that’s pretty impressive. That’s really a significant impact on sort of the nature of our society that comes from almost an academic doctrine. Dube: Absolutely. This is sort of like ideology. It’s ideology, not skills that is explaining this important change here. And, in fact, this turns out to have played a non-trivial role in the fall in the labor share in the United States, for example. Krugman: That’s a really funny thing for me. Economists are supposed to be hard-headed, but in fact, if you really look at the data, and really do economic science, it says that ideology matters a lot. Dube: That’s right. And that’s one of the most important things. The late economist Alan Krueger once actually told me—well, he told us on Twitter in a conversation with me—that the idea that core theory is falsifiable and testable is a really big idea. And that is exactly right. Because if you start with saying, “Well, I’m pretty sure the labor market works this way,” and then I come and tell you, “Oh, actually, you know, it turns out this MBA CEO comes in and pay falls,” so you’d say, “Well, there’s got to be a really good explanation for that that is consistent with my model.” But it’s certainly not because the model is false, because it can’t be. And that basically highlights, in some ways, the conversations we had about the role of the minimum wage, which is something we could talk about as well. Krugman: I want to come back to wage structure for a second. When I say that labor economics is especially good or virtuous, or in some way special, it’s because there’s really this use of natural experiments where something happens and just looking at it—at least on a couple of major occasions—it has contradicted what most economists believed. And I do want to come back to wage structure, but minimum wage is the classic. It’s an extraordinary story. You could probably tell it better than I can. To some extent it’s where you came in, but it’s definitely where Alan Krueger and David Card came in. So let’s talk about that. Dube: Yeah. So maybe one thing just as a background for listeners: the United States, of course, introduced a minimum wage as part of the Fair Labor Standards Act in the 1930s, and during the ‘40s, ‘50s, ‘60s, and even ‘70s, the minimum wage was updated fairly regularly. You could have a Republican president or a Democratic president, or Congress, but it was generally updated and kept up with sort of like the typical or the median wage and even overall productivity and so on. That all changed in 1980, when Ronald Reagan came into power and he didn’t increase the minimum wage; he refused to, because he thought this was a bad idea. And this was also a time in the early ‘80s when, of course, we had real, still high inflation. So the combination of the fact that the nominal minimum wage just stayed put and there was inflation meant the actual real value of the minimum wage fell a lot. And so that had a really important impact on wage inequality at the bottom. It reduced pay for roughly the bottom 30 to 40% of the workforce. And so we went for basically a decade almost at this time without raising the minimum wage. And we have now had several of these long stretches. The most recent one is particularly long: it’s 17 years since we have actually raised the minimum wage. And so that’s a very dysfunctional way to set policy. But here’s the silver lining. The silver lining of dysfunctional policies is that you have natural experiments. So what happened starting in the ‘80s is that states started to come in and raise their own minimum wage. And so you started to create all of these little natural experiments. And this is really what began this literature—it’s called the new minimum wage literature—which started to look to see, ‘hey, New Jersey raised its minimum wage in 1992, but look, neighboring Pennsylvania did not. Eastern Pennsylvania and New Jersey are not super different; they’re right next to each other. There’s a lot of similarities, maybe sharing similar types of economic shocks and so forth. Why don’t we compare to see what happened?’ And this is exactly what Alan Krueger and David Card did [https://davidcard.berkeley.edu/papers/njmin-aer.pdf]. They went and surveyed fast-food restaurants on both sides of the state border, and then went back a year later and said, “Well, let’s take a look. What happened? Didn’t we actually see a lower number of jobs in New Jersey?” And what they found really shocked the profession. It turns out, not so much. In fact, not really anything we can see. And, you know, this was really kind of an earth-shattering discovery, because it challenged the core model of the labor market: the labor market is supply and demand, that’s it, there’s not much more to it, just like any other market. And this was really hard to square with it. And I think this led to kind of an emergence of a whole literature. And there are also things written that are very critical and, you know, not very polite about Card and Krueger. But, you know, it led to a lot of debate and also follow-up work, which is the way science progresses, if it’s doing the results that they’re replicated— Krugman: Yeah, the results have been replicated now many times, and you’ve done a fair bit of that. Because there are so many states and so much asynchronous minimum wage increases that you get results. And people might say, “Oh, it’s just fast-food workers in New Jersey.” But it turns out that we have now lots and lots of evidence that says, hey, these minimum wage hikes do not actually seem to cost jobs, or at least not significantly. Right? Dube: Yeah. So I think that my sort of contribution to the literature in our 2010 paper could be probably summarized by the word “many.” We see many of these and for many years, not just one short impact. And what we found was very much along the lines of what Card and Krueger had found. And even more recently, we updated that with more data, and we’re continuing to find very similar effects. In fact, just a couple weeks ago, I put out a Substack post [https://substack.com/@arindube/p-201524189] that really sort of leverages, in some ways, an important fact related to what I said—that we’ve not raised the federal minimum wage for 17 years, and that means 20 states have today a $7.25 an hour minimum wage, which economically is sort of equivalent to not having any minimum wage. It’s so low that it barely affects anyone. So we’re running this basically just more than a generation-long experiment where you have about half the country—a little less than half the country—with essentially no minimum wage, while the other half raised it sometimes quite substantially, or comparable to some of our European peer countries. And that creates this very sharp divide. But it also creates a divide that makes it very easy to see what is going on, because you don’t have to do a lot of fancy, you know, econometric statistics to really tell. Just plot, for example, as I do: what’s the restaurant wage in these two groups of states? Well, it turns out there’s a big gap that’s opened up, like maybe an 8 or 9% average earnings gap for restaurant workers. What happened to restaurant employment? It looks pretty much like a flat line. They’ve been growing very similarly. Per capita, restaurant employment has been very similar. And that just makes it very hard to look at that very simple fact and say, “No, I’m pretty sure it’s killing a lot of jobs,” because where is (the data that proves) it? I do a bunch of other things, but this sort of highlights how, for a very long, long stretch of time, we’ve split the country in some ways in half. And by the way, some of these states that have raised the minimum wage have also been more Republican-leaning. A lot of times when the minimum wage is on the ballot, it’s in red and purple states. In fact, this week in Oklahoma for a variety of reasons it didn’t pass, but it has passed in Nebraska, Florida, Arizona, and so on and so forth. So I think this sort of highlights, in some ways, one of the partial successes because we have been able to raise the minimum wage in about half the country. And as we have learned more, I think it has led to policymakers actually experimenting with potentially higher minimum wages. And that has, I think, helped create and raise wages at the bottom, partly offsetting the growth in inequality that had occurred over decades after 1980. Krugman: So I read the Substack post and I noticed that you had some, I would say discreetly acerbic comments for some of the people who refused to believe it. Or maybe it was a later comment of yours. But there have always been some economists who keep on insisting that this cannot be right, either because they believe in Econ 101 and that demand curves slope down, or at least implicitly, a little bit of a political critique because obviously a pro-minimum wage argument or something that seems to say that raising the minimum wage is okay has a kind of political side. But what’s actually striking is how little of that there is—that labor economics makes economics look good in the sense that if you have kind of overwhelming empirical evidence that contradicts people’s preconceptions and maybe even their political slant, people actually mostly go with the evidence. Am I being too idealistic? Dube: I think that’s generally right. I think in general, people have certainly updated their views. It’s not that there’s only a single answer to what does the minimum wage do, regardless of how high it is or something like that; it’s going to differ. And so, there are disagreements like, “Well, where is the turning point?” But that’s part of good science. But to be clear, there will be studies that claim that no, actually the minimum wage always causes job losses. And even just this week, there was one that sort of argued that if you don’t control for population differences, if you just look at the number of jobs, well, the number of jobs in California has grown less than Texas. Most economists, of course, look at what share of people are actually working—that’s the employment rate. But if you simply look at the number of jobs, that actually might suggest that it’s falling. Now, here’s the thing: it has been falling in these minimum-wage-raised states compared to the 20 states that haven’t raised it for four and a half decades. That’s largely driven by college-educated workers, because, of course, we have more college-educated workers moving to the Sunbelt. So, I think this is sort of a silly argument, but it is an argument that has been made. But it goes to show that there will always be studies. But if you look at the body of evidence overall, it suggests that the typical study finds very small employment effects, and especially in studies published in the last ten years, it’s basically around zero. And I think that has had an impact. And I think economists have sort of updated—I would say probably especially younger scholars. Sometimes, you know, as we get older, maybe it becomes harder for some of us to revise our priors, but younger scholars are therefore really important. Krugman: Yeah. I occasionally find people digging up some old quote of mine where I said minimum wages reduce employment, and it’s a 30 or 35-year-old quote, and I get to use the line, “When I see new evidence, I change my mind. What do you do, exactly?” There was a flurry of stuff showing up in my inbox claiming that California raised the minimum wage and it’s a disaster, and the evidence is in. But I guess the evidence actually goes the other way now, right? So what happened in California? Dube: Yeah. So here’s the interesting thing. California established a sector-wide minimum wage for the fast-food workers, higher than the overall minimum wage. So this is a case where this is applying for larger chains with 60 or more locations across the country to have a $20 minimum wage. And at that time, I think the minimum wage was $16 overall in California. So what’s interesting is this is much higher. And it’s also partial coverage, meaning, you know, only part of the low-wage workforce is covered. So you could actually imagine there’d be more theoretical reasons to expect a more negative employment effect, because you can switch—maybe you can relabel workers who are delivery workers as, like, outsourced and so forth, and not covered. So anyway, well, you’ve now had about five studies that have looked at it, including one that I did. And, you know, there are some differences across the studies, but really, it turns out a big part of that is what kind of data is used, in a really surprising way. So there are two kinds of administrative data sources that are really government data accounting based on actual payroll records: the QCEW and the QWI. And I know this is going into the weeds a bit, but it just turns out that one better captures the number of jobs at a point in time, and then the other looks at how many people are in a particular pay period. Now, this increase in wages also raises turnover because these are much better jobs now, so you have less people cycling through the same number of positions. And so there’s one data set that looks at a whole pay period; it seems to find a small reduction in employment. The other looks at a point in time and finds no change. And it turns out this is driven by the fact that these jobs begin so much better: people are not quitting so there’s just a lot lower turnover. But generally speaking, the overall range suggests that the employment effects were quite small—small positive in some cases, small negative depending on exactly how you do it—very large wage effects, and a very sharp reduction in turnover. So even in this very specific and very sharp and high minimum wage increase that serves as an experiment, if you will, it doesn’t show any clear predictions and projections about job losses so far. Krugman: Okay. I want to cycle back just for a couple of minutes to the wage structure issue, where, again, there’s this kind of historical story which says that the United States became relatively egalitarian because of New Deal era and 1940s policies, and then became a lot less equal. It’s funny. I always blame what happened after 1980 on Ronald Reagan, but you’re saying it’s partly the Harvard Business School, but there’s also cross-national comparisons. Talk to me about Sweden and then maybe I’ll weigh in. Dube: Well, I think we’ve both been writing about Europe and both visiting there. And so I was in Sweden for a while and partly talking about this book and also doing some of my research. What’s really interesting is that Sweden, of course, has been historically held up as sort of an egalitarian country, but it’s also gone through quite a bit of reforms in the ‘90s and 2000s, including scaling back partly some of the welfare state. And so I was really curious, like, where are they in terms of inequality? And it turns out that, yeah, if you look at their tax and transfer, they actually redistribute less than they used to. But the starting point, which is how much inequality do you have to begin with from the pay structure, that is still much lower than most other high-income countries. And the United States, of course, is the other extreme. So, just one example: the gap between someone at the 90th percentile and the 10th percentile—that kind of is a good measure of wage inequality—between like the early ‘90s and today, it went maybe from 1.8 in Sweden to 2.2, a little bit of an increase. In the US, starting off much higher to begin with, it went from like 3.7 to 4.8. And it actually increases even more if you look at a broader time horizon. So it’s just a really important thing to understand: like, why is that? And we can go back to, well, is it because the Swedes are just a lot more similarly skilled between each other? Because that would have to be the reason. Or is there something else? It turns out it’s mostly something else, and that has to do with collective bargaining. And this is also a really important aspect of where people don’t fully also appreciate one really interesting and important fact, which is that in the United States, when we ask, “Is your job covered by union contract?” that question is almost the same as asking, “Are you a union member?” And of course, union membership in the US, maybe in the private sector, having something like, you know, 35% back in the ‘50s, is today like 6%. And so barely anyone overall is covered in the private sector by a union contract. But here’s the interesting thing: if you went to France and asked what share of the workforce are union members overall, it’s like 10%. But 98% of jobs are covered by a union contract, right? Because what you have is sectoral bargaining. And this is a key thing which I talk about in the book. Sectoral bargaining was something that the US never really had. We basically had organizing and negotiating between the union and the employer at a company-by-company, sometimes store-by-store or factory-by-factory level, versus in a lot of our peer economies, what happens is workers and their representatives bargain with the employer and their representative at a sectoral level and at a national setting. Krugman: Basically, sectoral level means that instead of getting a wage agreement with XYZ contractors, you got a wage agreement with the whole construction industry. And so even workers who are not members of unions, even workers who work at companies that have hardly any union members get the benefit of the negotiation. And so, Sweden’s an interesting case where they actually have high union membership. Dube: Yeah. And Nordic countries generally, partly because of the way unions help provide some additional benefits, including unemployment benefits—that makes it more rewarding to actually join a union. But their coverage rate is even higher. And in countries like France or Austria, the coverage rates are substantially higher. So as a result, we have seen wage inequality not rise as much in a lot of other countries. And in Sweden, it’s actually been particularly low, and they’ve actually been able to retain it. And so that is a really important contrast. So one of the things that I talk about in the book is that we can’t get to sectoral bargaining at the national level without a substantial change in labor law. And look, the reality is that past attempts at changing and reforming labor law have not fared well. But the good news is that we can actually get to pay standards at the industry or sector level state-by-state. And what’s even more interesting is we actually have started to see some of this already, and this really leans on a model that actually now comes from a different continent: Australia. Australia has basically a national-level setting of wage floors by industries and, within industries, by different types of jobs. And that’s done not through collective bargaining—they have collective bargaining on top of that—but this is basically a sector-wide floor that’s set. And again, Australia has lower wage inequality, substantially lower than the United States. So, I talk about what the U.S. might look like if we had states do something similar. And like I said, I started to write this book in 2021. I actually had put out a survey proposal back in 2019. But in the last five years, we have a number of states that have started to implement some of this. For example, Minnesota has a sector-wide board that has representatives from workers and employers and the government to set pay in the nursing home sector. We have California that has a healthcare-wide minimum wage. Even more recently in the state of Washington we have a childcare sector board that just in the coming months will be issuing a set of wage floors in that sector. So we’re starting to see experimentation like this. And that’s important because if we’re trying to rebuild wages, not just at the very bottom that the minimum wage can really hit, but also those towards the middle, especially in the childcare or healthcare sectors, these kinds of jobs, you can actually raise pay there through these sectoral initiatives. And I’m very excited to see more being done along these lines, especially because, you know, I don’t know what can be done in Washington, DC right now. But we don’t have to necessarily wait around for a better day to come in DC. We can actually start doing some of this now, more or less. Krugman: So, it’s like the minimum wage is where half the states can do a lot on this broader issue of a more equal and better wage structure, even if things are totally stymied in Washington. Dube: That’s right. And that’s one of the nice things about federalism in the U.S., that we do actually experiment at the state level. And in the best cases, some of the better experiments actually get adopted. It could also be that some not-so-great experiments are done and get adopted. But that’s the nature of democracy. Krugman: Yeah. One of the areas where you really did a lot of the research and it was revelatory, but also, in a weird way, something where I found a lot of my sort of lefty friends not willing to believe it, was about wages post-COVID. So, let’s talk about that for a second. What happened? Dube: So, around 2021 and 2022, of course I looked at wages like any labor economist. I started to look around and find something that was puzzling because, as we’ve known for a long time, wages have been rising faster at the top than the middle and the bottom. And this is the growing wage inequality story. But it was looking like wages right after COVID, when we were reopening, a lot of people didn’t have jobs, especially in the hospitality sector—we’d sort of shut down part of the economy. So if in January 2020 someone said, “We are going to shut down some parts of the economy for a while, especially with low-wage workers, and then we’re going to reopen,” it’s like—here’s your quiz. If I could have given my class this question, like, “What do you think? What’s your prediction about what will happen to wages for low-wage workers?” I would have said wages would probably fall due to lower demand. And instead, it looked like wages were rising more at the bottom. And so this is what David Autor—my coauthor on this along with Annie McGrew—and I called The Unexpected Compression [https://www.nber.org/system/files/working_papers/w31010/w31010.pdf], meaning the compression of wages, reducing inequality—which is exactly what happened in the aftermath of the reopening after COVID, and led to a surprising amount of wage growth at the bottom. And it reduced maybe a quarter to a third of the increase in wage inequality that had occurred between 1980 and 2019. And so this was really very, very striking. And we asked, well, why? And the reason is because we had a very tight labor market. There were a lot of job openings chasing workers and, as a result, it increased workers’ leverage. And it’s not just that there was more demand for workers—that’s true—but we also saw people leaving jobs. So we had quits from particularly low-paid jobs. This goes back to the issue of different companies with different pay policies: well, companies that were actually going for a low-wage strategy found it harder to hold on to those workers, and wages actually then rose more there. And this is the increasing of intensification of competition in the labor market that actually really helped boost wages. In many ways, this was like: if we want the market to actually work well for workers, you need the market to be relatively tight. And in writing the book, what I’ve found was that, it just turns out between 1980 and 2019—up to just before the pandemic—there were about seven years of a tight labor market. We used to spend a lot more time with tight labor markets in the postwar era before 1980 than we did since. And this turns out to be another important part of that equation of: what did it take to have broad-based wage growth? Those seven years—if I just, like, snap my fingers and just erase those like some evil genius villain, what would happen? Well, if I went to the top of the pay distribution, it would make very little impact; the average wage growth would fall from 1.1 to 1%. Not much change. At the bottom, it would go from already a small 0.3% average real wage growth to zero. So the entirety of the wage growth at the bottom between 1980 and 2019 happened in a handful of years that was basically close to full employment: the late 1990s and the late 2010s. Under Trump I, those years also saw significant compression. And this is why the post-pandemic period was a really important one. But it’s also very messy because, as we know, this was also a time of a large increase in inflation, a chunk of which was, by the way, global in nature. But nonetheless, people were very reasonably unhappy about it. So it makes for a difficult thing to extract the signal from noise. And this is why in the book, I really highlight also why even these other periods in US history were so important in actually raising wages, highlighting really the critical pillar that full employment plays if we are trying to rebuild the wage standard. Krugman: Okay. What do you see happening now? My comment sections are full of, “Oh, it’s a K-shaped economy —the top is rising, the bottom is falling.” And people really refuse to admit that the compression ever happened. But also there are all these fears about AI. Everybody wants to know what AI is going to do, and nobody can honestly say that they know. But do you have any views on where we’re going right now? Dube: Yeah. So the easiest part of that to answer is just to start with wages. The good news is that much of the compression that we saw has remained. The bad news is that the last year and a half has seen some take-back. Basically we have seen lower wage growth at the very bottom. The particularly bad news is, of course, from this year, when higher inflation has erased, as of now, pretty much the entirety of the real wage growth since Donald Trump took office. And so, that’s really bad. That’s not just at the bottom, but just generally. And so I think wages are not doing great right now and that part is largely just an unforced error of where we are today with having raised inflation, literally having caused a supply shock—inflation purely out of discretion, right? But yeah, the other part—and this is the longer part and harder to say—is what we see not within pay, not wage inequality. Wage inequality has been an important part of inequality overall in the last 50 years. But wealth and the division between capital and labor. And looking into the future, that’s where my worries lie: where are we going? And I guess, the worrisome part of me thinks that, broadly, there are two possible ways that the current AI structure can go. My modal view is probably that I think it’s going to lead to moderate productivity gains. And how well that translates into wage growth partly depends on what we do in our other policy and institutional choices. But I think it can potentially be a source of possible wage growth. The other—and these are two very polar cases—well, this is going to be the singularity. I tend to be skeptical of that view of an artificial general intelligence that really just dramatically transforms the world as we know it. It’s possible—anything is possible—but the other possibility is that actually there’s a bubble and then it bursts, and that leads to a downturn. And that downturn could be harmful. So, there are all of these possibilities and I, of course, don’t know which it might be. But there are risks on both ends where what I do know—and this is what I sort of talk a little bit about in the book—is that, again, it goes back to the word “choices.” I don’t think we need to think about what AI does as something that just happens to us. We can choose to have institutions and a governance structure that can regulate that. You know what’s interesting, going back to Sweden, I was talking to folks in the labor movement there, and they, of course, have contractual language that requires negotiations over technology, and that includes AI. Where that goes is unclear at this time—it’s still early days—but that’s the kind of thing that we need to think about. So imagine having sectoral boards in the health care sector that, among other things, also sort of has regulatory language around how AI is used and how it can affect the workforce. So we need to think creatively, of course at the national level, but even more locally if necessary, about what that governance looks like, and understanding that this is part of the choice that we can make and not simply, you know, take the technology as just a force of nature that we just have to live with. Krugman: Okay. So, choices. We can actually shape our future. Probably won’t, but can. Anyway, thanks so much for talking to me. And I’m sure we’ll want to come back in a couple of years and see how all of this played out. Dube: Sounds great. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe [https://paulkrugman.substack.com/subscribe?utm_medium=podcast&utm_campaign=CTA_4]

Power and Geopolitics After Trump

Transcript Hi everyone. Instead of a regular post today, I’m going to put up a video. There are a number of reasons why I feel like doing that instead of the usual. One of them is that this is a dry run for a talk that I will be giving virtually later today. There’s a conference on the economics of digital transformation taking place in Croatia, although I’ll be doing it remotely. And they have asked me to talk about global power, geoeconomics, and Europe. Those are all themes that I’ve been thinking about quite a lot. And today’s miniature talk is an opportunity to try talking through those themes. And the way I want to structure it is as what has changed, at least in the way that we all now understand the world, since, well, basically since Donald Trump returned to power. That’s an American-centric point of view, if you like, but it’s kind of a natural bracket. And of course, everything really has changed, mostly not for the better, under Trump. And it has, as it turns out, big implications for Europe as well. So let me just try to get into that. Start by talking about the world as it seemed to be at the beginning of 2025. There were, and still are, three great economic superpowers in the world: China, the United States, and the European Union, in that order. If we measure GDP in 2024 at purchasing power parity, which is basically just adjusting for differences in national price levels, you had China with a GDP of something like $37 trillion, the United States with something like 29 trillion and the EU with something like 28 trillion. That last bit may be a bit of a surprise — maybe all of it is a surprise to some people — but yes, in terms of the actual amount of stuff it produces the Chinese economy is now substantially bigger than the US economy. And the European economy is almost the same size as the US economy. If you think that Europe is backward and poor and helplessly dependent, it’s not. It is an economic superpower. And in fact, by this measure, Europe has basically maintained this position of being about comparable to the United States for a long time. This is a whole other topic that I’ve been writing about and will continue to write about in the future. In that world, basically, two things were really kind of striking. One is that the United States seemed to perceive itself as being a dominant power, even though China was bigger and even though Europe was about the same size, and Europe acted as if it seemed to perceive itself as not being in the same league, as being not a superpower at all. All of that may be changing, and events are part of the reason, so let’s talk about the events. Now, the most obvious: the United States just lost a war. Just lost it bigly, as Trump used to say. It’s an astonishing story. We went up against Iran, which was definitely not a major military power or a major economic power, a sort of middle-ranked power, if that, and utterly failed to achieve our war goals. In the process, we inflicted a lot of damage on the world economy and depleted our stocks of high-tech weapons that will take years to replace. Altogether, immense damage was inflicted on Iran, but Iran has clearly emerged stronger. The United States has emerged humiliated. The attempts by Trump and minions to pretend that it was a victory don’t help. They only make the United States look not just humiliated but delusional. So that’s a big deal. It has large implications for US power and influence going forward as well. To explain those implications, it’s helpful to talk about one of the other things that really dramatically changed with Trump coming back into office, which was trade policy. The United States began really seriously trying to throw its weight around. Liberation Day, the tariffs on everybody, basically trying to pressure all of the world into giving us various kinds of concessions. Give us what we want or we won’t let you sell in our market and everybody needs to sell in our market. Okay, what we learned from now well over a year of trade war is that U.S. power in that dimension is substantially less than certainly than Trump appeared to believe it was. And just in general, trade, leverage and trade negotiations, leverage in trade disputes has less to do with market access than a lot of people assumed and more to do with supply chains, with getting stuff that you use in your economy, means of production, not in the sense of capital, but intermediate inputs or just inputs in general. The nation that has more ability to strangle its rivals by cutting off supply chains is the one that has the upper hand. So it turns out, and we had already learned this from the trade stuff, that China with its dominant position in rare earths and some other crucial industrial materials actually had a stronger hand than the United States. Yes, we have a big market, but loss of a market can be offset to some extent by domestic stimulus, domestic support programs. Not having crucial industrial materials is not so easy to make up for. So we learned that the power in international trade disputes in a fundamental sense reflects power over supply, not power over demand, which is something economists have always tried to say. The point of trade is not to sell. The point of trade is to get stuff. You sell as a way to pay for things that you get from other countries. But now we have it demonstrated very obviously in real life. So that in itself meant that we’ve had a blow to the perception of US power. It turns out the US market is not almighty; access to the US market is not anything like as powerful a tool as we thought and Chinese strangleholds over key inputs are much more important. And then of course we’ve seen that even more graphically demonstrated by war with Iran and it turns out that Iran’s ability to disrupt traffic through the Strait of Hormuz was a really huge empowering point, and it was the kind of thing that the United States really didn’t think about, and certainly the Trump administration didn’t think about. And it shows the true rules of global economic power, because largely Iran was able to win this war through economic power rather than strictly military action, the rules of economic power are not what a lot of people thought they were. Who benefits from that? Well, obviously China. What we’ve seen now is that in terms of a global power competition, China has demonstrated that they have substantial power over supply chains. They’ve also demonstrated that they can weather a cutoff of oil pretty well. And global power is a zero-sum game. So the United States, by weakening itself, by showing that we don’t have the ability to impose our will militarily, we don’t even have the ability to keep international shipping routes open, has emerged as just a much less formidable player, which means that China by comparison looks better. Add to that the fact that the United States has been erratic and unreliable. Our current leadership just doesn’t understand that a reputation for doing what you promised, honoring your agreements, is itself a source of power, and we have done an enormous amount to undermine that. Not news to anybody. Trump looks much weaker. America looks much weaker. To a certain extent, China is the beneficiary of all that, at least in terms of power. Now, of course, life is not all about power. And in the end, you don’t run a country to maximize global power. Maybe the Chinese do. I’m not sure about that. But in any case, it’s not a zero-sum game in terms of living. But in terms of power, it is a zero-sum game. And the United States share of that power, however you measure it, is clearly down as a result of the war. Europe is a little bit interesting here. Europe played essentially no role in any of this. Europe wasn’t involved, obviously, in the war. Europe didn’t do very much at all except to suffer. Still, one thing that is kind of important is that Europe — at least to some degree, not really through emergency responses but just through the general way that the Hormuz shock played out — Europe demonstrated or some European countries demonstrated that they can be much more independent of global hydrocarbon resources than they have been. Europe is not a major oil producing area. It has some, but not a lot. It’s not a major gas producing area anymore. It’s essentially a very resource poor economy relative to the size of its GDP, relative to its population. But it is an economy that increasingly relies on renewable energy. And those countries that have gone especially far in relying on renewables weathered this really well. That’s the lesson of Spain’s ability to ride through this with very little rise in electricity costs compared with some other countries. Italy, which has very little in the way of renewables and is very heavily reliant on natural gas for electricity generation, Italy did much worse. But Spain has given an illustration of how the renewable energy revolution — solar plus batteries is what really runs Spain now — has made Europe more independent and can make it more independent still in a world economy where control of natural resources used to be really critical and it’s becoming increasingly less critical. So that’s actually a point in Europe’s favor. That’s one piece Another piece of this is that Europe has always, in my lifetime, literally, and from a bit before my lifetime, Europe has always been far less of a global power player than you would expect given its sheer economic weight. Now that’s partly because Europe doesn’t exist as a political entity. though it’s more of one than it used to be; the common market has gradually turned into something more than that and Europe is able in some important ways to operate as one and is finding ad hoc ways of cooperating more. But it was always in a secondary position very much — or tertiary position given the rise of China — largely because the United States in addition to having a big economy was overwhelmingly the dominant military force. Now until just the other day there was never a question that the United States would use its military force against Europe; but Europe depended on the United States. Europe’s defense, its security, all depended on the United States. Okay, now where are we? The United States is quite simply just less credible as a security guarantor, not just because of crazy stuff where we threaten Denmark over Greenland, and not just because we’re erratic all the time, but because we’ve just demonstrated that our military capability is a lot less than we thought it was. The United States could not batter Iran into doing what it wanted. It could not keep the Strait of Hormuz open. So U.S. military preeminence is a lot less intimidating, also a lot less reassuring if you thought you had America on your good side than it used to be. And on the other hand the prospect that Europe might be able to defend itself, achieve its own security without the United States, looks a lot stronger than it did not very long ago. And that’s not just because of the war in Iran but also because of the war in Ukraine. Now, there are many, many horrifying things that have happened under Trump. One of the ones that is particularly horrifying to some of us is the abandonment of Ukraine, the clear tilt towards siding with Putin in his attempt to destroy a democratic nation. The United States basically stopped giving any aid to Ukraine at all. almost as soon as Trump took office. U.S. aid of all kinds, but especially, of course, military aid, is all gone. But a funny thing has happened. Ukraine is still standing. If anything, the war seems to be tilting in its direction. Now, that reflects partly the fact that Europe did step up. particularly with economic aid: Europe has filled the gap, pretty much, that the United States left so the flow of money to Ukraine continues. But it’s also because war has changed. To the extent that the United States appeared to be essential it wasn’t just the money — we knew that Europe could come up with some money — but it appeared that what would what How could Ukraine defend itself without U.S. weapons? Well, it turns out that in this age of drone warfare that Ukraine can mostly defend itself. Actually, what they can’t really stop is Russian missiles that destroy civilian targets, which is horrifying, but it doesn’t appear to really work in terms of altering the military balance. And Ukraine has developed its own suite of weapons, and quite aside from the fact that Ukraine is hanging in there, this says that one of the sources of perceived US superpower status— super duper power? versus Europe is a mere superpower? — was that, well, we had the weapons, that we had the technology, that even if Europe could come up with the money, they needed U.S. weapons to be effective, as did Ukraine. And if the United States cut off the flow of weapons, what could you do? You really could not stand without all of those sophisticated, high-tech weapons that only the United States knew how to produce. Well, those weapons are kind of looking obsolete right now. Not entirely, but we just saw Iran do a lot of damage with drones that the United States didn’t appear prepared to stop. And the United States, with all of its super-duper weapons, was not able to suppress them. We had the spectacle of million-dollar patriots shooting down $30,000 Shaheds. This is not a good look. And Ukraine has become a major arms producer ,has become in many ways the expert in this new age of drone warfare. The Europeans are picking up some of that, and there’s a lot of new cooperation on weapons with Ukraine. But maybe the most important thing to say is that, well, that special U.S. advantage, because we had the weapons and no one else did, it’s not much of an advantage now that it appears that those weapons are largely obsolete. Not totally, of course. The Ukrainians would really love to get more Patriot missiles to stop some of those Russian missiles that are destroying 11th century churches and so on. But the balance has shifted in a way that means that the United States is not indispensable at any level. We’re not indispensable financially, and we’re not even indispensable militarily. It’s like we have the world’s best cavalry in an age of machine guns. What good does that do? Okay the Chinese presumably have immense capacity. Chinese dominance of manufacturing means that on almost any dimension China is the super super duper power, they’re really way out in front. But there’s much more parity between between Europe and the United States than there was because the United States doesn’t really have economic dominance and we don’t have military dominance anymore. We dominated an age of warfare that now appears to be behind us. So where does Europe stand here? In a rational world, the rise of China and the coordinated, concerted, efforts of the United States and Europe to deal with that rise would be the central story of geopolitics in the year 2026. Unfortunately, things are not rational. And so we have a belligerent, erratic United States with Europe largely on its own. But Europe being on its own is not nearly as impossible to imagine as it used to be. This is a world that has tilted towards China. That’s probably the biggest story. But it is also, in effect, tilted towards Europe because it’s tilted away from us here in the United States. Take care. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe [https://paulkrugman.substack.com/subscribe?utm_medium=podcast&utm_campaign=CTA_4]

Lunch Money with Paul Krugman and Heather Cox Richardson

Thank you Michael Scarmack [https://substack.com/profile/29305883-michael-scarmack], Scotland Explained [https://substack.com/profile/375810392-scotland-explained], Oakbridges.ca [https://substack.com/profile/134432056-oakbridgesca], Kim G [https://substack.com/profile/32893660-kim-g], Cathy Stein [https://substack.com/profile/318670950-cathy-stein], and many others for tuning into my live video with Heather Cox Richardson [https://substack.com/profile/4875576-heather-cox-richardson]! Join me for my next live video in the app. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe [https://paulkrugman.substack.com/subscribe?utm_medium=podcast&utm_campaign=CTA_4]