The Wolf-Krugman Exchange: Trump’s ‘vibecession’ | FT Podcasts

Key Concepts: Authoritarianism, Non-Democratic Rule, Public Opinion Polling, Economic Uncertainty, Consumer Sentiment ("Vibes Session"), Protectionism, Tariffs, Artificial Intelligence (AI) Boom, Oligopoly, Government Corruption, Affordability Crisis, Inflation, Wage Stagnation, Supreme Court Authority, Labour Market Freezing, Long-Term Unemployment, Financial Stability, Speculative Bubbles, Autogolpe (Self-Coup), Liberal Democracy, Fascism.

Current State of US Democracy and Political Landscape

The discussion begins with a cautious optimism from Paul Krugman, who feels "less terrified" than before. He characterizes the current political agenda as an attempt by "would-be authoritarians trying to speedrun a transition into one party, non-democratic rule," aiming to "end US democracy more or less permanently." The good news, according to Krugman, is that this agenda "does not seem to be going well, or at least it's not going according to schedule." Unlike figures such as Orban or Putin in their early takeovers, Donald Trump's public support has "cratered." This is evidenced by the November elections in New Jersey and Virginia, which confirmed polling data suggesting the public "loathes Donald Trump." Martin Wolf concurs, having feared such an outcome since 2016, and expresses surprise at the complacency of many concerned friends. Despite this, both acknowledge the continued presence of "craven politicians and craven institutions."

Krugman rates the state of American democracy at a "four or a three" out of ten, but notes it might be "trending up" due to increased public pushback. He highlights previously "unthinkable" occurrences, such as "masked government agents kidnapping people off the street," which are now routine. The US, once a beacon of democracy, now "look[s] enviously at places that know how to do democracy seriously, like Brazil," especially after Brazil imprisoned Bolsonaro for attempting to overthrow an election, a move Trump reacted to with punitive tariffs. This public pushback, particularly evident in gubernatorial elections that served as a "referendum on Trump," suggests the "Maga coalition" idea is unlikely to succeed "unless they basically use force and intimidation." A key factor driving public sentiment against the Trump/Maga agenda is "the price of groceries," rather than a mass uprising against threats to democracy.

US Foreign Policy and Governance Disarray

The conversation touches upon the "weird" state of US foreign policy, marked by "conflicting stories from different members of the administration about what the policy is." A leaked peace plan, for instance, showed "clear signs of having been translated directly from the Russian," with syntax not typical of a native English speaker. This points to a lack of process, with different actors like the Vice-President and Secretary of State "independently trying to make foreign policy," while Trump appears to have "no idea what's going on." Wolf mentions a colleague's report that "every single Russian expert in the State Department has been sacked," contributing to the administration's perceived cluelessness. This extends beyond foreign policy to critical domestic areas like healthcare, where "large parts of the Centres for Disease Control, National Institutes of Health, they've laid off anybody who knew anything." Krugman describes the current governance as "sinister incompetence," leading to fears of accidental global conflicts, citing a past incident where personnel securing nuclear weapons were "accidentally laid off."

State of the US Economy and "Vibes Session"

Krugman rates the US economy at "maybe a five" out of ten, indicating it's "clearly in worse shape than it was in January." Conventional indicators show unemployment "a few tenths of a percentage point higher" and inflation "up" after a downward trajectory. While not a "catastrophe" or "recession," "weird shadows" and "huge risks" from "highly speculative investments in AI" make the situation "considerably worse" than numbers suggest. Wolf agrees with the "five" rating, noting a clear "sliding down hill."

A significant part of the economic malaise is attributed to a "vibes session" – a pervasive gloom despite some economic activity. Unlike the "giddy" atmosphere of the late '90s dot-com and telecom boom, current consumer sentiment is "at its lowest point ever," even lower than after the 2008 financial crisis or during 14% inflation in 1980. This is because the current AI boom primarily involves "booming expenditure by a really small number of gigantic companies" (oligopolists), which doesn't excite ordinary Americans or offer a sense of widespread opportunity. Furthermore, there's a public perception that these businesses are "very heavily built on scams," "hacking your brain to indulging your and encouraging your worst instincts." This, combined with a government perceived as "of by, and for predators" and "blatantly corrupt," contributes to a general "sense that it's unfair," which resonates more politically than abstract inequality.

Affordability and Inflationary Pressures

The "affordability idea" is highlighted as a potent political issue, exemplified by Zohran Mamdani's successful campaign in New York. The US experienced a "one-time step jump in prices" of roughly 20% from 2021-2023, far exceeding the expected 6% over three decades of low inflation, leading people to feel "cheated." While wages, particularly at the lower end, have risen, people feel these gains were "snatched away by inflation." The Consumer Price Index (CPI), though "honest," may not fully capture the impact of rising interest costs and, crucially, housing prices, which "have outpaced earnings." This creates a tangible sense that "my father was able to buy a house and I can't."

Trump's campaign promises to "bring prices down," "cut the price of energy in half," and make "groceries much cheaper" have not been delivered, leading to a feeling of "betrayal" among the public. Krugman notes that "what really is killing the Trump, the Maga drive to take over America is the price of groceries."

Protectionism, Tariffs, and Legal Challenges

Krugman clarifies that protectionism, while degrading "long-run efficiency" and hurting "long-run performance," doesn't necessarily cause a recession. The primary economic issue stemming from Trump's trade policies is "uncertainty" due to "constantly changing tariffs," which has a "chilling effect on business." This effect has been somewhat masked by the "vast boom in artificial intelligence."

The legality of Trump's tariffs is currently before the Supreme Court. Lower courts have already ruled many tariffs "illegal." Prediction markets suggest only a 26% chance the Supreme Court will uphold them, which could void "about 70 per cent of the tariffs." Krugman believes that "blatantly ignoring" such a ruling would be problematic, potentially making Customs agents "personally liable." While the president has leeway under Section 232 for national security tariffs (e.g., on "bathroom vanities"), Krugman asserts that "on any reasonable standard, almost everything he's done on trade is illegal." A Supreme Court ruling against Trump's "signature policy" would be a "very important judgement" and "humiliating." The persistence of affordability rage is partly due to the slow "pass through of tariffs into consumer prices," as businesses may "eat the tariffs" while awaiting legal resolution.

Labour Market and AI's Impact on Jobs

The labour market is described as "frozen," with "very low hiring" despite not yet experiencing "mass layoffs." This is attributed to tariffs, general uncertainty, and potentially AI. While overall unemployment isn't significantly up, "long-term unemployment is," making it "very grim" for those who lose jobs or young people entering the market. This creates anxiety, as losing a job can have permanent negative effects on a career trajectory.

The impact of AI on jobs is still uncertain. While some businesses report productive use, many haven't. There's a "liminal space" of "potential and hype." AI is a "powerful, productive technology" capable of solving previously difficult problems like object recognition and translation. However, its short-run macroeconomic impact is primarily driving business investment and the stock market, with the risk that, like the late '90s dot-com boom, "everybody who invests heavily in it loses their shirt." There are early indications that AI applications are "reducing hiring," particularly of college graduates, or that companies are "waiting for AI" to replace workers.

Financial Risks and Speculative Bubbles

The AI boom has fueled stock market buoyancy and speculative bubbles, including in cryptocurrencies like Bitcoin, potentially linked to deregulation. This creates a "wealth effect" for the well-off. However, there are growing financial risks. Investment in AI is increasingly funded by borrowing, not just retained earnings. "Credit default swaps on Oracle have just blown out," signaling significant risk for even major players. Krugman describes financial stability as a "game of whack-a-mole," acknowledging that while he doesn't believe we're "at the edge of another financial crisis," economists have a "zero success rate" in predicting recessions. Wolf is less worried than in 2007, noting the current situation is "narrower" and not housing-related, with major companies involved being "solid."

A concern is the rapid depreciation of data centers, suggesting a "big waste of resources" if the investment doesn't yield sufficient returns. There's also the question of whether the US is "doing AI wrong," especially compared to China's focus on "smaller models that are less comprehensive" but achieve high effectiveness at lower cost.

Synthesis and Conclusion on the Future of US Democracy

Despite the ongoing challenges—public unhappiness, low Trump approval, and various economic and political uncertainties—Krugman expresses a growing belief that the "autogolpe, the self-coup will fail," and Trump and company "will not succeed in installing permanent autocratic rule in America." While this makes him "optimistic," he stresses that it's "still very scary" and "an enormous amount of damage has been done" to America's reliability and standing in the world. He argues that merely holding back the "bum's rush from Maga" is insufficient; a "truth and reconciliation commission" and "some accountability" are needed to safeguard democracy long-term. Wolf remains deeply concerned by the "astounding amount of genuine, clear fascism, even Nazism, circulating around on the extreme right," warning that these forces "only have to win once" to create a lasting problem. Both agree that there are "no guarantees" for the survival of American democracy, emphasizing the need for continuous vigilance and action.

Cultural Coda

Paul Krugman's cultural coda, reflecting his current mood, is Pink Floyd's "The Great Gig In the Sky," characterized by an "extended, wordless scream." Martin Wolf, drawing from his opera background, chooses "Vissi d'Arte" from Puccini's Tosca, a lament by the heroine against tyranny, asking "Why, God, have you inflicted this upon me?"