‘Trump will dismantle the world trading system’
NYT columnist, best-selling author, and Nobel Prize-winning economist Paul Krugman discusses US elections, global economy and Greece
Paul Krugman needs no introduction. A Nobel laureate in economics (2008) and a contributing columnist for The New York Times, he is considered a specialist in deciphering international political and economic dynamics. In an interview with Kathimerini, the author of the book “Arguing with Zombies: Economics, Politics, and the Fight for a Better Future” says he believes that a possible victory for Donald Trump will lead the US to impose excessive tariffs, while the model of “trade protectionism” will hit smaller countries.
Discussing Greece, and by extension EU policies, the “heretical” intellectual who had advocated for Grexit sticks to his earlier assessments and adds that the ideological attachment of some European leaders has prolonged the fiscal crisis.
With the polls indicating the victory of former president Trump, and with Project 2025 in mind, what impact do you think Trump’s economic policies will have on the US and global economies?
It is very ugly for the US. It is really a lot of really bad economics, like tariffs and probably a loss of independence of monetary policy, as well as serious risks of inflation. But in some ways, with the United States, just because it is such a big economy, you can do a lot of things wrong and the economy is fairly able to withstand them. However, the impact on a number of countries, especially smaller countries, would be disastrous because Trump will basically dismantle the world trading system, and then any country that depends upon access to global markets, that is not part of the EU or the United States, is very much at risk.
Do you think the US will move to the model of trade protectionism by imposing excessive tariffs on imports?
Yes, I mean, Trump has more or less promised that he is obsessed with them. He has the people within his own party who opposed that last time and have basically withdrawn from the field. So, there is no question that what I believe would happen is that Trump would start with some across-the-board tariffs expecting them to make the trade deficit disappear. When that does not happen, he will raise the tariffs further. And so we would be looking at a very protectionist turn by the United States, probably a reduction of a third to a half in total US trade.
In your opinion, can Western societies compete with the productive capacity of countries like China or India?
It is not the production capacity per se. The concern that we have is that in particular sectors like autos, there is a vast excess capacity that particularly the Chinese are trying to deal with by exporting the surplus, which is just not going to happen because it is unacceptable. There are too many communities that would be destroyed by that flood of imports.
Fifteen years ago, we had a China shock which was very destructive politically and this one would be much bigger. Such a shock, “China 2.0,” is not going to be allowed to play out. The Chinese think they can export their way out of their economic problems. They are going to have a rude awakening.
‘The Chinese economy has still got a tremendous amount of vigor and entrepreneurship but their current model is unsustainable’
Therefore, do you foresee the Chinese giant deflating?
I do not know exactly how this plays out, but China is an extremely unbalanced economy, it has far too little consumer spending to support the level of investment that they are trying to generate and they, for some reason, refuse to transfer income to consumers to make up that deficit. So, they have been trying to resolve the whole thing with exports. The problem is that the world is not going to accept those exports. In a macroeconomic sense, I think in a lot of ways, China looks like Japan did circa 1990 and it has the same deflationary forces. The Japanese, in the end, managed it fairly well, they supported demand with public works, they transferred income to the public, and also Japan had a great deal of social and political cohesion. So Japan handled all of that fairly gracefully. Now China has the same starting macroeconomic problems, but probably without the cohesion. So, the Chinese economy has still got a tremendous amount of vigor and entrepreneurship but their current model is unsustainable and they do not seem to be willing to change.
Moving to a different chapter, years ago, you estimated that Greece would be better outside the eurozone. With Greece now exceeding 2% GDP growth, and the expectation that inflation will fall to 2.1%, would you revise your previous estimations?
No, not at all. The argument was never that Greece would never again grow, but that you would experience years and years of extremely painful deflation and high unemployment and then eventually be able to have some very slow, belated economic recovery, which is what is happening. Compare where Greece is now with the pre-crisis trend. And you know, it is tragic. Greece has paid an enormous price and is still paying an enormous price for what it had to do to stay in the euro.
In 2015 you pointed out in The New York Times that “Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients – and when their treatment made the patients sicker, demanded even more bleeding.” In your opinion, was Greece used as a scapegoat for Europe’s fiscal rescue?
Greece is not entirely blameless here. Greece really did have excessive debt and it was going to be a difficult adjustment regardless. But in general, what happened was that Northern Europe blamed Southern Europe for its own problems when a lot of what happened was simply that the euro was a poorly conceived project. And they just kept on insisting that more and more sacrifice was necessary and Greece again was in the worst shape. And they were many people who said that other Southern European countries were hopelessly indebted and that they could not recover unless they made immense sacrifices, and then Mario Draghi said three words, “Whatever it takes.” And all of a sudden, the yield spreads mostly disappeared, and the crisis went away. So that was not a clear indication that these were not the sins of Southern Europe, but this was just a bad system.
Do you think that the lack of competent leadership and vision in Europe has led to this fiscal impasse?
I do not think it is a lack of competence. I think that the problem was ideological. Some people fell in love with the idea of the euro. And also Germany in particular and some other countries as well just have this obsession with fiscal prudence that overrides everything else. So, it is not that they are incompetent, it is that they have bad ideas and refuse to revise those ideas in the face of experience.
With Greece having crossed the Rubicon of the memorandums, what policies would you suggest Greece follow and what traps should it avoid?
At this point, Greece is not going to leave the euro unless there is another even worse crisis. Greece has recovered a lot of cost competitiveness and probably the best bet is to hope for an export-led recovery, doing whatever you can to facilitate that. And as best I can tell, Greece is not doing too badly on that. However, some of the other countries have followed that route and gone further along; look at Portugal, which has had a substantial recovery after having at one point been considered almost as bad as Greece, and their recovery is based on competitive exports and huge revenue from tourism, and Greece can follow that path too.
Looking ahead and with AI accelerating the rate of production, what are your observations on the impact of AI on the economy? And will white-collar jobs disappear completely?
So far, nobody knows what AI is going to do. It is one of those things where we have had an enormous amount of investor interest. Many companies are spending a lot of money and until now there have been very few solid pieces of evidence that it is going to do a lot. Maybe it will, but at this point what we know is that it is not really artificial intelligence. In reality, it is large “language models”; under a dismissive description, we would call AI a souped-up autocorrect. And there are a lot of problems with that, like that it will give you extended answers to questions much of which are lies. Therefore, it is not at all clear yet whether this is really a significant technology or whether this is mostly hype. In reality, it is large “language models”; under a dismissive description, we would call AI a souped-up autocorrect. And there are a lot of problems with that, like that it will give you extended answers to questions much of which are lies. Therefore, it is not at all clear yet whether this is really a significant technology or whether this is mostly hype. And I do not pretend to know the answer to that, but people are sure that this is revolutionary and I am not at all sure of that, although I am not sure it is not either.
