The Economic Risks Keeping Paul Krugman Up at Night

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1:40Today's number 2.4. That's how many hours on average people spend shopping online at work. I hate those little reminders that people who bought this also bought. Okay, those people are also emotionally fucked up in the head. Stop profiling me.

1:59Listen to me. Markets are bigger than us. What you have here is a structural change in the wealth distribution. Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it. Ed, I made that up myself. Yeah, I could tell. You could tell I made it up myself? I had a great joke on, what was it? Oh, there's the Prof G show. I don't know if you know this. I have another pod. I do other podcasts, Ed. That's right. And it was that I watched Jaws last night, but instead I watched it backwards. and it's actually the heartwarming story of a shark that helps disabled people recover their lives.

2:33I think that's genius. Really dialing it back, and this was the question last week, should we dial it back? I thought the answer was no. I guess the answer is yes. We've got a dad joke about Jaws and about shopping. Would you trust the judgment of someone who takes the time to comment on a YouTube video? I mean, we love our fans. We love our fans. Love them, but I'm not listening to any of you. No shock. I always try to be positive in comments. I'm not getting into fights anymore with people online because I'm usually fighting against a bot, and then I find my erectile dysfunction gets even more dysfunctional.

3:09And so, I'm telling you, Ed, it's coming. You laugh now. You laugh now. Just wait, my friend. Just wait. Teladnophil, which, by the way, is a generic name for Cialis. Just get used to it. And it's less embarrassing to say to your nurse who's got, or your nurse, your doctor, who always has like an attractive nurse in the room, and you have to say, I'm kind of interested in those drugs that, what is it, how you say, make dick hard. I don't know who I'm imitating there. I just know that's all kinds of wrong. You know what? Actually, our producer's fucked up. You know what today's number should have been?

3:46What? 30. Why is that? Ah, okay. That's right. There we go. Ed Elson, 30 under 30, according to Forbes. Which, by the way, I did not know Forbes still existed, but it is still very prestigious. Very prestigious. And Catherine, we're on another podcast, Rachel Moderates. She came on. This is such exciting news. Ed just got 30 under 30 on Forbes. And I literally reflexively shouted out. That bit shows me everything. It's true. I do know everything. Tell us, how does it feel to be the 30 under 30? Yeah, it's nice. You know, the secret of the 30 under 30 is it's actually 600 under 30. They keep on increasing the number of us every year.

4:37So, I mean, that's the sort of little footnote that we should consider. But still very exciting. Well, you join past alumni, including Mark Zuckerberg, LeBron James, Mila Cyrus. LeBron James. He and I have a similar career trajectory, I think. I think you're much more similar to Miley Cyrus, but that's just me. The guy who started Spotify. That's pretty good company. Also, Elizabeth Holmes and also Sam Bagman-Fried. I mean, if anything's going to happen to me, I'm going to end up in prison in the next two years, if we're being realistic here. Let's bring this back to me. I peaked pretty early.

5:13I came out of the Gates Strong, out of business school. I started a strategy firm. Someone got me invited to Davos. I was literally 29 at Davos. And I thought it would just keep going uphill, just up and to the right. And by the time I was 33, I was divorced, broke, and basically living like a caveman in New York. Like occasionally leaving to try and go to the ready teller and get food and pursue sex unsuccessfully and then going back, retreating back to the cave. So that's what's coming next to you, Ed. That's what's coming. That's next up. Next up. I can't wait. You just got it. You can't let it get to your head.

5:50Oh, that's too late for that. Be one of those quiet, conceited guys. You're always like, oh, well, I don't think about me, me, me all the time. I have to make you think that I don't think about me all the time. That fake British accent is about says it all. That says it all. Claire and I know you're from fucking Alabama. Anyways, what do we got going on today? We got a conversation with Paul Krugman, which is going to be great. And I would also add that we are recording our annual Ask Me Anything episode next week. So please send in your questions to markets at ProftyMedia.com or drop them in the comments.

6:24Very excited about that episode. I think that's all I got before we got this conversation with a Nobel Prize winning economist. More importantly, along the same lines, did you see me on Oprah? I didn't see you on Oprah, but I saw a photo of you and Oprah. Is it out yet? No, she and I just rolled together. What do you think? Yeah, I was on her show. No, I understand you were on the show. We're dating. I just haven't seen the interview yet. Decided to come public with our relationship. We were talking in the side channels. It strangely looked AI generated, that photo of you and Oprah Winfrey. Yeah, it did look fake, didn't it?

6:57Everyone looked so happy. It didn't look like repute. I had no idea what to expect. I know you want to know more about this. I do, actually. I walk into a room, and they have filled the room with like 100 young people. 80 of them are men. Wow. And they all proceed to ask me questions about mental health and what should I do? I'm having trouble connecting to relationships. And I'm like, dude, I don't know. When I was here, I was getting fucked up and approaching people in Irish bars. I don't know. I was literally sweating. And I had to basically start every sentence with, I am not a licensed therapist.

7:32I'll just give you my experience. And if it's helpful, great. And at one point I said to this woman, I'm like, I don't know. I have no idea. It sounds like you're really, you know, it sounds like you're struggling. I have no idea. It was so uncomfortable. I think someone told them I was Dr. Drew or something or Astaire Perel. You got to assume that position if you're going on Oprah. You're not going to be doing hard-hitting economics. You're going to be talking about feelings, right? My friend Gail King got me on the show. Gail King's my new best friend. She's super cool and nice and funny. Anyways, I was on Oprah.

8:07That's very cool. That's it. And now Paul Krugman. Let's get into it. Here is our conversation with Paul Krugman, Nobel Prize winning economist and distinguished professor of economics at the Graduate Center of the City University of New York. Paul, thank you very much for joining us for the very first time on Prof G Markets. Oh, hi there. Good to be on.

8:32Scott Clillian has an issue with the intro. We talk about Paul so much. I assumed he'd been on seven or eight times. It probably feels as if we know you. We're parroting your data so much. Well, we're slightly short on time, so I want to get straight into the questions. I have so many questions for you, Paul. And the first is, you know, we're coming to the end of the year here, and a lot has happened. We've had a new administration. We've had Liberation Day. We've had tariffs. AI has exploded. You have been writing about economics for years. You're a foremost leader in economics. Just at a very broad level, what has stood out to you in 2025?

9:14And how do you think 2025 is going to be remembered in economic history? I mean, it's a weird year, and that's all I can say. I mean, history doesn't usually give you clean experiments. It's usually more than one thing going on. But this year is really extreme. On the one hand, you have 90 years of U.S. trade policy abruptly thrown into the waste bin and replaced with very high tariffs. And on the other side, you have this AI boom, which is the biggest sort of, well, it's the biggest thing since the housing bubble. But the housing bubble was kind of on its own. And here we have the AI boom sort of colliding with and interacting with the tariffs.

10:01And it's a very, very bizarre economy right now. One of the things you've been talking about lately is affordability. And that's something that's been very prevalent in politics, most notably probably with the mayoral election. Where do we stand in terms of affordability in this economy right now? Clearly, we're seeing some growth in the overall economy because of AI, but the affordability crisis seems to be a kind of a different thing. The problem that we have in talking about affordability is that there is a simple thing, which is just your real income, typical person's wage divided by the consumer price index, which is actually up a little bit since pre -pandemic.

10:45So we're actually not seeing the simple version, oh, prices are way up and everybody is impoverished, is not true. Way too much reporting talks as if that was the story. But that doesn't mean that everything is OK. So once you start to look under the surface, you see, first of all, there are some real cost of living issues or just generally getting by issues. There's interest costs are way up, certain really critical things. Above all, I would say that the cost of buying your first house are way up. So people are not imagining that there's an affordability crisis. And then if we just sort of take affordability as kind of a proxy for how are things, well, the economy is in some important ways worse than it looks.

11:33We don't have high unemployment, at least not yet. We don't have high inflation by historical standards. But we do have this frozen job market where, you know, if you got your job, OK. But if you lose it or you're new to the labor market, it's very hard to get a first job or a new job. And again, I do think that, and I will be writing myself some more, I think that the way that some things that are key markers or have been key markers of middle class status are receding out of reach matters in a way that the normal numbers don't quite capture. We read a really interesting Substack article recently, which has kind of gone viral by this guy, Michael Green, this asset manager, where he brought up, and I don't know if you've seen this, but he brought up this poverty line question where, you know, the current poverty line in America that we all use is around$30 ,000, a little over$30 ,000.

12:32And he made the point that this is an old metric, an old measurement that we used that worked in the 60s, but no longer works anymore. And he came up with kind of an adjusted calculation, and he landed on$140 ,000 as the poverty line. It's been very controversial. Some people said that that number is all wrong. But the point kind of stands. It's like, well, we're all talking about affordability. We're all trying to figure out what's going on for the American economy, particularly on the lower end. And this has really resonated with people. I just want to get your reactions to that article and this idea that perhaps that metric that we've used to measure poverty might be flawed.

13:15I actually have been aware of the article and not bothered to read it because it's kind of a stupid point. I mean, I sit at the City University. I sit at something called the Stone Center for the Study of Socioeconomic Inequality. Let me tell you, my colleagues know all about poverty measurement. And, you know, poverty measure is one of those things where basically Lyndon Johnson needed a quick and dirty measure of poverty. and an economist at the Bureau of Labor Statistics, Molly Arshansky, did a quick and dirty calculation, which somehow got stuck. And the original calculation was based on the cost of food and since then has been just adjusted for the Consumer Price Index and nothing else.

14:01I mean, Molly Arshansky did something really useful, and it turned out to be extremely useful to have a standard measure of poverty, even if it's somewhat arbitrary. but if you really want to think about poverty, there's one question which is can people afford the essentials of living and then there's a bigger, tougher question which is are people really part of the broader society? Poverty as a measure of social exclusion is really what you want mostly. Most countries actually measure poverty quite differently. They say that poverty is having less than half the median income. and we can do that for the United States.

14:41And it does show that we've actually, because of increasing inequality, poverty has risen over time. And yes, the material standard of living associated with half the median income has gone up, but in some ways that doesn't help much. So this is the wrong approach. I mean, in some ways it should just say, you know, poverty, schmoverty, how are we doing? How many people are really effectively excluded from the economic mainstream in America? And the answer is a lot and too many. And we, for kind of almost bureaucratic policy reasons, we're kind of stuck with this poverty measure, but trying to fiddle with it to make it better, that's really not very helpful.

15:29It sounds like maybe you agree with the premise, though, which is that this idea of a poverty line is kind of an arbitrary and stupid way to measure things with this question of how is America doing? I feel like one of the larger points is like the economy is so much different today than it was 60 years ago. There are so many other things that we need to account for. You mentioned there that real income is up, but this affordability crisis is still a problem for all of the other issues that you mentioned, the job market, housing market, borrowing costs, all of these things, which seems to bring us to this question of like, how are we supposed to measure the economy then?

16:10If we can't rely on the poverty, we can't rely on income, what should we be looking at? I mean, I would say the poverty measure is arbitrary but not stupid. There was a reason for doing it. There's a reason why a lot of federal programs are key to the official poverty threshold because they have to be key to something. So if you look at what are the subsidy rates under the Affordable Care Act, they're tied to your income as a percentage of the official poverty line. And, you know, changing that would be kind of a nightmare. It's just, you know, there are more important things to spend political capital on.

16:47So, you know, let's focus on what's important. And, again, we have pretty good measures of inequality. We have a pretty good sense of how many people really can't afford to be part of the mainstream of American life. They're all very troubling. So just we don't need the problem. The fault lies not in our numbers, but in ourselves. Right. It's fundamentally a question of what kind of society do we want to have and how do we deviate from that? And clearly, if the poverty line, you know, if you have some calculation that sets the poverty line at a level that is way, way above where people actually consider themselves poor, then that's wrong.

17:27It doesn't matter what the details of the calculation are. So let's just say, are there a lot of Americans who are below some line? Yes, there are. If someone said we're taking in$5 trillion in receipts, tax receipts, and spending$7 trillion, I would naturally assume that we were either at war or trying to jumpstart or reverse an economic decline, a malaise, get us out of a recession or a depression. And yet we're not. I mean, I don't think either of those are true. And the fact that the economy is not surging with$2 trillion in additional deficit spending, to me says that masks an underlying sickness, that the economy is actually much weaker than people think.

18:12Your thoughts? Before COVID, a lot of us were talking about secular stagnation, which is a totally impenetrable set of words. It gives you no clue of what we're actually talking about. But it really was that we actually had persistently inadequate demand, persistently inadequate spending in the economy, and that interest rates were always extremely low. And even that wasn't enough to really jumpstart the economy. It may well be that we would still be in that state if it weren't for these big budget deficits. And so that's a concern. It's also the case that advanced, stable, rule-of-law nations that borrow in their own currency have a lot of leeway to run up large debts.

19:03They can go a long way up that debt-to-GDP ratio without getting into a financial crisis. Is that still a description of America? Are we – I mean we're large, but are we stable? Are we a rule of law society? If I were an investor, wouldn't I worry about some current or future autocratic presidents deciding to just arbitrarily write down our obligations? So these numbers are troubling. But we all know where it comes from. We basically have a political deadlock where we have immensely popular programs, I think deservedly so, like Medicare and Social Security. And we also have a complete unwillingness to collect enough taxes to pay for them.

19:53To me, this feels unsustainable. When we're operating at what feels like it's not a good economy, not a bad economy, just what you call, I don't know, somewhere in the middle. And we've decided that it's just standard operating procedure to go 40%, you know, to spend 140 % of our tax receipts. To me, A, I feel that's unsustainable. Do you agree? And B, when, and it's hard to tell when, but how does the music stop? Is it just when, I've never thought that people won't show up for our treasury auctions. they'll just demand more payment in exchange for the risk. Is there a limit? Do we go to, I mean, Japan's much higher than us, okay, but at what point does the debt become an issue?

20:34Britain had debt that was 250 % of GDP at the end of World War II, but it wasn't a crisis because people said Britain is a serious country run by people who are not idiots, and they will, and do what is necessary, as they did, to control their debt load. Now, the trouble is that we may not be a serious country, and more to the point that the markets may conclude that we're not a serious country. And that's when the limit hits. It's not an arbitrary number. It's kind of a, who are we? You know, Stein's law. Herb Stein, chairman of the Council of Economic Advisors, whose son was a much less funny comedian.

21:20But Herb Stein's law was, if something cannot go on forever, it will stop. And Stein's law clearly must apply at some point. But so far we haven't hit that, though. I have to wonder. I mean, the character of American governance has changed so much in this past year that you have to wonder whether any assumptions based on the kind of country we used to be still apply. But I put a lot of work on this. I actually was looking for, at various times, I've looked for examples of countries that, like the United States, borrow in their own currency, have a high level of debt, and are kind of politically paralyzed, but are not hyperinflation territory or whatever, and for crises.

22:06And it's really hard to find them in history. I mean, talk about the French franc in 1926, where, but it is really hard to, we don't have a lot of historical examples that will help us understand how this ends. Sooner or later, it has to end one way or another, but how, I don't know. We'll be right back after the break. And if you're enjoying the show, send it to a friend and please follow us if you haven't already.

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25:48We're back with Prof G Markets. So one of the big themes of our show, our talk tracks, is that our economy has become more fragile because 40 % of the S &P is represented by 10 companies. in that if NVIDIA announces, a big company announces they're not getting the return they'd hoped regarding their investment in AI, NVIDIA doesn't meet expectations. NVIDIA goes down 60 or 70%, which I will remind people, every one of the big tech companies has been down that much in a 12-month period at some point in the last 10 months or 10 years. And basically overnight, the S &P is off 10, 15, 20%, which represents a half of global market capitalization and immediately we're in what feels like something like a global recession, if not something worse.