In a conversation that spanned US-China trade tensions, corporate policy uncertainty, and legislative moves that could deepen fiscal deficits, Krugman’s central theme remained clear: Trump’s economic policies are eroding not just macroeconomic stability, but America’s foundational credibility in global trade and governance.
Below is the verbatim transcript of the interview.Q: What is your assessment of what Donald Trump’s trade policies have done to the US economy?
Krugman: So far, it’s really hard to see the tariffs in the hard data. It takes time for them to show through, but we’re likely to see a bump in consumer prices starting within weeks. So, the inflationary impact of the tariffs is coming.
You can already see that businesses have scaled back a lot of expansion plans, not simply because of the tariffs, but because of the uncertainty. If you ask me, “What will tariff rates be 120 days from now?”, nobody has any idea, and that includes Donald Trump, that includes his treasury secretary. Businesses are reluctant to make plans or investments on that basis. So, I think we’re probably now maybe slightly down, but still maybe a 50% chance of recession. Certainly, an economic slowdown, certainly a bump up in the inflation rate. It’s stagflation, maybe stagflation light, but we’re definitely heading for some kind of stagflation.
Q: Could you give us a sense of your outlook for the US economy for the full year 2025 as a result of Trump’s policies? You’re saying there’s a 50% chance of a recession. What could be some of the contours of the stagflation, according to you?
Krugman: A sort of best guess is that we’ll have little to no growth for the year, maybe slightly positive, maybe slightly negative. If it’s slightly negative, we’ll call it a recession. If it’s slightly positive, we won’t. But from the point of view of how it feels to people, it’ll be the same thing, almost surely higher unemployment, and quite surely higher inflation. Even with this very modest step back in the tariffs, tariffs are probably going to add about 2% to the consumer price index over the course of the year.
We had an economy in 2024 that was, by any normal standard, a terrific year, solid growth, inflation that was a fraction of a percentage point above the Federal Reserve’s target, not in a way that anyone really noticed. 2025 is not going to look nearly that good.
Q: How do you react to the news about Moody’s downgrading the US sovereign credit rating from AAA? What are the warning signs here, according to you?
Krugman: One thing that needs to be said is that if a rating agency downgrades a corporation’s bonds, I take that very seriously because I suspect they know a lot that I don’t. When they downgrade a country, they don’t know anything that anyone studying macroeconomic data and the fiscal situation doesn’t already know. So, in itself, I don’t think the Moody’s downgrade is particularly informative, except insofar as it’s telling you that a lot of people out there are looking at the United States and saying, “Is this still the America we knew?”
Yes, we have a lot of debt, but we have the resources to cope with it, to pay it down. And we’ve coasted for a long time on the belief that eventually our political system will do the right thing.
If you look at the budget bill that appears to be on track to be enacted this week, this does not look like a country that can be trusted to do the right thing. It’s a bill that will blow up the deficit with tax cuts, when we’re already at a basically long-run unsustainable deficit, supposedly paying for that with absolutely savage cuts in aid to people in need, which are probably not sustainable even with this government.
Millions of people who voted for Donald Trump thinking he was going to make their lives better are about to discover that they have no health care. We do not look like a serious country. And how long can we continue to coast on the belief that we will once again become a serious country when, in reality, we look less serious by the day?
Q: What do you think Donald Trump’s tariff policies and some of his trade deals will do to long-term confidence in the America story? Do you think Donald Trump will be able to make corrections in the next few months, or do you feel what he has done is going to shake investor confidence in the long term?
Krugman: One thing to understand about the tariffs, aside from the fact that they are really very high, we say that he’s walked them back, but, we’ve gone back from a few days ago when we had the highest average tariff rate in 100 years. Now we only have the highest average tariff rate in 90 years. This is not a big deal. We’re still extremely protectionist.
We had very low tariffs just a few months ago, and now we have an average tariff of, depending on which numbers you use, something between 15 and 18%. Even if that gets walked back, the fact is we’ve now shown that we are a country that can do stuff like this. People don’t talk about it a lot, but we have many agreements. We have free trade agreements with multiple countries. We have broader tariff agreements under the World Trade Organisation, and we’ve just ripped them all up.
The Trump administration has just said, “Oh, deals, agreements, treaties, never mind. We want to do something different.” And even if they end up walking all of it back, which does not appear to be in the cards, the fact is that we now know the US can elect people who will do that. I’m sitting here in New York saying the Trump administration treats international agreements the way New Yorkers treat ‘Don’t Walk’ signs, they’re a suggestion, not something you actually have to obey. What country will ever really take us seriously when we make promises? What business is going to make plans on the basis that current policy is something you can rely on to continue?
So, no, we don’t undo this easily. It’ll take many years of responsible government, of which we see no sign anytime soon, to get back to where we were four months ago.
Q: Do you also see this as having a major impact in terms of rebalancing global capital markets and the role that the US stock market plays?
Krugman: Tariffs, there’s a lot of evidence on what they do to trade balances. They reduce the amount of trade, but countries that impose tariffs on their imports also usually end up doing a lot of damage to their exports as well. There’s no particular reason to think this is going to reduce the US trade deficit. The only way it might is if the dollar gets weaker because people stop thinking of the United States as a safe place to invest. We’ll need to see how that goes.
But again, this is really an earth-shaking betrayal of everything people thought about the United States. America has mostly, for better, though in some ways for worse, been the safe haven. And now, all of a sudden, we’re a place that doesn’t honour its agreements. We’re a place of “who knows what.”
And longer term, I worry, what happens to US technology now that we seem to be systematically destroying our prestige universities? Now that we seem to be cracking down on government funding of science? So, rebalancing is not the word I’d use. Undermining is probably a better word.
Q: I’d also like to ask you about the weakening of the dollar. We’ve seen significant weakening against major currencies like the euro, and the yen. At the same time, there’s higher volatility in the US bond and stock markets. What is the trajectory, according to you, and what are the big causes for concern?
Krugman: I spent a lot of my career on financial crises in emerging markets. And what’s happening in the United States looks like a sort of very low-key, but nonetheless qualitatively similar thing. It really does look like we’re getting a bit of a “sell America” trade, as if people are losing confidence in the United States, losing confidence in the dollar.
Normally, tariffs make a currency stronger because you buy fewer imports, so there’s less demand for foreign currency. Instead, the dollar has gotten weaker. And I look and say, “Well, I’ve seen this movie before.” Now, it’s a very pale shadow of what we’ve seen in the past. The weakening of the dollar by a few percent does not look like the 80% fall in the Indonesian rupiah in 1998, but it does rhyme a little bit with what we’ve seen before. And again, it’s incredible that that’s happening here in the United States.
Q: Now, when it comes to Donald Trump’s trade deals, there was a lot of worry around his tariff war with China. But he has now walked back on it to some extent, and he has lowered tariff rates on Chinese exports to 30%. China would be imposing a 10% tariff on US goods flowing towards Beijing. So, do you think this deal is now good for the world economy, or do you feel there are no winners or losers? Or who is the winner in this?
Krugman: No winner, economically, this is destructive for everybody. And, it tells you something about how much we’ve lowered our expectations that we think of a 30% tariff as low. I mean, that’s still a crazy high tariff. A 145% tariff basically meant shutting off trade completely between the United States and China. A 30% tariff, there’s some estimates and assumptions to be made, but when I run it through my model, I say this will only cut trade between the United States and China by 65%. We’re still talking about a massive decoupling of the world’s two largest economies, and it’s really a bad thing. It’s a bad thing for both of us. If I had to say, I think probably in the long run, the damage will be greater to the United States, but it’s actually huge damage to both economies. So how you can look at this and not say, “My God, what have we just done?” baffles me.
Q: Do you think Donald Trump has gone ahead with this trade deal under pressure from US companies?
Krugman: US companies, US markets, yeah. Unfortunately, we’re hearing more than I really wanted to know about the actual policy process. We know that major changes in US trade policy come about because some members of his cabinet manage to catch him in his office while other members of his team are in meetings elsewhere and persuade him to make major policy changes. Then they sit in his office until he’s posted the policy change on Truth Social. We are the world’s greatest nation, and we’re making policy basically based on who talked to the President last. God knows what the elevator operator will tell him next.
Q: About what he said to Apple and Walmart, he literally told them to eat tariffs after Walmart said they were having to increase prices as a result of the tariffs imposed by the US administration. How do you think this is going to go down with US industry and the kind of precedent it sets by telling one of the largest retailers in America to go eat tariffs and absorb them?
Krugman: First of all, Trump has been telling us all along that China will eat the tariffs. Now he’s saying, well, actually, they won’t, so Walmart should eat them. That’s pretty funny. And I thought Republicans believed in free markets. Instead, we apparently believe in an economy where the President tells you what prices to charge, which is pretty bad, and it’s also just not feasible.
Retailers like Walmart have a margin of a few percent, and when you’re imposing reduced tariffs of 30%, saying they shouldn’t pass it on to consumers is just not going to work. Maybe they won’t raise their prices, they’ll just stop selling stuff. If anything, this is a recipe for empty shelves. And does Trump, have any idea how complicated a modern economy is? He cannot go down the list of major companies one by one and tell each of them not to raise their prices. Even he can’t put up enough tweets to do that. So, this is crazy. This is just trying to avoid a bad headline, and it’s going to be bad news for corporations who have to wonder: What can we do that won’t run the risk of suddenly becoming an enemy of Donald Trump? I mean, a President who has decided to devote substantial amounts of his time to denouncing Bruce Springsteen and Taylor Swift, who knows what he might do to your company?
Q: That brings me to Apple. Trump said during a press conference that he told Tim Cook that you cannot be manufacturing in India for the US market. It’s fine, whatever you want to do in India, you do for that country, but if you’re manufacturing for the US, it has to be in America. How can he even dictate business or manufacturing decisions to any company?
Krugman: He has no legal right to make those kinds of decisions. But then again, legal rights are not something that the Trump administration seems to care a lot about. But it does, in a way, get at a fundamental economic issue, which is that a lot of the things the US imports, producing them domestically is just not cost-effective. We can do some things. United States, is not incompetent at manufacturing. We’ve had some semiconductor plants open and be very successful. But a lot of the production of something like an iPhone, significant segments of it, are very labour-intensive. You can’t automate them completely. The United States is still a high-wage nation. It’s just not feasible to produce them competitively in the United States. And if Trump thinks that he can force us to do that, then, I don’t think it’s possible. But if he tried, the increase in the cost of living for US consumers would be insane. And actually, the cost of doing business, because a lot of the stuff that he wants to bring back to America isn’t even for consumers, it’s stuff that businesses use. It ends up making a lot of business less competitive in the world.
Q: Do you feel that all of this, Trump’s criticism of certain policies of companies, is going to slow down the capex cycle? Because companies will be like, “Hey, we don’t want to invest anymore. We don’t know what’s happening at the White House. Policies may change, let’s not put up additional capacity, let’s not make fresh investments.” Do you think this could lead to a reduction in job growth in the US?
Krugman: Oh yeah. The recession risk for the United States largely comes not even from the tariffs exactly, but from the uncertainty. I mean, if Trump just announced 10% tariffs on everybody forever, and people believed him, that would raise the cost of living, but probably businesses would start investing on that basis. If he keeps announcing, “Well, whatever I said about tariffs yesterday, I’ve completely changed,” and the new tariff rate is good for 90 days, and by the way, whatever business decision you make, I may go out and denounce you and take revenge, a lot of companies… you can just start to see it in the actual announcements. But truly, there’s a lot more of, “Hey, the safest thing to do, maybe the only safe thing to do, is to sit on cash.” Don’t stick your neck out. Any investment you make runs a substantial chance of being completely wasted money, because policy just did a 180-degree turn before the investment had a chance to mature.
Q: On the “beautiful” tax bill that was set to come, as Donald Trump called it, it has been stalled for the moment, but many say it’s not completely off the hook and may still pass the legislative process. This could increase the US debt by at least $3 trillion to $5 trillion. How do you see this tax bill that would extend major tax cuts to different taxpayers? Who is this going to benefit, and do you think it will go through the US Congress?
Krugman: I think it will go through. Apparently, the committee hurdle that held it up last week was crossed late last night, so this probably is going to go through. They’re rushing it. It’s kind of a bum’s rush, because if the public got any wind of what’s in it, it probably would fail. And the reason is not the tax cuts, not the deficits, although it is bad. It’s clear, this is why Moody’s downgraded, because this is highly irresponsible in terms of increased deficits. In the past, the United States has been able to shrug off worries about the deficit. That may be coming to an end. But the savage cuts, I’m seeing something like 15 million people might well lose health care. A lot of people are going to lose nutrition aid. This is just an attempt to partially offset the cost of those tax cuts for the wealthy. They are going to literally ruin the lives of millions of Americans. Many of them are people who voted for Donald Trump. So, if this does get enacted, expect a tremendous political backlash, because this is not just dollars and cents. This is a massive act of cruelty.
Q: The US and India are negotiating a trade deal. They may have an interim trade deal as well. How do you think this will be for both economies, and your outlook on India?
Krugman: I don’t have a real outlook on India. I haven’t studied it.
In terms of a trade deal, I’ve actually been mentioning India as one of the few places where there could conceivably be a meaningful trade deal. India, although it’s come a long way down from the extremely high levels of protection it used to have, still has significant tariffs, and it can offer the United States concessions in the form of reducing those tariffs. It’s very different, we had an alleged trade deal with the UK, which was completely meaningless. It had to be meaningless because the UK has less than 1% tariffs on US products. So, the UK couldn’t make concessions because there was nothing to concede. India could make some concessions, and maybe that’s enough to make some difference, maybe enough for Trump to declare victory.
In terms of the impact on either economy, it’s really not going to be a big deal. Among other things, India is not close to the United States, it’s not a neighbour. America is not India’s biggest trading partner. And India, from the US point of view, is a quite minor trading partner. It’s a growing economy, more significant than it used to be, but it’s not nearly as big an economy as, say, the European Union, and it’s not nearly as close as Canada or Mexico. So, US business will not even notice whatever the deal is. It will have no visible impact on the US economy, and probably not much impact on the Indian economy either.
Q: And finally, as we see the US and Donald Trump disrupting the global economy and multilateral institutions, what does this mean for the rise of China economically? What are the big themes around China that you’re watching out for, and which possibly concern you?
Krugman: China has some serious problems. China is an economy that’s built around target rates of growth, 8%, 9%, and they still have a lot of their institutions set up for that. But they can’t do that anymore. Their working-age population is shrinking. The technology has advanced sufficiently that they can no longer achieve extremely rapid progress just by borrowing. They’re still formidable. They still have a lot of growth potential, but they’re not managing it very well. They have excessive levels of investment with diminishing returns. So, China has problems.
But I have to say that in terms of global influence, the Trump administration is really making China great again. I mean, we are now in a world where China is a more reliable negotiating partner, can be trusted to keep its word far better than the United States. It pains me to say that. China is an authoritarian regime, and they are generally not very trustworthy, but they are not nearly as erratic as my country has become.
