The Ezra Klein Show - Trump’s Tariffs, Market Panic and What Comes Next

Episode Date: April 11, 2025

After a week of market chaos, President Trump pulled back from the brink. But he didn’t pull that far back. He left a 10 percent tariff on most of the world and launched a trade war with China. It��s unclear what he will do after this 90-day pause or what countries need to do to satisfy him. But one thing that is very clear now is that our economy is subject to one man’s whims.How are businesses supposed to adapt to this new reality? What is this new reality?Peter R. Orszag is the chief executive and chairman of Lazard, one of the world’s largest asset management and global financial advisory firms. He also served as the director of the Office of Management and Budget under President Barack Obama, so was a policymaker during a financial crisis. And over the past few months, he’s been talking to lots of C.E.O.s and corporate board members as they try to process these changing policies. I wanted to ask him what he’s been hearing and how he sees the volatility of this moment.Mentioned:“A User’s Guide to Restructuring the Global Trading System” by Stephen Miran“Paul Krugman on the ‘Biggest Trade Shock in History’” by The Ezra Klein ShowTrade Wars Are Class Wars by Matthew C. Klein and Michael PettisBook Recommendations:Underground Empire by Henry Farrell and Abraham NewmanChokepoints by Edward FishmanSmart Money by Brunello Rosa and Casey LarsenThe Catalyst by Thomas R. CechKaput by Wolfgang MünchauThoughts? Guest suggestions? Email us at [e-mail] can find transcripts (posted midday) and more episodes of “The Ezra Klein Show” at nytimes.com/ezra-klein-podcast. Book recommendations from all our guests are listed at https://www.nytimes.com/article/ezra-klein-show-book-recs.This episode of “The Ezra Klein Show” was produced by Jack McCordick. Fact-checking by Michelle Harris, with Mary Marge Locker and Kate Sinclair. Mixing by Isaac Jones, with Aman Sahota and Efim Shapiro. Our executive producer is Claire Gordon. The show’s production team also includes Marie Cascione, Rollin Hu, Elias Isquith, Marina King, Jan Kobal and Kristin Lin. Original music by Pat McCusker. Audience strategy by Kristina Samulewski and Shannon Busta. The director of New York Times Opinion Audio is Annie-Rose Strasser. Special thanks to Matt Klein. Unlock full access to New York Times podcasts and explore everything from politics to pop culture. Subscribe today at nytimes.com/podcasts or on Apple Podcasts and Spotify.

From New York Times opinion, this is the Ezra Klein show. Here's how the last week or so went. President Donald Trump unveiled a half-baked package of gigantic tariffs. So half-baked, one of them was a tariff on a group of islands inhabited by penguins. Those tariffs threw the markets into chaos. That chaos, it should be said, was not simply the result of higher expected prices or supply chain disruptions. What markets hate is uncertainty.

Financial crises are usually the result of some unexpected uncontrollable shock that overwhelms the policymakers who are trying to maintain stability. In this case, Trump himself was a shock. He was announcing that he was himself trying to end this era maintain stability. In this case, Trump himself was a shock. He was announcing that he was himself trying to end this era of stability. He wanted a realignment of the global financial system.

And he can't shift those tectonic plates without creating a few earthquakes. But man, what an earthquake. Trillions of dollars of wealth wiped out of the stock market by choice. The Trump people said, don't worry about it. That's Wall Street, not Main Street. All we care about is the American worker.

But then the upheaval hit the bond markets. The market for US treasuries began to shake. A bad sign because US treasuries are the relentlessly reliable asset at the base of the global financial system. Crack that and the whole house can come down. And that seems to be what pulled Trump back from the brink. The bond markets that persuaded you to reverse course.

I was watching the bond market. The bond market is very tricky. I was watching it. But if you look at it now, it's beautiful. The bond market right now is beautiful. But yeah, I saw last night where people were getting a little queasy. But he didn't pull that far back. He is still tariffing most of the world at 10%. He's tariffing China at 145%. And as for the tariffs he paused, well, that's a pause. It's a 90-day pause.

What happens at the end of 90 days? What deal is Malaysia supposed to strike with us in the meantime? Who are they going to make that deal with? Nobody knows, not even, I suspect, Trump himself. But I think what we can say right now are three things with certainty. First, we're entering an era of higher prices and unknown levels of supply chain upheaval. We're about to see a massive trade war with China. The global economy is complex. When you put this kind of pressure on that system, things that you're not expecting can break. Second, we are in an era of extended, extraordinary economic uncertainty. No one really knows what any of these tariffs are going to be

in a year. Will Trump get peeved by what countries do or don't offer him in the next 90 days and return with yet more fury? Trump sees tariffs as ongoing leverage in every policy dispute. Is he really going to give that up? I'm doing these two or three day turnarounds on these podcasts and the tariffs are often different by the time I release the episode. If I don't have enough policy certainty to plan a podcast, how are major companies supposed to plan long-term capital investments? Third, the king cannot hear no. How are major companies supposed to plan long-term capital investments?

Third, the king cannot hear no. One of the most appalling parts of his whole fiasco was watching Trump's advisors fawn over him after he buckled. Bill Ackman, the hedge funder, wrote on X, this was brilliantly executed by at-real Donald Trump. Textbook art of the deal. You heard this again and again. Here's the White House

press secretary. Many of you in the media clearly missed the art of the deal. You clearly failed to see what President Trump is doing here. The art of the deal. Only there's no deal. Trump struck no deal with anybody. And there was definitely no art. We learn the outer edge of Trump's pain tolerance, and so did the rest of the world. So there goes some of his leverage. We saw a slapdash policy fall apart within a week or so. But still, Trump's allies are declaring his genius.

Not because they expect us to believe it, but because they know he needs to hear it, and he needs to hear them saying it in public aloud. It is part of the structure of humiliation that dictators demand of their servants. Authoritarianism is not just a mode of governance. It's a habit of communication. The king is always right, even when he is contradicting what he said the day before. Future influence in the court relies on being in his good graces, and praise is the currency of that grace. Dictatorships are disastrousaces, and praise is the currency of that grace. Dictatorships are disastrous in part because they restrict the flow of information around

the decision maker. The bond market was eventually information Trump could not ignore, that nobody could tell him to ignore. But those who seek his favor and his ear are making sure he learns nothing from this episode. I suspect we are underestimating how thick the informational bubble around Trump now is, how little bad news actually reaches him, how rarely he ever hears serious criticism clearly delivered, how much the sycophants around him praise every utterance that comes out of his mouth.

So no, I don't expect Trump to learn much from this episode. But what should the rest of us learn from it? My guest today is Peter Orszag, the CEO of Lazard, one of the world's largest asset management and global financial advisory firms. He was also the director of the Office of Management and Budget under Barack Obama. So he served as a policymaker during financial crises and is a market and CEO whisperer in these last few months. What is he hearing? What is he hearing?

What is he seeing? As always, my email, esraklanshow.nytimes.com. Peter Orszag, welcome to the show. Good to be with you. So we are speaking late afternoon on Wednesday the 9th. This morning markets were in turmoil, then Donald Trump announced a 90 day pause on non-retaliating countries. Tell me, as you were tracking the markets and as you were talking to the people at your

bank, what you were seeing? I would say among CEOs and boards, a pause, a kind of, we're putting decision making on hold because we can't figure out how this is going to play out. I think people often say markets don't like uncertainty and businesses don't like uncertainty. You saw that play out in real time, which is a deeply negative reaction to the level of heightened uncertainty that was in the marketplace. The treasury market was beginning to shake. Yeah.

Can you describe what was happening there? Sure. Well, here's the backdrop. So I think we need to step back and I will own, having been a mistaken fiscal worrywart in 2008 or nine, worrying about the fiscal path and an era when it turned out not to have been necessary to have those concerns.

And over the past 15 years or so, even I, former budget director, have gotten sick and tired of like the endless worrying, the sky is falling, the budget's unsustainable, all of that. I kind of have zoned it out. Unfortunately, I think we need to get back into that mode because the situation today is much different than it was a decade ago. Deficits today are six or seven percent of GDP, a decade ago it was three. Interest rates are roughly twice as high as they were then. And the final piece, which brings us to your question, is just under $9 trillion

of US debt, treasuries, is owned by foreign creditors. And the argument has always been they would never sell that because if they sold, they'd lose money because they'd create a reduction in the price by selling. And also there's no good alternative that everything in life is relative and there's no point looking elsewhere because everything else is more unattractive than anything the US could offer. The situation can change though if the US, if frictions between the US and many key allies rise and those allies then say, actually, if we're each imposing pain on one another,

maybe I'm willing to tolerate the losses from selling my dollar reserves and also my treasury holdings. And that's one part. Then there are questions just about the most recent turmoil and what you were seeing was some unusual behavior in the treasury market along two different dimensions. One was normally during these times of crisis, the exorbitant privilege of being the reserve asset, you're normally the safe place to go. So even if it's kind of something you did, there's a warning over the debt in the US.

People get nervous. They go into treasury. So the interest rate goes down even if the thing that's causing the riskiness is your own kind of doing. Here what was happening is that happened initially, but over the past few days, what's been happening is interest rates on US treasuries have been going up, not down, despite the other market turmoil. That's an unusual thing.

And then there were other aspects of it. So not to get too wonky or too detailed, but basically when people suffer losses in stocks, they often have to make good on if they borrowed any of that. Treasuries are a very liquid thing that they could sell. So there was kind of a little bit of a feedback loop. And there were other unusual things, which we could talk about involving bonds versus swap rates.

We don't need to go into all of that, but there were little tremors that were showing up in the debt markets that I would be shocked if they did not catch the attention of senior officials in Washington. I mean, Trump talked about them and talked about the, I think he called it queasiness. He said they were getting queasy. And that I think scared people. You can maybe explain why this is better than I can, but people are okay with the stock market going up and down.

They're not okay with the bond market beginning to unravel, that that is taken with a different level of seriousness than the S&P market, the equities market, that's volatile. The treasury markets are not supposed to be volatile. Well, what I would put it is, you have sort of different exposures. I mean, for most Americans, you'll have some money in the stock market, but the biggest asset you own by far is your house.

And to the extent that mortgage rates are driven off of the 10-year Treasury rate or some underlying Treasury rate, you can see a more direct impact on the financial condition of many people off of the bond market rather than stock market. But I would say both are important. I don't know that one is more important than the other. The only thing I'd go back to is that your comment reminds me of is don't forget that in the early 90s, James

Carville didn't say I want to come back as a stock market. He said I want to come back as the bond market. So they backed off on this a little bit, but we're still in a place where the tariffs that are being proposed are pretty significant. So they're more or less what Donald Trump was promising during the campaign, a 10% tariff on imported goods. It's still a little bit unclear and probably by the time this comes out, it might have clarified.

But now the tariff on China looks to be it's in the, you know, over 100% as we're speaking. There are some different tariff rates on a couple other things. It seems that this is on the order of a 25 point tariff increase on average because the China one is so high and that's the calculation I've been seeing around. This is being treated now given how bad things were getting as a walk back to a moderate position. But when I talked to people who were Trump supporters during the campaign, and this was

a proposal, they promised me nothing like this would ever happen. They'd just be negotiating ploy that he would come down from after he got some deals. So, from your perspective as somebody talking with a lot of different companies who has a perspective on markets, what does it mean for these tariffs to go into effect? How does that change your estimation of future US growth? How are you advising or would you advise companies to act act given there's been a lot of volatility here? What is this point mean for the economy? I think splitting the world into China and ex China probably makes sense for this purpose just given the dramatically different tariff rates

So a 10% across the board tariff rate and yes, there are some exclusions and and this and that but let's just call it 10% I mean remember we were at kind of 2 to 3% So it it will when I talk about the underlying tectonic plates of the global economy, it will have an effect. The China part I think is more complicated because I suspect that if you ask me to bet a year out, the tariff on China is not gonna be anywhere remotely like 125% or whatever it's gonna land at now.

And instead what it will happen is there will be some set of agreements with all the ex-China part of the world and then an attempt to reach some negotiated settlement with the Chinese that involves a higher tariff rate than we had before, but nothing like what we're seeing right now. So there are two forces here. There's one, the tariff rate. And if the tariff rates, if anybody believed they were stable, we could simply model that out. Okay, a 10% tariff here, a 60% tariff there. We could think about that like a tax policy. But then there's the uncertainty.

Like you're saying here, you don't expect the China tariffs to be what they are today in a year or in two years. I think a lot of people don't even expect the bilateral tariffs on a bunch of different countries to be what they are today in a year or two years. So one of the things the Trump administration says they're trying to achieve is persuading companies to make investment decisions based on these tariffs, specifically to persuade them to invest in the US. But if companies don't trust that the tariff environment today is going to be the tariff

environment in a year, and these are long-term capital expenditure decisions, it would seem that the obvious thing to do is to just wait. Yeah. And that's that in every discussion that I've been having with CEOs across the globe pre this announcement, but I suspect a lot of it will continue because you can wait 90 days, see how it plays out.

There were a lot of decisions on hold. And it was for a variety of reasons. You know, you highlighted one, which we don't know the level of tariffs, but also we don't know the response of foreign governments. Many foreign companies are under pressure from their own governments not to invest in the US. You saw President Macron say that explicitly, but others have said it more in private.

So most of the corporate decision-making seemed to be on hold. And I would suspect that that is going to remain largely the case until there's more clarity. I'll give you one example. The administration had come out with a variety of these bilateral reciprocal tariffs. And one problem along with others in terms of creating the uncertainty is

you couldn't argue that was the worst case. Even the X percent, 17% on Israel, you couldn't argue that was the worst case because the administration also said that if a country retaliates, it will raise the tariff rate from the billboard. And that's exactly what's happened with regard to China. So they've shown they're willing to do that.

So what was interesting today is administration officials, including the Treasury Secretary, said you can now be assured that what we showed you before is the maximum. There's some tension, I think some further clarity that needs to be provided of how that works with the simultaneous thought that if any country were to retaliate, we may go above what was put forward before. So these are the sorts of questions that over the coming days I think are going to need to be answered in addition to whatever deals ultimately are cut before firms are going to feel confident that they

can make some investment decisions. And then the second problem is one that I know you've identified and spoken about before, which is we do have elections in the United States and the policy structure can change. And so I don't know any company that's making an M&A decision or an investment decision for two and a half years. It's making these decisions over a much longer period of time. And so the other question is how much of this will stick thereafter? And what I'd say, not to do the Lazard advertisement, but just really briefly, I created a geopolitical

advisory team a couple of years ago and the demand for that team is off the charts because you can't make a business decision today without taking these sorts of things into account for exactly the reasons that we're discussing. But how can you make the decision at all? Because as good as your geopolitical advisory team might be, And they are excellent.

I'm sure they're wonderful. I do this professionally and I'm pretty good at it. And I know the people involved. And I can tell you that they cannot tell you what Donald Trump will do in 30 days or 90 days. Because the only person who knows is him and he doesn't know. Well, I don't know what he knows and what he doesn't know.

But what I would say is I agree with you. I mean, what I have been saying internally is we need to make sure we are not presenting false conviction here in terms of what will happen because fundamentally people don't know. I do think once we get through this stage, so let's assume that there are a set of deals, the variance in outcomes may be less extreme. And so it's not that businesses can't decide under uncertainty.

They do that all the time. The world is an uncertain place. That happens all the time. It's just the levels of uncertainty here were so extreme that it was freezing people in their tracks. So I think what the administration presumably would want to do is bring that level of uncertainty back into kind of a manageable range. And that's one interpretation with these different factions within the administration, what just happened today. Has there been a signal aside from wait and see that in your experience companies are taking from the reorientation of American policy?

I mean, there are investments you cannot pause forever. There are decisions you have to make. Companies make, as you said, decisions under uncertainty all of the time. And obviously Donald Trump has intuitions. People know what those are. In the decisions that do need to be made, have you seen a pattern on the way people are trying to plan for the uncertain policy equilibrium we are likely to be in to some degree for a while. I'd say it's too early. I mean, you know, it's been roughly a week and so... It's not very long now. It's not very long. And I've done a lot of CEO level discussions and most of them just wanted to talk through

what might happen, what the scenarios were, and they were just at the beginning of, you know, let's put things on hold for now, but not getting to the, and therefore this means that, or what have you. In general, not always, but there are usually not that many decisions that need to be made in the span of a week. So the question becomes, the longer the uncertainty persists, the more economic damage there would be. And some of it becomes irreversible, not just on the corporate side, but in terms of the foreign investor attitude towards the United States and what have you.

So I think right now we're at another period of peak uncertainty because the uncertainties come down, but we don't know whether it will persist or not. Well, one of the reasons I am myself skeptical that the 90-day pause is as clarity-bringing of a policy move as I think some are treating it is that I remember the 30-day pause on Canada and Mexico. And there was a market reaction to the announcement of the 25% tariffs on Canada and Mexico.

Then he backed off and people said, oh, look, old Donald Trump, he's not going to do this. That guy cares about the stock market. And then in 30 days, he did. And then we had another reaction. And then it's been kind of escalating from there. And now there's a de-escalation. But nobody really knows what he wants

from these other countries in the 90-day pause. There's been a bunch of reporting that people in other countries who would happily come and try to make a deal. Not exactly clear what we want from Vietnam, but maybe we could get it. But it has not been communicated to them what Donald Trump wants.

And there have been, Steve Moran gave this speech, and he said, well, maybe you can help us with defense spending, or maybe you can buy more of our things, or you could just make a direct donation to the US Treasury was one of the options. But it's a little, one of the things that has been very, I think, tricky about this is there's one world where they're trying to achieve something very discreet. And there's another where Donald Trump likes tariffs because tariffs are leverage. And he's a person who works in leverage, wields leverage, who develops moments of anger in

other countries, right? Maybe we come to a deal with Europe, but then Europe does something he doesn't like or France does something he doesn't like. And so this kind of shakiness can persist. One of my worries for the economy right now is that, you know, a 10% tariff and a higher one on China is bad, but there can be adjustments made to that. But a world where lots and lots of companies are delaying investments over a long period of time, that's a secondary effect that will push a lot of investment we need or we're

expecting in the present out into the future. And that does have an effect on jobs. It does have an effect on our industrial base. It does have an effect on lots of other things. And I mean, that just seems very likely to be our world. Or are you more optimistic about it? The administration now has an opportunity, whether it's realized or not, to lay out a little bit more sort of what they're trying to accomplish

and provide what people had hoped would happen on April 2nd, which is, okay, this is actually the deal. This is what we're doing. Go on with your lives so you could adjust. Among CEOs and boards, I think people have some understanding of a change in the dynamic with regard to China, but the dynamic with, with, with regard to China, but Canada, Mexico, Europe, that part was a little bit, you know, um, befuddling,

um, because it wasn't clear what the theory of the case actually was. As a changed is the theory of the case less befuddling now? Well, I think there were two parts here. I mean, there's the theory of the case if it's executed in a particular way, and I want to come back to what that means. And then there's if it's executed in a different way. And I think what we've done is shift from kind of scenario two a bit into scenario one. And so what do I mean by that?

One way of thinking about it is the chair of the Council of Economic Advisors, Stephen Moran, put out in November of 2024 a guide to remaking the World Trade System in which he identified what the underlying objectives of this set of policies are. Maybe we can come back to that. But then also highlighted that there was a significant risk of adverse market volatility and adverse economic effects unless it was implemented in a particular way.

And what were the key attributes of implementing in a particular way? It was graduated implementation and forward guidance. Graduated implementation means baby steps, step by step, a little bit at a time. And forward guidance means you signal way ahead of time what you're doing in those baby steps to give markets and businesses and consumers plenty of time to adjust. And I think what we saw over the past week is it was not implemented that way. It was not graduated. It was all at once.

And it also took effect in a matter of days, not even months or quarters. I think it's good for us to circle the Moran paper for a few minutes, because something I see people on Wall Street doing, a lot of you all are very smart people and you're looking- You all, look at this. I'm not on Wall Street. I'm a poor member of the media here, man.

There is a search for a framework that makes sense. And Moran offered people the most sophisticated framework for something that might be Donald Trump's trade policy. But also Moran has said, he just gave a speech over the week where he's asked about his very important paper and he said, look, this paper is not important because I wrote it before I was in the administration. It's not exactly Donald Trump's trade theory. So I guess what I'd ask here, because I've seen people really wanting to make this paper,

the Rosetta Stone, how do you understand what it says? What is the remaking of the global financial order that it proposes? And then how well has the administration's policy decisions and movements tracked that paper's offerings? Okay, so before we do that, I think we need to step back even one step before that, which is to acknowledge that over the past two or three decades, the so-called Washington Consensus, the idea that basically free markets and unfettered competition, whenever possible, that that was the best system possible, that that's been discredited because many

people have not experienced the benefits to the degree that people think they should have or at all. If you look at life expectancy in the United States, for roughly two thirds of Americans, life expectancy has been flat to down over the past two or three decades. So before we get to the what, we have to start with the why. And it's because there is a deep level of frustration you've written about this and maybe we can get to some of the solutions that you proposed.

But I don't think I can solve to this. Thank you very much. We can flip the table here. But, but you have to start there. So you have to acknowledge that there's a lot of frustration, that there's a lot of anger, and people searching for a solution. So the Washington Consensus has been discredited, but there's been no intellectual framework that's coherent that has replaced it.

Do you feel that Consensus was discredited? I do. Because I don't buy this connection between trade policy and life expectancy as a one to one thing. No, no, it's not. And in fact, I think, you know, most of the evidence suggests that most of what was going on had to do with technology and other factors and not trade per se. But what I would say is the easy kind of the market will always solve everything and everywhere,

which is a caricature of what was actually policy over the past couple of decades. So it's unfair. You served in the Obama administration. I don't remember Barack Obama talking about trade as an endlessly unfettered good thing. When he had that gaffe, when he talked about people in hollowed out factory towns,

clinging to guns and religion, what he was talking about was hollowed out factory towns clinging to guns and religion, what he was talking about was hollowed out factory towns, right? Even then there was a lot of concern over whether parts of the country were being terribly left behind. Yeah, I think that's right. It is a caricature, but I think it's not unfair to present that as being a kind of meme. And I would also point out that China in particular, as opposed to Canada or Europe, plays a different role in that story.

But there's anger and a vacuum. Into that vacuum steps Donald Trump, who believed this since like the 80s, 90s in Japan. Correct. Right, he came to these views that he's proposing now when the antagonist wasn't even China, it was Japan. That's true, but I think it doesn't change the fact that there was a vacuum.

And so my only point is he ran on this agenda and he won on that agenda. Then the question becomes, well, what is, you know, beyond just saying trade has caused harm to certain parts of the population, what's the pathway forward? And that's where I think the Moran paper is interesting because it is putting forward a somewhat deep

and controversial perspective that deserves serious debate, which is the United States has occupied a place in the global economy. I personally think it has been a benefit, and in fact, it's been called the exorbitant privilege, which is that we are the reserve currency. We are the pillar of the global economy in the sense of it's the dollar that's used for the majority of international trade transactions. It's the dollar that has been where other central banks hold a disproportionate share

of their reserves. And what Moran is raising in this paper is the question of whether we want to be the reserve currency for the world. So he is taking what has been called the exorbitant privilege and raising questions about whether it's actually a privilege at all. So give me both sides of that. What do you understand to be the benefits America gets from being the world's reserve currency?

And what is the cost that is being argued, at least, that it carries? If we want the world to stop buying anything, Chinese telecom infrastructure or Russian oil or whatever, our ability to influence entities that are not even connected to the United States is dramatically higher because the whole infrastructure runs through us. That in order to move money from point A to point B, you typically are going through some intermediary that touches the United States and boom we can intercede at that choke point. New book is out that delineates those choke points. And that gives us the ability to influence things

that otherwise we would have trouble influencing. Companies in Europe or Africa that don't even have anything to do with the United States, but they do have to do with a bank that then has a intermediary that has something to do with the United States. That's one benefit. Another benefit is that our borrowing costs are lower

than they would otherwise be because the dollar and treasuries in particular are seen as the safe asset, the reserve asset, if you will. And so it's really hard to estimate this, but maybe somewhere between 25 and 75 basis points of lower interest rates. And by that, I mean, instead of it being 4.5, it would be 4.25 or maybe 4% borrowing costs.

So that adds up over time, especially because we now have a very substantial debt as a share of the economy. So those interest costs are quite significant. And I think the list goes on. And another way of looking at this is international investors have over indexed on the United States probably in part because of that fundamental role that we play in the global economy. So if you look at the share of dollars in stocks that people allocate to the United

States relative to other countries, it's higher than it quote should be based on our GDP or other metrics. And that's in part because of this special role that we play. All right. So those are some of the games. What's the downside? Right. What's the downside? The downside is that when you are that reserve currency, your exchange rate tends to then be higher than it would be.

In other words, the dollar is more expensive than it would be. You can think of it as because of that extra demand that other countries have for dollars as opposed to yen or euros or whatever. That higher exchange rate then means exports are more expensive. And one way of thinking about it is there's something that academics call the Triffin Dilemma, which is if other countries need your dollars to do their stuff when they trade, that means you need to be supplying dollars to them.

And logically, the only way that that can happen is if you're running trade deficits, because when you run trade deficit, you're effectively importing more than you're exporting, and the difference is that you're supplying cash or dollars to the rest of the world as a result. And so the argument that the CEA chair is laying out is to the extent that you think trade deficits are harmful and decline in manufacturing in particular is harmful, this

is a cause of part of that. And so is it really worth the other benefits? Let me zoom in for a minute on the question of whether or not the dollar is driving the decline in manufacturing employment. It's probably true that the dollar's value has had some effect on that. But every estimate I find is that it's a fraction of the total and this is more automation, it's more the move to services, it's more a bunch of different things, and it's probably

not going to come back. So you can look at other countries. Germany has a very different trade policy than we do. They've existed in more of the world that I think Stephen Moran and Donald Trump seem to want us to exist in. And you also see manufacturing as a share of employment dropping there. There are a lot of arguments people make right now that China has probably hit peak manufacturing employment. I think Donald Trump is a nostalgic. And I think that he wants

an economy and he's baselined on an economy of America in the 50s, the 60s, perhaps. And that he's trying in his own way to get us back there, but there's no there to go back to. And so one question I have for you is you did everything that Stephen Moran wants to do and the dollar was no longer the world's reserve currency, although they say they wanted to maintain its role as a reserve currency. They're contradictory on that. But if it was no longer the world's reserve currency, if it devalued, then what is your view of what that would buy us given the world we now live in of

automation, of cheap global shipping, of artificial intelligence coming online very, very rapidly? Is the thing they're trying to achieve achievable with this mechanism? Well, I think there are two questions. First, is it achievable? And it depends on what question you're answering. But if you're saying, could we get back to 30% of employment being in manufacturing as it was in the fifties from today's level? No.

And in fact, I think Paul Krugman on this, this very show last week pointed out just the math is very difficult. Even if you eliminate an entire deficit, even if you eliminated that and it all went into domestic production, you take the manufacturing share of GDP from about 10 to let's call it 15%, you're not going to have 30% of employment off of 15% of the economy unless you're doing really unproductive things, point one. Point two is, is that shift actually something that we want? So in this whole trade debate, by the way, we have completely ignored the fact that it's all about trade in goods. So this whole discussion has been about the

trade deficit in goods, but the US is a net supplier of services, net surplus in services to the rest of the world. And this raises the question of are manufacturing jobs actually better than services jobs? And why are we having a trade debate that leaves out, you know, if this podcast advertising on this podcast or some other aspect of the podcast generates revenue abroad, that is an export of a service. And backbone of the American economy. Backbone of the American economy. International podcast.

And it's actually interesting because once you buy into the thought that trade imbalances can only reflect restrictions or cheating or what have you, then the logical question is, well, are we running the surplus in services because we're cheating? I don't think so. But that is, you know, why is it any different for goods versus services? So it, it raises a bunch of different questions. I think you want to be more, I think I am being intellectually generous but realistic. I think there's a deep nostalgia in American politics, and I think it's true in both parties,

for manufacturing employment. And I think there's a way in which services and also financialization are seen as decadent in a weird way, unmanly. I mean, we talk about the working class in politics and the implicit working class, particularly on the right, although not only, is this guy in a hard hat. When a huge amount of the working class, particularly on the right, although not only is this guy in a hard hat, when a huge amount of the working class now are nurses and teachers and so that's one piece of it.

I think there's a sense of these were the good jobs. These were the jobs on which a man could provide for a family and his wife could stay home with the children and we're trying to get back there. And I think that's often said quite explicitly by people on the right. And then there's a second dimension to it, which I think is more reasonable, which is that industrial base is a mechanism of national strength. And particularly if you've adopted the view that we are going to have an increasingly antagonistic relationship with China, having so much of our industrial base dependent on Chinese supply chains

or simply happening in China altogether is dangerous. And we need to reassure that. In the Biden administration, it was thought about as friend-shoring where you'd want it in a kind of architecture of friendly nations, including ours. For Trump, they've often talked about it more intensely domestically.

But it's not really about the employment, it's about the manufacturing might to win the wars of the future or dominate the industries of the future. Yeah, two parts on this. The first is the boundary between manufacturing and services gets blurred as to your earlier comment that more of manufacturing gets automated and more tech is used in manufacturing as has been happening. So the boundary, I mean, there's a whole line of business

called industrial tech that, you know, involves that area that's gray between what used to be thought of as manufacturing and services. So that's point one. And point two is, actually I'm gonna make three points. Point two is that the industries that are crucial to national security from the 1950s may well be different than they are today.

I would argue that dominating AI and dominating the new payment systems and the new payment stack that is being developed digitally are going to be really important, maybe more so than whether we can, you know, manufacture our own sneakers, for example. And so third point I'd make, since you had mentioned the previous administration's ideas on French shoring is I do think coming back to that point of the intellectual vacuum,

there were attempts, there were sort of grasping attempts to lay out a structure that would make sense and kind of hold together, but I don't think it actually worked. There was nothing that actually replaced the Washington Consensus, the Econ 101 character of life with something that kind of hung together. And so the impression, fair or not, was just, you know, we're going to throw together a bunch of different things and hope it all makes sense. You served in multiple administrations. You were the head of the Office of Management and Budget under Barack Obama. And I mean, I covered policy processes you were in.

And they were quite careful and tedious. And this has not been that. I mean, among other things, they put high tariffs on an island populated by penguins. And there's been a way in which it has felt like there are a lot of anti-trade intuitions all at war with each other simultaneously, that they're trying to do all of the possible arguments at once. Something in the Moran paper that he's very focused on is you need to keep your allies on your side in that. You are trying to reduce the level of global upheaval. That has not been their

approach here. They've backed off now on some things, but they've pissed off basically every other country along the way. And they're saying this is a kind of art of the deal masterstroke. But my read of the situation is people are going to be very loathe to trust us. And their desire to maybe not be exposed to US financial dominance in an era when the US seems intent on weaponizing that dominance against anybody who might cross us or not give us the concessions we seek, is creating an incentive for them to find ways of building some insulation from what we could do to them.

That's not the Moran theory. That's more something else. I think there's a lot to unpack here. I think we need to go back over actually a couple of different administrations because, and this has literally been laid out quite well in two new books, one called The Underground Empire and the other called Choke Point, in which we have over time taking that ability to project our financial dominance, as you put it, and kind of get what we want at the potential risk of alienating the people that are subjected

to those dictates. And that has been building gradually, I'd say it's at a much more extreme level now. And so I do think what we're seeing is a underlying tectonic plate shift in the global economy, in which the US role at the center of everything is under severe stress. And it's under severe stress, both because of that history of kind of gradually building things up in terms of using the tools that we had. It's under significant stress because of the idea that we're going to change the overall tariff structure, regardless of whether it's done gradually or done more suddenly. And it's under stress because of changing shares of GDP and relative performance in

different parts of the world. So you put all that together and yes, I mean, again, I've been traveling throughout the globe and talking to a lot of people and there is a question being raised about whether, I mean, take digital payments as an example, where the existing system involves a lot of old technology to move something from A to B. Even if you're using your cool app, you're using one of the apps, the back end of that is still very old school in terms of how it moves from A to B. And there are new technologies that can do that much more efficiently. So who is going to own that new payment stack? That is a really big deal.

In fact, there's another book out called Smart Money that documents all the ways in which China in particular is trying to own that new payment stack. Underground Empire is by Henry Farrell and Abe Newman. And I had a conversation with Farrell recently about this. And he said something that I've been thinking about since, which is that, as you note, the way that the US became central to the global financial architecture, and then we began to use that as a way to project something akin to force.

Think about the sanctions on Russia or Iran. But we typically did that with at least some international buy-in and around issues that, you know, we were sort of acting as a global policeman. Whether or not you like what we were doing, that was the theory of it. And what Farrell was saying was that if you look across a lot of what the administration is doing, the tariffs are one dimension of it, but also a lot of what Doge was doing with payments and government money. It was a sort of application of that weaponization of financial power across basically every layer of the Trump administration's goals, whether they were punishing internal enemies in America, like universities or nonprofits, you know, that they understand to be part of like the progressive power base,

or they were using tariffs as surplus leverage that could get them concessions from functionally every country on the globe simultaneously. What they did was take a power we were using somewhat sparingly though, as you say, with increasing frequency and made it arguably the cornerstone of this particular administration's economic theory that we actually have this power, and if we squeeze, everybody will have to bend the knee simultaneously and we can get deals nobody else has gotten before. It's not that there's nothing to that theory, but I think the fear many people have had

or the belief they've had is if you squeeze too hard and you squeeze on everybody all at once, what it will lead them to do is pull away from the US into players. I mean, China has its own problems, but they're quite far ahead on that payment stack and they would like to be seen as a safe harbor. And I think one of the nightmare geopolitical scenarios for America now is that Donald Trump embarks on this huge global financial reordering under the idea that we will take back manufacturing from China.

And instead what he does is allow China to take financialization and financial power from us. Yeah, look, I think there were probably multiple reasons for what happened today in terms of a pause, but I think one plausible explanation, and certainly what I was hearing in Europe and elsewhere was we're not so sure that relying on the United States or investing in the United States is what we want to do in this kind of environment and reopening the question of whether re-engaging with China was attractive. In other words, exactly the opposite of what you're trying to accomplish.

I think it's plausible that with a scenario in which there are very steep tariffs that are imposed on China, but an attempt to get to yes with everyone else, that you're back to a world in which if your goal is to de-risk or isolate from China, and I've written about this in the past, what you want to do is have a superblock with Europe. You basically want the US and the EU and the UK to join together, along with Canada and Mexico, North America and Europe together, and reach some common purpose on what you're trying to do, because the throw weight of that combined entity is so large that it will affect everything else that happens in the global economy.

There's a well-known phenomenon called the Brussels effect, which has to do with when the EU sets a standard, global firms tend to adhere to it even for stuff that they're not shipping to the EU. Because once you're doing it that way... Right, that's why we're all clicking on cookie pop-ups on every website on the internet. Exactly. So what... That comes out of an EU regulation. So what the potential here is for like a supercharged Brussels effect, because if it were Brussels and Washington together, that's virtually unstoppable.

So you know, that is I think the most, if your goal is to isolate China, that is the most effective way to do it. And when you take on the whole world all at once, as someone put it, over the past 24 matters, the debt market matters, the debt level matters, and we have some problems here. And that's something I actually do hear a lot from the Trump team. Now, I tend to discount parts of it

because they're so intent on doing a giant tax cut that it makes me wonder how, seriously, but taking them at their word, one of the things they often say, to go back to something that's in the Stephen Moran paper, is that this also reflects our global defense commitments and the way we sort of act as an architecture of security for many countries around the world. I have heard weirder theories about the tariffs as an effort to bring down interest rates, which would change the long-term value of the debt.

When you look at what is going on here from the fiscal position, given that I think they do believe that our fiscal position is unsustainable and it's dangerous for the future of the country, how does all of these trade machinations and the broader set of economic policies you're seeing from them, how does it fit into your worries or your projection of the sort of relationship between our policy and our debt? Well, look, I guess before this pause, so just taking the previously published tariffs by country, the Yale budget team had estimated that the revenue impact would be something like $300 billion a year. So if you want to shave that down and assume everything's just 10% outside of China,

I mean, maybe it's $152 billion a year. That's something, but relative to deficits that are, you know, 10 times that size, it's certainly not a panacea. It'd be something like 1 trillion plus over 10 years, which is significantly less than the cost of the tax cut they're planning. I do think what you're going to see on the tax cut is the possibility that something very unusual happens, which is either the Senate parliamentarian rules in a particular way or the chair of the Senate Budget Committee just goes around the parliamentarian, both of which are possible in a way that basically makes the extension

of the existing tax cuts look like it's cost free. However they score the tax cut, it will still require us to pay for it. It doesn't matter if you're six feet because you were at three and you went up, or you just stayed at six feet. You're at six feet because you were at three and you went up or you just stayed at six feet, you're at six feet. So I guess my question here is whether or not in all these efforts to reorder the global financial system, where Steve Bannon and Stephen Moran for different reasons will tell you that the US is badly overextended by its role as a global reserve currency and its role

as a global defense protectorate, that their theory is that if you unwound that role the US is playing, you could solve or significantly ameliorate our debt problems. Do you buy that theory? You might slightly reduce the debt problems by reducing some of the burden of defense spending and what have you, there would be an offsetting role on the costs of the debt. Well, fundamentally, because foreign investors may be less interested in buying U.S. debt in that world. I think this is a really important debate to be having, which is, do we want the U.S. to be at the center of the

global economy or not? That is, I think, a fundamental underlying philosophical or sort of fundamental debate that is being kind of papered over a little bit by the toing and froing over tariffs, but at the heart of it, that is a deep question. I personally think we are better off if we're at the epicenter of the global economy, but that's a debate to be had. Well, let's go to that more fundamental debate, which is no theory quite stepped into the

void that the previous theory of trade and the benefits it would bring to America and that it would liberalize China. Nothing really stepped into the void that that left. You said that the Biden administration made some points on French shoring. That didn't quite do it. Now you have Donald Trump and their theory is very aggressive, but I don't think it's working out great. I'm a little skeptical that their theory is going to be the theory.

Do you have a contender? I'm not saying it has to be yours specifically, but is there some vision out there? Is it like, what do you think this theory needs to consist of? What are we even trying to achieve in your view? I will give you an inkling, which is actually, I mean, you're aware that I was a big part of the beginning of the Hamilton Project. And so going back to a Hamiltonian perspective, I think might be interesting.

What are the aspects of a Hamiltonian perspective? It has the recognition, and I think this is something that the Democratic Party has not done a good job at, and it's something that I've tried to live in my own life, people can criticize it, but that fundamentally there are significant benefits that come from effective business or effective commerce, that there is no other way of organizing production in society that beats having commercial enterprises doing most of it. So that is a core part of the Hamiltonian philosophy that at least significant parts

of the Democratic Party seem to have wandered away from, at least in the caricature. A second part though is coming back to trade. It's not unfettered free trade that's at the heart of that vision. It's something that's a little different. It's a little mercantilistic and it might start to stretch too far in that direction. And then there's a part on the role of the federal government and obviously on fiscal matters and what have you

that I think could be the makings of a new vision, but I have not. That sounds very Biden-esque to me though. I mean, wasn't what they were doing turning down the dial a little bit on open trade with China, do more friend shoring, use industrial policy to protect strategically important sectors like the Chips and Science Act to reinvest in semiconductor manufacturing. Maybe but the boundaries weren't well defined in my opinion.

And I'd also say, this may be an unpopular thing to say with some of my former colleagues, but I would say I think the part on actually business can be good for society, that part was absent from the sort of the rhetorical framework. Was it absent from the policy framework though? I mean, like the semiconductor manufacturing. Not entirely. Yeah, that's fair. Is offering money to private semiconductor firms.

But as you know, words matter a lot in policymaking. So yes. I always find the business community is more sensitive than I would think it would be. Everyone's sensitive. Everyone cares a lot about whether what they're doing is seen as productive and good. And yes, I take your point, but it's not just

the business community. I think everyone gets all worked up. That is fair. Status is maybe the most fundamental currency in human life. And I think presidents don't always realize how much they are doling out status. Yes, I think that's fair. So when you've been talking to firms, when you're thinking about the next couple of years,

I guess one question I have had is whether or not we are putting too much weight on trade for your first principle there, which is to say, I'm a believer that effective commerce is very important. But something I've heard from a lot of people following this debate is that even if what you're trying to do is reshore manufacturing, trade is probably not your most important tool. Tariffs are certainly not your most important tool. Matt Klein and Michael Pettis,

who wrote the book Trade Wars or Class Wars and have been sort of significant figures in the rethinking of trade, both have said versions of this to us and or said it publicly. So I guess a different version of this is if what you want to do is have effective commerce, some of that in trade, some of that elsewhere. Where would that lead you? I mean, okay, let's say they put down the tariffs. Then they should focus on what? What other barriers exist to the world of American greatness that you think, you know, in Stephen Moran's paper

or elsewhere they're describing? Well, there's both the carrot and the stick or the impediment and the push. But I think you're right that a lot of what is going to happen over the next decade frankly comes down to technology. And someone at one of the recent gatherings I was at said it this way that tech trumps tariffs. That what happens five or 10 years from now will depend a bit on what we've been discussing, but it's going to depend probably a lot more on the evolution of these amazing new innovations

and technology that we're all hopefully using in our daily life. I know I am. And so what would matter for that? There are lots of different pieces that matter for that. And I don't want to delineate all the different parts, but I would say this. And Alex Karp from Palantir laid this out in a recent book. I think that there is a national interest in having Silicon Valley own the AI revolution, a national security interest, and an economic security or an economic interest from that.

And then there are lots of things that fall from that. But the first thing is to recognize that that is what you're trying to do. And then also final question, what are three books you'd recommend to the audience? I think I named two or three already in this discussion, but beyond the ones about underground empire and smart money and so on, maybe I'll add two.

One is called The Catalyst by Thomas Keck. And it's all about the role of RNA and not DNA in most of what happens in the human body. I think RNA has been seen as this kind of sidekick to DNA, and it's DNA that drives everything. And the story he tells is of the central role of RNA. Now, he also won the NOVA Prize for working on RNA, but it's a great read.

And the second one is called Kaput by Wolfgang Manchu. It's about the economic malaise in Germany and what's caused it, which goes back beyond just the Russian oil and the reliance on China back to a question, it's almost aligned with what we were discussing earlier, about the role of technology and driving Productivity in companies final thing I'd say that's a offshoot of that book is it's been common to basically say US companies are Performing the best in the world and US companies are exceptional and European corporates have been underperforming if you actually look at the data Which I did recently it's really astonishing there is a bit of a gap But it's not even remotely what you would think.

So I'll give you an example. If you look at something called return on invested capital, which is just a way of measuring the efficiency or how good a company is at its operations, and you rank companies in Europe, the 95th percentile European company by that rank is equivalent to the 92nd percentile US company. I think if you listen to a lot of the rhetoric, you'd think the 95th percentile European is

like the 10th or 20th. And what's been happening this year is actually European stock markets have performed better so far than the US stock market. So the book is all about why German companies are terrible. There's also a bit of a broader European story that maybe they're not quite as terrible as the conventionalism suggests. But isn't it the case, I mean, you look at the biggest companies in the world that Europe has far fewer than they used to. They don't have many frontier technology companies anymore. It's very specific to technology. Productivity has raced

forward in America. So it's specifically the technology sector. It's really in technology. The hyperscalers in particular are so far, beyond what anyone else has accomplished. If you look across other sectors, much less true. Peter Orzak, thank you very much. Great to be with you. This episode of The Hizoklanjo is produced by Jack McCordick. Fact-checking by Michelle Harris, Mary Marge Locker, and Kate Sinclair. Mixing by Isaac Jones with Alman Sahota and Afeem Shapiro.

Our executive producer is Claire Gordon. The show's production team also includes Marie Cassione, Roland Hu, Elias Isquith, Marina King, Jan Kobel, and Kristen Lin. We've originaled the music by Pat McCusker, Audienced strategy by Christina Samuelski, and Shannon Busta. The director of New York Times Opinion Audio is Andy Rostrosroser and special thanks to Matt Klein.