Martin Wolf is Associate Editor and Chief Economics Commentator at the Financial Times, London.
In this week’s conversation, Yascha Mounk and Martin Wolf discuss why stock markets remain near record highs despite Trump’s tariffs, whether “TACO” (Trump Always Chickens Out) is a sustainable pattern, and how Trump’s economic ambitions compare to those of truly revolutionary leaders.
This transcript has been condensed and lightly edited for clarity.
Yascha Mounk: We had a wonderful conversation yesterday about the current state of the economy. Of course, we talked about the Federal Reserve and Trump’s attacks on it. We were planning to release the episode on Saturday. In between, Donald Trump announced his pick for the new chair of the Federal Reserve when Jerome Powell retires in a few months. It’s Kevin Warsh. Given that you know just about everybody in that world, Martin, I imagine you might have met Kevin at some point. Tell us about him and what you make of him.
Martin Wolf: Well, I have met him. I’ve heard him. He’s very articulate and confident in the way he expresses himself. The honest truth is that there are some real puzzles about him. There are things I don’t understand about him, and friends of mine don’t really understand them either.
Clearly, by comparison with a number of the other candidates, he’s a relatively credible figure. He’s a significant academic economist, although there have been some very good chairs who weren’t. Alan Greenspan, for example, was pretty good until the end, when he let things rip. Warsh has lots of experience in markets. He’s politically astute. He has been a governor of the Fed, and quite an influential one during the financial crisis, when Ben Bernanke relied significantly on his judgment about markets.
So he is, I think, a reasonably qualified figure. I don’t think there’s much doubt about that. Then there’s the question of his judgment. He is famously, historically, an inflation hawk. In 2010 he delivered a speech that is very well known in New York, in which he stressed that the job of Fed independence is to manage monetary policy, and that it is our duty to ensure inflation does not rise too fast. He argued that it should be absolutely clear that the Fed should not be funding the government with low interest rates or expanding the balance sheet beyond a limited degree. I won’t go into that in detail.
Already in 2010 he was worried about surging inflation. People like me at the time, and many others, Paul Krugman being the most famous, thought that was mad. There was no sign of inflation in 2010. The worry was that the economy was in a slump. It seemed extraordinary that he should worry about inflation then. It looked very purist, almost ultra right wing, a let-the-markets-go-where-they-might view. If there was a deep recession, well, it would sort itself out. The only real worry, in that view, was inflation.
In fact, inflation did not rise for another ten years, and for reasons very different from what he was focusing on. So it seemed like a bad judgment, but it also suggested that he really was an inflation hawk. That appeared to be what he genuinely believed.
More recently, of course, in the run-up to this decision, he has been indicating that monetary policy should loosen and that interest rates should come down. If you’re an economist looking at where the US is now, that does not look plausible at all. Inflation is fairly resilient. The economy is very hot. The labor force has shrunk because people have been driven out of the country. Should interest rates really be cut?
That leads to the conclusion that what really drives him, and this is the point Paul Krugman has been making, is politics. He is politically loyal. In that case, he is not really an inflation hawk at all. That stance was just convenient in 2010, when Republicans were attacking Democrats for pursuing inflationary policies, even though they really weren’t. What he would really be saying now is that he is a political figure who is going to support Donald Trump.
The truth is that, going through those possibilities, I don’t know which he really is. If he truly is an inflation hawk, there will be real ructions between him and Mr. Trump. If he is not an inflation hawk, then I’m worried.
Mounk: Do you expect that Warsh would go along with Trump’s attempts to undermine the independence of the Fed? Do you expect that he would be soft on inflation? How do you think this might play out over the next few years?
Wolf: Well, the way he has described his view on independence is as follows. It is very interesting, actually. There is monetary policy. There, we should be independent. As I said, he was very clear about that consistently through the crisis. One would have to assume, if he is serious about that at all, which is a very big question since he has not had this job before and has not borne this responsibility, that if inflation were to pick up a great deal, and it is obvious that it could pick up a great deal, though he might be too slow about it, he would tighten monetary policy severely, even if the president hated it.
We do not know if he will do that. We never know that until we see it. The most famous case when the Fed did do what the president wanted, when it was precisely the wrong thing to do, was under Arthur Burns in the early 1970s. That basically led, or at least played a big role, in the great inflation upsurge of the 1970s, which was a monetary policy disaster. That is how we learned how important independent central banks and control of inflation are. We would not want to see that happen again.
Will that happen? It depends on whether there will be an upsurge in inflation if he cuts interest rates, as he has indicated he would like to do, and how he would then respond. We honestly do not know. If that were to happen, it would be very worrying. We would be back in quite a big mess.
He has said, and this is very important, that in other areas, notably regulation, consumer protection, and things like climate, those are areas in which the Fed should not be independent and should bow to other institutions. Most of those I do not worry about very much. The regulation issue, however, is important. One of the big lessons of the financial crisis of 2007 to 2009 was that if banks are not carefully regulated, and we saw this again with Silicon Valley Bank, and they allow their balance sheets to become too leveraged, particularly with a large amount of long-term debt, they become very vulnerable to runs, and then you get crises.
If he really decides to take a back seat on regulation, and the administration continues with what look like some very risky regulatory positions on quite a number of things, that could also turn out to be a problem. So I would say there are two areas of risk: monetary policy in relation to Trump, and financial regulation. We will have to see which is the real Mr. Warsh.
Mounk: Assuming that Kevin Warsh gets confirmed and takes office, what standards should we judge him by in the first years of his job? Where do you think the areas are in which he might end up in conflict with Donald Trump? We are going to want to see whether he is able to stand up for expert economic decision-making, or whether he allows himself to be steamrolled by the president.
Wolf: Well, we have to judge him like any other chair. He is supposed to be guided by the evidence, by the data. He has been clear about this. The data are sometimes ambiguous, in which case you give the chair the benefit of the doubt to some extent. He has argued that we are going to see a huge productivity upsurge because of AI, and therefore we should not worry too much about inflation. This is rather similar to the argument Greenspan made in the mid-1990s, when he said that a productivity upsurge justified allowing the economy to run hotter and that it would not be inflationary. That turned out to be right.
So if the Fed argues that we have a productivity upsurge that will keep inflation low and therefore we should not raise rates, and it turns out to be right, that is a perfectly reasonable judgment and one has to give him the benefit of the doubt.
If, however, it becomes obvious that inflation is really surging and the president wants him not to do anything about it, even though his job clearly is to do something about it, then his response becomes the decisive test. Monetary policy is always conducted in relation to an uncertain future and with long lags, so there is often room for reasonable disagreement. Sometimes, though, it becomes clear that the Fed is too late. Many people would argue that this was already the case in 2021 and 2022. At that point, action is required, and what matters is whether he takes it.
That is the biggest test of all. Similarly, though this is a lesser test, if he goes along with large declines in bank capitalization and the rise of leverage in hidden or opaque forms that are potentially dangerous, and he does not push back against that, that would also be a bad sign.
Mounk: We’ve now had Donald Trump in office for a year. What has changed in the world economy since then? Are we still living in the same world or are we, in economic terms, living in a completely different one?
Wolf: There are two answers to that. I think in terms of expectations, some policy parameters, and the perceived future, increasingly we’re living in a different world. That creates a disjunction because, of course, the actual economy doesn’t change very quickly unless you have an event like a world war, which, thank God, we haven’t had for a very long time, which does change things incredibly quickly.
Essentially, economies go on doing what they’re doing. Most of the transactions are a continuation of previous transactions. Businesses are essentially the same. Trade flows continue. Financial capital flows continue. You look at growth rates, they’re all something incremental on what was there before.
I think it’s very important for people to remember that actually economies, people’s livelihoods, what they go out to do every day, don’t change that quickly unless you’ve got a stupendous shock like a pandemic, which changed things, or a war, a major war. But the framework, and I’ve written several columns on this, within which all this activity is going on has become wildly uncertain and unpredictable and, in some obvious and important ways, has actually changed.
So we’re living in one of those, to use a cliché, Wile E. Coyote moments when you think you’re going to go over a cliff, but actually you’re not going over a cliff because you can’t go over it that quickly.
Mounk: Or you haven’t felt the impact of going over the cliff until you look down and then suddenly, you plummet to the ground.
Wolf: I think it’s very important. Partly it’s because it wasn’t as revolutionary as all that, and partly because of what my friend Robert Armstrong, a colleague, has called the TACO: Trump Always Chickens Out. His bite isn’t nothing, but his bite is much less bad than his bark, which means that he hasn’t changed everything. It’s just that everything has become uncertain.
Mounk: So the stock market should be at an interesting intersection of those two things because valuations of stocks are partially based on last quarter’s earnings and the business that is ongoing, but it’s also a bet on the future. It’s the expectation that markets have about how well a company is going to do over the next many years. So why is it that the stock market is not quite at record highs as we’re reporting, as we’re speaking, because it’s gone down a little bit over the last couple of days, but very close to record highs, higher than it was a year ago, at a time when tariffs are much higher than they were a year ago, and it was widely predicted that that would harm the economy in a very serious way?
We see the investigation and then potential prosecution of Jay Powell as the head of the Federal Reserve. We see extreme political pressure on the Fed to lower interest rates and the likelihood that a new appointee, which Trump is going to be able to name relatively soon, is going to be a partisan appointee who just does the bidding of the White House. All of that should at the very least make investors less certain about whether Amazon and Apple and Nvidia and all of those companies are going to continue to bring in the returns that have earned them those outsized valuations in the stock market. Yet the market is up. So what’s going on with that? How can we make sense of this?
Wolf: There are several answers. One answer is that I’ve never regarded the market as a very good predictor of what is actually going to happen, and that’s consistent with the evidence in the medium to long run. But it’s important to disentangle what we’re talking about. You’re talking about the market, and it’s very interesting that you are. You’re talking about the U.S. market.
The U.S. market is very important. Of course, it’s the most important stock market in the world and has been for a very long time. But actually, strangely, in the last year it’s non-U.S. markets that have been doing particularly well. European markets have done much better than had been expected. In a way, that seems more surprising, because you’d think that Trump’s tariffs, whatever they do to the United States, should have hit the rest of the world even harder. But that doesn’t seem to be how it has played out. There are a number of answers. It’s not just about the United States. It’s a much more complicated story.
The first is something I pointed out in a column a week or two ago. I can’t remember exactly when. The world economy since the pandemic has been doing really well overall. Not just the American economy, which is obvious, but more generally we’ve had a very strong recovery from the pandemic. Profits have been doing very well. On top of that, we have a very big technological revolution going on, centered on the United States and now increasingly on China, whose benefits ought to be available to everyone in the world. So it’s not just about the profits of those companies, but the opportunities that will be created by using these new technologies, particularly artificial intelligence.
It’s also important to remember that betting that the world economy will grow and that profits will be made by new businesses has been a pretty consistently good bet, at least since the 1970s, which is a very long time and well outside the time horizon of most investors.
The last point is that this is an era of easy money. You might be a bit worried about inflation, and that’s reasonable. But in an inflationary age, it’s quite sensible to hold real assets. Gold is a real asset, so it’s doing very well. Silver is a real asset. But so are stocks. Yes, there could be disruption, but a reasonable assumption is that in the medium to long run, equities are a good hedge against inflation. They’re not perfect. You can get profit squeezes of various kinds. But if you’re worried about inflation, selling bonds is the most obvious thing to do. That might be a real problem for some governments, but equities are not an unreasonable place to be.
For all these reasons, I don’t find what we’re seeing in markets worldwide, and the optimism about growth, unreasonable. It’s also worth stressing that the tariffs, as they’ve ended up, are clearly a disruption, but they are tariffs of the United States against the world. The United States is a very big market, but as I pointed out at TICON today, it accounts for only 17 percent of the world’s imports of goods and services. That’s important, but there’s another 83 percent.
That 83 percent is continuing to trade. Not only continuing to trade as before, but also finishing big trade deals. Look at the EU–India deal. It’s a very big trade deal. Trade hasn’t been abandoned globally. The United States has pulled back, but others have not. I think people are basically saying to themselves that Trump isn’t as bad as they feared, the United States isn’t going to blow up, the rest of the world is fine and coping quite well, and the best thing to do is bet that capitalism will continue to perform. This might be wrong, but I think that’s what people are saying.
Mounk: That’s a very strong reconstruction of why that optimism isn’t obviously silly. I think there’s a tendency among opinion journalists, whether op-ed writers or podcasters, to assume that everybody is stupid and nobody understands things. When markets are so high, they may very well be betting on the wrong horse, and they may very well be underestimating some of those tail-end risks. But you first need to understand the logic of a lot of very sophisticated people, with a lot of money riding on making the correct calls, before you can then go on to criticize them.
Wolf: Remember, markets are expensive. That is a reason for believing in correction. But it’s not obvious to me that what markets are betting on is insane.
Mounk: Now, one of the foundations of this is the idea of TACO, that Trump always chickens out. There are two concerns I have about that. One is a straightforward one, which is that he has chickened out particularly on economic policy repeatedly over the course of the last year. He seems to be chickening out on Iran in certain ways. So this is something that might apply beyond economic policy as well.
But of course, he is quite unpredictable, and he has done some things that are more extreme than people would have predicted over the course of the last year. So the fact that he has chickened out on a number of things during the first year of his administration does not predict with certainty that he is going to continue doing so in year two and year three and year four. And of course, I am sure that Trump is well aware of the term TACO at this point. Given that he is, if nothing else, proud and a man of vanity, he probably wants to disprove that it applies to him. The second point, which is slightly more subtle and which I have seen somebody make on social media, is that the dynamics of TACO are going to get more and more gnarly. At the beginning, Trump makes an announcement, for example, that he is going to raise all these tariffs. There is immediate panic in the financial markets. Stocks go down a lot. That is a very strong signal. That is what makes all of Trump’s allies say, you can’t do this, and he backs down.
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The next time Trump makes an extreme announcement, the market reaction is more muted because people start to think that he chickened out last time and perhaps he will chicken out again this time. But that means that the mechanism that made him back down last time has become a little bit weaker, though it is still enough, and he chickens out again. The third time he makes an extreme announcement, the markets say TACO. People have read the column. They know the term. They ignore it. There is barely any reaction in the markets. Then perhaps Trump thinks it is safe to go ahead with it. So is TACO a kind of resource that gets whittled down and consumed over time, because the game of chicken involved keeps getting closer to the knife’s edge? The driver has to jump out at a later and later stage for the mechanism to work.
Wolf: I think that’s not implausible. I’ve never been fully confident that one should rely on it. Foreseeing what Trump will do is certainly way beyond my pay grade. But it does seem to me that there’s an argument to be made that the areas where he’s really passionate about breaking the mold are relatively few.
If I compare him with other autocratic leaders with big ambitions, and I’m not making any other comparison, just think of Mr. Hitler, it was pretty obvious and exposed that he actually wanted to change the entire world and, among other things, conquer the whole of the East and repopulate it. That was a spectacularly big, indeed insane and criminal ambition.
But what does Trump want to do? He wants to change trade policy. Lots of tariffs. He doesn’t want to break the world, but he wants to change trade policy, and he’s done that. He wants to eliminate the U.S. deficit, but he hasn’t actually taken any of the main measures that would be needed to do that. I’m sure he’s surrounded by people who must be telling him that he wants to be a big presence in the world.
Mounk: In fact, there was just a news story, as we’re recording, in The New York Times today, and I’m sure in the Financial Times as well, that the U.S. trade deficit is now at record highs, and that as a result of economic policies over the last year, the trade deficit has increased, which is the opposite of what he wanted.
Wolf: No, the tariff policies don’t work because he’s not coherent and not logical. He replaced Mr. Maduro in Venezuela. This is about as small a thing as you can do. He wants to give Putin a big chunk of Ukraine. What he wants to do in Iran. All I’m saying is this is not a man who wants to revolutionize the world. He does want to withdraw the United States from its post-war hegemonic role. That’s very important, but it’s one of those slow-motion changes.
I think one area where he does want to change things is the way the United States works. That’s why I think ICE and how it operates may be the most important thing he’s doing. But when I look at him in the world, he’s conservative and revolutionary in some sense, but his ambitions are quite small. So TACO is not required to change anything very radical. It’s not clear to me that he actually wants to shape the world as a whole from top to bottom. He wants to withdraw from it, which has very big implications, but very different implications from a revolutionary.
If I were an American looking at this, I would say, as I wrote in my book on this, the real issue is whether our democracy will survive. That’s very important. Does Trump really want to shape the world in a meaningful sense as other great revolutions have? My instinct is no.
Mounk: That’s a really interesting point. A childish way of saying this is that he doesn’t want to revolutionize the world; he just wants to put his name on it.
Wolf: He wants to put his name on it, and he wants to take America home, which is a very big change. You can see it’s changing Europe now, and this is all very important. But it doesn’t mean that it shakes the world in the sense that we suddenly realize the whole monetary system of the world, the whole economic system of the world, is going to be utterly different tomorrow. It doesn’t feel like that.
Mounk: I sort of understand Trump’s obsession with tariffs. I think it’s a misperception of the world, but you can see how somebody with a certain set of economic instincts thinks, why am I walking down Fifth Avenue and there are all these Japanese and German cars? He’s on the record in the 1980s saying that he wanted them to be American cars. How do we make sure to do that? We put up tariffs so that these German and Japanese cars can’t come in. I can see why he’s so obsessed with that. It’s easy to understand where that comes from.
I’m a little more surprised by the fact that he is clearly very deeply committed to having low interest rates. Is that because, if you’re a real estate guy, low interest rates are helpful because you can take out mortgages more cheaply, and so he’s always wanted low interest rates throughout his career for that reason? Or is it that there is a theory, coherent so far as it goes, that low interest rates stimulate the economy, and if the economy is going well, then he’s going to be more popular and people are going to think it’s a Trump boom?
That economic theory is right so far as it goes. But if you go too far, inflation shoots up and you have all the problems that probably elected Trump the second time, among a host of other reasons. Why is it that he’s so obsessed with putting pressure on the Federal Reserve to lower interest rates faster than its governors think is sensible?
Wolf: It would be absolutely insane for me to say that I understand the intellectual processes of Donald Trump, because I really don’t. I think there can be few men more different than him and me. But I have come to the view, so this is a hypothesis, that he really does view the world through the lens of a real estate developer.
He thinks it makes a lot of sense for America, like a good real estate developer, to borrow money. Of course, it’s much better to borrow money if it’s cheap. Unlike Trump the real estate developer, Trump the president owns the U.S. government, which in his view includes the Federal Reserve. The job of the Federal Reserve, from his point of view, because he now owns the bank, which he didn’t when he was a businessman, is to do what he wants. In the past, that created lots of problems for him because his projects went bankrupt many times.
I think he believes the job of the Federal Reserve, which is my bank, just as the government is my government, is to make sure borrowing, which is part of what he has done with his fiscal policies, remains cheap. He has pursued a massively expansionary fiscal policy. I control the bank. I can force people to lend to me cheaply. So why am I not doing it? Why is this person stopping me from doing this?
They say it’s because of inflation. Donald Trump has never thought about inflation as a systemic problem. He has no idea, in his mind, of what the whole economy is or how things add up across the whole economy. That’s not how he thinks. Similarly, as a businessman, it’s obvious to him that if he spends more than his income on the products of some other company and runs a deficit, he is going to go bankrupt. So if the Germans, the Japanese, and the Chinese insist on selling more to him than they buy from him, they’re going to drive him into bankruptcy. He doesn’t like that either.
One way he thinks he can get around this, as Mr. Bessent has told him, is to drive down interest rates at the Fed. It’s not as good as forcing them to rebalance, but he’s not going to go any further. He thinks these people are behaving badly and defrauding the United States.
The final thing I think he believes is this. When he looks at his wonderful fortress country, when was it really proud and great and powerful? The answer, from his point of view, is the late nineteenth and early twentieth century, when the United States was booming, when it had huge tariff walls and stopped other countries from sending goods to it. In his view, that is when America built its industry, and that is what it should return to.
These are very primitive, very basic, perfectly natural ideas for a not particularly intellectual businessperson to hold. They’re not consistent or coherent, but I’ve come to the view that this is actually how he thinks.
Mounk: Explain one thing to me that is taken for granted in discussions of the very contentious relationship between Donald Trump and the Federal Reserve and this extraordinary announcement of an investigation into Jerome Powell. Part of this, as you’re saying, is that I have argued for a long time that a hallmark of authoritarian populism is the unwillingness to accept checks and balances, the unwillingness to accept limitations on power. I’m the elected president. I should be able to decide what I want. How come there’s this weird independent institution that gets to define my will? That is illegitimate. That’s a fairly straightforward piece.
But why is it that the independence of a central bank is so important? The case that, ten or fifteen years ago, a lot of my friends on the left were making, and that now some people in the Trump universe are making, is superficially compelling. Where interest rates lie has big downstream consequences for economic life. When you have higher interest rates, you often have lower inflation, but you also have higher unemployment. When you lower interest rates, you often raise inflation, but you also stimulate the economy and can lead to lower unemployment and more people finding jobs. That’s not always true, it’s within limits, and you can complicate the picture in a million ways to make it more sophisticated than I, as a humble political scientist, have made it. But there are some trade-offs there.
Isn’t that a political trade-off? Isn’t that something elected politicians should decide? Isn’t that something we, as a people, should have a say over, because it’s a normative trade-off between two different goods? There is at least a very reasonable prima facie case that this should be subject to democratic control, and that perhaps the fact that so many things have not been subject to democratic control, including interest rates, is one of the reasons why people got angry and voted for populists in the first place.
Having laid out that case, what is the reason why the independence of central banks is so important? Why is it that if there is an investigation into, and perhaps prosecution of, Jerome Powell, that is not just potentially an injustice where an upstanding public servant is being scapegoated because he happens to be in the wrong position at the wrong time and is unwilling to bow to Trump’s pressure? Why is it actually a problem for the long-term well-being of the U.S. economy and perhaps the world economy?
Wolf: The broad point is that a democracy in which the government can do whatever it wants at any moment and for any reason will pretty soon cease to look like a democracy. There have to be constraining institutions. At the very least, there have to be institutions that ensure fair elections. You have to have institutions that ensure political rights and protect them against the government. That pretty quickly gets you to the position that you have to have some sort of independent rule of law that protects these things. You can discuss how far it goes, but a democracy ceases to be a democracy if an elected government can do whatever it wants. Absolute democracy is its own antithesis.
Then the question becomes, what about money? Where does it fit? Should it be part of the political domain, outside the political domain, or somewhere in between, which is where we are now? Politicians decide who the Fed chair is. Politicians set the law within which it operates. That is absolutely clear. The Fed has a mandate to pursue low unemployment and price stability. It has a dual mandate, which is more progressive than in places like Germany or the eurozone, where the focus is primarily on price stability. So it clearly operates within a political context, like other institutions, but it is given substantial operational independence.
Why is that? There’s a general answer and a very specific historical one. The general answer is that power over money is immense. It is an immense power, but wielded irresponsibly it is immensely destructive. The danger is that a government decides it can print money without limit, finance any size of fiscal deficit with the printing press, and ignore normal budgetary procedures. That gives the government enormous power, but over time it destroys money itself. We have many historical examples of this. Look at Argentina. This is not a theoretical concern.
Economists almost universally agree that there has to be some institutional constraint. Historically, there have been two approaches. One was tying money to a commodity, the gold standard. That collapsed in the 1930s, and no serious economy has returned to it. The alternative is to delegate monetary authority to an independent institution.
In the postwar period, only a few countries, most notably the United States and Germany, had genuinely independent central banks. Many others, including Britain and France, had highly politicized central banks after World War II. By around 1980, there was a broad consensus among economists that countries where politicians controlled central banks performed worse, with higher inflation, greater instability, and worse long-run outcomes, than countries with independent monetary institutions.
The experience of the 1970s was crucial. President Nixon pressured the Fed, and the result was the Great Inflation. That confirmed for many that central bank independence worked better. Milton Friedman articulated this most clearly. In the short run, inflation can feel good. It can boost employment and growth for a few years. But eventually inflation expectations explode, interest rates spike, bankruptcies rise, and unemployment soars. It is a terrible trade-off.
Countries with independent central banks, particularly Germany, did much better. That experience shaped later decisions, including the creation of the European monetary system and the euro. This didn’t come out of nowhere. The theory was tested in practice and broadly validated. We tend to forget this history because it happened decades ago, but that doesn’t make it irrelevant. Most economists still believe central bank independence is essential. This old man believes it too.
Mounk: I’m struck by two things. We were recently at a small gathering together, alongside some other wonderful former podcast guests like Audrey Tang, the Taiwanese digital minister, and Rachel Kleinfeld, the great researcher on violence as well as American democracy. You said a really striking thing in that context, which is, I think you quoted somebody saying this to you, that people always worry that we’re going to forget history. That’s not what happens. We learn the lessons of history, and then we forget them.
That is really striking and may apply to a broader conversation about populism as much as to this. One of the pieces of data that you presented is that you can look at the impact of populism on the economy. When left-wing populists get elected, like in Venezuela, the economy immediately goes into negative territory and then becomes worse after that. When right-wing populists get elected, the economy tends to be boosted by that for a few years. They come in promising cuts to taxation, cuts to regulation, and a business-friendly environment. For the first few years, the markets buy that, investors buy it, and things go relatively well. Then those places tend to nosedive, and they end up in comparably bad territory as the left-wing populists, not quite as bad, but almost as bad.
Wolf: Yeah, not quite as bad. 15 years later, you’re significantly poorer, about 10% poorer than you would otherwise have been, is the estimate.
Mounk: Presumably, one of the mechanisms for this is that they tend to take control of the central bank.
Wolf: This is one of the mechanisms. They tend to mess up public finances and that’s why they have to take control of the central bank. They cut taxes too much. You can see this in the United States now.
Mounk: My last question about Donald Trump, and then I want to move on to some other topics: does this fit the pattern? The economy is doing reasonably well in the first years of him being in office, but soon he’s going to be able to name the chair of the Federal Reserve. He hasn’t completely transformed the economic system or the tariff system, but you’re certainly starting to see things that create drag for the U.S. economy. The trade deficit is up rather than down. Where does the United States fit into that slide that you presented?
Wolf: My view is that it fits very well. I’ll come to this in a second. The second point I would make, which is really, really important, is of course that the United States is different from everywhere else. It’s not a normal economy going into right-wing populism. It’s the United States. It’s the biggest economy in the world. It’s arguably the most technologically dynamic. I’m not going to engage in the debate between the United States and China now, it’s complicated, but it’s got a fantastic reservoir of innovative strength, the world’s most significant companies, and tremendous momentum. Messing up America is difficult. This is something I always say. Messing up America is completely different from messing up Argentina.
But it does seem to me that trade policy has created wild unpredictability, and so has investment policy, and this will affect investment. It’s bound to affect investment. They have damaged some of the obvious wellsprings of American growth. Immigration, and the willingness of talented foreigners, given what’s going on there, to come and live with their families, must be diminished. Lots of Chinese people are certainly saying, well, my future in China will be better than my future in America. I think they’ve damaged universities and research institutions. They’re damaging the rule of law and confidence in the rule of law. You can see that quite generally.
The soundness of the public finances depends on getting interest rates down. Why does he want rates down? Because interest on current levels of debt, which are now back to where they were in 1945 after a world war, is enormous. The debt ratios are so high. If he could halve interest rates, his public finance problems would largely go away. Of course he wants to lower interest rates, because debt interest is a huge part of his budget. But once he says that, he’s saying to people who hold Treasuries and other U.S. assets that this is a very unsafe place to put your money. Sell Treasuries and sell dollars. You can see signs of that too. The dollar is rather weak.
So we are seeing an immense machine, which I never underestimate, but they are making policy mistakes of exactly the kind I would expect to show up in negative form over the next ten to fifteen years if they are not reversed, slowing growth, slowing dynamism, and more immediately creating a real risk of crisis in the bond markets, the currency markets, and therefore in public finances. That could generate a profound shift in wealth-holders’ confidence in US liabilities, of which there are an incredible number. That could generate a crisis, which could probably include a stock market crisis. That’s the risk.
Mounk: You just returned from Davos, and you wrote a column about it in the Financial Times. You said that two topics dominated. The first is Donald Trump, and we’ve devoted a good half hour to that topic. The second is artificial intelligence. I want to make sure to pick your brains on that as well, because I’ve been thinking about it a lot lately.
To me, the fundamental economic question about artificial intelligence is whether it is a normal technology, as two writers recently claimed, or a profoundly abnormal one. There is a view of the way it is going to automate away some jobs which says that we’ve been through this many times in history. A new technology comes in. It can fulfill a bunch of tasks that humans previously did at lower cost. Those humans lose their jobs. That can be very traumatic for people who have invested heavily in developing highly sophisticated skills, whether that’s medieval monks copying books word by word, or telephone operators who with great speed and dexterity patched your incoming call through to the right recipient.
New technology makes that obsolete. That is bad for those people. Their life trajectories may be negatively affected. Their earnings may be negatively affected. If they’re too old, they may not be able to retrain at a similar level of skill in some other profession. But it is good for the world as a whole, because the talents of future generations are freed up toward more productive uses. There is a reinstatement effect where new kinds of jobs suddenly show up. Human talent is redirected into better fields, and that’s how we all got richer. That’s why the world is much richer today than it was 200 or 500 years ago.
There is also the case on the other side, which is that virtually all forms of automation in the past affected manual rather than mental work. They tended to affect a particular profession, a particular activity, or a particular task. Now we have general-purpose technologies that can be dropped into virtually any mental task. An AI system doesn’t just patch calls through more effectively. It can potentially substitute for a lawyer, an accountant, a social media manager, an HR manager, or fifty other kinds of white-collar jobs. That raises the possibility that there will not be a reservoir of demand for human labor in the same way that there was in the past.
Where do you fall? Do you think that this is fairly framed? Do you think AI is going to be a big disruption that ultimately leads to a larger and more thriving middle class, or do you think it is going to decimate middle-class jobs in a way that is fundamentally different from previous technological transformations?
Wolf: This is a very complicated question. My answer to this is, first, genuinely I don’t know. Partly because I probably lack the expertise, but more importantly because I don’t think we know. The discussions I’ve had with people in this area indicate to me pretty strongly that we don’t know, and I suspect it will take a while.
Let me separate this out into three areas. First, the economic impact. It seems to me that the core argument you’re making, which is that this is a substitute for, if you like, skilled, trained thinking activities, is different. In the past, computers augmented that, and now it appears they’re going to substitute for it. This is obviously very important because the people who do that are, in some sense, the core of our society and our economy. Something that displaces what they do, and most obviously starts by displacing the young in these activities, whose entry jobs are disappearing first, is going to have an extraordinary economic impact and, because of that, an extraordinary social impact.
I’ll come to that further, but if you imagine that the displacement is huge and the new jobs you talk about emerge, as they usually do, rather slowly, we could have a social and political crisis that makes deindustrialization look trivial. Deindustrialization, though one of the biggest forces shaping our world, shook the working class, particularly the male working class, from top to bottom. Shaking the prospects of the educated middle class is socially far more dangerous and explosive because it affects them and their parents, who are the people who run our societies in almost every possible way. It does seem to me that the nature of the displacement you describe is going to create challenges even if we eventually arrive at a whole new set of activities.
The obvious question is what those new activities will be and how much they will involve an augmented form of intelligence or skill that we can’t easily imagine now, and how much they will be something completely different. What will those be? Will they involve relations among people in some way? I did discuss this at some stage with somebody young, obviously very brilliant, and the owner and creator of one of the leading firms. I won’t mention who, because that wouldn’t be fair. I asked him this very question, and all I can say is that he didn’t have an answer. If he doesn’t have an answer, nobody does.
All I can say is that, yes, logically, we should be able to find something else. The question is whether we will find something else that somebody is prepared to pay for. If not, how do we support all these people? That gets back to the structure of ownership and capital ownership. Can we really have a technological revolution that essentially benefits the shareholders and owners of fifteen or twenty companies? That would be revolutionary.
The final point I would make goes beyond the differential economics and the impact question of what will replace what. I think there’s a deeper question, and I’m interested in your reaction. I tend to think, perhaps because of what I do, that thinking and creating through thinking is at the core of what it means to be a human being. That’s what makes humans different from all other animals. If it’s true, and there’s a huge debate about this, that we’re moving into a world where machines can do that as well as we do or better, then we’ve deprived ourselves of any value in our own eyes as humans.
If that’s true, we would be living in a world with superior machines, and we would know they are superior. If we live in that world, what are we going to think we, as humans, are for, if anything? That strikes me as a profound existential question.
My instinct, for all these reasons, is to feel that it would have been a very good idea to bury this technology as soon as somebody invented it. That was never going to happen. Competition ensures that it won’t be regulated successfully, so we’re going to go on this journey. Perhaps this reflects my age or a certain conservatism, and the fact that I have a lot of grandchildren. I’m very concerned. I think the thinking that is emerging at a social level about what this means, and how we control it if we can, is de jure and beyond de jure. The idea that it’s all under the control of ten or so billionaires who, in my view, to a significant extent are psychopaths, terrifies me.
Mounk: I’ve written an article called The Third Humbling of Humanity. This draws on a concept by Sigmund Freud, who identified the first humbling of humanity as the realization that the universe doesn’t revolve around the Earth, and the second humbling of humanity as the recognition that we’re not God’s special creation but rather descended from apes.
Of course, the third great humbling of humanity was Freud’s discovery of the unconscious, which I think involves a little too much self-regard, so I discount that. That’s why I think artificial intelligence is going to be the third big humbling of humanity. What is it that defined humanity if you look at a lot of writing about this 200 years ago or 20 years ago? It’s the fact that we are capable of acts of intelligence and artistic creation that set us apart from other primates, that set us apart from cats and dogs and cows and whales and other intelligent animals. It’s the fact that we can compose poems and write short stories and make movies and sing songs.
If AI will soon be able to do all of that about as well as we can, and according to some studies humans already prefer poems written by AI to those of some of the greatest poets in history, and translations of the Odyssey composed by AI to translations by various well-known translators, that poses a really deep existential challenge to us at the level of a species.
I’m a creative artist. I’m a writer. That’s a form of creative art. I sadly do not have talents for music or painting. You really wouldn’t want to hear me sing a song or look at a picture I painted. But I also think about this from the perspective of creative artists and how our role changes through that.
I think I will always want to write my own prose because I learned laboriously how to write clearly. I grew up in Germany, where clear writing was not prized, and I owe it in many ways to your country, Martin, where I went to university, to having had a couple of teachers who said, spare me this convoluted stuff, write as clearly as possible. That is the way I make sense of the world and my own ideas. I’m also somewhat optimistic that my audience will still want to hear me talk and not some AI, and see me write and not some AI.
But if we get to a place where it will be easier for me to put two lines of an idea and my past writings into an AI and it can write my article better than I can, I’m still going to write my own articles, but it will change my relation to the work. The way I think about this is the Etsy store problem.
If you are in the eighteenth century and you are making socks for your children, the reason for that is that you want them to stay warm through the winter. It’s an essential activity. It makes you feel needed. It has very direct utility, which makes the activity satisfying. If today you have an Etsy store in which you sell handmade socks, that’s a nice novelty item. It’s a nice luxury to have. I respect people who have Etsy stores, and I respect the people who buy handmade socks. But everybody knows that factory-made socks would probably be more durable and warmer. So it’s essentially a kind of indulgence.
I worry that acts of artistic creation are going to go from something that is essential to making sense of the world, something that in an abstract sense has real value to add and feels like a necessary activity, to a glorified Etsy store, a kind of novelty. Look, this is a human-written text. That is a crisis of meaning, perhaps less important than the broader one at the level of the human species that I evoked earlier, but for people who take part in creative processes, I think it will be traumatic in its own way and require a great deal of adjustment.
In the rest of this conversation, Yascha and Martin discuss what artificial intelligence means for human creativity, and its potential impact beyond the United States and Europe. This part of the conversation is reserved for paying subscribers…
