AI, markets, and power: A conversation with Paul Krugman (2025 re-run)

In this episode, Nobel Prize-winning economist Paul Krugman and I discuss how a strong US economy, high asset valuations, and rapid AI adoption are sitting in uneasy tension. We explore what past technology cycles can teach us, why safety nets struggle to address disruption, and where genuine optimism still makes sense.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Azeem Azhar?

  In early 2025, I hosted the legendary economist and Nobel laureate Paul Krugman on my show. We never released it in the podcast feed, but it really is too relevant to leave in the archives, so we're sharing it now. In that conversation, Paul and I covered the most critical economic questions raised by artificial intelligence. We explored whether today's tech and AI valuations look more like a genuine productivity boom or a replay of the late 1990s. We investigated why the US is pulling away from Europe, whether AI might substitute for globalization, and what that might mean for emerging economies. And we asked what happens to workers and communities as this technology transition

• 0:41Azeem Azhar?

  unfolds. Listening back, it's a really sharp guide to the economic backdrop for everything we now discuss on Exponential View. Enjoy. We need to talk about the economy in 2025 and what's going on. I know you've got opinions, so why don't you start with your view of where we are in 2025, a sort of short-term horizon, headwinds or tailwinds, and then I'll respond to that.

• 1:09Speaker 01

  Okay, so I mean, we are very close to Goldilocks economy in the United States. Unemployment is low historically. Inflation is low historically. It's a little bit above the, you know, we have an official target of 2% inflation, and it's, if you look at probably the better measures, it's more like 2.5. And if you think that's really important, maybe we should have a drink or two and calm down. We're really in good shape. You know, it's starting. This is about as good a moment as we've seen for a very, very long time. And there's, the question is, there's always going to be something. Some stuff happens,

• 1:54Speaker 01

  as the bumper stickers don't quite say. And there's really two kinds of stuff that can happen. One of them is politics. And, you know, I'm reading whether there's now, it's possible that my president is about to impose 25% tariffs on Canada and Mexico tonight, or then again, maybe not. And that's a, that's a, that's a big deal. And we have a bunch of- Potential political shocks to the system. I've just been doing some work and if you look at tech stock valuations, it really has that sort of end of nineteen ninety nine feeling.

• 2:35Speaker 01

  And are we going to be facing a sort of financial bubble burst? It's, you know, and so they really calm, good times never last. And then this case, I think it's unusual that we have at least two obvious threats to the times we're in. But it all this will take time to unwind. So the numbers will continue to look good for the next few months at least.

• 3:03Azeem Azhar?

  Yeah, I mean, it's interesting that that we head into this with such a strong American economy. I I'm sitting here in North London and there's a particularly depressing series of charts which show OECD growth rate. These are the club of rich countries and you have the US in as part of it. And the US is just motoring away, right? It's the biggest economy there. It's growing much faster, far faster than the UK, where essentially the economy is roughly the same, has been the same size for, you know, a decade or more. And and and, you know, Europe, at some cases, up until about a week ago, it almost the mood felt funeral. But I think that there has been a change in the in the last in the last few days.

• 3:45Azeem Azhar?

  The bit that I I query, wonder about is this issue of the tech stock valuations. I mean, we're definitely at a point where this this magnificent seven, I love the way how the investment bank has always come up with these wonderful terms. So the mag seven are highly concentrated. In fact, this is the highest level of stock market concentration since before the the Great Depression. And and of course, you know, stock analysts love to look at things like this because, you know, history rhymes in in a sense. But it does feel that there is something that is is different this time around. I mean, for for one thing, there is revenue momentum in in a lot of these companies compared

• 4:27Azeem Azhar?

  to the dot com bubble where companies had valuations without revenue. The second is the world economy is much richer and much more complex than it was in ninety nine or nineteen twenty nine. And and so when I look at that, I I wonder, of course, animal spirits can upset stock market valuations as they did on Monday with DeepSeek. And if stock market valuations drop, they can spill into the real world through wealth effects or some other other dynamics. But it doesn't quite feel as overinflated as as ninety nine because we can see the the the revenue flow into these businesses.

• 5:07Speaker 01

  Okay, I would actually mildly disagree with you on that because nineteen ninety nine, we think about the conspicuously sillys. We think about pets dot com and so on, but you know, that bubble wasn't large part telecoms companies rather than dot coms. And and the telecoms companies had real revenue and just not enough to justify the valuations. And the technological, the the technology actually did deliver, maybe not on quite the ethical scale that people had hoped for, but we really did get a decade of substantially accelerated productivity growth out of the technology. So it was it was real stuff.

• 5:51Speaker 01

  What happened was that the idea that early movers and were going to be able to, as we now say, build a moat around their position, that they were going to be able to earn sustained high profits, turned out to be wrong. And in many ways, we look similar now that this is, it's, I think we're past the point of of wondering whether AI is actually going to do anything useful. We still don't know how much useful it's going to do, but it's it's clearly something real and there's real revenues coming in. But on the other hand. Our valuations, the valuations are far, far above anything that we would normally expect from those revenues. So the valuations depend on the belief that these are going

• 6:34Speaker 01

  to lead to entrenched positions for the existing companies.

• 6:38Azeem Azhar?

  Yeah. Well, I think, I think that's, that's really true. And in fact, that is probably what we saw on Monday, right? When this Chinese model, DeepSeek, it wasn't released. I mean, DeepSeek R1 had been around for a while. They'd declared they were doing it. Weeks, if not months ago, I had written about DeepSeek back in December 23. And in December 2024, I said, DeepSeek is a Chinese Sputnik moment for the US. So that was, you know, before, before the new year. Because I, I, I thought that a lot of these stock market valuations are, have embedded within them the idea that the US will have sustained AI dominance.

• 7:21Azeem Azhar?

  And sustained AI dominance will mean the best technology turning into the best product, turning into the fastest revenue growth, dragging forward with them the supply chain. So effectively, the Nvidia, the demand for Nvidia chips, ultimately AMD chips, and, and the manufacturing. And that, that bet was so concentrated that, of course, any little wobble will have animal spirits, you know, running through that China shop.

• 7:49Speaker 01

  Yeah. And not just that the US will continue to dominate, but that the Mag7 will continue to dominate. And that there won't be some contender, US contender, European contender. You know, it's worth remembering that although European macroeconomics doesn't look too good, there's a whole lot of, it's not as if the technological sophistication is restricted to the United States. And so, and it's really hard. And some of it is, it, some of it is just, I mean, I suppose we need to talk about Tesla at some point. And their, that is really bizarre. I mean, their actual business doesn't seem to be doing too well. But, but people have decided that, that somehow or other, there's magic associated, maybe with the

• 8:34Speaker 01

  political partnership. So.

• 8:37Speaker 01

  But I, you know, I take the lesson of the of the dot com telecom bubble of the nineties to be that even a really great technology does not necessarily justify really high evaluations.

• 8:51Azeem Azhar?

  Right, okay, okay, I hear that. I'm gonna, I'm gonna stick on with this, with this point because here's where I think today is different to, to, to the dot com. And I'll stop by telling you a story. So back in ninety, you know, ninety seven, ninety eight, I was building internet companies and one of the companies that I invested in was a realtor, online realtor in France. Of course, online real estate is a, is a huge business now, right? You have Zillow and Redfin and a whole bunch of others. When we got into that market, not only did only four or five percent of French people have internet access, you know, they were still largely on the Minitel

• 9:33Azeem Azhar?

  system, but that five percent wasn't far advanced in other parts of Western Europe. None of the realtors had PCs. And so when we went off to, to, or the founders went off to, to win business, they had to buy PCs for the realtors, train them on how to get onto the internet and how to upload their images and, and their inventory. I mean, it was, it was a complete nightmare. The difference today is that every company or the large proportion of companies, particularly big ones, are sitting on a digital stack which they've built over twenty years. All those billions of fees they paid to Accenture and P W C and S A P to do digital

• 10:14Azeem Azhar?

  transformations means they've got a digital infrastructure. And today it takes a single decision in Microsoft headquarters to put an A I tool into every copy of Microsoft Excel because it's all run on the cloud. And that feels really different to ninety nine. It feels like there's a whole set of hurdles that now don't exist that would allow a much more rapid deployment. And with rapid deployment should come much faster increase in revenues.

• 10:45Speaker 01

  Well, this does, yes, it does mean much faster increase in revenues. I think it's very clear that the whole A I thing is moving much faster. I mean, we thought things were moving fast. In in the nineties, but there's much faster. The adoption rates have just been, you know, the the S curve of adoption is is just far steeper. The question is going to be revenue for whom?

• 11:11Azeem Azhar?

  Right.

• 11:11Speaker 01

  And that's now what is true. And I think is which I'm, I think I'm learning to some extent from you right now is that the the fact that this stuff in some way sits on top of existing technologies and existing networks may actually be a reason to think that the incumbents can actually continue to capture a lot of this. I mean, the, you know, what we say is something like Microsoft is it's all about network externalities. Everybody uses Microsoft products because everybody uses Microsoft products. And the interesting thing about AI is in a way how undisruptive it is. That it goes, you know, it can be just put on top.

• 11:57Azeem Azhar?

  I spend a lot of time turning these things off because I don't want it.

• 12:00Speaker 01

  But but but, you know, Copilot is is right there and, you know, you're you're you're still, after all these years, using Word and Excel, which is the network externalities and the the mode. And then, but it it's not some upstart competitor bringing AI to word processing or number crunching. It's it's quite straightforward for Microsoft to actually go right in there and do it itself. So that might be a difference. Now, maybe that that we're just not thinking big enough and that there's something just radically different will break through. But it is true that right now it's looking as if they this is in terms of market share kind of less disruptive than some past technologies.

• 12:46Azeem Azhar?

  Yeah, I I feel this, I mean, I feel that that's right. You know, Gemini out from Google and Microsoft are all doing are doing reasonable well. I mean, we do have the new players, but what's interesting about the configuration of the market is that each of the new players like OpenAI and Anthropic and others are really closely embedded with the last generation's giants. And and it's not as if. The Ford Motor Company or AT&T was closely allied so strategically with with the firms that went before. So it feels like this industrial transition has different, you know, characteristics and you know, perhaps it is just that bits are bits and you're building on bits and and so, you know, what else can we expect at this time?

• 13:31Azeem Azhar?

  I would love to talk also about, you know, something that I think is is quite close to to your heart that is, I think, quite difficult to navigate right now, which is, what happened, what what should we think about what happens to the workforce under the speed of this kind of AI transformation? And and I will start with a little sort of pitch of how I see the state of the nation, which is that the companies are really, really eager to make productivity improvements and these tools can automate large parts of roles, right? They can automate many, many tasks. And so the natural outcome for for workers

• 14:15Azeem Azhar?

  will be either suppression of wages or it will be, you know, it will be loss of jobs on the flip side of that productivity gain. And that the question is not whether new jobs will get created, because historically we've always created new jobs. And, you know, we've seen work from some of your colleagues in in the field of academic economics to show that, you know, most jobs in the US are in categories that didn't exist sixty or seventy years ago. But I suppose the question that I have is, that I wonder about is, what is the likelihood that the econ that the economy will create enough new jobs in those categories for there not to be some kind of schismatic dislocation as this

• 14:58Azeem Azhar?

  technology rolls out? How have you thought about that?

• 15:01Speaker 01

  I think there's quite a lot of dislocation coming, although that's not new. I mean, that's a that has been the case for with every major change and in every major technological revolution, that that a lot of jobs are destroyed and a lot of jobs are created. And in the end, one way or another, there there ends up being full employment because that's more or less, you know, mass unemployment due to automation has been, you know, people have been predicting that for a very, very long time and it never happens. But the transition, the, a lot of people can find themselves in the, in the wrong job,

• 15:43Speaker 01

  in the wrong place, sometimes geographically. I mean, it just, it feels to me like it was just a year or two ago that it was, you know, we were telling people, learn to code. And now it turns out that coding is one of those things that AI does, apparently. I have no personal experience of, but apparently does pretty well.

• 16:01Azeem Azhar?

  It does pretty well.

• 16:02Speaker 01

  And, uh, you know, the way I've, I've been thinking about it. So one of the sort of put down remarks that people made about large language models, and I'm not quite sure if it applies fully to everything else, but that it was just souped up autocorrect. Which is, but the thing is, there were, first of all, you could say that something like agricultural machinery is just souped up guy with, guy with a scythe, cutting down, uh, cutting down wheat, which didn't stop it from being hugely disruptive. And meaning that we basically have, you know, we, we have fewer, the United States is a major agricultural exporter and we have fewer farmers than we have people playing World of Warcraft.

• 16:41Speaker 01

  So, um, so a technology can be sort of not all of that magical and still have enormous impacts and destroy a lot of traditional jobs. And the, in this case, souped up autocorrect, well, even if that's all it is, but very souped up. A lot of, a lot of people's jobs are basically souped up autocorrect. And those are, in many cases, jobs that we considered highly skilled. So a lot of things in middle management, a lot of, I mean, I, I don't know if there's a way to get this, but things that I've noticed is that translation, translation software is

• 17:23Azeem Azhar?

  Are they good?

• 17:23Speaker 01

  Not perfect, but damn good. And how many people were displaced by the fact that you don't actually need somebody who, who, uh, who speaks Mandarin? How many, um, the, yeah, the, uh, just a lot of, a lot of the jobs that we

• 17:42Speaker 01

  We we think, we like to imagine, and maybe we can talk about this, we like to imagine that the very highest creativity level stuff can't be automated, although that may come, that may come as a rude shock at some point, but but a lot of stuff that's just a few runs below that can go away. I think the in some ways the safest jobs are the ones that involve manual labor and dealing with the material world.

• 18:08Azeem Azhar?

  Right. Well, it's fascinating because 15 years ago, the story was AI was going to come after routine jobs in in offices. And what we have seen is the this souped up autocorrect, it doesn't really matter how it works in theory, if it's working in practice and doing much more than that, it will have an impact, is taking eh eh enabling, you know, lawyers and and software developers and creatives in all sorts of areas. And and I think that that has been comes quite a surprise. The I think Goldman Sachs did did some work last year and they were showing that the the sort of the the pinpoint where jobs really started to be impacted by effective L L Ns was about a hundred thousand dollar

• 18:53Azeem Azhar?

  a salary, which is, you know, well above the average. So so you you we end up in this quite interesting world. And and I agree with you that we may feel that there are certain jobs that are very high polluted and creative, and the machines won't be able to at least support or augment them. But with every, you know, release of an AI system, those systems get better and better. And I think that that does create a real pressure and attention. I mean, later today, OpenAI will release their next model, which is called O O three. And I I think quite a lot about what policy responses to this ought to be, given that there is so much uncertainty and given that it's really expensive to run

• 19:38Azeem Azhar?

  a safety net, right? We know that in Europe, our our tax levels are much higher, we have a much deeper, deeper safety net. And that to me feels like a kind of politically quite a difficult problem to to close down, right? Nobody really wants higher taxes, whether it's here or in Europe or in or in the US. And certainly, the politics in the US for the next three or four years won't won't support it. So that I think is going to be a really key point of tension, which is what happens if we do start to see really mass job displacement?

• 20:12Speaker 01

  Well, I mean, the my point of view is that since we don't know which jobs will be lost and we don't really know how to devise policies, honestly, we could do some things here and there, but but trying to efforts to deliberately promote the jobs of the future have gone rather spectacularly wrong in many cases. So safety net is mostly what you have. Now, I have an American perspective where our safety net is extremely threadbare compared with Europe and our taxes are quite low. And we could certainly do more of that. Now, what it doesn't do, even if you can have a safety net which protects people from real

• 20:50Speaker 01

  emiserization from the technology, you can't restore, you can't, it doesn't restore communities. You know, if you have a a community that is based around an industry that ceases to exist because it's it's either because of globalization, which is what mostly is the focus, but also just technology or even changes in taste. So I mean, I like to talk about the detachable collar and cuff industry of Troy, New York, right? That just went away.

• 21:21Speaker 01

  And when it does, you can you can have a safety net that ensures that nobody starves or goes without healthcare, maybe not in America, you can't, but anyway, but but you can't restore the community and you can't restore necessarily the dignity. And that's I don't, I don't have an answer for that. I mean, you do what you can, but we are going to be seeing a lot. I just want to key on one point you said, the, the technology may not, we may not be at a point where it replaces people of, you know, exceptional creativity or whatever, but it does enhance their reach.

• 22:01Azeem Azhar?

  Yeah, absolutely.

• 22:03Speaker 01

  And we've been seeing that for quite a while. I mean, uh, you know, I still have some ties in academia and which is a poor model, but I think may have something to do with. I think it's also true in things like the legal profession, which is that the very top people can actually do a lot, can basically cover a lot more bases because of technology and which actually makes things more hierarchical. I mean, I used to joke about a couple of fields that I follow, that we were now at a stage where there were only three people in the top 10. And, and that's a, again, it's a, it's an unequalizing effect of the technology, to which I have no answer.

• 22:44Azeem Azhar?

  No, I, I think we're, we're also going to see that there is in, in my other hat, which is to invest in startups and particularly deep technology and AI startups. There is a mood towards

• 22:58Azeem Azhar?

  a belief that you could build the, the billion dollar, single person company, like the one man unicorn, as they call it. And the idea is that there's a whole array of

• 23:10Azeem Azhar?

  ordinary and increasingly complex tasks that can be delegated to tens of thousands of AI agents. And you've swapped labor for capital and you're just paying a, a rental to a, a, a cloud service for that. And, and I think that, that, that is a direction of travel that we've, we've seen. The number of people employed even by a huge company like Facebook is far smaller than was ever employed by General Motors. And, and so, and so on and so forth. I know that we're going to go to questions in a few minutes. One thing I, I would love to also for us to talk about is, is trade and tariffs. You know, we've got a man in the White House who loves tariffs and certainly loves

• 23:52Azeem Azhar?

  the threat of tariffs. And we also have this geopolitical fragmentation. Now, as a technologist, what I see happening is a number of different things. We've seen from the political side, the building up of more and more walls around the internet. So it's not just China's great firewall. It's also, you know, Russia being able to seal off its internet. There is now this political pressure, which is around free speech in the US and a departure from European standards. And of course, in technologies with the export controls, most importantly, in a way forcing China to start to do its own developments in really hard technologies in advanced semiconductors.

• 24:35Azeem Azhar?

  So I see a world where there will be increasingly a couple of lanes of technology. And that, of course, reduces the size of markets and adds quite a lot of friction to all of it. It feels like that's a general drag on growth.

• 24:51Speaker 01

  Yeah, it is a general drag on growth. Now, a little bit funny, the whole tariffs on everything push, that is, if you want to understand that, I think you need a model of the mind of Donald Trump. That really, there really isn't very much of a constituency behind that, except that he wants it. I really see business kind of hates it. And there's, but economic nationalism, more sophisticated economic nationalism is definitely on the rise. I mean, the Biden administration was far more economically nationalist than any American administration we've seen for decades.

• 25:30Speaker 01

  Europe is clearly moving somewhat in that direction. And the reason is mainly, I think, at some level, the world is a scarier place. We now are, you know, who thought that?

• 25:44Speaker 01

  That large steel conventional warfare was going to make a comeback in the 21st century. And now it has. And now you think that, well, we need to have capabilities, either domestically or in our close allies, that mean that we are not, can't be shut out, that we have the ability. And if possible, we're going to try and deny this stuff to people that we don't consider our friends. And that is going to fragment the world. And also, by the way, worth saying, and I know we need to get questions, I'm the one who said that. Um, the, um, the, uh, one of the things that is also true is that, to an important extent, technology can actually substitute for globalization.

• 26:25Azeem Azhar?

  Right.

• 26:25Speaker 01

  If you, if you need customer service, instead of getting somebody in Bangalore on the line, you instead are talking to a chatbot. And that's a, that's a real, um, change, change in dimension. So we may be headed for a much more fragmented world, both because it's less necessary to have global trade and because it's, uh, we're, we're much more afraid, with good reason, of being too dependent upon other countries. And what I worry about is the small countries who major left out of the cult. And so, you know, the EU is going to be fine. I think Britain will reach some kind of accommodation with the EU. If Britain will be fine, America will be fine. Um, Bangladesh?

• 27:09Speaker 01

  Vietnam?

• 27:09Azeem Azhar?

  Yeah.

• 27:10Speaker 01

  Not so clear.

• 27:11Azeem Azhar?

  Well, I, I, I love this line, technology is a substitute for globalization. I'm going to come back to you after we, we finish this live, live on that. In, in my, my first book, I talk about the coming fragmentation that was going to be driven by changing technology. And I identified this idea, although I didn't have quite the pity communication that you have, technology is a substitute for globalization, that there are technologies that will do the job that globalization used to do. And that would be things like You know, 3D printing or vertical farming that allow localized production, particularly of, you know, food, but also, I think critically, the change in the energy system.

• 27:54Azeem Azhar?

  So you you buy solar panels once, they last for 25 years, you buy batteries, they last for much longer than we ever thought, and you don't need to be, you know, a vassal to a sort of a petrostate. And that, I think, does create an interesting part for countries like Bangladesh or Pakistan or Vietnam, where, you know, a lot of their sense of sovereignty and ability to develop is about their access to energy, right? How much energy catch do they have as an economy? How many energy services can they actually use? And in the last two years in Pakistan, there's been this remarkable change driven by the falling cost of solar panels, which has meant Pakistan has become one of the largest importer of solar

• 28:38Azeem Azhar?

  panels, and broke the link between measured grid, delivered electricity and GDP growth. Because businesses could not be bothered to sit behind brownouts and blackouts and went off and bought solar panels to keep their businesses running. And and I think that there is this possibility where the declining cost of this technology can provide a much more affordable energy sovereignty for the long tail of the world that is not energy sovereign, especially smaller and poorer countries. And, you know, the first kilowatt hour of consumption a family has in a day from zero is the one that delivers the water pump, the refrigeration, the lights, the charging of the smartphones and makes a could make a big deal.

• 29:22Azeem Azhar?

  Now, of course, that is me, Paul, as an absolute relentless optimist about the human condition and where where we can go, but it is sort of one bright spark that I look at.

• 29:32Speaker 01

  Oh, the whole thing, yes. Just to say that the renewable energy revolution is the most hopeful thing that of today's world. And it's funny how people get all, you know, people get excited about IT, which I understand, but in terms of actually really changing people's, changing the prospects for development, changing the prospects for the planet, solar, wind. Batteries are probably the most important thing and they've really had Moore's Law-type productivity improvements, so it's awesome.

• 30:07Azeem Azhar?

  A quick note, if you want to support us in bringing more of these conversations to the world, please consider subscribing to the show. The 2025 Edelman Trust Barometer, so a trust barometer run by a big public relations firm, shows a high level of grievance worldwide, particularly against the wealthy in governments. How can markets, traditionally quite poor at addressing inequality, tackle this grievance, given the potential negative consequences? Well, that's a doozy. Over to you, Paul.

• 30:36Speaker 01

  Oh, but this is not, markets are not going to solve this. This is, let me just say, the, you know, we had, I grew up, I'm somewhat older here. I grew up in what was really a middle-class society, at least it felt like a middle-class society. There was poverty, there were some people, wealthy people, though not the way there are now, but it was mostly middle-class. And I had assumed that that was a society that sort of evolved naturally. Actually, we kind of thought that was an end state of economic development. But it turns out it wasn't. Obviously, inequality soared again, back to Gilded Age levels. But it also turns out to be that that society, both in the US and in UK and Europe more

• 31:20Speaker 01

  generally, that didn't just happen, that was created. The US was a highly unequal society in 1938, and it was a pretty much middle-class society by 1946. And it was all deliberate government action, strengthening of unions, new wage norms enforced during, by wartime controls. So, look, if inequality, and I think this is an issue, I think people are, whether or not they frame it that way, the fact that there's so much spectacular inequality and perceived, and I think true unfairness out there, this is, this is one of those things that governments need to do. Now, whether we are able to get our act together, I think we, it was kind of a miracle that

• 32:04Speaker 01

  we dealt with those tensions so well, you know, in my grandfather's generation, but maybe we can do it again.

• 32:13Azeem Azhar?

  Yeah, I guess the question is, what is the external impetus that drives that? And I think there is, you know, there is a sense amongst perhaps technologists that that impetus will be, will come because technology will solve, you know, every, every problem. But of course, we do find ourselves with a situation where dynastic persistence of ultra-high wealth in the US is, is pretty substantial.

• 32:40Speaker 01

  Major movements towards equality historically have always basically been associated with wars.

• 32:48Azeem Azhar?

  Absolutely, yeah.

• 32:49Speaker 01

  And there's the old joke, sorry, European, people who work at the European Commission say that they should have a statue in front of the Berlemont, the headquarters, a statue of Joseph Stalin, without whom none of this would have been possible.

• 33:05Azeem Azhar?

  That's grim humor. There have been a load of questions about debt, so I think we should turn, turn to those. I'm just trying to read my notes. Alan Greenspan used to say, we don't know the max, the level of maximum federal debt, and I hope we never find out, because when we do, it will be too late. And I guess this is directly to you, which is what is the max according to Paul, or what is the ideal level of debt?

• 33:28Speaker 01

  Okay. I mean, there's a, a pretty good analytical doctrine called functional finance, which is not MMT, although there is a whole other thing, but which says that the number doesn't matter, right? You suggest just think about the macroeconomics. And I don't think that's entirely true, but is largely true. This, it, as long as you're not having uncontrollable inflation, particularly countries that issue debt in their own currency have a lot of running room. And examples, I mean, the, the max, I think the max debt number we've ever seen as a share of GDP would be the UK, which came out of World War II with debt at 250% of GDP. So, you know, more than double the current US level. And there was

• 34:13Speaker 01

  no debt crisis. Now, you can argue that there was a fair bit of financial repression and controls and, but, you know, we, we haven't lost the ability to do that if necessary. But in any case, I don't think that was the issue. I think that we're You know, it's imprudent to just keep on running up that debt to G E P ratio. But there is not a hint in anything I can see that we're hitting any kind of limit. You know, people who bet against J G Bs, against Japanese debt because of their debt levels, have just lost money and lost money and lost money over the years. It's advanced countries with stable governments that borrow on their own currency just have

• 34:56Speaker 01

  far more fiscal space than most people tend to imagine.

• 35:01Azeem Azhar?

  Although, I mean, in the UK, of course, we got heavily punished a couple of years ago when two prime ministers back, it's hard to keep track, really spooked our debt markets. And in a sense, we've got the hangover today. And I guess the Chinese are contending with a whole slew of other debt problems themselves, which which actually may advance the U advantage the U S over the next few years.

• 35:28Speaker 01

  Yeah, well, although I have to say that the reason that Liz Truss lost the the race with a head of lettuce as to who would would survive longer. There was, I think, the UK economists calling it the moron premium or the, I mean, it was, it wasn't simply that her plans looked fiscally irresponsible, they looked stupid. And now, of course, stupidity always comes along, but I don't think that was a fair test, really, of of the sustainable level of debt.

• 35:58Azeem Azhar?

  Yeah, well, fair enough. I mean, we're gonna, we're gonna figure it out. And I think the one thing I would say in the UK now is, in the last week, the government has has really come out fighting, they've come out fighting for investments in infrastructure, for public-private partnerships. It's a sort of, I suppose, quite a healthy neo-Canadianness in a way, right? Let's let's build a lot of stuff. Let's make it, make sure it's infrastructural, make sure you can build on top of it rather than, you know, speeding up debt for the consumption this year or the next. We had another question. When does it make sense for the Fed to raise interest rates? Is it possible that high interest rates might help with labor disruptions?

• 36:38Speaker 01

  I'm not quite sure I understand the second part of that. I mean, the Fed is, look, they have.

• 36:46Speaker 01

  As they should, a dual mandate, they're supposed to achieve full employment or sustainably full employment and they're supposed to have low inflation and the inflation, you know, there's a target of 2%, which is rather arbitrary, is one of the few things in the world that you can really blame on New Zealand, which is a whole story. But the, but something like that, inflation, basically keep inflation low enough that people are not constantly thinking about it. The, the right level of inflation is low enough so that it does not become a major source of, major use of cognitive energy and as full employment as you can manage. And

• 37:29Speaker 01

  that's where they will set, that's what will determine where they set interest rates. They will judge it wrong sometimes because they're, actually the dirty little secret of all this stuff is that Jerome Powell has no, essentially no information that anybody who knows how to use, you know, I know how to use Fred, the Federal Reserve database doesn't have. And so they'll get it wrong, but I don't think, now the, the labor market disruption issue, not, not really. I mean, we did have a big labor market disruption as we came out of COVID because the mix of stuff that people wanted to buy was very different and we had a period when

• 38:08Speaker 01

  we had a really high ratio of unfilled job openings to people looking for jobs, which was transitional and probably, you know, and the Fed raised interest rates in part because that seemed to be kind of inflationary, but that problem has kind of solved itself for the time being. Now, if AI could produce another similar disruption, although unlikely to go as quickly, but I, I don't think, you know, the, the fact of, the Fed has got one dial to, to, to turn, central bank, you know, the, the, the overnight interest rate and there's only so many problems you can solve with only one dial.

• 38:47Azeem Azhar?

  Yeah. And I also wonder about, when we think about how this intersects with the, with the labor market, what is happening from a geographical structure perspective, you know, as we move into these advanced economies, you get this effect of agglomeration, you know, people want to get to where the other.

• 39:06Azeem Azhar?

  Strong growing companies are, and so you get these clusters building, San Francisco Bay Area being the most powerful in the world. And it strikes me as quite a challenging public policy problem to figure out how to turn a 21st century economy into one that grows across a broad geographic spread. I remember talking to somebody very senior at one of the foundation AI labs a couple of months ago, and they said to me, you know, what we can't figure out is how this technology doesn't become a giant vacuum cleaner sucking all of the wealth to San Francisco. And this is obviously not an interest

• 39:49Azeem Azhar?

  rates question, but it is, it is a challenge, I think, about how you revitalize local economies, because local economies fundamentally where people live, it's where they have their roots.

• 40:01Speaker 01

  Well, this is, this is right up my alley. I mean, so half the sweetest thing it was for work on exactly this kind of issue. To a first approximation, the answer is, we can't do that. I mean, we, there have been major efforts in some places to really support lagging regions. When, when technological changes is wanting to pull stuff into the already rich parts, what can you do to promote development in the lagging parts? And so Italy has poured vast sums into the mess of journalism, which mean, mean that people have enough to eat, people have healthcare, but has never really caught in business to

• 40:43Speaker 01

  go back there. Germany, the former East Germany, you know, Germany has pretty generous benefits and all of that, and, and nobody is suffering materially very much in former East Germany, but they also haven't, you know, but the industry hasn't come back. And it's a lot of money. And so basically, that policy failures, and even in the United States, although we don't do very much of that explicitly, although Biden tried to some, but we have, because of the way our benefits and tax system is structured, we in effect give enormous aid to.

• 41:15Azeem Azhar?

  lagging regions. If you look at West Virginia or Kentucky.

• 41:19Speaker 01

  That though, we see foreign aid that's about twenty percent of their GDP.

• 41:22Azeem Azhar?

  Through the US tax.

• 41:23Speaker 01

  And pass through system.

• 41:24Azeem Azhar?

  Which means that and thus feed jobs.

• 41:27Speaker 01

  There's a lot of jobs in healthcare in West Virginia. What there aren't are coal mining jobs. What there isn't is industry. And what there isn't is any of the cutting edge technology because why? Would a technology company want to be in West Virginia? And so. And no one has ever cracked that one. It's it's a. Um, it's. I'm sorry, I mean, I wish that there were brilliant solutions, but the fact of the matter is that. Kind of a. You know, this, we've been economy where to the extent that where people. People doing sophisticated stuff want to be near other people doing sophisticated stuff and.

• 42:04Azeem Azhar?

  Yeah.

• 42:05Speaker 01

  And that's been, which is a huge reversal, by the way, up to about nineteen eighty, stuff was spreading out. And then.

• 42:13Azeem Azhar?

  That's right.

• 42:14Speaker 01

  But there's a real reversal since then, which is everywhere.

• 42:18Azeem Azhar?

  When I got involved in the tech industry. You know, the ratio of San Francisco to Boston was about two to one. And now it's whatever fifty to one or thirty to one. I mean, it's really, it's really changed. And I agree. It's a really. This agglomeration problem that you know so well, very, very hard to find. Um. Great policy. Solutions, solutions towards, I suppose. The only things that start to perhaps be. A little bit rosier. I mean, I I wonder the extent to which the IRA, which was, you know, one of Biden's flagship policies. Has been able to revitalize manufacturing in places that are not San Francisco or New York. And with that, you can start to see local ecosystems and and and expertise.

• 43:04Azeem Azhar?

  In those areas and, you know, further down the track, ultimately, local economies can function because there are, there are people there. But it doesn't feel like you're going to have the anchor tendency of the big ten or twenty companies. I mean, of the big. Ten companies in the US, I think every single one is on the West Coast.

• 43:21Speaker 01

  Yeah, and and then if you take the the other great source of of high value added per worker is. Greater New York, which is mostly international industry and. Now, you know, isolated places. In the in the hinterland can thrive, university towns.

• 43:41Speaker 01

  Places that have spectacular natural beauty can, and those can become not just, they can become places where your remote work becomes possible and you can, and so maybe like one in 10 small towns in the hinterland can actually thrive. And, but the trouble is it's highly selective. And so if you travel around, you will find, I found this in multiple countries, but certainly in the United States, you, you travel through

• 44:14Speaker 01

  central Pennsylvania, which is already far enough away that it's kind of beyond the, the metro New York orbit, and you'll see this thriving town with a lot of boutiques and, and coffee shops, and actually a very internationalized workforce, and then 10 miles down the road is desolation. Don't have an answer for that. I mean, it's, and to just say, well, people should move. Well, People that want to move, they live where they live. Yeah. You come from where you come from sometimes, right? And even if they do, even if they do move, something is lost. There, you have a community. Yeah, it's gone. And that's, that's again, the kinds of things that you can't, that are really, really hard to fix.

• 44:53Azeem Azhar?

  So, you know, there are things I can't predict. You can't predict events. I can't predict the breakout of a war, and I can't predict, you know, a crazy, extreme diplomatic position that might emerge. But I think the US is just really, really well positioned. I wrote an essay six months ago, saying this is, the US is well positioned for the 21st, to, to, to lead the 21st century, subject to the politics holding together. And, and I do think that the degree of dynamism that exists will, will help it at the top line. I don't think there's much attention being paid to all of the, the points of tension that, that we discuss about inequality and access and

• 45:34Azeem Azhar?

  distribution, but compared to the UK and, and Europe, I, I, I think it could be in for, you know, quite a healthy, top line year buoyed by a sense amongst CEOs that can just get on and do things.

• 45:48Speaker 01

  Okay. So if somebody would just make our current administration just shut up and, and not do very much, then I think 2025 is going to be a very good year. And that may be how it plays out. It's kind of looking like a lot of stuff is going to be blocked or backed off. But I don't know that. In fact, I might be able to give you a better answer tomorrow. When we find out whether Trump actually does those tariffs on Canada and Mexico.

• 46:14Azeem Azhar?

  Right.

• 46:15Speaker 01

  But so the the big risk points, I am worried about overvaluation in tech. But the big risk points for the US are tech, trade wars and deportation. Because deportation, we haven't talked about at all, but that is something that's really where we can spin out of control and become enormously disruptive. But, you know, we start off, this is amazingly good. I mean, all of us who do these macroeconomic stuff are just sort of rubbing our eyes at how good the situation looks right now.

• 46:48Azeem Azhar?

  Right, of course, but we can never tell. Paul, thanks so much. I I really enjoyed this. I hope you did.

• 46:53Speaker 01

  I did indeed. Good to talk to you.

• 46:55Azeem Azhar?

  Thanks for listening all the way to the end. If you want to know when the next conversation is released, just hit subscribe wherever you're listening. That's all for now, and I'll catch you next time.