Welcome to another special edition of the Forecast from
Washington DCA rather stormy Washington DC.
The storm kind of reflects the political and economic mood at
the moment here. To unpeel the onion of this is
extraordinary week of events on the markets and in the White
House behind me, I'm very happy to say I'm joined by Professor
Joseph Stiglitz, one of the most eminent economists in this
country. Amongst other things, he was
economics professor at Columbia University, chief economist at
the World Bank, and of course, a Nobel laureate.
Welcome, Professor Stiglitz. Nice to be here.
So I want to start off with a quote that caught my eye this
morning from Bill Ackman, one of the billionaire hedge fund
buddies of President Trump, who was panicking about 7 days ago
about the markets going down too quickly for his liking.
And then when there was a reprieve to most of the tariffs
of 90 days announced by the White House and the markets shot
up, this guy, Mr. Ackman said vintage out of the deal.
This is a brilliant president. Do you agree with him?
No. And you have to remember that
market then went down again. This is vintage chaos that we've
seen a really trademark of Donald Trump.
And how dangerous is this chaos which seems to be soldiering on
not just for the US economy, but the world economy?
Very dangerous. You know, we've had 80 years of
trying to create a rule of law, a world in which borders didn't
matter very much, where we created complex and long supply
chains. And all that is being thrown in
the dustbin. It means that countries can't
take advantage of comparative advantage as they did before.
They can't rely on the rule of law as they did before.
And business really doesn't like the kind of uncertainty, chaos
and the absence of a rule of law.
Of course, Trump and his friends in the White House would say
this is about redressing the unfairness against America on
trade. This is about making sure that
China eventually, after this trade fall finishes, behaves
correctly in terms of its trade practices.
Do they have a point? A very small point, let me make
it clear. United States, and to some
extent Western Europe wrote the rules of the game.
And so it's ironic that we are now complaining that the rules
of the game that we wrote are working and we wrote them, let
me make it clear, for the interests of American
corporations and other Western corporations, American financial
institutions, we wrote them for our advantage and now we're
complaining the system is unfair.
You know, what I hear is, yes, there may be some unfairness,
but it's tilted. Where's the United States?
Not away from the United States. The problem here is that he is
interpreting trade deficits, and particularly deficits in goods
as a symptom of unfair trade. I mean, and the logic is a very
simplistic logic that we're better than any other country,
therefore we ought to be exporting more than we're
importing. And therefore if we're importing
more, it must mean that somebody's doing something
naughty. The fact of the matter is when
you have a, a trade deficit at a multilateral level, it's a
symptom of a macroeconomic problem.
In particular, it's a symptom that the country's aggregate
domestic savings is less than it's domestic aggregate
investment, and there's going to be a capital inflow to make up
for that difference, and corresponding to that capital
inflow is a trade deficit. It's that simple.
Yeah, so basically what Donald Trump was trying to do was
punish foreign countries for not buying American goods.
So this isn't just about tariffs.
This is about the inability or the unwillingness or the
unaffordability of places like Cambodia or Laos or Vietnam to
buy expensive American stuff that they may not want.
Exactly. And there's even a deeper flaw
that in a modern world, we've moved from just trade and goods
to trade and goods and services. You know, manufacturing is only
less than 10% of the US economy in GDP and employment services
are multiple of of goods. And United States is a major
exporter of services, health services, financial services,
tourism. And what Donald Trump is doing
is shooting the US in the foot. If you look at what he's done in
terms of the attack on our universities, one of our most
important institutions, it makes it more difficult for us to
export our educational services. If you look at what he's doing
to tourists, including from the UK and from other countries
wanting to come to the United States, there is the threat that
they will put into tension, shipped off to some place and
without the kinds of normal safeguards that you expect in a
democratic country. So that's discouraging tourism.
So he's doing more than anybody has ever done to actually harm
American exports. So the tariffs that he's
imposed, I mean, the the ones against China seem to be going
up everyday. I think the last time I looked
there was 140% American tariffs versus 125 from China.
Then of course, all the other tariffs that may or may not come
back in 90 days time. I mean, the last time we had
tariffs like that was in 1903, more than a century ago.
Is that the mindset of Donald Trump?
Do you think that, you know, early 20th century, is that
where he's gone back to? Very much so when the US was a
dominant power. He, you know, this Make America
Great Again is a, a, a going back to a world that no longer
exists, a world where manufacturing dominated, where
the US dominated and we could basically get away with
anything. the United States now is less than 20% of global GDP.
And China in terms of purchasing power parity is a larger economy
than the United States. And there's another asymmetry
that Donald Trump hasn't fully grassed that when we're imposing
these high tariffs on China, it creates an aggregate demand
problem for China. And they've been worried about
that, and they anticipated that. And correcting an aggregate
demand problem is not as difficult as correcting an
aggregate supply problem. And what the tariffs against
China are doing is creating an aggregate supply problem because
our supply is so dependent on complex supply use in which
China plays a central role. You know, we saw that after the
pandemic and when Russia invaded Ukraine.
Remember, in those days, there were these interruptions to
supply and we had enormous inflation.
We couldn't get some critical goods.
That's what Donald Trump is doing.
He's creating unnecessarily those supply side interruptions
that we experienced just a few years ago.
The other thing, of course, he wants to do 2 things really.
He wants to increase the revenue, the amount of money the
American government makes from these tariffs.
And he wants to bring jobs back to the Rust Belt, to all those
manufacturing towns that have been desolate for decades now.
Are those not 2 contradictory things?
Because of course, the less people sell to, to America, the
less revenue they'll be from tariffs.
And you know, the, the, the jobs don't necessarily come back as
if no one's going to buy the stuff that they produce.
It's actually worse than you just described because first, if
we get manufacturing back, it's going to be modern
manufacturing. You know, I just was saw a
factory in China. We were there producing 1000
cars a day with 2000 workers. Most of the production was done
by Roebucks. Modern manufacturing is very
advanced and China now has a comparative advantage in
engineering, which is at the core modern manufacturing.
So because we have not invested in railroads, we've not invested
in logistics, we have a comparative disadvantage in some
of the core ingredients for manufacturing.
Secondly, it takes a long time to produce many of the to create
the factories, and given the chaos that he's created, firms
are going to be worried about moving into the United States.
Thirdly, and most importantly, he's raised the tariffs on steel
and aluminum, key ingredients into the production of other
goods. And by increasing the cost of
production, he makes American exports less competitive.
So in fact, while he create a few jobs in, say, steel or
aluminum, he destroys many more jobs in the sectors that in the
areas where we use steel and aluminum.
So he again is engaged in job destruction.
So when economists look at the whole portfolio of what he has
done, it's much more job destruction than job creation.
I wonder, because it makes so little economic sense, what he's
been doing, whether this is just really political.
And what it's really about is trying to limit the expansion of
China, put China back in its box.
Because as you've just said, you know, when it comes to
infrastructure, when it comes to innovation, when it comes to
production and maybe even, you know, services down the road,
China and nominally communist state is beating America at the
capitalist game. That's right.
You know, in some areas we we do have enormous strengths and one
of our strengths was our universities, our research
establishment and he in the last three months has done more to
damage that than any competition with China.
So over the short, medium and long term, he's really
undermining the strength, the key strength of the United
States. It's like he's been attacking
the United States far more than China had been doing any any
damage. There's another element that one
can't underestimate, and that is the amateurness and maturing
this of his team. You know, I've talked to people
who've been in countries, you know, engaged in negotiations.
It's not like the normal negotiation where one side comes
in. Both sides come in with a sound
understanding of economics, a strong view of what they want.
And you have experienced and well informed negotiators.
This is amateur hour. And so you have people who may
be bright, may have been really good on Wall Street, but that
doesn't mean that they have any fundamental knowledge of the
deep intricacies of economic policy.
And so you have people been working on these issues for
decades and trying to interact with somebody who's just begun
to think about these issues. They find it frustrating.
But also, I wonder if it's amateur, because what's far more
important for Donald Trump and the people around the cabinet
table is loyalty to the boss than any kind of expertise which
might involve them contradicting him.
That's right. And there is an element of what
is going on of a cultural revolution.
You know, we've been talking about China and and China went
through a devastating cultural Revolution and it was that
experience that led to them to their reform and openness
strategy, which over 45 years has led to the highest rates of
growth and the largest numbers of people moved out of poverty
in the history of mankind. We didn't learn the lessons of
Chinese Cultural Revolution. And what I see going on right
now on the attacks on the universities, the attacks on
expertise are have a kind of close relationship to what
happened. It's sort of like the
establishment failed me. That's what failed us and these
are the leaks that look down on us and it's not true.
They were trying to create a better world for everybody, but
there's that grievance and so they're going to shoot the
country in the foot by destroying the expertise.
And in this trade war between China and the US, which seems to
be getting worse every day, what are the consequences of that
going to be for China, for US and also for the world economy?
Well, as we said for for 4045 years we've tried to create this
global economy based on complex supply chains, comparative
advantage and the whole the the standards of living on average
around the world have increased and numbers of people moved out
of poverty are enormous. That closing of the gap between
China and the United States and the fact that China now in terms
of the standard way of measuring these, the purchasing power
parity, China is now larger than the United States.
It's still per capita income is much lower, but it has four or
five times the number of people so that it is a larger economy.
the United States resents that. And Professor Graham Allison at
Harvard has talked about this as the facilities trap, that the
country that was #1 doesn't like the number 2 country coming up
and threatening their dominant position.
Well, China has been thinking about this issue for a long
time. After the first Trump
administration, they they began a process, didn't go fast
enough, didn't go far enough, but are now and have anticipated
what the United States is doing. So they are relatively well
prepared. You know, they've had some
advertisement. Nobody could have anticipated
COVID. They didn't manage COVID well.
But where they are today, they are in a deeply optimistic
position. DeepSeek, the advances in
robotization, their integration to the global economy give them
a set of a sense of confidence. So I think with difficulty
they're going to be able to manage through this.
On the other hand, as I said before, Donald Trump has not
fully anticipated the extent to which our supply chain is so
dependent on China and just breaking it adequately like
that. I'm afraid we'll have some
consequences for the United States, including inflation.
And the Fed is going to respond to the inflation by raising
interest rates. Good chance of having the worst
of all possible works works stagflation, which means that we
will have a a recession and inflation.
The critical question He wants the United States to be great
again. Will he restore manufacturing to
the United States? Will he restore America's
dominance in this area? There will be some movement of
some firms back to the United States that will occur.
But overall, because as I say, we're a service sector, we're a
knowledge based economy. And I said that well before
Donald Trump came on the scene. In the areas that are important
for a 21st century economy, we'll be worse off.
And so I think that the adverse consequences of this chaos for
the United States are going to be quite significant.
Now, the really interesting question, I think, is Europe.
Europe finds it difficult to work together.
The attack by the US against Europe has been uniting a lot of
discussion about the creation of a European Defence Force for a
long time, and there seems to be a significant movement in that
direction. If Europe gets united, responds
strongly to the war in Ukraine, creates a European Defence
Force, scrap some of the constraints that they've imposed
on their fiscal policy. And reassesses its trade
relationships with China and the rest of the world.
I think Europe can navigate its way through this very difficult
period and emerge actually stronger rather than being a
sort of a dependent on the United States.
There will be a more united Europe as a very important and I
would say the critical country in the world country, a region
supporting democracy and human rights.
So that's my hope. A lot rests on what Europe does.
Where does this leave Britain? The piggy court in the middle,
if you like, between the European Union and the United
States, which which with which it hopes it still has some kind
of special relationship. I think it's important for the
UK to cast its lot with human rights and democracy and
unfortunately Trump is moving away from both of those.
And so when I say UK has to cast its lot with human rights and
democracy, that means it has to move back towards Europe.
And that doesn't mean it has to rejoin the EU, but it does mean
it has to coordinate and be an active part of the European
Defence Force, cooperate with industrial policy, climate
change, creating a kind of new multilateralism which
unfortunately for a while may not.
The US won't be at the centre, the EU will.
The centre and the UK can be an important partner of the EU.
Just back to China briefly. What are the ways in which
China, which is the second biggest holder of American debt,
can retaliate against the United States in this trade war?
Well, I don't think it will actually do anything about
dumping its U.S. Treasury bills.
It would not be in its own interest to drive down the the
the price of those Treasury bills.
It could do that, but I don't think that will happen.
China has many cards in its hands.
It is the dominant player in a whole set of minerals and other
natural resources. While we weren't paying
attention, it it developed this dominance in materials that are
essential for your smartphone for for renewable energy.
You know, it's really quite remarkable that if you thought
that there was a a conflict of that kind, you would have begun
to to try to make sure you have the natural resources that would
make you able to have what might be called national economic
sovereignty. But the first Trump
administration didn't pay any attention to that.
It was more concerned with grievings and, and I would say
and, and other bad trade ballots, but not with the
extreme chaos that we have today.
There is one other dimension, obviously, that it could
undertake. It's no longer dependent in the
way that it was 25 years ago on American investment.
It has an enormous amount of savings.
You don't have that kind of savings.
It has far more engineers than we do.
So it's in many areas equal to or surpassed American
engineering. So it's dependence on American
firms has gone down. So take one example that might
be very salient in EV electric vehicles.
China's electric vehicles, BYD and a whole set of other
companies are now much better, much cheaper than Tesla.
So it could tax, it could tax the profits of Tesla, not worry
that, well, a Tesla might say we're not going to invest
anymore in, in, in China. They don't need Tesla's
investment. Apple makes a significant
impression of its profits from China and it could tax Apple
more. So it's this is not what it
wants to do. It wants to continue an
arrangement of of cooperation. It's their leaders have made it
very clear they want to cooperate, but they're not going
to kowtow. They're not going to be
subservient. And to put it in a broader
historical context, which many Americans don't take into
account, you remember in the middle of the 19th century there
were trade wars. Those trade wars were actually
with guns. Europe, with the support of the
United States, invaded China and demanded, demanded that China
open up its doors to opium, to the sale of opium.
And they were called the Opium force.
And it was a disaster for China. But we insisted this was what
fair trade, free trade was about.
China had that open its doors to opium.
It's ironic that now we're talking about phenotype, but
that that history which led to the what are called the
concessions and Shanghai and other cities in China where they
had to give up territory where Europe powers ruled.
Effectively, that memory is still there.
And so I do not see any way in which China is going to kowtow
to the United States where Donald Trump manding something
of China is going to get the resolution.
It has to be a dialogue based on equality.
And one of the problems here is they're more informed and
they've been better trained. United States universities,
their experts actually know more about economics in many cases
than than the negotiators that we're sending from the United
States. So, briefly, would you say that
what Donald Trump has done, what he's decided to do for political
and perhaps economic reasons, has hastened the ascendancy of
China and the decline of America?
Yes, it's true. I don't think the damage
necessarily in terms of this relative position is permanent,
but it's very, very deep. The most damaging thing for the
United States is what is, is not the trade war.
It's the attack on our science, an attack on our universities,
attack on the institutions that gave us really the comparative
advantage in technology. It's where we are today.
So his attack on those fundamental institutions
probably is the most damaging thing, but equally damaging is
the attack on the rule of law. You know, the the way in which
he's trampled on the safeguards, the the just ignoring the law.
And the last Nobel Prize in economics was given for studies
that emphasize something that I and A lot of other people have
for a long time. What has given rise to the
wealth of nations, to the success of countries like the UK
and the United States, Western Europe, is the rule of law, the
kind of certainty that that gives for investment.
And he's destroyed that. So this sort of crippled wing of
destroying, attacking silence and universities, attacking the
rule of law, and then attacking the trade framework and the
international rule of law has really damaged the United
States, I think very seriously. And of course, one of the things
that's really suffered is trust in the United States.
And trust in the United States is one of the things that has
always upheld the dollar, the US dollar as the currency of
reserve. I mean, you've effectively had a
golden credit card for decades. Is there a danger that that
golden credit card will not be demoted to silver or heavens
defend even bronze? You're absolutely right.
And let me say, emphasize something that that many of us
again have talked about for several decades, the importance
of soft power. It was US soft power that was
really much more important than our hard power.
People respected us because we were a carry country, a
successful country. People looked at us and said we
want to be like that. Now when people look at the US
and say no, we don't want to be like that, look what he's doing
to the universities. What are these doing to the rule
of law? Look at the inequality.
Look at the oligarchy, the role of money, the corruption.
So we are losing our soft power. Another example of the shooting
ourselves in the foot when he destroyed shut down USAAID
overnight it resulted in thousands of children dying in
Africa because they couldn't get the medicines.
It again undermined respect for the United States.
What kind of country could do that?
You know, it's an embarrassment. So he has destroyed our soft
power. Now to come to the more narrow
question of the dollar as a reserve currency.
China already anticipated this problem.
It used to hold 22 trillion or more dollars, its reserves.
The latest numbers that I've reported are it's down to 700
billion. It's diversified go euro,
Japanese yen. So this March away from the
dollar as a reserve currency is already way.
You know, Trump wants to have it both ways.
It wants to have the dollar as a reserve currency, but also not
have the one critical disadvantage of the reserve
currency. And that advantage is that if
you are reserve currency, people will be accumulating dollars.
If they're accumulating dollars, that is equivalent to a capital
inflow, and a capital inflow is equivalent to a trade deficit.
He doesn't like the trade deficit, but you cannot be a
reserve currency without having a trade deficit.
The trade deficit normally gives rise to deficiency of aggregate
demand. That deficiency of aggregate
demand requires fiscal stimulus. That fiscal stimulus means a
fiscal deficit. And the Hawks, the fiscal Hawks,
the Republican Party don't like that.
You can't understand this under Keynes.
And some people say it was Keynes insight to say let's not
be a reserve currency, let's get rid of this hot potato.
And that had undermined the strength of the UK.
Triffin talked about a great professor in the last century
talked about what was called the Triffin paradox that the reserve
currency create. To maintain that reserve
currency, you have to get more and more debt, deficits
accumulating over time. And that of course has that debt
increases, the confidence in the reserve currency decreases.
And so he said, you know, there's a there's a a kind of
tension here. Now, the way front lungs resolve
this is to break the laws of arithmetic and just destroy
economics. The particular proposal that he
has, it has been, I don't know if you've heard about the
Marleco Accord. And when at feature of that is
that countries around the world would accept trade in their
T-bills for century bonds with which do not yield any interest.
And those in other governments that I talked about and say
what, what do you think about this?
They say, well, that's equivalent to a default.
And So what some people in the Trump administration are talking
about is a default on the dollar.
If that discussion continues, that of course will undermine
the USS reserve currency. Finally, Professor Stiglitz, I
mean Scott Besson, the Treasury Secretary, said the other day,
the next four years of this administration are going to be
about Main Street and not about Wall Street.
A kind of populist message from a rather unlikely man, to be
honest. If what's happening at the
moment means pain on Main Street, inflation, job losses.
Do you think that American Society can sustain that?
Or will there be a mass kind of electoral rebellion against
Donald Trump and his people? I think there will be an
electoral rebellion. What many Americans are not
worried about is will we have free elections in 2026?
You really think that's a danger that you won't have free
elections? Well, remember what happened in
2020. Donald Trump tried to overturn a
free and fair election where Joe Biden won by 7 million votes.
He tried to overturn that. Now, one can't help but ask the
question, if you accumulate a lot of power, if you show that
you're willing to trample the rule of law, is it not
conceivable that you would use that power and your
insensitivity to the rule of law to maintain your power?
And it's not that difficult because all you have to do is
intervene in a limited number of elections because we have red
states, we have blue states, and then we purple states.
And so if you intervene in enough of the purple states, you
can ensure that you maintain power.
So because we are a divided country, it's not like he has to
shut down the whole electoral process.
All he has to do is intervene in a relatively few stakes
congressional districts and we will not have free and fair
elections. That is the worry.
Is America becoming the most powerful Banana Republic the
world has ever seen? I think that that's the worry,
and it's a Banana Republic in so many ways.
When we talk about banana republics, we often talk about
leaders who don't have expertise, who govern on whims,
with authoritarian figures, who may have flawed views,
grievances, and it's their whims and their misconceptions,
obsessions which dictate economic and other social
policies. And we've never had a Banana
Republic with so much military power.
And that is what is so scary. Professor Joseph Stiglitz, thank
you very much indeed for joining us on this special edition of
the Forecast from Washington, DC Professor Stiglitz, thank you
very much for joining us. It's been a pleasure.