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The Ezra Klein Show

By Ezra Klein

Produced by Rollin Hu

This is an edited transcript of “The Ezra Klein Show.” You can listen to the episode wherever you get your podcasts.

I’ve covered the economy for a long time — including a financial crisis and a pandemic — and I can’t remember a stranger and more chaotic year than this one, where it was so unclear what the story was and how everything would turn out.

Other years, the economy has been either bad or good. But what is the economy right now? From “Liberation Day” to the deals and the pauses and the carveouts, it’s unclear what our tariff policy is.

Then there’s the giant A.I. build-out that is keeping the economy afloat. But is that a bubble? Does it herald massive labor-market disruption? Is it good for us? Is it bad for us?

The economic data has also become completely divorced from how people actually perceive the economy. If you look at consumer sentiment, people feel like the economy is as bad as it was at the depths of previous recessions. And yet the economic data — the job market, wages, inflation — all kind of look OK.

So as 2025 comes to an end, I wanted to do a show wrapping up the strangest year in the economy that I have ever covered.

Tracy Alloway and Joe Weisenthal, who are at Bloomberg and co-host the excellent economic podcast “Odd Lots,” are here to talk it all through with me.

Ezra Klein: Tracy Alloway, Joe Weisenthal, welcome to the show.

Tracy Alloway: Thanks so much for having us.

Joe Weisenthal: Thrilled to be here.

We’re here almost at the end of 2025. Tracy, let’s start with you. How would you describe how the economy is doing right now?

Alloway: That’s actually a really tough one, which probably says something about this moment in economic history, which is that no one really knows anything.

We had these tariffs that came in, and many people were expecting those to have an inflationary effect. We haven’t necessarily seen that, even on things like unemployment. But a lot of people have been concerned about a recession for ages now, and that just hasn’t materialized.

I think a lot of traditional economic thought that should dictate how things develop and unfold isn’t bearing out. So I would describe the economy as unexpectedly chaotic, perhaps. It’s just not acting the way a lot of people thought it would in the current situation.

Is it chaotic, or is it unexpectedly normal?

Alloway: Maybe normal. [Chuckles.]

I kept thinking as I was looking at this data that, if you just showed me the macrodata of the year, if you showed me the jobs numbers month on month, if you showed me gross domestic product and inflation, and I didn’t know any story line, I would say: Hey, pretty normal year in the economy.

Alloway: Yes, that’s fair. There’s a layer of policy chaos built on top of an economy that seems surprisingly resilient to that chaos.

Joe, what’s your state of the economy gloss?

Weisenthal: I want to echo basically the same thing that Tracy said. Look, there is clearly a labor-market deceleration happening — I don’t think anyone would dispute that. Unemployment is, as of November 2025, 4.6 percent.

All that being said, the temptation is to assume that, OK, you have this creaking labor market, and then it snowballs, and then you have a proper recession. But people really have been talking about the imminent recession for three years.

Yes, I remember Joe Biden’s imminent recession.

Weisenthal: There were so many imminent recessions, and I think everyone is just very gun-shy right now about calling anything.

We also have this weird thing, where understanding the economy is murky in the best of times. Then layer on to that fact that, prior to the government shutdown, data collection — response rates to government surveys — have been getting worse and worse. Then you figure: OK, during the shutdown, that impaired the data collection process on top of that.

So you have multiple, I don’t know, error bands is maybe how you would present it. Then you have this very strange economy where we know there is this one sector of the economy that’s doing absolutely phenomenally well, which is A.I. and other tech-adjacent things, and then the other areas that probably are sort of stagnating — maybe a little “stagflationary” vibes.

So even if we had a very clear picture — let’s say we had great response rates in all the surveys, and they had been running, and we hadn’t had a government shutdown — this is just a very strange underlying condition. So levels and levels and levels of uncertainty.

The ontology of the economy is unclear. [Chuckles.]

Weisenthal: Yes, absolutely.

So I want to go through some of these stories that you have covered very closely, what happened at the start and where they’ve settled.

And I want to start on tariffs. Tracy, you mentioned the tariffs. So take me back to the week of “Liberation Day.” There were a lot of emergency episodes of your podcast that were great.

What happened then? And what has happened at a high level since then?

Alloway: So that was a crazy week for obvious reasons — capital-H history being made.

I think the surprising thing to everyone was the actual rollout of the tariff announcement and just how unstructured it seemed to be in many ways. This idea that we were going to impose tariffs on small islands out in Oceania —

Weisenthal: Tariff the penguins!

Alloway: Right. Whose only export is bat guano or something like that. It just didn’t make any sense.

Markets don’t deal with uncertainty at the best of times, and this was like a boatload of uncertainty being dumped onto the market. So you saw this huge reaction.

What was even more surprising was that the market recovered so quickly. We spoke to a lot of businesses back in April and May and asked them: How are you dealing with the tariffs?

And we heard, for instance, from a women’s clothing company saying: It’s been absolute chaos. We don’t know what’s going to happen this year. I’m supposed to be putting in orders for the winter Christmas season. I don’t know if I can actually do that with my suppliers in China. I don’t know how much to order.

And yet, fast-forward to now, and things seem to be ticking on relatively well. The big question is going to be whether or not that’s an overhang from earlier periods in the economy. People have already bought a lot of stuff. They stockpiled inventory coming into tariffs. So maybe at some point, all that uncertainty, which you would presume would cause businesses to invest less in their own companies, maybe eventually will hit.

One of the reasons the tariffs were hard to cover is they kept going up and down. Then there would be these bilateral deals with other countries.

Joe, I want to show you a chart from the Budget Lab at Yale that tracks effective tariff rates since the beginning of the year.

Can you talk through what you see on the chart? What happened? And what do you make of it?

Weisenthal: So this is a chart of the U.S. average effective tariff rate since the beginning of the year until now. At the start of the year, the U.S. was an open economy — we had very few trade barriers. It was less than 5 percent on average. Probably looks like it was somewhere close to 2 percent.

Then obviously, when we started getting those initial tariffs on Mexico and Canada — and then, of course, there was “Liberation Day” in early April — nearly 30 percent effective tariffs across the board. Then we started getting the deals and the carveouts and the bilateral arrangements, and we’ve settled in this area that’s somewhere between 15 and 20 percent.

So we are now a very high tariff country. And I think if you had taken those first numbers seriously, people would have looked at them as like: No, we just can’t trade at these levels. But with the modifications they became, I think, tolerable.

The way I’ve been thinking about the tariffs is this: On the one hand, you might say: OK, tariffs are inflationary. They raised the price of goods. That’s inflation.

Another person might say: Tariffs are disinflationary. Tariffs are a tax, historically. And most economists would say, when you raise the tax on things, you’re taking money out of the economy. That’s disinflationary.

So to add to this uncertainty, you can make both arguments. The way I conceive it —

It’s disinflationary because it slows down economic growth?

Weisenthal: Yes, because you’re taking money out of the economy —

You’re taking money out, and people don’t have that money to spend.

Weisenthal: The way I resolve the tension in my head is not to think about inflation versus disinflation itself, per se, but just to think about this idea that we have raised the cost of doing business in the United States. That, I think, we could safely say.

Tracy mentioned that we talked to a women’s clothing retailer. We were also in Alaska this summer, and we talked to this guy who owns the biggest furniture chain in Alaska, which was really fun. And he was talking about how they were going to find a company in India that manufactures this couch or that chair, instead of in China. So they find workarounds, which is why trade hasn’t come to a halt.

But that company in India, maybe they don’t take as many orders as previously because they’re worried that by the time that couch gets to the port, maybe the tariff schedule is going to be different, and then the importer doesn’t want to take delivery of it at the new tariff rate, etc.

When it all shakes out — inflationary versus disinflationary — we don’t really know. But if you add up all of these factors, it’s going to make uncertainty about sourcing decisions, it’s going to change your pricing, and you don’t know how consistently you’re going to access your goods.

In the end, it raises the cost of doing business. It throws sand into the gears, so to speak, of the economy in ways we may not feel for a long time but that might over time degrade the economy or degrade our standard of living.

It settles high, right?

Weisenthal: Yes.

It’s more than half as high as it was right after “Liberation Day.”

And Tracy, I listened to a lot of “Odd Lots” in that period, as in every period.

Alloway: Well, thank you.

And I was listening to the Flexport C.E.O. tell me that global shipping was going to collapse. I was hearing people say that kids were not going to have Christmas toys. And then Donald Trump said: Well, what do these kids need all these toys for anyway? [Chuckles.]

Weisenthal: Which he’s right about.

It’s the antimaterialist turn in Bloomberg here.

Weisenthal: Yeah. [Chuckles.]

And I was hearing that things were just going to break down if tariffs held at high levels.

And then they held at high levels, and things did not break down. Why?

Alloway: It’s an excellent question. First of all, a lot of that hyperbole that we heard about empty shelves and things like that was right after the announcement. And so there’s still a debate: Had you stuck with those levels, maybe we would have seen that.

But even where they settled at the higher rate — actually, if you zoom out on that chart and go back to the 1930s, we’re at the highest effective tariff rate since the Great Depression, basically. So you’re right: This is really surprising.

I think one of the things that’s happening here is there’s a tendency to oversimplify the business environment. People think there’s a company in the U.S. that imports stuff from a supplier in China, and that’s all that happens — that’s the way things actually get into my house.

But of course, there are all these middleman entities in between that process. What that means is you actually have a pretty diverse cushion to absorb some of the tariff costs and maybe even some of the operational issues.

So maybe the shipping company lowers some of its rates in order to encourage business. You’ll have an actual importer who’s bringing that stuff and then selling it wholesale, and maybe they’ll start reducing their prices to offset some of the tariff rate.

So if everyone is giving up a tiny slice of that value chain, then the impact on prices can end up being a lot less than you expected.

Weisenthal: One thing I appreciated, or really realized, after the Covid shock is that American businesses are really good. They’re really well run. And I think this is an important point.

If you think back to March 2020, so many people had no idea what was going on, and some people sort of retreated into their homes. I will admit that I was one of them. I was like: All right, I’m just going to stay on my computer.

And then you look at the creativity of American corporations, which were like: We’re going to figure out a way to turn this restaurant into an overnight commercial kitchen for delivery.

We saw this incredible amount of resilience during that period. We saw a tremendous amount of companies figuring out: OK, what do we have? And how can we keep operating during these extreme conditions?

I have come out of the last five years with a greater admiration for the creativity and resilience of corporate America to withstand these shocks, and management and executive teams essentially finding a way to very quickly pivot and figure out: How are we going to keep running our business under this new uncertainty?

But not just us, right? When we were hearing from all kinds of people who had a line of sight on global shipping data and port data, one reason the predictions of collapse felt so vivid was that it was so inhumanly complex. You would think something that intricate cannot possibly be as flexible.

Weisenthal: To withstand a shock of that magnitude. Yes.

This many shocks. Like, shock after shock after shock. I mean, there have been wars in this period.

Weisenthal: Yes, that was my realization after the Covid shock. That had such an extraordinary impact: Every corner of the globe restructuring life almost overnight, or maybe in the span of a couple weeks.

And of course, there were tremendous shortages everywhere and all kinds of disruptions. But somehow, the machine kept ticking in a way that, looking back, I think would have surprised a lot of people.

Alloway: Not to be supernegative, but I do think we shouldn’t downplay the impact on productivity.

There are a lot of man-hours being devoted to figuring out the tariff schedule — maybe figuring out how to game it a little bit — and then filling out paperwork at the docks and stuff like that.

I don’t know about you, but I shop a lot. I bought something from the Netherlands in September, and I never got it because the shipper said they couldn’t figure out how to mail it to the U.S. and who would actually have to pay the tariffs.

I ended up getting into a credit dispute with them. It took up a lot of my time. I still don’t have the item.

Weisenthal: We get so much content from Tracy.

Alloway: Yes — from my daily life. But that’s one thing, right? So imagine this multiplied by millions of things across various companies. It’s a lot of hours, a lot of manpower.

But let me ask you about the other side of this. We’re talking about the catastrophes that either didn’t or only sort of happened. And I take your point that there was real disruption here, even if it wasn’t the economy shattering.

But obviously, the point of the tariffs, which were a chosen policy in the way that the global pandemic was not, was to create benefits.

And as I would listen to the Trump administration, I would hear that it was going to bring a ton of manufacturing jobs and capacity back to the U.S. I heard a lot about how much revenue it would bring in. Maybe we wouldn’t even need income taxes anymore. I would hear a lot about the security benefits of this.

So the tariffs are a policy meant to create a gain for America. Did they?

Weisenthal: This is the funny thing. We’ve been talking about tariffs for so long, as if it were just something that happened. But to your point, there was ostensibly the idea that it was going to make the economy better.

We chose this! [Laughs.]

Weisenthal: Yes, we chose to do it, which makes it very different than the pandemic, obviously.

I have seen no evidence that we have seen some gain from it — none. There has not been some great boon for the American work force. We know that unemployment has been ticking up.

It is true that they’re collecting a decent amount of revenue from the tariffs — that is real. But the idea that has somehow obviously redounded to the benefit of the American consumer or home buyers, or made our deficits more sustainable, per se — I haven’t seen any evidence of it.

So in terms of the good? I don’t know.

Alloway: There’s also a major policy tension where Trump was claiming: This isn’t going to have an impact on prices. Your prices are going to stay the same. It’s not going to slow down the American economy. But then he was also arguing that this was going to be a huge revenue generator for the U.S. government.

You can’t have both. You can’t charge people a bunch of money and raise a bunch of money, and expect not to be taking the people’s money. It has to come from somewhere.

I didn’t mention one other policy aim here. So we had “Liberation Day.” We tariffed a bunch of penguins for a while. They begin to remove some of the tariffs. And then there is a really big policy pivot that makes a lot of people on the right happier: They settle down the tariffs on our more normal trading partners, and they jack them up on China.

And the new policy rationale we are given is that this is a trade war with China. We are going to isolate China. We are going to take our manufacturing capacity back from them. We are going to reverse their manipulation of world markets.

Now we’re here at the end of the year, and we finally have a deal with China.

Tracy, what is that deal? And how does that fit or not fit the China theory phase of the trade war?

Alloway: So it is true that competing with China is one of the few areas of bipartisan agreement at the moment. I think everyone feels this sense of competition.

But what China has actually been really good at is creating ecosystems for certain products and industries. For instance, on the rare earth side of things, we hear all the time that rare earths are a major choke point for the U.S., and there are worries that China is going to cut off supplies.

The way China has approached that industry is they have mining extraction — again, it probably benefits from a lack of environmental regulation — and they’ve also built manufacturers. And then they have a very vibrant E.V. industry and computer industry that’s built around that rare earth supply, and is there to off-take the supply — to actually consume it.

It’s very hard to replicate those types of ecosystems in a short time frame.

I buy that. But we went from a 100 percent-plus tariff on China as an effort to make them less competitive, to, I believe, now it’s going to be a 20 percent tariff on China? So it seems like we’re not —

Weisenthal: That’s the thing: We don’t really know where the White House stands. The question you posed: Is the entire trade war about isolating China? — that was one view.

The U.S. is not the only country where........

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