Paul Krugman's Unconventional Outlook On The Economy

Jan 29, 2013
Originally published on January 29, 2013 6:24 pm



Over the past several years, Democrats and Republicans have disagreed on how address the problems of deficit and debt, but there's broad consensus that we need to reduce both by significant numbers, and soon. In his columns in New York Times and in a book called "End this Depression Now!" Nobel Prize-winning economist Paul Krugman defies the conventional wisdom. He argues for more spending, not less, says the deficit's not too bad, and that a little inflation might be a good thing.

So deficit hawks, call and tell us why you think this is such a big problem. 800-989-8255. Email us: You can also join the conversation on our website. It's at Click on TALK OF THE NATION.

Paul Krugman joins us now from our bureau in New York. "End this Depression Now!" is just out in paperback. And nice to have you back on TALK OF THE NATION.

PAUL KRUGMAN: Hi. Hi. Good to be on.

CONAN: And why are you right, and those you describe as the very serious people so wrong?

KRUGMAN: OK. The first thing to say is that people with serious money on the line, you know, bond-buyers, don't seem especially worried about the current U.S. deficit. So, you know, the - we've had people saying, oh, this crisis. We're going to turn Greece, Greece, I tell you, any day now. They've been saying that for several years, and no hint of it, even though its borrowing costs are at historic lows. There's a reason for that, which is that if you actually do the numbers, bearing in mind that the deficit that we have right now is for - to a large extent, the result of a depressed economy, which is starting to recover.

Look at the 10-year outlook, it's not that bad. It's - we're not going to be much deeper, even if we do nothing more. Even if we do nothing more, we will be only somewhat, only slightly deeper in debt relative to GDP, which is the right measure, 10 years from now.

If we - we should do something more, arguably, but it's not a heavy lift, to just stabilize things. Twenty-five years from now, yeah, something's going to have to give. But why exactly is it a priority to, you know, take the steps right now to ensure that the Social Security benefits or something, or medical costs are going to be lower in the year 2035 than we currently expect they're going to be? There's something to think about, but not at a time of mass unemployment, mass suffering, the most important issue that we should be looking at.

So it's this odd thing. People in the - you know what I call them? The VSP, the very serious people, have convinced themselves, convinced a lot of the public that the deficit is an urgent crisis issue. But there's not a hint in the numbers, in the actual markets that this is, in fact, anything like a crisis, and they've crowded everything else out of the discussion.

CONAN: Some of those people say the bond investors may look at this and say, well, the U.S. economy is not in such great shape. There is risk down the road. It's that it's much safer than anywhere else in the world, so there's no place else to put our money. Europe's in a bad way, talking about Greece. And China, not doing so well.

KRUGMAN: Yeah, except, you know, the European countries that have their own currencies are, like us, able to borrow very cheaply. Japan, right, Japan is much deeper in debt that we are, but like us, they have their own currency. They borrow in their own currency, and they're not having any problem. Their interest rates are low, and the new government in Japan has announced a stimulus program. The markets don't seem at all disturbed. If anything, they're cheering, because Japan clearly needs a boost to its economy.

So, you know, this is a - we've, basically, you know, we've got a psychosomatic disorder, right? Our governing classes are suffering from an ailment that exists only in their imagination. And unfortunately, the rest of us are paying a very, very heavy price for that obsession.

CONAN: If we're deluding ourselves, so are most of the countries in Europe, beginning with Britain.

KRUGMAN: Well, that's right. Britain is a nice test case, because Britain, like us, has no urgent need to do anything. They have their own currency. They borrow in their currency. They have a lot of autonomy. Their borrowing costs are very cheap. And two-and-half years ago, the new Cameron government said, nonetheless, what we need is austerity. And don't worry, austerity will inspire our confidence and it will actually strengthen the economy. And they brushed aside. They were praised for ignoring all those economists who said this is going to send you into a double debt recession, and it's sent them to a double debt recession.

In fact, up until the point when Cameron made his turn in policy, the U.S. and the U.K. had been growing - recovering in about the same pace. The U.S. recovery continued. The British recovery did not. So, you know, thank you, Prime Minister Cameron, for controlled experiments here. But it's an experiment that says that this was - this is very much the wrong focus for policy at this point.

CONAN: And there is then the problem of - you look at the deficit since President Obama came into office: trillion-dollar deficits every single year. Yes, the debt may not be a problem, if you say so. But it's mounting fast.

KRUGMAN: Well, it's, actually, it's - but the deficit, the flow, the rate at which we're adding to the debt is falling. In fact, the deficit has come down a lot since Obama took office. It's come down primarily because the economy is recovering. We got that deficit. It wasn't that we - we did not, in fact, have a runaway spending spree. What we actually had was one hell of a financial crisis, the worst in 75 years, which among other things, depressed revenue, meant that there was a sharp fall in the economy, a sharp full in tax receipts and also actually led to some entirely justified temporary spending increases. We were spending more on unemployment benefits and food stamps. That's all going away, visibly, as we speak.

As the economy recovers, all of that is going away and, yeah, it's easy. I really think that the tyranny of numbers that sound big, you know, $1 trillion dollars. You got to hear that in the voice in Dr. Evil, right, $1 trillion dollars. But, you know, we're a $15 trillion a year economy and then we will be a $15 trillion and more economy for - in the years ahead. And so if you look ahead over the next decade and you say, look, you know, the United States economy is going to produce around $200 trillion worth of goods and services over that period, and we're going to add certainly several trillion dollars more in debt. But, you know, put it on the right scale, how - you know, ideally if we had a stronger economy, I would say yes, let's bring down that deficit. Let's worry about the debt. But we don't. Not now. So now is not the time.

CONAN: Let's bring some listeners into the conversation. Our guest is Paul Krugman, the Nobel Prize winner and New York Times columnist. His latest book is just out in paper today "Stop This Depression - End This Depression Now!" Let's go to Tom, and Tom's on the line with us from Denver.

TOM: Hi. How are you?

CONAN: Good. Thanks.

TOM: Thanks for putting me on.

CONAN: Sure.

TOM: My dispute with Mr. Krugman would basically stem along the lines that the economy has indeed recovered somewhat, but the trend of the amount of government spending is people my age who are getting Social Security and getting Medicare, increases the so-called take. I mean, I'm definitely one of the takers. There is no question about that. But I think that that eventually, and I'll be the first to admit, I don't know when. But the bond market right now, although, Mr. Krugman points out that it's, you know, pretty benign in the interest rates, the problem is, is the Fed is one of the major buyers.

And I realize there's a symbiotic relationship with the Chinese and even the Japanese. But what concerns me is at some point in time that that is very likely to turn around and then you're going to have higher interest rates. And if you're going to take care of all these extra takers like me, you're going to have to have a more productive workforce. And I don't see how you can get the productivity if you don't have a low interest rate hurdle to stay on top of.

KRUGMAN: OK. Can we talk about - there are two different pieces to this, and both of which - I think there's a lot of - the conventional wisdom out here is very, very flawed. So one of them is the notion that we are vulnerable, that what if the Chinese decide not to buy our bonds. What you want to bear in mind is the United States is not going to default. We're not going to run out of cash because we print the stuff. So the - what that means in turn is that the interest rate that people are going to demand on U.S. long-term bonds, you know, that's related closely to the interest rates that you expect that the Fed is going to set on short-term interest rates, which, you know, the Fed controls.

Unless you give me a reason why those are going to rise, and that's not going to happen until the economy recovers. But as long as those short rates stay low, the long rates in the stay low. So you say, what if the Chinese or somebody, what if people decide that U.S. bonds are not such a great investment? Well, that would cost a dollar to fall, and that that's a good thing. A weaker dollar would actually stimulate our economy. And by the way, you actually have a test case. Right now, Japan, which has much higher debt, relative to the size of the economy than we do, has nonetheless announced it's going to do a stimulus program, announced it's going to have expansionary monetary policy, and it's going to, you know, it's going to try and break out of the stagnation, never mind the debt - for now.

The markets have tiered, that the yen has fallen, and that's a good thing. It's all good, turning - Japan in a way is doing an experiment for us to see what happens if a country that owes us a fair amount of debt, nonetheless says, while the economy is depressed, we should not worry about that. And the Japanese experience so far is not to worry. Good stuff. The other thing - I don't know (unintelligible)

TOM: (Unintelligible) worry, but...

CONAN: Tom, I guess, Tom left us. Yeah.

KRUGMAN: (Unintelligible). But let me give you the rest of this. I agree that if you take aging of the population and you take the rising health care cost, that if you look at where the U.S. budget is likely to be in the 2030, let's say, it does not look sustainable. Something has to give. We're going to have to do some combination of more revenue, find a way to spend less - whether that means reducing benefits or it means just getting serious about controlling health care costs which is my preferred root. In the year 2030, we're going to have to run our budget very differently than the way we run it right now. The question is what exactly - people are saying, therefore, we can't run budget deficits now. that makes no sense at all. the amount of extra debt that we will or will not run off for the next few year is going to have - be almost irrelevant to our ability to pay those bills in the year 2030. And so people will sell so we have to commit now to cutting entitlement spending in the future, which, again, that may be something's that's going to happen, but why - if the threat is that at some future date we will have to cut benefits. And that people are saying so to avoid that, what we have to do is commit now to cutting future benefits - wait, what exactly have you accomplished? What have we done that is different?

So - but above all, the crucial point is that the deficit in the year 2013, 2014, 2015 is almost irrelevant to the question of how we're going to pay for whatever it is we want to do in the year 2025 or 2030. So don't give me stuff about the long-run budget outlook as a reason why we cannot provide much needed support to the economy right now as it copes with what is still a depression in my view.

CONAN: "End This Depression Now" is the name of Paul Krugman's most recent book. You're listening to TALK OF THE NATION from NPR News. And let's see, we'll go to Chris, Chris with us from Columbus.

CHRIS: Hi, Dr. Krugman. I believe in a lot of what you're saying but I'm concerned about inflation, because the CPI increase rate for 2012 of 1.7 percent seems to sure understate the inflation in my life. For example, property taxes were up 11 percent where I live and that's kind of a typical annual thing. Electricity rates in Columbus, Ohio were up 22 percent, I understand, last year - and that's a big bill for me. Again, that's kind of an annual thing. I'm sure you know what average health insurance rates are up. One of my staples in my diet is beans. The can of beans I buy just went up hugely. Where does the Bureau of Labor Statistics get this 1.7 percent?

KRUGMAN: Well, you know, they are very careful. They're very professional. And I used to just try to walk through how they do it and why you shouldn't attack them or claim it's a little distorted. But it turns out, now, we have independent estimates. Some of my old colleagues from MIT back in the days when I talked to her have put together what they call the billion prices index which makes use of prices quoted on the Internet. And so completely - it has - makes no use of the official data at all. It's completely independent estimate. And the billion prices index, it turns out, tracks the official inflation rate very, very closely. There is no hint at all that there's something wrong with the official numbers.

Of course, individuals, if you happen to buy something - if you - there's some things who's price has gone up a lot and that thing happens to be a particularly big expenditure item for you, then your personal - your personal experience may vary. But I think there's no hint of an inflationary explosion as people say there should be. And more - maybe even more crucially, you cannot get a sustained inflation problem if wages aren't going anywhere - and wages are not going anywhere. We're not seeing an explosion of wages as we did in the 1970s. Last time we had serious inflation, it was a wage-price spiral. You can't have wage-price spiral without the wages - and wages are not going to go anywhere until we're a lot closer to full employment. So this whole inflation threat thing, that's another - that's something that has loomed very large in people's imaginations without anything in reality to correspond to that perceived threat.

CONAN: Thanks, Chris. And let me ask you, if your formula, more spending - people like to spend money - is the way to go, why aren't you getting more followers if you're arguments are so persuasive and if your solutions are so much nicer than, well, we have to swallow hard and take benefits away from the elderly and the sick?

KRUGMAN: I'm - there are several reasons that - things would go into this. One is that the - there's the power of bad metaphors. The notion - I remember back when early on in President Obama's tenure, we all made fun - the Congress makes fun of John Boehner, Speaker of the House now, speaker of the House, not then - saying oh, Americans are having to tighten their belts so the government's tightened it's belt too - which is a terrible idea. It's misunderstanding the way an economy works. When lots of people are cutting back, you want somebody to spend more, otherwise you have depression. We saw how stupid that is, but then a few months later, President Obama started using the same metaphor which us shows how we can let a homely household metaphor which turns out to be totally inappropriate nonetheless can end up dominating the way we talk about things in public policy spheres.

Second thing is politics. You say well, everybody likes spending money. Oh no, they don't. Republicans don't like spending money on those people. They don't like anything that suggest that the government can do anything good, so they've been bitterly opposed to any public spending unless it's on the military. And so it's not something that usually happens.

And finally, there's this kind of closed intellectual loop. I've been doing, you know, I have a new paperback edition of "End This Depression Now!" is out, and so I've been doing various shows in the last few days. And I keep on running into people and say well, nobody believes what you believe. Yes, you know, everybody thinks the deficit is an urgent problem. Which is funny because actually you'd list he people who basically say the same thing I do, maybe not as colorfully, would include the chief economist, Goldman Sachs, the former vice chairman of the Federal Reserve, the former treasury secretary, Larry Summers, the economic senator of the Financial Times. They're all these people with as many credentials as you would like who are saying, in fact, what I'm saying. I'm actually not all out on the far end on these things, but they are ruled out, they're not considered serious.

CONAN: Paul Krugman, thank you very much and you're certainly among the very serious people we talked to on this program.

KRUGMAN: Thank you. I think.

CONAN: Paul Krugman, author of the New York Times. "End This Depression Now!" is just out in paperback. I'm Neal Conan. Political Junkie Ken Rudin's with us this hour tomorrow. It's the TALK OF THE NATION, from NPR News. Transcript provided by NPR, Copyright NPR.