SYNOPSIS:

GUESTS: Paul Krugman

BYLINE: John Defterios, Lauren Thierry

BODY:

JOHN DEFTERIOS, CNNfn ANCHOR, IN THE GAME: Our next guest this morning wonders whether the Great Depression might happen again. His query is contained in his new book, “The Return of Depression Economics.” He’s the well known MIT economist, Dr. Paul Krugman. He joins us now from Watertown, Massachusetts, just outside of Boston.. Dr. Krugman, it’s great to have you on fn this morning. Welcome back.

PAUL KRUGMAN, ECONOMIST, MIT: Hi. Good to see you.

DEFTERIOS: Let’s talk a little bit about the momentum building, in fact, for this theme. You’ve put it out and a book here, but there are a number of economists talk about consumer spending and how people are borrowing a great deal. They’re enjoying this wealth in the stock market, but it’s tied to basically one horse right now. Is that your primary concern?

KRUGMAN: Yes. I mean, of course, consumer spending goes up and down, and we know that, but if you’d asked me or practically anybody two or three years ago, we would have said, oh, you know, whatever happens, in Greenspan we trust. The Fed can take care of things. And although the sky hasn’t fall on us just yet, the lesson the last couple years have not been that easy. You look at problems of other countries and you realize we’re not as much in control of this thing as we thought we were.

DEFTERIOS: That raises an interesting point. You’re right there, but we have thrown everything at the stock market in the last two years. I mean, Long Term Capital Management tied in with Russia, the crisis in Thailand leading to a complete sell-off in south Asia and in Japan. Really what else could go wrong here that could prompt this erosion in consumer spending in the United States?

KRUGMAN: Well, I think a lot of people, when they look at the stock market, find a little bit hard, despite all of the good news we’ve got about the economy, find it a little bit hard to understand why it’s as high as it is. That raises the question whether it’s a bit lie Wile E. Coyote in one of the old Road Runner cartoons. He’s walked about 10 feet off the edge of the ledge, hasn’t looked down yet, and really anything that makes people look down really is you that, hey, we’ve got a good economy, but it’s not that good, could cause a fall in stock prices. And that—the trouble is that we don’t have a lot of room to fight the effects of that, if it does happen.

DEFTERIOS: OK. Let’s get into this little bit. What would you do differently now with this economy? Would you try to basically discourage consumers from mounting this debt they’ve built up over the last two years? Retail sales that we’ve seen for the last six months have been extraordinary based on fact that they’re looking at their 401(k) primarily and seeing great deal of wealth being created. That’s a dangerous trend, in your view?

KRUGMAN: Yes. I mean, if you look at the situation not too long ago, you would say, OK, stock prices are up, but there isn’t a lot of debt being built up. If you looked at us even a year ago, we didn’t look much like, say, Japan in late 1980s when they had a booming stock market. We didn’t have the build-up of vulnerability. We didn’t have the consumer debts. We didn’t have the leveraging up. Now, we’re startling to see it. Now, at this point it’s still not that bad. At this point we could probably handle a fall back in stock prices without anything very serious, but the longer this goes on, the worst it gets. And it would be nice to pop the bubble before it gets too dangerous.

METAXAS: This raises an interesting point as we saw the bubble burst in Japan. Alan Greenspan, as you know, has been very concerned of the fact that the government’s playing a major role in Japan and not unleashing the entrepreneurial spirit in that country. Is there—the bottom been reached Japan if you look at the Tankan survey right now. Are you worried as well as many others right now that Japan’s going to slip right back into recession, because it’s all government spending?

KRUGMAN: Yes. In Japan the best you can say about things really is things are getting worse more slowly. I mean, there’s the one very peculiar GDP number, but it’s probably not - it is not convincing. And the Japanese situation is one in which they have the biggest peace time deficit spending program ever. It dwarfs any public work-style program, it’s the new deal times 100. And all it’s doing is holding the economy from a complete plunge into the abyss, and they can’t keep it up. It’s a long ways before the Japanese are out of the woods is not even the right phrase. I think it’s a long ways before their back from the brink.

DEFTERIOS: If you look at the U.S. model right now, Paul, what would you say, if anything, wrong with it. I been to a number of economic forums and everyone stands amazed at what we’re seeing in the United States. Is there anything that is wrong with the model, despite the fact that it’s all based on stock market in terms of the consumer wealth, but looking at the machinations of the economy right now, do you like what you see?

KRUGMAN: There’s a lot of things I like. I like the ability to have rapid productivity growth, much better than it was in the past 20 years. I like the ability to run a very tight labor market, a very full employment economy without, so far, any signs of inflation. I don’t like the fact that consumers are saving only through capital gains, that people are really don’t seem to be putting anything aside out of their cash flow. And I don’t like fact that we’re running ever larger trade deficits. And, you know, basically we are able to continue with this boom only because of the rest of the world is investing enormous amounts of money in the U.S. we think that will go on forever, but then so did the Asians.

DEFTERIOS: Right, of course. Let’s finish on one thought. Are you looking for any cracks in the global economy, similar what to we saw in Russia or in Asia? Or is the worst behind us? No the Japanese, I mean, I can give you four or five things that worry me, but if I had the single biggest thing to worry about, it’s Japan. Like I say, it ain’t over until the Sumo wrestler sings. I think the Japanese have another cliff to fall off as soon as the effects of this current wave of public work spending die out.

DEFTERIOS: Great to have you on the program.

KRUGMAN: Great.

DEFTERIOS: Paul Krugman, the author of “Return of Depression Economics.” And, of course, he’s an economist at MIT joining us Watertown this morning.

Originally published, 7.5.99