Halftime Report: Author, ďReturn of Depression EconomicsĒ, CNNfn


GUESTS: Paul Krugman

BYLINE: John Defterios, Lauren Thierry


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, ďThe Return of Depression Economics.Ē Heís the well known MIT economist, Dr. Paul Krugman. He joins us now from Watertown, Massachusetts, just outside of Boston.. Dr. Krugman, itís great to have you on fn this morning. Welcome back.

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

DEFTERIOS: Letís talk a little bit about the momentum building, in fact, for this theme. Youíve 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. Theyíre enjoying this wealth in the stock market, but itís 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 youíd 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 hasnít 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 weíre not as much in control of this thing as we thought we were.

DEFTERIOS: That raises an interesting point. Youíre 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 weíve got about the economy, find it a little bit hard to understand why itís as high as it is. That raises the question whether itís a bit lie Wile E. Coyote in one of the old Road Runner cartoons. Heís walked about 10 feet off the edge of the ledge, hasnít looked down yet, and really anything that makes people look down really is you that, hey, weíve got a good economy, but itís not that good, could cause a fall in stock prices. And thatóthe trouble is that we donít have a lot of room to fight the effects of that, if it does happen.

DEFTERIOS: OK. Letís 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 theyíve built up over the last two years? Retail sales that weíve seen for the last six months have been extraordinary based on fact that theyíre looking at their 401(k) primarily and seeing great deal of wealth being created. Thatís 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 isnít a lot of debt being built up. If you looked at us even a year ago, we didnít look much like, say, Japan in late 1980s when they had a booming stock market. We didnít have the build-up of vulnerability. We didnít have the consumer debts. We didnít have the leveraging up. Now, weíre startling to see it. Now, at this point itís 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 governmentís playing a major role in Japan and not unleashing the entrepreneurial spirit in that country. Is thereóthe bottom been reached Japan if you look at the Tankan survey right now. Are you worried as well as many others right now that Japanís going to slip right back into recession, because itís all government spending?

KRUGMAN: Yes. In Japan the best you can say about things really is things are getting worse more slowly. I mean, thereís the one very peculiar GDP number, but itís 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, itís the new deal times 100. And all itís doing is holding the economy from a complete plunge into the abyss, and they canít keep it up. Itís a long ways before the Japanese are out of the woods is not even the right phrase. I think itís 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 weíre seeing in the United States. Is there anything that is wrong with the model, despite the fact that itís 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: Thereís 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 donít like the fact that consumers are saving only through capital gains, that people are really donít seem to be putting anything aside out of their cash flow. And I donít like fact that weíre 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. Letís 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, itís Japan. Like I say, it ainít 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.


DEFTERIOS: Paul Krugman, the author of ďReturn of Depression Economics.Ē And, of course, heís an economist at MIT joining us Watertown this morning.

Originally published, 7.5.99