The NewsHour with Jim Lehrer, December 31, 1997: Interview with Paul Krugman


JAMES MORGAN: I think you'll see with all the corruption issues breaking down and being exposed in Korea and Southeast Asia and so forth that that whole system will begin to shift.

SPENCER MICHELS: How hard the Asian financial crisis hits American shores probably won't be known for the next few months, but the crisis has put American executives on guard, businessmen whose fortunes depend on worldwide connections.

ELIZABETH FARNSWORTH: Paul Solman takes the story from there in a discussion recorded last week.

PAUL SOLMAN: Our analysis of the global economy comes from Michael Mussa, chief economist at the International Monetary Fund, which has just released its latest world economic forecast; journalist William Greider, author of "One World, Ready or Not: The Manic Logic of Global Capitalism," and Paul Krugman, also an author and professor of economics at MIT. And welcome to you all. Mr. Mussa, how hard are we going to be hit by the Asian crisis? How hard are we being hit?

MICHAEL MUSSA, International Monetary Fund: Well, the United States economy from the substantial slowdown in Asia from where we expected ourselves to be probably is going to feel an impact on the order of 40 to 50 billion dollars, around a half a percentage point of US GDP in a negative direction. Now, that, of course, is 40 or 50 billion in an 8 trillion dollar economy. However, the economy is doing very well domestically. And so the net effect is actually probably a little bit of a slowing desired at this stage, which means that rather than having the Federal Reserve tighten interest rates, instead, the Asian slowdown will afford the Fed some latitude to simply hold back for a while.

PAUL SOLMAN: So you should be relieved? I mean, you're smiling. We're talking about the Asian financial crisis.

MICHAEL MUSSA: Well, the Asian crisis is going to have a significant impact on the U.S. economy I think on the same order of magnitude as we felt the Mexican tequila crisis in 1995. But at that time the U.S. economy was already slowing down because of a considerable tightening that the Fed had carried out over the course of 1994. Now, it's coming to hit the U.S. economy at a time of particular strength, so we're probably going to feel it somewhat less than would otherwise be the case. That's, of course, assuming that things don't get a lot worse.

PAUL SOLMAN: Well, Prof. Krugman, assuming things don't get a lot worse, no big deal, just a drop in the ocean, bucket, whatever you want to use as a cliche here?

PAUL KRUGMAN, MIT: I guess in Greenspan I trust, which is pretty much what Mike is saying. I mean, I don't think that anything is going to happen to the United States as a result of this that can't be handled. We have intelligent policies here and amazingly, I actually do think we have intelligent policies. I mean, the direct loss of exports is serious for the companies involved, but it's an $8 trillion economy with 130 million workers. A lot of those workers are working extra hours this Christmas because the economy is, in fact, roaring on many other sectors. So I don't think this is a really--I wouldn't be scared about the situation of the U.S. economy. The Asians, themselves, is another matter.

PAUL SOLMAN: Are we overreacting then to this whole idea of a global economy? Has this been oversold?

PAUL KRUGMAN: Well, yes, sure. Everything that's photogenic gets oversold. And as we just saw, this is a terribly photogenic sort of thing. I think the thing to remember is that the global economy is just like the domestic economy only more so. The kind of crisis that's happening in Asia is not that different in many respects from the sorts of things that we're accustomed to on the domestic scene. If there were too many office buildings and shopping malls built in Thailand, it was for pretty much the same reason that 10 years ago there were too many office buildings and shopping malls built in Texas--runaway financial system, bad regulation, and a little bit of--more than a little bit of a market bubble. It's not something that is completely novel; it's not something that should cause us to think, oh, my God, the whole system is about to fall apart.

PAUL SOLMAN: So, Mr. Greider, is our wagon hitched to the global economy?

WILLIAM GREIDER, Journalist: I don't share this air of good feeling. First, let me say, I think it's fundamentally a mistake to suggest to Americans that this is an Asian problem; this is a global problem; and we all--we financiers, investors, banks, multinational corporations--participated in the mistakes that were made in those Asian economies. We're talking about American multinationals and German and Japanese and American banks and European banks and Tokyo banks.

PAUL SOLMAN: Briefly, how did we--

WILLIAM GREIDER: By essentially making the same plunge, a race to capture opening markets-- consumption--and over-investing, building more factories than that consumption base could support, and then at some moment discovering that those loans that had been made were, in fact, not going to be paid off, at least in the terms we imagined, and beyond that, creating a base of what I call productive over-capacity, assuming growth in consumption that doesn't develop. And at that point somebody's got to close a lot of factories and, therefore, people take defensive actions, which is to export their surplus production, if they can. And that's how it comes back to our shores. We can argue over the severity, but the fact is a lot of Americans are going to lose their jobs in the next year or two because of this crisis. And we may regard this as mild or severe.

PAUL SOLMAN: Well, let's take these one at a time. In other words, you're worried about a global contraction.

WILLIAM GREIDER: We have severe economic damage that's been done in the global trading system. And that will bounce around, causing in unpredictable, random ways other losses. As that develops, and particularly as exports and authorities get surprised by this, as they have been, there's a psychological plateau that anxiety deepens, and people then say, I'd better not invest, I'd better not buy; I'd better put the money under the mattress; or I'd better not make the loan. And if you look at where Japan is right now, it is caught in that classic trap where it can't quite get things going again because everybody's scared.

PAUL SOLMAN: Okay. So, Mr. Mussa, that's it, things get worse. That's the worst--

MICHAEL MUSSA: If things get worst. One needs to distinguish the situation in the United States from elsewhere. I mean, the United States in 1996 exported $5 billion worth of product to Indonesia, $10 billion to Thailand, and--

PAUL SOLMAN: That sounds like a lot of money to people.

MICHAEL MUSSA: But compared to the size of the U.S. economy it's a very, very small amount, even if it fell in hand. And that would be an enormous calamity far out of scale to what we're seeing in any of these economies. Its impact on the U.S. would be quite small. It doesn't say, obviously, that the particular businesses and particular individuals will not feel the impact. But one of the very favorable things about this crisis--and it is an international crisis--in contrast to what we called the debt crisis in the 1980's, which corresponded with the big inflation and disinflation in the industrial countries, which was a worldwide economic shock, this, very fortunately, something's occurring in a number of Asian emerging market countries and affecting Japan at a time when the U.S. economy is strong and Western Europe is recovering. And that is really a very favorable circumstance for the world economy to be able to absorb this type of disturbance.

PAUL SOLMAN: But your latest forecast has revised downward your estimates of only a few months ago, with respect to world growth?

MICHAEL MUSSA: World growth we revised down after an earlier revision, revised it down another 8/10 of 1 percent. And that's in the $30 trillion world economy. So that's a lot of billions of dollars. Most of that effect is in Asia. The U.S. was revised down .2 of a percentage point and Europe .1.

PAUL SOLMAN: So, Prof. Krugman, global contraction, global overcapacity. You've been somewhat skeptical of Mr. Greider on this subject for a while now.

PAUL KRUGMAN: Well, gosh, we had, as Michael Mussa pointed out, we had the debt crisis in 1982.

PAUL SOLMAN: That was the third world debt crisis.

PAUL KRUGMAN: Third world debt crisis.

PAUL SOLMAN: Brazil, places like that.

PAUL KRUGMAN: And then we recovered from that. And since then, global capacity has probably grown about--oh, I don't know--60 percent. We've had earlier crises. How much capacity is too much? I mean--you know--there's no--as far as we can tell, there's no limit on the amount that people are willing to spend if they have the money, and it's possible to screw up. Capitalist systems do screw up. We do have recessions, but I can't think of there being a sort of absolute limit on spending. So I don't understand what global over-capacity means.

PAUL SOLMAN: Well, what does it mean?

PAUL KRUGMAN: Look, there are particular things. Let's get our facts right. There are a couple of Korean auto factories that shouldn't have been built. But if you ask what too much of was built in these countries that are now in crisis, it is primarily office buildings. It's primarily real estate is the center of it. You don't need a global over-capacity story to create too much real estate building. All you need is lax banking, of which Bill Greider is right, western banks are part of the problem, but you need banks out of control and a bunch of Asian Donald Trumps take advantage of and then build some very special real estate. It's not nearly as cosmic a catastrophe as the Greider story would tell.

WILLIAM GREIDER: The dynamics of global competition, price, cost, fight for market share, drives multinational corporations, ours and theirs, and lots of others to expand into new markets and to reform their production processes, make them more efficient, blah, blah, blah.

PAUL SOLMAN: And faster and faster?

WILLIAM GREIDER: And faster and faster. And they can't turn back from that, so, yes, they're closing lots of old factories, but they wind up in lots of sectors, not every sector, but in many major sectors, despite closing lots of factories year after year, winding up with a global over-capacity.

PAUL SOLMAN: Let me give him a chance to respond. You're saying that the money rushes into these sectors; they get overbuilt.

WILLIAM GREIDER: And we can blame the Koreans and the Indonesians, but, in fact, there were Americans and Japanese and Germans and French alongside them.

PAUL SOLMAN: Mr. Mussa, you've got your hands up here.

MICHAEL MUSSA: Undoubtedly, that happens from time to time industry to industry and sometimes overall for an economy. But that has been the story of the last 200 years in the United States in an economy that has been enormously productive and in which real living standards have risen consistently over the longer term.

WILLIAM GREIDER: And if you go back over those 200 years--

MICHAEL MUSSA: And it's certainly true in Asia as well, and we've gotten over-excess capacity in the steel industry and in a lot of other industries.

PAUL SOLMAN: But could he be right, could he be right, that there's this happening worldwide, and that we're going to go into some kind of downward spiral, at least for a while, like we did in the 1930's?

MICHAEL MUSSA: I think there is no reason for doing that.

PAUL KRUGMAN: Let me break in here.

PAUL SOLMAN: Go ahead. Break in.

PAUL KRUGMAN: It could happen. It would require Murphy's Law on a global scale, everything that could possibly go wrong has to go wrong, and it requires intense stupidity on the part of Alan Greenspan and his counterparts around the world, which, I guess, means it could happen. That's what happened in 1931, a combination of Murphy's Law plus intense stupidity. But there's nothing that's inherent in the system that says it has to happen.

WILLIAM GREIDER: This may surprise you, but I actually agree with your historical summary; that, of course, it requires governing authorities like the Federal Reserve and like the IMF and some others to make a series of mistakes that lead us downward, instead of pulling us out of this. I couldn't agree more. And that's one of the reasons I'm nervous because the governing authorities, not just in America but around the world are following neoclassical orthodoxy that says focus on the financial indicators, get those in balance, get those stabilized, and everything else will come into place. I am arguing that we're in circumstances now which are quite fragile, and the wise thing to do now would be to focus on real growth, the real players, the producers, consumers, wage earners, and get out of this crisis two, three years, by making sure we don't go downward.

PAUL SOLMAN: Now, Mr. Mussa, you've got--last word goes to you. You've been accused of being the cause of his anxiety. So what do you say?

MICHAEL MUSSA: Well, the IMF is far less influential in this environment than the Federal Reserve is at this stage of the game.

PAUL SOLMAN: But are you following the usual orthodoxy?

MICHAEL MUSSA: No. Actually, what we've been trying to do in East Asia is considerably different than the approach we took to the debt crisis in Latin America at the beginning of the 1980's, because that was largely a fiscal problem of governments overspending. And so cutting back their budget deficits was a central aspect of it. Now, we are trying to avoid excessive depreciation of their currency. I think the real sector needs to sort out its own problem and, indeed, it has been too much government intervention trying to keep too many businesses afloat too long that has impaired the performance of the real sector and brought the financial sector into difficulty in these economies. We need less government intervention there. We need to allow the market to work a little better.

PAUL SOLMAN: Thank you all very much.

ELIZABETH FARNSWORTH: Still to come on the NewsHour tonight the California smoking debate, the universe as seen by the Hubble, and a David Gergen dialogue.

Originally broadcast, 12.31.97