All Things Considered, January 21, 2009

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ROBERT SIEGEL, host: This is All Things Considered from NPR News. I'm Robert Siegel. In his inaugural address, President Obama talked about the big problem facing his administration - the recession.

(Soundbite of inaugural address)

President BARACK OBAMA: The state of our economy calls for action, bold and swift, and we will act, not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together.

SIEGEL: That phrase "action, bold and swift" raises some questions. What kind of action - public works spending and tax cuts? Is $800 billion too bold or not bold enough? And how swift is swift? We're going to put some of those questions now to two economists, a liberal and a conservative. And we start with the former, New York Times columnist and Nobel Laureate, Paul Krugman. Welcome to the program once again.

Dr. PAUL KRUGMAN (Nobel Laureate; New York Times Columnist): Hi, there.

SIEGEL: In a recent column, you advised, deal with the threat of doing too little by doing more. How?

Dr. KRUGMAN: Well, I think this is a situation where you want to pull out all the stops. You look for as many public investments as possible, including some that will take a while to get going, because all indications are that we're looking for an extended slump. You do things that put purchasing power in the hands of people who are likely to spend the money, which happen to be also the same people who are most distressed so, enhance unemployment benefits, enhance food stamps, medical care for those without insurance. All of these things are ways to do good, but also help support the economy. And I have to say that Obama's numbers, although they sound huge by any normal standard, don't actually sound big enough to me.

SIEGEL: And you talk about spending - you're against tax cuts. Is that because it's not doing good - that there's an ethical problem with it, or is it actually not so effective in making the economy grow?

Dr. KRUGMAN: It's not as effective. I mean, what we know is that a substantial part of tax cuts will be saved rather than spent. Now, I understand that it's a little bit hard to come up with enough reasonable spending projects to give us the kind of stimulus we need, so there probably have to be some tax cuts in the mix. But the thing is, we do desperately need to repair those bridges and build those mass transit lines. So tax cuts are not your priority. I hope that they aren't too much of the program.

SIEGEL: If 800 and whatever billion dollars is modest, given the scale of the problems, should it be 900 billion? Should it be a trillion dollars? What's the amount?

Dr. KRUGMAN: When I try to do the numbers, I easily come up with a two-year program of a trillion dollars or more. The number they pulled up sounds rather like they sort of said, we need a big number, but it needs to be somewhere well short of a trillion because otherwise people say, you're spending a trillion dollars. And unfortunately, what the economic arithmetic says is a trillion dollars is in the right vicinity.

SIEGEL: I understand the case for not worrying right now about deficits. But when we talk about adding a trillion dollars plus, at a time when we have failed to address entitlement spending in any serious way, isn't there some point at which the fiscal damage really gets pretty serious for the economy?

Dr. KRUGMAN: Yeah, you know, a trillion here, a trillion there, and eventually you're talking about real money, but the U.S. is a very big economy. A trillion dollars is not that much. And one thing we ought to say is that to the extent that you help the economy, you do also help tax revenue. And the true cost of a dollar of spending - not zero, but it's more like 60 cents or 50 cents. We're really talking about if we did the program I would like to see, we're talking about a headline cost of a trillion dollars, but a true addition to the national debt of 600 billion, which is not good, but is worth it as precaution to rescue the economy from this very, very dire threat it's under.

SIEGEL: Just one last question. Let's say you were on the inside, or for that matter, writing the column, and you're trying to measure the success of the stimulus program. What's the bottom line? Is it all in economic growth? Is it in the unemployment rate? What are you looking for as your sign that it's working?

Dr. KRUGMAN: I'm looking for the unemployment rate. I want to see the unemployment rate stay safely below 10 percent, which is by no means a foregone conclusion. And I want to see it coming down notably next year.

SIEGEL: Economist and New York Times columnist Paul Krugman, thank you very much for talking with us.

Dr. KRUGMAN: Thanks a lot.

SIEGEL: Well, now to the views of economist Russell Roberts, professor of economics at George Mason University in Fairfax, Virginia. Welcome to the program.

Dr. RUSSELL ROBERTS (Economics, George Mason University): Good to be here.

SIEGEL: And you would say - you describe yourself as a free market economist. I used conservative earlier, but...

Dr. ROBERTS: Free market is fine.

SIEGEL: OK. Paul Krugman says for a stimulus to work, try a trillion dollars and easy on the tax cuts, if you must. What do you say?

Dr. ROBERTS: Well, the spending part, I'm not very optimistic about 825 billion - some large fraction of that is supposed to go to roads, bridges and other things. Congressional Budget Office just came out with a study showing that'll take at least two years, so it's unlikely to have much of an impact on the recession. We hope the recession will resolve itself in two years. The money is going to be borrowed, which encourages people to be more worried about the future and their future taxes down the road. And I don't think it's going to be particularly well-spent. So I see a hurried project financed by borrowing on stuff that's probably going to be wasteful.

SIEGEL: But Krugman and others would argue that the other - an alternative proposed remedy to stimulate the economy, tax cuts, tend not to get spent but to get saved.

Dr. ROBERTS: The tax cuts of last spring did get saved. That was the 160 billion that we used at the time to save the economy. It didn't work. Those weren't real tax cuts, they were just a tax rebate. And that's unfortunately what is the Obama tax cut within the proposal that's been floated so far. That's just giving everybody a fixed amount of money. What we want to do is change incentive. So if we're going to have tax cuts, it would be nice to have tax cuts that change tax rates.

SIEGEL: As you contemplate grading the Obama - or once it gets approved by Congress, the Democratic stimulus plan, what's going to be your bottom line? What number are you going to look at to see whether it's working or not?

Dr. ROBERTS: Well, I think what we're worried about is the unemployment rate. As Paul Krugman said, we don't want it to go over 10 percent. We'd like to see it come down. But we have to face the reality, which is a very unpleasant one, that it is very possible that there is nothing the government can do to stimulate the economy. We seem to assume that it's just a question of finding the right stimulus. But it's very possible that the lack of confidence that people have in the future right now is not easily fixed, either by spending or by tax cuts. Some businesses are going to have to fail. Some people are going to have to have problems with their debts. Wages are going to have to change. That may be the reality.

SIEGEL: Let me just ask you this question...

Dr. ROBERTS: Yeah.

SIEGEL: I mean, there's an argument for a big infrastructure spending which is at worst, you know, no matter what effect it has on the overall unemployment rate, at worst, you have better roads and bridges when it's all over. I mean, there are things that we need.

Dr. ROBERTS: Have you ever been in Huntsville, Alabama?


Dr. ROBERTS: Yeah, my parents live there now. There's a highway. It's about 12 or 14 lanes. It stretches that way for about three miles then it shrinks down to a sort of civilized six. Why? Why is there this remarkable lake of asphalt? There's no traffic generating the need for a 14-lane highway or 12 whatever it is - it's just unbelievably wide. I assume some senator in Alabama who was politically powerful got that passed. We didn't get a lot of benefit from that, so that's - you've got to be careful. It's nice to fill in holes. It's good to make sure bridges don't fall down. But I don't think there's hundreds of billions of dollars of that waiting to be done.

SIEGEL: Professor Roberts, thank you very much for talking with us.

Professor ROBERTS: Thank you.

SIEGEL: And it's Russell Roberts of George Mason University. We also heard from Paul Krugman of Princeton and of The New York Times.

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SIEGEL: This is NPR, National Public Radio.

Originally broadcast, 1.21.09