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DEBORAH MARCHINI, Anchor: What's likely to be the focus of Sunday's presidential debate? Now, if the rhetoric we've been hearing from the campaign trail is any indication, key issues are likely to include taxes, tobacco, crime, economy, and the role of government.@PGPH Joining us now with some insight and perspective on what's likely to emerge from the debates and which candidate could strike a chord with the business community is Paul Krugman, professor of economics at MIT. Paul, welcome here, it's good to have you here.

PAUL KRUGMAN, Professor of Economics, MIT: Good morning.

DEBORAH MARCHINI: Is there anything of economic or financial market significance that you think could come out of these debates?

PAUL KRUGMAN: I'm hoping that the case will be made that the Dole economic plan is really irresponsible, as opposed to the Clinton economic plan which is only mildly irsponsible. That's what we'd like to hear.

DEBORAH MARCHINI: What makes it really irresponsible [unintelligible]?

PAUL KRUGMAN: There's $550 billion of tax giveaways that we just cannot afford at this point.

DEBORAH MARCHINI: All right, what makes the Clinton plan mildly irresponsible?

PAUL KRUGMAN: There's about $140 billion of tax giveaways that we can't afford at this point.

DEBORAH MARCHINI: You- face it. You don't want to see either side cut taxes, do you?

PAUL KRUGMAN: That's right. We- we're in a very serious fiscal situation. We have an aging population and the U.S. government spends, basically, most of its civilian money on the elderly. We cannot afford- if we were responsible, we'd be running budget surpluses now. This is no time for tax cuts.

DEBORAH MARCHINI: If we were responsible, what would you do?

PAUL KRUGMAN: Oh, boy. If I had unlimited political capital?

DEBORAH MARCHINI: Would you cut- would you cut benefits?

STUART VARNEY: Yeah, what would you do?

DEBORAH MARCHINI: Would you cut benefits to elderly Americans?

PAUL KRUGMAN: Well, certainly means-test benefits cutback, generally you'd have to cut benefits and probably raise taxes.

STUART VARNEY: Now, the economy is doing- on the surface, at least, particularly well at the moment. Very low unemployment rates, low inflation, relatively low interest rates, et cetera, et cetera. Do you think that Mr. Clinton can take much of the credit for that situation?

PAUL KRUGMAN: Very little of it. The deficit- budget deficit is, maybe, $40 billion lower than it would be, had he not passed that 1993 tax increase. The rest is all Alan Greenspan's doing.

STUART VARNEY: Alan Greenspan is really running this economy and he's responsible for its good performance?

PAUL KRUGMAN: Oh, yes. Alan Greenspan has done a masterful job uniquely well, compared with all other Central Bankers in the world.

STUART VARNEY: How would you define Mr. Clinton's economic policy? What is it?

PAUL KRUGMAN: Make cheap, politically popular proposals at the edges of the economy and let Greenspan do his job.

STUART VARNEY: You don't care for politicians very much, do you?

PAUL KRUGMAN: Oh, I- I love some of them, but the ones I like tend not to get elected.

STUART VARNEY: Looking into the future, way into the future for a second - how about the financial markets? Do you see a point coming where the stock and the bond markets will no longer be very attractive and will shift into hard assets with [unintelligible] for example, or in the ground, gold, whatever?

PAUL KRUGMAN: Yeah. I mean, first of all, the long run- in the long run, resource prices are not going to stay as low as they are. It's a finite planet, pretty soon 2 billion Asians are going to want to have Western standards of living and have the money to buy them, which is going to drive up resource prices. The other thing is that we are heading for budget crunches in all of the advanced countries, which are going to- because of the aging of the population, and that is going to have an adverse impact on long-term bond prices.

STUART VARNEY: Long-term bond prices will suffer - stock prices as well, do you think?

PAUL KRUGMAN: Oh, sure, because they will, in fact, move together.

STUART VARNEY: You are talking the very long term- you're looking right out into the beginnings of the next century, I take it?

PAUL KRUGMAN: Yeah, I think around the early years of the next decade, people will see that - "My God, it's only seven years until the baby boomers start retiring." And that's when the crunch comes.

STUART VARNEY: You see this as a real pressing problem for a lot of countries, right? The aging population and the requirements of government services to pay for- to provide for them?

PAUL KRUGMAN: Sure. Although the United States is among the worst because we have the biggest baby boom, and therefore the demographics are going to swing much more dramatically here than in most other places.

STUART VARNEY: But we don't have the most generous of programs for those people, whereas, say, Japan and the West Europeans do.

PAUL KRUGMAN: No, actually we do. We have very generous- what we- we're stingy with our poor, but we are quite generous with our elderly. So we are actually in the same league when it comes to the retirees, as the European countries are.

DEBORAH MARCHINI: Paul, I'd like to ask you about something you said - that Mr. Greenspan's done a good job, Mr. Clinton's been right to get out of the way. A lot of folks on Wall Street wouldn't agree with that. They think Greenspan should raise interest rates ahead of the presidential election to forestall a threat of inflation.

PAUL KRUGMAN: The wonderful thing about Greenspan is that he talks the talk of Central Bankers about wanting stable prices, but he doesn't walk the walk. He's a perfect hypocrite, which is high praise.

DEBORAH MARCHINI: You're an MIT economist - you don't think stable prices are a good objective?

PAUL KRUGMAN: I think that 3 percent inflation is about right, and that's what we've been maintaining.

DEBORAH MARCHINI: You think inflation is desirable? You wouldn't want to see zero inflation?

PAUL KRUGMAN: That's right. There's a lot of evidence accumulating that going that last bit- going down from 3 percent inflation to zero inflation, means a persistently higher unemployment rate. I don't know if Greenspan actually thinks explicitly that that's a bad idea, but he's acting as if he doesn't want to squeeze out those last few percent.

STUART VARNEY: As an economist, would you be happy if Mr. Clinton won a second term, but the Republicans kept the House and the Senate?

PAUL KRUGMAN: I've got mixed feelings. I- there's something to be said for that, but I think the Republicans deserve to be punished for some of the things they've been saying, and I would like to see them learn a lesson.

STUART VARNEY: All right.

DEBORAH MARCHINI: Paul Krugman, professor of economics at MIT, pleasure to have you with us this morning.

PAUL KRUGMAN: Thank you.

STUART VARNEY: Thanks, professor.

DEBORAH MARCHINI: Thanks for being here on Business Day.

Originally broadcast, 10.4.96