Wall Street Journal Report, July 12, 2009

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MARIA BARTIROMO, host: Well, in a week when President Obama has made several historic visits abroad, attention is turning to two of his front burner issues on the domestic front: health care reform and the stability of the broader economy. Joining me now to talk all about that is Paul Krugman. He is the Nobel Prize winning economist and columnist for The New York Times and he joins us right now. Paul, good to have you on the program.

Mr. PAUL KRUGMAN (The New York Times): Good to be here.

BARTIROMO: I saw your op-ed on Friday talking about the stimulus package and whether or not we do need a second stimulus.

Mr. KRUGMAN: Right.

BARTIROMO: Tell me how you all come out on this.

Mr. KRUGMAN: I'm very much for a second stimulus. I was always--I always thought it was too small. And look, the economic outlook has darkened a lot, not because the stimulus has failed, because most of it just hasn't even arrived yet, but because, you know, things happen, stuff happens. And what looked even in January like too small a package, really looks too small now. We're looking--I mean, The Wall Street Journal just came out with its survey of economists and they're forecasting the unemployment at the end of 2010 will be as high as it is now. That's a pretty bleak outlook. We need more oomph behind this policy.

BARTIROMO: Yeah, but what will be the measure of success for this stimulus package? I mean, is it not true that a lot of the money that taxpayers did receive was actually saved?

Mr. KRUGMAN: Well...

BARTIROMO: Talking about a savings rate of 6.9 percent, which obviously is a good thing, but they're not going out and spending it and buying things.

Mr. KRUGMAN: Well, this was why a lot of us said that it has to be more tilted towards government spending, as far as you can. Now, consumers may spend some more of that, right? A large checked arrived, they don't--you don't expect them to spend all of it at once, but sure, the big stuff is helping states avoid budget cuts and then spending on infrastructure projects that we really need.

BARTIROMO: Both the House and Senate right now have committees working on health care legislation.

Mr. KRUGMAN: Right.

BARTIROMO: We're hoping to see a vote within the next couple of weeks. The Congressional Budget Office has scored legislation from two Senate committees. One added up to more than a trillion dollars, the other nearly $600 billion. Can we afford health care legislation?

Mr. KRUGMAN: Sure. That--those are not big numbers. You want to bear in mind that the federal government projects that nationally we'll spend $33 trillion on health care over the next 10 years. So we're talking about something that would add maybe 3 percent to our total health care spending over that period, not counting the savings that would probably come along with the legislation, reform of Medicare, comparative effectiveness and so on. It's probably not actually from a national point of view going to cost anything at all to get universal health care. These are small numbers. You do have to pay for it. You pay for it with a combination of Medicare savings, probably some kind of tax someplace along the line, but you know, this is well within the range of what we can do.

BARTIROMO: Would the option to purchase public or private insurance plans encourage competition or some people say it would actually dilute it?

Mr. KRUGMAN: No, it would encourage competition. Remember, most states have very little competition among private health insurers. A lot of the states, I happen to look at, you know, Iowa, because of Chuck Grassley; 71 percent of that market is just one single insurer. So there's very little competition out there. Get people a public plan that competes with the private plans, it's going to actually increase insurance. This is not a competitive free market. This is--this is a collection of cartels that we actually have out there.

BARTIROMO: Some economists have floated the idea of taxing employer provided health benefits, something that would have a huge impact, obviously, on middle class Americans. How do you feel about that?

Mr. KRUGMAN: The--you don't want to tax the whole thing. No way. I mean, there's actually--right now we have a system where that employer tax break for providing the benefits is actually the only thing that holds most of our system together. But some tax on plans in excess of some very high number, that's OK. We're probably--you know, in one way or another, we're going to be gradually shifting towards a system where there--this is more of a benefit that's provided for everybody rather than something where some people get gold plated plans and some people get nothing. So that's OK. I don't--I'm not--I don't object to the principle but the details matter enormously.

BARTIROMO: You know, we know that health care expenses is really the biggest issue in terms of--in terms of the cost for business, for consumers, but this economy, as you just said, we're remaining watching this economy stalled. What is going to get this economy moving again? You say we need another stimulus?

Mr. KRUGMAN: Right. That's what...

BARTIROMO: At some point.

Mr. KRUGMAN: Well, I think we--since these things take time to take effect, I think we should be moving on a second stimulus now, but long run recovery is a little bit hard to see. I mean, but the one thing we know we need to do is we need to provide enough support so we don't fall into a deflationary spiral, which is what I'm deeply afraid of right now.

BARTIROMO: Because people are still deleveraging.

Mr. KRUGMAN: Yeah. People are still deleveraging, people are still, you know, increasing their savings rate. And, you know, wages--we came into this with wages growing about 4 percent a year. Most recently, wages are growing at about 7/10 of a percent per year. That's pretty close to the edge of serious deflation, and once you get into that, it's very hard to get out.

BARTIROMO: What happened in L'Aquila in your view? The Group of 8 met this week in Italy, L'Aquila, Italy, the eight largest industrialized economies. Anything come out of that?

TEXT: Group of 8 G8 Member Countries: Canada, Japan, France, Russia, Germany, U.K., Italy, U.S.

Mr. KRUGMAN: Well, just marginal movement. I mean, look, international...

BARTIROMO: What else can they do at this point?

Mr. KRUGMAN: Right.

BARTIROMO: They've met, the G-20, they've met in London, they've met...

Mr. KRUGMAN: Well, I said that last G-20 meeting was infinitely more productive than the usual meeting because the usual meeting accomplishes nothing at all.

BARTIROMO: Yes, I agree with you.

Mr. KRUGMAN: So you don't expect that much.

BARTIROMO: No, but the G-20 was definitely effective.

Mr. KRUGMAN: Yeah, not so much.

BARTIROMO: The G-8 this week, what do you think?

Mr. KRUGMAN: This wasn't much. No, there was--there were some statements of good intent. Not much more than that.

BARTIROMO: Going forward, can the rest of the world help the United States or is everyone looking inward at this point?

Mr. KRUGMAN: You know, we really ought to be having a coordinated stimulus, but we're having enough trouble even getting a unilateral stimulus of adequate size. So no, I don't--I don't have many hopes out there.

BARTIROMO: Is there any growth in the economy that you can name?

Mr. KRUGMAN: Oh, sure. Look, industrial production is probably going to turn positive quite soon if it hasn't already. There's, you know, inventories were drawn down, there's going to be an inventory bounce. There's some signs. You know, the green shoots are not entirely a myth. There's some stuff that's turning up, but none of it looks like it's enough to actually stop us from continuing to bleed jobs.

BARTIROMO: All right. We'll leave it there. Paul, great to have you on the program.

Mr. KRUGMAN: Great to be on.

BARTIROMO: We so appreciate it. We'll see you soon.

Mr. KRUGMAN: Thanks a lot.

BARTIROMO: Paul Krugman joining us down here on Wall Street. Coming up next on the WALL STREET JOURNAL REPORT, what does your neighbor know about making money that maybe you don't? The inside secrets of self-made wealth. And then what could be a new era for the isolated culture of North Korea? Is advertising making inroads in the communist country? Back in a moment.

Originally broadcast, 7.12.09