The Mirror: Interview with Paul Krugman

SYNOPSIS: A very good translation done by Emmanuel Betry of Krugman's "Der Spiegel" interview

"A Coalition of the Elite" American economist Paul Krugman on the contradictory prospects for the world economy, necessary reforms in Germany and his journalistic battle against President Bush.

MIRROR: Professor Krugman, the economic situation of the U.S. has improved since the beginning of 2001. Is the American economy over the worst yet?

KRUGMAN: The economic situation has not changed fundamentally for one year: few signs of pick-up in investment but strong consumer spending that has prevented the economy from falling back into recession. The optimists are saying all the time that businesses will soon begin to invest again what has not happened. The pessimists believe that the consumer will retreat but that did not happen either. It is clear that the growth rate of the US economy is too slow to fully use its productive capacity. It puts downright pressure on prices -and so on profits- and causes the unemployment rate to rise. The similarities with the situation of Japan at the beginning of the 1990s are stronger than we would like them to be.

MIRROR: What is your forecast for 2003?

KRUGMAN: My prediction would be two to three percent growth on a year-to-year basis. If you ask me if the US economy can fall back into recession, I'd say: yes, absolutely. On the other hand, can it grow by 5 percent? It is also possible.

MIRROR: The Republicans are planning a new round a tax cuts to give another boost to the economy. The Democrats are opposed to it and warn about rising deficit. On which side of the debate do you stand?

KRUGMAN: A senior official of the Treasury Department once said that the federal government is basically like a huge insurance company that incidentally also operates a national defense company. The most sensible position would be to cancel the permanent tax cuts that were decided in 2001 since we can't currently afford them and make it a primary goal of the federal government to make sufficient provisions to meet its futures liabilities. I admit that this position isn't easy to convey in the political debate, which makes it hard for Democrats to turn the tide of the discussion in their favor.

MIRROR: In your opinion, what should the administration do: just sit back and wait for the situation to improve?

KRUGMAN: If I had like Bush the control of the Senate, of the House of the Representatives and of the White House, I would: first, increase financial help to the states; second, cut the payroll tax; third, raise unemployment benefits, since this money would in all likelihood be spent immediately. I would focus on relief to the middle-class and lower-income workers. Yet what are having instead? Classic conservative fiscal policy that benefits mainly the well- off, businesses and investors. When you analyze the propositions made by the White House, you find that two-third of the benefits are going to the top 5% of taxpayers.

MIRROR: But isn't it in the nature of fiscal reform that those who pay the most taxes are going to profit the most from it? The top 5% of the income distribution are contributing to 50% of income tax receipts.

KRUGMAN: You can also make an entirely opposite calculation: when you look at the tax cuts for the top 1% of taxpayers, you'll realize that this small group get 40% of the planned $ 1,35 billion relief -once the plan is fully enacted- although their share in overall federal tax revenue is only 24%. This way of favoring the rich is the main characteristic of what the Bush administration is doing. It represents what is usually called a plutocracy, a coalition of the elite. KRUGMAN: It is true that your situation looks quite hopeless. What Germany urgently needs is a devaluation of its currency but this is no longer possible since the introduction of the euro. Now I'll try to persuade the European Central Bank to act more like a local bank of issue. Interest rates in Europe are undoubtedly too high and there is nothing against raising the inflation target. What next? Structural reforms, what else.

MIRROR: With the U.S. as a model?

KRUGMAN: If America puts too much faith in free markets, then obviously Germany puts not enough. All is very tightly regulated, from termination rules to store closing times. What Germany lacks nowadays is a Margaret Thatcher.

MIRROR: America is bracing for a new military confrontation against Saddam Hussein. Will a war damage the U.S. economy or, like many believe, give it an additional boost?

KRUGMAN: Military spending boosts demand, no doubt about that. On the other hand, the bad fiscal situation will force Washington and the states to cut social spending this year, so the net effect will be rather negative. I think that the economic consequences of a new Gulf War are going to be slight. Yet it could be expensive, if America is forced to station a large number of troops in the Gulf for a long time.

MIRROR: 2002 was also the year of spectacular corporate bankruptcies. You had prophesized that the Enron collapse would in retrospect be more important for American self-consciousness than 9/11. With the benefit of hindsight, do you feel your judgment has been vindicated?

KRUGMAN: I must confess that I was surprised and also a bit shocked by the speed with which memories of scandals like the fall of Enron or Worldcom have disappeared from public consciousness.

MIRROR: You have also misjudged the American voter. Republicans have won brilliantly in the mid-term elections in November; President Bush is still tremendously popular. Apparently, Americans don't dislike that much those you call a coalition of the elites.

KRUGMAN: I have unfortunately never been very good at guessing the reaction of voters. But you should not forget that a country that is preparing for war is the best thing that can happen to an administration. War makes you always look good on TV.

MIRROR: Do you really believe that preparations for war have significantly distracted citizens from the depressing state of their stock portfolios? It can be assumed that they had every reason to be angry, especially since the administration is visibly reluctant when it comes to effective corporate regulation.

KRUGMAN: Sure, people find their deposits cut in half but then they watch TV and see their president, with wavering flags on the background, and they assume that he is on their side. They don't want to believe that he is part of the system that has cut their pension savings. It is a very distressing thought that the clique of robbers could be hidden behind the very authorities that one turns to for help. Psychologists call that cognitive dissonance.

MIRROR: You write almost every week against President George W. Bush and his administration. If one were to believe your articles, now sits in the White House a group of swindlers and liars that has only one goal: to make the rich richer and the poor poorer. Do you seriously believe that?

KRUGMAN: Nobody expects the President to be a saint. Everyone knows that those who sit in the White House bend the truth a bit to their advantage. But the length to which this administration goes to deceive the public is quite spectacular. I have sometimes the feeling I don't live in one of the oldest democracy of the world, but rather in the Philippines under a new Marcos.

MIRROR: Where did the administration lie and deceive?

KRUGMAN: It began with budgetary double accounting, when trillion of dollars of revenues were counted twice for different purposes. You also find this distorted relationship with facts concerning the Iraq war and the question of the actual evidence against Saddam Hussein or the close relationship of administration officials with big firms. That has evolved in a pattern that clearly points to something new in American politics.

MIRROR: It became relatively quiet after the accounting scandals at WorldCom or Enron. Is it over? Or are further cases of deceit a possible threat?

KRUGMAN: The current calm is probably misleading. You just have to look at the profits that were posted between 1997 and 2001 by the 500 largest American companies listed by Standard & Poors and compare them with the NIPA figures, the national income statistics from the US Department of Commerce, which can't be embellished and which, remarkably, scarcely moved during that period. We can therefore reasonably assume that the S&P 500 firms have overestimated their collective profit by about 30%, which means that still more Enrons will go bust.

MIRROR: Many experts are blaming Alan Greenspan for having inflated the stock-market bubble with its monetary policy. Do you also think that?

KRUGMAN: It is doubtful that he could have prevented the bubble, but he has in any case never seriously tried. In fact, he has talked the stock market up. He was a prominent advocate of this unlimited millennium optimism. He became a cheerleader, and if there's one thing that a central banker should never be, that's it.

MIRROR: The question is really about whether the central bank should worry about stock prices. Should it really intervene on interest rates?

KRUGMAN: It is a difficult question, which is at the moment seriously debated among economists. On the hand we know how bubbles are formed and what problems they can cause to the whole economy. On the other hand is the question of whether we really want to further expand the task of the central bank. My position on the subject fluctuates a lot: you can defend both positions with good arguments.

MIRROR: Did you lose money on the stock market?

KRUGMAN: Yes, but not much.

MIRROR: You currently write twice a week for the New York Times, publish books, give presentations. Do you still show up for class?

KRUGMAN: I am preparing right now for my next lecture. To be honest, I am quite happy I don't have to earn my living out of writing and to still have an academic career. This way I can take totally different risks than a regular journalist. I don't have to rely on good access to the White House so I can allow myself not to please everybody.

MIRROR: You obviously didn't.

KRUGMAN: What it is peculiar is that, when I arranged my column with the New York Times in Fall 1999, I actually thought I would provide good-tempered comments on the specifics of the New Economy. Instead of that, I find myself once again the lonely voice of truth in an ocean of corruption. I sometimes think that I will end up one day in one of those cages in Guantanamo Bay [laughter]. But then I can always seek asylum in Germany. I hope you'll take me in case of emergency.

MIRROR: Professor Krugman, we thank you for this interview.

Originally published, 12.30.02