The NewsHour with Jim Lehrer, October 3, 1996: Interview with Paul Krugman


MR. HOLMAN: Meanwhile, economists from the rival camps have sparred over how the Dole tax cuts would be paid for.

LAURA TYSON, National Economic Adviser: [September 12] I do not believe that you can balance the budget and we can give a $550 billion tax cut, 70 percent of which is paid for by just assuming economic growth and interest rate reductions. There's no assumption that it will occur, and it seems to me, what are they going to cut?

JOHN TAYLOR, Dole Campaign: The key here is a growth program like Sen. Dole has put on the table, and the, the budget balance is a key part of his program, balancing the budget and reducing taxes, and the numbers do stand up.

MR. HOLMAN: The tax debate is likely to continue throughout the campaign, including when the candidates, themselves, face off on Sunday night.

MS. WARNER: Now two economists on the candidates' tax proposals. Robert Barro of Harvard and Paul Krugman of MIT. Welcome, gentlemen. Robert Barro, let me start with you. In its broadest terms, it seems to me there's one major difference between the two, and I want to ask your opinion of which is preferable for the economy, across-the-board tax cuts, or the kind Dole is proposing, or targeted tax cuts, smaller ones of the kind Clinton is proposing?

ROBERT BARRO, Harvard University: [Boston] I like the idea of an across-the-board tax cut, which I think will help economic growth in the long run. The 15 percent cut is not my most preferred plan. I would have preferred a more basic movement to a flat rate system, more of a consumption tax, but I like the general thrust of the across-the-board program.

MS. WARNER: And why?

MR. BARRO: I think that will cut the rates that matter for people when they're deciding about how much to work, how much to invest, what kind of productivity enhancements to have. I think it will help economic growth. I think the overall Dole plan is focused on that issue. I think it's the right place to put the emphasis.

MS. WARNER: Mr. Krugman.

PAUL KRUGMAN, MIT: [New York] I think the word for the Dole plan is irresponsible. Even before you can start to talk about whether these plans will or will not help economic growth, you have to ask, what does it do for the solvency of the federal government, because everybody who's looked at it realizes that the federal government is in very serious trouble. Even if we really do balance the budget by 2002, if you look a few years beyond that, and you realize that the aging of the American population is going to have a devastating effect on the federal budget deficit. If we were responsible at all, we would be running budget surpluses now to build up reserves for that, so this is not a good time to go offering a $550 billion tax cut, even if you had a plausible way to pay for it. And the fact is that the Dole plan does not have a plausible way to pay for it. I just picked up a copy of the Dole campaign book, "Trusting in People," and I wanted to flip to the chapter that tells us what programs he's going to cut, you know, what interest groups is he going to take on, because that's what, you know, he's about downsizing government, fighting the special interests. You know, there isn't any chapter on that. Dole hasn't proposed a single substantive cut in federal spending. There's just nothing there. It's an empty plan, and, therefore, it's a disaster if we cannot afford such a thing.

MS. WARNER: And then are you saying that the Clinton tax cut is preferable to this because it's smaller, or preferable also in its concept?

MR. KRUGMAN: Preferable because it's smaller. I don't have any grief with the Clinton plan. It's not much of a plan, but it's $400 billion better than the Dole plan.

MS. WARNER: All right. Mr. Barro, respond to the critique that was just offered there by Mr. Krugman in terms of how the Dole tax cut will be paid for.

MR. BARRO: The Dole plan recognizes that in order to be effective you have to have not only tax cuts, you have to have spending cuts. And I think the general philosophy is you have to have the tax cuts basically to keep the revenue from the federal government to put on the pressure to cut the expenditures. I think the opponents of the plan like it not--dislike the plan not because they think it's going to fail and lead to budget deficits, but, rather, because they think it's going to succeed and force a cut in the federal government, force a cut in particular in various types of federal social expenditures which a lot of opponents really don't want to happen.

MS. WARNER: And what do you see in the Dole plan specifically in the way of cuts? Is it a realistic plan to pay for it?

MR. BARRO: The current plan is not so specific in terms of where the cuts are going to come. I think there are many places in the federal budget where one could have desirable cuts, and I wrote an article sometime ago outlining $100 billion in cuts that I thought would be perfectly fine. I think, in fact, it's going to put some pressure on entitlement programs, including Medicare, and I think you'd find that if you had the tax cut, you'd see spending cuts in a lot of different areas.

MS. WARNER: Paul Krugman, what about that argument, just put in the tax cut, the spending cuts will follow?

MR. KRUGMAN: Uh, that didn't happen in the 80's when Reagan put in tax cuts and the result was $4 trillion of debt that we didn't have before. You know, I think Dole deserves to be judged on the program he's actually presenting, not on what we might hope he might do. And his actual program contains new specific spending cuts. I can't find anything in it. It's--it's, you know, it's all counting, counting chickens-counting your chickens not only before they've hatched but before you even have a hen to lay the eggs. It's an amazing thing that he's presenting.

MS. WARNER: Robert Barro, in presenting this tax cut plan, both Sen. Dole and many of his aides said no Medicare, no Medicaid, no Social Security cuts at all to pay for it, and then during the convention he also took defense off the table. Could you pay for a tax cut of that magnitude if you took those items off the table?

MR. BARRO: If you ask me for a prediction, I would say if you had a federal tax cut of this sort, that it would, in fact, force some restraint on entitlement programs, particularly Medicare, Medicaid. I think Social Security is a different situation. I think you want to think about moving to a more privatized system in the long run of the sort that's been very successful in Chile. That won't really lead to expenditure cuts in the short run, but in the long run, it'll create a much more productive environment.

MS. WARNER: But are you saying you don't think it's possible to pay for a tax cut of that size unless you go into at least Medicare and Medicaid?

MR. BARRO: I think it's possible to do it. I think if you're asking me to predict, I would predict that pressure on Medicare and Medicaid would be part of what would occur. I also think the reading about the 1980's was really not correct. I think if we hadn't had the tax cuts in the 1980's, in fact, we would have had a much bigger growth in federal spending than we actually saw. So I think the tax cuts in the 80's were successful to some degree in holding down federal expenditure. I think we got into trouble only in 1990 when George Bush moved toward a different regime, and I think the proposal here is to move back to the Reagan 1980's, and I think that's basically a good idea.

MS. WARNER: Paul Krugman, let me ask you about the other arguments that the Dole campaign makes on behalf of this tax cut. They say, and he says that Americans are just being taxed at a higher rate now than at any time in history, and that that is impeding economic growth, that you need tax cuts for growth. What about that argument?

MR. KRUGMAN: Well, let's not try to argue. The statement about how high taxes are is not really true. And America is actually the lowest taxed country in the industrial world, but the main point is, look, somebody comes along and offers you a miracle cure for arthritis, and you say, look, I've read the medical research on this, and it doesn't actually help arthritis, and it has undesirable side effects, and his response is, what's wrong with you, don't you understand how bad arthritis is? To say that we don't have the economic growth we'd like and, therefore, we have to go for this wildly irresponsible plan just doesn't make sense. It's only going to aggravate the problems we've got.

MS. WARNER: So you don't think it would help growth at all?

MR. KRUGMAN: If you really were prepared to find the spending cuts to pay for these lower taxes, then lower taxes would have some effect, probably a small one, but some effect in accelerating the rate of economic growth. But if you have a huge tax cut which is really not paid for, then what you're talking about is something that's going to lead to a large increase in the deficit and that drag on the economy from the deficit is going to exceed any favorable impact from this plan. So now this is--this is, in fact, an anti-growth plan.

MS. WARNER: Mr. Barro, where are you--where do you come down on this growth question?

MR. BARRO: I agree with some of what Paul said there. I don't think you'll have a long run benefit for the economy unless the tax cuts are accompanied by spending cuts. I think as a political argument, the tax cutting way at the outset is the way to get the spending cuts. And I think if you had the tax and spending cuts together, you will get a boost to economic growth. That will be strengthened if in addition to having tax cuts, you have a shift to a more efficient tax system, strictly a system that doesn't penalize saving, as our current system does, and a system that has lower marginal tax rates. I've estimated that the overall effect of the Dole plan, including not only the tax part but some of the other reforms, could conceivably raise the long-term growth rate by about + percentage point a year, which is a pretty significant effect.

MS. WARNER: Do you agree with that, Mr. Krugman?

MR. KRUGMAN: That seems to me to be a very, very high estimate, but the--the important point is that's not the plan that's been announced. The title of the Dole campaign book is, is "Trusting in People." Now, what Bob Barro is saying, which is a much better plan, is not the plan they're selling. So if that was the truth, what they're actually doing is they're selling the American people a plan which is tax cuts with no spending cuts that are actually going to hurt anybody. And then only after they're in office, are they actually going to go out there and, and really tell us the truth about how they're going to pay for I. I don't think that's what they're even planning to do, but if it is, what they're planning to do, they certainly don't trust in people.

MS. WARNER: Let's turn for a minute to the Clinton plan, which is much smaller, but Mr. Krugman, do you think that as the President just said in this tape we heard that if you give targeted tax cuts to encourage, she said, child bearing or education or home buying, does it have that effect?

MR. KRUGMAN: No, not really. You know, I'm not going to--I'm not going to try and defend the Clinton program.

MS. WARNER: Now we're not asking you to. I'm really asking for your analysis.

MR. KRUGMAN: No. The reality is that what the Clinton program is doing is throwing a few goodies here and a few goodies there. There are a few things, maybe education support, that might actually do a bit to increase the rate of growth, but basically it's a program of trying to stay on track for a balanced budget by the year 2002, uh, while winning as many political points as possible for as little money as possible. It's not great. If I could have a bumper sticker, it would say Clinton-Gore in '96, things could be worse.

MS. WARNER: Mr. Barro, your view of the Clinton plan.

MR. BARRO: Well, on the child credit side, I think both political parties are equally bad. That's not the kind of tax cut that's going to spur our economic growth.

MS. WARNER: This is the $500 per child credit which both are offering.

MR. BARRO: Right. That's not the way to get productivity increased. Some of the other proposals of Clinton are okay, but they're not very important, and they're sort of too targeted rather than being across-the-board, basic structural changes. The reason I like the Dole plan is I think it has some hope of being a more effective pro-growth plan, whereas I see none of that on the other side.

MS. WARNER: But the President isn't really saying this will stimulate growth. He is saying that the government should use the tax code to make it easier for families to have children or send them to college. What about that argument? Does it work? Does it make it easier for families?

MR. BARRO: I think it's a good idea. It's part of an overall program to change the treatment of college tuition expenditures. There's some rationale for treating that in the same way you might want to treat physical investment.

MR. KRUGMAN: I think the public has to eventually grow up and realize that taxpayers and recipients of government benefits are basically the same people, and if you try to give something to everybody, that means you're going to take something from everybody. This stuff is not really doing anybody much, much good.

MS. WARNER: Before we go, I want to ask you both, you've both been around these public policy and political arguments about taxes for a long time. Why do you think this year if all the polls are correct the public for the most part doesn't believe in these tax cuts, Mr. Krugman? Doesn't--in other words, doesn't believe they're really going to happen.

MR. KRUGMAN: I don't really think that the public was ever all that sold on tax cuts. I think the public voted for Ronald Reagan the first time because he was a more appealing character than his opponent. They voted for him the second time because the economy was experiencing a strong recovery, which wasn't Reagan's doing, but happened on his watch. And I think the public is going to vote for Bill Clinton in a big way because the economy is in the middle of a strong recovery, which isn't Bill Clinton's doing but happened to happen on his watch, and that's--that's I think end of story.

MS. WARNER: Mr. Barro.

MR. BARRO: I think Reagan pretty much delivered on his promises overall. I think George Bush caused a lot of damage by not following through on his tax cut promise and in particular by raising taxes in 1990. I think that led to a lot of skepticism. I think President Clinton has contributed to that by not following through on his promise of a middle class tax cut. I think that's a lot of the reason why people are skeptical about Dole's promises, but I agree that the key thing is that the economy has been doing quite well. It's one of the stronger overall economic performances in the post war period, something like fourth or fifth if you do some of the conventional rankings of presidential terms. I think people are basically happy about the economy. I think that's the key matte.

MS. WARNER: Rather than tax cuts. Well, thank you both very much. Thanks for being with us.

MR. KRUGMAN: Thanks.

MR. BARRO: Thanks.

Originally broadcast, 10.3.96