Moneyline, March 12, 1999: Interview with Paul Krugman


DOBBS: Turning now to the economy -- and what an economy it is, low inflation, strong growth, the longest peacetime economic expansion in history. It is fueling the bull market -- can it all last? Joining me now from Boston, MIT economist Paul Krugman. Good to have you with us.


DOBBS: Well, let's start out with this market, this economy. Can it last?

KRUGMAN: There's been a lot of good news, but there hasn't been as much good news as some people think. I mean, a lot of what's going right with our economy is the product of two things that we hope don't continue: one of them is that it's a depressed world out there, which is the reason the commodity prices are so low and the dollar is so strong, and the other is that U.S. workers have still not really shared very much of this gain, so wage increases have been very slow. Those are not going to go on forever. Sooner or later we're not going to have those favorable factors letting us run as fast as we're going.

DOBBS: Paul, let's turn to the wage increase. More workers than ever before, as you've styled them, and employees, labor, are participating, though, in the benefits of this wealth creation through the stock market, through 401(k)s, pension funds, are they not?

KRUGMAN: Oh, sure. No, it's not a question about the demand side. I mean, it's not -- the U.S. so far is doing very well at generating demand. That's not what I worry about. But if you ask how have we been able to have the lowest unemployment rate in 25 years without a whiff of inflation, a large part of the answer is that, somewhat surprisingly, we've got these very tight labor markets and we don't have rapid wage increases. You can't keep on doing that forever.

DOBBS: I don't suppose it would be desirable in any case. In terms of the depressed world economy, the depressed world economy in terms of Asia, for example, this market and this economy were raging before we saw the Asian economic crisis in the fall of '97. What do you think will happen when we see Europe falter here even more, as many economists are predicting?

KRUGMAN: We're a big economy, so even if the rest of the world is depressed, the sort of mechanical transmission is not that large. There's not, you know, there's not gears and levers that say if Europe slows down we have to slow down, too. But from my prospective, the troubles that the rest of the world has had are not -- are not a way of saying that we're great and they're inferior. What they say is this is a more dangerous world than we thought it was. If you talk too people in Japan, they'll say that America in 1999 looks to them just like Japan, 1989. Now that's a little bit of wishful thinking there, but still, the fact that Japan could get in so much trouble, you know, is an indication that we don't -- we're not as good, none of us, the Japanese, but not us, either, are not as good at stabilizing our economies as we used to think. And I think the lesson of the last couple of years has really been one that we should be very cautious. We should be aware that this machine is not something we understand all the controls.

DOBBS: And in terms of the market here, with about 30 seconds, your judgment about where the stock market goes?

KRUGMAN: Well, I'm one of those people who for a long time has said that the market can be justified only if you believe in inverted Murphy's Law, that you believe that everything that possibly can go right will go right. Now the amazing thing is for the last two years, everything that could go right has gone right, but it's still not something you'd want to count on.

DOBBS: Paul Krugman, as always, good to have you with us.

KRUGMAN: Thanks.

DOBBS: The short-term direction of stocks and interest rates not on the agenda of Michael Milken's global conference this week. The participants in Beverly Hills had somewhat more lofty interest to consider. Casey Wian was there and has the report.

Originally broadcast, 3.12.99