SYNOPSIS:

HOPKINS: A top White House official today said that there's little chance of a double-dip recession in the United States. Glen Hubbard, chairman of the President's Council of Economic Advisers, said such a possibility is, quote, "really remote." My next guest remains very concerned about the economic recovery, though. Paul Krugman is a columnist at the "New York Times" and a MONEYLINE regular. Welcome, Paul.

PAUL KRUGMAN, COLUMNIST, "NEW YORK TIMES": Good to be on.

HOPKINS: Do you agree with Glen Hubbard? Do you think that there is just a remote chance that we'll have a double-dip recession?

KRUGMAN: I think it's not remote. It's actually, I'd say, at least a one-in-three chance. The more important point is, we could very easily, I'd say even probably, have something that feels like a double dip. Suppose the economy grows for next two quarters at the same rate that it grew in the second quarter, around one percent growth rate. Suppose that the unemployment rate is 6.6, 6.7 percent, at the end of the year. Technically, I guess, you would say we didn't have a double dip. It sure won't feel very good.

HOPKINS: What about the Enron case? And how much does that play on the economy?

KRUGMAN: Well, it's hard to say. I mean, the main thing you can say is that everyone is waiting -- the fort's under siege and we're waiting for the cavalry to arrive. And we keep on getting news that says the doughty consumer is defending the fort, keep on holding off the barbarians, but the cavalry, which is business investment, keeps on not arriving, and all of this scandal, all these doubts about corporate America, make the -- we keep on waiting for this thing to happen, and it becomes increasingly remote given that we, the corporations, are in trouble.

HOPKINS: But now that we have the first guilty plea, presumably tomorrow, in the Enron case, is this going to make corporations start spending and give consumers more confidence?

(LAUGHTER)

KRUGMAN: Certainly it's not going make corporations start spending. They're going to be wondering a little bit who else is in line. I mean, it's unfortunate, but this is not exactly what you need to make corporate executives feel good. Look, I think it's very important that Enron executives be prosecuted, but we have a large problem, and very little of what went wrong in corporate America was illegal. The whole point here is that Enron was probably unique in the amount of sheer crass breaking the law that they did, if they broke the law -- we're not sure of that, even, but this is not the answer. We're going to spend a while with the hangover from the bubble.

HOPKINS: Are we starting to look like Japan at all?

KRUGMAN: More than I would like us to. I've been obsessed with Japan personally, professionally for years, and I had a long list of reasons why we weren't Japan. And a lot of that list has been sort of getting crossed off. I never thought we would be in a situation where the Fed funds rate was below two percent without a firm recovery. That means that there isn't much room left for Greenspan to act. I never thought that we'd be in a situation where we would be looking at deficits as far as the eye can see, and therefore, very constrained in what we can do in terms of fiscal policy. I'm very concerned that we have a housing bubble, which is not comparable to that great real estate bubble in Japan where a paper- sized piece of downtown Tokyo was worth $100,000, but it's still enough to give you another reason to worry about further downward shocks. We're a lot more like Japan than I would have believed possible three years ago.

HOPKINS: So it's something that everybody needs to watch, basically.

KRUGMAN: And remember -- sorry, one last thing here -- that Japan never had a steep decline. What it had was 10 years that felt like what the U.S. economy feels like now -- slow growth, rising unemployment, just kind of malaise. Unfortunately, we're looking rather Japanese these days.

HOPKINS: Paul Krugman, "New York Times" columnist and MONEYLINE regular, thanks.

KRUGMAN: Thank you.

HOPKINS: Coming up on MONEYLINE, talk of a possible war with Iraq sends oil prices to a 15-month high. Oil expert Dan Yergin will be our guest. And Malden Mills, the company that stood by its employees when a fire burned down one of its factories is a step closer to recovery.

Originally broadcast, 8.20.02