SYNOPSIS: 2001 was a truly aweful year, but at least energy prices dropped and there weren't any false "stimulus packages"

HOPKINS: Thanks very much, James Martone, in Cairo. And despite all of the challenges this year -- the attack against America, the recession, the vanishing surplus -- MONEYLINE contributor, Paul Krugman, says it could have been worse. Paul, welcome.

PAUL KRUGMAN, "NEW YORK TIMES" COLUMNIST: Hi.

HOPKINS: So if it could have been worse, I guess we're doing some things right. What's that?

KRUGMAN: Well, I don't know if we're doing anything right, but there's just basically a lot of strength in the U.S. economy. You know, we turn out to be more robust than some of us feared, including me, you know, a few months ago.

HOPKINS: Also, you think that it's a good thing that we didn't get a stimulus package.

KRUGMAN: Well, you know, we weren't going to get a real stimulus package. We were going to get long-term business tax cuts under the guise of a stimulus package, and those things were not going to help much in the short run. And they were going to be a real problem in the long run. So, you know, considering the alternatives, considering what was actually on the table, I'm relieved that nothing happened.

HOPKINS: We do have deficits, though, for the federal government, and you think that next year, states will be having a big problem with deficits.

KRUGMAN: That's the big story that isn't out there. It's a crisis. We're looking at a really desperate situation for many state governments. It's a combination of the recession, medical costs, the tendency of the federal government to make policy by saying to states, "Here, you do this. It's a mandate." And we're really looking at very savage squeezes on state budgets with the most vulnerable people probably going to be hurt the most. It's the big story you aren't reading yet.

HOPKINS: One of the things that did go well this year was the fact that energy prices fell by about a third.

KRUGMAN: Yeah.

HOPKINS: OPEC cutting production, what's going to happen next year?

KRUGMAN: Well, it's probably not enough to cause a spike in oil prices, but it does mean that one of the things that's been going right is not going to keep on going right. I mean falling energy prices are probably the best single thing. You know, a lot better than the stimulus package. And, unfortunately, OPEC is getting its act together. Too bad they're not domestic. This would be illegal monopolization, but we can't, apparently, do very much about it.

HOPKINS: Gasoline last weekend, I paid less than a dollar a gallon. That's a real bargain.

KRUGMAN: Yeah. I mean, it's -- you know, in the long run, it's a terrible thing. You know, we're being encouraged to continue being gas hogs, oil hogs, energy hogs, and that's part of the vulnerability that we truly should be doing something about. But right now in a recession, cheap gas is, you know, a really nice Christmas present. And it's too bad we're not going to get more in the next month or two.

HOPKINS: Thanks, Paul Krugman, MONEYLINE contributing editor and also a columnist with the "New York Times," and a professor from Princeton. Thanks for joining us.

KRUGMAN: Thanks a lot.

HOPKINS: And coming up next, we'll update the war against terrorism, including another look at Rocket City, some of the weapons and technology that have come out of Huntsville, Alabama. Not much coming out of Buffalo, New York. More snow coming in, record amounts shutting down that city. And a record year for Hollywood, or was it? We'll take a look at the numbers when MONEYLINE continues.

Originally broadcast, 12.28.01