Hardball, December 27, 2004


WILLIAMS: Same to you. Up next, why are U.S. airlines taking a financial nosedive? We`ll talk to "New York Times" columnist Paul Krugman. And don`t forget to check out Hardblogger, our political blog Web site. Just go to HARDBALL.MSNBC.com.

WILLIAMS: This weekend, several U.S. airports were full of stranded passengers and missing bags. Is this a peek at what`s ahead for airline travel in 2005? For that and more on the economic outlook for the coming year, here is "New York Times" columnist and Princeton economics professor Paul Krugman. Professor, what is going on? Why are the airlines going broke?

PAUL KRUGMAN, COLUMNIST, "THE NEW YORK TIMES": Well, it`s a long-term process. There`s a lot of competition since deregulation, high fixed costs. They -- it`s very intense. I think the point is that this is -- what`s happened at the airlines is kind of typical of what`s happening in a lot of American businesses, very, very intense competition, very aggressive cost- cutting, and pushing closer and closer to the edge. And guess what? U.S. Airways and Comair went over the edge this holiday weekend.

WILLIAMS: Well, is this just the result of too many airlines basically and the winners will vote the losers off the island and then everything will sort itself out?

KRUGMAN: I don`t know. There is this sort of hyper-competition that`s been spreading through the economy. And it may be. It may be that, in the very long run, really, competition without some regulation is not workable. This is kind of like the old days in the 19th century when the railroads went from boom to bust to boom to bust. And the airlines have got somewhat similar economics to that.

WILLIAMS: Well, were you an advocate of deregulation?

KRUGMAN: Yes, I was. And I think there was a lot of gains for it. But we seem to be at this point, you know, finally -- and we have had more than 20 good years from deregulation, but we seem to be actually hitting some serious problems. But I think it`s -- to some extent, this may be just a particular story about a particular airline that was badly run and handled this thing very, very badly.

WILLIAMS: Well, should the government be doing anything to bail the airlines out?

KRUGMAN: You know, it`s hard. I don`t have a really good answer there. I think the government probably has to -- should do something, because this is so important to people. But it`s got to be a quid pro quo.


KRUGMAN: So we are talking about ejecting the government a little bit back into transportation regulation.

WILLIAMS: Well, one other question about the holidays, and that`s holiday sales. The recent numbers apparently show that the holiday retail period ended a little better than it started out.


WILLIAMS: That most retailers are on track to meet modest sales goals. What does this tell us about the overall economy?

KRUGMAN: You know, we have a recovery that`s ongoing. The real story is what lies inside those sales. High end is doing very, very well. Low end is not doing very well. And what we have here is a recovery that doesn`t feel like a recovery for many people.

WILLIAMS: By the way, why isn`t that always true? Why isn`t it always true that the places that cater to people with a lot of money do better than the places that don`t?

KRUGMAN: Well, because there`s competition at both ends. It`s possible to have too many Tiffany`s outlets. The point is that this is unusual. What`s happening is that people with lower-end incomes are not seeing those incomes go up, that we have had a recovery that just basically didn`t trickle down. Wages are -- purchasing power hasn`t gone up in the last three years. Employment, the unemployment rate is the same as it was three years ago, despite all of this talk of recovery. All of the big gains have been for people with high incomes to start with.

WILLIAMS: Well, let me ask you about a subject that I know is important to you. You wrote in "The New York Times" in the last couple of weeks that you sort of dragged yourself out of isolation to write about the Social Security privatization, because you feel strongly about it. You say, first of all, that there really is no crisis. Why not?

KRUGMAN: Because the system, the way we have always financed it, has set itself up to run for about 40 years, conservative estimate, without a crisis. We have had this -- look, four years ago, Alan Greenspan was asked, are these tax cuts that you are supporting going to endanger Social Security? And he said, no, because it has got a good trust fund that will be building up. It will be able to pay interest. Well, that hasn`t changed. Social Security, the finances actually look better now than they did four years ago. The exhaustion data on the trust fund has backed up from 2037 to 2042. And most people think it is going to recede further into the future. So, there is no crisis in Social Security. This is an attempt to displace what is really a crisis in the rest of the federal budget and say, oh, let`s not pay attention to that. Let`s do Social Security.

WILLIAMS: But what happens? Everybody agrees that there is going to be a nasty point out in the future.



WILLIAMS: What happens when we get to that point? Do we run out of money or you just don`t have enough money to pay everybody?

KRUGMAN: Well, yes, Social Security, at that point. The best estimates I`ve seen say that, in 2052, maybe, Social Security will run out of the trust fund, which means it will only be taking in enough revenue to pay for 80 percent of the benefits. That`s a fairly manageable size problem. So, at that point, we should do something before then, but at that point -- it`s not a big thing. Even then -- look, the rest of the federal budget right now, the rest of the federal government outside Social Security, right now, is only taking in enough money to pay for 70 percent of its spending.

WILLIAMS: And, in 30 seconds -- I`m sorry to say this, but, in 30 seconds, what is wrong with privatization?

KRUGMAN: It doesn`t solve the problem. It`s just three-card monte. It`s pretending that you can make the problem go away by reshuffling things among accounts and pretending that, somehow, you are going to create magic and make money come out of nowhere.

WILLIAMS: But you say it`s just basically taking money out of the trust fund, putting it in private accounts and it`s just juggling the figures around?

KRUGMAN: Yes and pretending that we know for sure that stocks will somehow yield enough money to offset the -- more than offset the couple of trillion dollars we`ll have to borrow over the next 10 years to make it happen.

WILLIAMS: All right, Professor Krugman, thanks very much. Happy holidays to you, too.

KRUGMAN: Happy holidays.

WILLIAMS: Join us tomorrow night at 7:00 Eastern for HARDBALL, as we take a look at the role Osama bin Laden may play in the elections in Iraq. On Wednesday, the co-chairs of the 9/11 Commission, Tom Kean and Lee Hamilton, will be here. And don`t forget to tune into for this Friday`s HARDBALL special edition, "A Soldier`s Journey Home." Chris Matthews visits America`s bravest sons and daughters, soldiers wounded in Iraq, now recovering at Walter Reed Hospital. That`s Friday at 7:00 Eastern. Right now, it`s time for the "COUNTDOWN" with Keith Olbermann.

Originally broadcast, 12.27.04