SYNOPSIS:

KRULWICH: (VO) Same for the economy. It'll come back, but if this is a high-tech slump, it could take a while. This is Robert Krulwich for NIGHTLINE in New York.

KOPPEL: And joining us now, Paul Krugman. He is a professor of economics at Princeton University and the author of a twice weekly column in The New York Times. Mr. Krugman is also the author of several books, his latest being "Fuzzy Math: The Essential Guide to the Bush Tax Cuts." He joins us from our New York studios. And did you buy what our friend Robert Krulwich has to say about the information economy, that it's like a big meal and when you've--when you've finished it, you're not really ready to have another meal just yet?

Mr. PAUL KRUGMAN (Economist): Well, yeah. I mean, it's--nobody's going to be buying servers and routers. Not many people are going to be buying big software packages. But, you know, the--the--the mistake we always make when these slumps come along is that you say, 'Well, we can't keep on investing in what we were investing in last year, so we can't invest.' And what--what that misses is, is there's a lot of other stuff out there. You know, there--we've got electricity shortages in--in California. We've got gasoline shortages in--in the Midwest. We've got natural gas shortages everywhere. There's lots of stuff to invest in if the price is right.

KOPPEL: That's OK from the vantage point of the individual investor, and as long as you know what you're doing, I guess you're going to do all right. I'm asking more in terms of the overall economy, though.

Mr. KRUGMAN: No.

KOPPEL: Are we now living in a time in which there really is no single industry that dominates the economy the way that big steel and the auto industry once used to?

Mr. KRUGMAN: Oh, for sure. The--the US economy is bigger, more complicated than almost anyone can imagine. And when I said invest, I didn't mean stocks. I meant we need workers building those things. We need, you know, steel, we need all the--all the things that go into them. The point is that there's lots of good things to spend money on in this economy. And...

KOPPEL: But is there lots of money to spend?

Mr. KRUGMAN: Well, that's up to Alan Greenspan, right? If--if the price is right, if the interest rate is low enough, then there are lots of options. And it's--so the thing that--that you can go wrong on is to say, 'Well, gee, the tech boom is over, therefore the economy is sunk.' What we could have, what we should have is a kind of rotation where we do less tech and more other things. And it's not fun, particularly not fun for people who thought the tech movement would go on forever, but it doesn't mean a recession necessarily.

KOPPEL: We need--be--be--be--before all these Cisco stock holders start jumping off bridges and other high places, you--when you're saying it's over, it's over for good or it's over for now?

Mr. KRUGMAN: It's over for now. But, I--if I had put all my money in Cisco, I would be jumping off a high place. I mean, you know, folly does get punished. And--and it has happened on a large scale. The question is whether everybody has to be punished for the folly of those who invested in--in--in a basically limited part of a very big economy.

KOPPEL: Let's just take a short break. We'll be back in a moment with more.

(Commercial break)

KOPPEL: And we're back again with Paul Krugman.

Professor Krugman, let's go back a moment to Robert Krulwich's first premise, and that is that Americans for as long as many of us can remember haven't been saving very well. And over the past few years, they've actually gone into deficit spending in a big way. Now, what kind of an impact is that going to have on a longterm basis? In the long run, it can't go on like this. But that's the old line. In the long run, we're all dead. And I think you don't want to imagine that all of a sudden tomorrow consumers are going to stop spending. For one thing, there's something funny about those numbers. You know, there--there's lies, damn lies and statistics. It can't really be true that the typical American is--is spending more than he earns. People seem to have more solid assets, not just stocks but really solid, good assets. And that seems like--there's--there's probably something a bit wrong with the numbers.

KOPPEL: Let me--let me--let me try and make the argument for them. And--and I--I understand that not all Americans are invested in the stock market. But those who were over these last ten years have sort of taken the position that they're watching the growth of their portfolio and saying, 'You know, I really am not--a lot wealthier than I thought I was, so I can afford to spend maybe more than I have.'

Mr. KRUGMAN: Yeah, but there's no question some of that's going to go on. Again, the question is, is it something that is--spells doom for all of us? Is it something that really has to ripple through the economy or can it be offset? You know, now interest rates have been falling like a stone. Thank you, Alan Greenspan. That means that as people who've lost money on stocks, cut back, as the demand for caviar, as the demand for expensive restaurants fall, there's also going to be a lot of people refinancing their homes, finding they can afford new home improvement projects--people who have not been over the deep end in spending. And it doesn't have to work, but if you look at that beige book he talked about, there is a reasonable hope now that this other kind of more responsible spending will come in fast enough to prevent this from being a real disaster.

KOPPEL: Let's talk for a moment about a favorite Krugman theory, and that is the uncrime and punishment theory. And let me just explain very quickly to our--to our viewers who may not be familiar. You do not take the position that simply because we have been living through prosperous times we've got to pay the price for it. Just because things have been good for the past 10 years doesn't mean that there's some law of economics that says, 'Now we've got to go through the seven bad years.' Explain yourself.

Mr. KRUGMAN: Well, the--the question is--OK, now, the really appealing thing here is to make it into a--a morality play, to say, 'Hey, we've been living high on the hog, therefore we now have to suffer.' What we've done is, we've made a lot of bad investments, we've build routers and servers, whatever they are, that we're not going to need. Those have got to be dumped, those have got to be written off. A lot of people are going to find that their stocks are not worth what they were. But we only have a recession, we only have mass unemployment if we can't find something useful for the work force to do. And there's no reason just because we've made some bad investments in the past that there isn't something useful for us to keep on doing right now.

KOPPEL: But your theory actually, I thought, went even a little bit further. You're saying just because we made mistakes in the past and too--built too many routers and servers, that doesn't mean we have to be punished for it.

KRUGMAN: Oh, the people who built the routers and servers or the people who bought the routers and servers are punished for it. The question is, who are we, all right? Cisco is not going to be worth what people thought it was. People who invested in Cisco are not going to be worth what they thought they were going to be worth. The question is, does the guy who works in a clothing store, 1,000 miles from Cisco--does he have to lose his job because Cisco made a bad investment? And the answer is no, that doesn't have to happen. It sometimes does happen because we mishandle it. It happens because Alan Greenspan or his equivalent gets behind the curve, doesn't cut interest rates fast enough. The good news is that we seem to have some pretty aggressive managers on this economy who have done--I wish they'd been even more aggressive. I've been riding Greenspan pretty hard myself. But they may be getting ahead of the curve. We're not fated to do--we don't have to go through this seven lean years if--if we do it right. And in the last month it looks better than it did a month ago.

KOPPEL: I'd like to get your sense of where we're going to be in about a year from now, good, bad, or indifferent, but let's hold for one second, and we'll come back to that final question in a moment.

(Commercial break)

KOPPEL: So, Professor Krugman, America awaits. Where are we going to be a year from now? Good, bad?

Mr. KRUGMAN: Oh, I think we're going to be OK. I think things'll be looking up. Unemployment will be higher than it is now, but we'll see the economy's on the mend, and we'll basically, I think, a year from now, be saying--as--as we have on previous scares--we'll be saying, 'What was that about? Why were we so scared?' Cross your fingers and hope that I'm right.

KOPPEL: We'll all mark our diaries and come back to you in a year. Thanks very much indeed.

Mr. KRUGMAN: Thanks a lot.

KOPPEL: Good to have you with us. That's our report for tonight. I'm Ted Koppel in Washington. For all of us here at ABC news, good night.

Announcer: NIGHTLINE is always on with abcnews.com.

Originally broadcast, 5.4.01