SYNOPSIS:

BURY: Do we really have an energy crisis? Not according to a prominent economist. We'll talk with him in a moment.

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BURY: Joining me here in Washington, Paul Krugman, finance columnist for The New York Times and author of "Fuzzy Math: The Essential Guide to the Bush Tax Cuts." Paul, I noticed in your column today, you said that when President Bush was asked what he would do about higher gasoline prices, he said, 'Well, the Congress ought to cut taxes.' What's wrong with that, more money in our pockets?

Mr. PAUL KRUGMAN (Economist): Well, there's nothing wrong with more money in your pocket. Most of it is more money in the pockets of people who already have plenty of money in their pockets. And about a quarter of families would get no tax cut under that plan. Those happen to be the families for whom the gas price increases the--is the biggest burden. You know, you take a tax cut that is really going to phase in mostly at the end of the decade and is mostly for the top 5 percent of taxpayers and say, 'That's the answer to this summer's gasoline crisis.' Well, I--it's Bush's answer to everything. Right...

BURY: So what is the--the answer? Tomorrow the administration is going to roll out its new energy plan. In the short term here, what exactly can the White House do about rising energy prices?

Mr. KRUGMAN: There's very little it can do about gasoline. It can try to have some relaxation and homogenization of standards, you don't want to know. But there are technical obstacles to refining this summer. It can police, there are some instances, probably, of price rigging. They're not a big part of the story. There's not a whole lot. We--we sort of got caught off guard. We don't have enough refineries for all the SUVs we built, all the gasoline they need. So...

BURY: Can they, for example, though, jawbone OPEC. I mean, OPEC has cut production. Can they talk to OPEC? Can they release oil from the Strategic Petroleum Reserve, those sorts of short-term fix?

Mr. KRUGMAN: Unfortunately, crude is--this is not a crude problem. It is a refine problem. There's actually enough crude. There's enough oil. The price of--of oil from OPEC is--is the same as it was last year or a bit lower. The problem is the refineries. It's, you know, you can't burn crude oil in your tank. You have to burn gasoline. And we don't have enough tubes to--to turn the crude into gasoline to quite meet the demand this summer. I--I have to say--I, you know, the administration will take a lot of political heat for the gas prices. This really isn't their fault.

BURY: So whose fault is it? In--in the piece we saw that it seems to be a complicated equation, demand, I mean...

Mr. KRUGMAN: Yeah.

BURY: ...more SUVs, more minivans at the same time, as you suggested, a lack of refining capacity. There doesn't seem to be a clear-cut villain in this one?

Mr. KRUGMAN: Yeah, mostly, it is nobody's fault. You know, once in a while, people, you know, it's some--it's something like what happens. Sometimes you have a housing shortage because not enough buildings were built. In this case we just didn't build enough refineries because three years ago refining was not a profitable business. There was lots of slack capacity. So it really isn't a big villain. If you ask, you know, what mistake did we make? Well, Americans started driving much bigger gas guzzling vehicles and everybody in Washington looked the other way and didn't say, 'Hey, wait a second, you know, what happened to all that energy conservation we did in the '80s and the early '90s?' We were a little too self-indulgent and we allowed it to go along. Mind you, that's gasoline. Electricity is another story. California electricity and gasoline sound like the same story, but they're actually totally different stories. And in California there are lots of villains.

BURY: In the short-term, in California, the president has already indicated that he's not going to demand, for example, caps on wholesale prices. So what can the administration do for California?

Mr. KRUGMAN: Well, I mean, the administration could do what it refuses to do. I mean, in a sense what the administration said is, 'OK, you people in California, you have to pay $ 70 billion in windfall profits to our friends the--the generating companies based in Texas.' That's a little crude. I'm overstating the case a bit. But it--it's actually it's outrageous. This is an emergency situation and in a sense the administration is saying, 'We're on the side of the profiteers.' Sorry, that raw. I think at this point, if they're not prepared to do that then there's nothing they can do, because this is a short-term, you know, emergency, and the administration is basically saying, 'We are not going to do anything.'

BURY: Well, they are saying, 'Put some shovels in the ground and start building more power plants.'

Mr. KRUGMAN: But they're doing that. I mean, there are, I think, about 17 power plants in--in--in--in, you know, in the pipeline, if I can say that, in California. If you look at industry people, talk to them, look at the prices for forward contracts, everybody thinks that the California problem will be over in two years. The question is, what about this summer? And the administration has said, 'We will do nothing for you this summer.'

BURY: So, on both of these questions, the California electricity situation and the price of--of gasoline, would you characterize either of these as a genuine crisis?

Mr. KRUGMAN: California is a crisis. The--although it will be over in two years, it's devastating for the California economy. And that's going to have ripple effects right across, because California is very important piece of our whole system. Gasoline price is an annoyance. Even if it's $ 3 a gas--a $ 3 a gallon gasoline, it's still in real terms, you know, adjusted for inflation, going to be no worse than it was in the early '80s.

BURY: But I guess it is a crisis there if you are a truck driver or you are a grocer or if you're commuting two hours to and from work every day.

Mr. KRUGMAN: That's right. That's right. I think a lot of people have been caught by this. And look, if you want to have a tax break, how about a rebate to everybody on an across the board basis, not a tax cut that's heavily tilted towards people making 300,000 and up. But, the truth is, the gasoline thing is going to make people hopping mad. It's not clear it's really a Washington issue.

BURY: For economists such as yourself, is the real danger that you see in this down the road one of inflation, given what we just saw in Michel Martin's report, with surcharges at the San Diego Zoo, higher prices for everything else?

Mr. KRUGMAN: I don't think so. You know, and we certainly had energy driven inflation before. But it's sort of I remember the real oil crisis. I remember what '79 looked like and this is not 1979. This is a little bit--we have other factors. Inflation is creeping up. It is possible this will add to it, but, you know, by and large, it is really not that bad.

BURY: Forgive me knowing you're an economist for asking you a political question. But very quickly, how significant of a political issue do you consider this for the administration and Congress in the next few months?

Mr. KRUGMAN: I think it's going to be a very big issue. You know, people get credit where credit isn't deserved and they get blame where blame isn't deserved. And the administration is setting itself up by trying af--they're the ones who are trying to use this for irrelevant things. And this is not a crude oil crisis, but they want to punch holes in Alaska and they want to use this as an excuse for it. So I think the administration having politicized this crisis, having said, 'This is an excuse. This is why we should have what we want and forget about the environment,' has to expect that people will turn it on them and that they will end up being blamed for this.

BURY: Paul Krugman, thank you very much for joining us.

Mr. KRUGMAN: Thank you.

BURY: We'll be back in a moment.

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BURY: Tomorrow on NIGHTLINE, as President Bush unveils his energy policy, the politics of power. That's our report for tonight. I'm Chris Bury in Washington. For all of us here at ABC News, good night.

Originally broadcast, 5.16.01