Voodoo Economics

SYNOPSIS: Rolling Stone's Will Dana interviews Krugman on the Bush administration's economic policy

While the rest of the media leads the cheers, it's up to New York Times columnist Paul Krugman to explain how Bush is looting the economy. Paul Krugman did not set out to become chicken little. When he started writing his economics column for the New York Times in January 2000, “everything seemed to be going right,” he says. “It had seemed we'd moved into an age of fiscal responsibility.” But by the time George W. Bush's campaign caught fire that spring, Krugman had discovered his great subject: the disconnect between the rhetoric of the Bush people (“No child left behind”) and the reality of their policies (“Get your greedy-ass government hands off my money”). Though the president's poll numbers have soared since the 9/II attacks and two successful military campaigns, Krugman has pummeled Bush from all sides with a persistence that would seem compulsive were it not so analytically rigorous. He can take almost any aspect of White House policymaking — tax cuts, deficits, homeland security, white-collar crime, the environment — and in 750 words lay bare the moral, intellectual or economic dishonesty of the president and his political operatives. “This is not just a recession,” Krugman says. “Not just an economic challenge. We've gone off the rails.” In column after column, Krugman has not only attacked the White House's seeming obsession with tax cuts but also the big lies that the administration has employed to gull the public. “You have to convince a large pool of nonwealthy voters that these policies will benefit them,” he says. This fall, he puts all this bracing gloom between hard covers, in his book The Great Unravelling: Losing Our Way in the New Century. Krugman talked to ROLLING STONE in his office at Princeton University's Woodrow Wilson School of International Relations, where he is a professor of economics.

WILL DANA: Can you give us a quick rundown of your view of President Bush's economic policy?

PAUL KRUGMAN: We have a sluggish economy, which is, for all practical purposes, in recession — whatever they say officially — and the budget's just gone out of control. And so what they're proposing is a tax cut that will lock in long-run tax cuts that will help push the budget further into the red zone and do very, very little to actually pump up the economy right now.

DANA: The White House is now proposing a tax cut of about $500 billion in the next ten years. Is this a significant amount of money, in terms of government spending?

KRUGMAN: Roughly speaking, we've got a $10 trillion economy and a $2 trillion budget each year. So $500 billion over ten years is not much, with respect to either one. In some ways, that's a misleading number. You know, if you take the original Bush proposal, it's $726 billion over ten years. But if you look at the ancillary stuff like Social Security savings accounts, we're actually talking about something that will, in the end, be subtracting something like an additional one percent of GDP from government revenue. At this point, the budget deficit is bigger than all nonmilitary discretionary spending combined. So even if you eliminated the court system — eliminated everything except for Social Security, Medicare and government pensions — you'd still have a deficit.

DANA: How does the Bush tax cut compare to the Reagan tax cuts of the 1980s?

KRUGMAN: Well, the combined Bush tax cuts — the one in 2001 and the one that he's now proposing — end up being bigger. And the thing, of course, is that we're twenty years closer to the point when we have to face the big, looming problem. The reason to worry about deficits is not what they do now but how do we cope with all of those baby boomers hitting Social Security and Medicare? If you've run up a large government debt before the baby boomers retire, and you've got overall tax revenue at a level that is insufficient to cover the cost of Social Security and Medicare, then you're setting yourself up for a fiscal crisis. And that's what we're doing.

DANA: What's the time frame here? Five years, ten years?

KRUGMAN: A lot depends on what the financial markets do. The baby boomers start retiring in big numbers in 2011. If the financial markets continue to lend the U.S. government money, then we could be going on till the year 2020 before it really becomes serious. But that's not what the financial markets usually do. Just ask the Brazilians. My bet is the global bond market will start treating us like a banana republic around the year 2010 — but that's not a secure date.

DANA: If you're a politician, 2010 is the distant future. Most elected officials aren't thinking much beyond their next campaigns.

KRUGMAN: You are elected to take some responsibility for the country's future. If you're completely cynical, you just let everything go and figure that some future administration will deal with it. And that's essentially what's happening now.

DANA: So you think the mind-set of the Bush administration is one of complete cynicism?

KRUGMAN: I have a hard time getting inside the mind-set. They are cynical — and yet they persuade themselves that they are somehow idealistic. There are probably some people in or close to the administration who actually have a grand plan to demolish the welfare state and roll back the New Deal. It's worth reading what the conservative Heritage Foundation says: It's all about getting rid of the middle-class entitlements — getting rid of Medicare and Social Security. And others in the White House really believe that, somehow or other, growth will solve all problems.

DANA: Does the White House really believe we can grow our way out of anything?

KRUGMAN: If you look at the back pages of the administration's own budget, there are long-run forecasts that are based on unrealistically optimistic assumptions — which is par for the course. And, even so, they show the U.S. essentially going into bankruptcy levels of debt by around 2030 or so.

DANA: Do the Bush people ever address this?

KRUGMAN: I guess the administration would say, “We're gonna find efficiencies or rely on market forces, or something.” But they haven't come up with a coherent version of that. It's basically, “We're gonna reach into the hat and pull out some bunny rabbits, and this will solve the problem.”

DANA: If this tax cut is so bad — and our fiscal future is so grim — why isn't there more of an outcry against it?

KRUGMAN: The bigger story here is that there is no group of people who can basically stand up and say, “Let me put politics aside, here's what I think we should do for the good of the country.” We've really moved to ideological politics — which means that there is no center. Try to think of who could stand up and say, “This Bush tax proposal is deeply irresponsible, and it's against the interest of the country,” and not be immediately accused of simply being a partisan opponent.

DANA: What about the two Republican senators — George Voinovich of Ohio and Olympia Snowe of Maine — who've said that they won't vote for any tax cut that's larger than $350 billion?

KRUGMAN: Look at what's happening to them: They bring up the idea of converting the tax plan from being grossly irresponsible to just highly irresponsible, and immediately you've got the Club for Growth running ads of them next to fluttering French flags.

DANA: Where's the media in all of this?

KRUGMAN: What was really amazing was the unwillingness of most media outlets to present the truth about the tax cuts. I was flabbergasted during the debates over Social Security privatization. On several network business shows, I saw presentations in which they compared the rate of return that you get on your Social Security with the rate of return you could get by investing your own money, as if that was an argument in favor of privatization. Which missed the whole point. The reason why the rate of return on Social Security looks low is because your Social Security contributions are paying for your father's retirement. That wasn't ever reported. The “liberal media” was presenting a bogus case in favor of the Bush administration's plan. Maybe that's why so many people are in favor of Bush's economic plans, because no one has explained them. If the president gives 100 speeches saying, “Leave no child behind,” and then actually fails to come up with the money, how many people actually know this? That's their specialty: the disconnect. And what you might say is, “Well, why don't we have news reports that say, ‘Here's what President Bush said, and here's what he actually did’” And the answer would be: If they did that, there would be howls about the liberal-media bias.

DANA: Why is the media so afraid of that? Can't they say, “We're just reporting the facts”?

KRUGMAN: There's a lot of pressure not to pursue these things. It's personal and it's commercial, and unpleasantness lurks for those who try to make an issue of these things — you are now accused of being unpatriotic. Remember that the scandal machinery that was running full tilt against Clinton and his people is now ready to be used against anyone who criticizes Bush and his people.

DANA: Right now, we are basking in the afterglow of military triumph. How do you view the war in Iraq from an economic perspective?

KRUGMAN: If it really was a pilot project for a whole series of wars, then we're talking real money. But the $20 billion we've spent so far is pocket change for the U.S. government. In terms of the economics, the main concern I'd have about the war right now is that it ruptured the rule-based system of international treaties and international financial arrangements, all basically set up by the United States to make the world economy run. All of that kind of goes by the board if you have the United States deciding that, when it chooses, the rules don't apply to itself. International-trade negotiations appear to be collapsing. Relations with a lot of Latin American countries have already collapsed. Bolivia apparently is descending into chaos, with radical groups on the rise. On the one hand, it's only a small, mountainous country in the middle of nowhere — so who cares? Except that's what we said about Afghanistan, too. So if you want to think about what's going to happen to the U.S. economy in the next two or three years, the war in Iraq is not going to change that much one way or the other. But these rather boring budget discussions, and the fiscal crises of states, and the possible failure to come to grips with corporate governance — those are going to be the things that are going to dominate the domestic political scene.

DANA: How serious is the problem of corporate governance?

KRUGMAN: Well, take a look at the numbers. There are two ways of measuring corporate profits. One is direct, just by looking at the profit statements that companies report. The other is indirect — you can estimate corporate profits out of the way the gross domestic product is put together. Usually, they move together. Starting about 1997, they diverged. The GDP-based estimates flattened out, while the reported profits by companies rose another forty percent. I think that's evidence that you had an epidemic of cooking the books throughout the corporate sector. While none of these are likely to be as extreme as Enron or WorldCom, there's reason to believe that there's lots and lots more where that came from.

DANA: It's tough to predict the future, but would you be willing to look into the crystal ball?

KRUGMAN: I'd say that America is probably going to be a place where, if you have a family of kids and you lose your job, serious misery may be staring you in the face. It's likely that you will find that there either is nothing like Medicaid, or the restrictions are extremely severe, so you have to be in dire poverty before you can get any sort of medical care for these kids. So either you have to be rich enough to afford medical care, or you have to be, basically, in the poorhouse. So if your elderly mother needs a hip replacement, you may well find that either you have to impoverish yourself to pay for it, or she'll have to do without. Taxes will likely go way up — particularly for working families. There'll be a lot of fees. Even now some school districts are charging for use of the school bus. Basically, if you're making $200,000 a year, taxes will be pretty low, and life can be good. But should you find yourself, through whatever misfortune, making $30,000 or $20,000 a year, it's going to be real — you want to think Charles Dickens. It's going to be poverty of a kind that we don't think of as happening to people in America. If you look at the things that are actually being severely underfunded now, the biggest burden seems to fall on children. We're stripping away programs that provide that basic floor for medical care and for nutrition. I'll bet we're going to see a substantial rise in infant mortality and more low-birth-weight infants. We'll see more children dying because their illnesses were untreated. It's gonna be a pretty harsh place. You can come back to me in fifteen years and see if this is right.

Originally published, 5.29.03