SYNOPSIS:

MYRON KANDEL, Business News Analyst: One of most respected U.S. economic minds has had a profound change of heart. Paul Krugman of MIT was a big supporter of the Clinton administration, but he now says he's horrified at the way the president is handling the economy. [interviewing] Joining us now to tell us, economics professor Paul Krugman of the Massachusetts Institute of Technology. Paul, what's your biggest beef about the White House?

PAUL KRUGMAN, Prof. of Economics, Mass. Institute of Technology: This is an administration which, despite all of the advice from economists who really know something about it, has decided that foreigners are our problem, that competition with Japan, competition with the Third World, outsiders are responsible for our jobs problems, that getting tough with the rest of the world is the priority, not dealing with our own domestic problems.

KANDEL: But we do have a huge trade deficit with the rest of the world, particularly Japan and China. What would you do about it?

Mr. KRUGMAN: The reason we have a trade deficit is really our own problem. The reason we have a trade deficit is that we don't save enough. That's a domestic problem. It's actually- to a large degree, foreigners are doing us a favor by lending us money which is the other side of our trade deficit which helps us keep on investing even though we do hardly any saving in our own-

MARCHINI: Surely, you wouldn't argue that the Japanese play fair in terms of trade. There are barriers to entering the Japanese market.

Mr. KRUGMAN: We have a- we have some real arguments with the Japanese, right, this is not a- the Japanese are not lovable. I wish that they were- would behave better, but it's a little bit like saying look, my neighbor's annoying me, so I'm gonna start trashing his back yard. I'm gonna kill his dog. Right, we are- we're taking what is really a sort of third rate dispute with Japan and making it the centerpiece of our economic policy.

MARCHINI: So what's the harm?

Mr. KRUGMAN: Well, the first harm is that we have a trade war. We can get into a situation where we start retaliating against the Japanese, they retaliate against us. The Europeans say yeah, we'll do that too, and we end up shutting down world trade. It's happened before, it could very easily happen now.

MARCHINI: Happened in the Depression.

Mr. KRUGMAN: That's right, played a big role in making that depression worse. In this case, it would be really damaging to the world economy and especially to smaller countries. The second risk is that we just skew our priorities all across the board like the way that we are loosening export controls on very sensitive things, advanced computers, spy satellite technology because in this administration no one dares say a word against exports. Exports have become God.

KANDEL: You know, the president has enough problems these days. Your new book is very critical. You think that's piling on?

Mr. KRUGMAN: You can't look- you know about the publishing business. This book was done in May. I couldn't have made that decision. I didn't know. At the time I wrote the book remember, this was a president who was on a role. He was very popular, so I was really sticking my neck out.

MARCHINI: Is this just a problem with the president's trade policies? I mean, if you look at the economy, interest rates are still relatively low, employment's growing, and the federal deficit's coming down. Some folks might think he's done a good job with the economy.

Mr. KRUGMAN: Well, he's done some good things, and there are some very good economists in the administration, but there are some core beliefs that are wrong in this administration and some key people who were put in their positions because they shared those core beliefs who are doing a lot of damage.

MARCHINI: And we shall see. Paul Krugman of the Massachusetts Institute of Technology, thank you for being with us this morning.

Mr. KRUGMAN: Thank you.

Originally broadcast, 3.25.94