SYNOPSIS: Michael Kinsley interview Paul krugman on Japan and free trade

MICHAEL KINSLEY, Host: Paul Krugman, last weekend, a friend of mine asked me an economics question which I didn’t answer very well, but I told her, as it happens, this week, I’m going to be talking to the guy everyone says is the most brilliant, young economist in America, and I’ll ask him. So are you ready for it?

PAUL KRUGMAN, Economist: Sure. I’m not so young anymore.

KINSLEY: No, you’re not, but that’s-

KRUGMAN: I’ll take the rest of it.

KINSLEY: You’ll take the rest. There’s still your reputation. She said you see the headlines in the paper. It talks about government jobs creation programs, government jobs training programs, Clinton to force welfare mothers off welfare and force them to take jobs. Then, in last Sunday’s New York Times was the headline, ‘Federal Reserve raising interest rates out of concern that unemployment is becoming too low.’ Isn’t there a conflict? What is the government up to? On the one hand, desperately trying to create jobs, and on the other hand, slamming on the brakes when there’s a worry that there’s too little unemployment.

KRUGMAN: Well, I mean, the real answer is that most of the job creation stuff is- it’s rhetoric. It’s not for real. To the extent there’s anything to it, we’re talking about training some people who would otherwise be unemployable to- so that they might be- might get jobs, but, no, I mean, the big news is, yeah, the Federal Reserve, which is not exactly part of the government, but, anyway, the Federal Reserve is afraid-

KINSLEY: It’s part of public policy.

KRUGMAN: That’s right, and the Federal Reserve correctly thinks that there is only so many jobs you can create in this economy before inflation starts to spiral up.

KINSLEY: So is it utterly futile for politicians to even attempt to create jobs to reduce unemployment if the truly correct policy should be to let the Federal Reserve set unemployment at any level it wishes?

KRUGMAN: More or less. I mean, basically, the number of jobs in the U.S. economy is, with some wiggle room, determined by the mind of Alan Greenspan.

KINSLEY: So is it, therefore, true what Mark [sp?] said, that capitalism requires a reserve army of the unemployed to function properly?

KRUGMAN: Oh, it’s not really a reserve army. What it is- the economy’s changing all the time, all right. People are being laid off as businesses go down in one area. They’re hired as businesses go up in another area. There’s a lot of friction involved in our economy, and that means there’s a certain sort of minimum average rate of unemployment that we can manage before the economy overheats. That rate is- I mean, some people think it’s 5 percent, some people think it’s 6 percent, but it’s somewhere in that range.

KINSLEY: Well, some people think, i.e. the supply side conservatives, The Wall Street Journal editorial page and so on- think that any talk of what used to be called the Phillips [sp?] curve, a tradeoff between inflation and unemployment, was nonsense. Is there anything to that?

KRUGMAN: Well, based on their record- I think if The Wall Street Journal editorial page says something is nonsense, that’s two points in its favor. I mean, the Phillips curve - the idea that if you have low unemployment, the inflation rate accelerates, and if you have high unemployment, it slows down – has held up just spectacularly. I mean, you couldn’t have done a better demonstration of the validity of the concept on what we’ve been through for the past 15 years.

KINSLEY: OK. Let me explain who you are. Paul Krugman is a professor at MIT but about to change his allegiance to Stanford?

KRUGMAN: Yeah.

KINSLEY: And he’s the author of the new book, which is why he’s agreed to be on this television show-

KRUGMAN: Of course.

KINSLEY: -Peddling Prosperity - The Economic Sense and Nonsense of the Age of Diminished Expectations. So this is really him here. You can see his picture on the back. And you are- you won the John Bates Clark Medal [sp?] which is supposed to be for the best economist under 40. However, you no longer qualify for it, being 41.

KRUGMAN: That’s right.

KINSLEY: And this is supposedly a leading indicator for the Nobel Prize. We don’t know whether that will pan out or not.

KRUGMAN: Yes, it- Nobel Prizes are getting- going to people who are older and older. So we don’t even think about it.

KINSLEY: Are you the brightest, young economist in America? If not, who is?

KRUGMAN: Oh, God. There’s no way to answer that gracefully, is there?

KINSLEY: You’re right. You’re right. I was just trying to see if I could trick you into it. And let me ask you this, though. You are regarded by many as being arrogant. Do you think that’s a fair accusation?

KRUGMAN: Oh, God. If they say it, I guess it must be true. I hope not. I mean, I- I’m trying to just talk sense. I mean, you know, I- you know- well, look, we’re- I’m an academic. You don’t actually succeed in the academic world unless you have a powerful conviction that you’re smart and that you’re right a lot of the time, but I don’t think I’m any worse at that than a lot of other people.

KINSLEY: All right. Fair enough. You’re best known among economists for having come up with what is regarded as the only respectable economic theory to justify some degree of protectionism, some degree of managed trade, strategic trade, industrial policy, whatever you want to call it, government interference with the workings of the market and the workings of exports and imports to maximize the economic output. At the same time, you are an opponent of the actual attempts by politicians, such as President Clinton, to do exactly that. In fact, I believe you said that you’re- you don’t even think your theory should be taught in schools because it’s dangerous. Can you, first of all, explain what your theory is in terms the layman could understand?

KRUGMAN: Sure. The theory is mostly about- it’s mostly a descriptive theory. It’s mostly not about the policy. It’s mostly about why do countries trade. Why do countries produce the things they do? And this- you know, the old theory- the standard theory says, ‘Look at the country’s resources. Look at its base. Look at the skill of its labor force and so on. That will tell you what it will produce.’ The new theory says, ‘Well, that’s some of the story, but a lot of the story is just plain accidents and then the self-reinforcing character of the economy.’ Why does the U.S. produce most of the world’s large jet aircraft? It’s nothing special about the U.S. climate or the U.S. genes that makes us good at producing aircraft. We got there first, and there’s a self-reinforcing process. We have the skilled engineers. We have the base. We have the knowledge. That enables us to keep it. That, obviously, opens a window for the government to rig the game so that it’s in our favor.

KINSLEY: It suggests, if that happened as an accident for airplanes, perhaps it could happen on purpose in other fields.

KRUGMAN: That’s right, and so there’s- without a doubt, there’s some possibility in principle for what we call a strategic trade policy that stems out of this theory of international trade that we’ve developed.

KINSLEY: Well, for example, in today’s paper, as we tape this, there was reported the government is going to spend a billion dollars subsidizing the industry that makes flat computer screens, the U.S. government, in the hope of essentially grabbing that market back from the Japanese. This is all being done through the Defense Department under a disguise that it actually relates to defense, but it’s actually industrial policy. Now is that a good idea or a bad idea?

KRUGMAN: I have to look at the specifics, which I haven’t, but in principle, something like that could be a good idea. I actually have nothing against that kind of program.

KINSLEY: What did- what- why are you so vocal in your opposition to the Clinton trade policy then?

KRUGMAN: Well, there are two reasons it bothers me. The first is really that the rhetoric implies not that there’s little room on the margin to improve things by an occasional policy like this one on flat panel displays, but instead that we are in this struggle for world markets, and that’s the- our- the life and death of the country depends on the struggle for world markets and that- that view of the world is so wrong that it disturbs me greatly. It means that the administration is operating on a philosophy of what economic policy is about that is just wrong.

KINSLEY: Well, now why is it wrong? Isn’t it better for a country, like a company, to want to sell more?

KRUGMAN: Well, at what cost? Countries are not like companies. I mean, that’s- this is- a lot of people think that- ‘Well, you know, the U.S. and Japan - that’s like Coke and Pepsi. Two brands are competing in the market. What’s good for one is better for the other. Win-lose competition.’ That’s what Les Thoreau [sp?] says, but it’s a lot different.

KINSLEY: He’s- that’s- from MIT, a former colleague of yours from two days ago.

KRUGMAN: That’s right. That’s not why I’m moving, but, anyway, the- what’s actually the case is that countries have a web of interconnections. Yes, Japan is a competitor in some markets to us. It’s also one of our biggest markets. It’s also a supplier of many very useful goods to ourselves. The relationship is by no means obviously a competitive one, looking at it overall. So that’s just a bad metaphor. It’s a bad view of the world.

KINSLEY: Most- now I don’t know if most people, but many, many people are actually enjoying- in America are enjoying the fact that Japan is now in a recession having difficult times. There is this sense that, if they’re having a bad time, it’s somehow good for us because we’re rivals. You’re saying that’s foolish.

KRUGMAN: That’s all wrong. In fact, we’re suffering because of the Japanese recession. I mean, it’s- it’s not dramatic because- and, I mean, countries are not as interdependent as advertised, all right. We only export about 10 percent of what we produce, and we only export about 1-1/2 percent of what we produce to Japan. So the linkages are not that big, but to the extent there is a linkage, what’s bad for Japan right now is also bad for us.

KINSLEY: But you’ve taken off after this concept of competitiveness, and I- maybe at a technical level, you’re right, but what most people mean by competitiveness is the same thing as what you mean by productivity. We ought to be producing as much as we can and selling as much as we can in order to get richer, and then the general layperson says, ‘There’s nothing wrong with that, is there?’

KRUGMAN: Yeah. If people, when they said competitiveness, had it clear in their minds that they meant productivity, what harm? But then why insist on using the word competitiveness, and the fact is that a lot of the people who talk about competitiveness don’t just mean productivity. They mean Japan bashing, they mean promotion of American interests at the expense of other countries, or they mean promotion of American commercial interests at the expense of anything else, even our own domestic interests.

KINSLEY: OK. Let’s take a break. Maybe we’ll try and get you to name some names when we come back.

[Commercial break]

KINSLEY: Paul Krugman, whenever we debate trade on Crossfire, Pat Buchanan brings up a point which I don’t have a good answer to and I’m hoping you can supply it. He says, ‘Look at the United States of the 19th Century. There were huge tariff walls, and our industry grew, and we became the most powerful industrial nation in the world,’ he says as a result of tariff barriers. Now is that true?

KRUGMAN: No. I mean, we did have some tariff barriers. By the way, they weren’t that huge. Never mind that. The-

KINSLEY: No.

KRUGMAN: But- well, I mean, no, we had tariffs that were typically on the order of 15, 20 percent. That’s high, but- by our current standards, but it wasn’t - you know, the idea that we- the idea that we were protectionists the way that, say, India is protectionist now is just wrong. I mean, there’s just no comparison, but what is true is you just can’t make- you can’t make that kind of argument at that little. There are an awful lot of things that go into national success or failure. You look at the educational system. I mean, the U.S. was educating everybody to read at a point when no one else in the world was doing that. Don’t you think that was more important than the tariffs? The U.S. was building a railway system that was better than anybody else’s in the world. Don’t you think that was more important than the tariffs? You know, if you look at Japan and its success, you say, ‘Well, they have some protectionist policies.’ They also have a good educational system. They also have good labor-management relationships. They also have a culture in which managers spend all night drinking together and never talk to their wives. What do you think is the important element there? I think it’s probably the last one.

KINSLEY: Let me ask you about Laura Tyson [sp?]. I’m not going to ask you anything personal about your professional rivalry, but I just want to ask you about her academic theory. She’s the head of the Council of Economic Advisers. She has written in favor of export quotas, not import quotas, where you say to a country like Japan, ‘We demand 20 percent of your microchip market’ - that’s the famous example ‘-or else.’ Now what is wrong with that?

KRUGMAN: Well, first of all, it turns out that we can’t get them- I mean, the one thing that you certainly require of a policy is some belief that we can actually get the other country to play along with this game, and it’s turning out that that’s very hard to do, but secondly-

KINSLEY: Well, we have gotten it.

KRUGMAN: Oh, we got an agreement on semi-conductors that- people don’t know what it really meant, and our market share sort of rose, but there were other factors there. The other- the things that we’ve gotten- I mean, we’ve gotten this Motorola deal which probably people know about, we got our cellular phones into the Japanese market, but that was a- that was not that kind of policy. That was a clear Japanese regulatory barrier that we had removed, a standard trade policy.

KINSLEY: Look, free trade is ideal. We can agree on that, and we can even agree that, if every country adopted the policy of going around and demanding certain percentages of other countries’ markets, the whole world economy would freeze up. That would be a disaster. But what is wrong with, for example, your saying to me, ‘I will be on your television show, Mike, if you agree to buy 20 copies of my book.’ That may hurt me, but it’s- isn’t it going to help you? Isn’t that what the United States is doing when they go to Japan and simply say, ‘Look, we’re the superpower around here. It may not be fair. It may not be rational. We want a chunk of your market.’ How does that hurt the United- I wish I could come up with an argument about how that hurts the United States because I think it’s a terrible idea, but I have trouble. Help me out.

KRUGMAN: OK. Those policies, when they occur, are probably not going to be in the interest of America as a whole. They’re going to be in the interest of the interest groups in our country that have got the ear of the Congress, the ear of the President. So that’s the first reason. Just- you know, if you’re going to give- have our government going out there and negotiating special deals, on whose behalf are they really going to be made? Plus, look-

KINSLEY: But it doesn’t hurt the people who are not beneficiaries of the special deals.

KRUGMAN: Sure it does. If the- a lot of those will turn out to be very expensive. They’ll turn out to be things that are diverting resources in the U.S. from other things that we might be more productive at doing. I mean, if we force the Japanese to buy a lot of auto parts that they don’t really want- you were just saying the Federal Reserve is raising interest rates because it’s afraid that unemployment will fall too low. Well, if we manage to push a lot of stuff out to Japan, the Federal Reserve will have to raise interest rates, and some jobs in some other U.S. industry will be lost. It will be very diffuse, it will be invisible, but it will be real. But more than that- look, the U.S. is not- we do not rule the world. I hate to tell people this. The European economy is just about as big as ours. The Japanese economy is about half as big as ours. If the U.S. goes out there arm twisting, playing rough, playing hardball, saying, ‘OK. World trade is a jungle, and we’re going to get what’s ours,’ so are the other countries, and we’re going to be the loser.

KINSLEY: But to take my example of you and the books, it really wouldn’t do you any harm if you could browbeat me into buying 20 copies of your book even though it’s hardly the free market at work.

KRUGMAN: No, if it’s- suppose that the largest publisher in the United States started browbeating everybody to make special deals on books and that was then emulated by the second and the third largest publisher and we got into a situation where books were no longer sold because people actually wanted them but instead were sold only through special deals, people were forced to buy them. Wouldn’t that hurt the whole book-selling trade? And that’s a better analogy to what we’re talking about.

KINSLEY: All right. You’ve talked me into it. Of course, I wasn’t hard- I wasn’t a hard sell. We’ll take a break and come back.

[Commercial break]

KINSLEY: Paul, you were explaining why badgering other countries to buy more of our products, which seems like such a good idea, is actually a bad one.

KRUGMAN: It really comes down to the question of what are the possible benefits, and if you add up everything that we could get, all- you know, all the imaginable things we could do, all the arm twisting we could get, what is it worth to the U.S. economy? The back of my envelope says nowhere- certainly nowhere bigger than a tenth of a percent on our real income. Is that worth it? Subordinating our foreign policy to commercial interests?

KINSLEY: At huge political cost.

KRUGMAN: Huge political cost. Let- the Japanese- we’d alienate a major ally for the sake of what? If they gave us everything we’re now demanding, it would not mean even a fortieth of a percent to the national income. I’ve done that calculation.

KINSLEY: I want to ask not just about national income but about personal income, income distribution. When I took economics back in the ‘70s, we learned from Paul Samuelson’s [sp?] textbook that growing capitalist free-market prosperity brought with it growing income equality. Is that still true?

KRUGMAN: Not for the last 20 years.

KINSLEY: Why is that?

KRUGMAN: I can give you the all-purpose economist’s answer which is, well, we’re not really sure, but what I think it is- we’re in a technological era now that’s kind of like the early stages of the industrial revolution. It’s the early stages of the information revolution, and just as the industrial revolution, in its first 20, 30, 40 years, actually led to greater misery for a lot of people, the same thing is happening now. It’s a very unpleasant situation.

KINSLEY: Isn’t it- is it- does it have something to do with the fact that skills are more highly rewarded and economic rationalization means that someone in India or someone in Brazil can do the job of someone in the United States which wasn’t formerly true?

KRUGMAN: Well, the globalization stuff- the moving jobs- low-skill jobs to India, Brazil and so on- I mean, it’s one of those things that sounds plausible and even makes a lot of sense in terms of economic theory but turns out not to work in terms of the numbers. We don’t have time to do that, but you actually check the numbers and it doesn’t look right. I think it’s skills, and even more than that, the way the technology works, it increases the premium on the best guy in any particular field. It’s what we call the superstar economy which is actually a technical term. It’s that- it’s a tournament where there are only a few winners.

KINSLEY: And what should we do about? Should we do nothing about it and not worry about it? I mean, it was always a very politically powerful argument for free trade, free markets that this was going to lead to growing income equality. If it’s not, doesn’t that dictate perhaps that government should do something, or should the government do nothing about it?

KRUGMAN: Well, I’m a liberal. I actually believe in taxing the rich and helping the poor and the unfortunate, and I think we have to continue to do that. We have to do more of it than we are, always bearing in mind that there are costs to it. There are no easy tradeoffs here, but if you think that the free market is going to lead to a just as well as an efficient society, you’ve got another thing coming.

KINSLEY: I wrote a column that got a tremendous amount of hostile response a few weeks ago saying that Generation X should stop complaining so much about being worse off than their predecessors because, yes, economic growth has slowed, yes, we should be doing more about it, but Generation X, the 20-somethings, are going to, in all probability, live better than the yuppie generation, better than the post-World War II generation, better than their predecessors. Now was I right, or were these people who were attacking me, saying, ‘How dare you suggest we’re going to be better off?’- were they right?

KRUGMAN: You might well be wrong. The increase in income equality, which especially hurts young workers coming into the labor force, has been really startling. I mean, it’s- this is the first time that I know if in U.S. history, at least since the data started becoming available in the last hundred years, when the gap between the top and the bottom is growing so fast that the bottom is actually getting literally worse off, and that is happening.

KINSLEY: And what to do- what should we do about that?

KRUGMAN: There’s no- I- I mean, there are feel-good schemes like worker retraining. You know, what the hell. Try it. See if it works. But I don’t really believe in it.

KINSLEY: And what good is that if Alan Greenspan’s going to come along and-

KRUGMAN: That’s a different issue. There’s no- our unemployment- we’ve been very good at creating lots of jobs. They just haven’t been very well-paying jobs. So the question is not the number of jobs. The question is the incomes. I don’t think there’s very much we can do except a whole long list of motherhood issues: get rid of the budget deficit, improve the quality of education, et cetera, plus tax the rich and help the poor.

KINSLEY: OK. On that inspiring note, we’ll have to take another break. We’ll be back for a few seconds in just a moment.

[Commercial break]

KINSLEY: Paul Krugman, last question so you can be honest. Don’t you wish in your heart you were chairman of the Council of Economic Advisers?

KRUGMAN: Oh, no. Oh, no. I mean, I- warning to future administrations: I’m temperamentally unsuited. I mean, this is clear, right? I fly off the handle at things that I think are bad ideas too easily instead of keeping my peace and trying to change them slowly from inside. No, I’m delighted not to be there. It- you know, that may not be credible, but, look, I’m smiling. I mean, I’m really happy not to be there.

KINSLEY: All right. Well, we’re delighted to have had you here. As Larry King would say, Paul Krugman, the book is called Peddling Prosperity, the publisher is Norton. We’ll be back the last Saturday in May with Heads Up. Thanks a lot.

KRUGMAN: Thank you.

Originally published, 9.96