SYNOPSIS:

DOBBS: The White House this week taking the offensive in an attempt to put the Whitewater controversy at the back burner or certainly at the back page. Friday, the administration released copies of the President and Mrs. Clinton's tax returns for the years 1977 through '79. That the period when they first began their investment in the Whitewater deal. That came a day after President Clinton held a primetime news conference admitting that an aide had overstated how much money the Clintons had lost on their Whitewater investment.

President BILL CLINTON: I am certain that we lost money. I do not believe we owe any back taxes. If it is determined that we do, of course, we will pay. I am now sure that we lost something less than $70,000.

DOBBS: The President holding the news conference just hours after Republican Congressman Jim Leach took the House floor charging that federal officials tried to cover up evidence that suggested the Clintons had benefited from savings and loan fraud. Well, my guest today says the President has a lot more to worry about than Whitewater. My guest is Paul Krugman. He's the author of Peddling Prosperity and one of MIT's brightest minds, once a big supporter of the Clinton administration but who now says he's horrified at the way the President has handled the economy, in particular international trade. Paul, good to have you with us.

PAUL KRUGMAN, Author, 'Peddling Prosperity': Thank you. I'm glad to be here.

DOBBS: The- this administration has taken on the issue of international trade straightforwardly. What is it that you think is wrong here?

Mr. KRUGMAN: The scary thing about the Clinton administration on trade is the way that it militarizes the issue. If you look at the rhetoric of administration people, if you look at the way that almost every confrontation with Japan is described, it's as if international trade was some war that we had to win. That's a really bad attitude, that's a misunderstanding of what it's all about, and it's very dangerous for the world economy.

DOBBS: The militaristic, the violent metaphor of war- that's one that's shared, however, by a number of governments, certainly, including the Japanese. I've heard people from MIT and I've also heard people from the Ministry- the Foreign Ministry use much the same-

Mr. KRUGMAN: Well, it's a little bit- there's no line that says that- you know, saying that we should be protectionists because other countries are is like saying that, because other countries have got rocky coasts, we should mine our own harbors. I mean, this is not a sensible policy. Just because there are some Japanese who do things- you've got to remember that the main victims of aggressive trade policies are your own citizens, not the foreign country.

DOBBS: I was going to ask you where does this metaphor lead one?

Mr. KRUGMAN: Well, it leads you into the feeling that we've got to win some kind of conflict at whatever cost, that we're going to make the Japanese tear down whatever barriers we feel we see there, deliver the results that we want or else, and when you're dealing with another country which is a real country- I mean, the Japanese are not some imaginary place that we can bully around. They're a real country where domestic politics rules just as it does here. When you confront a country with that kind of ultimatum, you're running a very high risk that they're just going to say no and that you're going to end up being forced to- either to follow through on your threats or back down in a way that's very embarrassing.

DOBBS: Well, let's talk about where we are now. This administration- and I can't think of anyone- any administration that's come close to it in terms of the heightened, if you will, rhetoric concerning trade, particularly vis-a-vis the Japanese. Where does it lead us?

Mr. KRUGMAN: Well, I mean, what I- my betting is still that the Japanese are going to do some economic reforms that they should do on their own account and that we're going to do-

DOBBS: But they are doing them.

Mr. KRUGMAN: Yeah, and that we're going to declare victory and pull out. That's certainly what we ought to do, and I think that's probably what we'll do, but there's a pretty substantial risk that we're going to look at the Japanese reform package and say, 'This is not enough,' and we're going to say, 'OK. You've got to import so much. We're going to demand you take another $20 billion of our goods,' and the Japanese will say, 'Hey, you can't treat us like that,' and then we're going to start a spiral of retaliatory trade actions.

DOBBS: Is it even practical, though, to think about, Paul, retaliatory trade actions in this day and age? So much of this economy, particularly in terms of consumer goods- those goods are Japanese. Our capital flows seemingly without interruption to Japan. I mean, that's really unthinkable, isn't it?

Mr. KRUGMAN: Unfortunately, it's not. In the long run, technology is going to make this an integrated world economy, whatever we want, but as my favorite author, John Maynard Keynes, said, 'In the long run, we're all dead.' The world economy, remember, was a very integrated place even, you know, in the year 1910. A lot of international investment. Almost as much international trade relative to the size of the world economy that there is now. That global economy was killed by protectionism between World War I and World War II. It can happen again. Politics can set back the clock on the world economy for 50 years at a stretch, and it could happen.

DOBBS: Why is it that you think the Clinton administration is pursuing what you see as wrong-headed policies, certainly within the rhetoric defining those policies?

Mr. KRUGMAN: Well, what I'm afraid is it's a- is that it's an honest, intellectual conviction on the part of the President, that as I- for me, the low point came when I saw President-Elect Clinton, actually, brandishing his copy of Lester Thoreau's Head to Head and saying, you know, 'I'm focusing like a laser beam on the economy, and this is how I'm doing it.' That showed to me that he really believes that- he doesn't know the difference, and he thinks that that kind of fun but inflammatory rhetoric is the real thing.

DOBBS: When he was waving Lester Thoreau, also from MIT- Lester Thoreau's book, he also had, it seemed at least from his campaign rhetoric, the idea that Japan and Germany were both more productive economies. He held them up almost as a model to which the United States should- we've seen that sort of thing go away from his at least public statements.

Mr. KRUGMAN: Well, yeah. In a way, that's the wrong question anyway, right? Suppose that they're doing better. That doesn't mean that we're in a war with them. It might mean that we have something to learn from them, and we do. We always have something to learn. We can learn from other countries' failures as well as their successes. But, sure, the idea that the Japanese were 10 feet tall and the Germans were 12 feet tall just doesn't stand up in the light of what's happened.

DOBBS: OK. Paul Krugman, thank you very much, and thank you for a very interesting book.

Mr. KRUGMAN: Thanks a lot. Thanks.

DOBBS: Well, coming up next here on Moneyweek, skeptics of the information superhighway questioning multimedia hype. That's next here on Moneyweek. Stay with us.

[Regional phone giant Ameritech announces plans to cut another 6,000 jobs by the end of 1995.]

[Commercial break]

Originally broadcast, 3.26.94