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Paul Krugman
Columnist, The New York Times; Professor of Economics and International Affairs, Princeton University; Author, The Great Unraveling
Answers to Written Questions from the Floor:
Q: You have articulated the fact that we may be headed toward an Argentinean-style catastrophe. How strongly do you feel about that prediction, how do you defend it, and when do you see the collapse hitting the U.S. if we continue on the same course?
A: I still think of my role at The New York Times and all of that as not being real life. In real life I do international economics, and crises is one of my things. I actually invented currency crises, not the thing but the academic field, 24 years ago. I'm kind of used to what the numbers look like for countries that are on the verge of a breakdown, and you look at a couple of numbers. You look at how big is the deficit relative to the economy the budget deficit. You look at trade deficits you say how big is the trade deficit relative to the economy? If you look at the United States, guess what? Our numbers are fully world-class for that. We have a budget deficit and a trade deficit as a share of the economy both that are bigger than Argentina before the 2001 meltdown or Indonesia before the 1997 meltdown.
That doesn't mean that it's about to happen. Advanced countries get the benefit of the doubt. There hasn't been an Argentina-style thing or an Indonesian-style thing in an advanced country yet, even though there have been periods when other advanced countries have run budget deficits and trade deficits as big as we're now running. Investors believe that advanced countries are politically mature. They can get their act together; they may have periods of irresponsibility, but they will come back. As long as it's plausible that you're going to turn back from the brink, markets give you breathing room.
Politically, we aren't actually that kind of country any more. There's absolutely no sign of the kind of political realism and willingness to compromise that would make it possible to close these gaps short of a crisis. One of these days the markets are going to wake up to all of that.
Bob Rubin, it turns out, has signed on to the same view, not saying that the crisis is going to happen, certainly not that it's going to happen next year, but that this is the big risk. Bob Rubin is the calmest man I've even met, with a lot of experience in markets, so it's just a little extra credibility to that. Do a straight-line projection, a realistic one without the sunsets, of what's going to happen to the U.S. budget, and what you've got is a debt burden that rises for the next ten years and then explodes because the baby boomers start to place demands on the system. This is not sustainable. Something's got to give, and when it gives, it can either give in the form of wise politicians doing what's necessary for the country, or it can do it in the form of all hell breaking loose and then something has to happen and that's, I'm afraid, the way it's going to play out.
Q: You can't endorse anyone, but do you see any good things in the Democratic economic platforms?
A: All of the Democratic candidates are, at any rate, more sensible than the policies currently being followed. They're all calling for a rollback of the upper-income parts of the tax cuts, which is a necessary step. The federal budget is out of whack by about 25 percent of federal spending. That's taking into account the fact that as the economy recovers, revenue will rise but also taking into account the fact that we have the looming obligations to the baby boomers. To close a 25 percent gap, you can't do that by nickel and diming clearly wasteful spending programs. You can't even do that by being nasty to powerless people, which is the current plan: make veterans pay more for drugs, cut housing vouchers. There's no significant amount of money in there. The only way to close it is either to have a large increase in taxes or drastic cuts in the core programs of the U.S. government, the places where the money really goes. The U.S. government this was a description by the undersecretary of the treasury is a giant insurance company with a side business in national defense. Defense, Social Security, Medicare, Medicaid and interest on the debt are the overwhelming bulk of what the federal government spends on.
It's hard to imagine bringing it under control without recapturing eventually more revenue than the Bush administration gave away. All the Democrats are making a step in the right direction. I also don't think that any of them is being fully realistic. Their programs are sort of halfway between what's actually happening and what will eventually be necessary.
Q: We've been seeing the dollar make significant changes against the euro and other currencies. Your take on where we're headed how long before we need to be bailed out by more than the Asian countries.
A: Early September, the dollar was weaker than it had been but hadn't moved. People would ask me about the dollar, and I'd explain about the trade deficit and how the markets clearly weren't taking into account all of that, and that the dollar would have to plunge. People would ask, "When do you think this is going to happen?" I'd say, "Based on my analysis, about two years ago."
In Road Runner cartoons, Wile E. Coyote always runs off the edge of a cliff about five steps, then notices there's nothing under him, and then pshew! The dollar is now having its Wile E. Coyote moment. The U.S. is importing vastly more than it exports. U.S. bonds do not offer significantly higher yields than euro bonds. Eventually, given those trade deficits, the dollar has to fall. Since you're offered no reward against that future fall, gotta get out of dollars now. The only mystery is why it took so long. The only things putting a bottom on this plunge right now: European economies are weak, and so the strengthening euro itself makes Europe look like a worse investment; plus, the Asian central banks, the Japanese and the Chinese, are still buying dollars. At some point, the central bank chairmen in China and Japan are going to say, "We're taking some pretty heavy capital losses here. Should we at least diversify into euros?" At that point it's going to be a much bigger fall. The Europeans cringe at the thought, but when you start to do the numbers, you really start to talk about a pretty big fall, and eventually a fall against the yen and the yuan as well.
Q: In the event that we get to that point, who might be a bailout country that will come to our aid?
A: Nobody has the resources, and nobody has the desire, to be honest. We don't have a lot of I'm sure the Bulgarians will do all they can to help.
Q: What role does the Congress play in all of this?
A: The House is run by one party with an iron fist and with things that come very close to violating the rules of democracy. The Medicare bill lost in the House vote, but they refused to close the session. They just kept it open and kept in open and kept on lobbying people apparently there are credible accusations that bribes were offered on the floor of the House until finally they were able to pass it by one vote. The House is run by Tom DeLay. The House is part of the machine. The Senate, unfortunately, is becoming more like that. People have this image, which I guess was once true, of advise and consent, and there was more play, but there isn't now. There are a clutch of senators considered centrist now. People now considered on the left are in the position formerly known as the center. I mean that literally. Try and find any way in which Tom Daschle is more liberal than Tip O'Neill. There are senators in the middle who occasionally talk about trying to stop something, but so far every single time they've buckled under the pressure.
Q: Where do you think interest rates are going to be in November '04? What impact on those rates will continued deficits have?
A: The Fed funds rate is going to be about where it is. The Fed has made it very clear that they're much more afraid still of deflation than inflation; they're going to keep the rate low.
Bond rates is an interesting question. The bond market today is the way the dollar/euro rate was six months ago; the markets have simply not faced up to the reality of an out-of-control budget deficit and of a world that is becoming increasingly unwilling to finance that deficit. One of these days the bond market is going to have its Wile E. Coyote moment, and at that point long-term interest rates are going to scoot up. That could happen at any moment. But, as I say, if you ask me when that's going to happen, the answer is, according to my analysis, about 18 months ago.
My guess is the big thing is going to come after November, when either we have a new administration or the investment bankers who some of whom are still saying, "We're going to have real deficit reduction measures after the election; this is all just political now" look around and say, "These people really are irresponsible." At that point it's going to be pretty dramatic.
Q: Several questions are related to outsourcing to the international marketplace, that robotics and automation are coming into the workforce with rapidity, and changes afoot that affect unions. Can you address the workforce of today and tomorrow?
A: Is it possible for us to continue to have job growth and a thriving economy with all of this outsourcing? Yes, if we have demand growing rapidly enough, which, with the right policies, we could, and we would be creating different kind of jobs. If the dollar continues to fall, that will make the U.S. a lot more competitive in a number of sectors. The real question is, What's this doing to the bargain, if you like, between capital and labor in this country? That has been shifting radically against labor, especially against non-managerial labor. This increasing inequality in the U.S. has been a long-term trend, but it seems to be accelerating, and the remarkable thing is that we are having rapid growth in the economy as a whole with no growth in wages, with the new jobs being created paying substantially less than the jobs that are being lost. I don't think outsourcing to India and China is the main factor, but it's a piece of it. The use of technology is a factor; it's just a general bargaining issue. The picture might look quite different if we still had significant unions in the private sector, but we don't, and that's one of the great changes of these past 20 years. If ever there's a serious Democratic majority, a new New Deal, one of the things it will have to do is see what can be done to restore an appropriate role of unions in the economy.
Q: People are reading about the early stages of what some may be calling recovery. They seem surprised that companies are investing in productivity increases and capitalization versus adding to employee rosters. Can you talk a little bit about why people are surprised and where you see that headed?
A: This is really out of line with previous experience. We had what we called a jobless recovery in the early '90s, and that looked like a hiring boom compared with what's happening now. At this stage in the post-'91 recovery, by this date after the bottom of the cycle, the economy was adding 260,000 jobs a month and that was a smaller labor force, so that was equivalent of more now. Despite everything you've heard, we're adding jobs at about 90,000 a month, which is not even enough to keep up with the growth in the population. It's hard to be sure exactly why this is happening. Part of it seems to be that a weak labor market means that companies, in addition to not giving wage increases, are also able to demand speed-up from their workers, so they're meeting the increased demand by working people harder. That can't go on forever, but it seems to be at least part of what's going on right now.
Q: Several people want to know a little bit about, in view of what you've written about the economy, how do you advise them to invest for retirement, or do you advise to invest in the stock market?
A: I'm out of the stock market, and I've been staying out of the stock market even though it has gone up lately. Somebody said that the scariest words you can hear when people are talking about the economy is, "It's different now." The Nasdaq is now valued at about 38 or 39 times earnings, and it seems that we haven't got the bubbles out of our system yet. You ask me what should you be in. I'm short in bonds that is, I've taken out a fixed-rate mortgage. But beyond that, I don't have any really great advice.
Q: Who is your most articulate critic?
A: J. Bradford DeLong at Berkeley has the best economics Web site in the universe (econ161.berkeley.edu), and when Brad says I'm wrong or I'm overstating the case I take it seriously. But he's largely on my side. I have a lot of crazy critics. We all would like to believe that there's a good, honest discussion between reasonable people going on somewhere, but there's very little of that in America these days.
Q: Have you been optimistic, and, if so, when, in what period?
A: I was pretty optimistic in the late '90s. I thought the stock market was overvalued. I did write a book called The Return of Depression Economics, but it wasn't the return of depression. Let me tell you the best thing that's happened in my working lifetime: When I was a graduate student, I thought of doing development economics, and I didn't because I didn't have the courage, because it was too depressing, because development economics was really non-development economics. There had been no success stories, no countries that had made it from Third World status to First World status since Japan in the late 19th century. That's changed. There are now a number of success stories.
Q: Have you ever considered running for political office?
A: I'm short, I've got a beard, I don't remember people's names. Some people have asked, if someone on your wavelength wins, would you take public office? Which is a more realistic question, and the answer is no. I think I don't have the temperament for it, and I do more good where I am.
