| |
April 4, 2008
 |
|
| The Conscience of a Liberal |
Introduction
JOANNE
MYERS: Good morning. I'm Joanne Myers, and on behalf of the Carnegie Council,
I would like to welcome you to what is certain to be a very provocative morning.
Paul
Krugman is our speaker, and his book, The
Conscience of a Liberal, is bound to make you think very differently about
our political and economic future.
Ever since Paul Krugman was awarded
the John Bates Clark Medal from the American Economic Association, which is given
biannually to an outstanding economist under the age of 40, he has come to be
known as one of the more "adrenalizing" economists of his generation.
However, it wasn't really until the fall of 2002, when the marketing of the Iraq
War began in earnest, that he started broadening his criticism beyond the sphere
of economics to include that of the war and the politics that accompanied it.
Mr.
Krugman has been adamant in making his perspective of the Bush administration
and the contemporary right well-known, so much so that many liberals identify
him as perhaps the most consistent, courageous, and unapologetic liberal partisan
in American journalism today. In column after column, he has made it manifestly
clear where he stands on the state of our economy and politics.
But it
was only with the publication of this recent book, The Conscience of a Liberal,
that he has more boldly laid out his solution for reclaiming America from the
right-wing conservatives. Just as Barry
Goldwater's The Conscience of a Conservative galvanized right-wingers
in 1964 to seek a radically different relationship between government and the
individual, our speaker this morning challenges America's progressives to reclaim
the values that made our country great and calls for a new age of reform and social
programs that will take the country back from the elite ideologues and return
it to the people.
Mr. Krugman looks back to the time of President Roosevelt
and the New Deal
with reverence. He sees this period as one that narrowed the income gap and lifted
the working class out of poverty, with the result that most Americans led relatively
comparable economic lives. Our speaker traces United States history, looking at
American life during that time. He begins with the New Deal reforms that tamed
the harsh inequalities of the Gilded Age. He then moves on to the expansion of
the middle classes after World War II and to the unraveling of FDR's legacy with
the rise of what Mr. Krugman calls the "movement conservatism" that
aimed to undo the welfare state.
He finally brings us up to the present,
where today we are witnessing the reemergence of immense economic inequality and
political polarization. If, as Mr. Krugman argues, politics rather than economics
created our present-day inequality, then perhaps politics may be the answer to
the future, especially since the public now seems ready for something that will
defeat the toxic levels of partisanship and eradicate egregious economic disparity.
I
know there will be many in our audience who will wholeheartedly agree with Mr.
Krugman's polemics and others who will throw up their arms and staunchly disagree.
Still, I would like to invite you to listen carefully, as knowledge can come from
intellectual disagreement, as well as serving to reinforce your own beliefs.
That
being said, please join me in welcoming a person who gives new life to the New
Deal idea that society should help its less fortunate members and who advocates
for a new, fair New Deal, the world's most widely read economist and one of our
most influential political commentators, Paul Krugman.
Remarks
PAUL KRUGMAN:
Good morning.
I have this book, The Conscience of a Liberal, which
was published just about six months ago. Given the physical realities of publishing,
they had to pry the manuscript out of my clenched hands about 11 months ago so
some parts of it look a little different than they did when I wrote it, and I
will talk about those towards the end of the initial talk. But let me tell you
a bit about the argument of the book, basically a bullet-point description of
the argument.
It really starts with an observation that the history of
the United States, the political economy of the United States, for the past 80
years at least, is overwhelmingly about the relationship between the political
polarization and economic inequality. You might say, well, look, there are lots
of other things; politics isn't one-dimensional.
But it turns out that
it is, actually. I drew a lot on the work of political scientists, especially
Nolan McCarty, Keith
Poole, and Howard
Rosenthal, who have looked at congressional voting. What's astonishing in
their work is, you can use voting on bills to array congress people along a left-right
spectrum, which is basically an economic spectrum, and that does an incredibly
good job of predicting their votes, not just on things that are obviously economic,
but on things that are not. It's amazing that there is almost perfect predictability
of the votes in the current Congress on the Vietnam War and on Iraq War-related—actually,
politics was very different in the Vietnam era. These days you would think that
it should be possible to be an Iraq War hawk and economic liberal or an Iraq War
opponent and an economic conservative, but it basically just doesn't happen. Politics
really is very much one-dimensional, even on seemingly unrelated issues.
There
used to be a second dimension to U.S. politics, which was race. That dimension
has largely collapsed, which is actually part of the story here.
The story
that comes out of many different sources is that there is a great sort of arc
in the U.S. political economy over the past 80 years. There is an arc in equality.
If you go back to the 1920s, we were an extremely unequal society. Historians
like to say that the Gilded Age ended sometime in the early 20th century, because
there was some change in the political mood, with Teddy
Roosevelt and Grover
Norquist.
Do people know who Grover Norquist is? He's the guy who said
he wanted to shrink the government "down to the size where we can drown it
in the bathtub." That's the famous quote. But the one I like is the one where
he was asked what he wants. He said he wants to bring America back to the way
it was before Teddy Roosevelt and the socialists came in.
So there was
a change in the political mood circa 1900. But in terms of economic inequality,
as best we can tell, America in 1929 was not very nearly as unequal as America
in 1899. The Gilded Age really lasted right up until the 1920s. Then we became,
for a generation after World War II, a truly middle-class society—not, obviously,
without inequality, but with much, much less inequality. I'm a baby boomer. The
world I grew up in was one in which America was a relatively equal society. Now
we are once again in a highly unequal society, in a second Gilded Age.
That's
not an exaggeration; that's not a metaphor. Given the available data, we are back
fully to the levels of inequality of the 1920s. We are really back to the same
disparities in income that we had before the New Deal.
The other big arc
is one in politics. If you go back to the 1920s, America was a deeply polarized
political system—very harsh divisions between the parties, very little agreement.
Bipartisanship really just didn't happen. We became, for several decades after
World War II, a political system in which there was a lot of overlap between the
parties, in which there were Republicans like Jacob
Javits, conservative Democrats, and there was a genuine center in the political
sphere and an ability to get along and to forge compromises. Then we became again
deeply polarized. So now the leftmost Republican in Congress is to the right of
the rightmost Democrat.
Clearly, those two arcs move more or less in parallel.
As my political science colleagues say, there is a dance of politics and political
polarization and economic polarization.
What I found in doing the work
for The Conscience of a Liberal is, if there is that dance, politics takes
the lead. If you look at it more closely, you discover that the political changes
tended to precede and cause, in large part, the economic changes. If you want
to say how we became that middle-class society that I grew up in, it wasn't that
we gradually evolved into a more equal society because of changes in technology
and global markets and all that. It happened abruptly. Between about 1937 and
1945, America abruptly became a society with much narrower differences in wages,
much less income to the top.
Claudia
Goldin, economic historian at Harvard, calls it "the Great Compression."
It's a period when income differences are just compressed dramatically. Obviously
and clearly, it's political. A lot of it took place during World War II, when
wages and prices and other things were controlled. In fact, the Roosevelt administration
designed those controls in such a way that they had the effect of raising incomes
much more at the bottom than at the top.
But it persisted for another 30
years. Standard economics would say that when you took off the wartime controls
it would go away. It didn't happen. That's partly because the New Deal shifted
the balance of power. Pro-union legislation, minimum wages, Social Security, unemployment
insurance all vastly increased the bargaining power of workers. It's also because,
it turns out, income distribution is less "invisible hand" and more
things like social norms than most economists like to admit. There is a very strong
element of what people believe is appropriate. So we created that middle-class
society.
Then we became grossly unequal again, and the political changes
again predated the income changes. Movement conservatism—it's not actually
what I called it; it's what the movement conservatives call it. Yes, Virginia,
there is a vast right-wing conspiracy. It's more or less in the open. It's an
interlocking set of institutions. If you Google "movement conservatism,"
the first page of entries ends up being mostly me, at this point, but after that,
you start finding the movement conservatives themselves talking about, where does
movement conservatism go now?
There is a self-conscious movement. It's
built around think tanks (Heritage, American Enterprise Institute), media organizations
(Fox News and all of that), and it took over the Republican Party. Today's Republican
Party is very different from the Republican Party of the 1960s. It is held together,
in large part, by money and jobs.
One thing I like to say is that in my
other identity as an economist, I know a lot of liberal professional economists
and conservative professional economists and a fair number of professional conservative
economists, but no professional liberal economists. The jobs aren't there for
you to make a living by espousing liberal positions on economic issues—or
very few of them. There are a lot where you can be basically hired to push the
party line.
This movement conservatism emerges during the 1960s and really
gains traction during the 1970s, taking over the Republican Party by the time
that Ronald
Reagan was elected; and, in power, has done a number of things that all contribute
to this rise in inequality, not just taxes, although it is remarkable—with
a great increase in inequality, you might expect that tax policy would lean the
other way, that you might have higher taxes on people with high incomes. Instead,
of course, we have gone—back when Dwight
Eisenhower and the socialists controlled Washington, the top marginal tax
rate was 91 percent. It's now 35, and so on down the line.
Also union policy:
People tend to say that the great decline in unionization in America was the result
of global forces. As always, there is some truth to that. But most of the decline
in unionization did not have to happen. Put it this way: There is no essential
reason why a company with a million employees that does not face international
competition shouldn't be unionized. Yet Wal-Mart is not. The reason it's not is
that Wal-Mart grew to be America's largest corporation during an era when the
power of the federal government was essentially arrayed against unionization rather
than for it. So that's the reason why we have so much weaker a union movement.
If
you actually just track the biggest decline in unionization, it took place during
the Reagan years. It took place very much because employers, emboldened by a government
that was on their side, took the offensive against unions and managed to shrink
them down.
You can go through other aspects of that. There is clearly a
strongly political component. If you look at rising inequality in the United States,
it is echoed, but faintly, in Britain—but basically all of that increase
took place during the Thatcher
years—and not echoed at all in the rest of Europe. Again, the international
evidence suggests very strongly the political aspect of the rising inequality.
Now,
the political question—we say that this happened, and you might want to say,
why would this movement be able to win elections? It's one thing to say that it
has organization, that it can recruit a lot of people. But if this stuff is, as
I argue, basically bad for most people in the country, if rising inequality benefits
a small minority and hurts a much larger group, why is it that it is able to win
elections?
It's kind of commonplace to say that it does so by changing
the subject, by getting people to focus on something else. One way to say this
is that what happens is that movement conservatives win elections by focusing
on other stuff and then use that victory to focus primarily on an economic agenda.
Actually, the 2004 election was a perfect illustration of that, essentially. Bush
won by running as the nation's defender against gay married terrorists, and the
first thing he did—almost the next day after the election—was to say,
"And now we're going to privatize Social Security." That was a dramatic
illustration.
But more specifically, what are the issues that have worked
in this way? There is a great book by Tom
Frank, What's the Matter with Kansas? A terrific rant about the use
of moral-values issues and so on to win elections. It's a great book, something
that everybody who is at all interested in these things needs to read.
It's
also probably mostly wrong. I have a colleague at Princeton who has a new book
coming out, by the way, I think The New Gilded Age. Although it does have
a fair number of equations and graphs in it, it's from the politics department
at Princeton, Larry
Bartels. Larry Bartels has a paper which influenced me a lot called "What's
the Matter with What's the Matter with Kansas?" (And Frank has a reply, which,
regrettably, he did not title "What's the Matter with 'What's the Matter
with What's the Matter with Kansas?'") But Larry produced a lot of evidence
to show that the traction of these moral-values issues is a lot less than people
think. There is just not a lot of evidence that many voters were moved to vote
against their economic interests by moral-values issues.
Certainly, national
security was decisive in the 2002 and 2004 elections. But that turns out to be
really exceptional. It's hard to find any other examples when that was crucial.
What
is overwhelmingly apparent in understanding what happened to U.S. politics is
race. It just is overwhelming in the voting data and it's overwhelming when you
start to look at the narrative.
I guess one way to say this is, if you
try to understand the shift of American politics to the right, five words explain
almost everything, those five words being, "Southern whites started voting
Republican." Larry Bartels has a number, which you can pick at, but it turns
out to be basically representative. We have all of these things about how white
men have turned against the Democrats because they are weak on national security.
In 1952, in the presidential election, 40 percent of non-southern white males
voted Democratic. In 2004, 39 percent of non-southern white males voted Democratic.
Basically, nothing happened, except for the switch of southern whites.
What
that's about is just the breakup of the New Deal coalition over civil rights.
Lyndon
Johnson, when he signed the Voting
Rights Act, said to Bill
Moyers, "We've given the South to the Republicans for the rest of my
life and yours." And that turns out to have been exactly right.
To
what extent has deliberate exploitation of racial divisions been a feature of
movement conservative politics? It's overwhelming. You may have noticed that there
was kind of a flame war over Ronald Reagan in The New York Times some months
back. It's crazy to assert that he wasn't somebody who used code words to exploit
race. It's not just starting the 1980 campaign with a speech in Philadelphia,
Mississippi, where the civil-rights workers were murdered. It goes all the way
back to the speech he gave in 1964 that started his national political career,
a speech he gave on behalf of Barry Goldwater, which was full of some extraordinary—I
don't know the word to use—coldness: "We are told that 17 million people
in America go to bed hungry every night. Yeah, that's probably because they're
all on a diet." That kind of thing is in the speech.
But it's full
of going-on about welfare cheats. The famous story about the welfare queen driving
her Cadillac actually had precursors in the earlier speeches by Reagan. He never
said what color the welfare queen was, but he didn't have to.
I ended The
Conscience of a Liberal on an extremely upbeat note, because I believed that
we really are in a position to have a great change, that we are ready. The title
is a play on Barry Goldwater. Although I obviously don't agree with what Goldwater
had to say, I do admire the fact that he was able to encapsulate a moment when
American politics was about to make a great turn. I was arguing that we were ready
for that kind of turn again. Much of the work on the book was done before the
2006 midterms. I wasn't sure what was going to happen then, but I thought it was
coming.
Why would I say that this great turn was happening?
One,
if you do look at public opinion, there has been a gradually growing backlash
against inequality. It's not usually phrased in quite that way, but if you look,
there is a lot of evidence that people have become increasingly disillusioned
with a society in which most people see very little in the way of income gains
and a few people do extremely well.
The other was the declining significance
of race in American politics. It's by no means gone, but there are a couple of
things that make it less—basically, the southern strategy losing some of
its effectiveness. One is the changing ethnic mix of the United States. We are
becoming, to put it kind of crudely, a less white country—more, mostly, Latino,
but also, to some extent, Asian voters—which means that you can't quite win
elections the same way. That works against movement conservatism.
The other
is that we have become a less racist country. It's actually quite stunning to
look back at polling from the late 1970s, early 1980s, Reagan's initial triumph,
and discover the extent to which people—actually, in some ways, I think most
significant are the hot-button emotional things that are not directly political,
like, "Do you approve of interracial marriages?" In the early 1980s,
a plurality of the public still did not approve of interracial marriages. Now
77 percent think they are fine. We have changed in important ways.
For
me, the symbolic moment of the 2006 campaign was the Virginia Senate election.
S.R. Sidharth,
the Webb aide
who was filming George Allen, to apply, I'm told, to Columbia Journalism School,
had to write an essay and say, "Why I should be admitted." The story
at least is that the essay was just three words: "I am macaca."
The
fact that George
Allen went into a racist rant is not something new in American politics. Actually,
that's as American as apple pie. We have had that throughout our history. What's
new is the voter backlash against it in Virginia, which shows that the politics
have changed.
What I would argue is that the New Deal was partly a huge
backlash against conservative governance in America, but what made it stick was
the ability to deliver, the ability to deliver programs that people really came
to regard as an enormous improvement in their lives. The place to do that this
time around is health care.
I can go on at length about health care, and
the possibility of getting even a somewhat cobbled-together universal health-care
plan is something that, I believe, is tremendously important as a way of changing
the country's direction.
What has changed since the book came out? In one
way, the prospects for a real change in the country's direction have grown larger
because of the economic situation. Obviously, the New Deal was made possible by
the Great Depression. I don't think we are about to have another Great Depression—though
I'm less confident of that than I would have been a year or two ago—but it
is extraordinarily bad economic times, an extraordinarily bad economic record
for the Bush administration. It's bad in a way that kind of makes the point about
what's wrong with that style of government: Financial institutions run wild; enormous
paychecks to people who walk away with $100 million from their imploded company;
a clear failure to regulate when it would have been in everybody's interests;
and so on down the line. You couldn't have asked for a clearer demonstration of
the point about why more government on behalf of the public interest is needed.
It's really quite dramatic.
The public reaction—I just got a glance
at this morning's CBS-Times poll. Eighty-one percent believe that we are
headed in the wrong direction. It's an extraordinary thing.
So that certainly
makes the political prospects for change better.
On the other hand, the
difficulty of getting reforms has been illustrated by some of what has gone on
since the Democrats took Congress. It's not that huge an issue, but it's tremendously
symbolic. The hedge-fund tax issue is kind of daunting. There you have a loophole
in the tax law which allows hedge-fund managers to pay lower tax rates than their
secretaries. It's about $6 billion a year, probably. It should be obvious that
a Democratic Congress would move to close that loophole.
Chuck
Schumer is squeaky-clean, honest, but also worried about campaign finance.
As I understand what he has had to say on this, it's from St.
Augustine: "Oh, Lord, make me chaste and continent, but not yet."
That is demonstrating the power of money to influence even a Democratic Congress.
The
presidential election: Think about my argument and let's abstract for a moment.
I'm arguing that the public is really ripe for a populist economic program, that
race is of diminished significance in politics, which makes it less easy for the
right to play that card against the progressives. If you were going to design
a presidential campaign from the Democratic side so as to minimize the chances
of actually winning, what would you do?First of all, race is of diminished
significance, but not gone. So you would go ahead and run an African-American
candidate.- The economic issues are really playing in a populist direction.
So you would run a candidate who talks a lot about unity and has kind words to
say for Republican governance in the past.
- Health care is really essential.
So you would have a candidate who is actually kind of soft on universal health
care and actually runs Harry-and-Louise-type
ads against his Democratic opponents.
Against that, you have to say,
look, this is a guy who has enormous political talent and is an incredibly eloquent
speaker.
But I do worry a lot. I think that the likely nomination of Barack
Obama puts the Democrats in a far weaker position than I had imagined. I was
thinking about a generic Democrat running for office, and I think a generic Democrat
would easily win this election. Unfortunately, you have to pick an actual person,
and the actual person, I think, has serious weaknesses.
We can argue about
that. I guess we will really find out in November. But I have kind of a bad feeling
about the way this thing has gone, which is not about Obama being a bad guy or
anything, but it is just a concern that this is tempting fate, in a sense. The
Democrats have, in a way, gone in precisely the direction that minimizes the great
advantages they have.
So this is going to be really, really interesting.
The public is crying out for change. I have never seen the public mood as favorable
towards the kinds of reforms I would like to see—not in my adult lifetime.
So this is a real chance to make a change in direction. But whether it actually
happens, I'm a little more depressed than I was. I was ebullient when I wrote
the book. My exuberance has declined some. Still, there are real big hopes for
change.
Thanks.
Questions and Answers
QUESTION: I would like to ask you a question
about the arguments on tax policy and energy. What I have never understood is
why economists such as yourself do not use the enormous increase in energy costs
as what I believe is the correct argument against the Republicans' shibboleth
against raising taxes. You have had what I think is currently running at $1.5
billion a day of taxes on energy that are not only not going to the federal government,
they are going outside the country, by and large. So they are the worst kind of
taxes you could have. Yet the economy was absolutely sailing along until it hit
the credit crunch that has nothing to do with taxes.
Why are not people
like yourself using this fact to eviscerate the Republican argument that raising
taxes kills the economy?
PAUL KRUGMAN: That's a good question. Sure,
the energy increase is like a tax increase. Maybe I have had too much experience
of logically airtight arguments that don't seem to actually get any traction whatsoever
to believe in them.
There is this thing. Part of the conservative belief
is that the economy is incredibly resilient and is able to handle anything, except
a tax increase. You can have terrible shocks, oil prices, famine, rising health-care
costs. The market can solve that. But raise taxes, even just a little bit, and
it will be catastrophic. Why they don't think the same resilience extends to that—sure.
What
can I say? I think the problem is the resilience of false beliefs, the resilience
of supply-side economics. You would have thought that the Clinton
era, when you raised taxes, had an incredible economic boom, a gigantic surge
in revenue, would have put the complete end to the notion that raising taxes reduces
revenues and cutting taxes increases them. But it has just been shrugged off.
My
favorite quote on all these things is Upton
Sinclair: "It's very difficult to get a man to understand something when
his salary depends on his not understanding it."
QUESTION:
I'd appreciate it if you would say something about George
Soros, who has been talking about credit default swaps. He says they are $45
trillion and no one knows what's there. That sounds incredibly frightening.
One
other comment. I do think you are unfair to Barack Obama. I think if you look
at the rest of the world, where there is so much hatred for us, there is incredible
enthusiasm for him.
PAUL KRUGMAN: Let me just say a word about Obama.
I don't think "the rest of the world will love him" is a reason to choose
a president. For one thing, those things can fade very fast. What matters is what
happens in concrete policy. I think any American president who gets us out of
Iraq will immediately lead to an enormous improvement in how the world feels about
us. On the other hand, the loss of U.S. prestige from the failure of the Iraq
War is something that no U.S. president can reverse. So I don't think that makes
that much difference.
Obama is a good progressive guy, who, unfortunately,
does not seem to make a priority on some of the issues that I think are really
important. On health care, which I believe is absolutely essential, he sort of
gratuitously put in a weaker plan than what I think is necessary. Basically, he
has a chair with three legs, when it needs four. He chose to campaign to attack
both John
Edwards and Hillary
Clinton, and now just Hillary Clinton, from the right on that issue. That
has been disillusioning.
As you know, I can't do endorsements at The
New York Times. So, in principle, you don't even know which party I would
like to see win the election. But if it's Obama-McCain,
which it probably will be—90 percent will be—then I'm clearly going
to be a lot more critical of McCain than Obama.
But I do think that this
has been kind of an unfortunate turn in direction. What can I say?
On the
financial, this has been shocking. I knew we had problems. I saw the housing bubble.
I saw that that was going to burst and it was going to be nasty. It has taken
a while to get a sense of the scope of things. I have written about this a bit
in the Times, but just to repeat: What happened, it turns out—this
actually also goes back to the New Deal and the undoing of it. What made the Great
Depression great? It wasn't the stock market crash of 1929. That's much exaggerated
in importance. What it really was, was the banking crises of 1930-31, the series
of bank runs, the closures.
We responded to those by creating a set of
guarantees and regulations that protected the banking system—deposit insurance,
credit lines from the Federal Reserve, and at the same time, regulations, so that
banks didn't abuse that privilege, regulations for capital requirements, reserve
requirements, limits on the types of risks they could take, which protected us
pretty well for 50 more years.
What happened after that was a gradual evolution
of institutions and arrangements that bypassed that whole financial security framework,
so that instead of having a bank in which people put deposits, to which they have
ready access and the bank uses those to make loans, now we have something where
institutions, in particular, will park their money in auction rate securities,
where they think they have access to it whenever they need it, which are then
used to finance investments, or they park it in asset-backed commercial paper.
There are all these complicated arrangements, which are fulfilling the functions
of banking, but they are not called banks. They are not regulated and they don't
have a safety net.
It's a shadow banking system. I don't know who came
up with the phrase, but it's actually used by a lot of people now. It's a shadow
banking system that we have created, which is, in effect, a 21st-century version
of the unregulated banking system we had in 1930.
What we have been experiencing
now is something that looks like the 21st-century equivalent of a bank run. Our
image is that a bank is this marble building and that a bank run is people standing
in line and milling around outside it. That doesn't happen. Now a bank is a complicated
institution with a lot of credit defaults and default swaps and so on that is,
at least legally, based in London, and the bank run takes the place of people
all trying to get their money out.
But what happened to Bear Stearns was
basically a 21st-century bank run. This is really scary. We don't have a regular
mechanism to deal with this, and it's producing a lot of closing-down of credit,
which is very dangerous to the economy.
The one advantage we have—actually,
Ben Bernanke
said this in his testimony, I guess, two days ago. Somebody asked him, "What
protection do we have against having another Great Depression?"
He
basically said, "Well, the fact that we know that the Great Depression happened
and we are aware of the danger."
By the way, you should know that
before his demotion, Ben Bernanke was the chairman of the Princeton Economics
Department and actually hired me. I was delighted to see that he actually quoted
Herbert
Hoover's treasury secretary, who said, "Liquidate the farmers. Liquidate
the workers. Purge the rottenness from the system." We know that that's not
the right thing to do.
But this is all ad hoc. It's very scary. It's very
much on the edge. They have pulled out all the stops in the last few weeks to
try to stabilize this. The results have been mixed. The Federal Reserve has now
committed about half its balance sheet to this stuff, so it doesn't have that
much more it can do. We hope this is under control. But it's the biggest, scariest
thing I have ever seen.
Before I was writing for the Times, international
financial crises were one of my specialties. I was kind of an ambulance chaser.
I used to go a lot to Argentina and Indonesia and all that. This one is actually
much more comfortable, because I can actually commute to the financial crisis
on New Jersey Transit.
QUESTION: I found your talk fascinating,
Paul. What I missed—and you may have talked about this at the start of your
talk, which I missed—did you say anything about the impact on the upcoming
election of the Iraq War?
PAUL KRUGMAN: I didn't say a word about
it. That's an interesting question. It ought to be. If you are asking what the
greatest political crime of this administration is, it's certainly the war. Other
things—I can tell you that the administration's anti-regulation bias helped
bring about the financial crisis. I can tell you about other things. But if you
want something that is really just a grotesque violation of the public's trust,
taking the country to war on false pretenses is about as bad as you get.
Until
a few days ago, my slightly uncomfortable sense was that Iraq had receded enough
from the public view to not be decisive in the election. We can all talk about
how essentially phony the claims of success are. Basically, we haven't defeated
the insurgents; we have hired them. That's basically what has happened. But the
casualty figures are lower. It's mostly been off the front pages.
Now,
recent developments may mean that that illusion is somewhat dispelled.
I
still think that it does look as if this election is going to be principally about
economics. That may or may not be the way it ought to be, but I think it's the
way it's going to be.
QUESTION: On trade policy, we seem to be stalemated.
Could you comment on what you see ahead, regardless of who may win the presidential
election, and the significance, not just for us, but for the rest of the world?
PAUL
KRUGMAN: Okay. That's a whole other thing. I owe the final draft of my paper
for Brookings next week on trade and wages.
How deep do I want to go here?
We had a working model for making trade policy in this country. We had special
interests in particular sectors, and then we could cobble together coalitions
to hold down those special interests. We have gotten to a situation where we have
virtually free trade. The remaining trade barriers are negligible.
The
trouble is that there's a fundamental problem with trade now, which is that it
is almost certainly true that trade is exacerbating income inequality. It's not
huge. It's not by any means the primary factor, but it's certainly a piece of
it. We are importing labor-intensive products, and it is having a depressing effect
on wages. Probably, I would argue, a clear majority of the workforce is actually
worse off as a result of trade—- not all trade. Obviously, going to zero
trade is not the issue. But the growing imports of manufactured goods and, increasingly,
services from Third World countries are probably a negative for a majority of
Americans.
So why not be a protectionist? The answer, from my point of
view, is because of the international consequences. The really important thing
about global markets is not what it does to the U.S. economy, but what it does
to the economy of Bangladesh or the Philippines. It's these very poor countries
that desperately need to be able to have access to markets.
Politically,
though, how do you use that line to win Ohio?
If there is a Democratic
president and Congress, will they actually go protectionist? Will they actually
rip up NAFTA?
I don't think so. I think the international political consequences would be just
too great. But will they sign major new trade agreements? Probably not.
The
formula that Democrats in Congress have come up with is, "We're not against
agreements, but we want labor and environmental standards," which is fine,
except, realistically, it's not going to make much difference. Either the labor
standards are so weak that they do nothing or they are so strong that they are
effectively protectionist. So I think it's more of a way of providing political
cover than anything else.
I don't think there's a real solution. What I
expect is basically a standstill on trade policy, not an actual major protectionist
backlash. I suspect a lot of people on the Democratic side would just like the
whole thing to go away. So would I. I think you basically want to just keep it
back as best you can. You can't actually go—ripping up NAFTA would be catastrophic
in a lot of ways. Yet I cannot in good conscience say that NAFTA has been great
for American workers. It hasn't. So you just sort of want to not go there, if
at all possible.
QUESTION: You are the bright spot in my life—
PAUL
KRUGMAN: By the way, I should tell you that one of my great experiences was
when I was having dinner in New York and someone came over and said, "I just
want you to know I think you're great. Your column is wonderful. You're my favorite
columnist. The
World Is Flat is your best book yet." [Laughter]
QUESTIONER:
It's not the worst kind of company you could keep.
I have made an interesting
observation, although not scientific, among Democratic voters, both supporters
of Obama and Senator Clinton. That is, "If the other one gets the nomination,
we're voting for McCain."
I can't understand that. My question is,
is this a broader thing than just the people that I know? If it is correct, how
do we head that off at the pass?
PAUL KRUGMAN: If you believe the
polls right now, it's actually quite broad. There are a substantial number of
voters on each side. Most of the people I talk to think that in the end most of
those voters will come home, so that it's not as bad as it looks.
But it's
a real issue. The way this campaign has played out, not so much in terms of what
really happened as in terms of the way it has been played, has enraged a lot of
people. If you read political blogs, it's astonishing. People who ought to be
entirely on the same side—Randi
Rhodes, Air America, just got suspended because she launched into some rant
about Hillary Clinton and Geraldine
Ferraro, using unprintable language—not on air, but, as always, it immediately
showed up on YouTube.
You hear this a lot from Obama supporters. They are
just furious—"Why won't she get out?" There is this incredible
willingness to ascribe the most sinister motives to anything the Clintons do.
I'm
one of those people who believes that the whole thing about the Clintons playing
the race card is entirely invented. It never happened. It's just taking stuff
out of context and making it appear that they—and that's an incredibly vile
thing to do, to make someone who is not actually being a racist out to be playing
that.
There is a lot of resentment out of the way the whole thing has played.
I
would hope that the nominee—probably Obama, obviously; it takes a very narrow
pathway for it to be otherwise—will do something to reach out to those people.
The triumphalism—"Oh, look, we slapped down"—is going to be
disastrous, because it could turn off—well, I could go on.
One remark
I have heard from Clinton supporters is, "I'm going to vote for McCain because
I can't stand the idea of four years during which anything critical I say is interpreted
as being racist." There has really been a tremendous amount of bad blood
generated in this nomination fight, which I hope will all fade away by November.
QUESTION:
I am an unabashed admirer of yours, Mr. Krugman. I am not going to ask a question.
I'm just going to take advantage of my being here in your presence to express
my admiration for you. I think you are the only columnist that at least I'm aware
of that hasn't criticized any of the candidates based upon personality or reaction
to like and dislike of the personality. But you have analyzed their proposals
and the solutions that they offer, and have not supported a candidate, but supported
the proposals and the solutions.
PAUL KRUGMAN: Can I say a word
about that?
QUESTIONER: Am I wrong?
PAUL KRUGMAN:
No. This is right. I don't believe I have ever done that—I have certainly
never talked about somebody's laugh or their facial expressions.
By the
way, all of these journalists who specialize in the character assessment—aside
from that not being, I think, really what you ought to do, the historical record
is that they are terrible at it. I didn't write this in 2000, but it was obvious
to me that Bush, aside from having policy positions I abhorred, was actually an
ugly, mean-spirited frat boy. Why that wasn't totally obvious to everybody else
I don't understand.
You do much, much better by focusing on the policy positions.
QUESTIONER:
I want to thank you for that and for your voice, and I hope we'll hear your voice
for a long time to come.
PAUL KRUGMAN: We'll see. I hope the newspaper
survives.
QUESTION: In your recitation of the ups and downs of the
income gap and compression, you made no reference to the impact of the G.I.
Bill. I personally think the G.I. Bill was the major factor in creating the
postwar compression of the income gaps and equality. I wonder if there is any
concept that could possibly replicate what occurred as a result of the G.I. Bill.
PAUL
KRUGMAN: Oh, boy. The G.I. Bill certainly increased the number of people with
a college degree and did a lot to enhance that supply. I'm not sure, by the numbers,
how big an impact that is. I would have to go ask Larry
Katz, who does this stuff, what he says.
Put it this way: The U.S.
does under-support education. I'm not one of those people who believes that education
is the answer to all problems. But the U.S. does, in interesting and significant
ways, under-support education.
I have actually done a fair bit of comparing
of the United States to France. An interesting comparison. The picture that is
often portrayed here is that the French economy is terrible, that it's horrible,
deeply depressed and all that—of course, Rudy
Giuliani saying if Hillary Clinton gets in, we'll have British health care,
Canadian health care, French health care—French health care actually being
terrific, better than ours.
Anyway, their problems are primarily that financial
incentives cause too many people to retire early. They can't afford it. Most of
the rest, actually, is much less than people think.
What's really noticeable
is how much better they treat young people. Two statistics.
One is school
lunches. This is the very early stage. In the United States, we spend about $2.00
for school lunch, which means, of course, you have to feed the kids whatever surplus
the Agriculture Department has available. It's very unhealthy. The French spend
about $8.00. So there is an enormous difference in the quality of school lunches.
But
the other thing that struck me was, in college, it turns out that the United States
has a much higher rate of employment among young people. Many more people under
the age of 25 are employed. About half of that is because many Americans in college
have to work while they are in college. In France, they have sufficient financial
support from the government that they don't.
We have a system that actually
makes it quite difficult for kids from lower- to middle-income families to get
through college, or at least to fully focus on their studies. We are falling behind
the Europeans on college education. We think of ourselves as having lots more
college-educated people, but that is going away.
So it can't be a dramatic
thing like the G.I. Bill. Barring a full-scale war or a major depression, you
are not going to get that kind of dramatic thing. But we could certainly do a
lot to make education more accessible.
QUESTION: I just want to
draw you out more on your prescriptions for dealing with this economic downturn.
First of all, is it your view that regulation by the federal government of the
banking and financial sectors is somehow the key to coming out of this? Or is
that kind of closing the door of the barn after the crisis has happened?
In
particular, given your remarks two minutes ago about probably not being able to
do too much about NAFTA or these other trade agreements, because of our international
obligations, what other suggestions do you have, if the next administration is
Democratic in both the presidency and the Congress, for what steps they might
take that could help significantly revive the American economy?
PAUL
KRUGMAN: Regulation is not going to get us out of the current crisis. It's
what you do to prevent a recurrence. Basically, we are going to have to figure
out which parts of this greatly expanded financial system are, in fact, going
to be things that we have to rescue in a crisis. Quid pro quo: If you are going
to do that, then they have to also be regulated, with capital requirements and
so on. But that doesn't get us out right now.
What gets us out right now
is rescue operations where endangered institutions are propped up, where claims
are propped up, aid to homeowners, because that's where a lot of the losses are
coming from. And if it has to get much bigger than it is right now, then it's
going to have to change qualitatively, as well as quantitatively. If you end up
having to throw a trillion dollars into the markets, then there becomes a real
necessity to not just be handing the money out, but taking control.
People
are trying to figure out how this plays out. There is a lot of talk about what
they are calling the Nordic model. Sweden and Norway both had financial crises
in the early 1990s that were sort of comparable, in some ways, although they did
involve banks rather than these non-bank things. But, still, there are some parallels.
In both those cases, substantial parts of the banking system ended up being temporarily
nationalized, about a quarter of the system in Sweden, about a half in Norway,
and then eventually recapitalized and resold.
But if you were going to
ask, "If the current round of stuff doesn't do it, what would be next?"
the answer would be, probably—think about what happened with Bear Stearns.
Effectively, the Fed orchestrated the takeover of Bear Stearns by JPMorgan Chase,
with the stockholders not completely cleaned out, but losing the bulk of what
they had. That was thrown together. That was cobbled together at the last minute,
basically, a chewing-gum-and-bailing-wire solution.
But if you are going
to have to do multiple things like that, then take out the middle man. Instead
of having JPMorgan Chase take it over, have the federal government take it over.
That
may not be necessary. Everybody is crossing their fingers and all of their toes
and hoping that this thing will gradually stabilize. But that's where it might
ultimately have to go.
Let's hope that if we get to the point where that
really becomes necessary, it's not until next year, because I just don't think
the current crew is up to it.
JOANNE MYERS: Thank you very much
for an excellent morning.
|
|
