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LiberalOasis Interviews Paul Krugman
Paul Krugman, whose unflinching commentary has been one of the brightest lights in these dark times, hits the bookshelves this month with "The Great Unraveling: Losing Our Way In the New Century." You can order the book here.
The work combines several years of his essays -- from the New York Times, Fortune and Slate -- tied together with new material, in order to fully explain what he calls the "economic disappointment, bad leadership, and the lies of the powerful."
LiberalOasis has named "The Great Unraveling," the Book of the Month for September 2003, and on August 29, 2003, Paul Krugman joined LiberalOasis to discuss the book and the state of the economy.
LiberalOasis: What do you hope to accomplish with your latest book, "The Great Unraveling"?
Paul Krugman: I'm hoping that I can help people put it together, just pull it together in a way where they see just how badly they've been misled. How the things that are going wrong now are not just stuff that happened, but has been building from three years ago and before.
LO: Have things gone so off course that if a Democrat was elected President in 2004, that it wouldn't even be possible to fix everything in a four-year period?
PK: Certainly on the budget it has. Even a Democrat with a majority of both houses of Congress I think would find that...there was so much to be repaired that we wouldn't, as of 2008, be where we were in 2000.
Of course, the environment has also gotten a bit worse.
Think about it this way. It really took a long way through the Clinton Administration to work off the legacy that came in. I'm not saying the Clinton people were perfect, but they were certainly by and large trying to do the right thing.
But American policy in the first Bush Administration was wildly sensible and responsible compared to anything that's been happening in the second Bush Administration.
LO: Part of the Republican party-line is that the economy started to decline under Clinton. The stock market drop started in March 2000.
And implicit in that is the notion that the Clinton economy was phony -- it was just the dot-com bubble. Is that a fair criticism?
PK: No. There was a bubble. The one piece of it is to say that the budget surplus was inflated by the stock market bubble, that capital gains were certainly giving us a lot more revenue.
The huge budget surpluses of the Clinton Administration had a lot to do with the stock market bubble. They were not really a lasting achievement.
The gradual return to a balanced budget was a real achievement. But that move into surplus was the stock bubble.
A couple of things here.
Was the improvement of economic performance real? Yes. The stock market got ahead of the real economy. But the improvement of economic performance was real. That doesn't necessarily mean it was Clinton's achievement, but it was real.
Most of the improvement in the budget, but not that last couple hundred billion dollars, was a real achievement.
The thing to say is...we had tax cuts that were justified on the basis of the surplus that wasn't -- wasn't real.
If you ask, "who was it that bought into the illusions of the dot-com bubble?" It wasn't Clinton. It was Bush.
And we have had an economic policy which has not really responded at all.
OK, so we had a bubble, so there's some retrenchment. So you set about saying, "what do we need to do to bridge to economy over this difficult period?"
Instead, what we got was policies that were designed to cater to the hard-right base, and to exploit the economic difficulties, not to actually solve them.
LO: Second quarter GDP was just revised to 3.1% annual rate of growth. That's near the point where many economists say job creation will kick in.
Does that mean the economy is turning around, and Bush can credit the tax cuts for doing it?
PK: Well, it's quite possible that we will see some positive job growth.
But, I still don't see anything in there that says we're going have jobs growing fast enough to keep up with the growth in the population, let alone make up all the ground that's been lost.
And the main thing to say is: gosh, if you let me run a 500 billion dollar deficit, I could create a whole lot of jobs. That's roughly equal to the wages of 10 million average workers.
So the fact that we've managed to go from a 200 billion surplus to a 500 billion deficit, while losing three million jobs, is actually a pretty poor verdict on the policy.
Now if you say, is all of this deficit spending likely to produce some stabilization of the economy? Maybe, but that's not an achievement to be proud of.
LO: There seems to be a fault line forming in the Democratic primary, with one side Howard Dean and Dick Gephardt wanting to repeal all the Bush tax cuts, and on the other John Kerry, John Edwards and Joe Lieberman saying we should at least keep the tax cuts for the middle-class.
Is one of those strategies better than another for the economy?
PK: Put it this way. If you do the arithmetic, take the estimates of where we are on budget, we're actually very deep in the hole.
The best estimates say we got a fundamental shortfall of about 4.5 or 4.6 percent of GDP. The Bush tax cuts are actually about 2.7 percent of GDP.
So the truth is, even if we rolled them all back, we would still have a hole in the budget.
If you wanted to...keep the tax cuts for the middle-class, there's something to be said for [it]. Our tax system has gotten a lot less progressive over the past 20 years.
But that means that you're going to have to come up either with some kind of program cuts or some kind of additional revenue elsewhere.
Even with all the Bush tax cuts rolled back, we still have a long-run budget problem, though it's not nearly as severe as the one we're right now facing.
So if somebody says, "I just want to repeal some parts of it," I think it's fair to ask, "Well OK, what else are you going to do?"
LO: So in either case, it doesn't solve the entire budget problem. But is one better than the other as far as the overall economy is concerned?
PK: The question of the tax cuts and the question of the economy are not very closely linked.
Nobody thinks that we should be raising taxes, this year, now, right away. Because the economy needs to find its feet again, so you don't want to be sucking purchasing power out of the economy immediately.
We're really talking about what will happen over the course of several years, as the economy recovers.
It's not really... a question about what it does to the economy. The question is, who's got a real plan make the government solvent again.
LO: Are issues such as trade and globalization more relevant to the long-term effects of the economy?
PK: I have to say those issues -- they seemed terribly big issues a few years ago. And I'd like to imagine us back to a situation where they become top issues.
But at this point, they're really second-order.
The key thing, in terms of the state of the world right now, is that the United States has gone mad.
Let's get some return to fiscal and environmental and general governmental sanity in this country, and then we can talk about we manage globalization.
LO: Having been considered a proponent of globalization, how do you feel that has worked in practice? Has it helped developing countries raise incomes for the impoverished?
PK: It's a mixed picture...There are dramatic success stories, mostly in Asia. There's a lot of disappointment and worse, especially in Latin America.
If we ever get back to the point where we can even talk about these issues seriously, then I think we're going to have to ask: is there a way to get the good stuff without the bad stuff?
Clearly, disruptive movement of speculative capital [and] currency crises...have undermined the case for globalization a lot.
I was a pretty strong proponent of globalization. I still cling to the hopes, because all of the real movement up, all of the cases where desperately poor countries have made it into the ranks of countries with a reasonably decent standard of living have involved production for the export market.
So I'm pro-globalization in the general sense, because it seems to be the way out of poverty. But I have to admit there have been some real bad stories.
LO: Like Argentina?
PK: Well, Argentina or Indonesia have got to be the two worst. Argentina, in particular, is a tragedy.
They bought into the advice coming from Washington and New York, and had themselves a few years that looked really good, and then plunged into the abyss. So this has got to be a cautionary tale.
For what it's worth...I saw it coming a little bit before most people did, and I think it's possible to separate the good advice from the bad advice.
My dream for America would be to return to a situation in which people of decency and good will can have vicious arguments of globalization again. Right now, that seems to be a luxury we can't afford.
LO: We are seeing some talk from the Democratic candidates at least about NAFTA, that whatever help it was to the economy in the 1990s, that you're starting to see jobs being shipped away that aren't being replaced.
And so, perhaps we should renegotiate those agreements and incorporate some more labor and environmental standards for other countries. Is that the right way to go?
PK: I think you have to be very careful.
A certain amount of labor standards and environmental standards are a good thing. It's actually one of those cases where we can do good for everybody by putting it in.
But if no jobs are shipped out, then there's no gain. There has to be some rearrangement of who works where. That actually is, in a way, the point of NAFTA...
...I actually think that a lot the new questioning of NAFTA, isn't really about NAFTA. It isn't really about Mexico. It's really about the depressed US economy, the fact that we're not generating jobs at home.
If you think about it, the jobs in North Carolina, that are now being lost to foreign competition, are jobs that were once in New England, and were lost to competition from North Carolina. There is a cycle in these things.
That can sound very callous, because you say, "What about the people who lose their jobs?"
The answer is you ought to have a booming economy that creates new jobs to replace the old ones, and you also have a decent social safety net, so that people aren't that much at risk.
If we ever emerge from this tunnel of policy insanity that we're in right now, then I'm happy to have a discussion.
And I think probably we'll find that people who thought that they were bitterly opposed on policy towards international trade and globalization will discover that after seeing how many values we share, there's probably a lot more room for finding common ground.
LO: As you were putting the book together, going back over your old columns, is there anything you were surprised about? Anything you were particularly right or particularly wrong about?
PK: I underestimated. I just consistently underestimated just how bad things were going to be.
I thought, well they might blow the budget surplus, but I didn't think we were going to have a 500 billion deficit. I thought they would politically exploit September 11. I didn't think they'd take us off into an unrelated war.
My finest hour, at least in terms of seeing something that you weren't supposed to see, was the California energy crisis.
Not that I figured it out. Smart energy economists in California figured it out. I listened to them. This is not a shortage of capacity created by just the environmentalists. This is market-rigging on a grand scale, and so it has turned out.
LO: Is there anything we should be learning from that in regards to the recent blackout?
PK: Yeah. It's a little different. Although some people are floating conspiracy theories about the blackout, I haven't seen any real evidence for that this time around.
What's definitely true was that this thoughtless deregulation led to underinvestment in the grid.
We had a system that gave these regulated monopolists responsibility for the whole ball of wax. And so, they maintained power lines along with everything else.
We then took that system, and deregulated the power plants. It's just not possible to deregulate the grid. But we left that part -- it was nobody's responsibility anymore, no incentive to make sure it worked.
It's caused by deregulation. The California crisis was an actual abuse of the deregulated system by the companies. The blackout wasn't that kind of thing. We don't think that there was anybody artificially generating a crisis.
But it was another failure of deregulation because people didn't think through how this system was supposed to work...
...Deregulation in this whole industry is a very tricky business. It's something that could work.
If you had a combination of state-owned or heavily subsidized transmission network, and then competition at the power plant level, coupled with a very alert, aggressive regulatory agency that was prepared to crackdown on anything that looked remotely like the California situation, then this thing could work.
It doesn't seem to me that we're going to make it work.
LO: Is it something that needs to work to have an efficient, inexpensive power delivery system?
PK: We know how to run a power system. We have a model that more or less worked. It had some inefficiencies. But this is really a case where an ideology of deregulation led us to fix something that wasn't broken.
And it's a mark of how powerful our ideology is right now, that people regard it as inconceivable that we could go back to anything like the old system.
But I have to say, this new system that we've adopted doesn't seem to be functioning.
LO: In the intro of "The Great Unraveling," you mention how you came across an old book by Henry Kissinger from 1957 that you believe helps explain what's happening in American politics today. How so?
PK: What Kissinger told me was not so much what the people running the country are doing, as why it's so difficult for reasonable, sensible people to face up to what it is in fact dead obvious.
He talked in very generic terms about the difficulty of people who have been accustomed to a status quo, diplomatically, coping with what he called a "revolutionary power."
The book is about dealing with revolutionary France, the France of Robespierre and Napoleon, but he was clearly intending that people should understand that it related to the failure of diplomacy against Germany in the 30s.
But I think it's more generic than that. It's actually the story about how confronted with people with some power, domestic or foreign, that really doesn't play by the rules, most people just can't admit to themselves that this is really happening.
They keep on imagining that, "Oh, you know, they have limited goals. When they make these radical pronouncements that's just tactical and we can appease them a little bit by giving them some of what they want. And eventually we'll all be able to sit down like reasonable men and work it out."
Then at a certain point you realize, "My God, we've given everything away that makes system work. We've given away everything we counted on."
And that's basically the story of what's happened with the Right in the United States. And it's still happening.
You can still see people writing columns and opinion pieces and making pronouncements on TV who try to be bipartisan and say, "Well, there are reasonable arguments on both sides." And advising Democrats not to get angry -- that's bad in politics. And just missing the fact that -- my God, we're facing a radical uprising against the system we've had since Franklin Roosevelt.
LO: Do you sense that people are starting to catch on?
In some ways for me, the low point was those months after September 11, when everyone wanted to believe in the picture of a heroic president and a noble, unified nation confronting the threat.
And I was watching the actual policies. I was in touch with people in Congress who knew what legislation was being pushed. And that wasn't what was happening. What you actually had was a cynical power grab.
I felt for a little while there like I was all alone, [that] they're all mad but me.
And now, a large number of people understand what's been going on. It's still, unfortunately, a minority. But it's a large minority. It's not a handful of voices in the wilderness.
Share your thoughts about this interview at the LiberalOasis Soapbox.
NOTE: A minor transcription error was corrected on Sept. 3, 2003.
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