A Coalition of the Elites
US economist Paul Krugman on the different prospects for the world economy, necessary reforms in Germany and his journalist battle against President Bush
[This interview is translated from the German in: Der Spiegel, 1/2003.]
Spiegel: Professor Krugman, the economic situation in the US has brightened after the slump in 2001. Is the US economy out of the woods?
Krugman: The economic situation has remained nearly unchanged for a year. Investments have hardly recovered while strong consumption keeps the economy from a downswing. The optimists always say businesses will soon begin investing again. This has not happened. The pessimists believe that consumers will scale back. This also has not happened. The US economy grows too slowly to use its production capacities to the limit. This depresses prices and profits and the number of unemployed continues to rise. The parallels to the situation in Japan at the beginning of the nineties are strong.
Spiegel: What is your economic prognosis for 2003?
Krugman: My forecast would be two to three percent growth for the year. If you ask me whether the US economy can fall into a new recession, I must say: Yes, absolutely. Can it turn upwards five percent? That is also possible.
Spiegel: The Republicans plan another round of tax cuts to propel the economy again. The Democrats are against this and point to the growing state debts. Where do you stand in this conflict?
Krugman: A high official in the Treasury Department once said that the state strictly speaking is nothing but a huge insurance company that maintains a national defense business. Thus the most rational position would be to cancel the permanent tax cuts resolved in 2001 since we cannot afford them and they run counter to the mandate of the state to meet its obligations of provision in the future. I admit this position is not easy to communicate in the political debate. This is one of the problems of the Democrats.
Spiegel: What should the government do in your opinion: simply sit and wait as things follow one another?
Krugman: If I like Bush had control over the Senate, the House of Representatives and the White House, I would firstly increase financial assistance for the states, secondly lower social security contributions and thirdly improve unemployment benefits since this money would be spent immediately. My focus would be on a relief of the middle classes and low wage earners. But what are we doing instead? The well-to-do, the economy and the investors profit from classical conservative tax policy. When one checks the proposals currently circulated by the White House, two-thirds of the benefits go to the top five percent of the population.
Spiegel: Isn't it in the nature of a tax reform that those who pay most taxes profit most from the reform? 50 percent of income taxes come from the top five percent in the American income pyramid.
Krugman: A very different calculation can be made. Consider the tax cuts for the top one percent of society. 40 percent of the $1.35 trillion of relief fell to this small group although their contribution to the tax revenue of the state is only 24 percent. This imbalance in favor of the rich is characteristic for everything that the Bush administration does. It represents plutocracy, a coalition of the elites.
Spiegel: Instead of tax relief, the German government relies on tax increases with dubious success. The economic prognoses for 2003 are corrected downwards. The unemployment rate is 10 percent. What is your recommendation in this case?
Krugman: Your conditions are depressing. What Germany urgently needs is a devaluation of the currency. However this is impossible after the introduction of the Euro. Firstly I would attempt to convince the European Central Bank to act more like the local central bank. Interest rates in Europe are clearly too high. Combating inflation should be emphasized as a goal. What else? Structural reforms.
Spiegel: Is the US a model in this case?
Krugman: If America puts too much trust in free markets, Germany has too little trust. Everything is very closely clamped from unlawful dismissal rules to closing time. What Germany lacks is a Margaret Thatcher.
Spiegel: The US prepares for a new exchange of fire against Saddam Hussein. Will a war damage the US economy or propel the economy as some believe?
Krugman: Every military expenditure increases demand. On the other hand, both Washington and the individual states are forced this year on account of the miserable budgetary situation to slash their social budgets so the net effect will be rather negative. I think the economic consequences of a new Iraq war are rather insignificant. The consequences will be expensive if the US is forced to station large troop contingents in the Gulf in the long run.
Spiegel: The year 2002 was the year of spectacular corporate bankruptcies. You predicted that the Enron debacle in retrospect could be more important for America's self-image than September 11. Do you see your opinion confirmed in hindsight?
Krugman: That the memory of scandals like the fall of Enron or World-Com has quickly disappeared from the consciousness of the public surprises and shocks me a little.
Spiegel: You also misjudged US voters. The Republicans recorded a blistering election victory in the November election. President Bush is still tremendously popular. The Americans don't seem especially disturbed by what you call a coalition of the old elites.
Krugman: I was never very good at predicting reactions of voters. One should not forget that a land preparing for a war is the best thing that can happen to a government. War always makes a good impression on television.
Spiegel: Do you really believe that the war preparations will divert citizens from the depressing state of their stock accounts? They have every reason to be furious. The government mobilizes for more effective business prospects.
Krugman: Certainly, the people find their securities accounts cut in half. But then they switch on the television, see their president with waving flags in the background and simply assume that he stands on their side. They don't want to think he is part of the system or has taken their old age savings. That the authority to which one turns for help could be a clique of robbers is a very wild idea. Psychologists describe this as cognitive dissonance.
Spiegel: You write almost weekly against President George W. Bush and his administration. If one believes your articles, a band of swindlers and liars sit in the White House who have only one goal: making the rich even richer and the poor even poorer. Do you really mean that?
Krugman: No one expects that the president is a saint. Everyone assumes that the one sitting in the White House bends a little to his or her advantage. However the extent of this administration's deceiving of the public is rather spectacular. I sometimes have the feeling that I don't live in one of the oldest democracies of the world but in the Philippines under a new Marcos.
Spiegel: Where does your government tell lies?
Krugman: This begins with the double accounting where the same billion dollars is spent for different objectives. You find this garbled association with facts, concerning the Iraq war, the actual evidence against Saddam Hussein or the close relations of government members to mammoth corporations. A model has developed that unquestionably represents something new in American policy.
Spiegel: There is relative calm after the accounting scandals at WorldCom and Enron. Do more frauds threaten?
Krugman: The present calm is probably deceptive. One need only consider the profits shown by the 500 most important US corporations listed by Standard & Poors between 1997 and 2001... The 500 S & P corporations taken as a group overstated their profits around 30 percent. Several more Enrons will be exposed and smashed.
Spiegel: Many experts criticize the Federal Reserve head Alan Greenspan for aiding and abeting the stock market bubble with his interest policy.
Krugman: Whether he could have prevented the bubble may be questioned but he never seriously made any attempt. He actually encouraged the stock market. He was one of the most prominent supporters of this boundless millennium optimism. He was the cheerleader. A central banker should never be a cheerleader.
Spiegel: The question is whether worrying about stock prices is a function of the central bank. Should it really intervene around interests?
Krugman: This is a difficult debate that is very earnestly conducted among economists today. On one hand, we know exactly how bubbles arise and what aggregate economic problems can occur. On the other hand is the question whether we really want to expand the function of the central bank. My attitude is very undecided. Both positions can be defended with good reason.
Spiegel: Did you lose money on the stock market?
Krugman: Yes, but not very much.
Spiegel: You write twice a week for the New York Times, publish books and give lectures
Krugman: I prepare for my next lecture. I am glad that I still have a career as a scholar and don't have to live from writing. Therefore I can take very different risks than a normal journalist. I do not depend on good access to the White House. I would be corrupted with everyone there.
Spiegel: You obviously manage this.
Krugman: When I negotiated my column with the "New York Times" in the fall of 1999, I thought of offering ringing comments on the peculiarities of the New Economy. Instead I find myself now as the solitary voice of truth in an ocean of corruption. Sometimes I think that I landed one day in one of those cages in Guantanamo Bay (laughs). Still I can always ask for asylum in Germany. I hope you will accept me if the worst comes to the worst.
Spiegel: Professor Krugman, thank you for this conversation.