The Great Unraveling: Losing Our Way in the New Century

• Introduction
• Remarks
• Questions and Answers

Introduction

JOANNE MYERS: Good morning. On behalf of the Carnegie Council I would like to welcome you to what is bound to be a very interesting morning as we listen to Paul Krugman discuss his latest book, The Great Unraveling: Losing Our Way in the New Century.

There have always been columnists who have served as political barometers of their day. In the age of Bush, most would concur that Paul Krugman’s provocative biweekly op-ed columns for The New York Timesare essential reading for anyone interested in an alternative political-economic history of the last three years to that penned by conservative pundits.

Our guest began writing his column during the 2000 presidential campaign, and most of The Great Unraveling consists of the columns which have appeared in the pages of The Timesbetween January 2000 and January 2003. As he says: “It is a chronicle of the years when it all went wrong again, when the heady optimism of the Clinton boom years gave way to renewed gloom.” It is also an attempt to explain the how and why this happened, and in the end, according to Professor Krugman, it is all about leadership—incredibly bad leadership, he says—in the private sector and in the corridors of power.

Whether he is writing about the bursting of the stock market bubble, the federal budget, or the Bush Administration’s plans for privatizing Social Security, as major columnists go, he is almost alone in analyzing Bushonomics in a way that millions of Americans can understand.

Even before writing these columns, Professor Krugman was recognized as one of the world’s most eminent trade theorists and, in the view of his peers, a future Nobel Prize winner. In fact, his work in economics has won him several awards, including the John Bates Clark Medal, which is given to a rising young economist under the age of forty by the American Economics Association. In addition, The Economist has identified him as one of the top international economists, The Washington Monthly in a recent article cited him as “America’s most important political columnist,” and Editor and Publisher Magazine named him Columnist of the Year for 2002. Yet, before his columns appeared Professor Krugman was a widely acclaimed author of 200 professional journal articles and over twenty books, including Peddling Prosperity, Moral Dilemmas of a Free Trader, Pop Internationalism, Return of Depression Economics, and Fuzzy Math.

Professor Krugman earned his Ph.D. in Economics from MIT. He has taught at Yale, Stanford, MIT, and is currently teaching at Princeton, although he is on sabbatical this semester.

If you are interested in economic issues, you probably have read Professor Krugman’s columns, and if you read his columns, you probably have strong feelings about what he has and has not said. But as a guide and teacher, I can think of no one who is more qualified, more provocative, or stimulating to listen to as he talks about the economic climate of our time. Whether you agree or disagree, he is impossible to ignore.

And ignore him we have not done, for over the last several years the Carnegie Council has had the privilege of listening to him speak on at least three separate occasions, and each time he has been more informative, instructive, and insightful than the last.

Please join me in welcoming the man who is determined to help us find our way in the new century.

Remarks

PAUL KRUGMAN: A funny thing happened to me on the way to the Carnegie Council this morning. Someone recognized me on the street and said, “Keep kicking ass, dude,” which is a little bit off—I sometimes wonder how did I get from stochastic calculus to here.

I went from trying to write straight economics in my column to increasingly politicized discussion, and I went from puzzlement to bemusement to outrage and have become radicalized in the process of trying to keep track of what is going on.

These are terrible times, frightening things are happening in this country. As an economist, I was always something of an ambulance chaser; much of the work I did was on crises in various parts of the world. This time the crisis is here and that is the core of where we need to worry about things.

Some people will tell me that I am overreacting, that I am naïve in what I write—“Sure, there is a gap between rhetoric and reality in what our government does, but that’s always true”; “Sure, some decisions are politicized, they seem to be driven by political goals rather than national interest, but wasn’t that always true?”; and “Special interests seem to be carrying a lot of weight—that’s always true.” And it is true that no president of the United States has ever been a saint.

But there is something much bigger going on in the U.S. right now. For me at least, the clue that we were talking about something different came from looking at economic issues; but it became clear to me that it was much bigger than just economics.

First of all, rhetoric/reality—sure, every government says things that are not what it is doing. The critique of the Clinton years was that it was micro-policies dressed up to seem like major issues.

What is different this time around is that the stated purposes of policies are the opposite of what the policies actually entail over and over again. I first noticed this during the 2000 campaign, when then-candidate Bush offered his plan to save Social Security by diverting part of the payroll tax into personal accounts.

Social Security is a system in which, to a first approximation, each generation pays for the previous generation’s retirement. So if part of the payroll tax is diverted into personal accounts, you’ve taken away funding that is supposed to cover retirement and it weakens the system. So it was two minus one equals four.

Once you realized that they could do it on Social Security, you realized that it was happening on many other issues as well. So you had a tax cut that was heavily tilted towards the rich billed as a tax cut for the middle class and the poor. You had economic policies that were clearly not designed to deal with the recession billed as being exactly what the economy needed for the recession.

And since then we’ve seen that the habit of saying that black is white, up is down, chocolate is vanilla, is across the board, often with truly Orwellian language associated. So that a plan to open up large parts of national forests for logging is the Healthy Forests Initiative, and a plan to substantially weaken the Clear Air Act is the Clear Skies bill.

Secondly, everyone lets political issues distort policy, that’s just the way things are; you probably can’t get elected, can’t stay in government, unless you do some of that. But what we are seeing now is an absolute indifference to the actual job of governing. Again and again, whatever the problem, it is viewed not as something to be solved but to be used to push a preexisting agenda.

If the economy is slumping, “let’s have a long-term tax cut, but we’ll say that that’s exactly what the economy needs and we won’t do even the most basic things that you always do in a recession, like revenue sharing to help out state and local governments.”

“If we’ve got an electricity crisis in California, which is the result in large part of gaming of the market by generators, we’ll say that the answer is to punch holes in the Alaskan tundra.”

Finally, special interests. Sure, Chiquita Banana had an undue influence on U.S. foreign policy during the Clinton Administration. But it’s amazing right now. We all know about Halliburton and the Iraq contracts. There have been a number of anecdotes about Iraqi local firms offering to rebuild a bridge for $80,000 and the contract being given to Bechtel for $5 million instead. I’ve just received a raft of material that appears to confirm those stories.

One of the environmental issues is coal bed methane in Wyoming. It is very environmentally destructive. Possibly we should do it anyway, but certainly there ought to be some paying of the costs and the Interior Department ought to be dealing with this.

The Deputy Secretary of the Interior Department, who is ruling on the issue, is a coal industry lobbyist and still receiving checks. He has refused to recuse himself. But even if he does, his deputy is a coal industry lobbyist.

So we have an indifference to concerns about conflict of interest, a rawness that we have not seen since the Harding Administration.

I look at my own arc and berate myself for being so slow to catch on.

We need to understand that the U.S. is now governed not by conservatives, but by radicals who want to make a very drastic change in the way this country operates.

One group dislikes the welfare state, or the social insurance state. If you look at key Republican lobbyists, the Heritage Foundation, which is the intellectual headquarters, they use the terms “New Deal” and “Great Society” as terms of abuse. If you ask, “What does that mean?” New Deal means Social Security; Great Society means Medicare and Medicaid. And the most talkative of these guys is Grover Norquist, who has said that he doesn’t want to eliminate the government, he just wants to shrink it to the size where he can drown it in the bathtub.

If you ask, “How would you do that?” they always say, “The doctrine is that, rather than a frontal assault, you deprive the government of the revenue it needs to pursue these programs.”

If you do a long-term analysis—taking into account, on the one hand, that someday the economy will recover, which will bring back some of the lost revenues; but, on the other hand, that we have the overhang of the social insurance programs, which will become much greater once the Baby Boomers retire—the U.S. Government is running at least 25 percent short on revenue. The estimates of the long-run budget gap run to between 4.5 and 5 percent of GDP, which is about a quarter of the government spending.

Particularly if defense, interest payments, the basic running of the government, and the operation of the court system are untouchable, what is left? Social Security, Medicare, and Medicaid would have to be cut by between 40 and 50 percent to balance that budget.

And they want more tax cuts. Of that 25 percent shortfall, about 15 percent is due to the Bush tax cuts. So we would be in trouble anyway, but we are in very deep trouble because of those cuts. And they want more. There is no way. If we are not going to roll back all of the Bush tax cuts and then some, we have to be talking about eventually drastically undoing the legacy of Franklin Roosevelt and Lyndon Johnson.

Despite all the protestations and photo ops in the wilderness, this is a radically anti-environmentalist Administration. The end of new source review is a huge rollback of the Clean Air Act, undertaken by administrative fiat, a multibillion-dollar gift to a small number of utilities and industrial plants.

On foreign policy, there’s no question that Cheney, Wolfowitz and Perle have been agitating for the doctrine of preemptive or preventive war for a decade, and after 9/11 they got their opportunity. We’ve had the militarization and unilateralization of American foreign policy. A stunning change in direction.

And finally, what really keeps me up at night is church-state separation. You hear much more outside the regular media—overseas press and Internet – but it’s amazing how large the gap between the radicalism of what is gong on and the muted tone of discussion has been.

A large part of it is that it is simply too hard for people to understand or accept. I ran across a wonderful quotation from Henry Kissinger. His dissertation is a terrific book about Metternich and Castlereagh and diplomacy in the age of the French Revolution. He has a discussion about the difficulty that diplomats from the Austrian regime countries had in facing up to what they were dealing with: “Lulled by a period of stability which had seemed permanent, they find it nearly impossible to take at face value the assertions of the revolutionary power that it needs to smash the existing framework. The defenders of the status quo, therefore, tend to begin by treating the revolutionary power as if its protestations were merely tactical, as if it really accepted the existing legitimacy but overstated its case for bargaining purposes, as if it were motivated by specific grievances to be assuaged by limited concessions. Those who warn against the danger in time are considered alarmists. Those who counsel adaptation to circumstance are considered balanced and sane.”

That captures the state of mind of many moderates and liberals in the U.S. right now. They don’t want to believe, even though the radicalism of the people in charge is not particularly hidden.

A little over a year ago, I wrote a column about Representative Tom Delay, who has said that he is in office to pursue a biblical world view, that he went after Bill Clinton not because of anything specific but because he believed that Clinton didn’t share that biblical world view. After the Columbine School shootings, he called a press conference to say that the reason that things like this happen is because we teach evolution in high school.

After I wrote that column, I got snippy letters from liberals and moderates, saying, “What do we care about what some crazy guy in Congress has to say?” Tom DeLay is the House Majority Leader. The Speaker is a figurehead. Tom DeLay runs Congress. This is the face of the congressional Republican Party. He is radical on other issues as well.

There is also a question about media. The media are in two parts: part of the machine, the propaganda system; the other part wants to be objective, but that’s hard, so they usually settle for being even-handed, which is not the same.

So if Bush said that the earth was flat, Fox News would say “yes, the earth is flat and anyone who disagrees hates America,” and the mainstream media, for the most part, would run articles with the headline “Shape of the Earth Views Differ.”

On top of all of that, there is a lot of not-so-subtle intimidation. News organizations and individual journalists who don’t hew to the line face harassment, some of it hate mail. You might say, “You can just brush that off,” but it’s not so easy to do.

Let me give you a real example, which I happened to co-opt just recently. Christiane Amanpour from CNN gave a rather candid interview in which she said, “Perhaps to a certain extent my station was intimidated by the Administration and its foot soldiers at Fox News,” referring to the pre-war discussion. “The absence of evidence, at any rate, for an Iraqi nuclear program or an al-Qaeda link was there for anyone who wanted to see it long before the war.”

Fox News immediately issued a statement saying, “Given the choice, it’s better to be viewed as a foot solider for Bush than a spokeswoman for al-Qaeda.”

That’s the way things are working right now, and most journalists and news organizations do not make a conscious decision “we’re going to buckle in the face of that kind of pressure,” but it’s like receiving an electric shock, and so they back off.

Where are we now? Depending on which side of me gets out of bed, I have very different views.

The economic fundamentals of the U.S. situation, and even the social fundamentals, are not bad at all. Yes, we have an enormous budget deficit, but we have a huge economy—which doesn’t mean that you can ignore budget deficits but it means that you can solve them pretty easily. The U.S. is the lowest taxed of the major advanced economies. If we were to go half-way towards the Canadian level of taxation, the budget deficit would disappear. We have the technical ability to do it.

Not only do the polls suggest that the majority of the public would support reasonable fiscal policies, but also for the most part the public is fairly tolerant and doesn’t share the radical agenda that is being imposed on the country.

But if you get up on the other side of the bed, you say, “Resolving this requires political goodwill, consensus, leadership. To get past this we need another Franklin Roosevelt.” I’m hoping that there is a Franklin Roosevelt hidden inside one of these people out there, but it is not immediately obvious.

I’m feeling much more chipper now than I did four months ago. The scales have fallen from some people’s eyes and there is much more acknowledgement that something bad is going on.

Questions and Answers

JOANNE MYERS: I’d like to open the floor to questions.

QUESTION: Are you syndicated elsewhere around the country, or is the viewpoint that you are expressing limited to a small, liberal, educated fringe here in New York?

Secondly, I have the impression that the current Administration is trying to entrench a number of the actions that it has taken so that in the event of a change in administration, they would be very difficult to roll back. Does the American political system enable that to happen, or is it always possible for an incoming administration to reverse previous actions?

PAUL KRUGMAN: The second one is a political scientist’s question. You can appoint justices, you can redistrict, you can use the machinery of the electoral process to make it very hard to overturn the legislative majority of the Republican Party.

It is not legally binding, but it has always been the rule that you redistrict every ten years after the Census. Redistricting a second time, as in Texas, to lock in your electoral majority is a violation of longstanding rules of fair play. As is the California recall election.

As to your first question, the column is syndicated, and The New York Timesis a national paper with a circulation of a million. But most people don’t get their news from newspapers of any kind.

I have been on various TV shows in the last few weeks. Most people who have said, “I saw you on TV” saw me on Bill Maher’s comedy show, where I had a highly enlightened debate with my perfect sparring partner, Jesse Ventura. I managed to get in two or three words by yelling over him.

QUESTION: How would you react to the proposition that the things that you describe and which you are alarmed about are in fact what the American people want? Fox, for example, which you described as the foot soldiers of the Bush Administration, has outstripped CNN and others of its ilk in the ratings. President Bush has consistently been scoring about 50 percent—in fact, considerably more—for long periods of time in the approval ratings.

How would you react to the proposition that yes, you’re saying all of these things, but the American people actually support the Administration in pushing this course of action?

PAUL KRUGMAN: It’s a possibility. But what is ultimately most disturbing goes back to what the previous questioner said. There seems to be an effort on the part of the Administration to prevent the American people from changing its mind in the future.

Fox is a very popular news source. The Chicago Tribunehas done a survey. By their estimate, if you took all the people who watch all of the cable news in Chicago, they could fit them all into the seats in Wrigley Field. We are talking about relatively small numbers that CNN and Fox are fighting over.

Plus, Fox presents a cartoon version of reality. If you strip away the norms about what news is supposed to be, then you may be able to attract more viewers.

Polls don’t suggest that people support much of what is going on. But they don’t know. If you ask “Should we have a tax cut that delivers 40 percent of the benefits to people earning more than $300,000 a year?” people are not for that. If you ask them, “Did President Bush push that kind of tax cut?” they’ll say, “No, it was for the middle class.” They are misinformed with intent.

My favorite is estate tax. Estate tax in the U.S. has a very high minimum, even now. Before the Bush tax cuts, fewer than 2 percent of households paid any estate tax, half if it was paid by 3,000 estates a year over $5 million, so you can hardly get more elitist. But years of relentless propagandizing, calling it the “death tax,” convinced people. A plurality thinks that most people pay estate tax and that every year thousands of family farms and small businesses are broken up because of the estate tax—with never a real example, because, as far as we can make out, it never happens.

QUESTION: What is your view as to the employment prospects, around September 2004, and whether the economic recovery, if there is one, will generate any significant jobs, which may hold the key to Bush’s reelection?

PAUL KRUGMAN: According to current economic numbers, output is growing quite rapidly. We will probably have 5.5 percent GDP growth in the third quarter. The employment numbers are consistently dreary. There is nothing suggesting that any jobs are being created net.

The implication is that we have a huge increase in productivity. If you looked at one set of numbers, you’d say it looks like the beginning of a genuine serious recovery. If you look at another set of numbers, it looks like the job loss recovery continues. So it’s very hard to make sense of it.

The last time in my career that there was a big puzzle about the numbers, the resolution of the puzzle turned out to be bad data. Many of us are wondering about possible mismeasurement issues.

There are two possibilities in the numbers. One is that we are having a productivity revolution just now. We know we have been having a productivity increase since the mid-1990s, but it appears to have exploded in the last three months. The trouble is that there are no anecdotes from the shop floor telling you about that.

The other is that there is an explosion of outsourcing of services to other countries. This should be taken into account because we calculate GDP by subtracting imports. The question some of us have been asking is: but if Universal Widget Company moves its back-office operations to Bangalore, how does the Commerce Department know about it?

There is a possibility that something else is going on and that the U.S. trade deficit is even bigger than appears.

I would not be surprised to see some job creation over the next year. I would be fairly surprised to see it at a pace that would make people feel better about the labor market. But that’s purely dead reckoning in a very dense fog because the current numbers are completely weird.

QUESTION: You have decimated the Bushies. Now look the other way. Who do you see in the current crop of Democrats that meets your call for a change, and what chance does he have of getting elected?

PROFESSOR KRUGMAN: Timesrules I cannot endorse candidates. I’m every bit as nonpartisan as Bill Safire. First off, is any of the Democratic candidates being fully realistic about the budget? The answer is no, because if you want to maintain the existing services, keep the government’s current rule, without even taking on prescription drug coverage, etc., you need to roll back all the Bush tax cuts plus some, which nobody is saying.

All of the Democratic candidates are somewhere midway between current Administration rhetoric and reality. They are all more or less making sense.

My informal citizen’s judgment is that a Democrat will win only if he is certainly prepared to be confrontational; someone who says, “I’m like Bush only less so” will not win this election. It’s possible that somebody who says “Bush has done terrible things for the country” won’t win it either, but that’s the only way it could happen.

Given what is happening right now, Joe Wilson has said that he looks forward to the sight of Karl Rove being frog-marched out of the White House in handcuffs. If he gets what he wants, it might be a very different universe. Maybe the Democratic candidate will have a romp against the incumbent Dennis Hastert, but I suspect that’s not the way it will be.

QUESTION: We have not heard much lately about Kenneth Lay and Jeffrey Skilling and others like that. First, what connection, if any, did the Administration have with all of these CEO actions, and do you think that the regulatory system has changed anything? Has the environment of corporate America shifted in any significant way, or does that remain very vulnerable to corruption and abuse?

PAUL KRUGMAN: The Administration connection is very close. In the personal careers of Bush and Cheney themselves, you have essentially miniature versions of everything that has been going on in the big corporate scandals.

Bush’s own apparent insider trading case which was dismissed was four times as big as Martha Stewart’s. Harkin engaged in exactly the kind of accounting scams that Enron did. These guys are very much in the same universe.

The connection between Enron and Bush is very close. It was one of the prime forces behind both his governorship and his run for the White House. Why do people continue to regard Bush as an honest fellow, when his first reaction was, “I barely know Kenneth Lay,” and he backed Dan Richards for governor?

There are two acid tests to see whether you have changed the environment:

1) Executive compensation. The whole story of what happened is intimately bound up with corporate insiders against everybody else, and the explosion of executive compensation is a symptom and a cause of what happened. The question is: has executive compensation started to come back to earth? The answer is so far not at all. CEO compensation rose by double digits again last year.

The thing about Grasso is not that it happened, but that he and the NYSE thought they could get away with it. They went a bridge of $48 million too far, but it was something they thought they could do.

2) Reported profits versus what we think true profits are. There you have two measures: the National Income and Product Accounts (NIPA) measure, which gives an idea of what is happening to corporate profits overall in the economy; and then the reported profits by the S&P 500. One of the real signals of something gone very wrong is that those measures diverged radically after 1997 and they have not started to converge.

Corporate America has sounded the “all clear” and they think they can go back to slightly more discreet business as usual.

QUESTION: Early on you mentioned coal bed methane. I happen to have been drilling a lot of coal bed methane for a long time, and I try to be environmentally sensitive. Could you give me a little bit more advice on how to do this?

PAUL KRUGMAN: No. This is where you need the Interior Department. I’m not saying it is a bad thing to drill, but there ought to be both regulations and compensation. The cost of coal bed methane includes the effect on water supplies.

There should be a fee or license that pays compensation to the ranchers downstream and to the nation, which is having some natural environment destroyed. It might well be that, given all of that, it is still worth doing.

In the face of extensive protests, the place that you should be going for recourse, for an honest and unbiased judgment, is tightly connected to the industry. We should have some distance.

I’m not an environmental purist. We must have fuel and gasoline. Northeast New Jersey is pretty ugly, but you don’t want to destroy the refineries and return it to primeval wilderness. But we do not have any of the distance between the regulators and the regulatees that we ought to have.

QUESTION: When you spoke about Fox’s outreach to the public, you didn’t mention Michael Powell’s effort to extend that outreach.

Secondly, I have heard that reporters and media people have been loath to criticize because they are afraid of access. You don’t need access, but others do.

PAUL KRUGMAN: The second part is true. Particularly if you are a White House correspondent.

One of the heroic reporters is Dana Milbank at The Washington Post. The White House has repeatedly tried to get him fired as White House correspondent for The Post, because “he writes nasty stories”—not especially nasty, but they’re not fawning.

I am in a special position because I’m an economist. I can justify my existence because the economics writing I do is from information in the public domain. I’m not relying at all on insider sources, and can’t be frozen out because I never tried to get in.

I get a number of letters saying, “I’m telling my friends in the militia movement about you.” Some people have been following me, an attempt to cook up a scandal over perfectly innocent consulting work that I did before I was working for The Times.

The guy at the National Reviewonline is a full-time stalker, writes at least a column a day attacking me, so he’s got almost a three-to-one advantage on me in terms of numbers. He has been passing on suggestions from readers that somebody should throw a pie in my face on the book tour, which if that’s all it is, I welcome. Publicity is good.

On Michael Powell: it is my understanding that there have been two big steps towards effectively killing or substantially reducing the effectiveness of the media. One was the end of the Fairness Doctrine during the 1980s. The second was the Telecommunications Act of 1996.

The Powell rule change was only another half-step in that direction. It doesn’t look so big, but finally people’s ire has been aroused, which is why there was such a fuss about it.

Things that would have been regarded as completely beyond the pale are now normal.

Clear Channel’s stations were organizing pro-war rallies in advance of Iraq. They claim that it was the individual initiative at the station level and not centrally directed. Everything else about Clear Channel is iron-fisted, central control.

Once upon a time people would have said, “Wait a second, radio stations have a publicly granted license; they have to be scrupulously nonpolitical.” That’s not the way it works anymore.

QUESTION: I want to give you a one-sentence present: “To announce that there must be no criticism of the President, or that we are to stand by the President right or wrong, is not only unpatriotic and servile but is morally treasonable for the American public.” Theodore Roosevelt, 1918.

I carry it around in my wallet for occasions like this.

PAUL KRUGMAN: To give you an idea where we are right now, a quotation is now making the rounds from a wise man who said that “I personally regard those who reveal the names of undercover operatives as traitors.” The person who said that is President George H.W. Bush.

JOANNE MYERS: I thank you very much.