An interview with Paul Krugman
On Wednesday, Paul Krugman swung through town to promote his new book, “End This Depression Now!” I caught up with him at the Economic Policy Institute to talk about whether Ben Bernanke could actually end this depression, the prospect that Mitt Romney could be a closet Keynesian, and what we’ll be worrying about in 10 years. A lightly edited transcript follows.
Ezra Klein: The book is premised off the idea that the recovery has been, and will continue to be, slow. That something new needs to be done. But something you hear inside the administration is that if you step back, you can explain much of the sluggish recovery by adding together the crisis in Europe, the weather, the Japanese tsunami, instability in the Middle East, and a few other shocks. It’s been, in other words, a kind of bad luck, but it has given credence to this idea that the recovery is really off-track when it isn’t.
Paul Krugman: This has not been a surprise. It was predictable and predicted. We have all of the Reinhart/Rogoff stuff on the aftermath of financial crises. It’s a little bit funny to be invoking a lot of special explanations for something that should have been expected. And numerically, I don’t think those work. We only export 2 percent of our GDP to Europe. We’re operating 7 percent of GDP below capacity. A trillion dollars a year. That can’t be explained by these factors. The actual shape of the recovery has been basically what those of us concerned about the size of the stimulus predicted way back when.
I’m very pessimistic about Congress deciding to do anything serious anytime soon. But I think there’s more possibility for movement at the Federal Reserve. So if Bernanke really decided to pull a Professor Bernanke, if he could do whatever he wanted, how much could the Fed do? What kind of improvement in the unemployment rate could Fed policy lead to?
That’s wildly uncertain. Partly because you do see that getting credibility on that commitment to future inflation is an iffy thing. Worth trying, but an iffy thing. The great thing about fiscal policy is that it has a direct impact and doesn’t require you to bind the hands of future policymakers. And there’s the problem that the main channel through which interest rates affect the economy is housing. Are we ready for a housing boom? Maybe. It looks better than it did a few years ago, because we have less housing overhand. So it might do the trick. But it might not. I don’t really have a number on it.
Let’s talk about housing. One thing you hear there is that if the administration had done much more on housing, if it had really tried to get that negative equity down, it would have just blown a hole in the banks.
That’s okay. I don’t think it’s 1:1. But the lesson of the last few years is that somehow or another money does become available to bail out banks but not to bail out workers. So if you can do something to help workers and pay for it by bailing out banks, that’s a win.
A lot of the book is about how a certain class of economists have come to support somewhat unusual positions, like that the federal government can’t ever create jobs. If Mitt Romney is elected with the team we think he’ll have — guys like Greg Mankiw and Glenn Hubbard — will some of these economists become Keynesians again to move the needle on unemployment? Or will the positions taken in the last few years stick?
Mankiw and Hubbard have not actually abandoned their analytical positions as far as I can tell. They have left themselves an out. John Taylor, same thing. He’s got all kinds of arguments about why this particular stimulus didn’t do anything, but he’s still living in an essentially Keynesian world. But I don’t think they’re going to be calling the shots. I think if a president Romney tried to do stuff that’s more or less Keynesian, Paul Ryan would cut him off at the knees. And beyond that, I don’t think he’s got the conviction. Someone said his slogan should be “Vote Romney: He doesn’t mean any of it.” But his party means it.
But isn’t the way it would actually go is the Republican Party would say that what we need is tax cuts?
But that won’t work. Remember, they don’t like tax cuts for ordinary people. They like tax cuts for the rich. That will be very ineffectual. And they want to raise taxes on the undeserving poor.
Speaking of Keynes, are you surprised that Europe ended up so far on the other side of, so to speak, the Keynes curve?
No. I know the Germans. They’ve never believed in any of this. They’re at a point that doesn’t exist in our spectrum. Here, people are either pro-Keynesian economics and pro-strong welfare state or they don’t believe in Keynesian economics and they believe in social darwinism. The German thing is rigorous, you-must-balance-your-budget and a belief in a strong welfare state. And they’ve always been that way. Famously, there was a conference where the late Rudi Dornbusch came down with someone from the Bundesbank for breakfast and said, “and stable prices to you, sir!”
You bring up in the book how much the peculiar set of things that happened in Greece has become the frame for what’s going on in Europe. If Greece hadn’t happened — if it was just Portugal and Ireland and Spain and Italy — would we see it differently?
I don’t know. I call this the “Hellenization” of the crisis. But I suspect the Germans would have found a way to sell this as a problem of fiscal responsibility. It certainly didn’t help though. The Greeks have a lot to answer for in terms of creating a template that a lot of bad ideas have been projected onto.
Do you think we’ll have the euro zone in its current form in 10 years?
Depends on my mood. As a matter of substantive economics? It’s doomed. But some, like Martin Wolf, think that Europe’s leaders will eventually jettison their rigidity in order to save the European project. Because the European project is about much more than economics. But I just don’t know.
Do you have in your head a deficit red line or a date by which you think we need to start bringing down our debt-to-GDP level?
I don’t think it’s a red line. I think it gradually turns pinkish. I would be looking at the markets. Give me some hint in the data that we’re seeing an interest rate rise that is more than just changing optimism about the state of the economy and I’ll start to think about it. But this is not easy. There’s no systematic way to figure out where it is. If we look at countries that issue their own currency and borrow in their currency, it’s hard to find any evidence that there’s ever a red line. It turns out that Britain, when Keynes was writing, had a debt level substantially above what we have now. Japan keeps not having a debt crisis. But even if you’re worried about it, what do you propose we do? Fiscal contraction, right now, is almost certainly self-defeating.
What does a fiscal crisis actually look like in a country that controls its own currency? Because people think a lot about Greece, but it’s not Greece. Greece can’t print its own money.
Right, because if you control your own currency, you can keep rolling over the debt. So it’s actually a little hard to tell the story, but it’s not impossible. You could imagine a situation in which there is a level of debt that rises to a point where you start to think the government has a real incentive to rely on seigniorage rather than future tax collection, and that leads to spiraling inflation because of fears of future runaway money printing. You probably get an economic boom along the way because you’re in a depressed economy. But then it can go out of control.
France in the 1920s is the closest example. They came out of World War I with more debt than they could pay. It was clear there would be an incentive to inflate. In the end, the markets blew them away and the franc depreciated massively and there was inflation and roughly a doubling of a price level. That brought it under control. It didn’t go into a runaway scenario. And it did lead to a strong economy, which led them to unfortunately conclude that returning to the gold standard had helped them and they kept to that in the 1930s.
Let’s step back for a moment. What do you think we should be worrying about in 10 years?
I really think 10 years from now the signs that we’re on a runaway climate change will start to become a lot more obvious. It won’t be big rises in temperature yet, but will be enough to make people look around and say, oh my God. But by then, it will be very hard to bring it under control.
Are you a technological optimist on this?
Well, there are different kinds of technological optimists. One kind of technological optimist says we’ll spontaneously develop technologies that give us perfectly clean energy. I think so long as fossil fuels are cheap, people will use them and it will postpone a movement towards new technologies. And then there’s geoengineering, which we may eventually use out of desperation, but is full of unintended consequences and political questions. That won’t affect all countries equally. It will hurt some countries and help others. It would be a helluva thing to throw into the global situation.
I’m a technological optimist in that I think if we had appropriate pricing, we’d find it remarkably easy. The cost of getting out of rising emissions would be much lower than legend has it. But I’m not politically optimistic that we’ll do that.
So you’re an economics optimist. You think if we got the price right, we could get the technology right.
Yes. But it’s scary stuff.