The Worldly Philosopher

More and more I found myself speaking very uncomfortable truth to power,” writes Paul Krugman in the introduction to his new book, The Great Unraveling: Losing Our Way in the New Century. “Why me?”

The Guardian of London has called the Princeton economist and New York Times op-ed columnist “President Bush’s most scathing critic.” To The National Review Online he is “the most dangerous liberal in the country.” A vociferous group of Internet vigilantes poke and prod at his every word, as if they were looking for killer microbes. “These days I often find myself accused of being a knee-jerk liberal, even a socialist,” Krugman writes. “But just a few years ago the real knee-jerk liberals didn’t like me at all—one magazine [The American Prospect, September 1996] even devoted a cover story to an attack on me for my pro-capitalist views, and I still have the angry letter Raph Nader sent me when I criticized his attacks on globalization. If I have ended up more often than not writing pieces that attack the right wing, it’s because the right wing now rules—and rules badly.”

While contributing to Fortune and Slate in the 1990s, Krugman showed a flair for writing about business and the economy in ways that appealed to a wider audience. In January 2000, just as the economic boom was about to crash, he began writing for the Times. A fierce critic of the tax cut proposed by then presidential candidate George W. Bush, he discovered that he was writing more and more about politics and has gone from writing about corporate governance scandals and corporate cronyism in Washington to writing about the effect of corporate cronyism on U.S. policy in Iraq. “[O]ptimists who expect the administration to get its Iraq policy on track are kidding themselves,” he wrote recently. Officials in the Bush Administration are “allowing Iraqi reconstruction to languish and the disaffection of the Iraqi public to grow, while they steer choice contracts to their friends. What makes you think they will ever change their ways?”

Ironically, despite the overwhelmingly bleak picture that he describes in his columns, Krugman remains something of an optimist himself. The Great Unraveling contains an introductory essay that outlines the “revolutionary power” of the radical right that “now effectively controls the White, House, Congress, much of the judiciary, and a good slice of the media,” and would like nothing more than to turn back the clock to a pre-FDR, pre-New Deal America, with a wide disparity of income and no viable safety net. He concludes that introduction by saying that he has “a vision—maybe just a hope—of a great revulsion: a moment in which the American people look at what is happening…and put a stop to this drive to destroy much of what is best in our country.” While on book tour in Ottawa, Krugman recently spoke to the Observer by phone. The following is an excerpt of the interview:

Texas Observer: You’ve written, as you say, a pretty damned depressing book.

Paul Krugman: Basically what I’m saying in the book is that the problems are all political. On the economic side America is a rich country with low taxes compared with other advanced countries. There’s lots of resources, the economic problems can be solved just given some political will and reasonableness. I don’t think the public is as crazy as the leaders. I think a lot of what’s going on is because the public is being misled. So, what we hope for is the public coming to understand that patriotism and good will have been abused. It really would take nothing more than a general public realization of that and it will all be pretty easy to solve. Of course that’s a pretty steep hill to climb. What we need is another Franklin Roosevelt—and another 1932 election.

The introduction is really aimed at liberals, moderates who still don’t understand the seriousness of what’s going on. People who don’t want to go back to the America of Herbert Hoover or William McKinley. The trouble I have is that people who share my values often have a hard time sharing my concern because “It’s America. Really bad things don’t happen here. You don’t really have drastic radical movements taking over the country.” It’s been apparent to me for some time we’re really talking about some radical anti-American people who are now running Congress and the administration. It isn’t even a case of there’s a conspiracy out there and you don’t see it. It’s out in the open, but you don’t want to see it because that’s not the way things are supposed to be. So when Tom DeLay says something really very extreme, liberals and moderates discount it and say, “He doesn’t really mean that. He doesn’t really intend to go through with what he’s talking about.” In fact he does. The most important step in facing up to what’s going on in the United States is realizing that these people really do mean what they say.

TO: In his New Yorker review, John Cassidy says that you’ve been “radicalized” in the past five years. Do you agree with that?

PK: I haven’t become radicalized in terms of what I want in terms of policy. I’m moderately liberal on economic policy and very liberal on social policy. I don’t think my views have changed much since The American Prospect said I was too conservative. I have become radicalized in the sense that I’ve become much more aware that America as I value it is in real danger. I’ve gone from simply saying, “We have policy disputes,” to saying, “Look, we’re not just talking about the wrong ideas, we’re talking about people who lie a lot and abuse their positions of power.”

I realized that we were dealing with something off the charts back during the 2000 campaign when Bush came out with his Social Security privatization plan, which doesn’t sound like a very exciting thing to get radicalized about. If you know anything about Social Security, you know it isn’t really an investment fund, it’s a system where each generation pays for the previous generation’s retirement. When Bush came out and said, “Well, we’re going to let you invest your own money,” I wanted to say, “And you’re going to replace those funds how?” And there was nothing. Then I realized that we actually had people who were prepared to say that two minus one equals four and run with that. Then the whole economic policy program during the 2000 campaign and up through the first eight months of 2001 told me that we were dealing with very dishonest people. The sheer unscrupulousness didn’t became clear until after 9/11, those few months after 9/11 when overwhelmingly the mainstream media was lionizing Bush. Meanwhile I was tracking actual policy and saw outrageous exploitation of the event. Those were the darkest moments; that was when I really felt that we were dealing with a truly Orwellian situation.

TO: In a column published soon after 9/11, you warned that this was going to happen. What was it that you heard or saw right then?

PK: Literally less than 48 hours after the attack Bill Thomas, [Chairman of the House Committee on Ways and Means]—the guy who writes tax legislation—was trying to use terrorism as a reason to sharply reduce the tax rate on capital gains. Of course we’ve basically gotten what he wanted in this most recent tax cut, but he was trying to do it right then—80 percent of the gains going to 2 percent of the population. Right then and there you had political exploitation on a crass level. We now know that on the foreign policy front it was even faster, that literally the buildings were still burning when they were out there trying to say, “Well, this gives us the excuse we need to attack Iraq.” But what I got was that within 48 hours there was an attempt to turn 9/11 into a windfall for rich people. I had congressional staff contacts who were telling me what was going on. I don’t do very much inside reporting. Everybody in the Washington press corps must have known all about this, but it wasn’t something you were allowed to report.

TO: What do you mean?

PK: Everyone must have had people telling them what was going on on Capitol Hill. I’m sure many people in the Washington press corps were hearing that the Iraq hawks thought that Christmas had arrived, but it was a story that nobody wanted to report.

TO: You’ve also said that journalists are uncomfortable with the fact that the president lies.

PK: It’s a very hard thing to say. Even if it’s staring you in the face. Although it is interesting that they didn’t have much trouble saying that about Clinton, but that’s partly because there are a lot fewer liberal attack dogs who will go after you if you say that about a Democratic president. Also, of course, journalists find it much easier to talk about sex than to talk about war or the budget.

TO: During the 2000 presidential campaign, you weren’t allowed to say that Bush was lying.

PK: It’s one of those funny things. Howell Raines was vilified for his supposed liberal bias. The truth was that was really the only bad censorship I’ve gotten from the Times—I wasn’t allowed to use that word. I could say, “Things don’t add up,” or “This doesn’t seem right,” but I couldn’t actually say “They’re lying,” or any close synonym thereof.

TO: For journalists to have a problem with saying the president is lying strikes one as appallingly naïve.

PK: Well, I have very little insight into what’s going on. I don’t have an office at The New York Times. I could but it wouldn’t make sense. I actually haven’t even gotten around to getting myself a pass to The New York Times building because I’m only there two or three times a year. I’m off in a different environment, so I don’t have any sense of what’s going on. Everyone must know that there’s a lot of dishonesty but it’s uncomfortable to talk about.

TO: You worked on the staff of the Council of Economic Advisors during the Reagan administration.

PK: Martin Feldstein, a Harvard professor was brought down to be chairman of the Council. He wanted some whiz kids, smart young academics, to work with him. He brought down a bunch of people, many of them registered Democrats—all for non-political positions. The two senior people who were not on the Council but on the staff were me on the international side and Larry Summers [president of Harvard University, former treasury secretary] on the domestic side. Both of us registered Democrats, both clearly not friends of Reagan. But it seemed like a chance to go and see what it was like in Washington, make some difference. It was okay in that sense. It does look funny. Now people say, “What, you were in the Reagan administration?” But it wasn’t a political statement.

TO: What did you learn by working there?

PK: Mostly you learn not to have too much respect for senior people in the government. I would go to cabinet-level meetings as the guy sitting behind the guy at the table—passing out slips of paper reminding the boss of something that ought to be brought up. I also went to much lower-level meetings, which were pretty good. These are long-time civil service people and they were pretty good people. At the high-level meetings they had no idea what they were talking about. There were incredibly dumb conversations. They were pounding at the table over things that were just completely misconceived.

The Secretary of the Treasury [Donald Regan] was known to economists all through the government as Dumb Don, because he didn’t understand basic economics. But I think it’s actually stood me in good stead in my later journalistic career, because I know that there’s no point at all, if I’m trying to do policy analysis, in trying to interview the Secretary of the Treasury or the senior officials. They’re the people least likely to understand what’s going on. Primarily I get my stuff from people not in the government—a lot is from think tanks in Washington. It’s almost all in the public domain. There’s a role for guys who have sources who whisper in their ear, who give them classified documents and all that, but no one expects me to be any good at that.

TO: “Bait and switch” is how you’ve described Bush’s tax policy. How bad is it?

PK: We were sold tax cuts initially because we had this budget surplus: The government’s taking too much of your money and we’re going to return it. It was both the pretense that this was affordable and that this would benefit ordinary middle- class Americans. In fact, the tax cut wasn’t affordable. It was obvious even in 2001 that the first Bush tax cut was not going to fit inside a responsible budget. It was also obvious that the bulk of the benefits were going to very, very affluent people. Nonetheless, it went through and then in 2003 Bush used the brief illusion of triumph in Iraq to push through another set of tax cuts before telling us, “Oh, by the way here’s $87 billion we forgot about.” So, in both cases, bait and switch. The federal government is running around 25 percent short of the revenue it needs to provide the programs and services we expect. That’s not a hard number, but that’s a best estimate. That’s a lot. Since large parts of the budget are not movable—we’re not going to get large cuts in defense; we have to pay interest on the debt unless we have a real full-blown financial crisis—what you’re looking at is a revenue base that’s just radically short of what we need to maintain the programs that we’ve all counted on for the past 70 years. Not all of that is due to the Bush tax cut; we had something of a hole and Bush just dug it deeper.

TO: And where are the Democrats who are voting for this stuff? Voting for these cuts and the war with Iraq?

PK: I probably don’t know more than any average concerned citizen who tries to do some reading. But in 2001 they bought into the view that there was lots of money and they just didn’t want to stick their necks out by being against it. In the run-up to the Iraq war there was a combination of naivete and cowardice. To some extent people in the Democratic Party just couldn’t bring themselves to believe that an American administration would be making an all-out case for war without a very good reason. For me the truly amazing moment was the Colin Powell speech to the U.N. Lots of liberal pundits just folded their cards at this point. They just couldn’t believe that he would mislead them and yet everything in that speech has turned out to be untrue.

The other thing was just cowardice. If you criticized, well, of course you were accused pretty much of treason if you showed any deviation from the accepted line. It was a little bit—at the highest levels, for politicians, for journalists—it was definitely the McCarthy era. It didn’t reach down to where lots of ordinary people were being blacklisted but you certainly had that feeling among the elite.

TO: With respect to the Bush tax cuts, you’ve said that you’re “not part of the gang” and that as an economist you’re “able to see where the lies are.” But you’ve also said that you’ve had to play catch-up and didn’t realize how corrupted the U.S. corporate system had become. How do you explain that?

PK: There’s a difference between knowing how to do the arithmetic and actually havi
g done it. Look, I was naïve too. I did get letters when I first started writing for the Times saying “Corporate America is full of Ponzi schemes and some of our biggest corporations are false fronts.” And I suffered from the same problems that I think a lot of journalists continue to suffer from on many of the issues I’m writing about—that was just too hard to believe. No one mentioned Enron, but if someone had said that the company with the eighth-largest stock valuation in America is just a big Ponzi scheme, I would have said, “Oh, come on. I don’t believe that businessmen are angels, but I can’t believe that anyone would be able to get away with such a thing.” And, of course, it’s precisely because you don’t believe that it would happen, that it does happen. So I had to play catch-up. Once the scandals started to come to life, it seemed to be very unlikely that it was just going to be one or two companies. I became sensitized and started looking at other indicators.

TO: Why was it so surprising? You’ve written about all these other countries, you’ve looked at other systems—was it just the sense of “We’re different, we’re better?”

PK: You tend to believe that we’re an advanced, sophisticated country with a long history of serious regulation. All I can say was I wasn’t alone. Larry Summers was giving speeches just before he left office about how the real key to American success was our accounting system which enables investors to know how a company is really doing. In a way, I may have fallen into the trap of being so familiar with the crises and scandals abroad that I tended to exaggerate the difference between them and us and think that’s the kind of thing that can’t happen here. To hold the U.S. up as a model—as a way to see what the Indonesians were doing wrong—well, actually it turns out that we’re not that different after all.

TO: When you write about “Lost Continents,” you say that “free markets sometimes go badly wrong,” and you’re really not sure what’s happened, why things went so badly wrong in Argentina.

PK: Some of it I understood. I saw from very early on that the Argentine currency system was going to collapse. That was right up my alley and I saw that was a doomed experiment: U.S.-based ideologues had talked them into something that was going to end in grief. I didn’t expect it to crash as spectacularly as it did. What’s been disappointing is that none of the Latin American countries have gotten as much out of opening export markets as some of the Asian countries did. It does force me to rethink a bit what it is I believe about strategies for economic growth. I still don’t think that the policies of the ’50s and ’60s—inward looking development—is the answer because those policies ran to their limit several decades ago. But it’s now clear to me that the preconditions, if you like, the social infrastructure is much more important than I expected. We now want to ask, “Well, what does it take to have a South Korean style success?” Certainly it takes export-oriented growth, but it probably also takes universal, good basic education and land reform, which the South Koreans did and the Latin American countries did not. So it’s going to be a much harder task. In general I’m a lot less dogmatic—I don’t know if I was ever dogmatic—but I’m a lot less dogmatic than I was 10 years ago. If Lula decides that he needs to maintain some limited protectionism in Brazil for five or ten years for the sake of a stable environment with which to conduct other reforms, I will not go lashing out and accusing him of betrayal. I think I understand that a much more gradual approach is going to be necessary.

TO: You don’t hear that yet from the IMF, the World Bank, etc.

PK: Actually on some things you do. It’s more modest than some might hope. These days the IMF is pretty open minded toward capital controls. They’re still all for free trade, which for the most part I still am, though not as hard line as I would have been. But they have acquired some healthy skepticism about open capital markets. Not as much as you might like, but they’ve been a bit chastened too.

TO: When you look at people who demonstrate at Cancun, do you see them any differently than you did at Seattle?

PK: I think there was a big difference between Seattle and Cancun. Seattle was all about turning the WTO into a bogeyman. The WTO is just a trade agreement with a beefed-up forum for negotiating and dispute resolution. It’s not a big deal. In Cancun, what we had was a walkout by developing countries who are willing to sacrifice what might have been some gains in an attempt to make the system be what it’s supposed to be—a genuine multilateral forum that isn’t just a way that the advanced countries get to dictate the terms. I thought that the breakdown in Cancun, while a disappointment, was probably a step towards a future WTO that actually does a much better job. So, “Go Brazil!” is basically what I’ve thought.

TO: Going back to domestic economic policy, if someone were to ask you to make policy in a non-Republican administration, what would you do, given the current mess that we’re in?

PK: I actually think it’s pretty easy, in terms of turning the jobless recovery into a job creation thing. What we need right now is public spending to create jobs. A lot of it doesn’t even have to take the form of public spending, but simply staving off cuts. A really major program of aid to state and local governments would do a lot right now. Plus, we have a happy convergence that there is a lot of spending that needs to be done for homeland security. Rebuilding New York and a few other worthy causes would be job creating. So, a real shift away from tax-cutting towards job-creating, public spending is what we need to get us through this period when business investment is still depressed and the economy is just not creating jobs. After that—well, taxes have got to go back up. We have to reverse all of the Bush tax cuts and then some because we really are way short of the revenue that we need. You can borrow the money as long as you have a credible plan to return to a balanced budget in the future. The 500-billion-dollar deficit wouldn’t bother me if a realistic project would show that turning into a surplus once the economy recovers. The trouble is it doesn’t, because so much of it is driven by long-term tax cuts and a collapse in capital gains revenue which is not coming back. We’re looking at a deficit that stays at 400-billion-plus for the next 10 years and then goes up. And that’s the reason that the fiscal situation is grim. There’s nothing at all wrong with running a big deficit as a temporary measure to deal with the downturn.