Paul Krugman is with is the professor of economics and international affairs at Princeton University, professor at the London School of Economics, a nationally syndicated op-ed columnist, named columnist of the year by Editor & Publisher magazine for his column in the New York Times which he writes twice a week, and the winner of the John Bates Clark Medal, the most prized award given to American economists. He is the author of "The Conscience of a Liberal".

Thom Hartmann interviews Paul Krugman, 02 November 2007

[Thom]: Let's talk politics and economics here for a while, the intersection of the two. It has always seemed to me that economics is really the driver of politics and so often it gets ignored. In fact, people want to talk about guns, gays and God, you know, abortion and whatnot. And really the driving force behind so much of what we call politics all the way back to the founding of this country has been economic.

Paul Krugman is with us. He is the professor of economics and international affairs at Princeton University, professor at the London School of Economics, a nationally syndicated op-ed columnist, named columnist of the year by Editor & Publisher magazine for his column in the New York Times which he writes twice a week. The winner of the John Bates Clark Medal, the most prized award given to American economists. And as I mentioned, teaches economics and international affairs at Princeton University. Paul Krugman, welcome back to our program. It's been a couple of years since we've talked. It's great to have you back with us.

[Krugman]: It's good to be on.

[Thom]: Thank you. First of all you have a new book out: "The Conscience of a Liberal" and I want to congratulate you; it's brilliant. I haven't finished reading it yet but I'm well into it and a great, well grounded in history, certainly, in particular from the New Deal forward and the whole history of Movement Conservatism and just some remarkable stuff that I'd like to get into in our conversation this afternoon. We're going to have an opportunity to have a little bit of an in depth talk.

First, though, I'm curious what your take is on what happened yesterday with the Fed. It seems that Bernanke is in a corner; if he raises interest rates he throws the economy into recession. If he lowers the interest rates he crashes the dollar further and leads to hyper inflation. Are we at a point similar to what we were in the 80s when the bill came due for the Vietnam War? That the bill is coming due now for the Iraq war and we're going to see something like stagflation?

[Krugman]: OK, I'm a little less apocalyptic than that; I hate to disappoint you, but.

[Thom]: That's OK.

[Krugman]: No, look, Iraq is an outrage and it's incredible; the things we could've done with the money are: the children's health bill that Bush has vetoed, for 5 years for 4 million children would have cost 41 days in Iraq, so these are, it's an outrageous waste and we are now talking probably at least two trillion spent in Iraq by the time all is said and done. The US is a very, very big economy and, you know, so a trillion here, a trillion there and soon you are talking about real money, but still.

[Thom]: To paraphrase Everett Dirksen, yeah.

[Krugman]: Yeah, It's not, it even, the way I like to put is, as a share of the economy Iraq is still running at around one tenth of what the Cold War cost, it's running at about half of what Vietnam cost, so it's not a crippling expense; it's an outrageous expense but it's not crippling. Yeah, the economic...

[Thom]: But it adds to everything else, I mean...

[Krugman]: It adds to everything else, it's... The falling dollar does not worry me. It adds a little bit to inflation but it actually helps US exports. The fallout from the housing, the bursting of housing bubble and the sub prime stuff, that's where it's really scary because we don't know how deep that rabbit hole goes and it could be a lot and be a really big problem.

[Thom]: What's the significance of this injection of 41 billion dollars into the economy yesterday?

[Krugman]: Oh, you know, it's a question of, we're having what amounts to a slow motion non-bank bank run. You know, people are confident in their bank deposits but they're not confident in stuff that looks a lot like bank deposits; mostly institutional investors, so short short term loans to hedge fund operated stuff and you have the real problem of what amounts to a kind of run where people are afraid to lend short term, that they they're not sure they can trust the guy on the other of the transaction. And so the Fed is pumping money into the economy in an attempt to keep people, keep the juices flowing. It's very awkward, might not work if it gets really serious, but I think the answer in short is keep, public stay tuned. More likely than not it's not crippling, but the odds of something really bad are high enough to make us all a little bit sleepless at nights.

[Thom]: Well, isn't a liquidity crisis just a fancy way of saying that's what happened in 1929, 1930?

[Krugman]: 1931, actually. What we're really worried about is the, yeah, because the stock market crash was at the beginning, and the banking crisis of 1930, '31 is what really caused the Great Depression.

[Thom]: There was a liquidity crisis.

[Krugman]: Yeah, liquidity crisis, basically everybody couldn't trust banks; banks were being run, people put their cash under the mattress, and then surviving banks locked it all up in the vaults and refused to lend it out. And now we have a nice, this actually does tie in with the theme of conservative and liberal because we we dealt with all of that by creating a set of prudential regulations, government guarantees for the banking system. And all that's great except now we've had basically the growth of an unregulated financial system that does an end run around traditional banking, and although there were warnings, people told, members of the Federal Reserve board told Alan Greenspan 'hey, we've got a problem developing here', he said, 'don't worry, don't worry, markets take care of themselves', and here we are.

[Thom]: Well yeah, and that probably is in large part, can be tracked right back to 1956 when he sat in Ayn Rand's apartment and was initiated into her cult of objectivism.

[Krugman]: Yeah, he really got

an amazing amount of damage some bad novels have managed to do to America.

[Thom]: Yeah, it's really quite incredible. In fact today's Financial Times, an article about "A major US real estate appraisal company was accused yesterday of conspiring with one of the country's biggest banks to inflate home prices in a scheme that New York state officials said helped fuel the mortgage crisis.". Again to your book, "The Conscience of a Liberal". In the book you make a strong argument for capitalism in a regulated environment as opposed to laissez-faire capitalism. Isn't this a perfect example of how Greenspan and Reagan and Bush, this whole idea of just leave everything to the corporate powers-that-be, to the mythical 'invisible hand' that Adam Smith actually only mentioned once in A Wealth of Nations...

[Krugman]: Right, and in fact, elsewhere in "Wealth of Nations" Adam Smith said 'a group of businessmen rarely get together without trying to hatch some conspiracy to defraud that the market'.

[Thom]: Right.

[Krugman]: So, if you actually read Adam Smith. He, he ain't leading you where they think he does. But yeah, but look, whenever you have a large financial bubble, which we had on housing and mortgage lending, it turns out that there's a fair bit of fraud involved, and what we've actually got here is what looks like double-edged fraud; a lot of the least sophisticated lower income borrowers were misled into taking mortgages that that they really couldn't afford, and at the same time those mortgages were then repackaged into financial instruments that were sold to investors who didn't understand what they were getting. So it's, yeah, I know, what do you get when you cross an investment banker with a godfather? Somebody who makes you an offer you can't understand.

[Thom]: And that's that's exactly what's happened, tragically.

[Krugman]: Yeah.

[Thom]: In "Conscience of a Liberal" you talk about the "great compression". Explain to our listeners what the great compression is.

[Krugman]: Yeah. This is a, things you don't get taught in high school. Middle class America for about 30 years after World War II, we had a genuinely middle class society; had lots of flaws, had a lot of poor people, but most people were living in a truly middle class way. And there was a lot of fundamental equality in America. That didn't just happen. It wasn't something where just, you know, the market changed; it was created. It was created by Franklin Roosevelt and the New Deal. It was created in a very short period of time, between 1935 and 1945. That's the great compression. Not my phrase, but what economic historians call it; social security, unemployment insurance, progressive taxation, minimum wages, labor laws that gave unions the chance to organize; all of those things enhanced the bargaining power of working Americans, let them get a much better standard of living, let, hurt people who were very rich. People who called FDR a class traitor were right. He was making people of his class worse off, but made most Americans much better off and created a society which had a lot of common ground. It was an economic democracy in a way that it hadn't been before, and isn't is now.

[Thom]: Indeed, and I wrote an op ed about a year ago suggesting that we should forget about trying to roll back the Bush tax cuts; we need to roll back the Reagan tax cuts. Your thoughts on that?

[Krugman]: Well, even, there again, we can talk about exactly how it needs to be done but yeah. We need, first off, rolling back the Bush tax cuts is enough to pay for a basic universal health care scheme which is the first and most essential step. Going further on down the line, you know child poverty is vastly higher in the United States that in many other advanced countries, and the reason for that is primarily that we don't provide enough support to families with children. The sheer amount of misery, going beyond health care, that Americans can fall into is much greater than a rich country has any right to have. What does all that cost? That costs 2 or 3 percent of GDP, and that means more taxes.

[Thom]: Yeah. So we'll get into that in more detail right after the break. And that's the social safety net side of it; I mean, there's also the minimum wage side of it.

[Krugman]: Exactly.

[Thom]: You know, and the unionization side of it. We're talking with Paul Krugman, the New York Times columnist, economist, professor of economics, his new book "The Conscience of a Liberal", krugman.blogs.nytimes.com his blog.

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[Thom]: And Paul Krugman's also on book tour right now he's got a new book in fact you'll also be in my hometown, Portland, Oregon tomorrow night, won't you, sir?

[Krugman]: Ah yes, indeed, I will.

[cross talk]

[Krugman]: Bagdad Theater.

[Thom]: Yeah, you're going to be at the Bagdad Theater, yeah, and that should be a hoot. The book, "The Conscience of a Liberal". Paul Krugman, in your book you talk about movement conservatism and the rise of movement conservatism and there's an astounding quote from 1957 from the National Review, and a tip of the hat by the way to Carl Wolfson who does the morning show here on KPOJ, who brought this up this morning. In this quote they say,

The central question that emerges ...

is whether the White community in the South...

Now this is how the conservatives used to talk to each other.

...is whether the White community in the South is entitled to take such measures as are necessary to prevail, politically and culturally, in areas in which it does not predominate numerically? The sobering answer is Yes -- the White community is so entitled because, for the time being, it is the advanced race.

National Review believes that the south's premises are correct. It is more important for any community anywhere in the world to a firmament by civilized standards than about the -- demands of the numerical majority.

That is much like Russell Kirk wrote in 1953 when he talked about the necessity of orders and classes and the appearance of democracy, but essentially a ruling elite, that is the conservative world view is not?

[Krugman]: Yes it is, and in, on the next page of "Conscience of a Liberal" I quote National Review from the same year talking about what a great guy Francisco Franco was, having saved Spain from a regime that was betraying its soul -- the regime happening to be the democratically elected government. So, they're both the authoritarian streak and the, you know, and the pretty clear use of racism; all of that goes right back to the beginning and we reinvent William F. Buckley at this kind of nice fun guy in a bow tie, and that the reality is that from the beginning it's been a really harsh, you know, what you see now is if anything a toned down version of how it all started.

[Thom]: Yeah, well, if you strip the racism out, this language isn't all that different from what Alexander Hamilton was saying and what John Adams were saying at the founding of this country.

[Krugman]: I don't think that's right. I mean, they were concerned. They wanted some slowing down of the process through, you know, representative democracy rather than pure...

[cross talk]

[Thom]: But they didn't want the Senate to be directly elected.

[Krugman]: Yeah, well, you know.

[Thom]: They didn't trust the people.

[Krugman]: The point of the matter is, of course, the really crucial thing to see is that what you've got is that today's conservative movement, which now talks a lot about democracy and freedom, you know, when they were franker, when they weren't as good at -- I use this phrase I love from the British -- "dog whistle politics" -- stuff that only certain people can hear, there was a clear anti-democratic streak in the movement and remains to this day.

[Thom]: Yeah, and they speak, and only now they speak in code. You talk about how Lyndon Johnson basically blew it for the Democrats in the south by signing the Civil Rights Act, and the Republicans said, 'hey, a bunch of white southern racists -- we'll take them'.

[Krugman]: Yeah. Look, one of the real revelations I found in doing "Conscience of a Liberal" -- I didn't notice before I started doing the research -- is, once you take account of the great southern switch -- white southerners swinging to the Republicans after the civil rights movement -- there's not much left to explain if you're trying to understand why right wing politics have prevailed in this country. A stunning statistic: we all know white men have left the Democrats because of God, guns, gays, whatever. It's not true if you take the south out of the picture. In 1952, 40% of non southern white men voted democratic. In 2004, 39%. It's all the great southern switch.

[Thom]: Yeah. So Richard Nixon's southern strategy has, is still echoing with us. And, in a very real way, the sense I get from your book is that George W. Bush is simply Nixon, and in particular Reagan, following the same trajectory. He's not an aberration.

[Krugman]: That's right. Nixon actually was, Nixon was, pioneered the tactics. Nixon pioneered the southern strategy; the smear tactics, and never forget that Roger Ailes of Fox News was Nixon's media guru. But Nixon wasn't actually an ideologue -- if he believed in anything, it was just that he should be running things -- but Reagan was, and there is no, George Herbert W. Bush is Reagan's natural son. There really is not a, now the conservatives say, 'oh, he wasn't a true conservative, he betrayed, this is not true. He's exactly what the movement was aiming for all along and his failures are the movement's failures.

[Thom]: Yeah, indeed. We're having an in depth conversation with Paul Krugman. He has a new book out; it's called "The Conscience of a Liberal". His blog over at the New York Times, krugman.blogs.nytimes.com. And he's professor of economics and international affairs at Princeton University and, etcetera. Boy, your credentials are an arm long. We will continue the conversation right after this break. It's the Thom Hartmann radio program on Air America Radio. Want to drop by our live chat room, go to thomhartmann.com. Our blog, airamerica.com. Stick around.

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[Thom]: Paul Krugman our guest in one of our rare in depth, let's have a real conversation here with somebody who I have tremendous respect for. Paul Krugman, "The Conscience of a Liberal" his new book. krugman.blogs.nytimes.com his blog. Paul you, in your book you discuss, or Professor Krugman?

[Krugman]: That's all right. I'm, so long as you don't call me doctor and expect me to treat your headache, okay?

[Thom]: All right. In your book you talk about the difference between a liberal and a progressive being a belief system versus activism. You wanna riff on that for a second?

[Krugman]: Yeah because, you know, some people avoid the word liberal because it's been trashed and so, ask people 'are you a liberal?' and most people say 'no'; ask them, 'do you believe that the government should guarantee healthcare to every American?' and they say, 'yes', so it's a real, I think you can't run away from the label but I think there is a real distinction between being a liberal which is believing in democracy broadly defined, including economic democracy, and being a progressive. which is about actions, so about trying to bring your beliefs into reality. So we have a, one of the great things, this is a very optimistic book, by the way. "Conscience of a Liberal" ends up so upbeat that my friends are asking me if I'm feeling all right. So, and one of the things that make me so upbeat is that we have a real, now, a progressive movement in this country in a way that we didn't a decade ago.

[Thom]: Yeah.

[Krugman]: And it's clearly a progressive movement; it's not a liberal movement. You know, progressive is the right term because it is people who are trying to make progress; they're trying to get stuff to happen. So, it's an important distinction. You know, I like to consider myself both; both believing in these things and trying to make them happen. And, you know, progress, so we are, the hope is that we are about to enter a new progressive era, maybe a new New Deal coming from these progressives; liberals to try to make, not just have a view, but make it reality, changing America for the better.

[Thom]: Yeah. There are some echoes, I think, of the progressive movement from the 1880s to, well, up until the 1920s, late '20s.

[Krugman]: Yeah, and, you know, this is one of my, I quote Grover Norquist, who is the man we all love to quote because somebody said he's like a James Bond villain who likes to explain his evil plans.

[Thom]: Yes.

[Krugman]: And he once said he wanted to bring America back to the way it was before Teddy Roosevelt of the socialists came in.

[Thom]: That's right.

[Krugman]: In other words, not just before the New Deal, but before the progressive movement, and, well, we're gonna frustrate him.

[Thom]: Yeah, indeed.

[Krugman]: He's not going to get his way.

[Thom]: Well, America's waking up. There's one area where you and I have a stark contrast in our world views, and I'd like to explore that with you a little bit, and maybe you can bring me around or vice versa, or maybe we'll just agree to disagree. And that has to do with international trade. We have in the United States now, just this summer, 20 million Chinese-made toys were rejected because of lead paint and other lead hazards. That's mind boggling. You point out that if we were to go back to "protectionist" tariff type programs like China has right now, like Japan uses, like Korea uses, like most countries in the world actually use to greater or lesser extent. If we were to go back to that it would really only whack our GDP by about a tenth of a percent; it wouldn't be that big a deal. But it would, you say, render or impoverish people in other countries because they wouldn't be doing our manufacturing. Don't we have as our first obligation building our middle class here?

[Krugman]: The way I put it, first of all, you know, I certainly have more pro globalist views than a lot of people in the progressive movement, but I think there's been some toning down of the rhetoric on both sides of that internal debate. I once actually talked with Eric Alterman at a public event and we sort of, and we agreed, I don't know who came up with it, but, you know, while we were arguing about the details of international trade policy, Sauron was gathering his forces in Mordor and that's a little more important. So, look, the way I put it is this: first of all, product safety, you know, inspecting products, that's without question, that needs to be done, and other advanced countries do a much better job of that than we do. So this business of, you know, failing to do any, require effective safety inspection of Chinese imports, no, that's not about free trade.

[Thom]: But if we just manufactured them here.

[cross talk]

[Krugman]: By the way, the running joke right now is that actually we've now got a balanced trade with China: they send us poisoned toys, we send them fraudulent securities. So, but seriously, the way I would put it is this: it's very, very important for the world's poorest; very important for the Bangladeshis of the world to be able to have access to world markets. On our side, most of what's going wrong is not because of globalization. Think about the fact that Sweden, France, Canada all face the same global market we do, but they don't have the same return of the gilded age that we do. It's perfectly possible to have a strong welfare state, to have strong guarantees for workers, universal health care without shutting off imports of products, so the...

[Thom]: We've just lost Paul Krugman.

...

[Thom]: And apparently Paul Krugman's back with us. You were saying, sir?

[Krugman]: Oh, gosh, yes, sorry, guess the...

[Thom]: It was Alberto Gonzales.

[Krugman]: Department of Homeland Security I guess decided to drop that.

[Thom]: Exactly.

[Krugman]: Heimatssicherheitableitung [Heimatssicherheitabteilung - the German for 'Department of Homeland Security'] I think is the correct phrase. Anyway, yes, so, ok, protection. Look, it wouldn't, look, I think the answer, let's talk about it. I mean, I'm willing to, I'm not going to go hard line. I'm not gonna, I look at somebody like Sherrod Brown in Ohio who is a lot more protectionist than I am but shares my values, shares my view about where things ought to be going to, and I'm not going to be hard on him over this. Realistically we're not going to shut off imports from the Third World. We probably, we certainly going to have to more safety standards. It's an issue that needs to be discussed, but look, it's not top of the line either way.

[Thom]: Yeah. Okay. In that case, then we can't get into a shouting match about it. Doggone it! Okay. Weapons of mass distraction.

[Krugman]: Yeah.

[Thom]: A chapter in your book. This is marvelous, and it's how movement conservatism is talking in code. You want to riff on that for a minute or two?

[Krugman]: Well, sure. There's a whole bunch. I mean, religious stuff. You know, the religious right is less important to Republican victory than it thinks. And they're finding of their limits of their power right now, but certainly it has been a factor. And compassionate conservatism, what Bush was saying, people thought he was saying, 'I'm not going to be, I'm not going to hurt poor people; he wasn't saying that at all. He was actually referring to the work of Christian right authors like Marvin Olasky, the author of "The Tragedy of [American] Compassion", who basically said that the poor should have to rely on faith-based aid from religious organizations that checked out their virtue before it gives them money. It was actually the opposite of what people thought Bush was saying. He was not saying, 'we need to take care of the poor'; he was saying, 'actually we need to, compassion means requiring them to, you know, be good, the deserving poor, before they get money' and deserving poor means showing that they're sufficiently Christian. So...

[Thom]: Sort of a 'tough love' mentality.

[Krugman]: Tough love and tough religious love in particular. And just in general, Republicans, the rightward turn of the Republican Party have never won elections on the basis of its economic policies, even though that's what they're interested in. They win elections by changing the subject. Bush wins in 2004 by being the nation's defender against gay married terrorists.

[Thom]: Yeah.

[Krugman]: And only after the election does he say that what I really want to do is privatize Social Security.

[Thom]: Right, if in fact he won. I mean, you know.

[Krugman]: Well, yeah. OK, yes. I mean there's a real issue here, but let's ... he got a lot of people to vote for him because they thought he was moral values and national security, but what he was really interested in was undoing the New Deal.

[Thom]: What's your take on the current field of democratic candidates as an economist, as a liberal?

[Krugman]: On the policy side it's very, very good. I mean you've got to look at the policy proposals, health care and otherwise are more progressive than I would have imagined possible two years ago. The level of discussion is incredibly high. You watch the democratic debates and you've got a bunch of smart, well informed people actually talking about issues. I worry about the influence of the people who are giving money. You look at the fact that the, that corporate giving has with, basically every industry except oil and gas has now swung democratic for this election cycle. That's good in terms of how the election is likely turn out; it's dubious in terms of, you know, what will happen afterwards. And we have to hope that whoever is the democratic nominee isn't actually going to be just Republican lite. As I wrote in the column a few weeks back, we hope we're about to elect FDR, we're afraid we might be about to elect Grover Cleveland.

[Thom]: Right. You want to name names, here?

[Krugman]: Well look, this is not a problem for John Edwards because he's not getting very much corporate money. Hillary is.

[Thom]: Yeah. Yeah, that's been my observation as well. Paul Krugman is the author of the book "The Conscience of a Liberal". Get out there and buy this book. It is absolutely extraordinary and read his columns, of course, in the New York Times. Doctor Paul Krugman, thanks so much for being with us, sir.

[Krugman]: Thank you.

[Thom]: Great talking with you.