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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: I thought Hamilton had it right.

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Speaker 3: He said a national debt could be a national blessing,

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Speaker 3: and the national debt having a liquid market there provides

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Speaker 3: a good benchmark for the private sector. It probably underpins

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Speaker 3: the role of the dollar in the world. It allows

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Speaker 3: the Fed to conduct monetary policy easily. I think we

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Speaker 3: have to keep in mind the costs of paying.

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Speaker 2: Down the debt.

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Speaker 3: There is among some people a single minded focus on it,

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Speaker 3: but there's no free lunch in this world, and eliminating

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Speaker 3: the national debt, while it may sound attractive, has its

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Speaker 3: costs as well. The President, by the way, in his program,

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Speaker 3: is paying down as much debt as we can retire

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Speaker 3: in the next ten years. We're moving in that direction.

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Speaker 3: But whether we should pay it all off, I think

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Speaker 3: it is a more open question.

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Speaker 2: That was Larry Lindsay, director of the National Economic councilunder

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Speaker 2: President George W. Bush, appearing on Wall Street Week back

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Speaker 2: in March of two thousand and one, back when the

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Speaker 2: concern was about possibly having too little federal debt rather

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Speaker 2: than too much to take us through our current very

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Speaker 2: different situation. Welcome back now. Nobel Prize winning economists and

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Speaker 2: New York Times columnist Paul Krugman of the City University

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Speaker 2: of New York. So, doctor Crumy, thank you so much

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Speaker 2: for being back with us. As I say, it was

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Speaker 2: a very different time then when they thought we may

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Speaker 2: eliminate the national debt. But now we're hearing a lot

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Speaker 2: from people saying they're concerned it has gotten to be

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Speaker 2: too big. Is it too big? Is it a problem

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Speaker 2: for our economy right now?

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Speaker 4: Okay, So, first of all, that was silly even then.

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Speaker 1: I mean, there were you know, revenues were temporarily swollen

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Speaker 1: by the dot com bubble and all of that, and

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Speaker 1: you know, even in two thousand and one, we knew

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Speaker 1: that people like me were eventually going to hit sixty

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Speaker 1: five and start collecting benefits. So you know, it's so

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Speaker 1: that was a little bit silly to be concerned about

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Speaker 1: that back then.

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Speaker 4: Right now, the debt per se is not really a

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Speaker 4: serious problem.

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Speaker 1: I mean, you know, it's a day number, very four

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Speaker 1: trillion dollars or something like that. But if we actually

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Speaker 1: look at, you know, what does it cost to service

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Speaker 1: that debt, well, interest rates are still below the economy's

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Speaker 1: growth rate, and so as long as other non interest

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Speaker 1: spending and tax receipts are more or less in line,

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Speaker 1: then the debt is really not you know, it's not

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Speaker 1: a problem to continue servicing it if you know, really

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Speaker 1: no reason why that should be an issue.

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Speaker 4: But what is a problem, of.

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Speaker 1: Course, is that government spending and tax receipts are not

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Speaker 1: in line. And so the fundamental problem is not the debt.

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Speaker 1: The fundamental problem is that we are not managing to

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Speaker 1: pay our way. We're not actually adjusting our inflow with

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Speaker 1: our outflow.

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Speaker 2: Well one way were putting in. I suppose it's not

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Speaker 2: the debt, it's the deficit. It's how much we're actually

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Speaker 2: coming up short each and every year. And I think

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Speaker 2: last year it was something like eight point five eight

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Speaker 2: point eight percent of GDP was in deficit. And this

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Speaker 2: is a time when unemployment was very low, by the way,

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Speaker 2: and the yeah, some of that was good.

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Speaker 1: Yeah, some of that was interest payments, and really should

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Speaker 1: it's the primary deficit excluding interest payments, but that is

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Speaker 1: a serious problem. We do have an ongoing, large primary deficit.

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Speaker 1: Some of that there were you know, the year to

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Speaker 1: year fluctuations. There's quirky stuff that can move the deficit around.

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Speaker 1: But at a fundamental In a fundamental sense, we're not

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Speaker 1: living within our means at the federal level. And that

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Speaker 1: doesn't necessarily signal any kind of the media crisis, but

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Speaker 1: it does say that, hey, something's got to give. But

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Speaker 1: the trouble is, you know what's going to give. So yeah,

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Speaker 1: that is the real problem is not the numbers. The

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Speaker 1: real problem is that we are not politically apparently able

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Speaker 1: to reach any kind of agreement on how to live

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Speaker 1: within our means.

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Speaker 2: Not an immediate crisis, as you say. At the same time,

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Speaker 2: I remember back in the early nineties when we talked

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Speaker 2: about bond vigilantes, and there was the discussion within the

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Speaker 2: Clinton administration actually about the issues with the bond market.

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Speaker 2: At what point is it possible that the bond market

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Speaker 2: might send a powerful message to us. We talked to

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Speaker 2: Paul Ryan recently who said he thinks that it's quite possible

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Speaker 2: in the next administration, whoever is president, they could be

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Speaker 2: faced with what he would call a debt crisis. Does

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Speaker 2: that sound reasonable to you?

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Speaker 1: Not particularly, And I'm not sure I know why Paul

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Speaker 1: Ryan would know this any better than anyone else. But

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Speaker 1: the truth is, I've looked at I've actually put in

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Speaker 1: a fair bit of work myself on what's the historical

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Speaker 1: record of countries that borrow in their own currency experiencing

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Speaker 1: that kind of debt crisis, a strike by lenders something

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Speaker 1: like that. What are the historical examples of that happening.

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Speaker 1: It's almost no examples of that. I mean, you start

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Speaker 1: and you end up shigning. Well, maybe France in nineteen

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Speaker 1: twenty six. I mean, Japan has had huge debt for

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Speaker 1: decades now, huge persistent deficits.

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Speaker 4: Still no crisis.

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Speaker 1: It's actually I think we should focus less on what's

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Speaker 1: the risk of a single dramatic event and more on

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Speaker 1: the kind of gradual erosion of confidence that comes from

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Speaker 1: the fact that we can't seem to get our act together.

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Speaker 2: There's no doubt that there are a lot of political challenges.

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Speaker 2: But before we get to the political challenges, what about

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Speaker 2: what the right answer would be if we didn't have

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Speaker 2: to worry about the politics. And there were times of

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Speaker 2: which we actually did cut the deficit, right under George

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Speaker 2: Herbert Walker Bush there was a bipartisan effort that was

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Speaker 2: made Andrews Air Force Base, and then under President Clinton

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Speaker 2: it was not bipartisan. Actually, the Democrats did themselves. They

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Speaker 2: cut back on the deficit. What is the right thing

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Speaker 2: to do? Is it more taxes, is it less spending,

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Speaker 2: or is it all of the above?

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Speaker 4: There is no right answer.

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Speaker 1: The what we know from cross national comparisons is that

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Speaker 1: it's certainly possible to have a thriving economy with a

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Speaker 1: lot more taxes than the United States. The United States

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Speaker 1: is near the bottom in terms of tax receipts or

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Speaker 1: they're sure a GDP among advanced countries, So we could

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Speaker 1: be raising substantially more money and there's no there's no

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Speaker 1: real indication that higher tax rates would be a problem

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Speaker 1: for US economic growth. On the other hand, we don't

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Speaker 1: have to provide essential healthcare to everybody. That's that's not

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Speaker 1: that's not a question of economic rightness or wrongness. That's

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Speaker 1: a question of your values. We don't have to provide

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Speaker 1: an adequate retirement income to everybody. Again, that's not an

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Speaker 1: economic comparative. So that you can't actually divorce this from politics.

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Speaker 1: This is all about the political decision. What are we

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Speaker 1: going to try to close this gap by making mostly

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Speaker 1: the lives of older Americans tougher, or are we going

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Speaker 1: to do it by raising taxes? But probably I mean

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Speaker 1: that includes raising taxes on the rich, but probably also

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Speaker 1: at least a little bit more taxes on the middle class.

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Speaker 2: And finally, what interest rates assumptions should we put into

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Speaker 2: the model and deciding how we deal with the deficit,

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Speaker 2: because some people think we will have elevated interest rates

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Speaker 2: for the foreseeable future given some of the demands on us,

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Speaker 2: even though the elevated industries thus far have surprisingly not

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Speaker 2: hit the economy as much as one would have thought.

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Speaker 4: Yeah, on interest rates, I am fanatically confused.

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Speaker 1: I mean, I actually think that you can make a

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Speaker 1: really strong case either way that we went through a

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Speaker 1: long period of extremely low interest rates, which we thought

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Speaker 1: were grounded and fundamentals, especially demography, and then now we've

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Speaker 1: been going through through a period of much higher interest

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Speaker 1: rates with the economy remarkably robust in the face of

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Speaker 1: those rates. Has you know, have long run sustainable interest

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Speaker 1: rates our star if you talk to you know, FED officials,

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Speaker 1: has our star actually gone up? Or is this just

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Speaker 1: kind of a transitory phase? And I can make the case,

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Speaker 1: I mean, we certainly have for one thing, that demographic

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Speaker 1: situation has changed, which actually does, by the way, help

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Speaker 1: our long run budget position because of all things I

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Speaker 1: don't think what people were counting on, but it looks

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Speaker 1: like we have substantially increased immigration right now. We also

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Speaker 1: have possibly a lot of new business investment driven by

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Speaker 1: new technologies AI and all of that, we have the

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Speaker 1: Biden Industrial Policy, which is inducing a lot of manufacturing investment.

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Speaker 1: So maybe all of that has changed the picture. Or maybe, actually,

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Speaker 1: you know, twenty nineteen is still what should be our benchmark,

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Speaker 1: and we're going to go back to very low interest rates.

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Speaker 1: And I actually anyone who claims to be to know

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Speaker 1: for sure what the answers that is is deluting themselves.

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Speaker 2: So, doctor Krugman, let's look forward to this election we

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Speaker 2: have coming out of November, and what economic choices the

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Speaker 2: American people will be making as they go to the polls.

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Speaker 2: Give us your sense of how different these two people,

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Speaker 2: that is, Joe Biden and Donald Trump are in their

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Speaker 2: approaches to the economy.

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Speaker 1: Okay, so this is one of those cases where if

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Speaker 1: you look at past experience, you would say, well, how

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Speaker 1: much difference does it make? I mean, in a lot

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Speaker 1: of ways, the economy of twenty twenty four looks a

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Speaker 1: lot like the economy of twenty nineteen pre pandemic.

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Speaker 4: Full employment, fairly low inflation.

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Speaker 1: It's you know, worrying a little bit, but we were

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Speaker 1: worrying about the difference between two and three.

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Speaker 4: Not not anything major.

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Speaker 1: It's it doesn't look as if it has made a

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Speaker 1: whole lot of different who's in the White House. But

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Speaker 1: if there's a Trump too, uh, then there's a lot

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Speaker 1: of reasons to believe that it could be very different.

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Speaker 1: This is there were What's amazing if you go back

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Speaker 1: and look at Trump's first time in the White House

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Speaker 1: was how little he did when all this said and done.

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Speaker 1: You know, basically he got a moderate sized tax cut

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Speaker 1: through sort of period, end of story. There wasn't a

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Speaker 1: lot else that that went on. There were that's largely

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Speaker 1: because there were institutional restraints there were. They couldn't get

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Speaker 1: stuff through Congress, couldn't couldn't tell the Federal Reserve what

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Speaker 1: to do.

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Speaker 3: Uh.

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Speaker 4: That could be very very different right now.

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Speaker 1: And if you take seriously what the what Trump uh

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Speaker 1: former Trump aids are saying, Uh, it would be very

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Speaker 1: very drastic name Biden would decontinuity. Biden, if you can

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Speaker 1: do it, we'll do more, you know, some some further

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Speaker 1: tax increases, some more green industrial policy, but probably not

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Speaker 1: enough to make a huge difference to the macroeconomic numbers,

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Speaker 1: big differences in other respects. Trump, well, we know that

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Speaker 1: one of his former aids has been talking a lot

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Speaker 1: about rounding up millions of immigrants supposedly undocumented. That wouldn't

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Speaker 1: be surprising if a lot of legal immigrants got caught

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Speaker 1: up in the net as well in deporting, huge economic impacts,

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Speaker 1: huge disruptions to the labor force.

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Speaker 4: Another Peter Navarro, who's being interviewed from jail, but has

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Speaker 4: said that that J.

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Speaker 1: Powell will be fired within one hundred days and that

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Speaker 1: we will basically have the politicization of monetary policy. And

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Speaker 1: there's a lot of reasons to think that a Trump

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Speaker 1: second term might see him become one of those autocrats

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Speaker 1: who demands that you run the printing presses for his

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Speaker 1: political gain.

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Speaker 4: I mean of or Doen and Turkey or something like that.

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Speaker 2: It's so.

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Speaker 1: Huge uncertainty, but I think anyone assuming that a second

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Speaker 1: Trump term would look like the first one, with what

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Speaker 1: ended up being fairly conventional economic policies, nothing and the

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Speaker 1: Federal Reserve keeping the lid on things, could be very

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Speaker 1: in for a very rude shock.

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Speaker 2: Picking up on your comment about monetary policy and fedio J. Powell.

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Speaker 2: We had Ken Rogoff on somebody you know well fellow economists,

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Speaker 2: and when I asked that question for him, he said,

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Speaker 2: the markets would not let president new president Trump do that.

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Speaker 2: That they were to react really strong in the treasury markets,

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Speaker 2: and he would not have that option. Is that plausible?

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Speaker 1: The markets would certainly react, we would probably see acceleration

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Speaker 1: and inflation of plunge in the dollar.

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Speaker 4: But you know, how does he respond to that.

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Speaker 1: I mean, again, if you look at much smaller countries

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Speaker 1: that are much more exposed to market pressure, like Turkey,

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Speaker 1: authoritarian leaders have a habit of saying, well, the markets

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Speaker 1: are wrong, and I'm going to order them to stop.

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Speaker 1: But you know, you might be surprised at how much

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Speaker 1: you know socialism or at least in the sense of

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Speaker 1: capital controls and other things that might happen. You know,

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Speaker 1: Trump says to the FED, I want a booming economy.

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Speaker 1: I want you to roll the printing presses, and the

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Speaker 1: markets respond by driving the dollar.

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Speaker 4: Down inflation up.

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Speaker 1: He might well then say, well, I'm going to put

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Speaker 1: on rules that stop that from happening.

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Speaker 4: Rather than changing the policy. Remember, you know, we've had one.

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Speaker 1: You know, since the immediate after math of World War Two,

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Speaker 1: we've had only one episode of price controls in America,

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Speaker 1: and it was Richard Nixon, not some progressive Democrat who

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Speaker 1: did it. So I think you want to be I

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Speaker 1: understand Ken's point. He thinks that the on vigilantes basically

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Speaker 1: would would discipline Trump.

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Speaker 4: But I don't think that's a safe bet.

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Speaker 2: What about the prospect of inflation. Obviously tariffs tend to

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Speaker 2: be inflationary rather than disinflationary. At the same time, both

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Speaker 2: President Biden and for President Trump seem to like tariffs

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Speaker 2: pretty well.

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Speaker 4: Well, there's a big difference.

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Speaker 1: I mean, yes, both are doing terrorfs, and Biden has

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Speaker 1: not rolled back most of the Trump tariffs, which is politics,

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Speaker 1: that's you know there doesn't want to be accused of

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Speaker 1: being soft on China or something like that. But if

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Speaker 1: you look at the new proposals, they're actually although they

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Speaker 1: both are proposing terrans, they're very different in the both

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Speaker 1: in the details and in the purpose. So Trump's view

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Speaker 1: is clearly he thinks of trade as a zero sum game.

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Speaker 1: If we win if other people buy our stuff, we

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Speaker 1: lose if we buy other people stuff. And so he

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Speaker 1: wants to put a ring around the collar. He said,

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Speaker 1: a ten percent tariff on everything and the h and

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Speaker 1: maybe more for some other countries. That's not at all

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Speaker 1: what Biden is doing. What Biden is.

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Speaker 2: Doing is some.

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Speaker 1: Selective tariffs aimed at what he perceives as strategic sectors.

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Speaker 2: And if I'm not mistaken, you generally support the notion

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Speaker 2: we have to do, whoever the president is something to

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Speaker 2: have to do to prevent a second, as you call it,

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Speaker 2: China shock, such as we saw early around the time

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Speaker 2: of the WTO, in order to basically protect some of

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Speaker 2: our workforce.

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Speaker 1: Yeah, it's it's not so much jobs in the in

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Speaker 1: the aggregate. Sorry it sounding like an of commiss there,

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Speaker 1: but it's not so much the total employment. We're not

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Speaker 1: having a problem at least at the moment with overall employment.

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Speaker 1: But what we learned rather painfully from the first China

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Speaker 1: Shock was that sudden surges of imports can be just

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Speaker 1: eruptive in ways that a lot of standard economic models

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Speaker 1: don't capture, though non standard models do. They can disrupt communities,

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Speaker 1: they can disrupt strategic industries, and particularly if you are

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Speaker 1: doing what Biden is doing, which is to try to

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Speaker 1: sell climate policy, in part by saying it also it

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Speaker 1: creates manufacturing jobs. The political basis for that is going

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Speaker 1: to be undermined if it ends up creating manufacturing jobs

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Speaker 1: in China.

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Speaker 4: So now, and this is a prime look China.

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Speaker 1: I don't think the Chinese seem to fully realize, but

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Speaker 1: they they are having a situation of grossly inadequate domestic

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Speaker 1: spending and relatives to their production capacity, and seem unwilling

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Speaker 1: to boost their own demand. And there they want to

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Speaker 1: dump both in the sort of you know, common language

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Speaker 1: sense and probably in the in the illegal sense.

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Speaker 4: They want to dump the excess production on the rest

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Speaker 4: of the world. And it's not going to happen. We're

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Speaker 4: not going to accept it. The Europeans are not going

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Speaker 4: to accept it. So you have to do something.

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Speaker 2: And finally, doctor Kruman, let's go back to what Donald

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Speaker 2: Trump did during his first presidency. He certainly tried to

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Speaker 2: cut back on regulation. As we talk to former advisors

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Speaker 2: and even current advisors like Scott Bessant, who talks to

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Speaker 2: Donald Trump fairly regularly, he says, we will get greater growth,

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Speaker 2: economic growth because we will cut back on regulation. Is

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Speaker 2: that wrong as a matter of economics, in fact, if

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Speaker 2: you cut back on regulation, maybe other externalities that we

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Speaker 2: don't like. But is it generally true if we cut

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Speaker 2: back on regulation we will get more economic growth?

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Speaker 4: Certainly, not true necessarily, and there's just no evidence for that.

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Speaker 4: There is.

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Speaker 1: Just what's actually been oppressive if you look at the

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Speaker 1: US historical record is how little difference any of this

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Speaker 1: stuff makes too long term economic growth. You just cannot

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Speaker 1: eat that, uh, that improve that increased regulation, certainly that

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Speaker 1: that environmental regulation has had a negative impact. And one

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Speaker 1: of the things it's worth pointing out, you know, if

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Speaker 1: you particularly since the environment is probably at the core

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Speaker 1: of a lot of this. We talk a lot about

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Speaker 1: climate change, as we should. That's an existential threat, but

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Speaker 1: what people don't realize is the extent to which air pollution,

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Speaker 1: to take the prime example, has relatively short term economic

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Speaker 1: costs as well.

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Speaker 2: Professor, is always such a treat to talk to you.

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Speaker 2: Thank you so much many thanks to our Nobel Prize

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Speaker 2: winging economist Paul Krugman