Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: I thought Hamilton had it right.
Speaker 3: He said a national debt could be a national blessing,
Speaker 3: and the national debt having a liquid market there provides
Speaker 3: a good benchmark for the private sector. It probably underpins
Speaker 3: the role of the dollar in the world. It allows
Speaker 3: the Fed to conduct monetary policy easily. I think we
Speaker 3: have to keep in mind the costs of paying.
Speaker 2: Down the debt.
Speaker 3: There is among some people a single minded focus on it,
Speaker 3: but there's no free lunch in this world, and eliminating
Speaker 3: the national debt, while it may sound attractive, has its
Speaker 3: costs as well. The President, by the way, in his program,
Speaker 3: is paying down as much debt as we can retire
Speaker 3: in the next ten years. We're moving in that direction.
Speaker 3: But whether we should pay it all off, I think
Speaker 3: it is a more open question.
Speaker 2: That was Larry Lindsay, director of the National Economic councilunder
Speaker 2: President George W. Bush, appearing on Wall Street Week back
Speaker 2: in March of two thousand and one, back when the
Speaker 2: concern was about possibly having too little federal debt rather
Speaker 2: than too much to take us through our current very
Speaker 2: different situation. Welcome back now. Nobel Prize winning economists and
Speaker 2: New York Times columnist Paul Krugman of the City University
Speaker 2: of New York. So, doctor Crumy, thank you so much
Speaker 2: for being back with us. As I say, it was
Speaker 2: a very different time then when they thought we may
Speaker 2: eliminate the national debt. But now we're hearing a lot
Speaker 2: from people saying they're concerned it has gotten to be
Speaker 2: too big. Is it too big? Is it a problem
Speaker 2: for our economy right now?
Speaker 4: Okay, So, first of all, that was silly even then.
Speaker 1: I mean, there were you know, revenues were temporarily swollen
Speaker 1: by the dot com bubble and all of that, and
Speaker 1: you know, even in two thousand and one, we knew
Speaker 1: that people like me were eventually going to hit sixty
Speaker 1: five and start collecting benefits. So you know, it's so
Speaker 1: that was a little bit silly to be concerned about
Speaker 1: that back then.
Speaker 4: Right now, the debt per se is not really a
Speaker 4: serious problem.
Speaker 1: I mean, you know, it's a day number, very four
Speaker 1: trillion dollars or something like that. But if we actually
Speaker 1: look at, you know, what does it cost to service
Speaker 1: that debt, well, interest rates are still below the economy's
Speaker 1: growth rate, and so as long as other non interest
Speaker 1: spending and tax receipts are more or less in line,
Speaker 1: then the debt is really not you know, it's not
Speaker 1: a problem to continue servicing it if you know, really
Speaker 1: no reason why that should be an issue.
Speaker 4: But what is a problem, of.
Speaker 1: Course, is that government spending and tax receipts are not
Speaker 1: in line. And so the fundamental problem is not the debt.
Speaker 1: The fundamental problem is that we are not managing to
Speaker 1: pay our way. We're not actually adjusting our inflow with
Speaker 1: our outflow.
Speaker 2: Well one way were putting in. I suppose it's not
Speaker 2: the debt, it's the deficit. It's how much we're actually
Speaker 2: coming up short each and every year. And I think
Speaker 2: last year it was something like eight point five eight
Speaker 2: point eight percent of GDP was in deficit. And this
Speaker 2: is a time when unemployment was very low, by the way,
Speaker 2: and the yeah, some of that was good.
Speaker 1: Yeah, some of that was interest payments, and really should
Speaker 1: it's the primary deficit excluding interest payments, but that is
Speaker 1: a serious problem. We do have an ongoing, large primary deficit.
Speaker 1: Some of that there were you know, the year to
Speaker 1: year fluctuations. There's quirky stuff that can move the deficit around.
Speaker 1: But at a fundamental In a fundamental sense, we're not
Speaker 1: living within our means at the federal level. And that
Speaker 1: doesn't necessarily signal any kind of the media crisis, but
Speaker 1: it does say that, hey, something's got to give. But
Speaker 1: the trouble is, you know what's going to give. So yeah,
Speaker 1: that is the real problem is not the numbers. The
Speaker 1: real problem is that we are not politically apparently able
Speaker 1: to reach any kind of agreement on how to live
Speaker 1: within our means.
Speaker 2: Not an immediate crisis, as you say. At the same time,
Speaker 2: I remember back in the early nineties when we talked
Speaker 2: about bond vigilantes, and there was the discussion within the
Speaker 2: Clinton administration actually about the issues with the bond market.
Speaker 2: At what point is it possible that the bond market
Speaker 2: might send a powerful message to us. We talked to
Speaker 2: Paul Ryan recently who said he thinks that it's quite possible
Speaker 2: in the next administration, whoever is president, they could be
Speaker 2: faced with what he would call a debt crisis. Does
Speaker 2: that sound reasonable to you?
Speaker 1: Not particularly, And I'm not sure I know why Paul
Speaker 1: Ryan would know this any better than anyone else. But
Speaker 1: the truth is, I've looked at I've actually put in
Speaker 1: a fair bit of work myself on what's the historical
Speaker 1: record of countries that borrow in their own currency experiencing
Speaker 1: that kind of debt crisis, a strike by lenders something
Speaker 1: like that. What are the historical examples of that happening.
Speaker 1: It's almost no examples of that. I mean, you start
Speaker 1: and you end up shigning. Well, maybe France in nineteen
Speaker 1: twenty six. I mean, Japan has had huge debt for
Speaker 1: decades now, huge persistent deficits.
Speaker 4: Still no crisis.
Speaker 1: It's actually I think we should focus less on what's
Speaker 1: the risk of a single dramatic event and more on
Speaker 1: the kind of gradual erosion of confidence that comes from
Speaker 1: the fact that we can't seem to get our act together.
Speaker 2: There's no doubt that there are a lot of political challenges.
Speaker 2: But before we get to the political challenges, what about
Speaker 2: what the right answer would be if we didn't have
Speaker 2: to worry about the politics. And there were times of
Speaker 2: which we actually did cut the deficit, right under George
Speaker 2: Herbert Walker Bush there was a bipartisan effort that was
Speaker 2: made Andrews Air Force Base, and then under President Clinton
Speaker 2: it was not bipartisan. Actually, the Democrats did themselves. They
Speaker 2: cut back on the deficit. What is the right thing
Speaker 2: to do? Is it more taxes, is it less spending,
Speaker 2: or is it all of the above?
Speaker 4: There is no right answer.
Speaker 1: The what we know from cross national comparisons is that
Speaker 1: it's certainly possible to have a thriving economy with a
Speaker 1: lot more taxes than the United States. The United States
Speaker 1: is near the bottom in terms of tax receipts or
Speaker 1: they're sure a GDP among advanced countries, So we could
Speaker 1: be raising substantially more money and there's no there's no
Speaker 1: real indication that higher tax rates would be a problem
Speaker 1: for US economic growth. On the other hand, we don't
Speaker 1: have to provide essential healthcare to everybody. That's that's not
Speaker 1: that's not a question of economic rightness or wrongness. That's
Speaker 1: a question of your values. We don't have to provide
Speaker 1: an adequate retirement income to everybody. Again, that's not an
Speaker 1: economic comparative. So that you can't actually divorce this from politics.
Speaker 1: This is all about the political decision. What are we
Speaker 1: going to try to close this gap by making mostly
Speaker 1: the lives of older Americans tougher, or are we going
Speaker 1: to do it by raising taxes? But probably I mean
Speaker 1: that includes raising taxes on the rich, but probably also
Speaker 1: at least a little bit more taxes on the middle class.
Speaker 2: And finally, what interest rates assumptions should we put into
Speaker 2: the model and deciding how we deal with the deficit,
Speaker 2: because some people think we will have elevated interest rates
Speaker 2: for the foreseeable future given some of the demands on us,
Speaker 2: even though the elevated industries thus far have surprisingly not
Speaker 2: hit the economy as much as one would have thought.
Speaker 4: Yeah, on interest rates, I am fanatically confused.
Speaker 1: I mean, I actually think that you can make a
Speaker 1: really strong case either way that we went through a
Speaker 1: long period of extremely low interest rates, which we thought
Speaker 1: were grounded and fundamentals, especially demography, and then now we've
Speaker 1: been going through through a period of much higher interest
Speaker 1: rates with the economy remarkably robust in the face of
Speaker 1: those rates. Has you know, have long run sustainable interest
Speaker 1: rates our star if you talk to you know, FED officials,
Speaker 1: has our star actually gone up? Or is this just
Speaker 1: kind of a transitory phase? And I can make the case,
Speaker 1: I mean, we certainly have for one thing, that demographic
Speaker 1: situation has changed, which actually does, by the way, help
Speaker 1: our long run budget position because of all things I
Speaker 1: don't think what people were counting on, but it looks
Speaker 1: like we have substantially increased immigration right now. We also
Speaker 1: have possibly a lot of new business investment driven by
Speaker 1: new technologies AI and all of that, we have the
Speaker 1: Biden Industrial Policy, which is inducing a lot of manufacturing investment.
Speaker 1: So maybe all of that has changed the picture. Or maybe, actually,
Speaker 1: you know, twenty nineteen is still what should be our benchmark,
Speaker 1: and we're going to go back to very low interest rates.
Speaker 1: And I actually anyone who claims to be to know
Speaker 1: for sure what the answers that is is deluting themselves.
Speaker 2: So, doctor Krugman, let's look forward to this election we
Speaker 2: have coming out of November, and what economic choices the
Speaker 2: American people will be making as they go to the polls.
Speaker 2: Give us your sense of how different these two people,
Speaker 2: that is, Joe Biden and Donald Trump are in their
Speaker 2: approaches to the economy.
Speaker 1: Okay, so this is one of those cases where if
Speaker 1: you look at past experience, you would say, well, how
Speaker 1: much difference does it make? I mean, in a lot
Speaker 1: of ways, the economy of twenty twenty four looks a
Speaker 1: lot like the economy of twenty nineteen pre pandemic.
Speaker 4: Full employment, fairly low inflation.
Speaker 1: It's you know, worrying a little bit, but we were
Speaker 1: worrying about the difference between two and three.
Speaker 4: Not not anything major.
Speaker 1: It's it doesn't look as if it has made a
Speaker 1: whole lot of different who's in the White House. But
Speaker 1: if there's a Trump too, uh, then there's a lot
Speaker 1: of reasons to believe that it could be very different.
Speaker 1: This is there were What's amazing if you go back
Speaker 1: and look at Trump's first time in the White House
Speaker 1: was how little he did when all this said and done.
Speaker 1: You know, basically he got a moderate sized tax cut
Speaker 1: through sort of period, end of story. There wasn't a
Speaker 1: lot else that that went on. There were that's largely
Speaker 1: because there were institutional restraints there were. They couldn't get
Speaker 1: stuff through Congress, couldn't couldn't tell the Federal Reserve what
Speaker 1: to do.
Speaker 3: Uh.
Speaker 4: That could be very very different right now.
Speaker 1: And if you take seriously what the what Trump uh
Speaker 1: former Trump aids are saying, Uh, it would be very
Speaker 1: very drastic name Biden would decontinuity. Biden, if you can
Speaker 1: do it, we'll do more, you know, some some further
Speaker 1: tax increases, some more green industrial policy, but probably not
Speaker 1: enough to make a huge difference to the macroeconomic numbers,
Speaker 1: big differences in other respects. Trump, well, we know that
Speaker 1: one of his former aids has been talking a lot
Speaker 1: about rounding up millions of immigrants supposedly undocumented. That wouldn't
Speaker 1: be surprising if a lot of legal immigrants got caught
Speaker 1: up in the net as well in deporting, huge economic impacts,
Speaker 1: huge disruptions to the labor force.
Speaker 4: Another Peter Navarro, who's being interviewed from jail, but has
Speaker 4: said that that J.
Speaker 1: Powell will be fired within one hundred days and that
Speaker 1: we will basically have the politicization of monetary policy. And
Speaker 1: there's a lot of reasons to think that a Trump
Speaker 1: second term might see him become one of those autocrats
Speaker 1: who demands that you run the printing presses for his
Speaker 1: political gain.
Speaker 4: I mean of or Doen and Turkey or something like that.
Speaker 2: It's so.
Speaker 1: Huge uncertainty, but I think anyone assuming that a second
Speaker 1: Trump term would look like the first one, with what
Speaker 1: ended up being fairly conventional economic policies, nothing and the
Speaker 1: Federal Reserve keeping the lid on things, could be very
Speaker 1: in for a very rude shock.
Speaker 2: Picking up on your comment about monetary policy and fedio J. Powell.
Speaker 2: We had Ken Rogoff on somebody you know well fellow economists,
Speaker 2: and when I asked that question for him, he said,
Speaker 2: the markets would not let president new president Trump do that.
Speaker 2: That they were to react really strong in the treasury markets,
Speaker 2: and he would not have that option. Is that plausible?
Speaker 1: The markets would certainly react, we would probably see acceleration
Speaker 1: and inflation of plunge in the dollar.
Speaker 4: But you know, how does he respond to that.
Speaker 1: I mean, again, if you look at much smaller countries
Speaker 1: that are much more exposed to market pressure, like Turkey,
Speaker 1: authoritarian leaders have a habit of saying, well, the markets
Speaker 1: are wrong, and I'm going to order them to stop.
Speaker 1: But you know, you might be surprised at how much
Speaker 1: you know socialism or at least in the sense of
Speaker 1: capital controls and other things that might happen. You know,
Speaker 1: Trump says to the FED, I want a booming economy.
Speaker 1: I want you to roll the printing presses, and the
Speaker 1: markets respond by driving the dollar.
Speaker 4: Down inflation up.
Speaker 1: He might well then say, well, I'm going to put
Speaker 1: on rules that stop that from happening.
Speaker 4: Rather than changing the policy. Remember, you know, we've had one.
Speaker 1: You know, since the immediate after math of World War Two,
Speaker 1: we've had only one episode of price controls in America,
Speaker 1: and it was Richard Nixon, not some progressive Democrat who
Speaker 1: did it. So I think you want to be I
Speaker 1: understand Ken's point. He thinks that the on vigilantes basically
Speaker 1: would would discipline Trump.
Speaker 4: But I don't think that's a safe bet.
Speaker 2: What about the prospect of inflation. Obviously tariffs tend to
Speaker 2: be inflationary rather than disinflationary. At the same time, both
Speaker 2: President Biden and for President Trump seem to like tariffs
Speaker 2: pretty well.
Speaker 4: Well, there's a big difference.
Speaker 1: I mean, yes, both are doing terrorfs, and Biden has
Speaker 1: not rolled back most of the Trump tariffs, which is politics,
Speaker 1: that's you know there doesn't want to be accused of
Speaker 1: being soft on China or something like that. But if
Speaker 1: you look at the new proposals, they're actually although they
Speaker 1: both are proposing terrans, they're very different in the both
Speaker 1: in the details and in the purpose. So Trump's view
Speaker 1: is clearly he thinks of trade as a zero sum game.
Speaker 1: If we win if other people buy our stuff, we
Speaker 1: lose if we buy other people stuff. And so he
Speaker 1: wants to put a ring around the collar. He said,
Speaker 1: a ten percent tariff on everything and the h and
Speaker 1: maybe more for some other countries. That's not at all
Speaker 1: what Biden is doing. What Biden is.
Speaker 2: Doing is some.
Speaker 1: Selective tariffs aimed at what he perceives as strategic sectors.
Speaker 2: And if I'm not mistaken, you generally support the notion
Speaker 2: we have to do, whoever the president is something to
Speaker 2: have to do to prevent a second, as you call it,
Speaker 2: China shock, such as we saw early around the time
Speaker 2: of the WTO, in order to basically protect some of
Speaker 2: our workforce.
Speaker 1: Yeah, it's it's not so much jobs in the in
Speaker 1: the aggregate. Sorry it sounding like an of commiss there,
Speaker 1: but it's not so much the total employment. We're not
Speaker 1: having a problem at least at the moment with overall employment.
Speaker 1: But what we learned rather painfully from the first China
Speaker 1: Shock was that sudden surges of imports can be just
Speaker 1: eruptive in ways that a lot of standard economic models
Speaker 1: don't capture, though non standard models do. They can disrupt communities,
Speaker 1: they can disrupt strategic industries, and particularly if you are
Speaker 1: doing what Biden is doing, which is to try to
Speaker 1: sell climate policy, in part by saying it also it
Speaker 1: creates manufacturing jobs. The political basis for that is going
Speaker 1: to be undermined if it ends up creating manufacturing jobs
Speaker 1: in China.
Speaker 4: So now, and this is a prime look China.
Speaker 1: I don't think the Chinese seem to fully realize, but
Speaker 1: they they are having a situation of grossly inadequate domestic
Speaker 1: spending and relatives to their production capacity, and seem unwilling
Speaker 1: to boost their own demand. And there they want to
Speaker 1: dump both in the sort of you know, common language
Speaker 1: sense and probably in the in the illegal sense.
Speaker 4: They want to dump the excess production on the rest
Speaker 4: of the world. And it's not going to happen. We're
Speaker 4: not going to accept it. The Europeans are not going
Speaker 4: to accept it. So you have to do something.
Speaker 2: And finally, doctor Kruman, let's go back to what Donald
Speaker 2: Trump did during his first presidency. He certainly tried to
Speaker 2: cut back on regulation. As we talk to former advisors
Speaker 2: and even current advisors like Scott Bessant, who talks to
Speaker 2: Donald Trump fairly regularly, he says, we will get greater growth,
Speaker 2: economic growth because we will cut back on regulation. Is
Speaker 2: that wrong as a matter of economics, in fact, if
Speaker 2: you cut back on regulation, maybe other externalities that we
Speaker 2: don't like. But is it generally true if we cut
Speaker 2: back on regulation we will get more economic growth?
Speaker 4: Certainly, not true necessarily, and there's just no evidence for that.
Speaker 4: There is.
Speaker 1: Just what's actually been oppressive if you look at the
Speaker 1: US historical record is how little difference any of this
Speaker 1: stuff makes too long term economic growth. You just cannot
Speaker 1: eat that, uh, that improve that increased regulation, certainly that
Speaker 1: that environmental regulation has had a negative impact. And one
Speaker 1: of the things it's worth pointing out, you know, if
Speaker 1: you particularly since the environment is probably at the core
Speaker 1: of a lot of this. We talk a lot about
Speaker 1: climate change, as we should. That's an existential threat, but
Speaker 1: what people don't realize is the extent to which air pollution,
Speaker 1: to take the prime example, has relatively short term economic
Speaker 1: costs as well.
Speaker 2: Professor, is always such a treat to talk to you.
Speaker 2: Thank you so much many thanks to our Nobel Prize
Speaker 2: winging economist Paul Krugman