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