Lunch with the FT: Paul Krugman

I enter the Landmarc restaurant, at the Time Warner Center, on Columbus Circle, New York, where I have agreed to meet for lunch with Paul Krugman, the 2008 Nobel laureate in economics, Princeton professor of economics and international affairs, and liberal columnist of the New York Times. I know nothing about this bistro-style restaurant, which my guest has chosen for its convenience to a television interview he has just completed. The restaurant is impersonal and – it’s a late lunch, at two o’clock – beginning to empty.

Krugman, 59, most hated and most admired columnist in the US, rumpled and professorial, is sitting at a small table in the middle of the restaurant, working on his laptop. It is Thursday and he is writing his column. What, I ask, is it on? “It’s going to be Europe,” he replies. “Partly because it is coming to a head, partly because I am a little overstretched and that’s what I’m ready for. So I’m going to do that one.” I understand the feeling of being overstretched: Krugman is writing two columns a week, posting regularly on his blog, writing popular books and teaching.

So, I ask, will the argument of the column be that “it’s all over” for the eurozone?

“No. I don’t think they can save Greece but they can still save the rest if they’re willing to offer open-ended financing and macroeconomic expansion.” But this would mean persuading the Germans to change their philosophy of economic life. “Well, the prospect of hanging concentrates the mind; the prospect of a collapse of the euro might concentrate their minds.”

I change the subject to ask how he has coped with the shift from being predominently an academic economist to being the leading spokesman for the liberal cause. How did this happen? “Well, it was funny,” he responds. “I was doing a column for Slate and then a bit for Fortune, towards the end, and then the [New York] Times came along with this offer. It was 1999. We thought I’d be writing about the follies of dotcoms and stuff like that and then it turns out that it’s a much more awesome and ominous responsibility. It was nothing I ever planned.

“Really, the rough period was the first [George W] Bush term when it seemed like the whole world was mad, save me, or vice-versa, and it’s gotten easier.

“I have to say, though, that the economic crisis has played into the things that I was worrying about 15 years ago. It’s been almost alarmingly easy to figure out what to say. But it’s a very strange thing: it’s not at all what I was imagining I was going to be doing with my life.”

We have already gone straight into the issues. The conversation turns to the Japanese crisis of the 1990s. In retrospect, I suggest, the Japanese seem to have managed the aftermath of their crisis quite well.

He agrees. “What we thought was that Japan was a cautionary tale. It has turned into Japan as almost a role model. They never had as big a slump as we have had. They managed to have growing per capita income through most of what we call their ‘lost decade’. My running joke is that the group of us who were worried about Japan a dozen years ago ought to go to Tokyo and apologise to the emperor. We’ve done worse than they ever did. When people ask: might we become Japan? I say: I wish we could become Japan.”

At this point we order: salade niçoise for Krugman; foie gras terrine for me; and a bottle of sparkling water. This is definitely not going to be up to the gourmet standards of some lunches with the FT.

I return to our discussion. I ask whether he is not being unfair to Ben Bernanke, chairman of the Federal Reserve and a former colleague at Princeton. After all, Bernanke has avoided deflation in the US. Krugman responds swiftly: “We don’t care about deflation because having a small minus, instead of a small plus, makes a huge difference to the world. We worry about deflation because we think it is a reason why one has a persistently depressed economy. While we may not have deflation, we have a persistently depressed economy. So what difference does it make?”

But surely, I argue, the Fed did deliver negative real interest rates by cutting rates quickly and avoiding deflation. This prods Krugman into rare praise: “I have actually very few complaints about monetary policy here through some point in 2009. I thought that Ben [Bernanke] responded aggressively and forcefully, which was the right thing to do. He stepped in with the original QE [quantitative easing] and stabilised the economy.

“The question is, what did he do as we started to look more and more like Japan? At that point the logic says you have to find a way to get some traction. Fiscal policy might be great. But if you’re not getting it you should be doing something on the Fed side and I think that logic becomes stronger and stronger as the years go by. And it’s sad to see that the Fed has largely washed its hands of responsibility for getting us out of the slump.

“I hope that some day Ben Bernanke and Janet Yellen [vice-chair of the Fed] will think that I’ve done them a favour. There’s all this sniping from the hard money guys and somebody needs to say, ‘Actually, no, if we actually think about this realistically, you’re doing too little and not too much.’”

So what, I wonder, would he do if he were put in charge? He says he would add maybe another $2tn to the Fed’s balance sheet, by purchasing a wider range of assets, including more private sector liabilities. “But mostly”, he continues, “you work on the expectations side. I think mostly what you really need to do is to signal that you’re going to keep your foot on the gas pedal.”

It does not even matter, he believes, if people are not sure the Fed will carry through. They just have to believe it might happen. “So if Ben Bernanke made a statement, or the board made a statement, saying that we are reconsidering our views about the inflation target, even if we don’t have a credible commitment that they’re going to deliver 3.7 per cent annual inflation over five years, that’s still a help.”

In his new book, End this Depression Now!, Krugman dismisses contemporary macroeconomic theory. He is also critical of the idea that policy credibility matters. On this he says: “Credibility sounds great, but the evidence that anti-inflationary credibility is actually an important thing in the real world is basically nil.”

We return, inevitably, to the topic of the day. Would he conclude that the European currency union was a mistake? “Yes, I think we’ve been asking, whose fault is this crisis? And I think it was basically fated, from the day the Maastricht Treaty was signed. Now, I think it might be rescuable with a higher inflation target, which is a poor second best to having a fiscal union. But no, the setup is fundamentally not workable.

“What’s interesting is that the euro itself created the asymmetric shocks that are now destroying it [via the capital flows it engendered]. Not only have they created something incapable of dealing with shocks but the creation engendered the shocks that are destroying it.”

By this stage, I have long since finished my terrine. I always eat quickly. But Krugman is eating his salad very slowly, as he talks. He has to wave away waiters several times. The restaurant is now quite empty. When the meal is finally cleared, I order a double espresso, while he orders a regular filter coffee.

We discuss briefly the future of mac­roeconomics: his hopes rest on younger economists doing empirical work. “There are young people doing some really excellent research. Most of it, there are a few exceptions, but what’s really driving the cutting edge is empirical work.” Krugman points out that the prestigious Bates Clark medal, awarded to economists under 40 (he won it in 1991), “has been going overwhelmingly to people doing very empirical stuff. And I think that’s the salvation of economics in the long run, if there is a long run, because things are going so badly.”

We turn to his view of US politics. How does he explain what is going on?

He responds that “a couple of things do seem to operate here. One is money. There are think-tanks which don’t actually do a whole lot of thinking but which are lavishly financed ... You can have a lot of fun if you go back and look at what they were saying, and it’s hilarious, about Iceland as a role model, or the wonders of the Irish system.

“And then there is something about the appeal of this hard-money, gold-standard thing and it’s always had an appeal, but it seems even stronger now. I would have thought that the fact that people like me have been so much closer to [being] right on inflation and interest rates would move a substantial number of people into thinking that maybe their preconceptions were not right.” But no.

I ask whether he is disheartened by the failure of people on his side of the political argument to stand up for what they believe in. After all, I note, you must be disappointed by the willingness to accept the need to slash entitlement spending – rather than to raise taxes – when the federal tax ratio is exceptionally low and there have been extraordinary shifts in the distribution of income. Does Krugman think that’s all about money?

“These things are always complicated but some of it is about money. Look, with even a few mild words of reproof, Obama has lost a huge funding source from Wall Street. And you have got to give the right credit: they play a long game. They’ve spent 40 and more years working on ‘government is bad’ or ‘taxes are bad.’”

But, he continues, “there is an organised progressive infrastructure now in the way that there was not. It’s tiny and ill-funded, compared with the other side, but it’s actually also smarter than the other side. I certainly feel personally that, although I’m not getting the policies I wanted, I am getting listened to in a way that was not true even two years ago.”

So how does Krugman cope with the hatred he attracts? “2002 to 2004 were by far the worst, and that was mostly not about economics, that was about the fact that I was pretty much alone in saying we’d been lied into [going to] war. But you do need to develop a thick skin. I’ve partly developed the attitude that if I don’t get a whole lot of hysterical pushback then I probably have wasted the space in the column.

“I’ve been in this a long time and it was really shocking in the beginning. But eventually you get acclimated. I think it scares a lot of people off. I think a lot of journalists, the first time they publish something even mildly critical of rightwing orthodoxy, they hit this firestorm and they never come back. They run scared ever after. But I’m long past that point.”

I ask him about his punchy and provocative style. How conscious is it? “I had already done some of it in Slate so I had learned some of it, but this [writing for the NYT] is even tighter. There is a craftsmanship of making it work so that somebody, whose ordinary instinct is to think oh, economics, boring, will actually read through your piece.”

What fascinates me, I say, is how he manages the output, particularly the quantity of blogging he is doing. Obviously Krugman is quicker than most people but how does he get time for anything else?

“I am still teaching. I probably work 70 hours a week but not 100 hours a week. But I am damned fast. I write faster than just about anybody in journalism, it turns out, which is interesting.”

Krugman is famous for resisting structural explanations for the high levels of unemployment. But what does he think of the view that our economies are dangerously addicted to financial and asset price “bubbles”? He replies by asking whether I have ever seen the satirical publication The Onion. “Quite early on they had the perfect headline, which was, ‘Recession Ravaged Nation Demands New Bubble to Invest In.’”

So how’s his new book doing? “It’s good. It’s funny. We’re on the bestseller list in the US. But it’s selling like hotcakes in Europe. We’re in fourth printing in Spain and they’re about to put ads on the sides of Madrid buses, apparently.”

This brings us back to the eurozone crisis. I remark that the Germans are now in a position of having to choose between permanently bailing out those they regard as deadbeats or breaking it up, causing an immense economic and political mess. I feel quite sorry for them.

He responds: “I remember there was a humorous column in the Independent which would have been in about 1992 or thereabouts, about the decision to give the Booker Prize to the Maastricht Treaty – a postmodern novel in strict treaty form. And throughout the novel one senses, in the background, powerful forces with unknown motives. Who are these forces, what do they want? We never learn.

“It was a wonderful satire.”

Coffees are finished. We walk out from an empty restaurant, Krugman to return to Princeton and his column, I to return to the New York offices of the Financial Times. The crises go on. He is the pundit conservatives detest and liberals cheer. In the US anybody can become anything. A Nobel Prize-winning economic theorist can even become the country’s most controversial columnist.

Martin Wolf is the FT’s chief economics commentator


Time Warner Center, 10 Columbus Circle New York 10019

Salade niçoise $22.00

Foie gras terrine $17.00

Sparkling water $7.00

Double espresso $5.00

Coffee $4.00

Total (including tax, service) $71.88

Young economists: The empiricists strike back

The empirical work of young economists, as championed by Paul Krugman, is influencing policy debates. Here are some names to watch, say FT leader writers Martin Sandbu and Ferdinando Giugliano.

Esther Duflo, 39, at the Massachusetts Institute of Technology, is co-founder of its Poverty Action Lab. She leads a new trend of applying experimental research methods to anti-poverty policies to find out empirically what works best for economic development. In 2010 she won the John Bates Clark medal, awarded by the American Economics Association to the best US-based economist under 40. Her book Poor Economics (written with MIT colleague Abhijit Banerjee) won the Financial Times/Goldman Sachs Business Book of the Year Award in 2011.

Economists Betsey Stevenson and Justin Wolfers

Justin Wolfers and Betsey Stevenson, 39 and 40, a couple in life and in economics, are at the University of Pennsylvania. They study the labour market effects of public policy, in particular how this impacts women and family relationships. They are also at the forefront of “happiness economics” and challenge the “Easterlin paradox” – conventional wisdom saying that above a certain level, a country’s income per capita has little effect on well-being.

Emmanuel Saez, 39, is a French-born economist and professor at Berkeley, and a winner of the John Bates Clark medal. His work concentrates on income inequality and what governments can do to reduce it. Saez has shown that inequality in the US is now at a level which is nearly as high as before the Great Depression. To reverse this, Saez advocates a level of tax that is higher than that currently in place in many western countries – his “optimal” tax rate for the rich being between 45 and 70 per cent.

Emmanuel Farhi, 33, is a Harvard-based, French-born macroeconomist. In a recent paper, Farhi looks at the eurozone and at whether countries can devalue internally – that is, without having to leave the currency union. His finding that, under certain circumstances, changes in the tax system can replicate the effects of an exchange rate devaluation will no doubt play into the current debate on the single currency.

Raj Chetty, 32, is one of the youngest-ever tenured professors at Harvard’s economics department. He is best-known for going against the conventional theory that unemployment benefits reduce the incentive to look for work. Chetty’s research shows benefits can be helpful as they prevent people from rushing to take an unsuitable job.

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