Economist Paul Krugman

DATE September 10, 2003 ACCOUNT NUMBER N/A
TIME 12:00 Noon-1:00 PM AUDIENCE N/A
NETWORK NPR
PROGRAM Fresh Air

Interview: Paul Krugman of The New York Times discusses his new
book, "The Great Unraveling"
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

New York Times Op-Ed columnist Paul Krugman describes his new book as an
attempt to explain how our country's economy went downhill so fast, and why
our leaders made such bad decisions. That book, "The Great Unraveling,"
collects his Times Op-Ed columns from January of 2000 to January of 2003,
along with new essays about the intersection of politics and the economy.
Paul Krugman is an economist who teaches at Princeton University.

In a review of his book in this week's New Yorker, John Cassidy writes, quote:
"To many liberals, Krugman is a beacon of sanity in a world gone mad. To many
conservatives, he's an infuriating polemicist who distorts the president's
record."

What is beyond dispute is that he attracts plenty of attention. Last year,
The Washington Monthly hailed Krugman as "the most important political
columnist in America," unquote.

You describe your book as being about economic disappointment, bad leadership
and the lies of the powerful. You've accused the Bush administration of
lying. Give us an example of something that you see as not a disagreement, but
as a lie.

Mr. PAUL KRUGMAN (Author, "The Great Unraveling: Losing Our Way in the New
Century"): Oh, maybe the simplest case is just who gets those tax cuts? You
know, for whom are the bulk of the tax cuts going--to whom are the bulk of the
tax cuts going? And it's a very straightforward thing. You just go through
and look at the tax brackets which have the biggest cuts and you do the
arithmetic. And all of the Bush tax cuts are very, very heavily tilted
towards the extremely affluent. And yet the administration has insistently
claimed that they were targeted on the middle class or on lower-income working
people. You know, that's just a straightforward lie about the content of
their own policy.

GROSS: What does it take to be able to use the word `lie' in your column?
It's a column, it's an opinion piece, it's not a news piece...

Mr. KRUGMAN: Right

GROSS: ...but, still, what kind of, like, editorial oversight do you have
before you can go with the word `lie' in a column?

Mr. KRUGMAN: During the 2000 campaign, the then-editor of the editorial page,
Howell Raines, basically told me I could not use that word. I could imply it
by indirection, I could say it, but that it was just too harsh, too partisan a
word to use in the middle of a campaign.

After that, I really haven't had any restraints. But it is a funny thing.
There is a real reluctance to go after a politician if he lies about
substance. If he lies about his personal life, that seems to be fair game,
but if he says that two minus one equals four, when it comes to his actual
economic policy, or says that some country is an imminent threat when in fact
the evidence points the other way, people in the journalistic profession are
very, very reluctant to say, `Hey, he's lying.'

GROSS: Now you've described the Bush administration as revolutionaries. In
what sense does the administration strike you as revolutionary?

Mr. KRUGMAN: If you look at the sum total of the policies, and if you look
at the architect of the policies--not the front men, among whom I would
include Bush himself--but the architects, people like Grover Norquist, the
lobbyist who's sort at the center of the web, or The Heritage Foundation,
which is the intellectual headquarters for the whole thing, what these people
want to do, and they've been quite explicit about it, is they want to
dismantle most of the federal system as it's been built up since the 1930s.
They talk about the New Deal and the Great Society, basically the work of
Franklin Roosevelt and Lyndon Johnson, as being illegitimate. And they talk
about starving the beast. We've got to deprive the government of revenue so
that it's forced to give up these programs.

And then if you look at the actual policies of the Bush administration,
particularly if you look at the full wish list--they haven't gotten everything
they want yet--but if you look at the full wish list, it really is two things.
It's gonna roll back federal revenues to a level where we can't afford to have
those great entitlement programs. And it also shifts the kind of taxes we
collect back to a kind of pre-New Deal system in which wealthy people are
taxed at very, very much lower rates than they are today. So it really looks
like something that's much more radical than any of the official
pronouncements. It's a dismantling of America as we know it.

GROSS: President Bush is pursuing further tax cuts that would cost about $1.1
trillion over the next 10 years. Two months ago the president said that his
goal was to reduce the deficit by half to about $238 billion by 2006. What's
your critique of his math there?

Mr. KRUGMAN: Oh, in this case, if you take it literally and of course you
forget about the $87 billion he just asked for, then if you take the letter of
the law as it's written, much of the tax cuts, a large part of this last
package of tax cuts expires after two or three years. So there are sunsets.
And if those tax cuts expire, then a lot of the revenue comes back and it
becomes possible to reduce the budget deficit by I don't think even half under
those circumstances. But there's a lot of reduction.

The point, of course, is that those sunsets are not intended to actually
happen. Those tax cuts are really intended to be permanent. They made them
officially last for only a limited period of time so that they could hold down
the headline price tag on the day the bill was passed. But you know that
quite soon the administration will start saying, `Well, that's ridiculous, we
can't have taxes going back up. Let's extend those tax cuts.'

So essentially what they've done is they've turned a--What do you want to
say?--they've pretended that these tax cuts are temporary, even though they
clearly intend to make them permanent. And then they've claimed that they
have a plan to bring the budget deficit down, which is based upon the
fictitious temporariness of the tax cuts.

It's actually quite similar to what happened in the first tax cut, the one
back in 2001, which, by the letter of the law, expires at the end of 2010.
One of the implications of that, by the way, is that the estate tax
disappears in the year 2010, and then comes back in full force in the year
2011. So if you have an elderly parent sort of on the edge in December 2010,
you know what do do. Some of us called it the "Throw Momma from the Train"
act.

But right now, of course, Bush is out there is saying, `Well, that's
ridiculous. We should make this thing permanent.' And they're going to do
the same thing with the tax cuts that were rammed through this year.

GROSS: Now Congressman Gephardt has proposed that we scrap the 2001 tax cut.
As an economist, like, from your point of view, you disagree with the tax
cuts, do you think that they could just be scrapped? And if they were
scrapped, what would that mean?

Mr. KRUGMAN: Well, no one, I think, thinks that the tax cuts should go away
tomorrow or this year or even next year, because we still have a depressed
economy; you don't want to pull purchasing power out of it right this instant.
But if you are trying to look past the depressed economy--and the economy
will recover eventually--then you ask the question, how much of the tax cuts
that were passed in 2001 and in 2003, how much of those can we afford?

And the simple answer is, none of it. The federal government is now running
budget deficits that are more than 20 percent of its spending. The tax cuts
cut revenue by about 15 percent. We need to be back to balanced budget and,
in fact, we should be running surpluses right now because the baby boomers are
gonna start retiring and collecting their Medicare and Social Security in the
next decade, which means that there was never any money in the pot for any of
these tax cuts. And, in fact, we've got to do something, which might well
include raising taxes above what they were in the year 2000.

So if you actually just do the budget arithmetic, you come to the conclusion
that one way or another, let's put it this way, one way or another we have to
get back all of the revenue that was lost from those tax cuts plus. Now that
doesn't mean that we necessarily have to have new taxes that exactly match
the taxes we did away with, but it means that we have to do something that's
equivalent and more so in revenue terms.

GROSS: So it sounds like you think it would actually be dangerous to
just--not that this would happen anyway, but that it would dangerous to just,
like, repeal the tax cuts?

Mr. KRUGMAN: Well, I would be happy to see something that looked like the
reverse of what was done in 2001, where tax cuts were phased in, gradually
coming into effect. How about revocation of tax cuts which is phased in?
And then we can work from there.

See, as long as we know that we're going to be solvent in the long run, we can
handle even an enormous deficit for one or two years. The trouble now is, you
look at the tax laws as they're now written and you say, in the long run we
are not solvent, this is just not--we just can't go on like this. We're gonna
go off the edge. And what we need to do is put in now a path back to a
balanced budget. And I won't even be bothered if we have another $500 billion
of red ink over the next year, as long as you can see that we're on a path to
where the red ink stops flowing after a couple of years.

GROSS: What's your prediction? What happens if we don't go on a path that
will really rein in the deficit?

Mr. KRUGMAN: I think there comes a day when the people who financed the
deficit--you know, how do we run a budget deficit? The answer is basically
the US government sells bonds and people buy US government bonds because they
believe that it's the US government and it will always repay its debts. I
think there comes a point when the bond holders do to the United States what
they did to Argentina; that they say, `You know, we don't really actually
trust. We think there's a serious risk of a future default because this
country doesn't seem to have its act together fiscally.' And at that point,
we can only borrow at much higher interest rates, which then sends you into a
spiral of fiscal collapse. You can't borrow because people don't trust you,
and because you can't borrow, the deficit gets worse, because you have pay
usurious interest rates. And off we go into the wild blue yonder.

The point, I think, is that right now none of that shows because we're
America, and people think, well, this doesn't happen in America. But all of
the evidence about the political system, all of the evidence about what's
actually going on, says actually we're not that country you think we are. Or
we're not the country we used to be. We seem to be really completely
irresponsible at this point. And at some point the mystique of our name no
longer cuts it.

GROSS: What happens if other countries are unwilling to invest in us?

KRUGMAN: Well, it's not so much investing in America. I think we're really
talking about unwilling to buy US government debt. What happens is that you
just can't pay the bills.

Right now, I look at it and I say, if I just draw a straight line forward from
where we are now, one of three things has to happen. Either we have to have a
major tax increase, taking back everything that happened under Bush and more,
or we have to have drastic cuts in the core middle-class entitlements
programs, basically. We have to have big cuts in Medicare and Social
Security. Or we're gonna have a situation in which people just stop lending
money and the US government experiences a banana-republic-style financial
crisis.

Now you take any one of those three things, and people will say, well, that
just can't happen, that's impossible. It's inconceivable that we'll have tax
increases on that scale. It's inconceivable that we'll have cuts in Medicare
and Social Security on that scale. And it's inconceivable that the US will go
bankrupt. And yet one of those three things has got to happen. And if you
ask me which one, the answer is, God knows. But it's certainly going to be
some kind of a crash.

GROSS: My guest is New York Times columnist Paul Krugman, author of the new
book "The Great Unraveling." We'll talk more after a break. This is FRESH
AIR.

(Soundbite of music)

GROSS: Paul Krugman is my guest. And he's an Op-Ed columnist for The New
York Times. He's an economist who teaches at Princeton University. His Op-Ed
columns are collected in the new book "The Great Unraveling: Losing Our Way
in the New Century."

Do you feel that the role of government and the role of tax money is being
redefined? In other words, what should government be paying for in America
or abroad? Do you feel that that is being redefined now?

Mr. KRUGMAN: I think there are people in and close to the administration who
want it to be redefined. I think you can't understand what's happened now
without realizing that, for a long time now, a very determined, very
well-financed group of people have been trying to redefine government back to
what it was when Herbert Hoover was president. They want to get rid of this
whole set of social programs, the safety net that we've all become accustomed
to. But nobody ever runs on that platform. If you look at what candidate
Bush ran on in the year 2000, it was, `I'm going to protect Social Security,
I'm going to add prescription drugs to Medicare, I'm going to be
compassionate.' And, in fact, what we've now done is just basically taken
away the revenue that we need to maintain those programs without actually
telling people that we are going to restrict those programs or do away with
them.

So it's bait-and-switch again. I think the intention--I doubt that Bush
understands what he's doing, but the intention of the people who are
ultimately behind the plan is that, four or five years down the pike, they can
say, `Well, you know, we just can't afford all of these social programs;
look at the budget deficit,' and will shout down anyone who suggests that,
well, the reason we've got the budget deficit is because we had all these tax
cuts that you told us we could afford.

GROSS: What do you mean when you say that you doubt that President Bush
understands what he's doing?

Mr. KRUGMAN: I don't think--he doesn't know the budget arithmetic. I'm sure
he has no sense of how the numbers add up. I'm not even sure that you think
that you necessarily want the president to understand that. But I'm not even
sure that he understands the nature of the program for which he is the front
man. I think he thinks tactically. He thinks, what do I do to win the next
election? But, you know, I don't know that. But my guess is that there are
people in the administration who understand very well that they're in the
process of eliminating the tax base for America as we know it. But I'm not
sure that Bush is one of them.

GROSS: You think that the Bush tax cuts will have a cumulative, very bad
effect on the future of our country and that, you know, in the short term the
rich will benefit, and in the long term the country will suffer. If the
country falls apart, how would that benefit Republicans? Why would people
choose a course that would end in disaster?

Mr. KRUGMAN: I think they think that it will be difficult but not disastrous.
If you take what, oh, Grover Norquist--a lot of people should know about
Grover Norquist. But take what he says about how we need to deprive the
government of its lifeblood so that we can starve the beast down and so that
we can get the government down to the size where we can drown it in a bathtub.
I don't think--I think he envisions a situation of very difficult times where
the budget is deep in the red and the government's having trouble borrowing
and people say, `Well, we have to slash programs to make room.' I think he
doesn't imagine that we're going to have rioting in the streets. He might be
wrong about that. But what they are looking for is a time of extreme
stringency in which it becomes possible in the name of solvency to cut
programs that would be otherwise untouchable.

Is this a good gamble? If I were a Republican Party elder, would I be
willing to take that gamble, realizing that if it goes wrong that an angry
populace might turn on me? I wouldn't take that gamble. But we've got very
daring or, if you like, deeply irresponsible people making these decisions.
They're willing to take that risk.

GROSS: Do you think that the Republican administration doesn't believe, that
they've done the math and the math that they've done doesn't indicate the kind
of extreme consequences that you're predicting? Or do you think that they've
done the math, they see these consequences, and they're just willing to ignore
it?

Mr. KRUGMAN: Actually, we know they've done the math. If you look at the
last budget put out by the Bush administration, tucked way in the back--you
have to go through several hundred pages to find it--was an analysis of the
long-run budget outlook. And it was catastrophic. It clearly--even though I
can tell you that the numbers were way optimistic, nonetheless it showed
those long-run lines just went off the charts. It was clearly heading off a
cliff.

So they know. I don't know who they--I mean, does Dick Cheney know? Does
George Bush know? I don't know. But the Bush Treasury Department knows very
well that, as it now stands, the government programs now in place and the tax
rates now in place do not compute, they don't add up; that something drastic
has to happen. But I think they just figure that whatever's gonna happen is
not gonna happen before 2004.

GROSS: But, you know, people have more at stake than just the next election.
They have their lives and their children's lives at stake. Are you saying
that the don't care or that they just see things differently than you do?

Mr. KRUGMAN: They just think that they'll be able to do something very
different once they've locked things in politically. And what it is they
intend to do, I don't think they themselves have figured it out.

I have to say, sometimes I do find myself wondering, just what do these guys
imagine is going to happen? How do they think this is going to play out? Do
they think that someone's gonna wave a magic wand and bring this thing back
into balance?

But it really was quite something. A number of us were looking at their own
budget document and saying, they have--again, not up at the front, but hidden
at the back--painted a portrait of disaster for the nation. And why don't
they seem to care?

GROSS: Now you keep saying that the Bush administration math is, you know,
like two plus two equals seven, you now, four minus two is six, that it just
doesn't add up. But don't you think that in some ways math is subjective,
that you can use the figures in different ways and that figures are like
facts, you interpret them?

Mr. KRUGMAN: Not when you're actually coming to the bottom line of the
budget. The Reagan administration had what I thought then and still think
now were irresponsible policies. They justified their irresponsible policies
on the basis of theories that I thought were crazy but, given their theory,
you could justify. If you accepted the theory, then the policy made sense.

The Bushies are different. They just plain lie. They just plain say, `Here's
our tax cut; it goes mostly to the working class.' And then you actually take
a look at the numbers and it's not subjective. You just say, oh, 42 percent
of it goes to the top 1 percent of the population.

When I look at a lot of journalism, people speak with great definiteness
about personality judgments which really are subjective, and they talk with
great diffidence about cold, hard facts and numbers, which are--in many
cases, there is no argument.

In one of the pieces that I have in this book, I actually said that if a
candidate of a major political party said that the Earth was flat, the news
analysis that you would read in the newspaper would say, `Shape of the Earth:
Differing Views.' I mean, they--much of it really is that black-and-white.

GROSS: Paul Krugman is an Op-Ed columnist for the New York Times and is
author of the book "The Great Unraveling."

In early October, we'll speak with Grover Norquist, president of Americans
for Tax Reform, and learn of the strategist who helped shaped the president's
economic program.

I'm Terry Gross, and this is FRESH AIR.

(Soundbite of music)

(Announcements)

GROSS: Coming up, interpreting the figures. We continue our conversation
with economist and New York Times Op-Ed columnist Paul Krugman. Also Maureen
Corrigan reviews the new short story collection "Lucky Girls."

(Soundbite of music)

GROSS: This is FRESH AIR. I'm Terry Gross back with New York Times op-ed
columnist Paul Krugman. He writes about the intersection of politics and the
economy. Many of his columns are collected along with new essays in his book
"The Great Unraveling." Krugman is an economist who teaches at Princeton
University.

You think that Social Security is being threatened. What are the threats to
Social Security, in your point of view?

Mr. KRUGMAN: Well, basically that there just won't be money. You know, right
now the Social Security system collects currently substantially more than it
pays out in benefits. Right now, roughly, it collect about $4 in payroll
deductions for every $3 in benefits it pays, and it's doing that for a reason.
It's doing that to build up reserve, because we know that people are going to
get older, that the baby boomers are going to hit the system. Now if we were
making a serious effort to keep Social Security as we know it going, we would
be, in fact, using that Social Security surplus to build up a reserve for the
future. But the reality is that all of that money and much, much more is
instead being used to pay for current government expenses.

And you may remember just a few years ago, we used to talk about the Social
Security lock box, and we used to talk about the non-Social Security surplus.
Now no one even talks about that. They act as if it was all just one pot, and
as long we're in overall balance, which we won't be, that would be fine, which
amounts to saying that we don't consider Social Security revenues to be in any
sense set aside for the future of Social Security.

We should also say that there's, of course, the `Bushies' tried and will try
again, to push a partial privatization of Social Security, just convert it
into private accounts which, it turns out, is also a way of undermining the
system's finances.

GROSS: Would you explain that proposal?

Mr. KRUGMAN: Yeah. I mean, the idea is, the original Bush proposal, which
keeps on resurfacing in some form, is that about one-sixth of Social Security
revenues, of what you pay in, the FICA at the bottom of your paycheck, instead
of going into a general fund, would go into a personal account, and that
sounds great. `Gee, it's my money. Let me invest it.' The trouble with it is
that that's not the way--if you actually look at how Social Security works,
it's not an investment fund. It's actually a tax and benefit system, in which
really each generation pays for the previous generation's retirement. What's
really happening with the bulk of the money you pay into Social Security is
that it's paying for your parents' retirement checks. If you take a large
chunk of that and divert it into personal accounts, you've taken away the
money that is supposed to be used to pay benefits to people who are already
retired, and so it's a program that guts the system's finances.

And actually, if you really want the story, when did I know that there was
something seriously strange and frightening about the Bush people? It was
during the campaign when they unveiled the Social Security program, 'cause the
immediate thought, if you knew anything about the system, was, `Well, gee, all
right. You want to divert a trillion dollars over the next 10 years into
these personal accounts. What's going to replace it? Where does the money
come from?' And they never answered that question. They just pretended that
somehow the money comes out of thin air. They even pretended that it would
strengthen the system. It was a real two-minus-one-equals-four policy, and it
was just scary. At first, even I wrote columns that tried to make sense of
what I thought they must be proposing, 'cause on the face of it, what they
were proposing was such obvious nonsense that they much have something else in
mind. And then eventually I realized, no, they aren't. They're really just
counting that trillion dollars twice. And it's just a mark of how
disconnected from reality policy discussion has gotten these days.

GROSS: President Bush said a few days ago that the economy was looking up.
Do you think that there are signs of an economic recovery?

Mr. KRUGMAN: Yeah. Yes, but. We're going to have a good quarter in terms of
GDP. The output numbers will look good. It appears that we're not going to
have a good quarter in terms of jobs, which is what matters to most people. I
wouldn't be surprised if a year from now, more Americans have jobs than do
currently. I wouldn't be surprised if we have at least some upturn. You
know, to some degree, the economy has a tendency to heal itself. At some
point, businesses, even if business is lousy, they say, `But you know, those
new gizmos, the latest generation of computers or whatever, is so much better
than what we've got that we really should replace it.' And when businesses
start to do that, you start to have something of an economic rebound. So I
wouldn't be surprised if we see a much better economy--well, I don't know
about much better--a better economy a year from now than we have today.

I think it's now nearly inconceivable that by a year from now we will have
recovered the jobs lost since early 2001. We've now had about 2.8 million
jobs lost, and it would be very, very difficult to get back to that level.
And I think it's completely inconceivable that we'll make up for the true job
gap, which is a lot larger than that, because the population grows. We're
really about five million jobs in the hole. So if you ask the question:
Could we have 500,000 more jobs in America a year from now than we have today?
Yeah, that could happen. Could we have 2.8 million, which would still leave
Bush as the first president since Herbert Hoover to end a term with fewer
people than were working at the beginning? I think that's very, very
unlikely. And could we be back to the kind of full employment that we started
to take for granted in the late '90s? I think that's absolutely out of the
question.

GROSS: Why do you think it's so unlikely that we will be able to get back the
jobs that we lost?

Mr. KRUGMAN: Partly because we're just so far down that we're so deep in the
hole. Beyond that, at no point during these past almost three years now have
we had economic policy that addressed the problem.

GROSS: Which is? What's the problem?

Mr. KRUGMAN: Well, the economic policy that addresses the problem is
something that tries to get people spending now, that tries to put money into
the economy in a way that creates jobs when we need them. So, look, there are
certain things you always do when there's a recession. The federal government
always comes to the aid of state and local governments. It always provides
them with money so that they don't have to do severe cutbacks, so they don't
have to lay off school teachers and stop road building and lay off policemen.

This time the federal government didn't. It didn't provide any aid, even in
the most extreme case. I was a little bit shocked to discover that so far,
New York City has received less than 30 percent of the $20 billion is was
promised right after September 11th. So the aid at the state and local
governments that always happens in a recession just hasn't happened this time

You normally have the federal government try to provide some kind of tax
relief that is targeted on the people most likely to spend it, which tend to
be people with lower incomes. And we've had a little of that, but it's been a
very small fraction of the overall tax cuts. So just to say, what we've had
is economic policies that have tried to use the economic difficulties to push
through long-term goals, pre-existing goals of the people in charge, none of
the standard things that you would have done to fight what has turned out to
be a very intractable recession.

GROSS: You say in your book that you've been accused of being a knee-jerk
liberal, even a socialist, but just a few years ago, you say, the knee-jerk
liberals, you say, didn't like you at all. What were you criticized for then?

Mr. KRUGMAN: I like free markets. I don't worship them, but I like them. I
think that they can be very, very powerful as long as you're willing to
recognize when they're going wrong. By and large, with some limits, I'm a big
fan of globalization, of free trade basically, because I want the Third World
to stop being the Third World, and all of the success stories, all of the
cases of countries that have really come up in the world have involved
large-scale exports to the world market. And I think if we want to have hope
for the really poor people in the world, we have to have a world market that
allows countries to have an economic takeoff. And because of all that, some
of the really strongly interventionist people in the United States thought
that I was too friendly to markets. In the mid-'90s, I would be accused of
not really being a liberal, even though I'm all for helping the poor, because
I was also for free trade.

GROSS: My guest is New York Times columnist Paul Krugman, author of the new
book "The Great Unraveling." We'll talk more after a break. This is FRESH
AIR.

(Soundbite of music)

GROSS: My guest is New York Times op-ed columnist Paul Krugman. His new book
is called "The Great Unraveling."

How would you say the content and tone of your column has changed since you
started writing it in--What?--the year 2000?

Mr. KRUGMAN: Yeah. Well, I started writing at the beginning of 2000. It
was still the new economy. The Nasdaq hadn't even peaked yet. US policies
appeared to be sensible. The budget was in growing surplus. The first few
columns were happy. They were maybe having a little fun with absurdities. I
had some ominous warnings about foolish policy, but that was out there. That
was other countries. You know, America was a well-run, solid place. Clearly,
the tone could have gotten more political, because the political situation in
this country has grown increasingly frightening. And they've become more
ominous generally, because, boy, are we making a mess of our situation. So
I've gotten darker, more political and, I guess you have to say, angrier, I
think, with justification.

But I've gradually come to realize that we are facing a challenge to our way
of life, an internal challenge. The real threat isn't some terrorists who can
kill a few people now and then but are not fundamentally a threat to the
continuation of America as I know it, but the internal challenge from very
powerful domestic political forces who want to do away with America as I know
it. And it's just clear to me that this is one of those crucial points in
American history.

GROSS: What do you think is most at risk in the American way of life the way
you see it?

Mr. KRUGMAN: It's hard to know where to begin. But suppose you took all of
the things that are happening, things that I write about regularly, some
things that I write about less regularly but are clearly in the background.
You would say, `We are at risk of dismantling the--well, first of all, we're
just at risk of a fiscal crisis. We're looking at irresponsibility on a level
that I don't think you can find before in American political history. We're
looking at the possibility of dismantling institutions that do a lot to make
America a more decent place, Social Security, Medicare, Medicaid. We're
looking at foreign policy. This is not usually my brief, but of course, one
can't help writing about it. We seem to be trashing the international
institutions that we ourselves built up after World War II in an attempt to
create a more peaceful world. And then, not really my brief, but you can't
avoid thinking about it: civil liberties. We seem to have people who, at the
first possibility, as soon as they were given the opportunity, they jumped at
a whole series of restrictions on individual freedoms and greatly enhanced
tools for centralized control.

So it's a very scary thing. There's a combination of irresponsibility and
authoritarianism in the people now running the country that I find very, very
frightening.

GROSS: One of the things that you were able to do in your columns is come up
with analogies that help explain a complicated economic story.

Mr. KRUGMAN: Yeah.

GROSS: And an example I'd give of that--and I'd like you to kind of do this
for us--is the ice cream parlor analogy for what happened with the books at
Enron, Adelphia, WorldCom, Dyncorp. Can you use the ice cream parlor analogy
to explain that for us?

Mr. KRUGMAN: Sure. I was trying to explain what these frauds were about, and
I'm not sure I can remember all of my examples, but they included--basically
it was, you own an ice cream parlor. You have some ability to control what
goes into the books. You're going to be selling stock in the ice cream
parlor. What can you do to get yourself a profit to make yourself personally
rich? One of them was that you sign contracts for delivery of ice cream cones
in the future, and you make an estimate of the profit you're going to earn on
every ice cream cone sold in the future that is wildly exaggerated, but no one
can know that yet. And then you book the imputed future value of all those
ice cream cone sales as if they were part of your current profits, which under
some rules you're allowed to do, say, `I've got this enormously popular ice
cream parlor,' sell lots of stock, pocket the money and disappear. That's
basically the Enron strategy. If you look at what they did, that's basically
how it worked.

Another was that you don't pretend to be earning lots of profits, but you say,
`This is going to be a tremendously profitable business, and we're going to be
number one, and just to show you how we're going to be number one, look at how
may ice cream cones we're selling.' But it turns out that you aren't really
selling all those ice cream cones; they're fake sales where you sell them to
somebody and then he sells them back to you, and you're just creating a lot of
apparent trading in ice cream cones that is not real transactions. That was
the Dynegy strategy. And you go on down the list. It really helps to just
think about it in terms of the small, in terms of a particular example.

GROSS: Are you confident that the kind of shenanigans or criminality that we
saw at the top of some large corporations is over now, that that's history and
that the stock market is a safer place?

Mr. KRUGMAN: Actually, I'm confident that it's not. I mean, I can't tell you
which of the S&P 500 are still engaging in these shenanigans, but we can look
at a couple of indicators. Really, there are two overall indicators that I
like to look at. One is to compare the profits the companies report with an
alternative measure we have of total corporate profits. It's a little more
technical than I really want to explain, but we have one measure that we think
is not affected by these shenanigans, but it doesn't tell you about individual
companies. It only tells you about the economy as a whole. And the other is
the one that could be affected by funny accounting on the part of
corporations. When those two started to diverge, which really started to
happen around 1997, that should have been a flashing red warning light. It
should have set off sirens that something was going really wrong. Those
numbers have not converged. We are not seeing those things go away. So it
suggests that there really hasn't been very much reform.

The other thing is executive compensation. If we were really seeing an end to
self-dealing on the part of top corporate executives, you would expect to see
executive compensation. The top 100 CEOs in the US, if you look back around
1970, they were earning about 40 times as much as the average worker. By the
year 2000, they were earning a thousand times as much as the average worker.
That was another indicator of insider dealing, of self-dealing, of management
exploiting the stockholders. If there was a real reform, we would expect to
see that gap start to narrow again. In fact, it's continuing to widen.

So I don't think there's been very much real reform. I think that Washington
made a couple of show trials. We'll say, `Oh, we'll punish Martha Stewart,
and that's the end of the story.' And of course, that's a trivial case
compared to the real ones, but they're going to basically try to convince
people that it's all over, and it's not.

GROSS: You wrote a column--This was in late 2001--in which you said that the
Enron scandal would mark a bigger turning point for America's perception of
itself than September 11th. Do you stand by that?

Mr. KRUGMAN: No, but not for the reason you might think. The story about
September 11th that people were telling at that time was that it was going to
be the moment when an angered America took up arms and we really showed the
world. I don't think that's the way we will remember it. What I did not
understand at that point was the extent to which--I'm going to say something
fairly stiff here. I didn't understand the depth of the cynicism in our
leadership. I didn't understand the extent to which they would exploit
September 11th for political goals, the extent to which they would use it for
partisan advantage in the elections and the extent to which they would use it
to rationalize projects that had nothing to do with terrorism. Now they've
done all that, and I think we will, in fact, look back at September 11th as a
turning point, but it'll be a turning point that we're ashamed of in future
generations. They'll look at the way in which patriotism and fear were
exploited and abused, and we'll say, `My god, this was the point when America
really took a very serious wrong turn.'

GROSS: Thank you so much for talking with us.

Mr. KRUGMAN: Well, thank you.

GROSS: Paul Krugman is an op-ed columnist for The New York Times and author
of the new book "The Great Unraveling." In early October, we'll speak with
Grover Norquist, the president of Americans For Tax Reform. He helped shape
the president's economic program.

I'm Terry Gross, and this is FRESH AIR.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Review: Nell Freudenberger's collection of short stories titled
"Lucky Girls"
TERRY GROSS, host:

Two years ago Nell Freudenberger was a 26-year-old assistant at The New Yorker
magazine when she published her first story in the magazine's `Debut Fiction'
issue. Since then many critics and readers have been waiting for her first
collection of short stories to be published. It's just come out, and it's
called "Lucky Girls." But critic Maureen Corrigan says Freudenberger writes
with the emotional wisdom of someone who's been around for at least a century
or two.

MAUREEN CORRIGAN reporting:

The women in Nell Freudenberger's debut short-story collection "Lucky Girls"
really know how to make a mess. They backpack their complicated lives all
over the globe, shoving their way into marriages in India, leaking lust in
Thailand, stomping all over memories in India again and Vietnam. Maybe in
real life, women this sloppy, this destructive wouldn't be likeable, but in
Freudenberger's fiction, they're irresistible. In the vivid way she humanizes
her high-maintenance women and leavens their troublesome predicament with an
essentially comic tone, Freudenberger reminds me of the immortal Laurie
Colwin, and that's just about the highest compliment I can pay to any short-
story writer.

The title story of the collection, like the four that follow, pulls off the
trick of being both technically sleek and deeply poignant. The unnamed
narrator of "Lucky Girls" is stranded emotionally high and dry in India. When
we meet her, she's just been surprised in her small roach-infested house by an
older woman named Mrs. Chawla. Over the course of the next few pages, it
unfolds that Mrs. Chawla is the mother of the narrator's lover who's recently
died. It also unfolds that the lover was married with teen-age children.
Mrs. Chawla never visited the house while her son was alive. Like the rest
of her extended family, she disapproved of his extracurricular relationship,
particularly with an American. As the narrator tells us, `The family's taste
was conservative, and I thought they believed that people, like the drapes and
the sofa, should match.' Over the course of several more visits, bossy Mrs.
Chawla interrogates the narrator, but our sassy narrator gives as good as she
gets. Listen to this cagey conversation in which Mrs. Chawla is trying to
find out when the narrator plans to leave India.

"`Where exactly are you from?' Mrs. Chawla asks. `My father lives in Boston,
but my mother is in California now.' `Ah,' said Mrs. Chawla softly, as if
that explained everything, `an American family. That must make it difficult
to decide where to return to.' `It rules out Boston and California.' Mrs.
Chawla didn't smile."

These two women are having such fun diverting themselves from their grief by
playing cat and mouse with each other, we readers are lulled into a false
sense of security until the last few pages, when the mischievous tone shatters
and hatred erupts.

All of Freudenberger's tales about women out of their cultural element shift
ground suddenly like this. Characters or moods or anecdotes that initially
occupy the center yield to something completely unexpected. In the story
called "Outside The Eastern Gate," another unnamed narrator returns to her
childhood home in India to visit her senile father, only to discover that her
late mother's lesbian lover, once reviled, is now her father's caretaker.

And in my favorite story of the collection, "The Orphan," a 47-year-old woman
named Alice is roused in her New York apartment by a phone call from her
daughter, working in Thailand caring for AIDS babies. Her daughter says she's
been raped but then calls back to blithely tell Alice that the incident was a
cultural misunderstanding. Alice, her husband and their college student son
all gather in Thailand for Christmas. Her son, Alice tells us, shows up at
the hotel dressed like someone coming out of trench warfare in the Balkans,
with canvas work pants, toeless leather sneakers and a T-shirt bearing the
acronym of a campus club he's joined, CRK, Cool Rich Kids, an organization of
college students who divert money from their trust funds to causes endorsed by
the anarchist collective. The story reads like an upper-class dysfunctional
family comedy of manners until Alice realizes that her marriage is really
irrevocably finished, and this ghastly holiday reunion turns into a wake.

It's usually wise to keep one's distance from women who cause or suffer this
much trouble, but Freudenberger's commanding style makes a reader want to know
more, stay longer in the company of these disoriented and sometimes dangerous
dames. Lucky girls to find such a writer to tell their stories. Lucky
readers, too.

GROSS: Maureen Corrigan teaches literature at Georgetown University. She
reviewed "Lucky Girls" by Nell Freudenberger.

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(Credits)

GROSS: I'm Terry Gross.

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(Announcements)

GROSS: During the invasion of Iraq, many of us were riveted to the radio,
listening to NPR's Anne Garrels reporting from Baghdad, where only a few
reporters remained. On the next FRESH AIR, we talk with Garrels about
covering the war and its aftermath. She's written a new memoir called "Naked
in Baghdad."

I'm Terry Gross. Join us for the next FRESH AIR.
Transcripts are created on a rush deadline, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of Fresh Air interviews and reviews are the audio recordings of each segment.