We've been interviewing
top economists and financial advisers about the
outlook for the economy and the
stock market. Today, we're speaking with
Nobel laureate Paul Krugman. Professor, thank you
so much for joining us today. Do you think
that the US and policymakers, both at the
federal, state and local levels have reopened
the economy too soon at the risk of health
and longer term damage? I don't think it's even
seriously arguable that we reopen too soon. We did
not have the virus under control and we also
reopened stupidly, I mean without requiring face masks,
without even taking the cheap,
easy precautions. And so here we are. Do
you think that there will be longer term damage
because of that response, or will it take the
economy longer to recover? I've actually been kind of
an optimist, kind of almost reluctantly, is
not my temperament. But this is not like
the last crisis a dozen years ago when we
had fundamental problems with the economy and it took
years to work out of them. At this point you
know, there's lots of stuff that's wrong, but
nothing that is like nothing like the overhang
of consumer debt that we had in 2008. If we could get the
virus under control, we're pretty well set for
a very fast recovery. We have seen better
than expected unemployment numbers over the past
couple of months. Do you think those job
that will continue to be the case going forward? Those job gains in May
and June were a blip. Unfortunately, when we say
the job, the unemployment rate in June,
well, we actually mean it turns out what's it's
a survey that looks at where people are in the
second week of June. So it's already
very old news. We'll look back on May and
June as the as the years of a false hope. I think not the
months of false hope. Where do you stand on
the debate about when and how we should
reopen schools? Reopening schools is a
hard one because there's lots of things have turned
out to be doable remotely. I'm hoping for
a lot fewer long distance flights to go
stare at somebodies PowerPoint. But education is
not one of those things. Education really,
particularly for younger and less
advantaged students. The classroom is
really, really important. You just cannot expect
11 year olds from disadvantaged families to
do remote learning effectively. So on the
one hand, you really, really don't want to not
have the schools open. On the other hand,
schools are petri dishes. Anyone who has children
or knows people have children knows that school
that that when the kids are in school, you
get sick a lot more. And to do that now,
conventional education now is just asking for disaster. So we're going to be
looking at some kinds of awkward compromise attempts to
get restore some in-person schooling if
we can. But now it's not clear
we can do that. So there is
no good answer. No, we we backed ourselves
into a situation where there is no good answer.
And there couldn't be longer term effects
of that. It sounds like, from
what you're saying. There's two things about
that, about the young. One is that if someone is
still in junior high or elementary school, you disrupt
his or her education. You're never going
to really make up for that. And then the
other thing is, graduates who enter a
bad labor market. We actually know about that
from a number of studies, suffer permanent damage
to their career prospects. And so by not
getting this thing under control and giving ourselves
probably a year of depressed labor markets,
we've actually done immense damage to the
class of 2020. Will there be longer
term changes in the workforce, though or in the
types of jobs that kind of fuel the economy
when we think about the future? Do you think that
this will have a longer term effect on
the workforce? I've been using the
metaphor in international trade, which is my home
field, we talk about infant industry
protection. You get a
new industry started. Sometimes countries have done
it by forcing self-sufficiency. And then
sometimes once they even when the borders are
thrown open again, you can the industry has learned
to do its job. And it persists and
we basically had infant industry protection for distance
work in this crisis. And I do believe
some of it will stick. We're seeing a big
difference between what's happening in the stock
market and the economy. What explains that
to you? So stocks are attractive and
some to some degree, just because if you're getting
0.6 percent on on your 10 year treasuries,
maybe you should buy stocks instead. And so
there that's a rational explanation. There's a second
point, which my friend Barry Ritholtz just
pointed out, which is that if you look at
the stocks, they've been leading the charge. They tend
to be the big tech companies. And those tech
companies are mostly in some cases, or at least
largely not actually U.S. businesses. They derive half
or more their revenue in several cases
from overseas sales. And so to some extent,
what's happening is that they are riding on the fact
that the rest of the world is doing a better
job of dealing with this than we are. So they're
riding on the prospects of economic recovery in Asia
and Europe, even as the U.S. completely
mucks things up. The third thing is, I
think their worker, it's very hard to escape the
sense that there's a mania. Now that this is
a foul ball market, that there are people who saw
stocks go way up between late March and and now
where the first part of that was ,well, we had
a we had the incipient financial crisis. Credit markets
froze up for a couple of weeks there. The
Fed stepped in and unfroze them, stocks, which
had plunged, came roaring back, and then
people said, oh, stocks are good and they piled
in and becomes a self-fulfilling prophecy for
a while. So there's clearly you look
at the way that people have piled into
the stocks of bankrupt companies like Hertz. And
it there's clearly something, a bit of mania
going on and the relative importance of
those three. Who knows? I, with each
passing day as the the news about the economy gets
worse and stocks keep rising, I become more
convinced that there's something crazy going on. But we don't really
know that yet. Are there potential bubbles that
you see when you when you look at companies
like Hertz that are trading so radically
or tech stocks? There are almost surely
multiple bubbles out there. Maybe the whole thing
is maybe that the last 15 percent or whatever on
the S&P 500 is a bubble because it's a
I don't know that. But it seems plausible
because in a bubble. As Robert Shiller famously
pointed out, a bubble is a natural
Ponzi scheme. People buy in. They make money because the
next wave of people buys in. It's everyone
for everyone it's great until you finally run
out of suckers. And this has that
feel to it definitely. How much has the Fed stimulus
and buying up of all of these assets, including
corporate bonds, and bond ETF's contributed to
some of this bubble like behavior that
the stock market? I am not I don't think
the Fed has really driven up valuations so much
as it has. It's avoided a
plunge in valuations. There was a there was
a plunge because financial markets were freezing
up in March. And that was it was it
was the fall of Lehman all over again. And the Fed,
they poured a lot of money in to lubricate the
markets, and that did help stocks a lot. Now, whether the subsequent rise
has much to do, I don't think so. I mean,
if you look at the amount of money, it looks
awesome but you look at spreads. It's not as
if risk spreads are unusually low. It's just that they're
not unusually high. And that's because despite
the stress, the Fed has avoided that. I don't
see what else the Fed could have done that could
not have stood by and allowed a financial crisis on
top of the viral crisis. So this is
what had to happen. And if there's some mania
in the markets, well, that's what happens From what you're saying, it
sounds like the stock market is not exactly
a correct representation of the economy right
now then. Stock market has never been
a good indicator of what's happening to the
market, the economy at large. And now in particular,
it's a really poor indicator. I mean, partly
because it never is. There's always the link
between stocks and other things, like jobs
is always weak. And also, I have the
sense that investors have still not taken on board
just how bad the Covid-19 news is. You've talked about this idea
of a liquidity trap where, you know, monetary
policy may be less effective because consumers,
businesses aren't spending. Are we in
that situation right now? We are on the edge
of one I mean strictly speaking, a liquidity trap
is basically the same as saying interest rates are
at zero and can't be cut anymore, which
is true. Right now we're on
short term rates. We are at at the
zero lower bound, which isn't exactly a bound. You can get a little
bit below that, but probably not a good idea
to do that. And so we're in
that situation now. I don't think that's what
the problem with the economy is right now. Even before the virus, we
were very close to that point. We were we had
low unemployment, but we had very little
room for maneuver. So, I mean, what I was
saying just before all of this happened was that I
didn't know where the next shock was going to
come from, but that the economy didn't have
shock absorbers anymore because there was no room
to cut interest rates significantly. Well, we're
still in that situation. So the sort of
if there's an act two after the virus, then it
may well be, oh, we're back in the jargon
phrase, a secular stagnation. We're back in a
situation where the economy's normal, that the economy
bias is towards being depressed because we don't
have the tools to restart it when
things go wrong. So what role does fiscal
policy play then in helping us get
out of that? Fundamentally, the amount that
businesses want to invest seems to be less
than the amount that people want to save.
That's another way of looking at what a liquidity
trap is all about. And what can you
do about that? Well, if somebody would
invent the railroad or something that demands a
lot of business investment, that would
be great. But barring that, there's a
big role for the government to do useful stuff
in a way that also sustains spending. So a
really big infrastructure program is with interest
rates so low, with infrastructure clearly creaking is
a huge ought to be a no
brainer right now. It's cheap, it's needed, and
it helps keep us away from
liquidity traps. What about, the direct
stimulus, as in more stimulus checks or a
universal basic income, where do you come
down on that? I'm actually negative on
both of those. And it's stimulus checks is
kind of a current administration idea. The universal basic income tends
to be a kind of progressive bill that
depends on which progressives you talk to. But
I think we've just seen an object lesson in
what's wrong with that. We had roughly one in
five workers suddenly found themselves unable
to work. Their livelihoods cut out
from under them because of the virus. And we
responded, as we should have, with enhanced
unemployment benefits that for many workers actually was
more than they were making. But in any
case, basically compensated for the loss in wage
and salary income for those people. That was
a good policy. Suppose we had tried to
do it through, we didn't have a stimulus check, which
was a nice windfall for people who had not
lost their jobs and was trivial for those
who had. 1200 dollars is even for
a low paid worker, doesn't make up for very
many weeks of lost work, whereas 600 dollars a
week extra in unemployment benefits does make
up for it. So the stimulus checks were
actually not all that helpful. And a UBI
where everybody got income. No questions asked. Would also not be all
that helpful unless it was so huge as to
be completely unaffordable. So what we've actually seen
is the this very strong case for
extreme, for targeted benefits, for contingent benefits,
maybe with as little paperwork
as possible. What about the concerns about
the debt and how much this fiscal stimulus
and monetary stimulus is increasing
public debt? Interest rates
remain low. There's no sign that
the markets are disturbed. The arithmetic of debt
is really encouraging because interest rates are
well below the economy's normal growth rate,
which means that you don't that increased
debt really doesn't require that you make
any special sacrifices to pay it down. And
historically advanced countries, Britain came out of World
War 2 with debt that was 250 percent of GDP. Nothing bad happened. So there really is no,
we're not anything like at a crisis point. And
at this point, with everything else going on,
I think the great danger is that we spend
too little, not too much.
