- Business Insider recently caught up with Nobel Prize-winning economist and New York Times columnist Paul Krugman to talk taxes, Trump, and bitcoin.
- Krugman is sceptical about the effects of the Trump administration’s tax plan.
- “Will workers see their wages increase in a way that anyone will notice over the next five years? No,” he said.
- He expressed concern about some of the candidates for the Fed board, such as Marvin Goodfriend.
- He said any disruption of NAFTA could be a “hugely costly thing.”
- He also said that bitcoin is an obvious bubble.
Here’s a transcript of the interview as aired on “The Bottom Line.” It has been edited for clarity.
Josh Barro: Let’s talk about this tax bill that seems to be rocketing its way toward enactment in Washington. We got an analysis this week from the Treasury Department, this one-page sheet that claims Trump’s economic policies – including this tax plan – should increase economic growth so much that in fact budget deficits will shrink despite the large size of this tax cut. Is this a plausible analysis?
Paul Krugman: So this is an analysis with scare quotes because the number comes out of thin air; they just made it up. They said, “We’re going to increase growth by seven-tenths of a percentage point,” which doesn’t sound like that much.
Barro: Each year.
Krugman: So over 10 years. GDP is going to be 7% larger. They have no explanation of where that comes from. They told the Treasury staff to assume that growth rate and tell us what it does for the budget deficit.
First of all, it’s about nine-times as big as the Joint Committee on Taxation, which is Congress’ official evaluator, says we’re going to get out of these tax bills. And it’s just a crazy number. Advanced economies like the United States, at the technological frontier, with not completely crazy economic policies, there’s almost nothing the government could do, the most ideal policy in the world isn’t going to boost GDP by 7%. This is crazy.
The most ideal policy in the world isn’t going to boost GDP by 7%. This is crazy.
Barro: There have been a variety of analyses come out. You’ve talked about the Joint Committee number that found this modest but positive effect on economic growth. There was also an analysis by the Tax Policy Center, which is a joint project by two sort of left-of-center think tanks in Washington. Their analysis also finds a very modest positive effect on the economy. Do you think this is right? Will this tax plan be growth positive compared to doing nothing at all?
Krugman: There are two questions here. One is that none of these studies are very good at dealing with the impact of what the deficit itself actually does to growth. Deficits famously were not a problem during a depressed economy, but now that we’re close to full employment there may be some negative. There’s another, subtler issue that none of these organisations – the Tax Policy Center are great people – but there’s something I don’t think they have got a great handle on, which is growth in what exactly?
What they find is that gross domestic product, which is what we usually talk about, it will be bigger. But the way that happens is by increased inflows of foreign capital. That means that we have a bigger capital stock, which means that we produce more, but it also means that we pay more profits to foreign companies. Also, about a third, we think, of the corporate tax cut benefit to after-tax corporate profits will actually go to foreigners. If we ask what happens to gross national income, the actual income of US residents, it’s not clear that that goes up at all.
Barro: That’s interesting. Normally people talk about GDP, which is gross domestic product, which is total economic activity within the United States. You’re saying that the gross national product, which is the total economic activity that accrues to people in the US – including US profits from foreign activities, but excluding foreign owners from US activities – you’re saying that could be negative even if GDP were positive?
Krugman: Yeah. I mean, it’s never been an important issue in the United States until now because the difference between GDP and GNP is trivial. But for economies that are smaller and have lots of foreign investment, it can be a very big deal. In Ireland, GNP is only 75% of GDP, because there’s so much foreign ownership. Now, if this bill even does what it’s supposed to, it kind of moves us toward being more like Ireland. We could see a headline GDP number that is up some, but is almost all offset by these increased payments to foreigners.
Barro: One of the key arguments that Republicans have been making for this bill is that when you cut corporate taxes, you give big benefits to workers. Not just through economic growth, but they contend that a substantial fraction of the corporate taxes is actually paid by workers in effect because companies prefer to locate in places with lower corporate tax rates and will be willing to pay higher wages. Even that Tax Policy Center analysis that we were discussing, they assume that about 20% of the corporate tax is ultimately borne by workers. Is this right? Is there a significant benefit to workers from reduction of the corporate tax?
Krugman: Probably some, a little bit. I mean, it matters a lot what horizon we’re talking about. In the short run, nothing. All of this effect only works through capital coming in and building up and increasing the demand for labour. That takes time. If you ask what happens in the first year from a corporate tax cut, none of it goes to workers. Over the course of 10 years, maybe a larger portion. But there are limits on how far this goes. So yeah, there’s something there. Realistically we have to imagine there will be some effect, but will it be visible? Will workers see their wages increase in a way that anyone will notice over the next five years? No.
Will workers see their wages increase in a way that anyone will notice over the next five years? No.
Barro: So if the effects are small does that mean that sort of some of the doom and gloom about this bill from Democrats has been excessive? I mean, let’s say it’s going to add a few percentage points to public debt as a percentage of the economy 10 years from now. Interest rates are very low. It doesn’t look to me like that there are likely to be significant crowd-out effects from that. Are there significant downside risks from this bill? Is this going to hurt us, or does it just not matter very much?
Krugman: I think probably it doesn’t matter very much. I mean, it’s not a good thing. You’re supposed to use times when you’re near full employment to pay down debt, not run up additional debt. Running up additional debt with most of it going to a very small number of people is a particularly bad idea. But if you ask, “Is there a crisis?” It seems unlikely. Just, you know, politically, I would love to say this is going to be a disaster, but actually, when I try to work through it, I can’t convince myself that there’s going to be much of a market reaction at all.
Barro: So you don’t ascribe the run-up in stocks to this bill?
Krugman: Oh, actually no. Look, stocks are up around the world. They’re up by about the same amount all around the world. If you didn’t know that the US numbers were US numbers and the European numbers were European numbers, and the Japanese, you wouldn’t know which was which. There’s a global stock boom, which is not particular to Trump. If you think there’s a Trump bump you have to say there’s a Merkel bump, and there’s an Abe bump as well.
If you think there’s a Trump bump you have to say there’s a Merkel bump, and there’s an Abe bump.
Barro: How would you characterise economic performance right now? Is the economy good, and how much credit does President Trump deserve for how the economy’s doing?
Krugman: The economy’s pretty good. In fact, it looks like we’re close to full employment, although we don’t know why wages aren’t rising more. Trump gets essentially zero … First of all, there have been no actual policies. There hasn’t really been any policy change. The convention, usually, when people try to assess the economic impact of administrations, is to assume that the first year reflects the policies of the previous administration, so no there’s nothing, nothing that is Trumpian about what’s going on.
Barro: Is there any possibility of sort of a self-fulfilling prophecy of economic improvement under Trump? Which is to say, immediately after he was elected, there was a big improvement in consumer sentiment, all from Republicans who thought that the economy was terrible, and then it turned around. And because Trump was going to be president they thought things would be really good. Could that be manifesting as, you know, more consumption, more business investment just because people feel confident in Trump’s performance, if that could be something that itself causes the economy to improve?
Krugman: Well, the thing is, the economy’s been adding jobs at a steady rate for years now. If anything, the rate of job increases is levelling off, the curve is bending downward. You can’t see any Trump effect in there. And look, these issues with self-fulfilling confidence is a big deal when unemployment is 10%. Then the economy’s performance is crucially dependent upon having enough spending out there. Where we are now, consumers get a lot more confident, the economy starts to grow faster, the Fed will raise rates faster, so it’s kind of – we’re not in that kind of universe anymore. That’s a 2010 story. Not a 2017 story.
Barro: Let’s talk a little bit about the Fed. Am I correct in saying that you think Jay Powell is a good pick to run the Fed, but you’re concerned about some of the other choices that the president has made or might make about the Federal Reserve Board?
Krugman: Yeah, there was no good reason not to keep Janet Yellen. But Jay Powell appears to be a reasonable guy; there appears to be no significant policy error between him and the Yellen regime, which is fine. What I was afraid of was, given that Republicans have been insistently, and you know, defiantly wrong about everything monetary for the past 10 years, that they would make them having been wrong about everything be the criteria for being the chairman of the Fed. Well, that didn’t happen. Trump picked Powell, who looks like he has been OK. The people who were now being floated for the Fed board do seem to fit that criteria.
We have Marvin Goodfriend, who is a reputable monetary economist with a tremendous track record, saying, “Inflation is coming, inflation is coming! We must get ready to start raising rates now, now, now!” during 10 years of a depressed economy.
Barro: How much should we think of Fed policy as being driven by the on-the-record ideological statements of people who end up on the board? I mean, it seems like the chairman ends up having a lot of influence, even though decisions are made by a vote of the board, and then also it feels like there’s a lot of reaction to political and economic events. Once you get on the board, it becomes a lot costlier to be wrong about monetary policy than when you’re someone just observing.
Krugman: That has historically been the case. It’s historically been the case that the staff plus the chairman ends up setting monetary policy and that that members of the board rarely will block the will of the chairman if it agrees with what the staff is saying. You can see that in both directions by the way. Ben Bernanke was a much more aggressive monetary Dove before he went to the Fed than he was afterwards. During the crisis we kept on saying, “If only Ben Bernanke would listen to Ben Bernanke.” Once you get to the Fed, there is an environment, but you know this is Trump’s America. So maybe the old rules don’t apply anymore.
Barro: But Trump says he’s a low-interest-rate guy …
Krugman: Sometimes, but he’s been all over the place on that, but the question is to what extent are they … Paul Ryan is an Ayn Rand monetary theorist who thinks that “Atlas Shrugged” contains all the rules for monetary policy. We don’t know what’s going to happen.
Barro: Let’s talk about trade. Do you worry at all about Trump’s rhetoric on trade? What if he follows through on threats to withdraw from NAFTA or to start a trade war with China? What’s the effect of that in the US?
Krugman: The NAFTA issue I think is a really a huge issue, if it happens, which is probably why it probably won’t happen. The thing about NAFTA is not so much who are the beneficiaries. I mean, I think United States benefits from NAFTA, but the main point there is that there’s no such thing now as Mexican manufacturing and US manufacturing. There’s North American manufacturing.
There’s no such thing now is Mexican manufacturing and US manufacturing. There’s North American manufacturing.
It’s this tightly integrated complex of industries where stuff is shipped back and forth. Different pieces of an automobile are made all over the continent, and if you break that up, if you disrupt it, then we’re talking about a lot of disruption at the industry level, we’re talking about a lot of plants closing, new plants opening. It would be exactly the same sort of thing that people complained about from the growth of trade, except this time it’s like the old joke about the motorist who runs over a pedestrian and says, “I’m sorry, let me fix it,” so he backs off and runs over him again. That would be a hugely costly thing if we really disrupt NAFTA. That means that industry is horrified at the prospect. So in a way trade is going to be the test of whether there’s any of that Trump orthodoxy left. Is he willing to block the big companies on that?
Barro: Regardless of whether there’s a good remedy available to Trump, or whether the remedy that he’s talking about makes any sense, is he right in his critique that free trade and relatively loose immigration policies have depressed the wages of native-born American workers over the last few decades?
Krugman: Trade a little bit. Most estimates do suggest that increased International Trade did have some depressing effect on blue-collar wages in the United States. We import labour-intensive products; that reduces the demand. It’s probably not huge, and it’s probably mostly in the past. It’s not a continuing force of further downward pressure. Immigration, actually, the evidence suggests that immigrant workers are not for the most part competing with native-born workers. They’re competing with immigrant workers who are already here, more than that. Even though you take somebody with 11 years of education from Mexico or Central America, compare them with somebody with 11 years of education born here, they’re actually very different, the skill sets, the occupations are very different. The immigration thing, although it’s the one that resonated most with with Trump voters, is probably in fact the place where his economics is just wrong. He has a better case on trade.
Barro: Finally I want to ask you about bitcoin. Does the run-up in bitcoin prices make any sense to you?
Barro: What’s going on here?
Krugman: Bitcoin … nobody understands it. Which is, for the time being, a positive.
Barro: A positive for the prices?
Krugman: It’s got this mystique about it because it’s the some fancy technological thing that nobody really understands. There has been no demonstration yet that it actually is helpful in conducting economic transactions. There’s no anchor for its value.
Unlike pieces of paper with dead presidents on them, those are anchored by the fact that you can use them to pay taxes. There’s no anchor for bitcoin, but bitcoin has developed this mystique. Probably the price going on partly this tied up with libertarian stuff. I’m told that there are apocalyptic “the end is coming” guys who are accumulating bitcoin, because once we turn into a “Mad Max” wasteland, having a digitally distributed … never mind.
I think it really doesn’t make a whole lot of sense. And the psychology of it is clearly … I mean, if you’re using the shoeshine-boy test, or “My barber asked me about bitcoin.” The feeling that people are caught up in something that they really don’t understand, is overwhelming.
Barro: So you think this is an obvious bubble?
Krugman: This is even more obvious, I think, than the housing bubble was, and that one was, I thought, tremendously obvious.
Barro: Sometimes a bubble can be obvious and yet can persist for a long time. And in fact, I’ve been saying that Canadian housing is in a bubble for years, and it keeps going up. So the nice thing about calling a bubble is that if it doesn’t burst you can always say, “Well, it’s just going to burst later.” I guess the question is how long can something like this go on with bitcoin?
Krugman: The thing about bitcoin is there isn’t actually a whole lot of stuff. In a way, the fact that it’s completely untethered to anything real means that it doesn’t fall until … It can just hang there in mid-air for a long long time. It’s not like housing prices. If housing prices are unrealistic, the more housing gets built, and you can see it. With bitcoin, the cost of producing new bitcoins has gone crazy high, so that’s not going to happen. We’re waiting for a Wiley Coyote moment. Cartoon physics. He runs off the edge of a cliff and it’s only when he looks down and realises there’s nothing under him that he goes Pchew! So we’re waiting for that sort of thing to happen, and that can go on for a long time.
A bubble is a natural Ponzi scheme; that’s how Bob Schiller puts it. That as long as it’s going on, everybody that bought in keeps making money, and it looks good. In the end, somebody’s going to be left holding the bag. Everybody assumes it’s not going to be them.
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