US economic woes

Not many economic theorists receive death threats. But then Professor Paul Krugman is no ordinary commentator. His critique of President Bush's economic policies has made him one of the most influential and controversial voices in America. He was live on the programme, in discussion with one of his most eloquent critics.

KIRSTY WARK:
I am joined by the aforementioned Professor Paul Krugman, who has just written the book, The Great Unravelling, a selection of his columns on the Bush administration. Also by Irvine Stelzer, from the Houseman Institute who writes a column for the Sunday Times. First of all, Paul Krugman, let's pick up on one of the last speakers there. You have delivered a concerted onslaught against Bush's economics, and essentially that he is dishonest and lying to the American people. And you have been accused of a deep psychological problem in returning to this time and again?

PROFESSOR PAUL KRUGMAN:
Yes, except the trouble is he does lie a lot. Now some of it is actually, when he said repeatedly that: "Most of my tax cut is going to middle-class and working-class Americans." That's simply untrue. Some of it is things that are literally true but are designed to mislead. So when he said in the State of the Union and repeatedly afterwards that from this latest tax cut, 92 million Americans will receive an average tax cut of $1,000 a year. That was intended to convey and did convey the Impression that the typical family would get $1,000. The fact is, this is based on people not understanding what "average" means. If Bill Gates walks into a bar, the average wealth of the patrons is several billion dollars, but in fact the majority of families got no more than a couple of hundred dollars a year. It was deeply designed to mislead and they do that all the time.

KIRSTY WARK:
Bush designed to mislead. Stephanie Flanders' figures show that the richest people get the biggest tax cuts, the richest people are best off by the tax cuts?

IRVINE STELZER:
Well the richest people pay the most of the taxes, so they would get most of the tax cuts. I think what you have to keep in mind is that someone in America earning $40,000 a year with two children, now under Bush, given the child tax credits, pays no taxes. That figure was about $25,000 under the previous administration.

PROFESSOR PAUL KRUGMAN:
Can I come in? This is what I talk about. "Pays no tax" - you mean pays no income tax.

IRVINE STELZER:
Pays no Net Income tax. That's what I said.

PROFESSOR PAUL KRUGMAN:
No. You didn't, you said "taxes". This is what I am talking about, that is a wonderful line, but in fact 85% of American families pay more payroll tax than income tax. What you just said was, "Pays no taxes." This is this the kind of thing, there is this campaign to mislead. I am sorry, I am being aggressive, but this is how it works.

KIRSTY WARK:
Irvine Stelzer.

IRVINE STELZER:
You see you have to... I read Paul's book. I agree with a lot of the things he says about fiscal policy and so on. The problem is that, if you read the introduction, it's a background - the background is that these are liars, you can't believe anything they say.

KIRSTY WARK:
Very legitimate in fact.

IRVINE STELZER:
They are all legitimate policy disputes, they are all legitimate policy disputes about how you distribute tax cuts.

KIRSTY WARK:
But in the sense they are not revolutionaries, they are not legitimate?

IRVINE STELZER:
Well there is a sense in which they are radical. There is a sense in which they do not like the system they have inherited, either in international relations or in economic affairs. There is nothing wrong with being radical. The problem I think Paul has is that they are radical right.

PROFESSOR PAUL KRUGMAN:
Well no, the problem I have is that the radical is not sold honestly. Well I mean I have a problem with the radical itself. I'm sorry, I'm being a bit...

KIRSTY WARK:
No, no, lets just go with it. So, he goes for a big campaign of tax cuts. He grows the economy, but it doesn't actually grow many jobs?

IRVINE STELZER:
Well, but we know two things about jobs. One is that they are a lagging response to a growing economy. I think everyone concedes that. The second issue is we know that a lot of the data are very difficult to handle, but there has been a net loss in jobs under the Bush administration. I don't speak for the Bush administration. The only thing I speak for is to have policy disputes based on policy issues, not based on assumptions that we are dealing with liars.

KIRSTY WARK:
But what would you do about the jobless recovery?

PROFESSOR PAUL KRUGMAN:
Well look we've spent...the three elements of this administration's policy have been tax cuts for the wealthy, tax cuts for the wealthy and tax cuts for the wealthy. There are certain things you always do during a sustained job slump that they haven't done. One of them is to aid to state and local governments. It turns out state local governments are required to have annual balanced budgets. They have been laying off school teachers, firemen and policemen. Ordinarily you would expect the federal government to be providing some aid. They haven't done that, that is a major down draft on jobs.

KIRSTY WARK:
That's one.

PROFESSOR PAUL KRUGMAN:
Another thing is that there is a certain amount of public work spending that's on tap. A lot of homeland security things.

KIRSTY WARK:
A new, New Deal?

PROFESSOR PAUL KRUGMAN:
Yes, except that in this case, it's relatively easy New Deal things. There are things they aren't doing inexplicably, like rebuilding New York, like defending ports against terrorist attacks. The last part is temporary tax cuts directed to those most likely to spend the money, who are cash- constrained middle and lower income families.

KIRSTY WARK:
These are three things.

IRVINE STELZER:
Right, and some of them make sense, I mean, I'm not here to defend the Bush administration, but what I am saying is for example...

KIRSTY WARK:
But why if you are not defending it, tell me why aren't they doing it?

IRVINE STELZER:
Well first of all, it is true that the history of public works does not show those are very good jobs, very productive jobs, they add much to the public wealth. Second, as far as spending the tax cuts, the best data we have, and the data aren't very good, show that about 75% of the tax cuts were spent. I don't think anyone denies that this recession would have been much worse. And in fact in Paul's book he says short-term tax cuts would have been helpful in this part of the business cycle. Whether or not they have a plan to eliminate these as the economy recovers, that's an interesting issue. They, I think do have a problem, they haven't solved that, but they certainly made the recession as Larry Lindsey said, a lot less severe than it would have been had they not cut taxes.

KIRSTY WARK:
What about the mismatch between the deficit and the fact that people don't care?

IRVINE STELZER:
Well I don't know if people don't care, it is very hard to say. The latest polls show that about 50% of the people feel that things are fine, very good or good and 42% feel they are not so good. I don't know if people don't care, I think people have some, what they care about is whether the President cares. That was senior Bush's big mistake, he didn't seam to care about the economy. I think that at least this president has shown that he does care and that he cares about jobs. Whether or not people are going to buy into his programme, and that will also be affected by Iraq, we'll see in the elections. I think Paul has gone too far saying Bush doesn't want to have elections any more.

PROFESSOR PAUL KRUGMAN:
I didn't say that.

IRVINE STELZER:
Yes you did, "and possibly eliminate elections".

KIRSTY WARK:
Just picking up on the deficit, if people don't care particularly, or if people aren't concerned at the moment about the deficit, then that is not going to play well in terms of a democratic economic platform?

PROFESSOR PAUL KRUGMAN:
I don't want to really, you know, who knows what matters in politics? It's all packaging. In California the voters were outraged over a deficit that turns out to have been about 10% of state spending and national politics were told they're indifferent about a deficit that's equal to about a 25% of federal spendings. So it's all how it's portrayed. Now if it is treated as non-issue by the media, then maybe it will be a non-issue in the election. But you know the election doesn't end history and we are on a course towards a very serious physical crisis eventually, but not probably next year.

IRVINE STELZER:
I think there is two things wrong with that, with respect. One is that the notion that somehow the media are not properly portraying this from someone who writes for the New York Times, which you said lands on a million doorsteps with your column twice a week, is a little far-fetched. I mean the fact is the media are talking about this. The second thing is, the question of whether in the long run we will solve this deficit problem as a long run problem having properly built one up in the short-run I think just remains to be seen. These predictions of what the deficit is going to be 10 years from now aren't worth a lot and neither were the predictions of the surplus.

PROFESSOR PAUL KRUGMAN:
I think it was Margaret Thatcher who said "why do people always expect surprises to be positive?" I think perhaps the picture will be much worse than we imagine.

IRVINE STELZER:
Yeah, or better.

KIRSTY WARK:
Gentlemen, thank you very much indeed.

This transcript was produced from the teletext subtitles that are generated live for Newsnight. It has been checked against the programme as broadcast, however Newsnight can accept no responsibility for any factual inaccuracies. We will be happy to correct serious errors.