Wall Street Journal Report, October 21, 2007

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MARIA BARTIROMO, host: Well, the high price of oil is having a direct impact on the economy, and it may also become an issue in the upcoming presidential election. New York Times columnist Paul Krugman is out with a new book, "The Conscience of a Liberal." Krugman teaches economics and international affairs at Princeton University and he was recently named Columnist of the Year by Editor and Publisher magazine. Congratulations, Paul.

Mr. PAUL KRUGMAN ("The Conscience of a Liberal" author): Well, thank you.

BARTIROMO: Good to have you with us. Let's talk about oil, and the way you look at it in the book is really the expense on middle class. The population is spending more money for oil.

Mr. KRUGMAN: Yeah. I mean, one of the themes of the book is the middle class hasn't done very well at all, and that's accentuated right now because oil prices fall more heavily. Now, we have a consumer price index which is supposed to measure typical consumption, but the lower down you are on the income scale, the more these oil prices hurt. And you--look, you know, people look at some of the macro numbers--4.7 percent unemployment, look likes a pretty good economy. People feel lousy about it. Partly that's long term trends of growing inequality, middle class left behind, and partly it's energy.

BARTIROMO: What kind of an impact are you expecting then on the economy? Because it's amazing to me that we have not seen a bigger impact on the stock market with $90-a-barrel oil.

Mr. KRUGMAN: If you had told us--you know, if you had told me four years ago that we'd have $90-a-barrel oil and we wouldn't already be in a recession, I'd be amazed. I think we may be hitting a cracking point, but it's amazing how well we've been able to hold up. On the other hand, 90 may not be the end of the story.

BARTIROMO: Let's talk about the upcoming election. And you wrote an op-ed on Friday in the Times that you're watching and you were surprised to see business actually walking away from the GOP. How significant really is that?

Mr. KRUGMAN: All of the stories--remember, it's just a couple of years since we were all being told permanent Republican majority. You know, 2004 election was decisive. It's never going to change. All of that assumed that the Republicans were going to have dominant--financial dominance, that business was going to support the GOP. Now, at least so far this election cycle, aside from oil and gas, there is no GOP industry. There--even industries like drugs, pharmaceuticals, is splitting its money evenly and most are supporting the Democrats. What that's telling you is that business, which was supposed to be the core of the coalition behind a GOP majority, has bailed out on the party. Not just on Bush but on the party.

BARTIROMO: Well, I don't know about that. I mean, look, the bottom line for business, I think, in many scenarios, is lower taxes, right? They want corporate taxes in check. They don't want their taxes to go up. We will see taxes go up, right, if we were to see the Democratic Party take control?

Mr. KRUGMAN: Yeah, but, you know, business also needs competent stability and they don't--the whole way--during the Republican dominance, the GOP tried to turn K Street into a subsidiary of the Republican Party rather than the other way around. Business didn't like that. Yeah, taxes will go up. No question. None of--all of that...

BARTIROMO: How much will they go up, Paul?

Mr. KRUGMAN: If you're making more than 200,000 a year, you're going to paying Clinton-era taxes. That's pretty clear from any of the Democratic candidates.

BARTIROMO: So 15 percent goes up to 30 percent.

Mr. KRUGMAN: Well, no, wait. Thirty-five percent goes up to 39.6 on top marginal rate. Fifteen percent on capital gains, probably--certainly goes back to 20 and probably to 28.

BARTIROMO: That's what I--yeah, that's what I was just saying.

Mr. KRUGMAN: Dividends probably go back to being taxed as ordinary income. You know, all of that to pay for universal health care.

BARTIROMO: Let's talk about universal health care. You know, we had on the maker of "Sicko," the film, Michael Moore...

Mr. KRUGMAN: Yeah.

BARTIROMO: ...you know. And he was talking about how, you know, other economies around the world--Europe, Canada--you know, they have universal health care and it works. Do you think it works?

Mr. KRUGMAN: I think it works. Whole chapter in "Conscience of a Liberal," my new book, about that. There are lots of measures. You know, people talk about the horrors of these health care systems. It's mostly imaginary, and the ones--France--Michael Moore uses France. France is a terrific health care system. It beats the US or matches it on every dimension and it costs only about 60 percent as much per person as ours does.

BARTIROMO: But I've got to say to you, Paul, if I get sick, I want to get sick in this country, I don't want to get sick in France.

Mr. KRUGMAN: My only reason that I wouldn't want to get sick in France is that I don't speak French. Otherwise, the high end care is as good as ours...

BARTIROMO: Right.

Mr. KRUGMAN: ...and, in many ways, the basic care is better. Germany is also--you know, this is--it's funny. Rudy Giuliani says, you know, if Hillary comes in we'll have French health care. French health care is terrific. It's--and it's--and of course there are no uninsured French citizens.

BARTIROMO: Yeah. So what is the plan on the Republican side for health care?

Mr. KRUGMAN: They're going to cut taxes so as to make people buy insurance policies with bigger deductibles and bigger co-pays and somehow that's going to solve the problem. It's--the Republicans believe that the problem with American health care is that people have too much insurance. I'm sorry. They--I--there's a logic to that, but it's crazy fundamentally.

BARTIROMO: Let me ask you about the broad economy right now. I want to ask you what you think of it and where we are right here because when you get, you know, differing--we just had segment on right before you and we looked at, on the one hand, you've got slowing growth--we know that. The US is slowing.

Mr. KRUGMAN: Yeah.

BARTIROMO: On the other hand you've got sky-high oil prices and other raw materials prices going higher, so there's an inflation issue. Where are you on all this?

Mr. KRUGMAN: I have to say I've been a little rattled--not in the way you might think--I've been rattled by the fact that the economy holds up as well as it does given housing bust has gone, you know, as badly, even worse, than I expected. Had all these financial ramifications. Oil prices are high. But we don't actually see yet in the data what looks like a recession, just a slowdown. And it may feel like a recession to a lot of people, but I'm not quite sure. We seem to be running on fumes. But we seem to do awfully well at running on fumes. So I'm--I have to admit a little bit of bafflement.

BARTIROMO: So you don't think we're going to go through a recession, or do you?

Mr. KRUGMAN: I think--you know, one in three chance, but it's--I--if I have to make a forecast, then my record is, like everybody's, pretty bad on this. I'd say we're heading for what we used to call a growth recession. The economy's still growing but unemployment is rising and people feel pretty lousy.

BARTIROMO: All right. We'll leave it there. Not a great point to leave it on, Paul.

Mr. KRUGMAN: OK. Well, sorry. I wish I was more upbeat.

BARTIROMO: Good to have you with us. Good luck with the book and congratulations to you.

Mr. KRUGMAN: Thanks so much.

BARTIROMO: Thanks for joining us. Author/columnist Paul Krugman. Coming up next, we'll take a look at the news this week that will move Wall Street and have an impact on you and your wallet. And remembering a grim anniversary. It was 20 years ago that Wall Street did something it doesn't want to do again.

Originally broadcast, 10.21.07