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TERRY GROSS, host: This is FRESH AIR. I'm Terry Gross. Although war with Iraq is occupying world attention, many Americans say the most important issue to them is the economy. President Bush says his tax cut plan will revive the economy. His critics say the plan will primarily help the wealthy while getting us into a potentially catastrophic level of debt. The president says Americans would receive an average tax reduction of $1,083, but his use of the word 'average' has been contested. For example, according to a study by the Tax Policy Center of The Brookings Institution and the Urban Institute, if you compare the average tax reduction within different income brackets, you see a different story. The study says the average tax cut for people with incomes over $1 million would be about $90,000. A $200,000 income would get about a $12 1/2 thousand break. The tax cut with incomes of 40 to $50,000 would be about $380. We're going to hear from guests on each side of the tax debate, starting with Paul Krugman. He's a New York Times columnist who's also a professor of economics and international affairs at Princeton University. He says the Bush plan won't be an effective economic stimulus. The tax cuts don't go into effect quickly enough for that.

Professor PAUL KRUGMAN (Princeton University): If your objective is to put money in people's pockets and, you know, help the economy now, then you want a tax cut that delivers a big bang into the hands of people who are likely to spend it, and you want to do it in the next year or two. If you look at both the original 2001 tax cut and now this new plan, the great bulk of the actual tax cut income is not now, not this year or not next year, but, you know, five years or more in the future, which means that unless you imagine that people are sitting down and saying, 'Well, if I look at clause 33 of the new Tax Cut Act, that means that in the year 2009, I'm going to have more money, so I think let's go out and buy a new refrigerator now,' which people don't really do, then it's very hard to see what good it does the economy right now.

GROSS: Who do you think are the winners and losers with President Bush's proposed economics plan?

Prof. KRUGMAN: Oh, that's easy. I mean, consistently, incredibly consistently, these plans keep on providing big tax cuts to people who make more than 300,000 a year. And by--they provide very little--typically, you know, pennies a day--to the median family and, you know, very little at the lower end of the income distribution, nothing at all for the poor. By creating future deficits, by creating all this budget stringency, it ends up meaning that there'll have to be slashing, you know, of government programs, means that state governments will have to raise taxes, which typically bear most heavily on the working class and the poor. So it's class warfare, topped out in class warfare.

GROSS: Well, the Bush administration's argument in part is that it's the people with high incomes who are paying a disproportionate amount of taxes, therefore they're the people who need the tax relief.

Prof. KRUGMAN: Well, you know, that's not an answerable question in the sense of what's right, what's the right amount that different people should pay? To some extent, that's a value judgment. But what is interesting is that when they make this case, they--well, let's say they lie. They always focus on the particular taxes that tend to be paid by the rich and don't focus on the taxes that are paid by the poor and the middle class. So when they--you know, if you look at the income tax, that tends to be something that is--it's a strongly progressive tax. People with high incomes do pay a large share of the income tax. If you look at the payroll tax, that's actually regressive. People with lower incomes pay a higher share of their income than people with higher incomes. If I were to say, well, we're only going to cut taxes on yachts, and if you look, taxes on yachts are overwhelmingly paid by very rich people, so, you know, it's unfair to tax them so heavily. You can see what they're doing is they're loading the argument, and what's interesting is that the argument keeps on shifting. The answer is always the same: tax cuts for rich people, but one year it's for short-run stimulus, the next year it's for long-run growth, the next year it's because it's unfair to tax the rich so heavily. Different rationales, always the same answer.

GROSS: What programs are taking the biggest hits with the tax cuts that President Bush has proposed?

Prof. KRUGMAN: Well, I think the first thing to say is that we haven't yet seen the big hits. There's a tremendous amount of pushing the consequences into the future. So it you really look at what's happened so far, we've seen a budget surplus of $230 billion turn into a deficit that, you know, the administration is saying will be 300 billion and independent analysts are saying 400 billion. Those deficits will eventually have to be met by something, either future tax increases or program cuts or some mix of the two. So if you actually ask 'Where are the cuts so far?' they're not too visible. What they've been doing is a lot of nickel-and-diming on various things, everything from pay increases to the military, which have been scaled back, to spending on homeland security, which has been remarkably small, to raising rents for the poor as part of the change in housing policy. But if you actually look, the cuts so far are a tiny fraction of--the spending cuts so far are a tiny fraction of the tax cuts. The really big stuff is going to come later, and I presume that the Bush team is thinking that it'll actually--they'll come on someone else's watch.

GROSS: What are some of the clues to what might be affected most in the future when we're deeper into the deficit?

Prof. KRUGMAN: Well, they're already talking about major overhaul of Medicare and Medicaid. I think that's probably the biggest thing. We're talk--a lot of what is now an entitlement would probably cease to be an entitlement. That is, there would be a certain amount of medical care that you would get, but beyond that, you're on your own. And so, you know, that's where the big bucks are, and I think they know that.

GROSS: But that's not how the president is describing it. He's saying that we'll be better off because we'll have prescription drugs covered.

Prof. KRUGMAN: Yeah, well, it's--I have to say, one thing that we have to realize now is that experienced Bushologists(ph) have gotten used to the idea that whenever the president promises something, you say, 'OK, that's the bait. Where's the switch?' and it's almost without fail. If it sounds like a good thing, then you start to look and say, 'Wait. Where's the catch? What's going on here?' And in this case, it turns out that prescription drug coverage is supposed to come with a requirement that you enroll in an HMO, which might be a bigger thing, basically saying that Medicare as we know it--you have to step out of the Medicare system if you want to get the prescription drug coverage. So there are some generous-sounding words from the administration, but when you look underneath, it almost always turns out that we're actually talking about a cutback.

GROSS: And the states--most of the states now are in dire financial straits. How, if at all, does that connect with the Bush economic plan or with the budget deficit?

Prof. KRUGMAN: Well, the first thing to say is that economically, this is a very big thing in the short run. Right now, the state governments are considering, or probably going to implement, a combination of tax increases and spending cuts that amount in total to something like $100 billion over the next year, which swamps any short-term stimulus from the Bush economic plan. So if you actually take US government as a whole--federal, state and local--we're actually going to be doing what we said we'd never do again after the Great Depression, which is having a fiscal contraction in the face of a depressed economy. And it's very intimately connected to the budget, to the tax plan. What the US government normally does in times of economic distress is it does some revenue sharing. It helps out state and local governments so that they aren't obliged to cut back, you know, fully, that they get a fair bit of help. And this is the worst state fiscal crisis since the 1930s.

GROSS: Why are so many states in such a bad financial mess?

Prof. KRUGMAN: Well, it's a little bit--it's a mixture of things. A lot of it is the same reason why the federal government has us moved so suddenly into--from record surplus to record deficit. At the end of the stock market bubble, the depressed economy cuts into revenues at all levels of government. The other thing is that a lot of state governments treated the good years of the late '90s, when the revenue was pouring in, as if they were a permanent condition. They didn't set aside money for a rainy day. They passed tax cuts that were not affordable. There was some increase in spending, a little bit of our runaway spending, although actually, if you look at the numbers, they're not very impressive on the spending side. Basically, it's--if you like, you could say that states did Bushonomics before Bush came in, that they said, 'Ooh, we've got a surplus. Let's give it away with tax cuts.' and then when the conditions turned sour, they find themselves in deep, deep trouble.

GROSS: And the federal government isn't going to help them out of that trouble.

Prof. KRUGMAN: That's right. Just before this latest Bush package was announced, all of the newsletters, the speculation was, well, you know, the Democrats want 75 billion in aid to the states, but, you know, Bush will probably give them 30 billion. The number came out and it was zero, zero dollars and zero cents, and that was--absolutely shocked. That's a--in a way, it's unprecedented. I don't think you can look--well, there hasn't been a state fiscal crisis this severe since the 1930s, but even in much less severe cases, there's been at least some help from the federal government, and it's amazing that they're providing zero this time.

GROSS: So what are some of the services or other things that we might lose as the states get deeper into trouble?

Prof. KRUGMAN: Well, a lot of cancellation of infrastructure. We're not going to get a lot of road-building or road repair or hospitals or schools. A lot of stuff is going to be postponed in an attempt to save money now. The Medicaid--whenever you talk about state budgets, medical care for the poor always comes up. There's going to be a lot of tightening of criteria, a lot of exclusion of as many people as possible, with the brunt of that, at least according to the things I've been reading, falling on children. Basically, a lot of poor children are not going to be getting medical care. So it's nasty stuff. It's harsh and it's cruel. You might argue that states overspent, but the things they're going to cut back on are not pork projects. The things they're going to cut back on are medical care for poor children and road maintenance, not good stuff.

GROSS: If you're just joining us, my guest is Paul Krugman. He's a columnist for The New York Times and a professor of economics and international affairs at Princeton University. Let's take a short break here, and then we'll talk some more. This is FRESH AIR.

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GROSS: We're talking about President Bush's economic plan. My guest is Paul Krugman. He's a columnist for The New York Times and a professor of economics and international affairs at Princeton University. Let's look at the middle class for a second. Looking at the Bush economic plan and what's happening with the states, what would you say the middle class stands to gain in the next few years and what do you think the middle class stands to lose?

Prof. KRUGMAN: Well, 'middle class' is a funny term in the US. The range of people in the US who think that they're middle class runs from around 20,000 a year to 300,000 a year, and so when we talk about the middle class, it's a problematic term. If you actually look at what's going to happen to families near the middle of the income distribution, you know, the median family, the answer is that they will, all told, get a few hundred dollars a year, typically, in tax cuts out of the Bush plan, not more than that, and that on the other hand, they will probably face state and local tax increases that will take away quite a lot of that, maybe all of it, and they'll see a cutback in state and local services, which will further worsen the situation. And then there's all this postponed pain, all of these deficits that will force drastic things to happen, basically, in the 2010s, in the next decade, which will, of necessity, mean big cuts in the great middle-class entitlement programs, in Social Security and Medicare. So ultimately--I think basically, if you work it through, you'll probably have to be making 250 or 300,000 a year to be at all likely to be a winner when the dust settles.

GROSS: So you're painting a pretty dire picture: tax cuts now resulting in an increasingly huge deficit, cutting back of entitlements, cutting back of other services and then, in a few years, having to raise taxes again anyways.

Prof. KRUGMAN: Yeah. I mean, anyone who's actually sat down with the numbers, tried to figure out how this tax cut is affordable, ends up shaking his head or, you know, banging it down against the table because the numbers just don't work. Nothing short of really a gutting of the New Deal and Great Society institutions, nothing short of really a drastic cutback in Social Security and Medicare as we know them would make room for the kind of tax cuts that the Bush administration is now pushing, so something drastic has to give. You know, there are people who will argue that that's what we should do, but the thing is to say is that the Bushies have never made that case. They've never said, 'Well, we need these tax cuts and, because it's so important to have tax cuts, we propose to drastically cut back on Social Security and Medicare in a few years.' They've made it seem as if the stuff is, you know, perfectly reasonable and affordable without any great disruption in the American political system, social system as we know it, and it isn't.

GROSS: Now the Bush administration is proposing big tax cuts at the same time that it's pushing for war with Iraq. What is your opinion of lowering taxes as we march to war?

Prof. KRUGMAN: Well, there's an issue of simple revenue. You know, this war is going to cost something. They haven't given us any estimates, not in the budget, but it's certainly going to cost something. The other thing is, it is kind of weird. Isn't war supposed to be a time of shared sacrifice? Just psychologically, it's a very strange situation, where you declare war, you declare it's going to be tough, it's going to be hard, where you actually cut back, you know, on social programs because of war, and at the same time, millionaires get big tax cuts. This is unprecedented.

GROSS: What is the Bush administration proposing for funding the war? Where is it proposing the money will come from?

Prof. KRUGMAN: Oh, the bond market. I mean, they have obviously not made any move to raise revenue. They have not made any serious spending cuts. They've made, you know, painful spending cuts, painful to some poor, defenseless people, but those are--in terms of the amounts of money, they're token, so it's really not going to make a significant difference. The idea is to borrow for the war, which is--you always do borrow for wars to some extent, but they seem to have no notion that there's ever any point at which you have to be prepared to pay something for it.

GROSS: The Bush administration has offered Turkey tens of billions of dollars in return for its help and its endorsement of war with Iraq. What do you think of when you look at the Bush administration's domestic economic plan and the amount of money that it's offering Turkey?

Prof. KRUGMAN: Well, the numbers on Turkey--again, you know, you have to have some grasp of the sheer scale, both of the US budget and the Bush tax cuts. If you look at all the tax cuts that are proposed just in this latest round, they come out to something like $1.5 trillion. The money that we're giving to Turkey, as best I can make out, actually turns out to be about $6 billion in cash, so it's not really a large thing compared with the tax cuts. What's interesting is that it is a large sum compared to the amounts that the administration is spending on homeland security. It's interesting that the Turks get their money right away while the firefighters and the policemen haven't yet seen anything. It's also interesting that the Turks--it turns out the sticking point was not the price, but the timing. The Turks wanted, and got, immediate delivery, cash on the barrelhead. You sort of have the impression that they don't trust this administration to make good on a promise. They want the money now.

GROSS: If we go to war with Iraq, what do you think that might mean for the American economy? A lot of Americans remember World War II, and World War II actually got us out of a depression. What would an Iraq war economy mean today?

Prof. KRUGMAN: This is not a big war. Whatever else we think, it's not--you know, World War II at the peak, the US was spending more than 40 percent of GDP on the war effort. That would be the equivalent of $4 trillion a year today. Even high estimates of the war in Iraq say we might be spending one or two hundred billion per year. So the war is not going to be a big thing, either negative or positive, in terms of the spending on it. I think the question you have to ask is: What are the collateral effects? What kind of other things happen? And is this going to--some people think it's going to lead to plunging oil prices, which is a good thing, but I've tried to figure out that and I can't see it actually in the data. Other people think it's going to lead to unrest and uncertainty all around the world, which is probably a much more serious negative. I think it's actually probably overrated as an economic issue in both directions. The greatest superpower the world has ever known is proposing to take on a fifth-rate power someplace else. This is not going to be a big thing in terms of the economy.

GROSS: America has been losing jobs, and much of our manufacturing is done overseas. Floyd Norris, who writes for The New York Times, your paper, wrote in December that the economy now supports 2.2 million fewer private-sector jobs than it did when President Bush was sworn into office. Are there ways of creating more jobs now that you can see?

Prof. KRUGMAN: Oh, I think it would be extremely easy. The ingredients of a sensible recovery plan are fairly obvious. You go out there and provide aid to the states so they don't have to do all these cutbacks. You provide money to people who are likely to spend it through rebates to individuals, not to rich people. And probably you also have some acceleration of things the government needs to spend money on. I mean, we could create a whole lot of jobs very justifiably with the homeland security projects. You know, you could have a Franklin Roosevelt-style WPA in the name of defending the country. But all of that stuff is apparently out of bounds politically.

GROSS: Why do you think it is?

Prof. KRUGMAN: I think the ruling party, the party that controls Congress and the White House, is dedicated to the idea that being nice to poor people is bad and being nice to rich people is good. They just cannot wrap their minds around the idea that we've actually got a situation in which being compassionate is also practical.

GROSS: Paul Krugman is a New York Times columnist and a professor of economics and international affairs at Princeton University. We'll talk more about the economy in the second half of the show. I'm Terry Gross, and this is FRESH AIR.

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GROSS: Coming up, we continue our conversation about the Bush administration's proposed tax cuts with New York Times columnist Paul Krugman. Then syndicated columnist Bruce Bartlett explains why he supports the tax cuts. He was an economic adviser for President Reagan and the first President Bush.

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GROSS: This is FRESH AIR. I'm Terry Gross, back with Paul Krugman, a New York Times columnist and a professor of economics and international affairs at Princeton University. We've been talking about why he opposes the president's tax cut plan. What do you think the odds are that the Bush economic plan is going to go through Congress?

Prof. KRUGMAN: I have no idea. I mean, sometimes when I look at the swing moderates, people like the moderate Republicans like Susan Collins or the right wing of the Democratic Party, I think of them as being like Charlie Brown with Lucy and the football. You know, no matter how many times Lucy snatches away the football as he tries to kick it, he still falls for it again. And I suspect that they may do it, you know, one more time, that they may once again believe that this is actually a sensible plan that Bush is proposing and go for it. But they're going to be yelling, 'Argh!' just like Charlie Brown. It happens again and again.

GROSS: You're critical of what the president projects will be the average benefit, the average tax cut for a middle-class American. In one of you columns, you basically told a joke that gave an interesting definition of average. Would you tell that for us?

Prof. KRUGMAN: Sure. It's--a liberal and a conservative are sitting in a bar. Bill Gates walks into the bar. The conservative says, 'Yippee! We're rich. The average person in this bar is now worth a billion dollars.' And the liberal says, 'What are you talking about? Yeah, sure, Bill Gates has walked in and that raises the average in the bar by a billion dollars. But that doesn't make you or me any richer.' And the conservative says, 'Ha! I see you're still practicing the discredited politics of class warfare.' That really does--that is the way it is. I mean, the typical--I think we can say the generic Bush plan on anything delivers huge benefits to people at the top; not very much to most of the rest of the population. Then they go out and say, 'Well, look, the average person gets a benefit which is X, $1,000, $1,500, whatever,' when, in fact, that's just like saying, 'Well, there are 30 people in the bar and if you divide Bill Gates' wealth by 30, then it's still a lot of money.' But, in fact, the other 29 people in the bar don't get any of that.

GROSS: When you look at the Bush economic plan, does it strike you as politics as usual or does it strike you as something beyond that?

Prof. KRUGMAN: No, this is not politics as usual. I mean, I haven't studied all previous presidencies, but I don't think there's been anything like this level of--well, let me be blunt. I think the level of irresponsibility and dishonesty is unprecedented. There's been nothing like this before. No candidate has ever misrepresented the content of his policies as much as Bush did in 2000, and no president has ever done as much as Bush has done since. And I can't think of a case before where a US administration has pursued policies that seem so obviously to be heading us in the direction of fiscal catastrophe.

GROSS: If you were the economics czar for President Bush, what advice would you be giving him?

Prof. KRUGMAN: Oh. Well, it depends on what his goals are, right? I mean, I don't--in terms of my goals, I would scrap the whole thing and let's start over. Look, here's a picture of what I think is happening in the economy right now. We have a short-run problem which is a sort of hangover from the excesses of the bubble years. There was too much investment in some things, too much corporate debt. Business investment's going to stay depressed for a while. So we need a bridge over this depressed period. We need to sustain spending, which means aid to states and local governments, money in the hands of working-class Americans who are likely to spend it, and federal spending on homeland security and other things, all to support demand until businesses are ready to invest again. Longer term we have what is now looking like a very serious fiscal situation. So we really should be--we shouldn't have done that tax cut in 2001, and we certainly shouldn't do anymore long-term tax cuts. So we should be rolling all of that back. And then we should be thinking about what kinds of choices we need to make about Social Security and Medicare to assure their long-run stability. It's a kind of, you know, pump money into the economy now, but let's also do something to make sure that the federal government can actually pay its bills in the decades to come. Not very complicated, actually, but as I say, again and again you come up with the reality that anything sensible seems to be completely ruled out politically these days.

GROSS: How do you think the possibility of war with Iraq is affecting the amount of attention the Bush economic plan is getting in Congress and from the American public?

Prof. KRUGMAN: Oh, I think it's tremendously distracting. I'm having the personal experience that when I do write a column that is purely about economic issues, I actually get some letters that say, you know, 'We don't care right now,' and in general just a huge drop-off of interest. And I think that's general. It's very hard to focus on any of this stuff with war occupying the foreground of everyone's attention.

GROSS: Do you think it's important to focus on it in spite of war?

Prof. KRUGMAN: I don't know. I guess to some extent I'm just a normal member of the public, and I also am rather obsessed with this war right now. It is a little bit hard to go on about, you know, long-term revenue effects of the new savings accounts when we may be talking about bombs any day now. Let me say, though, I actually regard this all--as being in some sense all about peace. You know, I think that the style of policy that I decry in the Bush-ese when it comes to economics is also visible in their foreign policy. So I don't actually view these as entirely separate issues.

GROSS: What's the connection in your mind?

Prof. KRUGMAN: Both a kind of level of irresponsibility--you know, we're going to do what we want to do and never mind the consequences--and a consistent unwillingness to level with the public.

GROSS: Well, Paul Krugman, I want to thank you very much for talking with us.

Prof. KRUGMAN: Well, thank you.

GROSS: Paul Krugman is a New York Times columnist and a professor of economics and international affairs at Princeton University. Coming up, syndicated columnist and economic adviser Bruce Bartlett tells us why he supports the president's tax cuts.

This is FRESH AIR.

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Originally published, 2.15.03