LOU DOBBS MONEYLINE, August 22, 2001: Interview with Paul Krugman

SYNOPSIS: An interview with Lawrence Lindsey and then Krugman responds to it discussing Social Security, Medicare, and the economic slowdown

LAWRENCE LINDSEY, WHITE HOUSE ECONOMIC ADVISER: The point is we have, we have that surplus. Remember, from an economic point of view, from a financial markets point of view, you've got to include that Social Security money in there. After all, that's money the government is using to buy back bonds in the market. That means we had -- what? -- $158 billion surplus. On net, we are retiring that amount of debt. That is the second biggest surplus in American history, both absolutely and as a share of GDP. And so, as far as the government's fiscal health goes, we're doing very, very well.

HOPKINS: But can you really promise that Social Security surplus is going to be a lock box, that isn't touched with only about $2 billion to spare? And that's the administration's forecast.

LINDSEY: Well, the president is committed to that. And we're going to make sure that we don't touch Social Security.

HOPKINS: What about Medicare? With the possibility of using the hospital insurance fund, aren't you really raiding Medicare?

LINDSEY: Well, let's talk a little bit about Medicare. I just want to -- I don't mean to do too many numbers, but let me give you three numbers if I may. We are collecting $175 billion in Medicare taxes and another $22 in medical premiums. So total inflow to Medicare is $197. We are spending $242. That means every dime in Medicare that is coming in is being spent on Medicare. And we're moving $45 billion from the rest of the budget to spend on Medicare as well. So Medicare is more than amply covered. We are spending all Medicare money on Medicare and $45 billion besides.

HOPKINS: Now you are projecting that the economy next year is going to grow more than 3 percent.


HOPKINS: That is an incredible increase from where we are now.


HOPKINS: How is it going to turn so quickly?

LINDSEY: Well, it's actually turning rather slowly. Remember, we've been in the doldrums now for probably about year and a half in slow growth. And that's a long time for a slowdown. What we have kicking in next year, are three things. First of all, the tax cut. We'll be having another withholding tax cut January 1. Second, monetary policy. When I was at the Fed, we used to think of the lags as running 12 to 18 months. That means most of the impact of monetary policy is going to come in next year. And finally, we have had some retreat in energy crisis, worth perhaps three-quarters of a percent of GDP as far as more money in the pockets of business and households. I think those three things together are going to produce substantial growth next year. One more thing to keep in mind, when economies bounce, they really bounce rather quickly. Remember '92 was one of the best years in the 1990's, the first year out of the '90 recession. And excuse me, '83 I believe we grew almost 6 percent. So growth rate of 3.2, which is what we're projecting, I think is just rather reasonable.

HOPKINS: A lot of people are pointing to what's going on in our stock market as very similar to what happened in Japan after the bubble burst. What do you see?

LINDSEY: Well, there are always similarities, but there are some important differences as well. I think the most important one is most of the money in our stock market went into improving technological infrastructure. In Japan, it went into inflating real estate prices. I think that infrastructure's going to pay off long-term for a higher growth rate for the United States economy for the years to come. I think that's one the key differences. One other difference I'd like to point to, in Japan, the fiscal authorities, the monetary authorities didn't act. Here we did. We passed a tax cut, the Fed cut interest rates. And I think that's going to make a huge difference for the economy going forward.

HOPKINS: Thank you very much.

LINDSEY: My pleasure, Jan.

HOPKINS: Larry Lindsey, the president's economic adviser. Thanks for joining us on MONEYLINE.


Now for reaction to Mr. Lindsey's comments and to give us his perspective on whether Congress can meet all these budgetary obligations without dipping into things like Medicare and Social Security, we're joined by Paul Krugman. He's "New York Times" columnist and MONEYLINE contributor and also a professor from Princeton. So be our truth squad. Can we do all of this stuff?

PAUL KRUGMAN, ECONOMIST/"NEW YORK TIMES" COLUMNIST: You know, if a listed firm did the accounting gimmicks that the administration is doing, they would be having an interesting conversation with the lawyers at the SEC right now. These numbers that you're hearing right now are based on outrageous, you know, making money disappear, making the coins disappear. Is he moving from hand to hand? And they get worse as you get to the out years. I mean, the thing that everybody who's looked at this knows is that this was going to happen, but wasn't supposed to happen this soon. 2002 looks worse than 2001. 2003 looks worse than 2002 and so on. No, there's not -- there's no -- I mean, especially if you consider Medicare in same boat as Social Security, which you should. They're both retirement programs. It's gone. We're into deficit now from here on in.

HOPKINS: So what's it mean? No programs other than a tax cut?

KRUGMAN: Prescription drug coverage is dead as a realistic program. You know, the administration will try to do something fake, but there isn't money for it. The build-ups the Pentagon is expecting are gone. A realistic Social Security reform plan: Reforming the system takes extra money, not just the money that's in the system now. You've got to put something in. That's gone. So either we have no Social Security reform or we have a fake reform that blows up just about the time I retire.

HOPKINS: So we couldn't afford these tax cuts, I mean, is that the bottom line?

KRUGMAN: That's what -- I mean it's crude and it's childish to say, "I told you so," but I told you so. This is exactly what people like me were saying three months ago. And it's happening.

HOPKINS: But we have an economy that's slipping. We have tax cuts coming right at this point, which could be a crucial point. Is it enough to turn the economy around?

KRUGMAN: It's a problem. The rebate is fairly small. I mean, the big problem with this tax cut, which is only partly fixed by the rebate this year, is that it comes in slowly. Most of the big tax cuts come you know, 2005, 2006. When Larry Lindsey talks about Japan, you know, the problem with Japan is they've done lots of deficit spending, but it dribbled out. It started small and then it built and it built. And guess what, that's exactly the way the Bush tax cut is set up.

HOPKINS: What about the economy? Do you see any signs that it's turning?

KRUGMAN: I'm a little depressed. You know, inventories, probably that's over, the inventory slump. But you look at the things that could drive a recovery, business investment, nothing happening. Housing, long-term rates haven't fallen enough to produce a boom there. The trade balance is going to get worst before it gets better because the dollar is still very strong. It's not a happy picture.

HOPKINS: And so the stock market is reacting the way it should be reacting?

KRUGMAN: I'm not -- I mean, I think there may be some panic in there, but it's hard to see a recovery anytime soon, a real recovery.

HOPKINS: Paul Krugman, Princeton professor, MONEYLINE contributor and "New York Times" columnist, thanks. And still ahead on MONEYLINE, are payphones passe? We'll tell you why they're getting harder to find. And then, should you be worried if the dollar gets weaker? You might be surprised at the answer.

Originally broadcast, 8.22.01