SYNOPSIS: Wideranging interview over all parts of the Globe

Published on December 24, 1998

Translated by Peter Bartl

Weltwoche: Herr Krugman, in polemical articles you tell the mighty of the world what they should do. Are you a megalomaniac?

Krugman: I don't think that I'm doing anything extraordinary. I give advice publicly. Many others do the same.

Nevertheless, you published a letter to [Malaysia's prime minister] Mohamed Mahathir, where you suggest that Malaysia's introduction of currency controls might be due to one of your articles.

When I propose something unheard of, and shortly afterwards it is put into practice, I do think I may have provoked something. Anyway I was told that I did have a certain influence.

Let's assume you did know better than Mr. Mahathir. How is the Asian crisis going to develop?

I think that the hot phase is over, I mean this feeling that everything is about to collapse. The fall in industrial production has stabilized in the meantime. However, a solution to the crisis is nowhere in sight.

You have said that only currency controls would clear the way out of the depression.

Currency controls allow a state to reactivate the economy, through low interest rates and an expansionary fiscal policy, without the pressure on the currency becoming too great. Today such currencies collapse immediately in the absence of brakes. How is a country in that situation supposed to get back on track?

Which other countries could still get into turmoil?

The danger is greater than I could have imagined two years ago. For instance Brazil faces the same dilemma as the Asian countries at the beginning of the crisis. Although recession threatens, due to fear of speculators they must follow restrictive policies. That is perverse.

What about the developed countries?

Look at Japan. Even such a developed economy sits in a recession against which conventional instruments can do nothing. Despite low interest rates the demand stagnates.

What do you mean? Are the US and Europe next?

I do not see any immediate danger, but to be sure, certain Japanese problems can be observed here [in Europe] as well, like demographics. Due to over-aging, the sector of the population that earns money is getting smaller. People tend to save rather than spend. At the same time companies invest too little, because the perspectives do not look good.

But these problems little affect the booming stock markets.

This optimism is really bizarre. I think that Brazil, in spite of the IMF's package, will fall into recession next year and with a 50% probability it will introduce some kind of currency controls, like Malaysia.

With no disrespect to your proposal of currency controls, up to now it has been above all Alan Greenspan who has prevented the worst, with his lowering of interest rates.

Yes, the unexpected rates cut, and especially its timing, has convinced everyone that the Fed would prevent a worldwide recession. From a sheer technical point of view it was insignificant, it had to do only with the markets' psychology.

Isn't it astonishing, that such simple measures work, even though everyone can see through them?

That is really astonishing. The crisis has shown us how prophecies can be self-fulfilling. When a large number of investors suddenly thinks that a developing country has problems, they then cause a crisis that confirms that belief. But sometimes a crisis can also be stopped, when somebody like Greenspan stands up and says that everything will be fine.

You were one of the first to question the myth of the Asian economic miracle, and now, in contrast to the economic mainstream, you ask for currency controls. Why are you always saying something different from your colleagues?

What you say isn't true. I am no wild outsider, I belong to the mainstream. Most of what I have published so far are contributions to ongoing economic research; for instance, in trade theory. When I write for a broader public, I tackle subjects in which the public's conventional wisdom does not agree with economic research.

And that's why you claim in your book something so off the mark, such as, the talk about globalization has no substance?

The subject of globalization awakens intense emotions. But much of what people say is simply wrong. For instance it is said that the economic success of low-wage countries takes place at the cost of the US or Europe. But international trade is no zero-sum game. When those countries export more, it necessarily means that they import more with the money earned. Further: the figures show that trade with such countries plays a relatively small role in the total trade of developed countries.

Now be serious: everyone believes that the emerging Third World countries want a piece of the cake at our cost.

Just because everyone believes it, that does not mean it's the truth. The same people who talk so much about globalization also say that competing countries of the Third World not only have trade surpluses but also attract much capital from the developed countries. But that's impossible, alone due to accounting. One cannot import a lot of capital and at the same time have trade surpluses.

There is then no competition between countries?

There is some such competition, in certain areas anyway. The question is, is it to our disadvantage or advantage, when the neighboring country gets richer. The answer is, both can happen. Usually it is rather good, although the effect isn't very large in any case. It is similar in the case of tax competition: the capital flow from countries with high taxes to those with low ones is rather insignificant.

But if nothing of what the media and politicians say is true: are we all idiots? Or do only economists see the truth?

It is not a question of economists versus non-economists. I believe that many people simply do not take the trouble to check whether their claims really make sense. They do not want to be bothered with mathematical models or empirical research. It is far more attractive to tell big stories about globalization. And when you argue with figures or economic principles, they get angry.

Why do you care about all that at all? Where did you get the idea to tell others that they are wrong?

And why shouldn't I? Why does anyone believe he knows better? Out there there's an intelligent public interested in economic questions. Am I supposed to leave the field open to those who never opened an economics textbook and do not know what they're talking about? For instance, when globalization is held responsible for something that is actually due to wrong monetary policy, that can lead to disastrous economic policies. I want to prevent that.

Then why don't you seek a position in government ?

I have the wrong personality for that. Government officials must listen to a lot of nonsense and behave respectfully. I can't do that.

You have then no mandate to act as advisor.

Sometimes I do, but I try to avoid strict commitments, because I don't want to lose my independence. One thing is interesting: economists that move inside the political establishment live in a small world. Larry Summers of the US Treasury Department, for instance, studied together with Jeffrey Sachs at Harvard. Stanley Fischer of the IMF was my doctoral supervisor and is a close friend of MIT economist Rüdiger Dornbusch.

Who looks at the numerous differences in opinion among economists cannot avoid the feeling that economics is nothing but politics.

I don't see it that way. When we do not have the same opinion, that has do to rather with too much love of mathematical models and their over-utilization. Just try to classify me politically. I have already annoyed pretty much everybody.

Then where do the fundamental disagreements come from, for instance, regarding monetary policy? You want to use it to reactivate the economy, others say, don't touch it.

In the debate on monetary policy, ideology does play an important role still. But even there differences are not that great. The monetarist Milton Friedman and I argue in the same universe, we base our views on the same theoretical framework. With an uncertain future, we simply estimate certain parameters differently.

Regarding the future: we in Europe naturally want to know from you what it's going to be like under the monetary union and the euro.

I'm one of those ugly Americans who always thought that the euro was a bad idea. Europe isn't an ideal currency region. The labor mobility and the capital transfers are too low for that. But I've given up on the euro, it's coming now after all.

What will happen?

What worries me is how the European Central Bank will handle the euro. Duisenberg is no Greenspan, and I fear that the ECB will behave as more German than its German model and follow a rigid monetary policy – regardless of economic developments. Just to prove its credibility.

Then there will be no jobs miracle as in the US?

Hardly, but that doesn't have to do only with the ECB. Since it has gotten better in France this year, everyone says that's the euro effect. But I remember 1987, as the European Union Treaty was signed. At the time, too, everyone said that the subsequent recovery was due to the common market! But it was only the economic cycle, and when the common market actually became reality, the unemployment was again in two digits.

Where is the problem?

In Europe the structural framework does not really invite someone to offer a job or to accept one. Compare that with the situation in the US: there an unskilled worker earns little money per hour, the social expenses are low, and there are almost no labor regulations. I estimate that, in Euroland, eight to nine percentage points of unemployment can be attributed to structural factors, the rest to insufficient demand.

Now you're giving us the eternal praise for the US model.

No. I think that it's possible to be less brutal than in the US and still to prosper. For me, Sweden of 1980 would be ideal: very generous and high social expenses, a flat income distribution and no unemployment.

Are you serious?

Yes, I just don't know how we can achieve that today. It isn't realistic. For that we need a model in which jobs are created and social support is assured as well. For instance, a state that offers everyone who's underpaid an additional income. Britain and Canada have reached the best compromise.