Episode 28: Paul Krugman - Professor of Economics at The City University of New York

0:00This week on Generating Alpha, in an episode different than most, I'm joined by none other than Paul Krugman. Nobel Prize-winning economist, prolific writer, and one of the most influential economic thinkers of our time. Over the past five decades, Professor Krugman has helped shape modern economics through both his academic work and his role as a leading public intellectual. He first rose to prominence for his work on international trade and currency crises, which earned him the Nobel in 2008. But beyond academia, Krugman became a household name through his long-running New York Times column, where he's blended economic insight with sharp commentary on fiscal policy, globalization, inequality, and politics.

0:42In this conversation, we talk about Krugman's early life, the roots of his interests in economics, the key and sometimes serendipitous milestones of his career. We dive into his views on the global and U.S. economies, the evolution of trade policy, the rise of Wall Street's influence, and the challenges of inequality and populism. He also shares what policymakers often get wrong and advice for the younger generation. I really enjoyed making this episode, and I hope you guys enjoy listening to it. Thank you. Thank you, Professor Krugman, for joining me. It's a great honor. Thanks for taking the time.

1:13Yeah, well, thanks for being interested. Always happy to talk when I can manage it. I appreciate it. I've listened to a lot of your podcasts and interviews you've done, and I've noticed that a lot of them are solely focused on your perspective and views at the time. But what I love to do with every one of my guests is understand the person they are. Start off by understanding the person they are. So if I can start off by going to your beginnings, your childhood, if that's okay, tell me a little bit about your upbringing and childhood in Utica. And how do you think that environment, that upbringing shaped your perspective today?

1:47Okay. I left Utica when I was eight years old. So it's very little of that remains. I can't really tell you anything. And I left before I managed to pick up an upstate New York accent, which is probably a good thing. Although then I ended up with a Long Island accent, which is not such a good thing. So, no, just, you know, and beyond that, it's really about as boring as you can get. I grew up in the suburbs and my father commuted in on the train every morning. My mother picked him up and returned at the station.

2:34Nothing particularly exciting. How did your interest in economics first develop? Because not a lot of 10-year-olds go around saying they want to be an economist. When did it develop and how did it develop? Well, I have a cute story which has at least some truth to it. I don't know if I've embellished it in my memory. But the story is that I was a science fiction fan, and I loved Isaac Asimov's foundation novels, in which mathematical social scientists saved galactic civilization. And I wanted to be one of those guys. And this is as close as I could get. So that's kind of, that was part of it. Mostly what happened was I went to college, and I took, I thought I was going to go into history.

3:19But I did take Econ 10, and I discovered that I was – the trouble with history was that, from my point of view, was I wanted to know more about the why and not just what happened. And I happened to luck into, you know, really interesting professors in economics. And I actually took about the same number of history and economics courses in college. But I just was lucky in making, you know, running and having good instructors. And it just sort of seemed like the natural path to follow. So looking back on your career, I kind of want to first give my listeners an idea of your career because you've had a very prolific and successful career.

4:09Could you just give me an idea of some of like the key milestones or key moments in your career that kind of you think most impacted like who's sitting in front of me today? Oh, wow. So the first actually was as an undergraduate. I took a course, a sort of seminar on resources and stuff from Bill Nordhaus and apparently impressed him enough as a college junior that he took me on as a research assistant that summer. So I spent the summer of 1973 working for Bill Nordhaus on energy economics, which was my apprenticeship in doing economics, which was great. That was probably a critical moment forward.

5:11I went to grad school at MIT, with no doubt a big help from Bill's recommendation. and it turned out, although I did a lot of interesting, I studied with Rudy Dornbusch, who was a real inspiration to lots of people and I learned something about doing economics

5:41to sort of blend policy and analytic stuff and just generally style of work. But again, this was one of those things. I took a short course from Bob Solo on the new monopolistic competition theory. And then when I was in my first year as an assistant professor, something clicked. And I said, oh, I bet this could be used for international trade. Went back up to spend a night visiting Rudy for advice. I flagged various ideas for research. He said, that's the one. And so that was a breakthrough. And then, I don't know, after that, presented not the first, but the first really good paper based on that stuff at the NBER Summer Institute in 1979.

6:33That really was my breakthrough professionally because that seminar went really well. And, you know, spent a year in the government in 82, 83, which was eye opening and pretty straightforward up until, you know, then I dabbled in journalistic writing and ended up at the New York Times, which is. was an interesting career break. But it just, I don't know, just most of the time I never felt that there, it always seemed like it was obvious what to do next. There was some opportunity opening up and

7:22mostly had fun along the way and didn't quite plan to be working as hard as I am at this point, but still doing stuff that seems like it's fun. You talked about that experience in government as being eye-opening. What particular about it was eye-opening? What did you learn from it? Oh, mostly what you learn is

7:54how ill-informed a lot of government officials are. Now, granted, this was, you know, I was sub-political level, but in the Reagan administration, and it was actually very mixed. What I learned was a lot of the political appointees were completely clueless, had really no understanding of what it was they were doing. I also came away, though, with a very strong respect for the professional civil service. So sort of at that point, at that point, sort of the top four levels of each department were political appointees or top three or four, depending. But once you got to deputy assistant secretary or office director, there were some really, really smart and dedicated people.

8:43once you got down to that level. So it was interesting. You'd sit in rooms in which the assistant secretary, who was a political appointee, would be talking complete nonsense and would be gently corrected by the staff. It's funny. You talked about kind of what you're doing next not always being obvious. And I sat down with Howard Marks to do a podcast a couple of months ago. And his whole thing is, he's really big on the role of luck within his career. Oh, that's definitely true. I just want to say that's for sure. I was saying, I mean, I didn't feel like I was making hard decisions, but very much just being in the right place with the right person at the right time has always been crucial.

9:25Yeah, everyone who's had success in their career, they've kind of seen that theme and I've agreed with it. I want to shift a little bit to kind of more perspectives, more views on the global economy. But instead of going kind of present, I want to go a little bit more historical. Your area of expertise that you're most famed for is trade policy. My question is, since the 1970s, there's been many administrations, but how would you, if you had to bucket a couple of those, 1970s until today, if you had to bucket into a couple of eras of trade policy, how would you bucket them? Well, there's really just two eras of trade policy.

10:04There's pre-Trump and then there's Trump. I mean, we had, you know, we have a system or we had a system which actually goes back 90 years. It's the Reciprocal Trade Agreements Act of 1934, which set up first the United States doing trade negotiations with countries, reciprocal trade agreements. And then post-World War II, that basically was the template for the GATT, which was a globalized version of what the United States had been doing on a unilateral basis. and a series of trade rounds, trade negotiations, gradual sort of ratcheting down of tariffs to where they were very low by 2016. And there was mostly continuity.

11:02I mean, there were differences. Reagan was a little bit more protectionist than the presidents before or after him. More voluntary export restraints, as involuntary, or I'll hit you over the head with a baseball bat, imposed on Japanese autos. But for the most part, nothing really radical. And it was actually very interesting that they, one of the things I did see, which was kind of, I refer to now, is I'd be at interagency meetings. I was very junior. So I wasn't at the table. I was the guy behind the table passing up little slips of paper to my principal. But some idea would be floated. And the guy from the U.S.

11:52Trade Representative's office would say that would be GATT illegal. And end of story. Reagan, whatever else you can say, Reagan, the Reagan administration believed that an agreement was an agreement. And if you violated a policy that would violate an existing trade agreement was not within the realm of things to consider. So that was interesting. And that was continuity with the way we'd done business before and the way we continue to do business afterwards. Absolutely completely gone now, but that was very different. So you've been around to see, as an economist, to see kind of many different administrations.

12:35What are the most common mistakes you see policymakers make, not even within the world of trade, but overall? Oh, my.

12:47You know, big mistakes are rare because they're being things I don't like, things I disagree with happen a lot. But big mistakes, I can come up with a couple. But up until the financial crisis in 2008, really, certainly federal policy just wasn't big in terms of macroeconomics. It was there were changes in policy, but they really weren't probably that big in terms of macro impact. They were distributional impact for sure. But, you know, so I didn't like the Reagan tax cuts, but I wouldn't call them a mistake. They were just an expression of different values. The first really big set of what I would call mistakes.

14:01Actually, in the United States, I can only think of one big sort of real mistake until we get to the current administration, which was the underpowered response to the financial crisis. It was just obvious to me that the Obama stimulus was way too small and that it would take years to recover, which turned out to be true. And that was a clear mistake, partially analytical, partially just – though they could have done it. They chose to not pull out the stops politically. But other than that, I mean, the – and – sorry. Okay. So I do international economics. I did a lot of probably much more than most U.S.

14:59economists even now think about policies in other countries. And there were lots of mistakes, again, mostly after the financial crisis, the austerity mania in Europe was really, really destructive.

15:17But it's not the the thing about policy is that under normal circumstances or what used to be normal circumstances, what the federal government does is usually not that consequential for the economy as a whole. and macro policy is mostly made by the Fed. And the Fed, you know, they make misjudgments, but they're not stupid and they're open-minded, which makes them very different from the rest of the government. And, yeah, I can think of, we can talk about places where they got it wrong, But for the most part, I wouldn't think of mistakes as being the core story. Yeah. I want to kind of talking about the talking about the GFC, you've witnessed the rise of Wall Street and the growing impact of kind of Wall Street and finance on the U.S.

16:19economy. What have you seen as the kind of most profound changes on how Wall Street relates to the real economy or influences policy? Well, first of all, finance just is huge relative to what it used to be. It's an extra three points of GDP, but that kind of understates just the amount of financialization. So we used to have an economy in which the banking system was pretty boring, pretty under control. Also, not a not especially high power, high prestige thing when all things went, you know, when I was in grad school, sort of the top third of the class got academic jobs. The middle third went to the Fed or international organizations and the bottom third, poor guys had to go to Wall Street.

17:16And they're the ones who all ended up with, you know, with five houses and so on. But but that was the 1970s.

17:27And the kind of creativity, mostly destructive, but the creativity and the proliferation and the role of Wall Street in just shaping everything, that developed during my working lifetime. It wasn't that way when I started. And what do you like, what do you see as the benefits and costs of it, the finance having such a big role? It's almost all costs. I mean, the famous remark by Paul Samuelson that the only financial innovation that he saw as a clear benefit was the ATM. it's a little outdated because I think you can now say that payment apps are in the same category of things that people really use and clearly do make life better.

18:21As for the rest, gosh, there was a lot of financial innovation, subprime lending, CDOs, all of that stuff, which all helped pave the way for the financial crisis. there's you know we can go to crypto and all of that but you know where I stand on that so I would say it's really it's really hard to point to benefits from all of this expansion of finance I found that interesting and it's a perspective that I mean at least people I've interviewed obviously they're in finance so they don't take on the topic of finance and a lot of people making a lot of money what's your view on the monetary divide in the kind of u.s today and do you think it at all faces it it's not all a threat to democracy well sure there's a huge divide i mean by uh uh by any you know inequality of both income and wealth is now at levels that are really back to the Gilded Age.

19:35And it quite obviously threatens democracy. If you look at campaign finance, especially since Citizens United, but even before, the role of extreme wealth in dictating outcomes is pretty shocking. The we have a I don't know, it's sort of obvious stuff, but the but the the gravitational pull, you can see that in in lots of legislation, lots of policies. And of course, then we actually had for a little while somebody who had no qualifications other than being immensely rich, Elon Musk, getting to sort of lay waste to large parts of the federal government. So all of that is really destructive and wouldn't be happening if you didn't have so much wealth concentrated in the hands of a few people.

20:48And at this point, I find myself looking back at the Gilded Age and asking why were the super wealthy of the late 19th century so restrained? I mean, they bought elections and so on, but they never actually tried to undermine the democratic system. And, you know, why are today's plutocrats so much worse than, you know, I'm missing the days of John D. Rockefeller?

21:23Yeah. On that topic, there's been kind of, with this wealth divide, there's been a large rise in populism. People like Zoran Mamdani, and on the other side, even candidates like Trump. Are there any policies or legislation that you've seen kind of, that you see as directly contributing to the rise of populism? Oh, I'm not sure about, I mean, certainly the direction of, I don't know what can you say. I mean, the rise of populism is a complicated story. And some of it is clearly the left-behind aspect, blue-collar jobs, real wages, depending on which non-mortar you use, either not up by very much or possibly they're probably not actually down.

22:16Definitely a really big problem of regional, stranded regional economies, which I think does contribute. But it's also, again, I have this kind of international perspective, and what really strikes me is how the kind of nationalist right has attracted lots of support, even in places that have far more genuinely populist policies than we do. You know, so there's a significant anti-immigrant right wing movement in Denmark. You know, Denmark has a social safety net beyond the wildest dreams of U.S. progressives. It has$23 an hour workers at McDonald's. And yet they also have a populist right, although it hasn't taken control of the country.

23:11So I'm not sure that we – I think there's a lot going on that goes beyond economics. I'm not an economic determinist on this thing. Okay. I'd like to talk a little bit about U.S. debt if that's okay. Some people are worried about U.S. debt levels and its trajectory, and I know kind of your stance on it, but I'd love for you to make it kind of more clear to my audience. Is there a cause for concern right now, and especially if interest rates rise to somewhere like 5%, 6%, 7 %? Okay. If you try to talk, two things. First, historical record is that stable, wealthy countries have historically been able to run up very large debts without a crisis.

24:14We talk about the United States, and we're roughly at as high as U.S. debt has ever been as a share of GDP, roughly where it was at the end of World War II, which can sound alarming, except we never had a debt crisis after World War II. The UK came out of World War II with debt that was 250 % of GDP, and they never had a debt crisis. And if you ask why, the reason is mainly that investors are willing, bond buyers are willing to cut a lot of slack for advanced countries because they are presumed to be responsible. that in the end governments will do what is needed. And they're also, they're presumed to be competent that a country like the UK or historically the United States hasn't had a problem collecting taxes.

25:16We have a bureaucracy that works. Now, the reason to be concerned about the US right now, yeah, interest payments are up and there's some mystery about why interest rates are higher than, persistently higher than they were. But the biggest reason to worry about a U.S. debt crisis is that are we still a credible country? Do you really think that, you know, the mathematics, the arithmetic of debt is really not that daunting. If the United States were willing to impose a 5 % value-added tax and do a little bit more aggressive cost control on health care, although we've already made more progress than people think on that, we have no problem.

26:13We can easily handle where we are. But the question is, given political deadlock, a significant tax hike on the middle class is out of the question. And in fact, we have a current ruling political party that is doing its best to make tax evasion great again. And acting responsibly just doesn't seem to be on the cards. And, you know, so one of the things that really struck me about Musk and Doge and all of that is there's one area where we know that there's massive waste, fraud and abuse. Most of it is a myth, but we do know that overpayments to Medicare Advantage plans are a known area of estimates run as high as$80 billion a year of just overpayments because of insurance companies upcoding their patients.

27:15And somehow or other, that never came up. You know, we're shutting down USAID, we're canceling research at NIH, but profiteering by health insurance companies is apparently off limits. And that's not the kind of government, kind of political system that would inspire confidence. I want to flip that question that you mentioned earlier on to you. At this point, where we are right now, is the U.S. a credible country? Oh, no, we are not remotely a credible country. I mean, and we can talk, I think, on the fiscal side, it's a little bit speculative. But I've been paying a lot of attention to, obviously, tariffs and trade.

27:57And I really get driven. And I'm astonished that we don't hear more about the fact that everything that has happened since April 2nd is a flat violation of solemn international agreements. I mean, we have a free trade agreement with South Korea, and we've just hit them with 25 % tariffs. we have we don't have free trade agreements with Japan or the EU but we have signed on to multilateral trade agreements and you know I actually hadn't ever looked at this before somehow but why are these agreements and not treaties and the answer is it's basically procedural some technical stuff but a treaty is something that's approved by two-thirds of the Senate, an agreement to something that is approved by majorities in the House and the Senate.

28:56And, you know, so there are technical details. But these are contracts. These are supposed to be legally binding agreements. The United States has agreed, has signed papers, has passed legislation, which says that any country that has most favored nation status, which is almost everybody, we have agreed. Our tariff rates on them are bound. We cannot simply go ahead and say, actually, we're going to tariff everything you sell at 30 percent. And yet we're doing it. And so the United States is a country that can no longer be trusted. It's not even that we don't honor our agreements. We don't even talk about the fact that we have an agreement that we're violating.

29:38So why would you want to place any trust in the United States at this point? Even if it's not realistic, what are the steps this administration or another administration, a new one in a couple of years, have to take to make America credible again? Well, we'd have to roll back everything that we've done on trade. We'd have to show some real seriousness about domestic economic policy. It takes time. I mean, again, the international stuff, we used to talk about how Latin American countries couldn't borrow in their own currencies. They were not viewed as credible. Actually, this had somehow or other somebody came up with the name Original Sin for their inability to be credible on borrowing.

30:33Many of them have graduated past that point. Brazil can now borrow and reage. But it took decades of reasonably responsible policy to get there. So, you know, I don't know, whoever, even if the next president is somebody reasonable and actually has a reasonable majority in Congress, which in practice, unfortunately, does mean a Democratic majority because it's going to take a long time for the GOP to become a normal party again. But even if the next president is pretty credible and reasonable, that won't be enough. We need to have multiple elections in which reasonable people are put in charge of the United States before people trust us again.

31:22Do you think this decrease in kind of credibility from the United States is giving rise in opportunity to any specific developing countries?