On this episode of the Capitalisn’t podcast, hosts Kate Waldock and Luigi Zingales talk with economist and New York Times op-ed columnist Paul Krugman about his book Arguing with Zombies: Economics, Politics, and the Fight for a Better Future, why he thinks America’s economy has failed the middle class, and how we can create a better economic future for our children.
Kate: Hey, listeners, a couple of things before today’s episode. First, we recorded this interview before the coronavirus situation became so dire. So, although we dig into some fascinating points, we don’t touch on COVID-19. That being said, we understand how important and world-changing this situation is, so starting next week, we’re going to be doing updates about the economic news and the implications of the outbreak. As always, thank you for listening, and enjoy the show.
Luigi: So, Kate, I have a question for you. Who is the most famous living economist?
Kate: Do you mean among economists or regular people?
Luigi: No, no, no, famous, famous, famous among ordinary people. A household name.
Kate: In that case, I would say it’s pretty clearly Paul Krugman. Not only does he have a Nobel Prize, but he also writes for the New York Times, and his column is syndicated throughout the world. Plus, he’s written a lot of popular books.
Luigi: You’re right. And we’re very fortunate today to have him in the studio. He’s touring the U.S. to present his new book, Arguing with Zombies: Economics, Politics, and the Fight for a Better Future. Welcome to Capitalisn’t, Paul.
Paul Krugman: Hi, there.
Kate: Paul’s new book is focused on the role that economics and punditry play in today’s American politics.
Luigi: As a result, we’re going to talk about this and more generally about the future of capitalism.
Kate: From Georgetown University, I’m Kate Waldock.
Luigi: From the University of Chicago, this is Luigi Zingales.
Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.
Luigi: And, most importantly, what isn’t.
So, Paul, do you consider yourself a capitalist in the sense, not somebody that owns a lot of capital, but a believer in the capitalist system?
Paul Krugman: Yeah. I mean, basically, we’ve tried having alternatives, we tried having command-and-control economies, the government running everything, and that doesn’t seem to work very well. And what does seem to work quite well is the private sector doing most stuff and the government doing a few things, but the government then providing a safety net. So, yeah, I’m for social democratic capitalism.
Kate: In the introduction of your new book, you described the transition from an academic economist, and, by the way, I would say a top-notch one to boot, to a reluctant pundit. Can you describe to our listeners why and how that took place?
Paul Krugman: Life sneaks up on you. I developed a reputation of being a good writer for an academic economist, which is kind of one of those backhanded compliments. But I was a columnist for U.S. News & World Reportin the 1980s. I never met anybody who read it, but I actually had some very early experience there.
Kate: Were you just reviewing the quality of colleges?
Paul Krugman: No, no, I never did that part. And so, I sort of slid in writing a gradually increasing number of popular pieces. It turned out I wasn’t too bad at that. Then, in 1999, along comes the Times, just out of the blue, offering me the best job in journalism. And I figured, all right, you know, let’s try something different here. I think on the whole, it’s worked out OK.
Luigi: First of all, I have to say that I do remember one of your early pieces in, actually, Fortune, with a very interesting topic. It was, why food used to be so bad in England and why it has become much better now.
Paul Krugman: That’s right.
Luigi: And I actually thought that it was very insightful, and I quoted it many times, because it’s interesting to see why, in some places, the food is so bad and remarkably bad. And, of course, coming from Italy, why in Italy is it so good everywhere and remarkably good?
Paul Krugman: Yes. Oh, god, I remember my first trip to Italy, which was an academic conference in 1980 and suddenly discovering what Italian food was supposed to taste like.
Luigi: One thing that struck me in your introduction, you kind of say you were hired to talk about economics, you wanted to talk about economics, but you ended up being put at the Timesin a moment where it was difficult to talk only about economics. And, unlike Kate, who is very young, I do remember that time. The second Iraq War was a sham. And so, for me, it was easy, because when I realized that the major piece of evidence that the Bush administration had was some alleged purchase of yellowcake in Niger that was identified by the Italian secret service, I knew that was something fake.
Paul Krugman: Well, you had inside information there. But . . . No, my first several years at the Timeswere a very peculiar time and not where I wanted to be, but felt I had to be, because I was the only columnist at a major newspaper saying, hey, we’re being lied into war, which seemed totally obvious, but people, for whatever reason, were afraid to say it.
Now, the new book, Arguing with Zombies, very deliberately picks up after that. So, it starts with the debates over Social Security after the 2004 election, because I was able to finally turn my focus to things where I actually knew something, as opposed to things where I just was the only person willing to say the obvious.
Luigi: At some level, I think you do a disservice to your reputation, because most people who don’t know you as an economist, who read you as sort of an opinion writer in the New York Times, they think of you as maybe very extremist or one-sided. But when it comes to economics, you’re not.
Paul Krugman: Look, I don’t care, is the basic answer. Actually, I do see or used to see, I think that Trump has changed this a bit, it used to, I could watch colleagues in the punditry trade. You could see they were counting, I just wrote one column attacking Democrats and now I should write one attacking Republicans, or vice versa. And I just don’t want to do that. I’m just going to do what I think is appropriate. And also, I mean part of the whole point of . . . And, again, I have a book about zombie ideas. Part of the point is that a large part of what one side of the political spectrum says is not actually a position that’s defensible in any way at all. It’s zombie ideas that should be dead but are still shambling along, eating people’s brains. So, if I come across as one-sided in the columns, that might be because reality is one-sided.
Kate: Well, so this is a good segue. In your book, you mentioned, economics can’t tell you what values to have. It can, however, shed light on what to expect from policy that reflects any particular set of values. But also, that’s where the politicization comes in. And then you go on to say, opponents of large government, they will attack government as being counterproductive, destructive, even if there is evidence to the contrary. But, as you mentioned, you have focused more on the right, and where did you get the idea that this is mostly a right-wing problem?
Paul Krugman: Looking at reality.
Paul Krugman: I mean, there is no counterpart on the US left to the Republican belief that tax cuts pay for themselves. You can’t find any significant—
Luigi: What about MMT? And they pay for themselves.
Paul Krugman: Oh, god, yeah, so MMT, I’m not sure how much our listeners are even going to know. But no, there are some people who think that they have this radical new macroeconomic theory, monetary theory. First of all, they don’t actually even have very many adherents within the Democratic Party. Supply-side economics has completely taken over the Republican Party, even though it’s pure voodoo. MMT maybe has Bernie Sanders this year, but nobody else. So, there’s no equivalence there. And then MMT itself turns out, I still can’t figure out what it really is. And I’ve tried.
Luigi: I’m glad, because we still have to do an episode on that, and we’re struggling, because it’s hard to figure out what it is, and now you validate our struggle.
Paul Krugman: It doesn’t matter what you say, the MMT people will say, no, you just don’t get it, you’re a dinosaur. So, it’s hopeless, kind of. But the point is, there are some foolish ideas on the left, but they’re not the mainstream of our left-of-center party. The mainstream views of the Democratic Party are pretty much defensible, whereas crazy stuff completely dominates the Republican Party. The belief that tax cuts pay for themselves, the belief that climate change is a gigantic hoax. So, the parties are not the same. And if you pretend that they are, then you are actually doing a disservice to your readers. And if I focus mostly on bad ideas from the right, it’s because those are the bad ideas that have real power behind them.
Kate: You both have written and spoken a great deal about power, though, and the role of power in politics and the interaction between power and capitalism. But doesn’t this sort of pose an impossible challenge to fighting the zombies, which is that it’s sort of not a fundamental economic issue? It’s hard to study power. It’s hard to really know in a pinned-down, precise way what causes what when it comes to power. So, how can we even begin to combat the zombies if we don’t really know what role power plays?
Paul Krugman: Well, hopefully, we know something about it and we study it and we talk to people who study it in ways that are different from economists. I now sit at the Stone Center for the Study of Socioeconomic Inequality at the City University of New York, which is actually interdisciplinary. We have political scientists and sociologists who really do study these. And I believe in talking to them. Economists do have this tendency towards arrogance, towards assuming that we’re smarter than any other social scientists, roughly comparable to the way that physical scientists think they’re smarter than any social scientists, and it’s not true. So, I actually want to study these things. And then at least we can try to document when it’s clear that power relations rather than the invisible hand are driving events.
Luigi: In my view, there was a very concerted effort in neoclassical economics to eliminate the word power from the vocabulary and relegate it so that it would not even be a matter of conversation.
Paul Krugman: Oh, sure. A lot of people in economics, two things, when they were saying . . . part of it was, there was in fact some political leaning. A lot of people just sort of were politically conservative, a lot of economists are, and didn’t want us to talk about that. And then there was this, well, the tools, our toolbox doesn’t really let us handle power very easily, so therefore, let us assume that it doesn’t exist, which is a constant problem. Assume the nonexistence of a can opener. But that doesn’t mean you can’t bring it back in. And, in fact, once you start to look, I mean, I’ve been paying attention to debates about income inequality for about 30 years now, and there’s been a clear shift away from the, it must all be the invisible hand, it must all be technology and market forces, to saying, well, actually, you know, things like the bargaining power of unions make a big difference.
Luigi: What is your view these days about income inequality? What are, in your view, the major causes of this income inequality?
Paul Krugman: As best as I can make out, everything that people have mentioned as a cause probably at least plays some role. There probably has been some technological component. Globalization has probably played some role, but the really big movements are things that have to do with institutional changes. I mean, the days when America was a relatively middle-class society were also days when 25 percent to 30 percent of the workforce was unionized. And a good part of the rest, at least companies didn’t want to be too ruthless out of fear that they would unionize. So, the collapse of the union movement, which is very much a political phenomenon, plays a critical role.
There’s a disputed, but I think plausible, argument that says that the changes in taxes caused changed incentives. Back when CEOs paid a 90 percent marginal tax rate, they didn’t have a whole lot of incentive to inflate their own paychecks, because they didn’t get to keep very much of it, and so a pleasant life was more important. Reduce those tax rates and CEO pay goes from 20 times the average worker to 200 times the average worker. We can look at this and say that politics probably played a really critical role. And, look, other advanced countries, there’s been some rise in inequality almost everywhere, but nothing like what’s happened in the United States.
Luigi: You’re absolutely right, but I think that the decrease in unionization took place in some form or another in almost every country and is mostly associated with globalization.
Paul Krugman: And actually, it’s not true. Denmark is just as open to the global economy as we are, and they’re 60 percent unionized. Canada has unionization rates now that are comparable to the United States in 1960. What is true is that manufacturing shrank and unions used to be largely in manufacturing, but that didn’t have to be the case. There was no economic law that said that Walmart couldn’t have been unionized when it displaced General Motors as the biggest employer in America. So, it really . . . There’s a lot less inevitable, ineluctable, invisible hand in all of this and a lot more political decisions than economists. . .
I actually would prefer not to talk like this, if only because it kind of devalues my own intellectual capital. I know from supply and demand. I don’t know very much from power, but still, I have to acknowledge that it’s there.
Luigi: No, you are right that Walmart could be much more unionized, but it is true that a lot of the loss was in manufacturing that was heavily unionized, and a lot of that was moved abroad. And part of the story is that the United States started the post-World War II period in a very privileged position, where it was the only country with a serious rule of law, high technology and an educated workforce, thanks to the progress in universal education at the beginning of the 20th century. In 1945, the United States was one of the most-educated countries in the world. Education did not keep up, and the rest of the world caught up with us. And so, today, people in China are equally educated, if not better educated, than in the United States. And so, it’s much more difficult for a high school guy to make a living with a good salary today because he’s competing with the Chinese.
Paul Krugman: No, but remember that . . . So, now I can put on my international economist hat ...
Luigi: That’s what I want.
Paul Krugman: . . . and point out that at least three-quarters of employment is in sectors that don’t actually compete internationally. Retail trade, Walmart, a whole variety of services. Out of the 10 fastest-growing occupations in the United States, eight of them are basically some form of nursing. So, yes, manufacturing faced competition, although, look at Germany, which has a unionized, high-wage manufacturing workforce and still competes on world markets. So, the idea—
Luigi: On the high wages, I would not be so sure, because after the Hartz reforms, the wages went down quite a bit.
Paul Krugman: It’s down from where it was, but it’s still way higher than the U.S. But, generally speaking, the extent to which globalization is responsible for this stuff is way overstated.
I actually have a case study that I like to look at, because it kind of illustrates what happened. Trucking, truck drivers used to be a . . . That used to be a good job with good pay and good benefits.
Luigi: It used to be regulated. They had a cartel.
Paul Krugman: It was regulated.
Luigi: And then, actually, the cartel, they regulated it.
Paul Krugman: Well, that’s right. And there was a union, which was powerful in part because it was a regulated industry within the cartel. And we took all that away and trucking got cheaper and the real wages of truckers fell by 30 percent, and it wasn’t because we had Mexicans driving the trucks, or it wasn’t because we had self-driving trucks. That hasn’t happened yet. That was because of a change in institutions. It was because of a change in power.
Was it worth it? Trucking is more efficient now than it was. It’s not clear how much of that has benefited the general population, but it does mean that there were a substantial number of good middle-class jobs for blue-collar workers that got eliminated, and it was a political choice that that led to their elimination.
Luigi: Actually, there is also a technological story. I think that now truck drivers can be followed with GPS much more effectively. So, in the old days, you had to pay an efficiency wage to make sure they were not stopping to do something along the way all the time. Now you know more about how they drive than their wife knows. And in a sense, this is the—
Paul Krugman: This is a . . . But again, that’s actually a fairly late development, as it turns out. I mean, the big drop in trucking wages took place in the ’80s.
Luigi: But that was because of deregulation.
Paul Krugman: Because of deregulation.
Luigi: But that, in a sense, I’m sorry to say, is my point . . . In the past, there were some professions that were earning a rent of some form or another, and that rent disappeared.
Paul Krugman: Right. But is that maybe allowing a lot? There were a lot of professions that earned a rent, and you can argue that was a lot of blue-collar jobs that were, you know, they were paying more than an unregulated free market would pay them. You’ve already assumed your conclusion if you say that eliminating those rents was a good thing. So, I mean—
Luigi: No, no, I hear your point, and I think it’s a good point, but this will suggest a completely different agenda than even most Democrats recommend, because this is not necessarily an agenda of tax redistribution. It’s an agenda of changing institutions to make the labor market less competitive and to protect labor more.
Paul Krugman: But at least the people I talk to are for all of that. I mean, we’ve got . . . Unfortunately, so the language police should have intervened in this long ago, but we’ve got predistribution versus redistribution. And predistribution is trying to change institutions in a way that that gives workers more bargaining power, and redistribution is higher taxes on the rich and more benefits for the less well off. And you want to do both of them.
And so, again, there are a lot of reasons why cross-country comparisons can be misleading, but still, Denmark versus the United States. Denmark turns out to have both a substantially less unequal distribution of market income, largely because of those strong labor unions, and at the same time a lot more redistribution through the tax-and-transfer system, and the result is a society that is vastly less unequal than ours.
Luigi: It’s also a society where universal education and homogeneity took place much before the United States. And so, I think that they had a lead advantage vis-a-vis that.
Paul Krugman: Well, they had.
Luigi: And now, with immigration, they have a lot of problems.
Paul Krugman: Well, one of the things. First of all, the . . . I mean, in a way that, if we want to understand the politics of why the United States has a hard time doing these things, sure, it comes . . . It’s overwhelmingly, almost everything ends up coming back to race. In Denmark, when you were going to have a strong welfare state, people thought of that as a benefit for people who could have been them. The United States, you propose the same thing, and people think of it as, you’re taking my money to give it to those people. That’s a big part of it. And it’s also true that even highly redistributive, egalitarian societies, by our standard, have their white nationalists. The Danes have their white nationalist party, the Finns have their True Finns. So, it turns out that even economic justice doesn’t protect you from all of these other ugly things totally, but it helps.
Luigi: But actually, the way it was explained to me by a Dane, who I don’t think was racist, is that the current system in Denmark is a system with a very high minimum wage and welfare protection for the people who cannot be as productive, and so they couldn’t earn the minimum wage. So, you keep them on unemployment insurance in order to maintain the system. Now, the necessary thing is the people who are not skillful enough to make the minimum wage should be relatively few, because otherwise the system goes bankrupt. And so, this person’s interpretation of why Danish people are afraid of immigration is not because they are black, it is because the new immigrants tend to have lower human capital. And so, it might destroy this balanced system.
Paul Krugman: I think you’d have a hard time making that case. I mean, every time that people say that low-paid workers are just inherently unproductive or . . . I mean, are we really admitting that we have a huge underclass of Americans who just can’t manage to make a living, a decent . . . By the way, one of the things that really did change my worldview in terms of economic research was the minimum-wage literature. Because if you asked me in 1992 what I thought were the effects of raising the minimum wage, I would have said, well, you know that there’s a social justice case, but it costs jobs. And then you have this remarkable literature that starts with Alan Krueger and David Card that shows that within the United States, minimum-wage increases do not visibly cost jobs. Obviously, there has to be a limit on that. A $30-an-hour minimum wage would destroy jobs. But it turns out that there’s substantial room for having more than we do.
What strikes me, by the way, is that Denmark has all of these welfare benefits and these high tax rates, and Danes in their prime working years are more likely to be employed than Americans are. Their productivity is exactly the same as ours . . . They have lower GDP per capita, but that’s entirely because they take more vacations. So, that’s a pretty good advertisement.
Luigi: It is a form of working less.
Paul Krugman: Yes, but I think, on the whole, a good thing. I mean, America, my American colleagues and I work too hard.
Kate: All right, so, to summarize, if you had to attribute the missing middle problem in the United States to globalization, automation, deregulation, or other, what fraction would go in each category?
Paul Krugman: Maybe 5 percent globalization, 10 percent automation, and the rest is all various kinds of political change. I really have way devalued my views on the importance of technology. I never thought globalization was a very big factor, and I think so even less.
The thing I missed about globalization is that, although I think the aggregate impacts are not that large, they turn out to be much more geographically concentrated than we realized. So, the number of jobs lost to imports from China was less than the number of Americans who are fired for various reasons every month. But if you’re thinking about the furniture industry of North Carolina, which is where most US furniture jobs were concentrated, that was devastating. So, although what happens to America from Chinese imports as a whole is not a big deal, what happened to Hickory, North Carolina, is a big deal. You ripped the heart out of a community’s economy.
Luigi: I think that is definitely a case, but also one thing that I noticed recently is that as economists, we always think about share of employment. And, of course, share of employment in manufacturing has been dropping since whenever. Then I started looking at the number, and the number was not dropping until 2000.
Paul Krugman: That’s right.
Luigi: So, the big difference, in my view, is if you simply have fewer people entering manufacturing, that is one thing. When you have a net exit of manufacturing that, in a short few years, was 12 million people, that’s a lot of people to reclassify, readapt to do something else.
Paul Krugman: No, the China shock was a real thing. Now, the truth is that there are always shocks like that happening, usually not from globalization, and often they’re invisible to people of our class. So, when I see people going on about, oh, automation, robots, I say, “Did you notice when giant cranes eliminated hundreds of thousands of longshoreman jobs?” It happened, a whole class of employment was destroyed by new machinery, and the chattering classes didn’t even notice, because they didn’t know any of those people. So, this kind of thing, it’s always happening, and all we can really try to do is have a society that at least prevents deep misery as a result of such changes.
Kate: But how can you be so confident that it’s going to continue happening, right? Maybe we just got unlucky for the past century.
Paul Krugman: Oh, maybe. We just don’t see it now. There’s nothing in what’s happening right now that suggests that the robot apocalypse is happening. It just isn’t in the numbers. And the impression that people have, I think comes from selective vision, from the fact that people who make a living by pushing around words and symbols didn’t know the people whose jobs were displaced by previous technological changes. But it could happen. Ask me again in 20 years. Maybe robots will come and take all our jobs, or maybe robots will decide to kill us all. I mean, I’m a big Terminator guy. But that’s just not what’s happening now.
Kate: I think it’s not reflected in the employment numbers, that’s for sure. But it’s reflected in the polarization of the types of jobs that are available.
Paul Krugman: I mean, I know, I respect the work that people try to do, but it’s not at all clear. There are enough issues of definition of what is a good job and a bad job that it’s just not that obvious. I mean, a lot of what we’re seeing are actually displacements. We talk about the retail apocalypse, which is true. An awful lot of jobs in retailing are being eliminated. A lot of jobs in distribution are being created. Not the same people, not the same . . . Amazon, I’m a bad guy, as I say, I buy a lot of stuff from Amazon because of convenience. We think of Amazon as this kind of cyber company. It’s all immaculate and untouched by human hands. In fact, they’ve got 150,000 people working in their US distribution centers. So, there’s lots of jobs out there. They may not be very good jobs, but again, why can’t Amazon distribution centers be unionized?
Kate: Then maybe they wouldn’t have to wear ankle bracelets and be tracked on every single move that they make and have 20 seconds to fill an order and have people work the lovely jobs that those are.
Luigi: Let’s go to economic geography, because we are in a world in which states within the United States are diverging, not converging as they used to, and so what should we do? In a sense, should we take a laissez-faire attitude and say there are a lot of towns that used to be flourishing and now they are nothing and we should do nothing about it, or should we intervene and do something about it to prevent this huge divergence?
Paul Krugman: OK. This is where I actually find myself unsure what the answer is, or even if there is an answer. Certainly, you want to provide aid. You want to make sure that declining economic regions still have health care, still have the basics, which, actually, we do, to a remarkable extent. I mean, the United States has got . . . We don’t do it explicitly. We claim not to have regional policy, but de facto that we do. I’ve done some number crunching, and Kentucky, de facto, receives aid from the federal government that’s 20 percent of GDP. And that does support some jobs, particularly in health care and human services, but it doesn’t bring back the old industries. And then, as for the rest, you know, I spent my early years, the first eight years of my life, in upstate New York, and can we revive that industrial economy? There’s no obvious reason why modern industries would want to locate there. The weather is terrible.
So, there’s a lot of debate. I mean, this is an area where I think we’re still trying to feel our way, and unfortunately real people are suffering in the meantime. But you can point to success stories. There are individual towns in the heartland that have done OK, but they tend to be really special cases. And my somewhat depressed sense is that there’s actually a limited number of slots for that. We have room for a certain number of college towns, we have room for a certain number of amenity resort towns. But every town that succeeds in these things is probably taking away a slot from some other town. The push towards concentrating the good stuff in big, highly educated metropolitan areas looks pretty inexorable. I don’t see any policy on the horizon that’s going to reverse it.
Kate: OK, so, Luigi, do you think that Paul’s ideas are capital-is or capitalisn’t?
Luigi: I think that actually Paul is much more a capitalist than people recognize. I think he had made it clear at the beginning of the talk, and I think that he’s concerned about the long-term survival of capitalism. And some people might agree or disagree with his proposals, but I don’t think that he’s a new democratic socialist yet.
Paul Krugman: Neither is Bernie Sanders. That’s the point.