How can winning a Nobel Prize in economics seem like it’s no big deal? Well, if you’ve already won the John Bates Clark Medal—an honor bestowed biennially on the American economist under 40 who has made major contributions to his profession—you’ve already taken home a piece of hardware considered by many economists to be slightly harder to win than a Nobel. Only 12 people have won both, including Paul Krugman, who collected the 1991 Clark and then snagged the Nobel (and its $1.4 million check) in 2008.
While Krugman’s elite status within the economics profession rests on his groundbreaking theory of international trade and his expertise on a host of international financial crises, his broader national influence comes from the media real estate he occupies on the op-ed page of The New York Times, a column he began writing in 1999.
Pointing to his relentless attacks on the Bush administration—which usually included creative ways to say “liar”—conservatives fume that Krugman is a partisan Democrat. The current occupant of the White House may politely disagree with that accusation, as Krugman has also directed withering criticism at Barack Obama. Krugman is not hitting a man when he’s down: While many of his peers in intellectual circles were swooning, Krugman was blistering candidate Obama during the 2008 Democratic primaries.
But there is a difference between the Bush years and now: This administration frets about what Krugman says, partly because of his ideas but mainly because his voice is listened to by legions of liberals disappointed with what they perceive to be the president’s failures. The administration courts him—he has dined on roast beef with the president at the White House, along with such other critics as fellow Nobel Prize winner Joseph Stiglitz. Krugman’s tone of “I knew it first” and “If you had listened to me…” can be annoying to some politicos. But the problem is that he has more often than not been right.
PLAYBOY sent noted economics writer Jonathan Tasini to find out Krugman’s thinking about the current economic crisis, the Obama administration’s handling of the financial meltdown, the politics rippling through the country as the 2012 presidential election looms and whether anything can be done to drag us back from the abyss. After many hours of conversation in New York and in Krugman’s Princeton University office, Tasini says, “Krugman is a man who made his reputation, in part, on his fascination with and intellectual work on financial panics and collapses. So he is in his element now because he loves a good crisis. As he admitted candidly, he is not a bright-eyed, slap-you-on-the-back, optimistic cheerleader. Quite the opposite. The global economy is giving him a great canvas to draw a depressing picture, but he’s also agitating for action that he says can get us out of the mess we’re in.”
PLAYBOY: It seems every month various people debate whether we’re in a depression or a recession. Where are we—recession, depression? Or is it something else?
KRUGMAN: The recession officially ended in June 2009 because that was the point when some things—industrial production, GDP, but not employment—started to go up again. But I say we’re still in a depression. I’ve taken to calling what we’re in the Lesser Depression. It’s not as bad as the Great Depression, but it’s like the Great Depression. It’s a prolonged period. We’re now four years into high unemployment and lousy economic prospects for most people. If you’ve lost your job, your chance of getting another is small. The number of people who’ve been unemployed for long periods is at a level we certainly haven’t seen since the 1930s. What we’re experiencing is an economy that probably feels in a lot of ways like the U.S. economy in 1937, when, almost everyone now agrees, policy makers were way too complacent and should have kept on pushing for more employment. It’s lousy.
PLAYBOY: In 2002 you wrote that you were worried about the unemployment rate—and it was only 5.7 percent. You also made the point that people had been out of work for longer periods than before, that people had given up looking. Now we’re almost double that rate.
KRUGMAN: It really is catastrophic. If you include people who aren’t actively searching for a job and people who are working part-time even though they want full-time work, we’re up to about one in seven. That means the unemployment rate is 16 percent. I live in a fairly rarefied social class now and so probably hear a lot fewer personal horror stories. But I do hear them: people my age, 58-year-old guys who’ve lost jobs and see no chance of ever getting another one; young people out of college with good qualifications who can’t find anything, who can’t get their lives started. The human damage is enormous.
PLAYBOY: Some of that debate is irrelevant to the average person. All they know is they don’t have a job or they don’t have a job that pays enough.
KRUGMAN: The point is there’s a tremendous amount of suffering. A lot of America is much worse off than it was four years ago. I think the main reason you should be angry about it is that it’s gratuitous. This doesn’t have to be happening. We actually have the tools to make most of this go away. If we could throw aside the political prejudices and bad ideas that are crippling us, in 18 months we could be back to something that feels like a much better economy.
PLAYBOY: So people in America today are suffering when they don’t have to be because of policy makers who won’t do the right thing?
KRUGMAN: That’s right. I’ve gotten some grief for my remark that if it were announced that we faced a threat from space aliens and needed to build up to defend ourselves, we’d have full employment in a year and a half. But that’s true. Why couldn’t we do that to repair our sewer systems and put an extra tunnel under the Hudson instead of to fight imaginary space aliens? Everybody in the world except us is doing a lot of investment in infrastructure and education. This is the country of the Erie Canal and the Interstate Highway System. The Erie Canal was a huge public infrastructure project financed with no private or public-private partnership. Can you imagine doing that in 21st century America? We really have slid backward for the past 200 years from the kinds of things we used to understand needed to be done now and then. And all of that because we are shackled to the wrong ideas.
PLAYBOY: Many people still believe efficient financial markets exist. Did that blind many economists to the biggest financial bubble in history?
KRUGMAN: Environmental regulations could actually be creating jobs right now, but people say, “Oh, that’s crazy. How could that be true? Regulations add to costs.” My answer is this: Does the story about the world that underlies what you guys are saying allow for what we see all around us? Do your theories explain nine percent unemployment and this monstrous economic collapse?
PLAYBOY: Is the United States becoming a banana republic?
KRUGMAN: In some important ways, yes. We used to talk about the classic problems of typically Latin American countries where the inability to achieve political consensus made it impossible to have effective economic policies. Well, that’s us. And, of course, there are the levels of inequality. In a lot of ways, America now looks like the classic Latin American problem.
PLAYBOY: During the financial crisis and particularly in the aftermath, many pundits blamed regular Americans for buying houses that were too expensive. Is that the cause of the financial crisis, people buying big houses?
KRUGMAN: No, it’s not. They did that because they believed the prices would continue to rise, and the lenders believed the prices would continue to rise. It’s not an evil thing to buy a house in the belief that if things go well, you will be able to afford it or sell it and pay off the mortgage. Of course, as always, people are trying to make it into “those people” being irresponsible and doing in the financial system. But it’s not that story. It’s just a classic bubble, but it’s an enormous one.
PLAYBOY: What about Wall Street’s role?
KRUGMAN: If you’re asking why people were buying those houses, it’s because the money was being made available. Why was the money being made available? You had a whole machine making it seem as if dicey loans were actually safe, and a fair bit of predatory stuff was also going on. People were being pushed into mortgages they were told they could afford because they didn’t understand the fine print. Of course there was the slicing and dicing and tranching and making subprime toxic waste appear as triple-A bonds.
PLAYBOY: Were there people who knew what they were doing was wrong and yet kept doing it?
KRUGMAN: Yeah, exactly. Money was flowing easily. Regulators were largely absent on both sides of the Atlantic. In the United States it was more systematic deregulation and nobody willing to say, “Hey, wait, this doesn’t make sense.” I doubt that many of them really understood just how bad it was going to be. But there were certainly people who understood they were cutting corners and taking risks that were much bigger than anyone was acknowledging. We have a situation in which people in the financial industry are very much “Heads I win, tails someone else loses.” The whole way compensation works is that if you can create even the illusion of high profitability for a few years, then when the thing collapses you can walk out of the wreckage a very rich man.
PLAYBOY: Were crimes committed here, and should people be in jail?
KRUGMAN: It’s hard for me to believe there were no crimes. Given the scale of this, given how many corners were being cut, some people must have violated laws. I think people should be in jail partly because I’m sure crimes were committed and partly because the lack of accountability is a serious problem. Something terrible happened and nobody has been held accountable. The public is angry, and a lot of the anger is being directed at the wrong targets.
PLAYBOY: Many complain that the Occupy Wall Street movement doesn’t have a clear message. What do you think?
KRUGMAN: I think OWS has done a great service. We didn’t need 10-point proposals. We needed someone to declare that the emperor was naked. The conversation has shifted since the protests began, and that’s good.
PLAYBOY: Are we undermining the political structure and our society if we’re not holding people accountable?
KRUGMAN: My sense is that in the face of this catastrophe, people needed some sign, a kind of symbolic sense of who was to blame. Obama helped create a political monster that’s now come and bitten him. If you’re not going to point fingers at the people who actually caused the problem, then those fingers may end up pointed at you. But we’re doing only minimal reform. One of the big differences in the 1930s was genuine hearings. There was a genuine attempt to say who the evildoers were. This time around the powers that be are desperately afraid that Wall Street might be mad at them.
PLAYBOY: Should reform hurt bankers? Is what’s bad for Wall Street good for Americans?
KRUGMAN: We know that finance got hugely bigger, right? Finance as a share of the economy doubled in the couple of decades before the crisis. What used to be a fairly slow, boring industry became gigantic. I think it’s hard to say that was good for America, that those people were doing something productive. The story was that they were directing the nation’s savings into productive uses, but somehow subprime lending doesn’t fit that description. Something that made finance less profitable, less attractive would probably have been a good thing. The people’s sense is that all this money was given to the banks and the people got nothing in return—which is wrong, actually. Not much was lost in all that. But things would be a lot easier to explain if the U.S. government had in fact temporarily taken ownership of Citibank and/or Bank of America. It would have been a lot clearer, and Wall Street would be a bit less arrogant than it is now because it would know that if you require taxpayers to save your business, it won’t be your business anymore.
PLAYBOY: You’ve said that the 2009 stimulus to create more jobs was one thing and the bank bailouts were another, but people conflated the two. Did Obama fail to get that message across?