Paul Krugman Warns of Fiscal Time Bomb If Relief Is Insufficient
The Nobel Prize-winning economist says we will likely need a stimulus bill as large as $4 or $5 trillion.
Paul Krugman is a Nobel Prize-winning economist and the author of many books including the recently published "Arguing with Zombies: Economics, Politics, and the Fight for a Better Future." Krugman spoke with the Business Insider editor-at-large Sara Silverstein to discuss why this recession was different from any we had ever dealt with. Following is a transcript of the video.
Sara Silverstein: Paul, your newest book is about zombie ideas, which are basically things that we know are false. We can prove they're false, but people still believe and they still impact our policies and our economy. How does this idea of zombie ideas apply to the coronavirus crisis?
Paul Krugman: This is new. No one was — I mean, it's not true that no one saw this, but there wasn't — virus denial wasn't an industry before this hit. But the reactions to this, to the whole handling — the coronavirus has been like global warming, but at about a hundred times speed. Right? The same thing. "The scientists are in a conspiracy against President Trump and trying to bring socialism with false warnings." All of that is what sort of laid the groundwork. You basically carried over the whole set of attitudes that came from climate denial, which is one of the most important zombies out there, straight into the coronavirus until like two days ago.
Silverstein: How does that affect how we're reacting to the crisis?
Krugman: We've been far behind the curve. It was already obvious in January that this was extremely high risk and we should have been doing massive ramping up of testing. We should've been doing social distancing. We should've been doing all these things that help to contain it. We really didn't get serious or Washington didn't get serious, again, until just a few days ago about any of this.
Even now, we're not doing what you always do when you have an emergency, which is you federalize the production of essential equipment. We still haven't done that. We still have this wild uncoordinated scrambled for ventilators and all of that.
The denial, virus denial, which is basically the same as climate denial, has been critical. I mean tens of thousands of people will die unnecessarily in this country because of it.
Silverstein: If you were responsible for writing the response, and we could talk about the policy response, what we're calling the $2 trillion stimulus package, what would it look like?
Krugman: There's first of all, there's the epidemiological response, which is — the one thing I know about epidemiology is I'm not an expert.
The economics thing, I'm kind of annoyed that people keep calling this a stimulus bill because it mostly is. We want GDP to decline. We want lots of people to stay home and not work while we get this thing under control. The goal is not so much to sustain the economy per se as it is to give this thing time to work and to alleviate hardship. This is mostly a disaster-relief bill.
The things that are really important are unemployment benefits, cash to families, loans to small business that allow the most affected people to get through this with the minimum of financial hardship. It also provides some stimulus. There are parts of the economy that are still alive. We don't want them collapsing because nobody has money to spend. There is some stimulus in there too, but this is mainly a giant disaster-relief bill, which unfortunately despite its size is probably not big enough.
Silverstein: How big do you think it's going to need to be, and how should we finance it?
Krugman: Well, something like ... We're still groping here, but something like 20, 25% of the economy is going to be shut down for an extended period and you really want to think of aid that's on the scale of that shutdown. We're basically trying to replace the incomes of those people, and we don't do total replacement, but mostly. We've got a $20-trillion-a-year economy, so it's not hard to make the case this might end up being $4 trillion or $5 trillion that we really should be doing it. The answer is borrow the money.
The private sector is not investing. Mortgage applications have collapsed. Business, who's going to be building office parks and all of that in the middle of a plague? Private saving for sure has gone way, way up. Maybe people are spending some of the money they're not spending at restaurants on other things, but a lot of it is just being saved. We have this huge surplus in the private sector of all of this excess money looking for someplace to go. They're offering it to the government for free. Real interest rates are negative. So, borrow it.
Silverstein: The unemployment insurance provision, you said makes sense. What do you think about the way that they're spending the rest of the 2 trillion?
Krugman: Well, there's different pieces. The small-business side looks like it's pretty well designed. It's loans that turn into grants for small businesses to maintain the payroll. So, that's good.
Just a flat-out check of $1,200, that's good. They're making it more difficult. It should be going automatically to people whether or not they filed tax returns as long as they're in the record someplace. So they're making it harder to get.
The big-business lending has an inspector-general provision to prevent corruption, which Trump has already said he's going to disregard. I'm worried about that — as are we all — so there could be a lot of corruption at that end.
I'd say this is about 80% a reasonable bill and then 20% of ... we don't know, but they're missing pieces. State and local governments really need a lot of help, and there's not remotely enough money in there. In a way, I think this crisis is going to be prolonged even once the pandemic subsides by the fact that we're going to have state and local governments that are in desperate financial constraints.
Silverstein: I was just going to ask you about the longer-term implications of some of these. Can you talk more about how that will impact ordinary people, the state and local governments' financial hardships?
Krugman: Sure. State governments, local governments, unlike the federal government have to balance their budgets each year. All of the ... They're losing tax revenue. They're having extra expenses. They're going to have to make that up in the near future, which means that they're going to be laying off ... It's going to be a lot like what happened after the 2008 crisis when layoffs of school teachers, layoffs of government employees were a big factor in holding back recovery and we're going to be ... Yeah, just as the pandemic starts to fade, we hope, we're going to be seeing state and local governments cutting back severely.
Also, by the way, the extra unemployment benefits are only for the next four months. A lot of the financial support that we're going to be providing now is going to be going away just when we're hoping the economy will bounce back. I'm really worried that the economic fallout may last much, much longer than people are thinking.
Silverstein: As we start to bounce back, I don't know how deep unemployment will get during the pandemic, but once jobs start coming back, where is going to be the new normal? Are we going to come back to full employment?
Krugman: Well, eventually, yes. Nothing about this has changed. Workers haven't lost their skills. People haven't lost their taste for all of the things that they want. But it is true that we had an economy that was ... the economy's weaker than we like to think even though we had full employment just the other day. We probably lost more jobs already than we did in the whole of the Great Recession. But just before that we were at full employment, but we are at full employment only with very, very low interest rates. To the extent that there's been a lot of financial damage that comes out of this to balance sheets of companies and households have been really savaged by it, which they will have been by the time this comes to an end.
Getting enough demand to restore full employment may be a challenge. We may really ... the White House has been talking about for the 17th time, they're talking about infrastructure, but maybe after this we really should talk about how the economy really needs a big infrastructure push. Partly because we need the infrastructure, but also to ensure full employment.
Silverstein: You shared a chart showing that during the 1919 influenza pandemic, the stock market actually rose. What's the difference between what happened then and what's happening now?
Krugman: I'm not sure. It may be that there was actually less social distancing then, people just died. There was a fair bit, but it may have depressed the economy less that time. Also, we came into this with stocks basically priced for perfection. This may have just served as a warning that we don't actually have perfection. This could be different, but I wouldn't be surprised if eventually stocks do well because interest rates are very low. Stock market is a really poor guide and in general to the state of the real economy.
Silverstein: So few Americans are actually represented in the stock market and benefit or are hurt by changes in the stock market directly. Is there any reason that individuals should be worried about other people's balance sheets and what the stock market is doing?
Krugman: Well, sure. A lot of people, most stocks are owned by ... A great majority of stocks are owned by a small fraction of the population, but those people do account for a disproportionate share of consumer spending. They're feeling poorer now, so that's another reason that we're going to be seeing some economic difficulties heading forward. People who were feeling rich and laying out on vacations and expensive restaurant meals may not be quite willing to do that even once the restaurants reopen and once the airlines are back up and running again.
Silverstein: You say that interest rates make it look like the — sorry, that's my cat — interest rates make it look like investors are expecting a long-term recession. Can you unpack that a little bit for us?
Krugman: Well, I wouldn't quite ... Interest rates have been extremely low for a long time now. The market seems to have bought into this jargon phrase, secular stagnation, which doesn't really mean that the economy stagnates, but it means that the economy has a persistent shortage — there just isn't enough investment demand to use all the savings that people want it to make. The markets seem to have capitulated even before the coronavirus hit. The markets basically capitulated to the view that that's where we were.
And they're not so much signaling the necessarily that we're in a recession for years, but we're, they're signaling that we're going to have an economy that is always on the edge of a recession for the foreseeable future. That's really, I think, one way to think about what secular stagnation means. The markets could be wrong, but it is clearly quite remarkable. A year and a half ago, markets were starting to act as if maybe the old days were coming back and normal levels of interest rates, and nobody seems to believe that now.
Silverstein: Can you walk us through your model for the coronavirus recession where nonessential employees versus essential employees and how the savings on one side and where everybody's going to sort of fall out?
Krugman: Yeah, so I like to think of the economy, it's stylized, too simple. But think of it as just two parts of the economy. There's nonessentials, which means either stuff that really isn't essential or stuff which we shouldn't be doing because it spreads the disease. We can do without it. Then there's essentials, or at least harmless. I'm not sure that Amazon orders aren't essential but, delivery services we can keep going.
We are basically deliberately and appropriately shutting down the nonessential stuff. We're doing, I would say it's like a medically induced coma where you shut down major parts of the brain basically to give it a chance to heal from damage, and which is appropriate. It's good. We need to do that if we don't want lots of lots of people to die, but the trouble is, first of all, all those people who are left unemployed because of this, what are they going to live on? All the businesses that are not able to operate, how are they going to survive? Which is why we need a big aid package, which is basically relief. That's the important part.
Now there's a secondary consequence, which is if you don't provide enough relief, all of those people whose businesses have been shut down can't buy other stuff, and so you've got a sort of a conventional recession laid on top of that and that's what we're trying to prevent in addition. It's mostly disaster relief, but there's also stimulus to try and head off that conventional recession on top of the coma.
I think that's the way to think about it. If you're thinking that this is just a replay of 2008, you're missing probably the bigger part of the story, but there are pieces. Part of this is like a replay of 2008, and that's what we need. That part should be avoidable if we act forcefully enough, which we haven't so far.
Silverstein: We haven't so far acted forcefully enough in terms of relief?
Krugman: Yeah. There's not enough money. The unemployment benefits, that's a big deal. The small-business lending, that's a pretty big deal. There's not remotely enough aid to state and local governments. We're making it too hard for people to get those checks.
Financial markets, thank God for the Fed, which at least is one bastion of competence that remains out there, and so they have been doing a yeoman work and getting the financial markets stabilized, although even there it takes time.
Silverstein: I was just going to ask, what do you think about the Fed's response? Can you elaborate on what the Fed is doing right?
Krugman: Well, the Fed is basically stepping in. Financial markets were starting to shut down the same way they did in 2008 because so many balance-sheet losses because of the virus that investors were afraid of anything that wasn't risk-free and highly liquid. You were watching corporate — even as interest rates on federal debt were plunging, corporate borrowing costs were soaring. Commercial paper rates were soaring. Basically money wasn't available for keeping the business going.
Now the Fed has stepped in to basically do the lending that the private sector won't. It's been buying longer-term bonds. It has said it's willing to buy corporate bonds if it needs to. They're going to be doing commercial paper. There's a commercial paper facility that they had back in the financial crisis, which I had a relative working for that, so I was pretty familiar with its operations and there are restarting it, but although that apparently won't be up and running until next week.
The Fed is kind of ... they've seen this movie and they're making an effort to make sure that they get it under control. They've been doing a pretty good job. They went big aggressively. They realized that the risks of doing too little vastly outweigh the risk of doing too much and they've made the right call.
Silverstein: Should the Fed be buying municipals and corporate bonds or should they even go further and be able to buy stock?
Krugman: Well, I would say munis for sure because the state and local is a big issue. Corporate bonds, I think they certainly need to do, but they don't, which is to say we are willing to do it. It may not be necessary actually to do it. There's a lot of those of us who follow European affairs or, you know, this is our whatever-it-takes moment like that moment when Mario Draghi said he was willing to buy the bonds of distressed countries. It turns out he never actually had to do it. Just saying it was enough to stabilize the markets. Maybe that's it, but you need to be willing to do it.
Stocks possibly, we haven't reached that point yet, but that's a possibility. There are limits to what the Fed much as some of my liberal friends say, "Why can't the Fed just send to everybody money?" And unfortunately, that's not within their legal remit, but they should be willing to buy again, whatever it takes, any kind of assets that they need to.
Silverstein: Should the Fed have been raising rates in retrospect when the economy was growing?
Krugman: No, no. It was clear that they overstated the recovery. They shouldn't have raised rates as much as they did. They overshot. They should have ... Yeah, some of us were saying, "Wait until you see the whites of inflation's eyes." And that really looks like good advice now. I'm not sure how much harm it did, but this is not why we're in the mess we're in now. Those rate hikes were premature, but they didn't cause the virus.
But no, I mean the Fed maybe will come out of this with an understanding that whatever you thought was normal, based on the way the world looked 15 years ago is not normal in this world.
Silverstein: If you look at the US response from a health and an economic perspective versus other countries around the world, how do you think we fared? Is there anything to learn from other places?
Krugman: Yeah, don't be like America. We screwed up on multiple levels. We totally failed. The other people can tell you more about the health response, but clearly we totally fell down on testing. We've totally fell down on medical equipment. We waited far too long on social distancing. All of that.
Other countries are doing ... the economic response is better than ours. Ours was better than I feared it was going to be. There was a point where it looked like Republicans were going to say tax cuts are the answer to everything. But look at Denmark, which is corporations that keep their workers on payroll. The government is picking up 75% of the tab. That's the kind of thing that really would be great. Unfortunately, I don't think America is politically in that universe, but we're in some ways having the weakest economic response of certainly of the G7 countries.
Silverstein: Finally, just to make you do my job. Where do you think the media is really missing the point? Is there anything that you would complain you wish that people would ask you?
Krugman: I think, well, I think the media had really, I mean other people can talk and take on the health-affairs stuff, but the media I think really still have missed the extent to which this is not a normal recession. We're still hearing it discussed in terms of stimulus. We're still hearing it as if this were the usual kinds of problems, and there's some of that, but, I don't think the fact that the essential thing is limiting hardship has really made it.
Every time I see stimulus in a headline about the tax bill, I get mad because that's missing the point. I actually have seen almost nobody talking about what happens four or five months from now when hopefully the pandemic has subsided, but then you have financial crises at the state level and the unemployment benefits have expired. We have a huge fiscal time bomb, which we can see is being ... the timer has been set on it as we speak, and I've seen almost no coverage of that.
Silverstein: What happens then? Let me ask you, Paul.
Krugman: Well, what happens is that just as the economy is ready to recover, mass layoffs of school teachers, mass cutoff of unemployment benefits undermine the nation's recovery. This could end up being in a way, a little bit like what happened in 2008-2009 when we had a pretty effective response to the crisis, but then went to fiscal austerity, which meant that the recovery was very, very slow.
Even though this is a very different kind of crisis, we could have the same kind of story. I think at the moment, unless there's another major round of legislation that is going to be the story.