The Nobel prize-winning economist explains it all.
I recently sat down with Nobel prize-winning economist and New York Times columnist Paul Krugman for an episode of my podcast, The Ezra Klein Show. We discussed how economists mucked up the climate debate, the Obama administration’s record on the financial crisis, whether Andrew Yang is wrong on automation, what it would take to revitalize the economies of middle and rural America, the policy and politics of Medicare-for-all, what a Democratic president should pass first, and much more.
You can listen to this conversation — and others — by subscribing to The Ezra Klein Show on Apple Podcasts, Spotify, Stitcher or wherever you get your podcasts. A partial transcript, edited for length and clarity, follows. Krugman, by the way, has a new book, Arguing With Zombies, coming out in January.
Climate vs. health care: What should a Democratic president pass first?
Ezra Klein
What is the policy you think the next Democratic president should try to pass first?
Paul Krugman
I think you want to do the modest stuff on health care because it would deliver some immediate benefits. Even though climate is the overwhelming issue, I don’t think the public gets that. And a new Democratic president has got to deliver tangible benefits right away, so that within a year people can say something has gotten better for people like them. I’d say you want to get some points on the board, so that you can have the credibility to start dealing with the climate issue.
Ezra Klein
Here’s my reasoning for doing climate first: If you don’t do health care for a couple more years, the problem in the American health care system is roughly the same problem in 2025 that it is in 2021. With the climate system, every year you wait, it gets harder and harder and harder to solve.
Paul Krugman
It is true that climate is one of these things where the damage is cumulative. So there’s that case for it. I am somewhat influenced — maybe wrongly — by what happened in Obama’s first year or two when there was a pretty good climate bill, Waxman-Markey, that just died, while Obamacare did happen, and in the end, is paying political dividends for Democrats. I think on climate policy, it’s actually the opposite of health care: You want to do something that doesn’t change people’s lives in year one. But you make it so that by year five you’re actually doing a lot of stuff.
Ezra Klein
I’ve been doing a podcast project on climate policy that has changed my understanding of what one would need to do. I’ve always thought about climate policy heavily on the pricing side — like carbon taxes or cap-and-trade — but at this point it seems to me the single most important things you can do are implement very big subsidies for, and increase research and development spending on, different forms of renewable and clean energy. If we could do what Germany did with subsidizing renewables — which brought down costs all over the world — for a large range of other things, that would have a potentially global impact.
And you could either pay for that in a progressive way or not pay for it at all. We’ve done much less important things and not paid for them and the economy has survived.
Paul Krugman
Economists did everyone a disservice by putting so much weight on carbon pricing. It turns out that a very large part of what we need to do is just stop burning coal. So it’s not like we need a whole lot of complicated incentives to induce people to move on many margins.
It is also true that R&D spending and pushing down the cost curve on alternative energy sources is a big deal. There were people who complained that the Green New Deal sort of sounds like a Christmas tree because you’re taking a whole bunch of different things and selling them all as part of saving the planet. But I think that’s a virtue, not a vice. If you can make it a Christmas tree where we’re going to be generating jobs through government spending and we’re going to be promoting all kinds of new industries and save the planet, that’s fine.
I would say that there’s a really strong case for not paying for it, as with anything that involves investment. Real interest rates are barely positive. So, we don’t have a fiscal constraint as long as we’re doing investment spending.
Why Democrats should be paying for far fewer of their programs
Ezra Klein
I want to dig in on that point. Republican spending on Medicare Part D or the Iraq War or Trump’s $1.5 trillion tax cuts are of a comparable size to something like significant investments in clean energy. And they didn’t destroy the economy. So, how worried should Democrats be about paying for things like the Green New Deal?
Paul Krugman
I’ve been proposing a three-way division of progressive proposals. First is investment — a lot of the Green New Deal stuff is investment. On that stuff, don’t worry about paying for it. Debt as an issue is vastly overstated, and a lot of these things pay for themselves. Go ahead and just deficit finance it.
There’s a second range of stuff — like universal pre-K or some expansion in health benefits short of Medicare-for-all — which probably should be paid for. But, because they’re fairly modest they can be paid for with fairly narrow taxes on the wealthy.
Then, there’s the really big stuff like conversion to a government-provided health care system which is too big to deal with in those ways.
For a long period of time elites thought that debt was the greatest threat to the US economy. Now I think we’ve largely come around to the correct view, which is that debt is just not a serious problem for the United States currently.
Ezra Klein
I find it interesting that, even on the left of the Democratic Party, this really doesn’t seem to be the view. Both Warren and Sanders have detailed exactly how they will pay for all of their proposals. Nancy Pelosi has said she will impose [the balanced-budget rule] PAYGO on the House under a Democratic president. Oddly enough, it seems there has been a lot more movement on this question among center-left economists like Larry Summers and Jason Furman than even among the left-wing of Democratic politicians.
Paul Krugman
Yeah, it’s not even the radical progressive economists. Most people would not consider Larry Summers or Olivier Blanchard, the former chief economist of the IMF, men of the left. Yet they are saying a little bit more deficit spending might be a good thing given the persistent weakness of private spending. So, I don’t know why that isn’t making its way into Congress or Elizabeth Warren’s campaign.
The Democrats’ health care debate
Ezra Klein
You have a section in your coming book where you’re looking back on Obamacare. You write, “a central piece of that strategy was that the Democratic reform plans deliberately left as much as possible of the existing health care system in place.” What was the logic of that decision at the time?
Paul Krugman
It was clear that nothing that was radical was going to have a chance of getting through Congress, even after big Democratic victories in 2008. That was partly because there are interest groups, but it’s also just that people are conservative. Not in the political sense, but in the belief that “if it ain’t broke, don’t fix it.” You have a country where half the population is on private health insurance and you didn’t really want to force those people to confront whether this new thing would be better. You wanted them to feel their lives wouldn’t change.
Ezra Klein
Do you think that was a mistake or a necessity?
Paul Krugman
I think it was a necessity. The one thing we might’ve been able to get was some limited form of public option and Joe Lieberman basically killed that. People forget just how close a thing [Obamacare] was — it barely made it through. There were still last minute deals being made hours before the vote. So, those who say that something much closer to Medicare-for-all was actually a possibility in 2009/2010 weren’t paying attention to the actual debate at the time.
Ezra Klein
Another version of this argument is that the situation is different now because of the ideological tenor of the country. Do you think the situation is different now such that the constraints that operated on Obamacare have lifted or changed for the next reform go-round?
Paul Krugman
They’ve definitely changed. I think that the things that were considered radical — like allowing people to buy into Medicare — are now almost standard fare for Democrats and appear to poll well publicly. And I think at this point we’re a lot less worried about the opposition from the insurance industry.
But what is still true is that people are small-c conservative. To tell 160 million people we’re going to replace the insurance you now have with something way better — I don’t think there’s any reason to believe it’s gonna work.
Ezra Klein
Let me try a theory out on you. When I think back to the Obama presidency, the entire Democratic Party was operating in the shadow of Bill Clinton’s legislative failures. His health care reforms, for instance, failed outright. So this idea took hold among liberals that it’s really hard, in this political system, to get anything passed. But if you get all the interest groups together and reduce opposition as much as possible, then maybe you can squeak through with half or a quarter of what you want. The Obama presidency was exceptionally successful at that strategy. It got a lot of half or quarter-loaves.
But those partial successes changed the critique. The operative concern is no longer failure from going too big, it’s failure from going too small. But if the political system hasn’t changed in a deep way, then we might ricochet back to the kind of failure we saw in 1994 under the next Democratic president. I could see a Sanders or Warren presidency getting absolutely stopped by a Mitch McConnell Senate. Do you think there’s validity to that concern?
Paul Krugman
It’s definitely a concern I’ve had. It’s why I’ve been for the more modest, less radical proposals on health care.
A lot of things we think of as being very left-wing are actually extremely popular — like higher taxes on rich people. But other things requiring ordinary middle class people to change aren’t ever easy to do.
Systems that are very different from our own on health care all have deep historical roots. There is enormous path dependence in policy. The systems that countries have on health care, retirement, and most other stuff has a lot to do with decisions that were made generations ago. And it’s very hard to shift to a radically different path. So incrementalism tends to rule everywhere.
Ezra Klein
If you really dig into what is happening in this debate there are two different views of what the constraint is on political change. One version is more or less the one that we are articulating here: public opinion constraint — people don’t like change and that dislike is catalyzed by campaigns run by insurance companies and Republicans.
But there’s the more left-view that the public is led by elites. And the problem is really that it’s people like Paul Krugman and Ezra Klein, making these arguments, saying that people have this small-c conservatism. If every elite was actually onboard Medicare for All, then people wouldn’t be afraid anymore. This side believes that public opinion is only a constraint insofar as it reflects where elite opinion already is. I’m curious how you parse that argument.
Paul Krugman
It’s hard to test. But polling says that a public buy-in to Medicare is very popular, but a replacement of private insurance that is not voluntary is not nearly as popular. How many people in all of that do you think are really taking their cues from me or you?
The international evidence is that it’s just very hard for to make radical changes in social programs. The shape of them tends to be fixed for a really long time. US Social Security is widely held up as a role model of doing it right because we got it right at a time when things were still pretty amorphous and uninformed. On the other hand, our health care system is a mess because of decisions we made around the same time that left us with bad stuff entrenched in the system.
So, I think the notion that this whole thing is extremely plastic — that if only the big shots would line up behind radical change, then the public would come around behind it as well — is a hell of a risky bet.
Ezra Klein
One of the debates right now is whether or not you want a health care system that is free at the point of service. And a reasonable worry about that is policy is set up so health care spending is automatic but other areas aren’t, health care spending will crowd out spending on housing, universal pre-K and other things with more marginal bang for the buck, given how little we subsidize them now. How you think about that question?
Paul Krugman
I don’t actually worry too much that extremely generous benefits would lead to a big increase in health spending because the big bucks are not in things where the patient decides, like an excess doctor visit or something. The big money is all in triple coronary bypasses and major things — and those decisions are being made by medical professionals.
There is a real fiscal constraint if you’re going to try to shift everything to the government paying all medical bills — although that probably doesn’t increase overall health spending and might well reduce it. I’m on the optimistic side there. But it is going to require more tax revenue and getting that tax revenue will be hard, so there might be other interventions that get crowded out in the meantime.
Ezra Klein
If you could design your perfect health care system would have private insurers in it or not? Is there a reason for private insurance to exist?
Paul Krugman
It’s not at all clear that insurance companies on core health care play any useful role. If we had a system without private insurers, no one would seriously be saying that what this system lacks is competition from private insurers because it’s not all clear what they can do that the government can’t do. So, my ideal system would probably be single payer. But you know the old joke: If I wanted to get there, I wouldn’t start from here.
Neoliberalism and its discontents
Ezra Klein
I’m wondering what you think of the means testing versus universality debate that has begun to flare up in the democratic primary. Pete Buttigieg has attacked some of the free-college plans as subsidizing millionaires going to college. And people have responded saying he’s using Republican talking points. But, on the other hand, it’s just not the case that Democrats want to end all means testing everywhere. How do you track this debate?
Paul Krugman
I think Buttigieg is using Republican talking points. Means-testing college tuition relief doesn’t save much money. It’s like means-testing Medicare. There just are not enough people who don’t need Medicare, so you save very little by means testing it. In those cases, you want to preserve universality because it’s makes the program simpler and makes the base of support stronger.
Now, it turns out that a universal basic income program that actually provides an adequate income is extremely expensive. So, things like basic poverty aid should be means tested because we can’t provide people with enough to live on unless we restrict who gets that money.
It’s not that means testing is always bad or it means testing is always good. It’s all depends on the details. It all depends on the numbers.
Ezra Klein
There are a lot of policy debates that are about working out ideas or values that are deeper than policy. One area that really does seem up for grabs on the left now is what we loosely call neoliberalism — the idea that the market is the appropriate way of weighing and thinking about public policy choices. What you think of the fight around neoliberalism?
Paul Krugman
First of all, I agree with the premise — that there is such a thing as neoliberalism. I think about some of the things that I believed in the 90s that I don’t believe anymore. There was excessive faith in the market as the arbiter of almost everything. I think it is right to back off from that.
But I’m not sure that it’s actually about values versus efficiency. There are a lot of things where public provision is just plainly more efficient than private. I think we learned from the history of the 20th century that you probably don’t want the government running auto companies and steel mills. On the other hand, publicly run utilities actually have a pretty good record. Public K-12 education has always been the bedrock of our education system (and the track record of for-profit private schools is horrifying). A lot of higher education has historically been done really well by state run institutions as well. On health care, if you actually ask what system delivers the best results at low cost, it’s genuine socialized medicine. The NHS is actually a pretty good system and damn cheap.
When I added up all of the things that where there’s a pretty strong case that the public sector actually is better, it’s 25-30 percent of the economy. So fairly straightforward economic logic actually says that a significantly mixed economy with a pretty big public role makes a lot of sense.
What the Obama administration got wrong, and right, about the financial crisis
Ezra Klein
How much do you see our politics now as the result of the financial crisis?
Paul Krugman
I’d say remarkably little. The shadow cast by the financial crisis on our political alignment is far less that ought to be. We should have learned a lot from that, but I’m not clear that we did. I think the 2008 is one of those turning points where politically things failed to turn.
Ezra Klein
In retrospect, how do you rate the Obama administration’s response to the financial crisis?
Paul Krugman
I would say this is where I was really unhappy because I think that they could have done a much stronger stimulus and they did. They really knew that they needed one, but they were too timid. I’ve still never understood why Republicans can pass a massive tax cut using reconciliation, but Obama felt he needed 60 senators to do a response in the middle of the worst financial crisis since the 30s.
I would have called for a much more aggressive initial response. If there had been no stimulus and there had not been the rescue of the auto industry, the US economy would have done much worse. But I think we paid a big price for the timidity of Obama and the people around him.
Ezra Klein
I’m a little bit sympathetic to the political constraints on the stimulus. But the place where I really am quite convinced — and I wrote columns about this — was the administration’s response on housing.
They seemed so terrified of credit markets reacting badly of investors being scared out of places that it really limited their movement, particularly on housing. I just think that on a basic fairness level — even if they thought this was the most efficient way to do this — the unfairness of it has lingered in a very toxic way in our politics.
Paul Krugman
I’m not sure. It’s certainly true that people in the Obama administration spent years constantly worried about a financial backlash that never came but here’s no reason anyone should have expected it to come — they were just inventing reasons.
I had the impression on housing, however, that they were politically terrified — and maybe with some reason, If you go back to the original Tea Party rant, it was all about letting colored people get off the hook for the money they borrowed for houses they couldn’t afford. It turns out that housing relief was a flashpoint.
Ezra Klein
That’s a place where I think confrontation might’ve made more sense.
I think a lot of the criticisms that have emerged on the left of the Obama administration tend to underrate political constraints that another president could not have solved any better. But I do think housing a great example of something where the longterm outcome would have been better if the Obama administration had been simultaneously more punitive on the banks and more lenient on homeowners and had just made that argument and fought for it.
Paul Krugman
To a large extent that was just Obama’s personality. I was in meetings with various leading progressive economists sitting with the president his people. And it was clear Obama and Tim Geithner were soulmates and he and Joe Stiglitz were not. So, this was just not the kind of thing that Obama was likely to do. And I think that was a missed opportunity.
The antitrust problem
Ezra Klein
How big of a problem do you think monopoly and monopsony are in the American economy today?
Paul Krugman
When I look at the overall picture — which is that we have very high profits and very low business investment spending — that’s what you’d expect to see if monopoly power was the source. It’s not that the return on capital is low, but the return on having a dominant market position is really quite high. So, it makes sense to think that monopoly power has become a big problem for the US economy and helps explain the bind we’re in.
Ezra Klein
Do you think it would be good for the economy if the Justice Department started going in and actually breaking up firms or do you think that that could end up being worse than the problem it’s trying to solve?
Paul Krugman
I don’t see any evidence that historically strong antitrust policy was a problem. We had strong antitrust policy for the generation after World War II and that was the best 25-30 years of economic performance we’ve ever had.
The idea that firms are not going to invest because they’re afraid that the Justice Department is going to go after their monopoly practices could happen. But all of the experience suggests that the inhibiting effect of monopoly on investment is much stronger.
The problem of geographic inequality
Ezra Klein
An interesting theme in some of your columns is that cultural breakdown is often the downstream consequence of economic breakdown. You make the point that what happened to African American communities in the 80s and 90s in terms of cultural breakdown started to happen to white communities in the 2000s as jobs moved into urban centers. Can you talk about that process?
Paul Krugman
For most of my sentient adult life, inner-city social problems were a big part of people’s mental picture of America. There was an orthodoxy at the time that the problem was cultural — that there was some kind of breakdown in the African-American family. And that’s why crime was so high. Along came the sociologist William Julius Wilson who said that those things are consequences, not causes. What actually happened was that economic changes destroyed the employment opportunities for men in the inner city and social breakdown followed from that.
If you wanted to do a semi-controlled experiment on that thesis, then take a bunch of white people, take away the good jobs, destroy their employment opportunities and see what happens. We ended up doing that in the heartland of the United States and, lo and behold, a social collapse with opioid epidemic and deaths of despair and what not. So, I think William Julius Wilson was probably right.
Ezra Klein
The way our political system works, it gives outsized power to the exact kinds of communities that are being denuded jobs and are thus correctly very angry. So, I’m wondering what an approach or agenda on economic geography might look like?
Paul Krugman
In the United States we don’t have a system of policies designed to help lagging regions in principle. But, in practice, we actually provide huge de facto aid. Kentucky, for instance, receives de facto aid from the federal government that’s about 20% of the state’s GDP. That’s beyond the wildest dreams of European cohesion funds or anything like that. But it’s not stopping the economic divergence. It’s cushioning the costs, but it doesn’t seem to attract industry to move back to these places. And if you look historically, countries that have tried hard to sustain lagging regions much more explicitly than than we have ever had in this country, they have not succeeded. I think the underlying economic forces that are leading to these regional divergences are very hard to counteract.
Ezra Klein
Why are we seeing this increasing economic concentration in the first place?
Paul Krugman
It’s hard to answer, but what a number of people have been saying is that the knowledge economy is a relatively recent creation and the timing is roughly coincident with the IT revolution. That’s suggesting that we’re moving towards a different kind of economy — one in which a lot of enterprises want to be in the middle of places with a lot of college educated people and a lot of amenities that serve college educated people.
Somewhat perversely, it looks to me as if the internet has actually fostered concentration because it’s made it possible to separate the low value activities from the high value activities. Today, your back office operations can be someplace where land is cheap and wages are low, but you can keep your corporate headquarters and your high-level technical staff in lower Manhattan. So, you don’t have to pay the higher rates for everybody but only for the good stuff. So that may also have fostered concentration.
It does look as if basically technology is what’s driving this. And we’re seeing the same thing happening all across the advanced world. The United States is not unique in this.
Is the robot apocalypse coming for us all?
Ezra Klein
You’ve been criticizing Andrew Yang’s robot apocalypse theories recently. I think it’s intuitive to people that if we had more automation emerging that that would be bad for the economy and bad for jobs. But economists say he problem in the economy is that productivity growth has slowed down in recent decades, especially compared to what it was in the post World War II era. And so if we were actually seeing what the dire robot people say we’re seeing, it would actually be good for the economy.
So is the problem that we have too many robots coming for our jobs or that we have too few?
Paul Krugman
We keep on hearing about how radical and impressive new technology is, but output per worker hour is growing very slowly. And automation is just a kind of mechanization that allows you to do more stuff with fewer workers. So I think what is actually happening is the kinds of technological change we’re seeing now are ones that are flashy and very visible to people like you and me, but the basic way we live our lives and do business haven’t changed all that much.
Now, there’s another question: Is [automation] good or bad for ordinary workers? And the answer is: it depends. Historically, there have been periods when at least significant groups of workers have definitely been hurt by automation. There have been other periods when the benefits of automation has been very broadly shared. But, I think currently it’s a moot point because automation is not really happening at all. The idea that robots are taking away the jobs of lots of American workers just doesn’t seem to be true.
Ezra Klein
There’s a great piece in the book where you say the way you do your work is to “listen to the Gentiles” — listen to the experiences people are having, even outside of what the economics profession can see. So, what do you take from the fact that it feels so true to people that technology is reshaping the economy and the technology is hurting them? Maybe there is something that the economic data is simply missing.
Paul Krugman
That could certainly be true. But I am not hearing a lot of workers talking about how robots are taking their jobs. That actually seems to be more of an elite thing.
Remember the skills gap about five years ago? Everybody important knew that American workers just didn’t have the skills to be employed in the modern economy. And then all of a sudden we have unemployment below 4 percent. But the skills gap stuff was not coming from workers saying they didn’t have the skills to operate this stuff. It was coming from Jamie Dimon and people like that. My sense is that the robot apocalypse is not actually a grassroots perception. It’s actually a particular part of elite perception.
Ezra Klein
That’s an interesting sociological point. You had a great piece on the skills gap argument and how it played a particular political sociological role at the time, which was to say that the problem is the workers themselves, and not rich people or bad policy just siphoning off money from the economy. Is that the argument here: Robots are in certain ways an out for elites who want to suggest that the pain in the economy isn’t their fault?
Paul Krugman
From where I sit, the problem of rising inequality in America is a problem of power. It’s because we crushed our labor movement and allowed firms to gain monopoly power. It’s because set the rules of the game in a way that have really disempowered ordinary workers. That’s not an appealing vision for a lot of people who are themselves successful. They like the story that it’s about technology — that it’s all about these fancy new machines. It’s something less confrontational than saying this is all about power.
Author: Ezra Klein
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