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Krugman Diagnoses Economic Problems

(Professor Paul R. Krugman of the Department of Economics won the Clark Medal of the American Economic Association earlier this year in recognition of important contributions to the field by an economist under 40. This interview was conducted by Naomi F. Chase, assistant director of the News Office.)

CHASE: Why is economics called "the dismal science?"

KRUGMAN: Malthus, who's considered the father of economics, was famous for his theory that population growth always tended to drive wages down to subsistence level. But nowadays, people use the phrase because economists are always talking about limits, always telling you what you can't do. I guess it's also called the dismal science because most undergraduates really hate it.

CHASE: Why is that?

KRUGMAN: People often take economics because they're interested in the newspaper headlines and discover that it's a technical field, dominated by mathematical models.

CHASE: They thought it was sociology.


CHASE: So how did you get into this dismal science?

KRUGMAN: In my early teens, I was a science fiction fan and fascinated by Isaac Asimov's Foundation Trilogy. It's about a group of people called psychohistorians- mathematical social scientists who can predict the future. That's what I wanted to do. Economics was the closest I could get to it.

CHASE: What kinds of predictions are you working on now?

KRUGMAN: I do two kinds of research. The first is long range, papers that I hope people will read 30-40 years from now. It's not particularly related to what's going on in US economic policy issues right now.

CHASE: What's the subject?

KRUGMAN: Most of that research has been on the theory of international trade. I'm moving into an extension of that work, that is, economic geography. It deals with international trade, regional economics, and urban economics. To inspire me I have an MIT Museum world map on the wall, a collage of nighttime satellite photos. The basic issue is the distribution of cities, and what's nice about the map is that the countries are nowhere visible. What you see is systems of cities. Looking from space you wouldn't be able to tell where one country ends and the next begins.

CHASE: Why is that helpful for studying international trade?

KRUGMAN: We need to think about smaller and larger units. I have a continuum from cities up to continents. I'm trying to zoom in and pull back, to see what one looks at as the units of economic analysis. I'm also trying to work with theoretical models in which you model location of production in space, not necessarily focusing on which country it's in. So, on the one hand, our unit of the economy of Massachusetts is relevant, so we shouldn't always talk about the economy of the United States as an aggregate. And on the other hand, we might want to talk about the European economy, instead of what each of the 12 countries produce. You might want to ask just where the production is located inside Europe as a unit.

CHASE: In The Age of Diminshed Expectations you said productivity, income distribution, and employment were the issues in the domestic economy. Is that true for the international economy, too?

KRUGMAN: No. My basic research is not necessarily about what I think are the most important issues but where I think I have something interesting to contribute. International trade is probably not in the top five economic issues in terms of importance for human well being. At the same time, I try to respond to current issues and have some impact. Recently I've been working on the income distribution issue in the United States, which is terribly important.

CHASE: In Diminished Expectations you make distinctions among which issues are important substantively and which politically and you touch on the unwillingness of political systems to deal with the political ones. Let's go back to income distribution. What is the important thing about income distribution in the United States?

KRUGMAN: Income distribution has gotten radically more unequal. We have had a tremendous redistribution problem in the population at large with most of it going to the top one percent of the population. That has essentially syphoned off all of the growth in the interim. The US economy is not growing as fast as we would like but it has been growing. Productivity is rising by one percent a year. The fraction of people in the workforce has been increasing. Overall, you would have expected the family income in the United States to be rising slowly, a little bit more than one percent a year. But for the past 15 years, the income of the median family has hardly gone up at all.

CHASE: Even though more people are working. Is that right?

KRUGMAN: Right. Families are smaller. So the typical worker in a family that has the same fraction of people working is actually earning less in real terms than in the late 1970s. A typical family is earning just a couple of percent more than it was in the late 1970s, because the wife is more likely to be working.

CHASE: The main point is that people are not better off.

KRUGMAN: Right. And those below the middle, the middle being about $35,000 annually, are actually worse off. The question is, if ordinary people are no better off or worse off, where did the growth go?

CHASE: Where did it go?

KRUGMAN: Most of the benefits of growth has gone to people in the top one percent. The rest has gone to people just a little bit below that. But basically it's the top one percent that is getting the lion's share of the growth. To be classified as the top one percent, a family of four has to have a minimum income of $320,000 per year. That's the bottom of the top. The average of the top one percent is about $560,000 a year. And it's a good bet that just as most of the gains of the top five percent has actually accrued to the top one percent, most of the gains of the top one percent have accrued to the top 2/10 percent. So 40 percent or more of the US economic growth over the past 15 years has gone to people making more than $500,000 a year.

CHASE: So the rich are getting richer as the poor get poorer.

KRUGMAN: Yes, which has not always been true. In the 1930s and the 1940s, the US distribution of income got much more equal. We don't fully understand why. Economic theory on income distribution is fairly weak. Franklin Roosevelt probably had a lot to do with it. There was a great movement toward equality in the Roosevelt and Truman years, from the depression to World War II through the Korean War. Income stayed fairly equally distributed for another 25 years or so, through the mid 70s. Then beginning in the late 1970s, there was a tremendous increase in the dispersion of income. The rich got very much richer, the poor got quite a lot poorer, the middle class sort of moved sideways. It explains a lot of the malaise, why Americans are feeling so depressed and angry. It's terribly important to understand what's happening to our economy, and, as a liberal, where I think we should be going politically. A lot of people are angry at welfare recipients and people at the bottom. It's worth pointing out to them that the top one percent of the population not only gets the biggest income transfer but also gets about as much income as the bottom 40 percent.

CHASE: What changes income distribution? Does tax policy change it?

KRUGMAN: A major tax cut would change it. Ronald Reagan was for the most part unsuccessful in cutting taxes. Income taxes went down, but social security and other contributions went up. For 99 percent of the population there was basically no change in the tax rate. But the top one percent got a significant break. Those same people who got most of the growth. As a political position, I think the United States has a lot of unfinished business. We need to spend more money on education, we need to spend more money on childcare, we need to spend more money on infrastructure, we need to reduce our budget deficit and I think it makes sense to get a significant portion of that money by taxing that top one percent that has been doing so well.

CHASE: You say in The Age of Diminished Expectations that Americans have been doing less well and not protesting very much about it.

KRUGMAN: Yes. That's the double entendre of the title. I think we're having a revolution of diminished expectations.

CHASE: Why is the electorate not making a fuss about this?

KRUGMAN: I'm not a political scientist but in general I believe in the Nathaniel West rule about Hollywood applied to politics: nobody knows anything. I find this paralysis of will amazing. I'd also call it a paralysis of diagnosis. Any time you try to propose anything, there is always a powerful group of people saying, oh no, we should do just the opposite. So if one group of people say, well, what we really need is a cut in the capital gains tax, I will be part of the group saying that's completely irrelevant to our problems and will only get us deeper in the hole. If I say we need to spend more on educating our children, they will say the problem is too much big government.

CHASE: What do you think we need to do about education?

KRUGMAN: We have the worst educated kids in the industrial world. There's really no question that by the time they finish high school, American kids know less math, are less able to write, know less science than in any other major industrial country.

CHASE: Has this always been true?

KRUGMAN: No. In the early part of the 20th century, people thought Americans were crazy for putting so much effort into public education and for having our kids go to school so many years for so many days each year. Actually in the early 20th century the Germans and the Americans were, in their different ways, the educational elite. Now we're at the bottom. We also have more children in trouble than anybody else by a huge margin. Poverty is very much a child issue in the United States today because elderly people have had a lot of improvements in their status so there are not that many poor older people now.

CHASE: How did this happen?

KRUGMAN: Most measures of poverty fell pretty steadily from World War II up until the late 1960s. Then they stalled out and started creeping back up again. In particular, the overall poverty rate is higher now than it was when Jimmy Carter was president, and the poverty rate among children is considerably higher. We've had a definite worsening of the situation. I'm not sure how we compare with 30 years ago, but we actually have more misery than we did 15 years ago. Those children should be the workforce of the 21st century. So we're all going to be paying the price for what's happening to them now.

CHASE: What are we going to do about this?

KRUGMAN: I'm pretty pessimistic. We seem to have very deep-seated problems. We're not collapsing but we seem to be stuck and unwilling to face up to it. A lot of these things are not the result of federal-level decisions. Education is partially a matter of budgets and the federal government could help there. But it's also a matter of standards and a matter of caring. We need to have parents care about the quality of the school, and be concerned whether teachers and administrators care about the quality of the school.

CHASE: Can they do it if they are not getting federal funds?

KRUGMAN: You need to have enough money so that you don't have children sitting on packing crates and you don't have classes without text books, both of which are actually happening now in the United States, but it's also true that we have schools that are not short of money and that are still in pretty bad shape. We've somehow lost our focus and our seriousness about education.

CHASE: What is an ideal society to an economist?

KRUGMAN: I don't have a real vision of what paradise would look like, but I'd vote for welfare state capitalism, a market system with a tax structure that takes away some of what the very-well-off make and provides a safety net under the population. It's an imperfect system but the best system that's ever yet been devised. The kind of society the United States and western Europe had between the end of World War II and now has its problems but is, relatively speaking, a pretty humane, pretty decent sort of society. Unfortunately it's become considerably less humane and less decent over the past 15 years. If I had to say what looks to me like a country that I could approve of, I would say a place like Canada.

A version of this article appeared in the May 27, 1992 issue of MIT Tech Talk (Volume 36, Number 32).

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