Paul Krugman speaks at the World Affairs Council of Northern California.
One of the world's preeminent economists and an insightful, outspoken commentator on economic and political affairs, Paul Krugman will give a preview of his upcoming book, The Conscience of a Liberal. In it, Professor Krugman evaluates American social policy and leadership over the last century, and considers where we go from here, as we enter the 21st Century- World Affairs Council
Paul Krugman is Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs, at Princeton University, and an Op-Ed columnist for the Times. His numerous books include "The Great Unraveling," "The Conscience of a Liberal," and "The Return of Depression Economics," an updated edition of which was published in 2009. For his contributions to New Trade Theory, he received the 2008 Nobel Memorial Prize in Economic Sciences.
Jane Wales is vice president of philanthropy and society at the Aspen Institute, president and CEO of the World Affairs Council, and founder of the Global Philanthropy Forum.
Previously, Wales was a special assistant to President Clinton, senior director of the National Security Council, and associate director of the White House Office of Science and Technology Policy.
She also chaired the international security programs at the Carnegie Corporation and the W. Alton Jones Foundation and directed the Project on World Security at the Rockefeller Brothers Fund.
Wales is the former national executive director of Physicians for Social Responsibility.
Group of people within a society who possess the same socioeconomic status. The term was first widely used in the early 19th century, following the industrial and political revolutions of the late 18th century. The most influential early theory of class was that of Karl Marx, who focused on how one class controls and directs the process of production while other classes are the direct producers and the providers of services to the dominant class. The relations between the classes were thus seen as antagonistic. Max Weber emphasized the importance of political power and social status or prestige in maintaining class distinctions. Despite controversies over the theory of class, there is general agreement on the characteristics of the classes in modern capitalist societies. In many cases the upper class has been distinguished by the possession of largely inherited wealth, while the working class has consisted mostly of manual labourers and semiskilled or unskilled workers, often in service industries, who earn moderate or low wages and have little access to inherited wealth. The middle class includes the middle and upper levels of clerical workers, those engaged in technical and professional occupations, supervisors and managers, and such self-employed workers as small-scale shopkeepers, businesspeople, and farmers. There is also often an urban substratum of permanently jobless and underemployed workers termed the underclass. See alsobourgeoisie.
Levy imposed by public authority on the incomes of persons or corporations within its jurisdiction. In nations with an advanced system of private enterprise, income taxes represent the chief source of government revenue. Income tax levied on individuals or family units is known as personal income tax. In 1799 Britain enacted a general income tax to finance the Napoleonic Wars. In the U.S. an income tax was first tried during the Civil War; the Supreme Court held it to be constitutional in 1881 but declared another income tax unconstitutional in 1894. In 1913 the 16th Amendment to the Constitution made the personal income tax permanent. The fairness of personal income taxation is based on the premise that one's income is the best single index of one's ability to contribute to the support of the government; most personal income taxes are conceived on the theory that when people's financial circumstances differ, their tax liabilities should also differ. Thus U.S. income taxes are progressive taxes, falling more heavily on those who earn more money, and individual income tax deductions are allowed for items such as interest paid on home mortgage debt, unusual medical expenses, philanthropic contributions, and state and local income and property taxes. Enforcement has been facilitated by withholding the tax from wages and salaries. See alsocapital gains tax; capital levy; corporate income tax; regressive tax; sales tax; value-added tax.
rpetty, most jobs that are created due to "tax cuts" are cuts in business profits, not capital gains and dividends. These cuts are helpful to "the rich" we allude to on an individual level, but the rich don't fund their own enterprise for the most part, but rather by issuing stock to the public to finance their expansion. However, most stock holders are either part of pension funds (already duty-free) or small amounts of holdings making little difference to them. If these people aren't benefitting from the cuts, then they can't buy the stock issued by business, hence no growth.
Also, Paul Krugman has not only "contributed" to economics, he has done so extensively. For God's sake, the guy won the Nobel Prize in Economics. He is a journalist, but more importantly, he still teaches economics at Princeton and gives lectures all across the world. To say what you did at the end of your comment shows ignorance and a huge lack of respect on your part.
Did they invest the most recent capital gains tax cut in American economic growth or American job creation? Or did the cut result in the continuation of a credit/financial asset/housing bubble and new jobs for those importing to us? No doubt that more disposable dollars in private hands is an economic driver, it just does not happen automatically or for the benefit of any particular nation in a globalized economy. A sensible cost/benefit analysis of cutting taxes to the wealthy is reasonable, as opposed to a blind faith that just happens to immediately benefit your constituency. Also, Paul Krugman is an economist with an occasional column, not the other way around.
Oh my, what does this guy think "the rich" do with the money they save from a cap gains tax rate cut? They don't stuff it into a mattress, they invest it which stimulates economic growth and creates new jobs. An excellent example of a journalist that writes about economics but has never created jobs or contributed in any meaningful way to the economy.
It's my pleasure to introduce our distinguished guest Dr. Paul Krugman. If you are interested ineconomic issues or the news of the day, you probably read Paul Krugman's columns in the New YorkTimes. He has been with the New York Times since 1999 and been a regular columnist on the Op-Edpage, whether he is writing about the Federal Budget or writing about America's middle class orAmerican economic leadership, there is probably no other columnist who is better informed and moremore qualified or more provocative.Professor Krugman is one of the world's most prominent international economist and economictheorist, he is particularly known for his work on international trade. He was co-founder of somethingcalled New Trade Theory and in recognition of that The Economist magazine nominated him or namedhim one of the top international economists. Also in 1991, the American Economic Associationawarded him the John Bates Clark Medal which is a prize given every couple of years to an economistunder age 40 who has made an extraordinary contribution to the field. Paul Krugman is the author of200 scholarly papers and journal articles and over 20 books, including "The Great Unraveling" oopsthat's hard to say, The Great Unraveling, oh I can't do that, can you help me "The Great Unraveling:Losing Our Way in the New Century", moral dilemmas of a free trader, "Pop Internationalism", "TheReturn of Depression Economics" and my favorite, "Fuzzy Math." In his new book, "The Conscienceof a Liberal" this author looks at American social policy over the past 80 years. So I ask you to join mein welcoming Paul Krugman.I am going to pick on you because I am I am somebody who actually does read you every Monday.And so I am going to start right out with start out the beginning with yesterday's Op-Ed in which youfocused on tax policy and you and you referred to President Bush's cuts certain of his tax cuts; cutson dividends, tax on capital gains, has been particularly elitist, say more.Okay. I mean it's not just that some of them all cuts have been elitist, but this one was really extreme.All right you know, just the who actually benefits from a cut in tax rate on capital gains anddividends. You know, most most people have very little in the way of capital gains or dividendsincome, particularly most people to the extent that they have any interest in their 401(k)s which wasalready tax sheltered. So this is really going to the handful of people who have enough stock andoutside of the 401(k) that they really are going to benefit and it turns out, when you do the the math,not the fuzzy math but the real math, as opposed to Karl Rove's the math I guess but anyway whenyou do the actual math it turns out that, in this case more than half the tax cut went to people withincomes of more than a million a year. That's about a 10th of percent of the population. And theamazing thing was of course they tried to they tried to sell it as something for regular middle class people.Well, how was it sold? I mean what was the argument?Well, there were a whole bunch. I mean they are very good at this, you know, they find well, myfavorite was that they had a chart showing that this tax cut would disproportionately benefit the elderly,an unusually high proportion of the people benefiting were above the age of 65, because a lot of reallyrich people are old, it turns out. So no but yeah it was a it was a pretty it was amazing becausethey they managed you know, they got the the typical way the newspaper stories are written, whichwas they did point out that this wasn't true, but they never actually said that. They said someDemocrats say that this cut favored the wealthy. So anyway.Right, well what kind of let's ask the question, get away from the politics of it for a minute and talkabout the economics of it, if someone who has an income of over a million a year, this will come as agreat surprise to you but I am not one of those, so I don't know the answer to this question; when thatperson has a tax saving, what does he or she do with it? Is it good for the economy?You know, I don't want to be imagine that we were under a socialist regime like let's say that of theEisenhower Presidency, when the top tax rate was actually 91 percent. It was plausible I think to saythat if you had a 91 percent top tax rate, that cutting down a little bit would would actually makesome people more willing to take risks. Some you know, some people ambition would drive somepeople to do some things that they wouldn't otherwise do that would be good for the economy. Butright now you know we are cutting the capital gains tax rate from 20 percent to 15 percent, I thinkyou are going to say that it's very unlikely there is going to be a big increase in investment and risktaking, what's basically going to happen is that some very wealthy people are going to get to keep moreof their income.Okay, now I am still reflecting on that 91 percent back on the Eisenhower years. What do we Imean compared to other rich states, other you know OECD states where do we stand when it comesto taxes?We are at the bottom. I mean theThe lowest.Yeah, I am about to to prattle on too much because they there are some there are some thingsabout Japan that but you know, leaving and looking at Western Europe, looking at Canada, the UShas far and away the lowest taxes. And it's you know, we are we are under taxed by those I am nota politician we are under taxed by advanced country standards. It's it's and particularly, if you are ahigh income person, somebody not a million dollar a year class, but let's say oh you know, NewYork Times columnist income class, would pay substantially more in taxes in France or Britain oranyplace else in the western world except the United States.But you would have substantially more in-services, what with those services, what are the distinctions there?Well, first of all, guaranteed health care. And that's a you know, in a way it's an illusion, that thatwe save on taxes because because companies typically pay, they do provide health insurance to theirworkers at seven percent or more of payroll. That's not necessary in other countries because it's beingprovided by the government and it's it is a tax. But it is a tax that substitutes for a premium. There is amuch stronger social safety net. What ever other advanced countries get is they get you know, wealways come back to France which is which is an example of a pretty well functioning, veryextensive welfare state. So there is there is aid for young mothers in in taking care of their children.There is pretty good support if you are unemployed. There is just a whole range of things that thatprotect you from the invest that you can quite easily fall into in this country.Now what stage where do you have to be in in the kind of economic ladder in which those tax cutsthat were received actually ended up being increases, because you ended up having to pay more for theservices that were suddenly denied.Well, yeah there actually have been some pretty detailed there are some assumptions involved, asthere always are, but if you look at this, anybody with an income under 75,000 a year is clearly justworse off as a result of the Bush tax cuts. Anybody with an income over 200,000 a year is a clearwinner. In between it's its some uncertainty. But if you are really going to say, you know most peoplein this country have incomes under 75,000 a year. Median family income is median householdincome is under 50. So it's it really is a case where the the top five percent of the population onlywere clear winners, the bottom 60 percent were clear losers or more than that, and you know, there is and .And there is when are saying losers you are not saying just in terms of the tax, you are saying loserswhen you are balanced off, loss of services.Yeah and but that's that's the way it you know, taxes do pay for something, much as we would asas some people would like us to forget that.And we we tend to think of services but what about infrastructure. This is on people's mind after thebridge in Minneapolis, but it's it should be on people's mind, regardless of ?Yeah we do look like we are I have to say I do I do like numbers, and I haven't able to get hardnumbers on this. But but it does look like our infrastructure is really being neglected because theyreally are letting it fray in ways that that other advanced countries are not.Right what are the political benefits really I mean if you have got a four year term I mean let'sthink of the incentives and disincentives for the politician, you got a two year term or a four year termand and you know your job is either to cut taxes for this audience say, or to make an investment insomething that will matter for the next 30 years.This has been something actually I have we used to manage to do it some how. We use to actuallypoliticians used to like to have either have their name on something or at least have the have thesense that they have made lasting contributions. I am not quite sure how they did it because now itreally does seem as if each each politician is just sort of passing the buck on to the next person, doingthat you know the minimal amount of Scotch tape and chewing gum, to hold stuff together, untilthe and so that the disaster falls on the next guys watch. Not just not just on infrastructure butforeign policy too at this point, but but any way the and this is a scary thing. I mean its, I don't know, welost some thing. We used to if you get back to before some how or other a Nelson Rockefeller cameup and you know people used to say that he did too much building when he was Governor of NewYork, that he had his as people said an edifice complex. But but better that than you know I Idon't I haven't followed California that closely but back in my in my State of New Jersey, there hasbeen we've had a series of governments where basically raided the pension funds, they raided everything so as to be able to say, "I cut taxes" and eventually you know that its going to it eventuallybasically falls on John Corzine's shoulders.And what is going to happen to the taxes that I mean most of the Bush tax cuts are are sunset, Imean there is a point in which we can just -.Yeah that's that's his great gift to future fiscal responsibility. If because the convention is the taxcuts are scored for a decade, so you always talk about what were the what would the revenue loss beover the next 10 years? In order to hold down the decade cost for tax cuts that were passed in 2001,almost every thing and then they did it again for the 2003 cuts, almost every thing expires on the lastday of 2010. So its sunsets, which is wonderful because it means that to undo a lot of these tax cuts,you don't need to actually pass new legislation, you just have to fail to pass legislation extending them.You know I couldn't we saw it at the time. I wrote back when the tax cuts were originally passed, Ithere is various of them. But the one I like best is the estate tax. You know estate tax disappearscompletely in 2010 and then springs back to the 2000 schedule, which has a 55 percent tax rate onlarger states, on the first of 2011. So back in 2001 I wrote, I described it as the "Throw Momma Fromthe Train Act" that but it does it does actually mean, it's actually a that the path is much clearertowards some fiscal responsibility under whoever you think is going to be the next President.Well, as you look at at the Presidential candidates, do you do you see folks who you would describeas fiscal conservatives or put it differently, they are perhaps a brand that's so useful, but do you seefolks who you think are likely to try to reign in spending and try to do something about the overallthe deficit.Well there is an interesting there has been a change on the liberal or the progressive side in attitudeson this. And I am part of it. You know if if the Democrat had won in 2004, I think there would havebeen a lot of pressure, there would have been a strong sort of fiscal conservative wing of the party thatwould have said, you know really what we need to do is get the deficit down, do what Clinton didmostly in 1993, raise taxes and use the money to pay down the debt. But as the realization of what hashappened has sunk in, what people now say, what I say is you know if it was abstract, if you couldguarantee that the next the next two or three Presidents would be fiscally responsible, that would bethe right thing to do. But what actually happened was that Clinton with great effort turned the deficitinto a surplus, paid down the debt and then had George W. Bush squander it on tax cuts and and apointless war. And wouldn't we all be better off, if Bill Clinton instead of being quite so scupulousabout the deficit, had use the money to expand healthcare, to build institutions that would be hard totake away, and that actually is now that the dominant view, and I think in the party, that if you lookJohn Edwards has been most explicit about this, but other democratic candidates are de facto taking thesame position. It is we need to let some of the Bush tax cuts expire and use the money to pay foruniversal healthcare and we are really not going to make a big deal about the deficit at least notinitially because the in turns out that progress against deficit is to easily squandered by the next guy.Well I am going to go back to this sort of starve-the-beast theory of yours later, but let me hang on toJohn Edwards for a moment and healthcare, is that perhaps motivated by a sense that we are in ahealthcare crisis?Oh well.I mean that that's a real -.Well, in a sense I mean it's real all right. Now look getting my little healthcare survey, I mean the US -.You can get your big healthcare survey if you like.Okay. No look we have the US has got this patch work healthcare system which is we sort ofstumbled in, we have never actually really developed a well thought out system for insuring thepeople at healthcare. But we had a system that between employer based coverage which has ispartially subsidized by the tax code, Medicaid for the poor, Medicare for the elderly was getting youknow, 87-88 percent of the population which is not enough, but was enough to to head off reallystrong pressure for change. That system is becoming a part of the seams quite rapidly. I mean its andthe whole employers are not are not offering healthcare to their employees any more, not becausethey are evil, some of them are, but not in general, not because they are evil but because it cost toomuch, and so the you have seen you know we would have this as part of the theme at Monday'scolumn, we had a reasonably good job growth, period, for last four years which appears to be overnow. But it wasn't unlike the last job boom which happened during the Clinton years, it's not bringinghealth benefits with it. The new jobs don't carry health benefits. We are heading towards a situationwhere the normal state of middle class Americans will be to be without health insurance. That's a crisis.Last night you told me sort of what income bracket, you must have insurance; you have to share this with -.Oh, yeah no all right, the thing about healthcare is when it rains it pours. In any given year half thepopulation has got essentially no healthcare expenses. 20 percent of the population is responsible for 80percent of the healthcare, five percent of the population is responsible for almost half the healthcare, sothat likely there is we got to find these people and stop them. But of course the point is, you don'tknow, it can be you. It's when something happens, you have horrific healthcare expenses which willeasily be hundreds of thousands a year. I do know a couple of people who say I don't need the healthinsurance and I write about it, they all have net worth of more than $50 million, because since if youhave even if you are a millionaire and the old sense of having your million dollars in assets a badtwo bad years of health problem can blow through all of that. So health insurance you cannot domodern healthcare without health insurance, because the what healthcare does is it provides anamazing, miraculous care for the few people who need it, but it's an expense beyond anybody's abilityto pay out the pocket.And and right now and you are saying 40 percent don't have a -?15 percent have no insurance whatsoever, another 25 percent have got inadequate insurance, thatbasically lets them down when an extremist and of course a lot of people who think they haveadequate insurance find that it doesn't work quite so well when they the insurance company tries tocontest a lot of the claims. But in any case 40 percent of the population in the United States is eitheruninsured or seriously underinsured.And what about children?Well children, it's complicated, we had actually been doing better you know the one area we if youare looking at if you look at young working adults, things are deteriorating quite fast. The one areawhere we are actually in better shape than we were ten years ago; is children. And its not because ofthe magic of the market place, it's because of the SCHIP, the State Children's Health InsuranceProgram, which is a federal program which has not covered all the children it should but has coveredmore. Of course Congress wants to expand that and and President Bush says, he will veto theexpansion. But and and by the way, children is easy the children don't by and large need open heartsurgery, they by and large don't need chemo, you know children are in expensive. So actually the costof the providing of getting almost all of the children in the United States covered for the next fiveyears would be about what we will spend in Iraq in next six months. So that's really it's really quitecheap.Yet it will be vetoed because of the -.It will be vetoed. It might conceivably be overridden by, probably not, so yeah, it will be vetoed. Itsa matter of philosophies of the President.And when it comes to preventive care, which is what we probably should care about as a as a societydo any of the presidential candidates have plans that would provide for preventive care?Yeah there's a lot all of them are talking about it. They are summing all of these things. I will sayokay I am I am tentatively furious Hillary Clinton, because she has not come out with a plan foruniversal healthcare. She says she will, but she have been promising it for about six months and we stillhaven't got it, which makes me very nervous that she is going to try and sort of -. But she has actuallycome out with a plan for preventive care that's quite good. I mean I have thought about that quite a lot.Yeah, I am trying to think about her polling, because she has described as polarizing, I am trying tothink where you put the tentatively furious?No I am just if she comes out with a good plan, now the latest rumor is sometimes this month, then Iwill withdraw all of the annoyance because then you know there is still time. It's just that this longdelay had made me very nervous, that she may be trying to avoid actually committing to explicitlypromising universal healthcare.And as you look at it as a okay so you have covered now, two candidates. One with whom you aretentatively furious, the other you think has got a good healthcare plan.And Obama's plan. So of the three frontrunners or the two and a half frontrunners you know,realistically given the poll both Edwards and Obama have had good plans. In Edward's case itsgenuinely universal, in Obama's case close to universal, and now certainly this is serious, I mean thisis the state of the conversation on the healthcare is vastly better than you could have imagined threeor four years ago.But you have only mentioned one political party.Uh-huh Rudy Giuliani, actually all of them I know Fred Thompson hasn't said anything onhealthcare yet but but Rudy Giuliani has essentially endorsed his plan appears to be identical to theplan that Bush came out within in February and its really its tax cuts tax cuts and the magic of themarket place are going to solve the problem. And its and Romney's plan is a little less but prettyclose to that as well. So its you know, nobody on the Republican side is treating this as a crisis.All right. Now speaking of crisis, if you read the newspapers read magazines, you come away with asense right now that we are we are facing a recession. Is that true?Okay, I can say with great confidence I don't know. And and neither does anyone else. Let me tellyou the people have been having some fun right now going back to consensus economic judgmentsearly in 2001, and most economists did not believe that we would have a recession, several monthsafter we now know we were already in one. So it's not that easy to tell. Look there is a problem.Clearly employment growth has stalled, whether we are actually going to start seeing job losses in themonths ahead I don't know. But it's clearly you know clearly the economic situation has deterioratedquiet a lot.We saw losses in the last month.That's right, last months its I am sorry, but too much you know the job change was minus 4000, Ithink plus or minus 50000 realistically, given the uncertainty of the data. The economic statisticsyou've heard this before, but economic statistics are a peculiarly boring form of science fiction, youdon't want to take it too seriously, certainly not on a one month basis. But the now clearly economyis slowing, clearly it's a problem. I mean the the question nobody knows the answer to is whether wereally are talking about a financial crisis stemming out of the sub prime mortgages, the whole housingbust, that it is severe enough to really cause problems in dealing with it. And I'd say the 40 percentodds that we really are going to to have something that is going to be bad enough to turn into anatural recession.All right, well we do have a sense of impact on jobs, in so far as the housing industry is a greatemployer. I mean it really employs such a vast array of different different sectors.Yeah its people the construction workers themselves, there are the suppliers of the home buildingmaterials, all of that the housing industry, but also home appliances, you know the a lot of the sales,you know home depot obviously, but just much a broader part of the economy, really those are salesthat takes place when a new house is built and people move into it. So the estimates are about a third ofthe jobs that we have created since 2003, are pretty much directly related to housing. And then asubstantial part of the rest is because the economy was doing not too badly, because the housing boomwas pulling it along. So that's not it's been -.So this is consequential either way. Tell me what the Fed is going to do?You got an in with these Princeton guys, right?Oh, right, yeah. That's right. Now in case you don't know the you know Ben Bernanke was theDepartment Head at the Princeton Economics Department before he decided to take a step down andand run the world. And terrific Department Head by the way. I have never seen anybody who wasthat good at at managing all those egos. But his look the first thing is they cut interest rates, ineffect you know they will cut the Fed funds rate, the betting now is 50 basis points at the next meeting.That's an end the markets are in effect betting that that's just the first of a series, so we are going tohave a whole series of interest rates cuts over the next year or two. The question is whether they haveto do something more exotic. And that's the alright, the story here. Once upon a time we had a wehad a terrible banking crisis in this country. Now the so we had a collapse of the banking system inin the 30s and which was a big factor in the depression. And we dealt with that with a whole series ofprotections, FDIC so your deposits are safe, regulation of the banks, reserve requirements, capitalrequirements, all of these and anything that's called a bank is quite safe now. The problem is thoseregulations also mean that it's kind of helpful from a profit point of view to create something that doeswhat a bank does but isn't called the bank. And and to a large extent that's what many of the hedgefunds are doing. They are essentially borrowing money short term, commercial asset that commercialpaper, and then they get out long term and figuring that in any given day not that many people aregoing to be want to be repaid, so its very much like the way a bank works, which leaves them open tosomething which is effect a bankrupt. And we had two weeks ago we had what looked like thebeginning of a giant non-bank bank run. It has let up a little bit, but things are still very dicey. And ifthat's going to happen then well then we are in uncharted territory and you have to talk aboutpossible extreme measures. You have to talk about the Federal Reserve lending money to institutionsthat aren't banks. And this is you know, do you really want, are we really ready to see Ben Bernankelending money to Henry Kravis. I am not sure about that. But in extremist, you might have to do iteven though it's the last person he would want to help. Are we talking about having Fanni MaeFreddie Mac, the Federal Housing they are not exactly Federal Housing Agencies, coming out andbuying sub prime mortgages, which they don't do, for it sound fiduciary reasons, but if it comes torescuing the economy you might have to do. You know we are all hoping that that doesn't happen. Iwill say okay I have not much in the way inside knowledge, but I do know that that Ben Bernanke,like me, spent a lot of time in the 90s obsessing about the Japanese crisis which which bears someresemblance to we are afraid might happen here, and was pretty big on well in extreme times youneed to do unorthodox things. So he might well be presumably they are thinking about all this now.What are the down sides of cutting interest rates?Dollar will fall, that's not a big deal. It sounds like the big deal, but it's not big deal. So one of thethings that could very easily happen is a substantial fall in the dollar, which if we were Argentinawould be a devastating thing. We are not Argentina, because this is good news you know, I havealways wanted reassure people of something, we are not Argentina. The reason you really get worriedif your currency falls on world markets is if you have a lot of debt foreign debt, which we do and thatforeign debt is in some else's currency. Trouble with the Argentines was when the Peso fell Peso fellfrom $1 to $0.30, suddenly all of the Argentine debt tripled in value from the point of view of theArgentines. And that led to you know basically everyone who could go bankrupt did go bankrupt.We have a lot of foreign debt it's also in dollars. So actually if the dollar falls the financial losses aregoing to hit the Chinese government and various Arab Oil Sheikhdoms and Japanese pension funds.And so it's not it's not that serious a problem for us. Aside from that I think the only thing that theonly thing that the Fed the only real reason to worry about cutting interest rates is if scares aboutthe economy or roll a false alarm, the Fed Government have to cut interest rates and tries to head off arecession that isn't actually coming, then you can cause some inflation. I am not very worried aboutthat. I think that that's a pretty small risk. You know, first of all it's probably not the case and secondlyit's you know, an extra few tenths of a percentage point of inflation are not nearly a serious a thing asyou know, collapsing financial sector. But but the Fed doesn't worry about these things and thereare a lot of inflation hawks in the Fed. So there is a lot of there is a lot of pressure on them to be verycautious which might be exactly the wrong thing.And wow the you gave me an excuse to talk about the Chinese. The thank you but I mean, herewe have a situation where another government has decided to do underwrite or deficit over a sustainedperiod of time for reasons that are not entirely clear. It may be just that -.Yeah I have a theory about that.Give us your theory.There are a lot of theories about what the Chinese think they are doing. I don't think they thinkanything is my theory. I think that they have a policy of pegging pegging their currency to the dollarand even though it really doesn't make much sense anymore, there is nothing that forces them tochange. And it's just a notion. So I think it's just that they just slide along and and you know there arefew people in China saying you know, we have got a trillion dollars in reserves, what are ever we goingto do with it. But they are finding it very hard to get any response because well things are okay, theeconomy is growing you know, what's what's the need to change. So I think it's it's just sort ofthey they have been supporting our economy out of absentmindedness. So that's my theory about the Chinese.And what are the what are the sort of the geopolitical consequences of a situation where we are soreliant on them and they are so reliant on us and something is we have got kind of a double hostagesituation going.Yeah. The Chinese if the Chinese were to cut off the try to you know, pull all those dollars out ofthe United States; that could cause some serious problems. It's one thing to say, its okay, the dollarfalls. But a real actually with the the highly technical terminology we use for it is the sudden stop,that's what the international finance a sudden stop where the Chinese just said, no more no moremoney, in fact we want the money back, that could be very serious for the US economy. On the otherhand it would also destroy the value of the assets that the Chinese themselves have accumulated. It'shard to envision a situation in which any of that happens, because the Chinese would be being selfdestructive. There is a converse thing. The United States got really mad at China, we could say, okaywe are expropriating your claims on the United States very, very hard, just imagine that happens. Soall of these things are you know worst case scenarios. If the if Taiwan declares itself a you know,goes over the line and the Chinese decide to to invade, I suppose you can have these thingshappening. Short of that it's hard to see. So I think that nothing the only thing we really need to toworry about, under normal circumstances is that the Chinese just sort of start saying you know, even ifit's going to lose us some money we really have to start diversifying into Euros. And I am amazed thatthey haven't done that yet, but you know one of these days.Now we have got disagreements with China, not only potentially over Taiwan, I mean potentiallyleading to conflict over Taiwan, but we have also got disagreements when it comes to Sudan, when itcomes to Myanmar, the former Burma. Do you see as this having gained or lost leverage or is there no effect?I think in the range of these things, there is not affect. I mean on balance if you has who has thestronger hand from the financial intertwining is actually the United States, it's the out line I can't never getthe numbers right, but John Maynard Keynes said something along the lines that if you owe the bank1000 pounds you have a problem, if you owe the bank a million pounds the bank has aproblem. And in fact the matter is that you know, if we if we you know its debtor countriesgenerally actually have the upper hand to negotiate look at the Argentines, defaulted on their debt,pay 30 cents and a dollar and they were appear to have been no adverse consequences, and if Argentinacan get away with it so can we. I mean I it's actually one of my favorite economic headlines ever, isfrom Reuters it was that "Argentina to creditor, so sue us." I mean so whether the Chinese are goingto sue us, you know, so anyway.And you are reminding me of of one of Howard Dean's lines when he was running for President, andhe described the Bush administrations policy as Argentinean policy and that is borrow and spent?Yeah, oh its its if you actually look at the numbers, its not really quite comparable, we have beensubstantially more irresponsible when they ever were, but I can't let this go, you should know thatthat out there in the the International financial world people with this now a joke that out there in thesaying that actually turns up the economic relationships with China, are fair and balanced after all. Theysend us poison toys we sent them fraudulent securities its all sort of evens out.Now I have got a several questions on on climate change and as a as a problem and and one ofthe questioners asks whether we should be moving for for taxes on carbon emissions and havingthat as being a major source of revenue in fact and I am so going to achieving two objectives at once?Yeah, and the first thing -That actually this question wants to replace banks payroll taxes with carbon taxes?Yeah, and as as I first of all let me say carbon taxes are clearly what we have to do, its 300 dollars oftons something like that is is in a rational world we do it right the way, which of course since it's theobvious right thing to do, its politically completely off off the table. And in terms of the - I wish I Ihave the vague memory of the table I have seen, its not nearly enough for revenue actually to replacepayroll tax. Its with the significant thing that there was there is there is some you know, a wholeeconomic literature or whether there is a what they call double dividend from from carbon taxeswhether by allowing to do so other taxes. Its pays up probably not, turns out that it probably doesn'tactually yield you much in the way of extra benefits, but sure I mean its favorite my favorite of theprobably the pieces I have ever written was back actually more than ten years ago, but there was a onthe 100th anniversary of the New York Times there was a people were asked to write articles for themagazine that were written from the point of view a hundred years in the future from the year 2096looking back. And and part of the things I wrote about most people actually couldn't bringthemselves to do, I think we are afraid to looking silly, but that can bother me. And the and waswas that I imagine to more than which in which environmental taxes have replaced all taxation. Butthe truth is the numbers on a state report level carbon taxes are not enough to remotely remove thereplace the payroll tax, but it would be the right thing to do and you know, may be six years from now,seven years from now we have enough sanity in the political process that we can really talk about getting it done.So what has been the effect I mean if if I mentioned to Paul that I am that I am I and everyone Iknow worries about about climate change, but that I don't see many people clambering to call theircongress person and ask them to raise taxes to to have impact on that problem, but I take you to sortof a different aspect of it because there are a few who are arguing for raising taxes on gasoline andand on emissions generally, but that doesn't necessarily affect we mean that doesn't essentially meanthat the congress people who vote for are going the find themselves getting reelected. I mean howhow is that process works for those for those of us who heaven forbid don't read the New YorkTimes each day, how do we get the information on how to vote and -Well, even if you do it I mean boy, look its really hard, the the ability of the public to to evenget a sense of of where candidates stand on issues, it is its pretty limited its it's anyway a fewhaving a issue we really are not interested in, its not that hard now when these days of the web to toget the information, but for most people don't do that most people have have lives to live children toraise, jobs to do and they they pick up their news still primarily from television. So you know, I thisis the problem if you try to have a climate change, a serious climate change proposal and make acenterpiece of a political campaign what you get through or even with the news even explain what itwas of proposal, we can only be - the only thing out there be the your opponents attack ads accusingyou of wanting to to raise taxes. So I don't know its - I suspect that the time will come, butunfortunately it doesn't seem to be there now.Tell me about how the the American public feels about about growing inequalities and andwhether as an electorate this is a higher priority to to address?It looks I mean I guess the question is what your definition of a high priority is? If if you ask peoplewhat's what's on their minds, what they think is crucial issue right now. Iraq tops the list by a marginand then Healthcare comes in fairly distant the second, but then way ahead of any other issue. So youasked what are because these these are things that people see in their lives. You know, the Iraqobviously but but Healthcare its - you know, many of us at least know people who are havingproblems with with health insurance. If you ask about the general mood that people do seem to -people are aware that economic growth doesn't seem to be doing a lot for the most Americans. Peopleare aware of raising inequality you look at the polling trends there is a definite sense that thatsomething has gone wrong. And if you so - it does set a background, I think you know, the attemptsto assess opinion on these general issues of inequality, role of the government to providing a safety netactually show a substantial movement of the left and the public perception. They really goes and startedat least a dozen years ago. Largely obscured by other stuff but at this point it does look like oneconomic issues the public is now as liberal as has been since the early 1960sWhich we suggested its pretty distant from its government?Well, certainly from the White House. The congress you know, there isn't the new majority in congressis one can say its it has trouble obviously getting stuff through not holding the White House and notall having enough votes to override a filibutster but I think their substantial lets put this with thedemocratic majority in congress right now is a lot more progressive than the democrat majority incongress before Newt Gingrich took control. Its no longer an uneasy coalition between southernconservatives and northern moderates and progressives, its now a pretty solidly progressive bloc.And and inequality relates pretty directly to the level of education and knowledge economists of soshould know -I mean it is true if you don't have a college if you don't have a college education you are pretty muchout of luck and in this economy, but if you do have a college education even the post graduateeducation that is by no means sufficient to the that if you look at who is being making out well in thiseconomy? Who has gained over the past 25 years? Its not college educated workers as a group it's asubset of college educated workers who for whatever reason have made it into an elite that has justtotally pulled away. So if you look - any numbers I quote for you now are partially made but they arethey are they have the truthiness, so - if I remember I think the median earnings of we can - medianearnings of college graduates in the United States are of something like 17 percent since 1980, which isnot a whole lot, its better than than high school but not a whole lot. But you know, the incomes ofcorporate CEO's are up about 500 percent in real terms, and you know, the CEO's and high schoolteachers generally have about the same numbers of years of formal education, so as not its educationis not is not the that take into success and just in general we look atLack of education?Lack of education is killer you don't you don't even get into door with out with out a collegedegree and usually you know, some thing beyond that. But what really happened is that a tiny top onepercent - if you look at the redistribution income is not from the bottom 80 percent to the top 20percent from the bottom 80 percent to the top one percent and largely the top tenth of a percent.And is it is it a myth that the - you know, I always think of our country as having had a continuallyexpanding middle class until recently but is that true?Its you know look, I think what the answer to that say the middle class society, the idea of Americaas a middle class society is not something that gradually we didn't gradually evolve into it, the bigthing in my in my new book. We didn't gradually evolve into the society I grew up, we didn't - itwasn't that we were there was the gilded age and then things got more middle class and more middleclass and finally by 1950's we were in Ozzie and Harriet land. What happened was that in 1929 wewere basically as unequal society as we have been in 1899. There have been no and we were still inenormously that - actually called the long gilded age. For practical purposes, gilded age levels ofinequality persisted right up until the new deal. And then the middle class society was created just wham,in a period of about 10 years. The economic historians actually called the great progression. And it wasreally achieved to political action under FDR and that's - and then it went away beginningin in the late 1970's. So now we are we are not a nation when I was growing up I thought thatmiddle class societies were what - where one modern countries become when they grow up, but itturns out that it was just a phase in American life.But it was a success such a success phase, so what what was the rationale for trying to rollback whatis referred to as big government?Well, there are very I mean the right to tremendous advantage of basically seven bad years, that wethat we have an economic crisis in the seventies which had very little to do with the government, it wasmostly about oil, but it it gave an excuse for - that we need to you know change everything. But ifyou look at the origins basically the a political movement from the right which was driven byhostility to the whole idea of the new deal, driven by hostility to progressive taxation, and I found away to to start winning electoral success starting in 1970's. And and that's that led to the changeits really a I have done a lot of work and this book coming you know, about the book. But the lot of itit really is politics first that the case for increasing income inequality the case for dismantling thethe institutions that has sustained a relatively equal society came before the actual change in inequality,and its we need to go back and look at Barry Goldwater, you need to look at what at Ronald Regan areason that Ronald Regan as he ran for the Governor of California in 1966, I see the evolution of thispolitical movement, that's what drives the change in our society.The and to what extent you have argued that that race plays a big role in this political movementthat the sameYeah, race is not the motivation of the movement. I can say this by - you know, actually you know,with that people both the both opponents and supporters of this call that movement conservatism, andits the collection of institutions the people people most most members of republican members ofcongress now are more or less self consciously part of the movement and the movement is not aabout race, the movement is about reducing taxes on the rich and scaling back to the the institutionsthat the social safety net. But it wins elections, has won election largely through race. If you actually gothrough and look at where it was possible, how it was possible for for politicians who were attackingreally quite popular policies to win national elections, it comes down very strongly to simply havingexploiting racial issues, and if you look at a little comparison.In in the 1950s, there was a Democratic majority in the House of Representatives. Until in 2004,there was a Republican majority in the house after the 2004 election, which was the biggest they evergot. In which parts of the country had Democrats lost ground and in which parts you know, howmuch they lost in various regions. It turns out that the the switch of control of Congress was morethan entirely accounted for by the South. The Democrats even before this last election, Democratsactually held more seats outside the South than they had held during their long period of of control ofCongress. And how did the South switch? Well, it's you know, in the 2004 Election, Bush won 85percent of white votes in Mississippi. And that's really at the core of why this thing work politicallyand and it was self conscious exploitation. As far as I know Ronald Reagan had no shred of racismhimself, there was no sign of that. But how did he campaign? He campaigned against welfare queensand their welfare Cadillac's. He started his Presidential campaign in 1980 by going to Philadelphia andMississippi, where the Civil Rights workers were murdered in 1964, and giving a speech on Statesrights. It's really it's really that cynical.Would it work today?It works in most of the countries. What sorry?Have attitudes changed?Attitudes have changed, the country has changed. Actually that's that's one of the reasons I I thinkI think this whole story you know, right after the 2004 election, every one were saying we are goingto have a permanent conservative majority and I think that they were that was entirely wrong becausethat was actually a last hurrah for the movement. Two things have happened, one of them is crude andone of them is is actually uplifting. The crude thing is that America is becoming less white. Hispanicand Asian, growing share of the electorate and the truth is that the political style the exploited race,much as they might like to differentiate, they can't actually do it. So you so they the definingmoment I thought for how American politics was changing was the macaca incident in Virginia.Right, there is George Allen, a Californian yuppie who reinvents himself as a as a Southern good oldboy and he starts using obscure racial epithets against Americans of South Asian decent. And its two things,one it can't actually in practice you can't make the differentiation, you know the its non whites arenon whites. And the other is Virginia is not going to stand for that. We are not kind of countryanymore. The other just uplifting thing is that that public opinion, we really are a radically less racistcountry than we were I was it's actually shocking to look at polls for the 1980s, on things like doyou think interracial marriages are okay? Strong majority the public said no, in 1980s. Now a hugemajority says it's perfectly okay. So we really have changed.And the numbers areOh it's it's 77 percent. Yeah I would say its okay just amazing.