tonight, a conversation with nobel laureate, "new york times" columnist in, and princeton professor paul krugman. >> in the united states, this is not as bad as the depression. however, it shares the feature of the great depression. most of the time period we call the great depression the economy was actually growing. but it wasn't growing fast enough to bring down that terrible unemployment rate at all quickly. same now. further more, the economic logic, the special feature of depression economics is that the federal reserve can't do its usual thing, can't just cut interest rates because the interest rates it controls directly are already at zero which has all kinds of implications. it means that things like fiscal austerity, ordinarily if the government spends less that doesn't have to cause a recession because the fed can cut interest rates to offset that. but it can't do that now. so all of the logic of how

economic policy works changes. we are qualitativefully the same situation we were in in the 30s. quantitatively it's not as bad but it has that same underlying logic. >> rose: paul krugman for the hour. next.

captioning sponsored by rose communications from our studios in new york city, this is charlie rose. >> rose: paul krugman is here. he is a "new york times" columnist in and a professor of economics at princeton. in 2008, he won a nobel prize for ground-breaking analysis on the international trade. he completed three decades ago since the financial crisis he has advocated for aggressive measures to revive the u.s. economy. he says that an expensive government spending policy has to be the best way forward. he writes about that prescription and more in this book "end this depression now."

i am pleased to have paul krugman back at this table. welcome. >> hi, there. >> rose: nice to see you twice in one day. >> that's great. that's great. >> rose: let me begin by talking about the global economy and then solutions. what's interesting about this book is you say it's more about going forward and how we can change things than it is about looking at all the policies that created the mess. >> there are a lot of books, good books, about how things went wrong, about the various mistakes that were made, about the bubble and all of that and a lot of postmortems on policy in 2009. okay, the question now what do we do? that's what this book is. >> rose: let's talk about where are we now? look at the global economy in terms of the united states but also start with sort of europe. >> we had a north atlantic crisis. the united states and the europeans had broadly similar crises. we had... spain is florida. nevada is ireland. they turn out to be twins except for the landscape, they turn out

to be similar economies. we both had big bubbles, we both had a big runup of private sector debt and then a collapse and we're both still deeply depressed. there's been some recovery but it's not enough to get anywhere close to full employment. the europeans are in worse trouble than we are because they have the additional problem of having created a single currency without the preconditions. >> rose: they can't print money. >> well, no individual country can print money and there's more to it than that. we probably want to talk about that but there are a lot of special problems the europeans have imposed upon themselves that we don't have. we're not doing very well. better than the europeans is not a good enough story. >> rose: stay with europe. you write about spain today. >> yeah, so spain, spain has got 25% unemployment. 50% youth unemployment. what's that about? it's... spain was for a while the... the markets loved spain

not wisely but too well. when the euro was created bond investors through europe, people basically said, hey, what risks are there? nothing can go wrong now that we all have one currency. so money poured into countries that had previously been regarded as at least somewhat risky, including spain. private money, not public money. the spanish government was running a budget surplus. but this vast inflow, financing a giant housing bubble, the bubble burst, leaves the economy deeply depressed, leaves spanish costs out of line because during the good years they had some inflation, they became uncompetitive with germany on manufacturing costs. then it gets really ugly because spain looks like florida in terms of the underlying economics but it doesn't look like florida in terms of the structure of government relations. when florida has a housing bubble that goes bust, well, washington pays for social security. washington pays for medicare. in fact, washington ends up absorbing at least some of the losses on the bad loans because

of fanny and freddie. in europe that all falls on the government that the country in question. so what has been a nasty crisis on both sides of the atlantic turns into a fiscal crisis for the peripheral countries of europe which makes their situation vastly worse, leads to drastic, drastic spending cuts, forced austerity, partly because of narrow-minded policies on the part of the germans and the european central bank which all turns into this downward spiral which they have not yet faced up to the realities of. they're still treating it as, well, you borrowed too much therefore you must have austerity without actually thinking about somehow that going to solve anything. >> rose: so in this great debate between austerity and growth they're taking the side of austerity because of the countries that have the power to influence are basically saying you have been profligate and we haven't and therefore for us to bail you out we want you to have better discipline.

>> yes. and which is, by the way, just in terms of here is fairness it's a terrible thing because, after all, excess credit expansion or excess borough requires that the lenders be as blind as the borrowers and if you ask... the caricature that's not too far off of the spanish situation is regional german banks lent to regional spanish banks and now the germans are saying all the pain for that should fall on the spain yards. >> rose: so where do you see it going? >> if you take the current set of policies in europe, it's disaster. >> rose: austerity. >> well, not just austerity but also the european central bank being deathly afraid of even the slightest hint of inflation. so if you have this tight money policy on part of the's bee, the european central bank, plus austerity as the sole answer then you're talking about an endless progression of ever higher unemployment numbers. very little progress, not

restoring confidence in the markets because even though markets say, well, they may want to see austerity but they don't like to see zero or negative economic growth which makes things even worse. the pressures get too intense. the social pressures, the loss of... the growing fear over disorder. so if i could tell a story on current policies, it begins probably with a run on the greek banks that ends up forcing greece out of the euro and then a series of domino effects as panic spreads. >> rose: what other domino effects? >> if you see one country can leave the euro you start to think the next one could. >> rose: probably spain? >> probably be spain. if greece leaves the euro and there's no credible policy response, then everybody starts pulling their money out of spanish banks to put it into german banks so that you don't lose money when... if spain should happen to leave the euro. that forces the event. so that's current policy. now, do i believe that's going to happen? that depends on what i had for breakfast because there's the...

everybody in europe understand what is a catastrophe it is for this thing to fail. >> rose: everybody in new york and washington understand what a catastrophe it is. >> i think the europeans even more. if i could say about europe, it's not just economics in europe. the european project is about peace and democracy and the europeans understand, i think better than most people here do, how terrible it would be for that project to fail. so... >> rose: when projects have failed in the past they've ended up with wars. >> well, yeah. i mean, look... the extremist parties in european countries are getting stronger. they're not... don't want to go overboard, we're not about to see the return of adolf hitler but we are seeing extremism on the rise. we're seeing at least one country in the heart of europe, hungary, which seems to be... >> rose: a lot of it is anti-immigration, a lot of it is nationalism. >> but it's all fed by economic distress. all of this against the backdrop of a terrible economy. so really bad things can happen

if this euro project fails. so maybe, just maybe, when it really reaches the crisis point of the germans saying, you know, all right, 3% inflation for five years wouldn't be such a terrible thing, and are willing to do what it takes to save this european situation. martin wolfe at the financial times and i have been arguing this at long range. i've been saying this was terrible and martin basically, who agrees with me as far as i can tell totally on the economics said "in the end europe will do what is necessary to save itself." i hope he's right. >> rose: you believe that about the united states, too. you quoted churchill to that effect and others. >> again, that's why i'm trying to cheer myself up. but, yeah, the europeans have created a trap for themselves with the single currency. they've created the single currency without the institutions to support it which is a... >> rose: a fiscal union no political union. >> no political union, no fiscal unit. and it also helps to have high

labor mobility and they have this problem of speaking different languages. but crucially fiscal union. my story, they... nevada/ireland. paired. identical-sized housing bubbles, almost the same unemployment rate. the big difference is that nevada doesn't have to pay for its own social security and medicare. >> rose: and ireland does. >> and ireland does. so it's a bad scene. we don't those structural problems. we have the preconditions for a single currency but we have, of course, our political deadlock which may be equally deadly. >> rose: what about china and asia in terms of how they have handled the crisis of 2009 and where they are today because china is projecting different kinds of g.d.p. growth rates as they had in the past. it's no longer double-digit. >> well, that was going to happen eventually. >> rose: because of their maturity? >> yeah, because you can't... you can move several hundred million people from the low productivity countryside into the higher productivity cities. eventually even china runs out

of people. so we had to expect... >> rose: runs out of what have? low-income wage earners or what? >> well, rages have risen substantially in china in the last few years. >> rose: i know. >> it runs out of workers who have basically nothing else to do. >> rose: some say those jobs will go overseas now, to somewhere else, bangladesh. >> vietnam is already getting substantial... >> rose: vietnam is. >> china seems to be the center of low wage production. that doesn't mean they'll crash, it does mean their growth slows, that they have reached... you know, for good reasons. this is what you want. you want an economic boom that draws workers into productive sectors and eventually pulls wages up because we've had and you've run out of surplus labor, which is what's happening to china. not... they have a housing bubble, a real estate bubble and how they can manage that we don't quite know. >> rose: it's more residential than office, isn't it? >> as far as we can tell but who... chinese statistics are... all statistics are science fiction but the chinese more so than most.

but the thing is they handled the crisis very well. they handled it with a fast, effective stimulus that let them... >> rose: large enough and targeted enough to suit you. >> that's right. south korea did pretty much the same thing. south korea is basically an advanced country and they managed to have an effective response. so the asians by and large did this right. the europeans for one reason and the americans for other reasons did not. >> rose: the argument is that the government has to create the jobs and do the spending because the private sector will not. >> that's right. you come into this, you have people who ran up debt because they believe housing prices will never go down, who lent money to southern europe because they believed we're all europeans and it's all safe now, then there's a kind of a shock, a wile e. coyote moment where people look down and say "whoops." >> rose: (laughs) >> then they pull back and the private sector is not willing to spend and yet you really don't want to have mass unemployment, so this is the time for the public sector to step in and do

the spending that the private sector will not. we didn't do that on a sufficient scale. we actually didn't do it much at all so we, in fact, do have mass unemployment and now is the time... well, you know, we can revisit that decision, which is why i wrote the book. >> rose: we'll get to the book in a second. that brings us to the us economy. people say the following about the u.s. economy even though growth in the first quarter was less than it was before. they say there is recovery under way and the thing that could threaten it are two: one, some huge implosion in oil prices and b, something incredible happening in europe that would have an adverse effect on us. do you accept that? >> i think that we do probably have a slow process of healing going on in the u.s. economy. but slow. so i... we have built very few houses for six years. so we have a backlog. >> rose: why? >> housing? hard to know. there's a question about prices

but there's a question about construction. i think both are if not at bottom close to. and you can see that there's probably... there's a pent-up potential demand for housing so if we start to have even modest improvements in the job market then 28-year-olds stop... are able to move out of their parents' houses, start buying or renting, you can have a virtuous circle where housing starts to recover and drives the economy. household debt. big drag on the u.s. economy has been this record high level of household debt that we built up. but household debt has come down significantly, partly by paying it down, partly by default and, of course, income has grown even if the debt has fallen so the debt overhang is reduced. and, again, if that means that people are able to spend and the economy grows, it comes down further. so there is a logic that says we have a spontaneous recovery in the united states that... you know, nothing is forever and we are probably even if we do

nothing we will eventually recover but take the pace of job growth that we've been seeing lately and we're still talking many years of high unemployment. we're still talking about a very gradual recovery. my argument is not that doom waits for us. terrible things can happen but that's not the central issue. the central issue is why should we suffer five, seven years of mass unemployment when the tools are there to bring it down really fast? >> so we might eventually get back to sort of a precrisis norm of 5% or 6% unemployment but it will take five or six years to do it. >> that's right. and this is the context, the famous line, "in the long runner with all dead" was addressed to people who will say "in the long run the economy will heal itself." "yes but in the long run we're all dead." how about we heal it faster and we save ourselves from all of

this suffering and all of the long-term damage we're suffering as a result of this ongoing depression? >> rose: what are you arguing in terms of comparing the depression that we had, the recession we had, and the depression of the '30s? comparison. >> comparison. obviously '30s was worse. which is not... although for some european countries not, right. for instance, quite a lot of europe they're suffering depression level slumps but in the united states this is not as bad as the depression. however, it shares the feature of the great depression. most of the time period we call the great depression the economy was actually growing. but it wasn't growing fast enough to bring down the terrible unemployment rate at all quickly. same now. further more, the economic logic the special feature of depression economics is that the forever can't do its usual thing can't just cut interest rates

because the interest rates it controls directly has gone to zero. and that means things like fiscal austerity... ordinarily if the government spends less, that doesn't have to cause a recession because the fed can cut interest rates to offset that. but it can't do that now. so all of the logic of economic policy works changes, we are qualitativefully the same situation we were in in the '30s. quantitatively it's not as bad but it has that same underlying logic and is just as... it's just as important to get out of it quickly. >> rose: and we are unlikely to have an event that has the consequences of world war ii. >> yes. well, we certainly hope not, right? this is not... >> rose: that's what brought the great depression to an end, is it not? >> yeah. for the united states it wasn't actually the war... >> rose: it was government spending. >> it was the approach of war. so we were not yet in world war ii but we began the buildup. so some people said... the u.s. economy went to war in 1940 and that's when the great depression ended because that spending, the

buildup, the construction of training camps was exactly the kind of stimulus that the economy needed. >> rose: so you're saying we need that kind of stimulus now. >> we need the moral equivalent of... moral equivalent of war as we used to say. but it turns out it's relatively easy to do right now because it was hard three years ago. three years ago when we were talking about the obama stimulus, the question was where are the projects? where's the shovel-ready you have? what's happened since then is we've had really terrible policy. not so much from obama but from absence of policy. so we've had enormous austerity at the state and local level so all we need to do really is reverse that and that will give us the kind of boost to the economy that we need to get out of this. >> rose: austerity at the local level? >> that's right. get schoolteachers rehired. >> rose: and firemen. >> and the policemen and the... >> rose: that will do it for you? that would be enough of a stimulus in order to... >> i've done... >> rose:... generate growth in

the economy? >> i do a little bit of the math in "end this depression now" and as best i can tell if we could not just rehire the ones we've fired but get back to the kind of normal job growth that we should have had. so we've lost 600,000 jobs at state and local level. we should have added 700,000 just to keep up with population growth. just to keep up with the norms of what we normally do. what we did during the bush recession at the beginning of the last decade. if we got those 17.3 million workers employed, state and local, if we spent the roughly $300 billion a year extra that we would be spending... should have been spending at the state and local level that's enough to get unemployment below 7%. i think if you could do that a lot of the positive dynamics, the "self" healing takes place. >> rose: part of what you're saying is we need to stimulate the economy now, we need growth now and we can take care of the deficit later... the debt later because you say the debt in fact is not a big a problem that

scares you as it does other people. >> that's right. mostly... people who get really, really... you can throw around the numbers, right, $15 trillion. but we're a $15 trillion a year economy, too. so you need to have some perspective there. i don't like debt. you know, if i could wave away the irresponsible tax cuts and the unfunded wars and get rid of the debt we ran up gratuitously during the good years i would. but on the scale of things to worry about, it's just not that high. we talk about... britain had debt that was well over 100% of g.d.p. for most of the 20th century. it's not a crisis level problem. >> rose: that's not a good thing. 100% g.d.p.. what is a good thing is... what percentage of debt to g.d.p. is one that you think would be satisfactory if not even optimistic for america? >> oh, if i could... look, we were... you may remember we were paying off debt at the end of

the '90s and that... >> rose: at the end of the clinton years. >> alan greenspan urged congress to cut taxes so that we didn't pay off the debt too quickly, right? i mean... >> rose: so did george bush. >> well, yes. speaking with one voice there. >> rose: (laughs) yes. >> i mean, i... debt of 25% of g.d.p. would be a better number. >> rose: it's 75% now. >> right. i'd be... >> rose: 75% now and you think 25% would be right. that's... that's not scarely. >> no, 25% would be optimal but you can live with 100% for decades on end. and right now isn't the time to be worrying about that number. >> rose: simply because if you worry about that number and have policies that deal with that number you will not be dealing with the economy in the near army that will provide jobs and also put the economy in a shape to grow so you can attack the other problem? >> that's right. and, in fact, it's pretty... there's very strong reason to believe that trying to reduce

debt now by slashing spending not only does it hurt the economy it doesn't end up reducing the debt because it shrinks the economy so you've got a lower g.d.p. it shrinks revenue so that the cut in the deficit that you achieve at the top of the spreadsheet is largely offset by a fallen revenue at the bottom of the spreadsheet and there's long term damage to the economy from having high unemployment so a reasonable estimate suggests that spending is counterproductive from a fiscal point of view. that's not an outlandish position. that was made... a research paper by a guy by the name of larry summers. >> rose: okay, but talk about that. you and larry summers have exchanged... you've clearly when he was in the white house you had a lot of conversations with him. you've had conversations with the president. larry summers had an opportunity to influence policy. they say they got all the stimulus they could from the

congress even though it was a democratic congress. they got all they could have. they could not have got an trillion three but you wanted more. they couldn't get it. >> well, to a certain extent that's water under the bridge. >> rose: okay, fair enough. >> i don't want to rehash that too much. >> rose: okay. go ahead but the point is now to make the... what i think disturbs me most about that record is that for a couple of years obama creed it had intellectual argument. he stopped even talking about the economy and turned to this focus on deficit which is was short-term deficits which was wrong headed and was playing into the hands of people who have the wrong ideas for the economy. so now is the time to push for doing things right. i know it will be hard to get the policies i want but you have to at least argue for doing the right thing. >> rose: laurie summers has said the following: that you like to establish the... you want to attack the party or the group in power so therefore when it was during the clinton years and they had bob reich and other

there is you attacked from the right. and when obama comes along you're attacking them from the left. and that is your natural position. >> i don't think that's actually... >> rose: what he said? i'll tell you that's what he said. >> i don't think it's fair. i think if you look at what i was saying during the early years of obama in office i wasn't saying "i'm against you guys," i was saying "you're going to have a disaster." also i was worried, you yourselfs are going to have a political disaster. that was the explicit warning i gave if you don't do enough to help the economy now you are going to be punished for it politically and the public is going to draw the wrong conclusion which is that helping the economy doesn't work. so i was actually trying to intervene to make them do the right thing for themselves. >> rose: but you believed they were taking essentially a centrist position. that's where you thought they were? >> they low balled. they played to the prejudices,

if you like, of the washington establishment which always believes the truth is somewhere between what the two parties are saying which has this kind of obsession with entitlements and social security which are not bad things to worry about but not always top of the agenda. obama played too that too much. but, again, this is all past history. >> rose: okay. fair enough, but i'm bringing it back to this book. you basically said "look, these are not radical new ideas i have this is like economics 101 and these are things i've been saying in my column." >> well, of course. >> rose: you're addressing this, though, you say... you're trying to go to public opinion and to an informed public opinion. who is that? >> it's a mixture. there's a lot of people... a lot of just ordinary citizens who taken a interest who get... they probably read my column but they get the... the column is a series of 800-word snowflakes

and then somebody says something different and says "what about the deficit?" and the reader may not quite... what's krugman's answer to that? and i did write about that in some other column. but the book gets all of that in the same place. the book is presenting the whole argument, how we should do this; why the objections are wrong. and there's some new stuff. i hadn't really realized until i s.a.t. down and think "okay, what should we be doing?" i hadn't realized how much just reversing the austerity that we've done is actually putting a large part of the stimulus we need right now. i didn't realize until i did this book how much easier in a technical sense that the business of this had become. >> rose: so when you talked to the president-- which you do as well-- what's their argument to you? do they say we hear you, we respect you but? >> at this point they actually are pushing harder. >> rose: where's the stimulus program they're pushing? >> they pushed a stronger program last fall, substantially stronger. it wasn't what i want but it was

a step in the direction of what i want. now there's an election... >> rose: which part of the legislation was this? >> the payroll tax cut. >> rose: okay, sure. >> but it was bigger. it was a big shock because it was a bolder program like people expected. not bold like my book but bolder than people expect which had i think was a sign that they're starting to think bigger. people in the administration, they will talk about political possibilities and, you know, i understand that, but i think that they have changed their view about whether it's a... whether it's appropriate to constrain even your ideas by what you think can be passed in legislation in the next few months. so they have taken a bolder position. i'm trying to give them more ammunition. trying to give them a... you know, we'll try to make the case again. >> rose: do you think the president is prepared to go to the country and say "what we need is more government spending"? >> he doesn't have to put it that way. >> rose: make us more competitive, an investment in the future, all that.

>> we need to repair this damage that's being done by short-sighted austerity, short-sighted cutbacks. >> rose: and the human equation of the american experience. >> that's right. and in the process also be delivering a substantial boost to the economy. i mean, what can you say? if he had been making the argument all along it wouldn't seem so outlandish right now. but i think that people... the notion of what the american public will accept is much... is mostly wrong. >> rose: how do you know that? because many people thought that the obama health care program was at the time offered real possibilities and was an effort by this president to address something that had not been addressed. it's easy to believe those who say there is a political backlash to that legislation. >> if you actually look at the polling on that, it's got a

margin... there is a... the disapproval is higher than approval, but part of the disapproval turns out to be people who disapprove because they don't think it went far enough. so it's actually not clear that it's unpopular legislation. there was certainly a backlash in the midterms because... >> rose: in 2010. >> the republicans managed to sell it as "they're cutting your medicare." and seniors vote in midterm elections. but that was... that's not really about health care reform, that's about an amazingly dishonest campaign that succeeded because it was not met effectively by the white house. but, look, i've looked at polling. the public in the 1930s when people asked "should we increase or decrease government spending" they strongly said decrease. balance the budget. and in 1937... >> rose: they relate that to their own personal experience. >> so it's an easy case to make, which happens to be wrong. in 1937, f.d.r. listened to what

public opinion was and tried to cut the budget and he ended up, because of premature austerity, putting the country into a recession. and that recession did more damage to him politically than doing the unpopular thing of continuing to spend. so my advice to the political people is, you know, what you need to do to work plitally is what works economically. good economic policy is the best policy politically. >> rose: where do you think this president is in terms of some keynesian, some left/right. is he, as many people perceive, a pragmatic progressive? >> i'd say he's actually a pragmatic centrist. on the question of dealing with this depression that we're in. intellectually i think the president agrees with my position. i don't know that for sure. >> rose: i would bet the president is prepared-- if it wasn't politically sensitive-- to be willing to make significant spending cuts in

terms of entitlements. >> oh, and you know, we can argue about ways to do that? i think that the core thing on the... if we're asking about fiscal... the fiscal position of the united states in year t year 2025 clearly we can't continue... we can't be spending the amount of medicare that's now projected. >> rose: we have a structural deficit. >> i think we need to attack that by going after the cost curve on medicine, not by means testing and things like that. and i think by and large the administration agrees with that. on these issues of what to do right now i think i'm not finding an a lot of intellectual resis difference the white house people i talked to. think appreciate it but they... they're nervous about making the case too openly. about making the case... >> rose: because they think it will be characterized as what? >> as fiscally irresponsible, even though it isn't. >> rose: so they're saying to you "look, paul, we know you're

right but you know what's happening, we're in the political race and if we say that we'll be characterized as politically irresponsible because the country is centrist and the country believes we need to engage in spending cuts because they think there is there's too much government." >> but this is why those of us who are sympathetic to the kind of things the obama administration wants to achieve but who are not inside need to make the case. so... it's not just me. larry summers has now become a ferocious opponent... >> rose: a krugman? >> probably he always was... >> rose: where does he agree with you now, now that he's out of government? >> he just published along with berkeley a paper on fiscal policy and the liquidity track which is what we're talking about in jargon which said that cutting spending right now is self-defeating and that spending more would actually be good for the fiscal health of the nation. >> rose: are they talking about sort of discretionary spending rohr they talking about defense spending?

are they talking about entitlement spending? >> they're talking about discretionary spending. >> rose: that doesn't get you there, does it? in any singh want way. >> what we need is more discretionary spending now. and then the long-run budget issue is about entitlements. >> rose: but you're saying discretionary spend willing get you there in terms of stimulating the growth to the economy. >> right. >> rose: that's enough. to stimulate growth, get people back to work and bring the unemployment down to in a near short term, a year or two, down ... that will do it? >> that gets us... that doesn't solve the long run budget issues. >> rose: why do they do that knowing that knowing that the political world has said before-- although it's suspect now-- that if you have 8% unemployment you cannot be reelected. >> well, that was bad... >> rose: analysis? >> well, by losing the midterms they lost the ability to pass any legislation. >> rose: right. >> but also then they reacted the wrong way by thinking the way to react to that was going to a cringe and adopting the republican position. but i think they've learned

better than that now and... i'm optimistic that if obama's reelected that he will certainly push for stuff that will do more to reduce unemployment. that what i'm talking about can provide a template for our maximum goals. >> rose: you're convinced if obama is reelected he'll engage in more government spending to stimulate the economy and reduce unemployment? that simple? where do you think that spend willing take place? >> i think it will take place largely... should take place largely through aid to state and local governments to reverse austerity. so it's now not hard. not where are the projects. it's rehire the damn school teachers. that's what it comes down to now. >> rose: state and local governments should rehire. but they're pleading poverty. >> which is why they need aid from the federal government. they can do that. e:>> ros>> r okay. now here's what you have to know, that bernanke and paul krugman were professors at princeton and they were admiring and friends and paul krugman

will be the first to tell you that ben bernanke was brilliant having to do with his analysis of the depression as well as what japan had done. on both of those cases he was first to say bernanke was right on. now comes along and bernanke is chairman of the fed and guess what he's saying now? the federal reserve chairman has the power and the obligation to end the slump and the human misery that comes with it. so what's stopping him? so here you are, you're a fellow princeton professor, chairman of the fed who you praised lavishly in the past... >> and when attacking his current policies i mostly quote from the writings of an economist by the name of ben bernanke. >> rose: what is it he said then that he's not saying now that's so right. >> he said... there were specifics. he urged the bank of japan. so japan ran a dress rehearsal for what we're in right now. japan slumped... >> rose: that's a long time. >> right, the long decade ends

up being about 18 years long. but japan had its slump but it had many of the features of what we're experiencing now and... although never as terrible, by the way. there was never as much here is human misery as we're going through now. >> rose: how do you measure that? in terms of unemployment? >> unemployment, in terms of poverty we're doing much worse. and what... so there were specific proposals. a quantitative easing, the kind of thing the fed has done but on a much larger scale. raising the inflation target to discourage people from just sitting on cash. those are the specific policies. but he went further than that. ben bernanke in a widely quoted paper about the bank of japan's self-inflicted paralysis said that they were... what they have to have was what he called rooseveltian resolve. the important thing is to realize they have enormous power and if one approach doesn't work to try another.

the great sin of the bank of japan in the year 2000 was to throw up their hands and say "we've done all we can do, there's no more we can do." and that's the perfect description of the bernanke fed right now. >> rose: what are the reasons far? what is it that you want them to do? you want some kind of q.e.-3? is that what you want? >>. ife.-3 for starters. >> rose: and what about interest rates? >> short-term interest rates are at zero so what you can work on is... they can have some direct impact on long-term interest rates by buying more long-term bonds which they've already done a fair bit of but not enough. but the main thing is the fed can affect expectations. right now expectations of inflation, expectations... long-term interest rates are reflecting the belief that the moment the u.s. economy starts to show any real signs of recovery the fed will tighten. and if the fed can convince... can pledge to hold off until inflation reaches 3%, let's say, that would have a major impact right now because so much of the economy does run on expectations

about future policy. so... >> rose: so now you are saying basically that the problem is that the country, whoever analyzes this, worried that if the economy begins to grow they will set in at the fed a fear of inflation. >> rose: that's right. >> and therefore they think the fed will then clamp down on that by lowering interest rates and that's the wrong thing to do and if they promise not to do that everything will be okay. >> not everything will be okay but it will help. so i think that was the kind of summary that comes out a little bit too strong. i don't actually think the fed can solve the whole thing but it can make a significant positive difference, which it's not doing. and it mostly works through expectations. >> rose: so you talked to him as well! >> not so much. >> rose: how much is not so much. how much is not so much? >> for years. >> rose: is that because he doesn't take your phone calls? >> i don't try. i understand... i'm kind of hot, right? >> rose: (laughs) >> he really needs... >> rose: toxic? >> hot i think is the issue. i don't think it's the same thing. so the white house can talk to me because they won't... they

won't get attacked by republicans for talking to me because they get attacked by republicans anyway. >> rose: ben bernanke thinks you're one in thesa.me >> which is not true. >> ros t l.k,oohis is todk,'s "new york times." t "ryan's rise from follower to g.o.p. trailblazer. representative paul d. ryan has become and his budget has become the alternative to what you say and the alternative to what the president proposes. >> it's kind of... the ryan phenomenon is quite awesome. and i mean that in the worst possible way. >> rose: (laughs) >> the budget is a piece of nonsense. it's an obvious piece of nonsense. if you actually look at what it substantively proposes it's cut taxes on the rich and cut aid for the poor and would increase the deficit. and all of the claims of deficit reduction risk on magic asterisks on "we're going to do something. we won't tell you what, we're going to do something to raise

revenue and cut spending." so it's essentially a fake document. ryan himself... john chait has a piece in the new york magazine, ryan himself was a budget busting deficit mongerer through the bush years so the whole notion he cares about the deficit is a fabrication. >> rose: bush himself was a budget buster. >> of course, but ryan supported him every step of the way. but i think the important thing is what are they calling? they're calling for low taxes on corporations and the rich and big spending cuts... >> rose: obama is for low taxes on corporations. >> well, he's for a corporate tax reform. >> rose: no, he's for reducing the corporate tax and paying for it by reduction in deductions. that's what he's for. >> right. >> rose: that's by definition a lower tax rate. >> not lower effective tax rate. that doesn't really change the amount that they pay. and the ryan plan would reduce the amount they actually pay. but the point is... we had this panel with carly fiorina.

>> rose: i'm getting to that because of what you blogged. >> and she said corporate tax cuts are the big thing that you want and then she actually cited as a role model ireland. and actual they's perfect. ireland has low corporate tax rates and has had the government spending cuts the republicans want and they have 15% unemployment and 30% youth unemployment. >> rose: but the argument at the time when they were calling it the irish miracle, everybody said the reason businesses are flocking flocking to ireland is because you pay low corporate taxes. >> and there was some of that. >> rose: is any of that true? >> businesses flocked to ireland. now exactly... you have these businesses, pharma industry in ireland that it's there but it makes almost no contribution to the irish economy. but that's not... the point is... the reason i liked that ireland story is it's a perfect illustration that all of this stuff about long-term and tax rates has... is irrelevant to the question of the recession... of the depression we're in. because ireland has gone... >> rose: recession or

depression? >> i think depression. >> rose: because of what? >> a recession a period when the economy is going down. a depression is a period when the economy is down for an extended period even though it may be wiggling up and down. what we called the great depression was too two recessions and two recoveries but it was depressed the whole ways and that's where we are right now. and also a depression is characterized by, among other things, the zero interest rates so the fed can't just cut rates. >> rose: i want to give you the opportunity to use your own metaphors. you talk about it like a car. >> right. so that's actually... i'm stealing it from john maynard kans because you steal from the best. people think because we have a vast economic problem right now it must be the result of vast malfunctions and nothing... we have to have total structural reform and total structural change. you can't expect that there's an easy route to recovery. and the analogy, which i took from john maynard keynes is like saying you have a $30,000 car

which won't run because it has a dead battery and somebody says "let's replace the battery, i can get you a replacement for $100." and you say "that's not possible. something as big and expensive as a $30,000 car can't be stopped by just a dead battery, your solution is too easy, we need to replace the entire engine." so what we have is really a quite narrow technical problem with the economy. it's something that could be solved in a matter of 18 months or a year provided we were willing to accept the reality. >> rose: okay, the technical problem is... just to make sure i understand it. >> lack of demand. not enough spending. >> rose: no consumer demand and if you put money in the hands of consumers they'll spend it. >> or in the hands of governments who will spend it. but it hardly matters who spends as long as we get an increase in spending, preferably on useful things but the important thing is to spend. more spending, more demand would mean more business investment, business investment is low because they're not using the capacity they have. give them a reason to expand and they will.

and just like that you can be a much, much stronger economy. >> rose: i want to jump back to one thing. you're not afraid of inflation. >> no, certainly not now. >> rose: or even if the fed acts you're not afraid of inflation. >> look, people say 4% inflation gosh, next step is zimbabwe. right? we had 4% inflation when ronald reagan was in his second term. i don't recall that as a country on the verge of... >> rose: what inflation rate did they have when ronald reagan assumed the presidency? >> it was 13 when he assumed the presidency and we all agree that 13% is too high. >> rose: and they imposed what? >> a terrible recession to bring the inflation down. >> rose: paul volcker did that as chairman of the fed. so you believe that was the right thing to do at the time or not? >> i think there was no real alternative. >> rose: so imposing pain at the time was appropriate. >> yes. >> rose: when you say imposing pain today, very different circumstances, you say... >> totally different story. i mean, stagflation, which is what we had at the end of the '70s is a genuinely difficult

economic problem. there are no easy answers to stagflation and there wasn't an easy answer. we went through a lot of pain to get rid of it. but not all economic crises are the same. each unhappy economy is unhappy in its own way so this one is a... is not at all that story. if we were in stagflation i'd be saying very different things about policy, but we are not. >> rose: two things about the ryan plan, number one, is that he does give some praise-- even though you disagree it, as you know. they say he is specific about spending cut he is thinks have to be made or those people who put together this kind of budget. whereas they don't believe that the president has been that... willing to make that kind of commitment. >> i think that's all entirely wrong. >> rose: okay. entirely wrong to give him any credit for suggesting the spending cut he is would make? >> i think it's... the ones he's been at all specific about are not large enough to pay for its tax cuts. to actually go through his

budget and you ask where does this reduced deficit come from? it comes from unspecified cuts to discretionary spending. in fact, over the long term it has discretionary spending-- including the military-- declining to a share of the economy we haven't seen since calvin coolidge was president. how does he propose to make that happen? the stuff... all the stuff that's concrete is sharp cuts in medicaid, sharp cuts in aid to the poor. but that's more than offset by his tax cuts for the rich and the rest is fake. >> rose: let's suppose somebody says "i'm with you, let's stimulate the hell out of this economy." will you at some point say to me that the debt is a huge u.s. problem for the future and tell me when you'll be prepared to say that and what you'll be prepared to do to bring it down. >> not a problem. i'll give you my... i'll get trouble for this but i've been saying that the long-run solution to the u.s. fiscal problem is death panels and

sales taxes. i'm being deliberately... >> rose: death panels? >> death panels and sales taxes. it means we have to make choices on health care. not in fact death panels. >> rose: to deal with the debt you have to make choices on health care. you have to fix health care. >> which means, among other things, say nothing to procedures that don't have medical benefit. so we need to do some things that will really restrain the growth... >> rose: health care costs because that's what's growing in percentage of the u.s. economy. >> and then we're going to need more revenue and i wouldn't be surprised if in the end we need a value added tax. so i'm willing to... >> rose: some people call that a sales tax. >> that's why i said death panels and sales taxes. >> rose: (laughs) >> but those are... and it's not really that hard to do. politically everything is hard. but we can do that. >> rose: paul krugman, the nobel laureate, princeton professor, "new york times" columnist in and author about what he thinks is necessary to stimulate the u.s. economy. tomorrow we'll have senator tom coburn, republican from oklahoma, who is a member of the

simpson-bowles commission who says we need to cut spending as well as enhance revenue. here is some of what senator coburn has said on this program which will give you a preview of what he might say to add to the debate when he's here tomorrow. >> the best tax we could have would be to eliminate the indirect taxes that we're creating now through the tax code. we have 110,000 agents at the i.r.s. we spend a quarter of a trillion dollars paying our taxes. nobody knows whether you paid them right or wrong. even the i.r.s. doesn't know that. and the best tax format we could have would be to eliminate in complicated income tax code and go to a pure sales tax. what everybody's talking about is let's keep the income tax and then let's go to value added tax. a value added tax on top of the income tax is just more of the economy taken by the government. our problem is the government's too large of a percentage of our

g.d.p. now. >> rose: is it fair to say that in essence you have come to this point that taming the deficit is a matter of national survival and that in doing that you do not have a bottom line. you per se? >> i do not have a bottom line. when the chairman of the joint chiefs of staff, when he's asked what's the greatest threat to our national security, says the debt and the deficit, we ought to wake up and pay attention to him. when erskine bowles says this is the most predictable crisis in history and yet the congress has done nothing on it this year and we're sitting still not doing anything and we know for us to finance over the next year, year and a half our debt that we have to make major changes in how we spend the taxpayers' money and our grandchildren's money that we're borrowing, 40 cents out of every dollar we spend at the federal government we're borrowing against our grandchildren. if we don't... those are obvious

things. it's the greatest threat to our nation but it's also the greatest threat to our future and what we love... no matter what your political persuasion is, we all... if you go on a trip to somebody that's your polar opposite you find 90% of the things you agree on when you start talking about america. we discount that and only talk about the 10% that we disagree on. that 90% that we agree on is that risk in this nation, the very mechanisms and intertwining of people and ideas and possibilities that built this great country is at risk and the number-one thing in front of us is we have to solve this and it means, you know, i'm not going to get everything tom coburn wants but the president isn't going to get everything he wants so somewhere in the middle there is a way that, number one, solve it is confidence level with international financial community because that's number one and number two create time

with which we can downsize the federal government. it's going to have to happen and people can say... we can't grow our way out of this, charlie. the only time we had real tax reform in the last 40 years was in the '80s where we saw 4.9% g.d.p. growth 40 years in a row and that was after the elimination of a lot of tax shelters, after the elimination of credits and deduction and we lowered the race. even though any income taxes went up it was beneficial for the country in terms of growth. what we need right now is 17 to 18 million people looking for a job that can't find one is we need growth. i will tell you that a lot of people i talked to my caucus are willing to move on changing rates and eliminating loopholes so the potential is there. but this idea of markedly increasing the rates, even thee's a polling winner and we look at the wealthy and say you can pay more when you look at it, in the long run economically it doesn't help our country, it

hurts it because we don't put that capital into job creation. so my hope would be that we'd see a little movement there. >> rose: the president seemed to have a different tone in this press conference than he did previously. >> i think that's important. i said on your show, and i receive said to other people if you want to negotiate with somebody i don't think you poke your finger in their eye. that goes both ways. our side has done it as well. it's time for the grown-ups in the room to start getting down to the brass tacks and see where we can reach a compromise where somewhere in the middle. >> rose: what success are you having with your republican colleagues? because you seem to be at a different place than, say, mitch mcconnell is, your leader. >> well, i'm not sure that he would reject having a reform of the tax code. the difference is is new taxes and increasing tax rates is really terrible for the economy right now and it's not it's on

of what the president did in the tax reduction bill of last year, recognizing that you don't want to increase the rates because of the precarious nature of our economy. so i think we can get there and i think a lot of my colleagues would agree to a tax reform proposal that would modify a lot of the tax credits and some of the tax expenditures. there's 1.1 trillion a year in tax credits and tax expenditures you could easily change $600, $700 billion of that a year in lower rates, you'd get a real response in the economy because you'd see money invested which would grow the economy and the net cost would be maybe $100 billion or $150 billion. >> rose: am i missinging? is the president suggesting we raise the rates? >> yeah, he's... i think his desire is rates on the wealthy above $250,000 go up... >> rose: okay, that's right. he basically said... his support for the bush tax cuts across the

board were for two years in terms but he would probably continue always believing in the bush tax cuts for the middle-class. >> yeah. but that really... in terms of wanting the grow the economy, that doesn't make sense right now. until we're out of this... actually, we have to do three things, one is we have to send the signal which means we need $4.5 trillion over ten years to buy time and send the signal. number two is we have to make sure our tax policy generates investment rather than generates tax avoidance, that's number two. and number three is we really is to clean up the regulatory environment so people are not inhibited from doing the things that would cause them to create jobs. >> rose: thank you so much again. captioning sponsored by rose communications captioned by media access group at wgbh access.wgbh.org

tavis: good evening from los angeles, i'm tavis: good evening from los