Paul Krugman: The Economic Failure Of The Euro.

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Paul Krugman: The Economic Failure Of The Euro

TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

Can Europe be saved? That's the question my guest, Paul Krugman, asked
about in his article about the euro's role in Europe's financial crisis.
He writes: Not long ago, Europeans could say that the current economic
crisis was actually demonstrating the advantages of their economic and
social model. But now, Europe's proudest achievement, the single
currency adopted by most European nations, is in danger.

Krugman's article about what he calls the euro mess was published two
Sundays ago in the New York Times magazine. He's a Nobel Prize-winning
economist, a columnist for the New York Times and a professor of
economics and international relations at Princeton University.

Paul Krugman, welcome back to FRESH AIR. Does the fate of the euro
affect the American economy?

Mr. PAUL KRUGMAN (Nobel Laureate; Economics Professor, Princeton
University): Well, some. I mean, that's not the main reason to care
about it. The main reason to care about it is that Europe matters, and
it's, you know, we want them to succeed.

But, sure, I mean, we export to Europe. We're all in this world economy
together. But really, that's not the core of why we should be concerned.

GROSS: What is?

Mr. KRUGMAN: Well, Europe is the great extension of the democratic
experiment, right? We have the United States, and then for much of the
20th century, across the water was a continent in terrible trouble, a
continent of war, dictatorship.

Now, we've had, for this past 60 years, a grand experiment in democracy,
a decent society, peace. We want that to work. You know, that's what we
stand for, ultimately.

GROSS: So which European countries are in the biggest financial trouble
now?

Mr. KRUGMAN: Well, it's pretty much all around the edges of Europe. So,
Greece, obviously, although Greece was actually kind of
unrepresentative, Ireland, Portugal. On the eastern side, Estonia,
Latvia, but - and the big one is Spain, which is much, much bigger than
all of the others. And all of these countries are in serious trouble
now.

GROSS: So is there a fear of a possible default, that they won't be able
to make good on their bonds and that people will be left holding the
bag?

Mr. KRUGMAN: Yeah, I mean, in fact, if you look at what's happening in
the markets, where the price of bonds, basically, as a way of measuring
how much, how likely the investors think it is that they'll default, the
people seem to take at least a partial Greek default as almost a
foregone conclusion. They take an Irish default as highly likely, and
they're pretty concerned about Spain. So sure, these are real
possibilities.

GROSS: And what would that mean if one or more of the countries
defaulted?

Mr. KRUGMAN: Well, you know, it's not the end of the world, or it
needn't be the end of the world. But it would just mean that one of
these countries would say, as Argentina did in 2002, okay, we can't pay
this stuff, we can't pay this stuff, and we're going to demand a
reduction in our debt. And that's - it doesn't mean that grass grows in
the streets, but it does mean that it's very much going to shake
confidence. It's a bad sign. It's a step back towards the old world of
fragmented countries and unreliable governments.

GROSS: So one of the things I liked about your article is that it had a
nice, concise history of the European Union and the euro. You call the
euro like a great experiment. So let's just step back a little bit and
look at that experiment, but let's go back to what you describe as the
roots of the European Union, which was this steel and coal agreement.
Would you talk about that agreement?

Mr. KRUGMAN: Yeah, so if you go back to just a few years after World War
II, 1950, you had - a lot of Europe was still in very great economic
difficulty. It was a very troubled time. A lot of people expected that
the bad old days of war and division would come back.

And there was a very specific problem, which was that at that point,
France had a lot of steel capacity but didn't have enough coal, and
Germany, West Germany, had a lot of coal, but there was no very good way
to strike a deal with the French.

And the French foreign minister proposed a, basically a pooling of the
two countries' industries, so that German coal would be available for
French steel plants and, ultimately, that you'd basically have a lot of
trade in steel and coal products between the two countries, which was an
important thing economically.

But right from the beginning, the French said this is more than that.
This is the step on the road to a federated Europe. This is a way to end
war because war will become actually impossible if we actually have a
coal and steel industry that sprawls across the border between our
countries. And we're going to - by positive achievements like this,
we're going to build a new Europe.

It's actually - you wouldn't think that a speech declaring a proposal
for something involving coal and steel could be an uplifting, inspiring
document, but it is.

GROSS: And, of course, France and Germany had a long history of war
between the two countries, two wars in the 20th century.

Mr. KRUGMAN: That's right, three big wars in total. And sure, I think if
you have said, in 1944, just six years before, with the war still
raging, that actually we're going to have a grand gesture of
conciliation and unification between these two countries, you would have
been mocked as unrealistically optimistic. And yet, there it was.

GROSS: So did that coal and steel community, this agreement between
France and Germany, expand into or evolve into the European Union?

Mr. KRUGMAN: Well, yes, it set a precedent. It was very successful, and
it met with favorable reaction. And so just about eight years later,
they formed what was originally the common market and then became the
European community and now the European Union.

So it set the stage for this coming together of Europe into something
that wasn't quite a nation but was something more than just a bunch of
separate countries.

GROSS: So what is it, exactly?

Mr. KRUGMAN: Well, Europe is, it's a funny - it's something that is a
kind of halfway house. You know, at one level, it's a customs union. So
there's free movement of goods. You know, we have something similar, a
little less integrated, in North America with NAFTA, but it's - the
European integration is closer.

And then there's a bunch of pan-European institutions, the European
Commission, a whole bunch of ways in which Europe has taken some of the
functions of government and made them something that sprawls across
national boundaries.

So it is a step. If you like, it's a little bit like America before the
Constitution, during the Articles of Confederation period, when we were
sort of a country, but in a lot of ways, we were still a bunch of
sovereign states. The Europeans have gotten to that stage.

GROSS: So which countries came first in the union, and which came later?

Mr. KRUGMAN: Oh, well, the original is, the original six is Germany,
France, Italy and the Benelux countries, so it's, you know, Belgium,
Netherlands, Luxembourg. So it's starting in that core.

But it has, you know, in a series of stages, it's expanded. Britain was
hesitant at first but did join. They brought in - so, you know, at this
point, just about all of, well, I was going to say just about all of
Western Europe, all of Western Europe and now a lot of Eastern Europe is
really part of this broader system.

GROSS: So when did the idea of the single currency, the euro, come
about?

Mr. KRUGMAN: Wow, I think probably people have been talking about it
since time immemorial. It was - I think it was in people's minds. I'm
not enough of an expert on the history of the concept to be sure
exactly, but I'm sure it was there even in the '50s.

But it got serious in the 1980s. In the '80s, the Europeans took a big
step, the Single European Act, which was going beyond just free trade to
harmonization of regulations, the euro sausage is what the joke made
about it, but basically saying that food standards, environmental
standards, safety standards would be the same across Europe, that there
would be legal freedom of movement for individuals within Europe. And
then the question was sort of, well, what next? And a single currency
was what came up as the seemingly obvious next step.

GROSS: Well, let's look at the pros and cons. What are some of the
advantages for the European countries of having a single currency?

Mr. KRUGMAN: Well, actually, the advantages tend to be more obvious than
the disadvantages. The advantage is you can hop on a plane in Barcelona
and land at Berlin and never have to change money. That a contract
that's signed between a company in Italy and a company in the
Netherlands, there's no question, you know, whose currency is this going
to be denominated in and what's it going to be worth given the exchange
rate on the day the thing comes due.

So it makes business a lot easier. It's smoothing things. To use the
example I used in the article, if you imagine that Brooklyn had a
different currency from Manhattan, there'd be a fair bit of
inconvenience involved in changing your Brooklyn dollars for your
Manhattan dollars every day. The euro eliminated that kind of
inconvenience within Europe.

GROSS: So what are some of the disadvantages of the single currency?

Mr. KRUGMAN: The disadvantage is: What happens if you really need to
make an adjustment between two countries? What if - well, it's not a
what if now - you had an enormous housing boom in Spain. That housing
boom led to a rise in Spanish wages and prices compared with wages and
prices in Germany. Then the housing boom went bust, and really, Spain
needs to get back to a more competitive level of wages and prices.

That's actually very, very hard if what's required is actual cuts in
wages, whereas if Spain still had its old currency, the peseta, you
could just devalue the peseta, and at one stroke, you would have gotten
those costs and prices back in line.

GROSS: So what is Spain doing now?

Mr. KRUGMAN: Well, Spain is in the early stages of what the Europeans -
the Europeans are great ones for jargon. Their euro-speak is a language
all its own. So what they call internal devaluation, which in a way
tells you, though, we're trying to do what would have been done if only
Spain still had its own currency.

But they're doing it instead by just squeezing down wages and prices,
that they're just - we've got a lot of unemployment, they've got 20
percent unemployment in Spain now, and that's going to gradually lead to
workers accepting pay cuts. And if they do that big enough and long
enough, then eventually Spanish industry will be sufficiently
competitive again.

GROSS: So what you're saying, I think, is that a downside of the euro is
that each country doesn't have the equivalent of a Fed.

Mr. KRUGMAN: That's right. It doesn't have the equivalent of the Fed. It
doesn't have an exchange rate it can use. Sure. I mean, if you look at
the countries that stayed out of the euro, whether it's Sweden or
Britain, they still have their own Fed equivalents, the Bank of England,
the Riksbank, and they were able to pursue independent monetary policies
that have given them a lot more flexibility in this crisis than the
countries that did go onto the euro.

GROSS: Now, is there a euro-Fed, like a central bank for the European
Union? Yeah?

Mr. KRUGMAN: Yeah. Yeah, there's the European Central Bank, which is
structured a lot like the Fed. We have regional Fed banks, like the New
York Fed. They have the old national central banks, like the Banque de
France, are their equivalent. And they set monetary policy.

In normal times, the ECB, the European Central Bank, functions a lot
like the Federal Reserve, but of course, it's setting policy for the
whole of Europe, and it's - as people say, there's a one-size-fits-all
problem. The monetary policy that may seem appropriate for Germany may
not seem appropriate for Spain.

GROSS: If you're just joining us, my guest is Paul Krugman, the Nobel
Prize-winning economist, who's also a columnist for the New York Times
and a professor of economics and international relations at Princeton
University.

We're talking about the euro. He wrote a very interesting piece about it
two Sundays ago in the New York Times magazine. Let's take a short break
here, and then we'll talk some more. This is FRESH AIR.

(Soundbite of music)

GROSS: If you're just joining us, my guest is Nobel Prize-winning
economist Paul Krugman. He's also a columnist for the New York Times, a
professor of economics and international relations at Princeton
University. And we're talking about the euro. He wrote a very
interesting piece about it two Sundays ago in the New York Times
magazine.

So, you know, in talking about the euro, I'm really interested in
hearing why England decided to never sign up with the euro and to
maintain its own currency.

Mr. KRUGMAN: Some of that was a bit of national pride. In other words,
there were some reasons that weren't very rational. You would have had
to replace pound notes bearing a portrait of the queen with euro notes
with pictures of generic bridges and doors on them.

But a lot of it was that there was a - put it this way, in Britain,
policymakers and economists were very conscious of the issues I just
talked about, about the loss of flexibility that would come with not
having your own currency.

GROSS: The loss of flexibility in creating your own monetary policy for
your country.

Mr. KRUGMAN: That's right. You wouldn't be able to do what Britain did
in this crisis, which was to aggressively cut interest rates in order to
try and insulate yourself from some of what was going on.

And in Britain, those - the skeptics had the ear of important people. In
particular, they had the ear of Gordon Brown, who was at that point
chancellor of the exchequer, in effect treasury secretary, who more or
less told Tony Blair: No, we're not going to do this.

Tony Blair, I think, was caught up in the European dream and did want to
join the euro, but Gordon Brown said, you know, this would be a really
bad idea and was able to make that stick.

GROSS: So has that isolated England financially?

Mr. KRUGMAN: Well, they - no. I mean, the interesting thing, one of the
arguments was, well, if we don't join this, terrible things will happen.
We'll be cut off from trade with Europe. We'll lose the role of London
as a financial center. And none of that happened. It turns out that
Britain is very closely integrated with the European economy. London has
thrived as a financial center, which has actually turned out to be a
problem because they suffered disproportionately when world financial
markets went to hell.

But no, it turns out that the predictions that countries that did not
join the euro would somehow become pariahs on the European scene has not
turned out to be true.

GROSS: So now that some of the countries in the European Union are doing
really poorly financially, like Greece, Ireland, Portugal, Spain, what
pressures is that putting on the countries that are doing better
financially?

Mr. KRUGMAN: There's a couple of things. There's certainly at least some
pressure to have a more inflationary, expansionary, whatever, policy by
the European Central Bank, although the ECB has not done that. They've
actually been fighting, and they're talking very much about the need to
control inflation, I think inappropriately. But there's certainly some
of that.

But the main thing is nobody really wants to see a default. Nobody
really wants to see Greece, or much worse, Spain, failing to pay its
debts because that would be very disruptive to the European economy.

A lot of the bonds, you know, a lot of the money ends up being owed to
other Europeans, and particularly to other European banks. So there's a
lot of German bank money on the line. So there is some sense that, hey,
we are not independent, we're not insulated from each other. A default
by a major European country would be a tragedy for all of the Europeans.

GROSS: I think there's discussion now about whether the more prosperous
countries should basically be bailing out the countries more at risk and
to the tune of how much money. Yeah.

Mr. KRUGMAN: Well, at that, you know, the United States, a lot of what
I've said about Europe, you might say, well, doesn't that apply to the
United States, as well? And there are a number of reasons why the same
issues may exist, but they're not of equal size.

And in the United States, we have a kind of automatic system of bailing
out because if you have a severe recession in some state, the amount of
taxes they pay to Washington drops sharply, but the amount of Social
Security and Medicare benefits that flow in continue. So we have that
process.

The Europeans have, they don't have anything like that mechanism.
There's a lot of aversion on the part of the German taxpayer to the idea
that they might have to bail out Greece. But some kind of help - well,
we already have large amounts of lending taking place from, official
lending to try and get these countries through. But the trouble is it
all looks well short of what's actually needed to deal with the
problems.

GROSS: What you're doing here is kind of making an analogy between a
state within the United States and a country within the European Union
in terms of what they get financially from being in that union and what
limitations they have. So why don't you make that comparison a little
more. What's the difference between a country in the euro zone and a
state in the United States?

Mr. KRUGMAN: Well, yeah, that's been, that's not just, you know, some
literary device. That's actually the way a lot of the economic analysis
of the euro has worked. We have an example of a continent-wide currency
union that functions. It's called the United States.

How much does Europe look like that, how much does it not look like
that? And the parallels, since both the United States and Europe managed
to have financial crises following housing bubbles, there's a lot that
we have in common. It's - it makes a lot of sense to think of Spain as
sort of being Florida and to think of Ireland as sort of being Nevada,
being small populations, huge housing booms, huge housing busts.

But the difference, there are really two differences that matter. One is
that the United States does have a common language and a common culture,
so that people move, in the United States, out of depressed regions into
regions with better job prospects much more than the Europeans do,
although they do move to some extent but not as much as we do.

So we, in the United States, we have this single language. There was an
old joke - I'm sorry, I'm wandering here, but there was an old joke
about creating the common European language. And it says, well, you
know, as a practical matter, it has to be English, but it begins
suggesting modifications, and by the end of the memo, it's turned into
German, which in a way illustrates the problem.

GROSS: Paul Krugman will be back in the second half of the show. His
article on the euro and the European financial crisis was published two
Sundays ago in the New York Times. He's a columnist for the Times and a
professor of economics and international relations at Princeton
University.

I'm Terry Gross, and this is FRESH AIR.

(Soundbite of music)

GROSS: This is FRESH AIR. I'm Terry Gross, back with Noble Prize-winning
economist Paul Krugman. We've been talking about his recent New York
Times magazine article about the role the euro has played in Europe's
economic crisis. Krugman is a columnist for The New York Times and a
professor of economics and international relations at Princeton
University.

Now, the Europeans have had a very strong safety net for people who are
unemployed, health care benefits. There are countries like France that
have very good benefits for new mothers. So there's a strong safety net
there. But there's more and more people now who need that safety net
because of unemployment. So how has that affected the economies in
European countries? And I'm wondering also how that's affecting your
thinking about strong safety nets and their pros and cons.

Prof. KRUGMAN: I think it cuts both ways. On the one side, those strong
safety nets have meant that the amount of sheer misery in Europe is
considerably less than here. You've actually had a roughly same depth of
recession in terms of GDP, in terms of industrial production in Europe,
as in the United States. But in the United States, that has really meant
incredible individual hardship. In Europe - even in the troubled
economies, and very much so in the stronger economies like France or
Germany - there just hasn't been - things have not been so terrible.

Actually, unemployment hasn't risen as much in Europe as it has here
because there are more - there's more regulation of hiring and firing,
which has helped to sustain jobs. And those who do lose their jobs don't
lose their health benefits. They have a lot more support. So in a lot of
ways, Europe is weathering this crisis better, as a human process, then
we are.

On the other hand, European budgets - because they have such a strong
social safety net, European budgets are hit very hard when there is an
economic slump. So some place like Spain, they moved from a budget
surplus to a huge budget deficit in the face of the slump, and it's not
because of anything - or not much because of anything the Spanish
government did. It's just because, well, they had a lot of taxes, and
the revenue has plunged, and they have a lot of benefits that have to be
paid because of their system. They are, in some ways, more fiscally
vulnerable to a slump than we are.

GROSS: Are many European countries now considering cutting back on those
benefits because they can't afford them anymore?

Prof. KRUGMAN: You often read newspaper stories about the - in this
country about that, and they tend to be way overblown. The Europeans are
talking about some changes. The French are talking about trying to raise
their very low retirement age, and so on. But it's always worth bearing
in mind that what passes for a hard-right, extremely conservative, anti-
welfare state politician in Europe is, in general, to the left of any
significant figure in the Democratic Party in the United States. So
they're in a different universe of discourse about these things.

GROSS: So what are some of the options that face the European Union now
in dealing with the financial crisis?

Prof. KRUGMAN: There are things they can't do. They can't adopt a single
language. They can't turn into America at a stroke. They can try to
enhance some of these ways in which strong countries can aid the weak
countries. They can turn Europe into more of a transfer union, as people
say, something where there is some automatic aid to countries that are
in trouble. They can probably provide significantly relief right now if
the strong countries are willing to back or guarantee at least some debt
issued by the weak countries. This is the euro bond idea.

But I think, realistically, it's hard to see this working out without at
least a couple of countries, in fact, getting a debt restructuring,
getting, saying okay, look. We can't actually pay all of this. Let's do
a workout where we only pay some fraction of it.

GROSS: Which would mean that people who bought bonds only get back a
percentage of what they were promised?

Prof. KRUGMAN: Yeah. Something. I mean, the extreme example - I don't
think any European country's going to do this. But the extreme example
in recent history is Argentina, which said we're not going to be able to
pay this, and eventually reached a settlement with bondholders at about
35 cents on the dollar. So you can imagine something like that happening
for Greece, for Ireland, little less likely for - well, substantially
less likely for Spain.

GROSS: Are you getting a sense that citizens of the stronger countries
are starting to resent the citizens of the weaker countries because of
the stress being put on the stronger countries who are expected to help
the weaker countries in this financial crisis?

Prof. KRUGMAN: Yes. And vice versa. One of the really destructive things
about this - if you want the European idea to succeed - is that if you
look at what's happening in Ireland right now, on the one hand, the
Germans are feeling that they are put upon, they're being forced to bail
out those irresponsible Irish. And the other hand, the Irish are feeling
that the Germans have turned into these cruel, heartless money
collectors who are turning Ireland into a subservient colony. It's an
ugly scene. It's not what you want to see happening.

GROSS: Is it a threat to the union?

Prof. KRUGMAN: I think that's a long ways off. I think it takes a lot -
to put it this way, there's a possibility that one or more countries
would end up being forced off the euro, forced off the currency -
although even that's a pretty awesome prospect to - it's not something
that would happen easily. The European Union itself, I think, is not
going to - is not that much in danger. But what's in danger is the - is
the - is faith and progress. The European Union, for the past 60 years,
has been a process of ever-greater integration, ever-greater progress
towards the idea of Europe as a single, democratic entity, as opposed to
a bunch of quarreling countries. And now all of that is in danger.

GROSS: So you said there's the possibly of one or more countries being
forced off the euro. How would they get forced off the euro? What's the
likelihood, and what's a possible scenario?

Prof. KRUGMAN: So I think it's reasonably likely, maybe 50 percent odds
for Greece, and lower for the others - although if one goes, there might
be a chain reaction here. The way it would work would be that ordinary
people, probably, Greek citizens start to think, you know, they're not
want to be able to make this work. They're going to have to reintroduce
the drachma and devalue it against the euro. And in anticipation of
that, they say, boy. I better get my money out of Greek banks and into
some place where there will continue to be euros.

So they start pulling their money out of Greek banks and putting them
into German or French banks, and that's a bank run. And that itself
forces action. The Greek government is forced to do something dramatic.
It's forced to temporarily close the banks. And then once it's done
that, it may say, you know, this will just start up again if we open
them, so let's get this over with. And they introduced a new currency.

That's more or less what actually happened in Argentina in 2001. They
had a supposedly permanent, irrevocable peg. The Argentine peso was one
peso, one U.S. dollar forever. But they had an enormous bank run, and
that led to the Argentine peso actually no longer being worth one U.S.
dollar, in fact, being worth only about 35 cents for a while, there. And
so that's - you know, so that's the story. You can easily see - well,
you can see how it could happen. It's an enormous thing. It's by no
means a certainty, but that's how the euro could at least partially
break up.

GROSS: Can a country just go back to its old currency? I mean, it's not
like the currency has been waiting in hibernation to be started up
again.

Prof. KRUGMAN: No, that's right. And that's why you can't just do it
casually. You can't just have a - let's have a debate in parliament
about whether to go back to the drachma, because if you did that, you
would, in the moment that the debate began, you'd have a massive bank
run.

So I don't think it's possible for anyone to say, coolly and
collectively, you know, (unintellgible) idea. We were wrong to join this
euro thing, and we should go back to the drachma or the peseta, because
everybody knows that even to raise the subject is to create a banking
crisis. But the thing is that the banking crisis might happen, anyway.
And if it does, then that's when you go off the euro.

GROSS: If you're just joining us, my guest is Nobel Prize-winning
economist Paul Krugman. He's also a columnist for The New York Times and
a professor of economics and international relations at Princeton
University. And his article about the euro was in The New York Times
magazine two Sundays ago.

Let's take a short break, and then we'll talk more about the American
economy.

This is FRESH AIR.

(Soundbite of music)

GROSS: If you're just joining us, my guest is Nobel Prize-winning
economist Paul Krugman. He's an economics professor and professor of
international relations at Princeton University. And he writes a column
for The New York Times.

We have been talking about your New York Times magazine article about
the euro, which was printed two Sundays ago. And one of your main points
about the euro is that it's hard for the countries in the economic union
who are in financial trouble to get out of it because they don't have an
equivalent of the Federal Reserve Bank in their own countries. They
don't have a country equivalent to manage the kind of monetary policy
that the Fed does - print more money, print less money, raise, lower the
interest rates.

In the meantime, it's been really interesting in the United States.
There's this movement to, like, end the Fed that's - leading the charge
is Ron Paul, who's now actually head of the House Financial Services
Subcommittee on Domestic Monetary Policy. And this is the subcommittee
that basically oversees the Fed. So I'm just really curious what your
reaction to this is, knowing how important you think the function of the
Fed is.

Prof. KRUGMAN: It's important. I mean, I think for the time being, the
Fed is not going to find itself forced into liquidating itself and we're
not going to go to the gold standard. But it actually is a significant
inhibition on the Fed. I think they're going to be less aggressive than
they would have been.

And I have to say, this is something I did not see coming. It did not
occur to me before about a year and a half ago that, faced with a
massive collapse in the world economy, faced with exactly the same
situation that Milton Friedman said the trouble was with the - that the
Fed did not print enough money during the Great Depression, that we
would find ourselves with a powerful political movement saying what we
need is for the Fed to stop printing money, that what we really need is
to do away with all of this effort to use monetary policy to rescue the
economy. That's been kind of a shock to me, although I think I now
understand where it's coming from.

GROSS: And Milton Friedman, I should say, is a - was a revered
conservative economist.

Prof. KRUGMAN: That's right. And so what's happened now in the debate
over economic policy is that we actually have a situation where if
Milton Friedman were alive today and making the kinds of pronouncements
that he made about U.S. policy during the Great Depression, or the
pronouncements he made about Japan in the '90s, he would be viewed as a
leftist. It would be the Friedman-Krugman axis here of - the axis of
mandatory evil. So that's an amazing development on the American
political scene.

GROSS: So there are some conservatives now who want to see a return to
the gold standard and to end the Fed. In Virginia a subcommittee was
created to study a monetary alternative in case the Fed breaks down and
to consider the gold standard as an option. What does the gold standard
mean? What's the difference between being on and off the gold standard?

Prof. KRUGMAN: Okay. Right now we're on a - I guess we could say we're
on the Bernanke standard. The amount of money in circulation is
determined by the amount that the Fed thinks ought to be in circulation,
and the Fed, in turn, you know, makes the decisions about that based on
considerations of unemployment and inflation or the lack thereof.

On the gold standard, at least in the strongest form, what you do is you
say we're going to say that a dollar is worth a certain number of ounces
of gold and that we're going to adjust this quantity of money based on
that target. End of story. The state of the economy, the overall cost of
living have no bearing. It's just we're only interested in one cost,
which is the pot of an ounce of gold.

You know, we had a system like that once upon a time. Many economists
believe that the attempts to sustain that system played a big role in
making the Great Depression as bad as it was. But now we have a
political movement that thinks that going back to that would be a good
idea.

GROSS: There's something so appealing about the gold standard, because
you know exactly what a dollar is worth, a certain amount of gold.
Whereas now, like what's a dollar worth? Like, who knows. It's a piece
of paper, depending on monetary policy, you can get this or that for
that single dollar bill...

Prof. KRUGMAN: Yeah.

GROSS: ...or the $10 bill, and it's fluctuating. It doesn't have that
clear-cut value that a gold standard provides.

Prof. KRUGMAN: Yeah. Although it's worth pointing out that since by and
large we don't eat gold and we don't live in gold houses, that a dollar
that had a fixed firm value in terms of gold would have a wildly
fluctuating value in terms of the things we actually buy. Whereas, the
dollar we actually have has a pretty predictable value.

Yeah, we sometimes have two percent inflation. We sometimes have one
percent. We sometimes have three percent. But by and large there are not
huge fluctuations in what a dollar actually buys. So it's a funny thing.
You know, gold seems like a, you know, solid, hard standard, but it’s a
standard that has very little relationship to, you know, what we
actually do and how we actually live. It's illusory in a way. The idea
that there's something especially sound about it is an illusion.

GROSS: Let’s look at another economic issue facing the United States
now. It's before Congress now whether to raise or not raise the debt
ceiling. Would you explain what the debt ceiling is and why this is an
important issue?

Prof. KRUGMAN: We have a funny, actually a rather bizarre system here,
where Congress decides on the budget twice. They decide on taxes and
spending but they also - there’s also a limit on the amount that the
U.S. government is allowed to have in debt, which is constantly being
breached. That is there’s this sort of further limit, this further red
line that you're not supposed to cross except that we continually cross
it, rightly or wrongly. And so every time we get close to that red line
either Congress has to raise it or the federal government has to stop
borrowing, which means bringing a lot of government activities to a
screeching halt.

So the thing is that I think in a way the way this is functioned is it's
pretty easy for politicians to say we must not raise the debt limit
because that doesn't commit them to exactly how it is we're going to
avoid passing it. So they don't have to commit to actually raising taxes
or actually cutting any particular spending. They just say we must not
raise the debt limit and so at least do a lot of grandstanding and
possible confrontations in the U.S. government.

GROSS: But say the debt ceiling wasn’t raised. What would that mean?

Prof. KRUGMAN: That’s a much debated question. Right now the federal
government is not taking in enough revenue to pay for its spending,
mainly because the economy is still depressed and so revenue is
depressed as well. But still, the fact of the matter is that the U.S.
government cannot continue its operations, cannot continue meeting its
promises unless it can raise more money by borrowing.

On the day that the debt ceiling is reached, there are probably various
ways that they can keep the thing running without too much disruption.
You can dip into various kinds of cash accounts, you can ask vendors to
accept a delay in their payments and so on. But if it goes on for a long
period of time then wow, you are forced to shut a lot of government
offices and maybe eventually, you know, stop sending out Social Security
checks.

GROSS: Would it also mean defaulting on paying back other countries?

Prof. KRUGMAN: Well, certainly one option would be to go into arrears on
our debts, to stop paying interest or principal on some of the debts.
I'm not sure that that’s something that you do early on in the process.
But yeah, if you look at where does your taxpayer dollar go in the U.S.
government? The big things are Defense, Social Security, Medicare,
Medicaid and paying interest on the debt we already have. So that would
certainly be one of the things that might be on the list of things to go
behind on payments.

GROSS: The U.S. has never decided not to raise the debt ceiling and
therefore, defaulted on anything, right?

Prof. KRUGMAN: Well, we had a government shutdown in - I think two
government shutdowns in '95, which were - but they were not, no one was
seriously trying to say okay, we're going to stop right here, no more
borrowing. What those were were power-plays. Those were attempts by
Republicans led by Newt Gingrich to force Bill Clinton to accept sharp
cuts in Medicare. So that's what's actually in the cards.

We're not actually talking about, I don't think, we're not talking about
anybody going into a situation saying okay, that's it, no more
borrowing, the U.S. government has to live within its means. That's,
neither party wants anything like that. What we're talking about
possibly is a game of chicken between Republicans and President Obama.

Given that that didn't work out for them too well six years ago, I think
the general belief is that they probably won't do it. But even if they
do, the point is it's not really about the U.S. reaching the end of its
debt limit. It's about jockeying over trying to say who is going to bear
the blame for this and therefore who is going to blink in terms of more
fundamental policies?

GROSS: Paul Krugman, thank you so much for talking with us.

Prof. KRUGMAN: Thank you.

GROSS: Paul Krugman is a columnist for The New York Times and a
professor of economics and international relations at Princeton
University.

Coming up, Maureen Corrigan reviews a new biography of J.D. Salinger.
This is FRESH AIR.
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Digging For Pearls In The New Salinger Biography

TERRY GROSS, host:

J.D. Salinger died a year ago this Thursday, and in time for that
anniversary, there's a new biography called, simply, "J.D. Salinger: A
Life." Book critic Maureen Corrigan says that Salinger, no doubt, would
have cringed at what Holden Caulfield calls all that David Copperfield
kind of crap that biographies necessarily expose. But readers who revere
Salinger will find a lot that's surprising in his early background.
Here’s her review.

MAUREEN CORRIGAN: Here's Holden Caulfield at the beginning of "The
Catcher in the Rye" uttering not only one of the most famous passages in
that novel, but one of the most famous passages in all of world
literature: What really knocks me out, says Holden, is a book that, when
you're all done reading it, you wish the author that wrote it was a
terrific friend of yours and you could call him up on the phone whenever
you felt like it. That doesn't happen much, though.

Good thing, too, Holden, I would say because chances are if you did
reach that beloved author, you'd be disappointed. Great writers pour
their best selves into their books. In life, most are merely human. That
truth was brought home to me yet again by Kenneth Slawenski's new
biography of J.D. Salinger. As anecdote after anecdote in "J.D.
Salinger: A Life" makes clear, it is a far, far better thing for readers
to meet Holden Caulfield or Buddy Glass than it would have ever been for
us to meet their strange, withdrawn creator.

Slawenski is the founder of a Salinger website called
DeadCaulfields.com; that fact doesn't exactly inspire confidence in us
literary traditionalists - and, indeed, it turns out that this
biography, some eight years in the making, is awfully wobbly. Not
surprisingly, Slawenski never got access to the great man himself, nor
to anyone in Salinger's inner circle.

The biography does contain new material - some letters and photos - made
available since Salinger's death. It also contains some achingly facile
observations. To wit, the first lines of chapter one describing the
fateful year of Salinger's birth read like a history paper written by
Holden's Pencey Prep nemesis, Stradlater: The Great War had changed
everything. As 1919 dawned, people awoke to a fresh new world, one
filled with promise, but uncertainty.

Buried within this sludge, however, are some genuine pearls. One
revelation that’s elaborated on throughout Slawenski's erratic biography
is just how crucial Salinger's World War II experiences were to his
later Zen Buddhism, as well as to his writing. Salinger served in an
Army Counter Intelligence Corps. On D-Day, he landed on Utah Beach, then
went on to fight in the Battle of the Bulge. Towards the end of the war,
he helped liberate a sub-camp of Dachau.

According to Slawenski, manuscript pages of "The Catcher in the Rye"
were on Salinger's person throughout the fighting. World War II and its
soul-shattering effects are, of course, explicitly present in Salinger's
monumental short story, "For Esme, With Love and Squalor." But,
Slawenski, who turns out to be an astute close reader of Salinger's
work, also teases out the war's influence on "The Catcher in the Rye."
Holden, you may remember, is haunted by the memory of his dead brother,
Allie, whose name, Slawenski points out, sounds suggestively close to
allies - all those fallen brothers-in-arms Salinger fought beside.
Slawenski also makes a convincing case for Salinger having the dead of
World War II in mind as he wrote Holden's parting words: Don't ever tell
anybody anything. If you do, you start missing everybody.

Salinger had those manuscript pages with him during World War II for
another, more practical reason: It took him an excruciatingly long time
to write. When, in 1950, Salinger triumphantly submitted "The Catcher in
the Rye" to his publisher, Harcourt Brace, the editors there rejected
it, apparently confused by whether or not Holden was supposed to be
crazy. Even worse, The New Yorker magazine, where Salinger had been
publishing his short stories, declined to print an excerpt. The editors
said that: The notion that in one family, the Caulfield family, there
are four such extraordinary children, is not tenable. It was enough to
make a man say nuts to the world - which is pretty much what Salinger
wound up doing for half a century.

When Salinger died last year, I, like a lot of other fans, reread his
small canon. Like all great literature, it yields up something new upon
each rereading. And as for "The Catcher in the Rye," in particular,
well, there's just no other voice in American literature that's as alive
as Holden's - sorry, Huck. Thinking again of Holden and how he wrestles,
so clumsily, with big questions about God and evil and struggles to
shore up innocence in all its fragility, I could understand why the
young Sgt. Salinger wanted to be armed with an early version of Holden
close to him for support and inspiration, as he told a friend, while he
was storming the beaches at Normandy and penetrating into the horrors
that lay beyond.

GROSS: Maureen Corrigan teaches literature at Georgetown University. She
reviewed "J.D. Salinger: A Life" by Kenneth Slawenski. You can read an
excerpt on our website, freshair.npr.org.

I'm Terry Gross.
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