DEBATING POLITICS, ECONOMICS AND OTHER TIMELY TOPICS WITH PAUL KRUGMAN OF THE NEW YORK TIMES

FRIDAY, FEBRUARY 19, 2016

PAUL KRUGMAN

Time for Realism,

Not Magic
It has been an interesting few
months on the progressive side of
the political debate, and I mean
that in the worst way. A significant
number of progressives are very,
very excited about the unexpected
support for Democratic presidential
candidate Bernie Sanders, and are
shocked to find that many I think
most liberal policy wonks are
rather skeptical.
For me, this is somewhat familiar
territory: I was skeptical about
Barack Obamas promises of transcendence back in 2008, too. And
then, as now, a fair number of enthusiasts took no time at all to declare
that I was a corrupt villain, desperate for a job with Hillary Clinton.
O.K., this too shall pass. But I
thought it might be worth saying a
bit more about where people like me
find ourselves today.
First of all, to say what should be
but sometimes apparently isnt obvious: What you would ideally want
and what you think can be achieved
arent the same thing. What I and
most of my wonk friends would like
to see is what the economist Robert
Heilbroner used to call Slightly
Imaginary Sweden that is, a
country with a strong social safety
net that protects everyone against
avoidable misery, provides workers
with substantial bargaining power
and with a strong environmental
policy. Someplace where basic decency is a fundamental principle.
But nothing like that is going to
happen in America anytime soon. If
were going to have any kind of radi-

cal change in the next few years, and

probably the next couple of decades,
it will come from the right, not the left.
As Matt OBrien at The Washington Post pointed out recently, even
the incremental changes that Mrs.
Clinton is proposing are very unlikely to get through Congress; the radical changes Mr. Sanders is proposing wouldnt happen even if Democrats retook the House. Mr. OBrien
says that the Democratic primary
is like arguing whats more real:
a magical unicorn or a regular unicorn. In either case, youre still running on a unicorn platform. This is,
alas, probably true: The platforms
of the candidates are better seen as
aspirational than as programs at all
likely to happen.
But in that case, why not go for
the magical unicorn? A couple of
reasons.
One is that there are degrees of
realism: A program that could be
implemented in part if Democrats
retake the House might turn out to
be a useful guide relatively soon,
while a program that requires a political revolution wont.
Another is that, perhaps inevitably,
the Sanders insistence on the need for
magical unicorns has led to invocations of economic as well as political
magic. I warned a while back that
even Mr. Sanders wasnt willing to
level with voters about what his ideals would require that, in particular, he was assuming unrealistic savings in order to gloss over the reality
that quite a few middle-class Americans would be net losers in a transi-

JIM WILSON/THE NEW YORK TIMES

The Democratic presidential candidates Bernie Sanders and Hillary Clinton at a debate in Milwaukee earlier this month.
tion to single-payer health care.
And this could matter a lot in a
general election. For sure, the Republican nominee, whoever he is, will be
offering plans that are obvious nonsense. But if his Democratic opponent
is also offering a plan that doesnt
add up, you know that the media will
portray the situation as symmetric,
even if it isnt. (And it wouldnt be:
Whatever is problematic about the
Sanders platform, G.O.P. fantasies
are in a whole other league.) This is
why its important to bring up the
criticisms of Mr. Sanders now, not
wait until later and its also why the

READER COMMENTS FROM NYTIMES.COM

A Political Revolution Is Long Overdue

Hillary Clinton is a magical unicorn herself one that pays lip
service to reforming the financial
industry, but accepts huge contributions and speaking fees from
Wall Street firms.
ROB P., CALIFORNIA

As a liberal, I have a number of

problems with the Republican
Party. Mainly, they seem to be more
focused on theatrics than governing.
For example, when they take a
position, conservatives are more

concerned with how that position

will play with the partys base than
with what effect it will have on the
country. One of the downsides of
this sort of political theater is that it
tends to go hand in hand with heretic hunting.
Democrats hadnt gone down this
road the way that Republicans had
that is, until Bernie Sanders started running. Mr. Sanders is taking
policy positions that are politically
impossible. Meanwhile, his supporters are branding pragmatists who

point this out as heretics.

Mr. Sanders is the first major
Democratic candidate in my lifetime
who is asking people to vote out of
animosity (toward billionaires).
Hes simply making unrealistic
promises. Mr. Sanders is bad news.
ALEX S., NEW YORK

Perhaps Mr. Sanders cannot

enact legislation that promises
health care or free public college
tuition for everyone. But if we dont
have a political revolution in the

campaigns knee-jerk response of attacking the messengers is such a bad

one. It might work in the primary, but
it definitely wont work later on.
Im not happy with magical unicorns as a campaign strategy. But
I understand the problem, which is
also the problem Mrs. Clinton faces:
Among young people in particular,
being a wet blanket is no way to be
hugely popular. Saying No, we cant
at best, maybe a little isnt all that
inspiring to people who want uplift.
Realistically, the slogan should actually be They shall not pass, which
actually could be inspiring.

All this poses an interesting

problem for Mrs. Clinton who
will, if nominated, be pretty good at
portraying herself as the defender of
President Obamas achievements.
Until then, can she try to match Mr.
Sanders in uplift? Probably not, because it would be insincere and come
off that way. Shes a veteran of many
years of partisan warfare, of personal vilification, of seeing how hard
positive change is (and yes, some of
that applies to me too, although not
to remotely the same degree). Shes
not going to be able to promise magic
without being obviously false. Mr.

Sanders, on the other hand, probably

believes what hes saying; the rude
awakening still lies ahead.
Mrs. Clinton will probably get the
nomination in part because African-American voters, much more
than young whites, know all too well
how hard it is to achieve change.
So far, at least, polls dont show Mr.
Sanders making major inroads in
the minority vote. And, as I said,
Mrs. Clinton is actually pretty well
positioned for the general election.
But you see the problem. Its a
rough time for progressives who
dont believe in magic.

United States soon, well never get

our democracy back. Our only choice
will be between oligarchy lite and
oligarchy heavy.
After all of your columns bemoaning income inequality, Mr. Krugman, you seem to be endorsing the
Democratic candidate who is most
likely to preserve it.

suppose that we must learn to live

within the political boundaries that
have been set by wealthy donors and
lobbyists, and that we should lower
our sights accordingly. Now lets
ask: How did we reach this impasse?
The answer is by following this kind
of advice.
Over the years, the Democrats
scrapped their New Deal legacy,
refused to play offense against
Reaganism and became the party
of acquiescence. Now, a candidate
has come along who is seeking to
rally the people and restore some
balance.
I find it quite strange that you and
your colleagues are apparently harboring more anger toward Mr. Sand-

ers and his supporters than toward

the inequities and injustices of the
status quo.

JOSH THOMAS, INDIANA

Another day, another New York

Times pitch for a passive, custodial Clinton presidency.
Mr. Krugman, suppose that you
are correct. Lets say that meaningful progress providing decent,
hopeful lives and fairness for working people is a pipe dream. Lets

ANN, MASSACHUSETTS

Sometimes real change requires

bold, abrupt moves.
If you keep contorting to accommodate the agenda of an aggressive
group, that group will keep demanding that you make more concessions.
AIDAN SMOKER, IRELAND

ONLINE: COMMENTS
Comments have been edited for clarity and
length. For Paul Krugmans latest thoughts
and to join the debate online, visit his blog at
krugman.blogs.nytimes.com.

PAUL KRUGMAN

BACKSTORY

Rate-Hike Bias Started With Bankers

New Policies Stir Markets

A few months ago, there was a debate

about the sources of pressure on the Federal Reserve to raise rates. Part of what drove
that debate was a clear division between
Fed insiders like Vice Chairman Stanley
Fischer, who seemed eager to raise rates,
and outsiders like me and Lawrence Summers, the former Treasury secretary, who
were strenuously against such a hike. What
was odd about the debate was that there
were few, if any, obvious differences in economic ideology between the two sides.
So what made Keynesian central bankers much more inclined to raise rates, and
much less receptive to the argument that
risks are asymmetric that waiting a
bit too long is no big deal, while moving
too soon can be a disaster than their
colleagues, counterparts and former students outside the system?
I argued that it had a lot to do with the
way that central bankers talk all the time
to private bankers and that bankers
are hurt a lot by low interest rates. Other
people, however, questioned the premise,
arguing that there was no good reason to
believe that low rates were especially bad
for bank profits.
May I say that recent events seem to
have settled that argument in my favor?

need to make money, and they

struggle to do so in a negative
rate environment. Should it be
any surprise that the threat
of global negative rates is
slamming the financial sector? (Read the post here: bit.
ly/1TlM5jH.)
And surely these adverse
effects dont begin only when
interest rates are at zero; low
rates must put a squeeze on
banks as well.
So I think that we have an
explanation for rate-hike
DREW ANGERER/THE NEW YORK TIMES
bias: Its the influence of the
Janet Yellen, the chairwoman of the Federal
financial industry. At the
same time, however, we also
Reserve Board, testifies at a House Financial
see that were just talking
Services Committee hearing earlier this month.
about influence, not complete
control or anything close to
it. The Fed has, Id argue, been swayed by
As negative rates spread around the world,
bank interests not by crude corruption,
banks are howling and genuinely sufbut simply by the fact of who they talk to
fering.
all the time. That influence hasnt stopped
As the economist Tim Duy recently
the Fed and other central banks from purwrote on his blog: The collapse in banking stocks suggests strongly that negative
suing policies that the banks really hate
interest rates are not compatible with
in an effort to pursue their primary job,
our current economic institutions. The
which is to stabilize the economy. At most,
system relies on the banks, and the banks
were talking about a tilt in policy.

READER COMMENTS FROM NYTIMES.COM

Under the Influence

The problem with rate bias is
that all of our economic models
are based on the notion that an
economy should be continually
expanding based on strong consumer demand for scarce global
resources.
But today the opposite is the case:
Economies are experiencing inadequate levels of demand in the face of
an oversupply of commodities.
As you have continually pointed
out, Mr. Krugman, the rules of economics fly out the window when we
hit the zero lower bound. Up is down,
and down is up. Virtuous saving be-

comes selfish vice.

There is no traditional road map
for getting out of this situation. The
only solution I see is Keynesianism:
Gain access to all the idle cash that
is sitting on the sidelines and put it
to work on research and infrastructure projects that will create jobs,
increase consumer demand and get
the economy moving again.
JOHN M., MAINE

If low interest rates are terrible

for bankers and rates are already
negative or close to it, why arent
bankers the biggest proponents of

increased government spending?

NAME WITHHELD, NEW YORK

It has been obvious for some

time that the Federal Reserve
is out of options for lifting the
United States out of this economic
malaise.
Monetary policy has reached the
end of its rope. It is time now for fiscal policy to take over, and its the job
of Congress to make that happen. A
good first step would be for lawmakers to pass a large infrastructure
bill to repair Americas bridges and
highways, and upgrade its electrical
grid.
I am sure that we would see a sudden upsurge in the economy and a
calming in the stock market. The
markets are only looking for some

In late January, the Bank of Japan sent

shock waves through global markets after officials announced that the bank was
adopting a negative interest rate. While the
country is not the first to try and boost its
economy with this particular strategy, Japans surprise move signaled that the tactic
might be pursued by other central banks
with increasing regularity.
After the announcement on Jan. 28, bank
stock prices fell sharply on expectations
that negative rates could result in lower
profits.
The European Central Bank began experimenting with negative rates in 2014,
and several smaller central banks on the
Continent have introduced negative rates
as a way to fight deflation.
Using standard monetary policy, central
bankers can generally stimulate a nations
economy by lowering the benchmark interest rate, which tends to increase borrowing
and investment. This strategy has historically been constrained by the zero lower bound if rates are already set at zero,
they cant be cut further to provide more
stimulus.
After the financial crisis in 2008, many

direction.
NAME WITHHELD, TEXAS

If bankers are feeling the pain

of low interest rates, then they
should use their massive political influence to gather bipartisan
support for a fiscal stimulus that
is big enough to return interest
rates to normal levels.
NAME WITHHELD, NEW YORK

So which is it for you and your

relationship with Hillary Clinton:
Influence or complete control?
GREG, PENNSYLVANIA

If the secretary of the Treasury

comes from Wall Street, is he not
more likely to think like a banker
and see the world as Wall Street

countries cut their rates to zero but never experienced enough of an economic recovery to raise them substantially. Central
banks have lately been forced to explore
more-unconventional stimulus policies,
such as quantitative easing, but these too
have proved to be ineffective in combating
deflation.
In response, some of these countries have
introduced negative rates, in which central
banks effectively charge commercial banks
a fee to hold deposits. These fees are sometimes passed on to depositors, either in the
form of new fees or directly negative interest rates. According to the strategys proponents, banks stand to lose a percentage
of the money they leave idle in a negative
rate environment, so they are more likely
to lend it out and bolster the economy.
In theory, interest rates below zero
should reduce borrowing costs for companies and households, driving demand for
loans, wrote Bloombergs Jana Randow
and Simon Kennedy on Jan. 29. In practice, theres a risk that the policy might do
more harm than good. If banks make more
customers pay to hold their money, cash
may go under the mattress instead.

sees it, despite the fact the he is

now in government?
If he comes from the New York
Federal Reserve Bank, is this not
also the case?
GEORGE, MICHIGAN

Whats obvious here is that

people shouldnt elect a president who takes money from Wall
Street.
So vote for Bernie Sanders.
NAME WITHHELD, FRANCE

If ultralow rates harm banks

enough to potentially spark a
recession, perhaps Americans
should find some other way to
spur growth.
Fiscal stimulus, anyone?
LEON E., VIRGINIA

Paul Krugman
joined The New
York Times in 1999
as a columnist on
the Op-Ed page
and continues
as a professor of
economics and
international
affairs at Princeton
University. He was awarded the
Nobel in economic science in 2008.
Mr. Krugman is the author or editor
of 21 books and more than 200
papers in professional journals and
edited volumes. His latest book is
End This Depression Now!