Economist Paul Krugman: Why U.S., Greece Differ

Ever since the financial crisis started bubbling up in Greece, the comparisons between the United States and the Mediterranean country have been inescapable. So could Greece offer a cautionary tale for the United States? Not really, says Nobel Prize-winning economist Paul Krugman. He tells host Guy Raz that while problems do loom for the U.S., they're nothing like those in Greece.

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GUY RAZ, host:

Many historians have long been wondering whether America is the new Rome. But lately, with the simmering debt crisis in Europe, financial analysts have been asking whether we're more like Greece.

Unidentified Man #1: The Greek government needs to cut back on spending and the same in the U.S. We have government spending out of control.

Unidentified Man #2: Is California the next Greece?

Unidentified Man #3: That sort of thing cannot continue. Otherwise, we do end up with what happened in Greece.

RAZ: Paul Krugman is the Nobel Prize-winning economist and columnist for the New York Times. And he joins us from Princeton, New Jersey.

Paul Krugman, welcome.

Professor PAUL KRUGMAN (Economics and International Affairs, Princeton University; Columnist, The New York Times): Hi there.

RAZ: So does Greece, you know, with its massive budget deficit and ballooning debt, offer any cautionary tale for us here in the United States?

Prof. KRUGMAN: Well, yes, but I'm actually reluctant to concede that because a lot of people want to grab Greece like a fumbled football and make it into their property. But the parallel is not close. There are a lot of special things about the Greek situation that don't apply to us, and we're nowhere near being in the same kind of trouble.

RAZ: April's budget deficit here in the U.S. is the largest on record. And a lot of financial analysts have been saying look at Greece, look at their budget deficit, look at our budget deficit, and you will get a sense of where our problems might be headed. Why do you think that's a problematic argument?

Prof. KRUGMAN: A couple of things. One is that the level of debt is still quite a lot less in the United States than it is in Greece. Beyond that, the saving grace of the U.S. situation and the, whatever, the dissaving curse of the Greece situation is the outlook for the economy over the next few years.

The U.S. budget situation is going to improve quite substantially over the next couple of years just because the economy is rising again. Greece, that's not going to happen. Greece is within the eurozone. It doesn't have its own money. Its costs and prices are way out of line with the rest of Europe. And it has no way to deal with that because it's stuck on the euro.

And so Greece is looking at a much, much worse outlook over the next four or five years than the U.S. is. The numbers just don't look at all the same once you get beyond the crude comparison of what's happening to the budget deficit right now.

RAZ: There's, as you know, a growing chorus of pundits and economic analysts essentially saying that we have created a system where we demand more, more services, than we're willing to pay for. Is that accurate? Is that fair to say?

Prof. KRUGMAN: This disconnect between tax collections and government spending is not something that is just a kind of amorphous public opinion has caused it to happen. It's been a deliberate strategy on the part of political conservatives in the United States to cut taxes first and then hope that the resulting deficits force you to cut spending.

RAZ: But you say ultimately, the government will have to probably both raise taxes and do some serious cutting, including cutting of entitlement programs like Medicare and Social Security.

Prof. KRUGMAN: Well, there's a huge difference between Medicare and Social Security. We can afford Social Security as is. We cannot afford Medicare as is. It's not this entitlements are too big. It's health care costs are out of control.

So what we need to do is we need to stop the constant growth of health care spending. Beyond that, we need several points of GDP somewhere, which could be somewhat higher taxes. I think, in fact, that ought to be the bulk of it. But then we can look for a few other places to save. And I think there's substantially more bloat in the military than there is in Social Security.

So people are buying into this notion that we need to be making sacrifices across the board because spending is out of control. Now we have a modest adjustment, plus one really big task, which is health care.

RAZ: And that's enough, you're saying.

Prof. KRUGMAN: Well, not quite, but it's most of it. If you get the health care costs under control, then we're still left with a budget problem, but it's a fairly moderate one. What we really need to do is we really need to resolve to act responsibly on the budget in due course. We need to say, look, we're not going to do what we did in the last decade, which is to continue to run budget deficits, to continue to squander our position, even once the economy had come out of recession.

This is not the time for austerity. The austerity should be coming. It doesn't have to be nearly as bad as people think, but the austerity should be coming, but it should be coming at a better moment in the business cycle.

RAZ: That's economist and New York Times columnist Paul Krugman. He joined me from Princeton, New Jersey.

Paul Krugman, thank you so much.

Prof. KRUGMAN: Thank you.

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