Interview by Lynn Adams Smith
Nobel Prize-winning economist Paul Krugman will be retiring from Princeton University in 2015 to join the faculty of the Graduate Center, City University of New York, as professor in the Ph.D. Program in Economics, where he will become a Distinguished Scholar at the Graduate Center’s Luxembourg Income Study Center (LIS). He will continue writing his column and blog for The New York Times.
Tell us about the Luxembourg Income Study Center.
The background here is that a number of countries have long collected data on the distribution of income —the US has been doing it since 1947—but it was often hard to compare the results across countries and to some extent over time. What LIS does is coordinate with local statisticians so that they produce comparable information, and help support research on what we learn from these comparisons. We learn, for example, about the comparative role of government programs in reducing poverty in many countries.
New York’s minimum wage is currently $8 per hour. Germany is introducing a national minimum wage next year of 8.50 euros, equivalent to $15 an hour. Swiss voters recently rejected increasing their minimum wage to 22 Swiss francs or nearly $25 per hour. What would you like to see the minimum wage be in the US?
I’m for raising the minimum to something over $10 nationally, which would bring it back in real terms and as a share of average non-managerial wages to its level in the 1960s. High-productivity centers, like New York, could justify going higher.
How has studying economics at a Ph.D. level changed since you were a student?
I’m actually struck by how little it has changed. The basic structure of course-work that lays a foundation, followed by dissertation, is the same; the math and statistical level has risen, but it was already pretty high in 1975! The content of some fields has changed, of course, mostly though not everywhere for the better. On the whole, though, the structure both of education and of the career track for young economists has been remarkably stable. I think that’s starting to change now, as the web and the proliferation of think tanks shake up the sources of career success. But that’s just happening, after decades of stability.
Do you have any concern that mounting student loan debt will eventually impact the economy and housing market?
It’s already happening. Household formation is very low, and debt has to be part of the explanation.
How much inflation is appropriate and why has the inflation rate remained low despite the expansion in the money supply?
Inflation is a tradeoff—higher inflation raises some costs of doing business, but low inflation or deflation have the effect of prolonging slumps. In the ’90s there was a sort of consensus that 2 percent made the most of that tradeoff, but subsequent experience shows that the costs of low inflation are much bigger than we thought. So I’d advocate something like 4. As for why inflation hasn’t picked up—both theory and historical experience told us that in a depressed economy with near-zero interest rates increases in the quantity of money would just sit there. Some of us were saying that over and over back in 2009 and 2010; what will it take for people to admit that we were right?
Are bubbles good or bad and do we need them to create strong economic growth and reach higher levels of employment?
Bubbles are bad if you have an economy near full employment, where they divert resources from their proper use and set the stage for financial instability. In a depressed economy, even ill-conceived spending can help create jobs, so bubbles aren’t necessarily bad. There are reasons to believe that we’re facing an era of persistent economic weakness, which means that we’ll only feel prosperous during bubble periods.
Please comment on how artificially low interest rates have impacted the current value of baby boomers’ retirement portfolios and should this be a consideration of the Federal Reserve?
Oh, boy. What do you mean “artificially low”? Compared to what? The appropriate level of the interest rate, most economists would say, is the rate that gives us full employment without inflation; since we don’t have full employment, that says that rates are too high.
And no, the Fed’s job is to stabilize the economy, not to protect incomes of some groups at the expense of that mandate.
Do you think Bitcoin will gain momentum and become a viable currency?
No. I could be wrong, but Bitcoin is harder to use than other forms of electronic payment, and lacks any fundamental source of value (unlike dollars, which can be used to pay taxes). It’s possible that Bitcoin will somehow become self-supporting, but for now my guess is that it’s largely a fad that will collapse one of these days.
What do you like to do for fun in New York City and what will you miss most about living in Princeton?
People don’t necessarily know this, but New York is a great walking and running city; the outdoors seems especially precious amid all that urbanism. I also value the music scene, and just the sheer number of interesting people. Oh, and tons of good modest-price restaurants.
What I’ll miss about Princeton is the birdsong, the good friends I do have there, and some of the cultural institutions, McCarter Theatre in particular.