[ Music ]

>> Susan Collins: Good afternoon and welcome.

I'm Susan Collins, the Joan
and Sanford Weill Dean

of the Gerald R. Ford School of Public Policy.

And I am simply delighted to see all of you and
welcome you here on behalf of the Ford School;

the International Policy Center;
and, the Department of Economics.

It is really wonderful to have so
much interest in our speaker today,

who I'll introduce in just a moment.

But as most of you know, we had to
move the venue because of that interest

and I'd like to thank Hill
Auditorium for wedging us in,

in the midst of performance of
the University Symphony Band.

I feel like I should go and
play the drums, but perhaps not.

It's a great honor and a personal
pleasure to welcome Paul Krugman to campus,

as the Ford School's 2009
City Group Foundation Lecture.

This lecture series was established several
years ago by the City Group Foundation

as a gift in honor of Gerald R. Ford.

We're very grateful to the foundation for
their generous gift, which has enabled us

to bring distinguished policy leaders to campus.

And we're extremely honored this afternoon to
be able to add Professor Paul Krugman's name

to the list of our City Group lecturers.

Today's lecture is the keynote address

for an academic conference we're
hosting on campus today and tomorrow.

The conference was organized in honor of
the distinguished career of our colleague

and friend, Professor Alan Deardorff, who is
currently the associate dean of the Ford School.

Alan's wide ranging and astute
contributions have furthered our understanding

of why countries trade.

The implications for growth and the impact
of trade policy on a globalizing world.

And the conference has also brought many of the
world's leading trading economist to Ann Arbor

and I'm very pleased to welcome
all of them here today, as well.

Well, like many of those conference
attendees, I'm an international economist.

And while I'm very proud of my profession
and its contributions, I do have to concede

that there aren't that many economists whose
work is followed closely by the general public;

whose opinions on economic matters stir
great passions among lay people; and,

whose weekly writings are routinely
discussed around the water cooler.

Well, Paul Krugman is the exception.

Whether they agree with him
or not, people from all walks

of life want to know what Paul has to say.

And just the past few days, for example,
he's appeared in quite desperate settings,

such as the keynote speaker at a conference in
Helsinki on Finnish Economic Competitiveness

and as a guest on the HBO show,
Real Time with Paul Maher.

Paul's even a hit over YouTube, where a
little known performer scored a quarter

of a million views with his song,
and I promise I won't sing it

for you -- his song, Hey Paul Krugman.

And if you haven't checked out the
YouTube video, I encourage you to do so.

But, of course, they don't award Nobel
Prizes for popularity or YouTube hits.

Paul Krugman is one of the great economists
of our time and he was awarded the Nobel Prize

for his analysis of trade patterns
and the location of economic activity.

Traditional theories of international
trade emphasize why countries are different

and why they will trade with us, exporting
and importing, and trade with each other --

exporting and importing different products.

Paul's work emphasized that an awful lot of
the trade that we see in the real world is

between countries that are quite similar.

And they're trading relatively similar products.

His models highlight both that firms can
take advantage of economies of scale,

or produce more cheaply by
producing large quantities.

And the consumers value variety and choice.

Thus, he pioneered models of trade

in which large firms producing similar
products compete in a globalizing marketplace.

These models also link globalization to economic
geography, helping us to understand where firms

and people choose to locate and why.

Paul's academic work stands out because
of its insights about the real world.

In packages that economists love,

because they're mathematically
elegant and deceptively simple.

This work on trade, like his work on
financial crisis and in so many other areas,

has launched new avenues of research and
literally thousands of academic papers.

As most of you know, Paul's work
is also remarkable for its clarity.

Lucidity of the writing in his many articles,

books and columns has significantly
raised economic literacy around the globe.

And as dean of a policy school, I
particularly want to highlight his dedication

to the importance of clear analytic
thinking as a guide for policy.

On a more personal note, I can also
attest to the fact that Paul has educated

and inspired generations of international
and policy oriented economists.

Nearly 30 years ago, his course on international
trade was one of the first courses that I took

in my doctoral studies at MIT and I have had the
great fortune to benefit from Paul's insights

and perspective as a member
of my dissertation committee

and at numerous points during my career.

For all of those reasons and more, I could
not be more pleased to call to the stage,

our 2009 City Group Foundation Lecturer.

Please join me in welcoming Paul Krugman.

[ Applause ]

>> Paul Krugman: Well, thanks.

Thanks Susan and thank every
-- thank you all for coming.

And thank -- I'd like to thank
the [inaudible] Burton [phonetic]

for organizing this great event.

Not this event, but the Festdrift [phonetic]
the celebration of the work of Ellen Deardorff,

which is a great group of people and, you
know, it's kind of a homecoming for me.

This is the world in which I started.

Because the occasion for this is the
conference honoring Ellen Deardorff's work,

I'm going to try to talk at least in a
speech a little about different things

than what I mostly talk about these days.

Mostly, you know, everybody wants to know
about the economic crisis and I will talk

about that a bit at the end, but I'm
sure it will come up in the questions.

But at least for starters, I want to talk
about my whole new territory, originally,

academically, which was discuss
-- sorry about that --

other than national trade and globalization.

And since this is Gannett, this is really
all about honoring Ellen Deardorff.

I just thought I'd reminisce for a moment.

So I got into international economics, you
know, coming straight out of graduate school,

late 1970s and joined what was then
the conference circuit that people

who would meet and many of whom are here now.

And so somehow, they all look older.

That hasn't happened to me, but in
anyway -- and Alan Deardorff was there.

Alan was, you know, at many meetings I was at.

Late '70s, early '80s and was extremely
distinctive because he was an American,

which at the time was quite rare.

At the time that I got into international
economics, there were a few Americans in it,

but it was mostly from other places.

Actually, the way I thought about it was
that it was a field dominated by colonials.

Some Indians, but mostly, Canadians
and Australians, it seemed at the time.

That's probably not true literally, but there
were an awful lot of them, which actually,

imparted a certain character to the conferences.

I was able to finally pinpoint the character.

Initially, I would go to these meetings and they
incredibly -- I come home exhausted, blasted.

Even though I was much younger then, obviously,
but even so, I really was having a hard time.

And I actually went to one with
a bad cold and was taking cough

and cold medicine and really couldn't drink.

I didn't dare to drink and it's funny how much
less -- you know, there's all these Canadians

and Australians and an awful
lot of beer at those.

But anyway, by the way, there's a Chihuahua in
my throat now, which may make an appearance.

There was a reason why Americans weren't
that prevalent in international economics

at that point, because even then,
international trade didn't seem to be

that big a deal for the United States.

In 1970, which is about when
a lot of people who were

on the conference circuit then would have made
their decision to be in international economics.

You know, imports were only about 5% of GDP.

They're 17% now.

So we had this explosion of international
trade, which has turned what was at the time,

a little bit of a back water within economics
into something that's enormously important.

So I want to talk about globalization.

What it's done and I'm going to
finish up by talking about the role

of globalization and the mess we're now in.

But I want to talk a little bit
about history, about the forces.

What we understand.

So first thing you should know
in terms of the history is

that globalization is not a new phenomenon.

It was -- there was a -- the
enabling technology for globalization,

the key inventions arguably were the
railroad, the steamship and the telegraph.

There was a very extensive global
economy created in the late 19th century.

That there's a lot to be learned,
even now, from studying that economy.

But at that, global economy kind of went into
abeyance for a long time between two world wars,

the Great Depression and protectionism
and a lot of shift by much of the world

to inward looking strategies
of economic development.

Globalization receded a lot and
by the 1970 World Trade as a share

of gross world product is probably only
back to around it had been in 1913.

Other aspects of globalization were
nowhere near their pre-World War I levels.

There was not nearly as much flow of
capital, even now, despite all that we talk

about immigration [inaudible] it's still
migration of people than there was,

because there are many legal barriers now
that didn't exist then and the legal barriers

of the poorest do actually matter.

But just about the time that I was getting into
international economics, just about the time

that I first met Alan Deardorff,
all that was about to change.

Now, there'd been some, some return.

international trade had grown
substantially in the '60s and in the '70s,

but it was done so in a kind of limited fashion.

Most of the -- what we would now consider the
emerging markets were still inwardly turned

in their economic policies.

What was happening was there
were agreements that had opened

up trade between quite similar countries.

So there was a lot of trade between
the United States and Canada.

A lot of trade within Western Europe, but it
wasn't a lot of the stuff that we now think

of globalization, certainly
China was not yet in the picture.

Even the smaller Asian economies
were barely there.

So it really didn't look the way it looks now.

What I was -- the analytical work that I did
that, that I and others did was a whole movement

that really, that ended up with that
kind of interesting event in Stockholm,

what was largely about that growth in trade.

Trying to understand why the United States and
Canada, which looked so similar to each other.

You do so much trade; why France and Germany
ship automobiles back and forth to each other.

It's kind of the way things tend to work in
economics, is as soon as you have a theory,

the world starts moving in a way to
make the theory less and less relevant.

And so we've actually, in some ways, moved to a
completely different world, which in some ways,

but not in all resembles the kind of
trade that we had in that first age

of globalization before World War I.

What changed?

Two things, I think, really.

And they were both happened.

I think to myself now, when we were at --
oh, the Handbook of International Economics,

the first volume was a conference
that took place in Princeton in 1982.

And when we were there, we didn't
-- had no idea, but in fact,

out there, the world was totally changing.

The whole world of trade was changing in a way
that certainly, I had no sense of at the time.

Two things were really changing.

One was technology.

The ability to ship things long
distances, fairly cheaply has been there

since the steamship and the railroad.

What was the big bottleneck was
getting things on and off the ships.

A large part of the cost of international trade
was taking stuff off the ships, sorting it out,

dealing with the pilferage that
always took place along the way.

So what the first big thing
that changed was the box.

The container.

A lot of those things -- we think about
technologies that changed the world.

And we think about glamorous
things like the internet and --

but if you try to figure out what happened
to world trade, there's a really strong case

to be made that it was the container.

The container that can be hauled off a ship
and put onto a truck or a train and moved on.

And these days -- used to be the ports
were places with thousands and thousands

of longshoremen milling around doing stuff.

Now, they're like something out of
one of those science fiction movies

in which something has caused all the people
to disappear and they're only machines, right.

But there's -- and [coughs] told you
about the Chihuahua in my throat --

the, the big change there, I've just been
re-reading a very good book called The Box,

which is about containers.

The big change there was really between the
late 1970s and mid 1980s, sharp drop in the cost

of transactions, which opened up the world;
made it possible to do what we do now,

which is to produce a good in
many, many different places.

As the different stages of
production, different components.

Ask yourself where is an
iPod made and the answer is,

that's a really complicated question to answer.

The other thing that changed was policy.

To some extent, in countries
like the United States,

but we had actually moved quite
a long ways toward free trade.

What really changed was that many of the
developing countries had followed for 35 years

after World War II, they followed
a policy of looking inwards.

Of encouraging production for the domestic
market, which whether by design or simply

because that's the way [inaudible]
equilibrium works.

Ended up discouraging exports, basically,

the way these inward looking
policies discouraged exports.

Great shift toward outward looking policies.

Great shift towards allowing foreign
trade to become the driver of growth.

The most extreme case, of course, being China,

which went from virtually closed
to the world, to extremely open.

And all of a sudden, this
explosion of world trade.

And all of a sudden or over a
relatively short period of time,

international trade was no
longer interesting to Canadians,

for whom it's always been interesting
because they have this neighbor.

And was interesting to all of us Americans.

What do we know about globalization?

I think even now, we don't --
we're still adjusting our stories.

In fact, I've actually been changing my
own story about globalization a little bit

than the last two months, because
I've been noticing some stuff

that I was not paying sufficient attention to.

I really should have, because
it's up my line very much.

So this is the part where I get to tell
you what I did on my summer vacation.

I did actually take -- was holidaying in
Scotland earlier -- just relatively recently.

And -- this is kind of depressing.

What do we commoners do on vacation?

They go to museums that are
focused on economics.

[Laughter] In Dundee, Scotland,
there's a terrific --

if there're any people economics-oriented,
you'll find yourself there.

Visit the Vurdonport [phonetic] Museum,
which is dedicated to the history

of the Dundee Jute [assumed spelling] industry.

And if you haven't been there, you might
think of Dundee, but [phonetic] the name --

it sounds like it ought to
be some cute little town.

It's actually -- they're trying
to rebuild, but it's a grime,

decayed industrial city trying
to crawl its way back.

And what it was industrially, was
jutopolous [phonetic] is what they called it.

It was the center of the world
jute trade, which was a enormous,

long-distance trade in the late 19th century.

Taking the fibers, which come from India,
treating them, drawing them; eventually,

ending up as burlap bags and such like.

Huge business.

Dundee had more millionaires per
capita than any place else in Britain.

How do we think about that?

Part of it was that it was compared
advantage, which is what economists --

the grand theory of economic of international
trade which has dominated most of our thinking

which is the country's trade
because they're different.

They have different resources, difference
competences and they trade, in effect,

to take advantage of those differences.

Obviously, Britain had to import the jute
because it won't grow in Scotland, for sure.

Why was the manufacturing
taking place in Britain?

Because Britain had the capital.

It had the technological skill.

It had certain kind of skilled labor in
a way that India, at the time, did not.

Later on, actually, the industry moved back --

the actual manufacturer moved to
India because those things did spread.

But initially, at least,
it was to do with Britain.

But that's not the whole story, because
that says why you should be producing --

why you should be processing
jute somewhere in Britain.

It doesn't say why you should
be doing it in Dundee.

And there the answer is much closer to the kinds
of things that I've spent a lot of time thinking

about in my career, which is
the role of increasing returns.

The role of things that accumulate.

So as is characteristic of these stories,

some more or less accidental
historical things that got started.

In the early stages, the process of
treating the fibers relied on whale oil.

Later, it turned to mineral oil, but initially,
it was whale oil and Dundee was a whale import.

And also, it was similar in some
respects to dealing with flax,

which was the only thing they had, but
all that, that's just how it started.

It became irrelevant.

You had this clustering.

You had this process where
it fed [phonetic] on itself.

In the economic geography, a lot of us,
some years back, we discovered the works

of the great Victorian [inaudible]
Alfred Marshall,

who focused a lot on these industrial clusters,
which was very much a story of the time.

That he said there were really three things.

There was the creation of a thick market

for particularly highly skilled,
but specialized skill labor.

There were specialized suppliers of equipment
services that you needed in the industry

and there was what we would now call
technological spillover, but as he phrase was,

the mystery of the trade become no
mystery, but are as it were the air.

Basically, everybody in Dundee
knew all about jute.

So you had this kind of clustering.

And that's actually quite typical.

If you go back, we do tend to think of 19th
century trade as having been straight forward.

There were countries with different --

there were tropical countries,
there were tempered countries.

There were countries that knew manufacturing
and there were countries that didn't.

That was actually a lot of
this clustering, as well.

So there were many such clusters.

Obviously, jute in Dundee.

Hose and lace in Nottingham.

Cutlery in Sheffield, go down
these last -- a series of things.

We actually had counterpart things
in the United States, as well,

although the United States was
protectionist and relatively closed.

So they served the domestic market.

So we also had Patterson, New Jersey
was the equivalent of Nottingham.

And Troy, New York was the detachable collar
and cuff center and that sort of thing.

Well, anyway, I always love
these historical things.

What about today's world?

Today's world is extraordinary,
complex, enormous volumes of trade.

When I was first getting into this, we
could say, "Well, you know, in some ways,

globalization still falls short of
what it was in the Edwardian Era.

Can't say that now.

Now, we have this enormous --
what we have and what didn't exist

in the past is these complex supply chains where
things are many, many stages of production.

That's the iPod, about a dollar -- the
iPod's final assembly point is trying --

but that assembly is only about
a $1.50 of the price of the iPod.

The rest, there is other trainee stuff in
there, but there are just many, many stages

and it's a large number of
countries are involved.

Creates a tremendous amount
of shipping back and forth.

A lot of that now, reflects again
differences between countries.

The wealthy countries still have advantages.

They have still somewhat better technology.

They have more skilled labor.

They have all of the advantages of being
in an advanced country environment,

so there's quality control issues.

I understand, I haven't seen it.

There's a new book out called,
That They Made in China.

There's still, even now, there are differences
in [inaudible] but on the other hand,

the developing countries have inexpensive labor.

And in some cases, reasonably good productivity
in manufacturing and so we have a trade back

and forth that is based upon
the goods that are really,

goods in stages of the production process

that are really still requiring advanced country
environment or done in advanced countries.

But the other stages are
done in developing countries.

Within that, there's a lot of the same thing as
my story about Dundee, but what's interesting is

that these days, if you want to find
those clearly defined industrial clusters;

those cities where a particularly sort of
narrow competence leads to the dominance

of the whole city economy,
you really find them best

in the emerging markets in the developing world.

So you go around China, you'll find
that there is, you know, there is --

well, if Dundee was Jutopolous
in the late 19th century,

Yambu [phonetic] is underwear
city in the 21st century.

There are these clusters, again,
the broad -- it's pretty --

it's probably a foregone conclusion that we're
going to have labor intensive apparel produced

in China or now, moving down to even
lower wage countries like, Vietnam.

But it's a -- the details
depend a lot on accident,

which leaves some particular
town to develop a specialty.

And derive advantages from that, because
there are advantages of this cluster.

The advantages of this scale of
production in a particular locality.

I should mention, by the way, since
again, this is Alan Deardorff conference

that this whole process of fragmentation
of production, which has made it possible

to have this huge volume of
world trade is one of his --

one of the areas he's done a lot of work in.

When this stuff first began, when we were
just starting to see the surge in exports

from smaller Asian countries, we used to say,
"Well, you know, there's only a limited amount

of this stuff that they can --
labor-intensive stuff that they can export."

What will happen?

I mean, I remember specifically saying,
what will happen if China tries to do this?

It just isn't possibly going to
be enough labor-intensive stuff.

And of course, it's there because the ability to
segment the production of goods and produce all

of these labor-intensive stages of production.

Transformed world -- the process really gained
a lot of momentum because of the interaction

of these technological changes
and the political changes.

The technological changes meant the country --

some countries could do very well by
integrating with the global economy.

And that made other countries more willing to
liberalize their policies and do the same thing,

and so this explosive growth of globalization.

Is it a good thing?

Or is it a bad thing?

And the answer, of course, is yes.

The good thing, first of all,
just in terms of the economics.

Clearly, there are -- the world economy
is richer because of all this stuff.

It's richer both, because we have countries
-- here [inaudible] for two reasons.

One is that we have countries concentrating
on the things they do relatively well,

which doesn't mean, as the economists know
here, it doesn't mean they do absolutely well.

Actually, on any given thing,
it's almost certain

that U.S. labor is more productive
than Chinese labor.

But that varies quite a lot, so by
having the Chinese do the things

at which they are relatively productive, we
get the whole world producing more efficiently.

It means the world wealth has gone up.

In addition, the world market makes it possible
to do a lot of things on an efficient scale.

In some cases, by just having a
really big factory, but in many cases,

by having a concentration of production of --

not many factories where the firms
produce mutually reinforcing advantages.

And all that gets passed
through ultimately, two buyers.

In the end, the world is a richer place because
the underwear makers of Yambu are more efficient

than any national, purely domestic
market-oriented underwear city could be.

So we have a world that's clearly richer.

But that doesn't mean everybody
benefits equally.

And there are many dislocations.

Many distributional effects.

The most obvious and the one we worry about
a lot is that lower formal education workers

in advanced countries are almost certainly hurt
by, by imports, that, that inequality is wider

to some extent because of globalization.

I would argue that the evidence
is still a little suggestive --

that it's a secondary factor -- but inequality
has widened and globalization is probably part

of it, and that has probably hurt
workers in advanced countries.

The, on the, if you, if you take a
global citizen point of view, though,

I think you want to say that those losses
are less dramatic than the huge gains

which many workers have achieved in
the developing world, and you, there,

there's a real trap, I think, for, for
concerned people in the, in the advanced world,

a tendency to think of, to compare
the ugly reality of life for workers

in today's developing countries with an
abstraction of what you think it ought to be

or with an idealized picture of what it
used to be like rather than with reality.

So sometimes this almost
comes down to condescension,

thinking about happy peasants living
their traditional lives and you compare

that with the actual workers at
Lonjeau [phonetic] and you say,

"Oh wow, this must be a terrible thing."

But the fact of the matter
is, given the reality,

which is that developing countries were
incredibly poor in 1970, and the fact that some

of them have now achieved a really big
increase in their standard of living even

if it looks pretty bad to us, that there's
been a tremendous amount of progress.

Hundreds of millions, perhaps
billions of people,

live better lives because of globalization.

But it is a mixed picture, and it's also
turned out to be much harder than, I think,

many economists believe to actually
reap those gains from globalization.

When the great takeoff of some East Asian
economies took place, a lot of people thought,

"Well, if you just open yourself up to
world markets, this is what happens."

And a number of countries, particularly Latin
America, at least, that's where I track it,

have opened themselves up to world markets, and
have not gotten anything like the same results.

So it turns out that it's a much more
mixed, much more uncertain picture

than we were hoping it would be,
but if you'd asked me 2 years ago,

"How's globalization going," I
would have said, "Well, you know,

there's a lot of...it's certainly
not wonderful but there are some,

some...a lot of good things have
happened, and that on the whole,

this is a, has been a force for good."

All right.

Something happened to us recently.

So we have the world economy
go into this terrible crisis.

What can we say about the role of globalization
in this future globalization, you know,

small questions, but anyway, let me,
let me, let me try to talk about,

about where, where I think we are, right now.

And by the way, of course, there is a, if you
read your history, you can't help but think,

gosh, we had this global economy
the single biggest force killing it,

the original goal of the global
economy was the Great Depression.

And now we are in a world slump that
bears a definite family resemblance

to what happened in the early 1930s.

Is it all going to happen again?

What does it say about where
we're going for now?

So, okay. The crisis.

We have had, well, it, it
has been awesome, of course.

The first year of the crisis tracks
the Great Depression very closely.

It actually turns out that the initial fall
in industrial production was as big as it was

in 1929-30, that the initial fall in world trade
was actually sharper than it was in 1929-30.

The fall in GDP, well, we don't
really have the statistics back then,

probably a little bit less, but, but
on the whole, we really did have a,

a onset of the Great Depression
scale world crisis.

It does appear to have stabilized now, so the,
it appears that Armageddon has been put on hold

for at least a little while here.

The Apocalypse has been postponed.

But it's, it's been a pretty
shocking crisis, and we are of course,

nowhere near being out of the woods.

Was the crisis caused?

Did globalization pave the way for this crisis?

Well, certainly not in the simple sense

that all this increased trade was
directly responsible for the crisis.

It didn't do that.

If you want to look for causes of the
crisis, you would possibly look more

at the financial side of globalization,
which of course, is not independent.

So if you're looking for where things
went wrong, you would say, well, as, as,

as China became deeply integrated into the world
economy, it also sort of stumbled into a policy

of accumulating huge reserves, which led to
a glut of cheap money in the United States,

which helped feed our housing bubble.

It's kind of an indirect chain, but
it certainly is part of the story.

You would also say that, in a more
limited sense, that we tend to think

of this crisis has having been a
primarily U.S. event, but actually,

there's a lot of it happened in Europe as well.

And they're, they're sort of
more localized globalization,

if you can use that phrase, played a big role.

They had huge lending to Eastern
European emerging nations that was,

in its own way, as big an imbalance as the U.S.

/China thing and has ended in
similar lease [inaudible] grief.

So you can certainly say that the
opening up of world capital markets,

the opening up of world capital flows,
played some role in engendering this crisis.

Globalization has certainly played
a role in propagating the crisis.

One of the things that has been remarkable
is that although you can point to certain,

you know, obviously, the, the places of the
financial excesses were the United States,

the U.K., arguably, but in different
ways, some of the European countries

that had a enormous housing bubble, so Spain.

The punishment has not borne,
if you look across countries,

has not borne very much relationship
to the crime.

That the steepest falls in GDP, at least
initially, have actually come in countries

that did not have runaway financial sectors and
did not have housing bubbles, have come in Japan

and in Germany, which were,
well, what was their sin?

Their sin was being deeply integrated
in the world economy and being exporters

of durable manufactured goods,
which took the biggest hit.

So the biggest declines in GDP, at
least initially, have come in countries

that were being hit through world trade,
and all of this is possible because we have

such a, an integrated global economy.

And that contributes to what is in
some ways, the most troubling feature

of this crisis looking forward,
which is that it hit everybody.

I'll come back to that in a second.

There's another sense in which the crisis,
in which globalization helped to lead

to a synchronized crisis, and
this is a little bit softer,

but I think, very, still very important.

One of the effects of globalization has
been, while it's, you know, obviously,

what's driving it is people looking for, for
profit, and what, what it's about the movement

of goods, and services and money, it
also produces an integration of thought.

We more and more, you know,
we all certain of culture,

I gather that there was a presentation
this morning about the horrors of,

of cultural homogenization, which is, you
know, whatever you think of it, it's very real.

We certainly all dress alike around the
world, we all, we all watch the same kind

of entertainment and, and we all think
alike, which means that intellectual trends,

the conventional wisdom of the moment is
now a global conventional wisdom rather

than a national conventional wisdom.

And in particular, pretty much everyone
around the world thought it was a great idea

to deregulate banking and at
the same time, so that we all,

when the house of cards came
down, it came down everywhere.

Which makes this very difficult right now.

We've just had an awesome financial crisis.

It's not, now that we've seen it
happen, that hard to understand.

We look at it and it's actually,
it is a, it is a more or less a,

a historically standard banking crisis,
but dressed in different clothes.

So we, we, if you go back to the early 1930s,
there was a wave of banking failures, bank runs,

and such things have happened in
individual countries since then.

This time, well, we actually had pretty good
guarantees for banks as conventionally defined,

basically, big marble buildings
that take deposits.

The trouble was that we had sort of
failed to do anything about the growth of,

of institutions that functionally are
banks; basically, anybody who borrows short

and lends long is a bank, but weren't
called banks, and didn't look like banks,

and weren't strictly speaking,
depository institutions,

but once you take that into account,

what we've had is the 21st century functional
equivalent of 1931 around the world.

With, it so, this time, bank runs
don't consist of hordes of people

out in the street banging on the doors.

They consist of hordes of people on
the Internet clicking their mouses,

but it does the same thing.

And it's sort of all played out very similarly.

And we have, thank God, had a
pretty vigorous emergency response.

So we have learned a little bit
these past 75 years and appear

to have contained it from
being a total collapse.

But what comes next?

Well, we've had a number of
more localized banking crises

around the world since, since
the Great Depression.

We've had, obviously, we have had
financial crises of various sorts.

We've had Mexico and Argentina and, and
Mexico again and Argentina again, and,

and the Asian countries, and Sweden and
Finland and, and all of these are very nasty.

We know the IMF has done a lot of, you know,
reaching back into history to ask what happens,

and the answer is that financial crises not only
are severe, but it takes a long time to recover.

There's one other thing that becomes
very clear from, from the record,

which is that all modern financial crises,

economic recovery from all modern financial
crises, relies crucially on the same thing,

which is that the crisis-afflicted
country recovers to a large extent by,

at least for a while, running
big trade surpluses.

It basically pulls itself out of its hole by
selling a lot of stuff to parts of the world

that were not caught up in the crisis.

I think you see the problem.

Unless you can find another planet to export to,

the normal [laughter] the normal
exit from financial crisis.

Not, not the stabilization, which I think has
been a tease, but the actual return to something

that looks like a reasonably, fully -employed
economy, that route is not available.

And you really look, it's, there really are
no exceptions to this rule in modern times,

whether it's Argentina or the East Asians

or even Japan emerging temporarily
from its lost decade of growth.

They've all been achieved
through export surpluses.

And that is not available, so if you
are actually looking for a precedent

for a world economy managing to emerge
from a financial crisis, and, you know,

fully recovered from the effects of a financial
crisis, without, where everybody's caught up

and where countries are not able to
do it by running trade surpluses,

you actually have to go back to the recovery
from the Great Depression itself, which was the,

you know, the full recovery was achieved

through a large public spending
program, known as World War II.

So, it's, it's not a very encouraging thing.

The last time we had a global
crisis, one of the effects was

to roll back globalization for a long time.

That does not seem to be happening right
now, although, yes, there's tariffs on tires

and things, but there's actually nothing
like the kind of protectionist response

that took place in the 1930s, not
much sign that that's going to happen.

The question I guess one might
ask is, maybe should it happen?

We seem to have a global economy
that is, that we don't exactly, we,

our institutions have not caught up with this.

We aren't actually managing to find global
solutions for crisis; we are just managing

to find ad hoc patches to, to keep
the thing from totally falling apart.

We are to a certain extent holding
the world economy together with,

with scotch tape and chewing gum.

So our, is there a, a reason in the
crisis to roll back globalization?

I think you could actually
possibly make that case.

But I don't think it's going to
happen, because the advantages

of globalization are still very real, the
virtues, and of course, everybody does remember,

actually, they remember something
which may not be entirely true,

which was that protectionism was a
major cause of the Great Depression.

That's arguably not true, but in any
case, it stands as a cautionary tale.

Which means that we need to
find a way to deal with this.

And I think one way to look at the
world right now, I mean, there are many,

there are many different ways to look
at it, but one way to look at it is

that we actually created this global economy

without creating the institutions
that we need to manage it.

We are still in a world of national policies,
even where we have super national institutions.

They're not functioning very well, so that the
European Union is looking awfully disunited

when it comes to [inaudible]
our policies these days.

And they really, they're enormously
interdependent, and yet they don't seem

to be able to make policy jointly.

We've had some cooperation in
some of the emergency measures,

but those have been amazingly dependent,
really on sort of personal contact.

I mean, they, you could argue that the,
we managed to save the world basically

because Jean Truchet [phonetic] and Irving King
and Ben Bernanke were able to sort of agree

on some things that needed to be
done in the heat of the moment.

And while I would like to have a rule that the
leaders of policy would always be in the hands

of smart bearded Princeton professors,
that's not something we can really count

on in the future [laughter] So we do, we
do, actually, we have not yet come to terms

with this enormously more integrated
economy, this economy that, I have to admit,

30 years ago when I was getting
into international trade,

I never imagined it would,
it would be this relevant.

And we have no choice in the end, because, well,
you could imagine rolling back trade flows.

You could imagine.

It would not, it's not technologically
impossible to go back to a world

of relatively inward looking economies.

There are other ways in which
we're globalized, like it or not.

The atmosphere doesn't care where a ton of
carbon dioxide gets emitted and we're now

at a stage where those global
constraints bind enormously on all of us.

So we're, we're globalized, whether we like
it or not; it's an amazing, frightening time.

I'd like to think that we'll come out of all
this with an understanding that we really need

to go beyond just trusting this vast global
economic machine to do the right thing,

and figuring that we actually need to have
some adult supervision of the whole thing --

maybe it will actually happen -- and hey,
we're supposed to be optimistic, right?

Otherwise, what's the point?

So, amazing times.

As a citizen of the world, I am quite
horrified about what we're going through,

a little less frightened than I was 6
months ago, but still, awful prospect,

but this is a conference to analyze economic
research and, and to celebrate the research

of [inaudible] Deardorff and as an economic
researcher, may I say, "Boy, I'm in clover.

This is like a volcanologist watching
Mt. St. Helen's erupt, and great time,

great time to study, unfortunately,
not to live through."

Thanks.

[ Applause ]

>> Thank you so much.

Paul. [laughter]

>> Susan Collins: Yeah.

First I'd like to thank you, Professor Krugman,
for coming to the University of Michigan today.

I wrote this down.

Recently I watched you and
former Governor Spitzer speak

on Bill Maher regarding the current
lack of social ability in this country

and the decreasing income
growth within the middle class.

Former Governor Palin was also mocked on the
show as she has been before, for saying recently

that the key to an economic
recovery is a slashing

of payroll taxes, corporate taxes, etcetera.

Globalization is obviously very
real and capital is free to flow

where the costs of it are the lowest.

If, in fact, the goal for our economy, is job
growth, real wage growth, and the decreasing

of income gap between the rich and
the poor, how does the maintenance

of a high corporate tax rate, which makes it
more expensive for multinational corporations

to do business in the U.S. relative
to other countries, and therefore,

makes the U.S. that much more uncompetitive
with the rest of the world achieve that goal?

>> Paul Krugman: Okay.

The, the corporate tax, the argument
that corporate taxes are really high

in the United States and are, are
driving business out, you know,

it could be true, but it happens not to be.

I mean, if you actually look at the numbers,
[applause] there's a lot of massaging

of the data, you know, that are used, so people,

the overall corporate U.S. corporate
tax rate is not much out of line

with other advanced countries and you know,

direct investment has, has
on balance, been flowing in.

It's not, just no sign that that's
actually been happening in America, so, not,

not, not the thing to worry about.

And by the way, you know, if you take the
overall level of taxation, you know, we're,

we're pretty much at the bottom
along advanced countries.

And if you take the, and even if there
were, there really were a big problem

with corporate taxation, it's not as if we're
dealing with, you know, anonymous vast forces.

If there was a, if there was really a war of
corporate tax cutting among the major economies,

we could sit down around a
table and try and settle this.

It's not, it's not a large number
of players, so no, this, this is,

of all the things to worry about, the idea that
high corporate taxes are costing America lots

of jobs, is really, doesn't
belong in the conversation.

[applause] Yeah.

>> Hello. I'd like to ask you to
clarify an observation that you made

about globalization leading
to greater inequality,

because it seems like you're describing
globalization as sort of a leveler

that lifts up, the wealth of China and that
it may be, does that at the expense of,

of workers in other parts of
the world, so what's the, the,

what's the metric by which you see in equality
increasing as a result of globalization?

>> Paul Krugman: Oh, yeah.

If you looked at inequality within the
United States has increased dramatically.

Increased, inequality within most advanced
countries has increased a little bit,

although basically, mainly in
the English speaking countries,

which is an interesting thing.

But the, but if you were looking at
some measure of world inequality, the,

that's gone down because of the big
rises in income and some of the roles,

in some countries that were formally very poor.

Actually, I'm going to give my, I didn't give
my usual pro-globalization sermon, which is,

when I went into economics, when I
was a PhD student, I thought to myself

that I really should be doing
developmental economics,

because that's what really
matters for the people.

But I didn't because in, circa
1975, it was too depressing,

because developmental economics was
basically non-development economics.

There hadn't been any big success stories.

There hadn't been...you tried to look for
a country that had gone from a third world

to first world, and you basically found
well maybe Japan, or you know, Japan 1883.

All of that has changed now.

Lots of poor countries have remained very poor.

There are a lot of terrible stories out
there, but there are also real success stories

and all of those are tied to globalization.

I think a world in which it is at least
possible to have a place like South Korea,

that was on the edge of subsistence in the
mid-1960s and is now a decent, advanced society,

is a much better world than the one which
we have sort of locked into permanent roles,

so that's the, that's the
pro-globalization sermon.

It doesn't mean you should
be blind to the downsides,

but that is the, the plus, the upside.

>> Professor Krugman, I just wanted
to ask, do you think the contributions

in the economic debates from, from people who
aren't macroeconomists, I'm talking voices

like Richard Posner, who is not an
economist at all or Eugene Falms [phonetic]

who is not primarily a macroeconomist or even,

even just regular bloggers
like Matthew Iglasias.

[phonetic] Is their contribution adding
to the state of the debate or is,

is there a risk that they're muddying it
by knowing just enough to sound interesting

and reasonable to people like, laymen
like me, but not enough to, not,

don't know enough to really
contribute substantially.

>> Paul Krugman: Oh boy, I mean,
economics is not a priesthood.

[laughter] And God knows, at this point, the
economists certainly have no claim to say

that no one who has, who acts, you know,
the piece of paper should be in the debate,

it's not like, you know, it's not like we've
done all that well in the last year or two?

[laughter] So, by all means, people should
play in, but I think, I think, you know,

in some ways, this whole modern system
of credentializing is, you know,

is somewhat artificial and someone can be,
look, I'll give you, I'll tell you some-,

Martin Wolf of the Financial Times,
is actually not a trained economist.

That doesn't stop him from doing actually
superb work, you know, on it, because he's,

he's learned a lot about it and not just about
the professional work, but observing the world.

So, that's fine.

Now, if people are going to weigh in on the
economic debate and not get basic facts right,

not understand the difference between
changes at an annual rate and actual changes

over the quarter and not, GDP at an
annual rate and GDP, and so on, this is,

this is about Posner, who was off by a factor
of 16, and his critique of Kristy Romer,

[phonetic] then, you know, then we
probably shouldn't listen to them.

But it's not a question of the credentials;
it's a question of whether they're serious.

>> Let me ask you a question
from two points of bias.

One is, I live in a state that at least used
to make its way in the world by making things

and selling things and secondly,
when I was getting my piece of paper,

we studied a lot about exchange rates, a term
interestingly, that you haven't mentioned yet;

I just want you to think about
contemplating a world in which our,

two of our major exports cease to
be mortgage bonds, private debt...

>> Right.

>> Paul Krugman: ...and, on the other
hand, U.S. Treasuries public debt,

and can we think about a world in which there's
less demand for those things in other countries.

The dollar, in fact, weakens considerably,
and all of a sudden, maybe some of our lost

or losing industries have a stronger
comparative advantage because the dollar is,

is a cheaper thing for people to buy with.

You know, that was actually starting to
happen just before all hell broke loose.

You could actually see U.S. exports were
surging, U.S. manufacturing was staging a,

something of a comeback and we
were running into constraints,

which were a problem but were revealing.

It, there are a lot of stories from 2007, about
the emerging shortage of skilled machinists,

skilled pipefitters; we were
experiencing a manufacturing revival and,

and being hurt by the fact that we had
gotten so much out of the business and no,

I think that's where we will be, if
and when we finally emerge from this,

and I say it will be a stronger manufacturing
nation again, partly because of a weak dollar.

It doesn't mean that we'll be doing
the same things we were before.

It's, you know, I don't think...apparel is
something that is going to be done very much

in the first world no matter what, but it's,
it's not going to happen and it's just;

we were in a very weird world on,
in the middle years of this decade.

We were in a world where the United States
was, as I love, as I used to describe,

we were in a world where we were making a living
by selling each other houses which we paid

for by money borrowed from the Chinese.

I mean, it was a...that's not sustainable.

That's not the way it's going to be.

The other version of that is that we
actually had fair and balanced trade.

Right, if they were sending us
poison toys and tainted seafood

and we were sending them fraudulent
securities, but the, [laughter] the...neither

of those is original [laughter]
but it'll, it'll come back.

Now it won't come back in the...in...and
of course, it may be a while.

And of course, China, the other
thing you need to bear in mind is

that China's enormous surpluses,
the, that's a recent development.

In China, it was roughly in [inaudible] balance
as late as 2002, so this whole bizarreness,

this bizarre economy, the house of cards that
collapsed, was a relatively recent creation,

and if we can go back to a more reasonable
set of exchange rates, a more reasonable set

of capital flows, some of this will come back.

I don't, I don't know what the fate of the
Michigan automobile industry is, right?

That's, that's problematic, not just because
of the, of the dollar and the crisis,

but also because of transplants and all of that.

But it 's going to be quite different.

And, yeah, it still is weird, I'm using
that word a lot, but, there, there is,

it is hard to figure out, we've become
so used to a country that doesn't seem

to be making many things, although but there's
more of those than people imagine, but, but,

but certainly less than there used to be.

The, if you take the train up the
Northeast Corridor, there's a famous,

as you cross the Delaware River, there's a sign
that says, "Trenton Makes, The World Takes"

and what they actually make
in Trenton now is nothing.

So, things have changed, but I think,
I think we'll see some of it come back.

>> Your comment about the U.S. actually
having lower tax rates than a lot

of Western advanced nations made me think about
what those taxes pay for in other nations,

namely, social safety nets, you know, healthcare
systems, which led me to the question,

if you were made king for a day,

and got to design the U.S. health
care system, what would it look like?

[laughter]

>> Paul Krugman: Yeah.

[applause] Yeah, I mean, look, the, the, if you
could wipe away all the political realities,

you'd want it to look probably
like France, which is,

with its heart, it's a very Gallic system.

It's actually hard to explain to fully
understand what's going on, but it's,

it's basically a single payer system with a
mixture of public, private, non-profit provision

of health care, but yeah, I mean,
if, if I could start from scratch

or waive away political reality,
I'd go for something like,

something like an idealized version of
Medicare for all, so, not just single payer,

but [applause] but a lot more, a lot more effort
to sort of police the provision of health care,

so that it's done wisely and you don't have
runaway costs and, and a lot of spending

on procedures that don't help people.

Now this is, but, that's it, okay?

I don't think you want to be a
purist, because there are lots of ways

to have universal health care with much
lower costs than the American system.

Basically, every other advanced
country does it, right?

And they do it in wildly different ways.

They do it, in single payer, they do it with
actual socialized medicine in Great Britain

and in Spain; they do it with
private but tightly regulated and,

and subsidized health care in, in
Switzerland and the Netherlands.

There, there, there appear to be about
a half a dozen ways to make this work.

We happen to be following none of those ways,
but it doesn't, it's not that you have to do it

in one ideal way, it's just
do it, that's the point.

[applause]

>> Hi there.

What's going to happen to the world
economy after a nuclear device is detonated

at the corner of Sixth Avenue
and 42nd Street in New York?

>> Paul Krugman: Oh boy.

[laughter] If it's one of the days
that's...it's fairly frequent,

that I'm actually in the
city, I guess I won't care.

The [laughter] no, look, this is, can I
say, though, that this is terrifying, but,

what actually would be, the actual
terrorist incident we had which, you know,

first was what supposed to change
everything, you know, didn't.

That we, this is, this is a real possibility
that someone could do it, but it's not,

it's not something that any of the
players we know about is capable of doing.

I mean, I'm stepping completely away from
economics now, but Al Qaeda is a vicious gang

of fanatics, but they really
got lucky on 9/11/2001.

They haven't been able to do anything
on that scale since, and, but, sure,

you want to be fighting nuclear
terrorism which, as I understand it,

the most important thing is actually
securing nuclear material in places

like the former Soviet Union, not,
and, and doing all of the things

that one tries to do to fight terrorism.

The, it, it's not a...there's no indication that
you have to completely change the way you live.

That we need to become a police state ourselves,
that we have to, there was a lot of talk

about world trade, world interactions have to
be shut down because of the terrorist threat

and that, that has proved unnecessary.

And, and I even think, I, every time I
squeeze my shampoo bottles into my little bag,

I get really mad because that was clearly an
overreaction, that the war on liquids was,

was inappropriate [applause] so, you know,
there are lots, there are lots of bad things

that happen in the world and
you try to deal with them.

I don't, you know, don't want
to fixate on just that one.

>> Thanks again for being here.

As an economics student, you learned a lot,
especially in mac, introductory macroeconomics,

you learn about, when it comes to government
spending, there's 2 major factors -

there's the Kansian [phonetic] multiplier
and then you have crowding out, and recently,

I know that some economics have argued that
the Kansian multiplier isn't as effective

as we once believed, and you've
actually argued against crowding out,

you believe that the large trillion
dollar stimulus package is crowding in.

So I was just wondering if you would
just explain that a little further.

>> Paul Krugman: Yeah.

It's not a, we're in a very
special circumstance right now.

We're in a situation where, which we, in the
United States, haven't been in since 1930,

although the Japanese were there in the 90s.

Which is, that interest rates, short
term interest rates are basically zero,

that there's a, and, if, see, the normal,
we talk about crowding out sometimes

as if it's a mechanical thing, but it's
actually, it's mediated through, through,

through actions by the Federal Reserve normally.

If you expand and the, you know,

fear of inflation expanding economy causes
the Federal Reserve to jack up interest rates,

the ones it controls, which then lead
to higher interest rates on other things

that should crowd out private investment.

Ordinarily, that's a very real story.

Certainly, what happened in the
80s from the Reagan deficits.

Right now, take the Taylor [phonetic] rule.

It's a rule of thumb for, to, for Fed policies;

it depends on how depressed the
economy is and the rate of inflation.

Apply a Taylor rule that actually
fits Fed policy in the past

and that's what the Federal
funds rate would be, should be,

according to the Taylor rule right now.

And the answer is about minus 5 or
6%, around minus 500 basis points.

This is a world in which expansion

of fiscal policy is not going
to cause the Fed to raise rates.

It's not going to lead to higher interest rates.

So, the normal arguments about
crowding out don't apply .

And in fact, or, an alternative way of
saying it, I'm going off this...one way

of saying it is, right now, the
world is awash in excess savings.

Around the world, the amount that people
want to save is less than the amount

that businesses are willing to invest,
even at zero short-term interest rates.

That's a world in which governments, by
borrowing and spending, are not crowding out,

are not taking away savings that
could be used for private investment;

they're actually putting
these excess savings to work.

And we'll actually need to hire investment,

because the main reason businesses
aren't investing now is

that there is not enough
demand for their products.

So this is not, you know, we don't expect
to be in this kind of situation very often.

This is a, this is Alice Through
the Looking Glass territory.

This is a weird, boy, that's been my word
all through the night, anyway, but this is a,

this is a, this is an economy in which
everything is kind of reversed and which,

I think I wrote this at some point, that
virtue is vice and prudence is folly.

That's not the normal state of affairs,
but it is the state of affairs we're in now

and if you believe the projections from
the Office of Management and Budget,

it's the world we're going to be
in for 2 or 3 more years at least.

So that, this is special times and
part of what drives me crazy is the way

that conventional wisdom about economic
policy has not taken on board the craziness

of the times we're now living in.

>> So, here in Michigan, where the
unemployment rate's really high,

the local industries are really
struggling, you know, the idea of some form

of protectionism starts to have some appeal.

I think you mentioned you
thought that was unlikely,

but the argument could be made for that.

Can you explain that a little bit please?

>> Paul Krugman: Oh, no, I mean, there,
there are different levels of argument.

So the first is, you mean would
Michigan manufacturing workers benefit

from some protectionist measures,
yes, at least in the short run.

Would those protectionist measures
make America as a whole poorer?

Under normal circumstances,
yes, but arguably not now,

because we do have this depressed
economy and we need more demand.

You can even make an analytical case,
though you want to be very careful about it,

that the world as a whole would be a little
richer if we had a little bit more protectionism

because every individual country would
feel freer to engage in fiscal stimulus,

knowing that the extra jobs
it creates would be at home,

so the lack of policy coordination
gives you some case for protectionism.

Now, there are good reasons not
to do this; namely, that in the,

protectionism does make the
world poorer in normal times.

Normal times will return eventually and if
you break up the system of trade we've built,

then it's very hard to put it together again --

probably take decades of
negotiations to reconstruct it,

so you don't want to do this lightly.

But it does, look, take the issue.

The tire tariff, that, there was a
lot of hyperventilating about that.

It happens to have been legal, because
we had pre-arranged that we had more,

that we had the right to temporary
restrictions on Chinese exports

that were imposing a big market share, market,

taking a big market share
in a short period of time.

So we, it was, everyone's out here
someplace, it was, it was not a violation,

it was not like the steel tariff that Bush
did which was a clear violation of the rules.

This was within the rules.

Was it a wise thing economically?

Probably not, but it, it was a response to
the very real concerns of workers and, I,

I think you have to be, you
have to cut some slack

in these very special, in certain situations.

If temporary protectionism
is what it needs to sort

of hold our political fabric
together for the time being, okay.

As long as it doesn't endanger the underlying
rules of the game, which we have not done.

So the, the way to think about it is, is,
to, not be too much of, of a purist here.

This is, this is, not the moment to be crusading
for absolutely free trade and no use of the,

the safeguards that are actually built
into the rules of international trade.

It's a time to say, "Let's get
ourselves out of this economic crisis,

so we don't have worse things happen
on, under, under irresistible pressure."

>> Yeah. Your show is great.

I think everybody like, love it, and it's great.

It's better than David Letterman [laughter]

>> And without the blackmail, too.

>> Haha. Well, you both are even better.

I like those statements such as Gal
Val [phonetic] and Dao Ao [phonetic]

but I do have some question as
you hope it's not aggressive?

Can you give me the honor to explain a better
version of the statement "cash for trash."

We got 4.1 billion dollars
interest rate, the interest payback

and after Tim Geitner [phonetic] have
that statement, and you have very strong,

disagreement, and I was positing if
you can give me the honor, explain,

what is the latest version
of your "cash for trash?"

>> Paul Krugman: Okay.

Cash for trash, which was not original.

I picked up the phrase from
somewhere, was the term I used

for the original Paulsen [phonetic] plan, which
was simply to buy toxic assets off the banks

at prices that I guess would
have been sort of invented.

I thought that was a really bad idea, it
would be a really bad idea for the taxpayer.

What we actually did, or what Paulsen
and then Geitner actually did,

that was, that version was dropped.

What was actually done was buying equity in,
in the banks to improve their capital ratios.

And that's what's being, you know,
they're being paid back and has actually,

it appears in the end to be
making a little bit of money

for the taxpayer, but it's
not the original plan.

The original Paulsen plan was a pure giveaway
and, and that was, well, it wasn't, you know,

it was, it had the risk of turning into a
pure giveaway and that was what was so awful.

Now, what's actually happened, I still think
taxpayers did not get enough of the upside.

We essentially set up our system under which it
was clear that, we socialized the downside, and,

but, but didn't get the full payment for the
taxpayers on the upside, and as it turns out,

the banks have been, at least so far, more
profitable than, than I expected and it,

it's turning out, at least in a financial sense,
okay, although the banks are still not lending,

but it, it was a, a, there was some really,
the, you know, if you revisit what happened

in those first 2 weeks after Lehman failed,

there were some really, really
bad proposals out there.

And they, they got better.

They still weren't good, but they got a whole
lot better after the, after the first round.

>> You mentioned that you thought that
the actions of the central bankers

and Chairman Bernanke was essential
to stabilizing the economic downturn,

and you might be aware that there's a bill
sponsored in the House right now by everyone

from Barney Frank to Michele Bachman
calling for an audit to the Fed.

I was just wondering if you could, clar-,
like what, what do you think the real role

of the Fed should be and how
should it be administered?

>> Paul Krugman: You know, I'm, I have
mixed feelings about the whole thing.

I believe in democracy, and the Fed is,
you know, it is a part of the government,

even though it's sort of
structured as if it was,

in a way that makes it a little bit
ambiguous and should have oversight.

That said, the, it's, it's
unclear what's being audited.

Part of the problem is we're
going to audit the Fed

but without defining what is the
Fed supposed to be doing, you know,

the Fed is not there to be making a profit.

The Fed is there to be stabilizing the economy.

So what are we auditing exactly?

And we have been reasonably well served.

Not, not, with some big holes, but, by,
by a quasi-independent central bank.

Now, that, that's turned out, the, it doesn't
look as good as it did 3 or 4 years ago,

when people still thought that Alan Greenspan
was right about everything, but, but it still,

there's a lot, you know, we do do this, we
do create institutions that are supposed

to be somewhat outside politics,
ultimately accountable but somewhat outside.

I mean, I used to say that the Federal
Reserve was, was like the Supreme Court.

That it was something that
was, was stabilized, you know,

something that was ultimately accountable,
but, but, but insulated from politics and,

and above the partisan process and then there
was a point around 2001 where I was saying,

okay, now we're 0 for 2, but [laughter]
but still, there's some virtue in it.

This isn't going to be a, this is a tough
debate, we got to think about the question.

The notion of a very independent central bank
was something that really took hold at a time

when people thought that credibility and
inflation fighting was the most important thing.

And obviously, we are not in that world
anymore, but it's not something, and basically,

I don't think that any audit process in which
Ron Paul is playing a large role in, in,

in determining what we're looking
for is going to be helpful.

[laughter]

>> Susan Collins: Unfortunately, we
just have time for one more question.

>> What are the implications of your theories on
clustering and economic geography for the future

of automobile production in Michigan,
and what must the region, the state,

the local and the national policy do
to retain its competitive advantage

or is this exodus in manufacturing inevitable?

>> Paul Krugman: Yeah, I'm not
going to be really reassuring here.

[laughter] What we think we know is that the
sort of peak of the forces for manufacturing,

clustering in the United States was, was
probably in, in the 20s or the 30s, that the,

the, you can actually this, Suku Kim
[phonetic] has actually looked at these indices

of geographic concentration of
manufacturing in the United States

and they peak around 1930, and head downwards.

Partly that might be because mature industries,

the necessity of having very specialized
suppliers in the same place becomes less;

partly it may just be something about
the changing nature of manufacturing.

It seems to be less and less necessary
to have manufacturing clusters.

If you look for the really spectacular
industrial clusters or economic clusters

in the United States now, they tend
to be intangibles; they tend, I mean,

Silicon Valley is not really at this point
a semiconductor manufacturing cluster,

it's more like a semiconductor
design cluster, and of course,

the financial sector in New York City.

So the, the forces that made it possible
for Michigan to be the, this dominant force

in automobile manufacturing, despite
having high wages relative to other places

where you might also do manufacturing
seems to be reduced.

It's not clear that there is
any way to recapture that.

It's not, and it's not just imports, it's the
spread of the auto industry down auto alley,

so it's, it's Tennessee and, and Georgia and
the Carolinas to which stuff has, has migrated.

So I don't claim to be an
expert on the auto industry,

but I've read books and articles
by people who are.

And they seem to think that the
conglomeration effects that once made this

such a dominant place in the auto industry
are just, just much weaker in today's world.

That doesn't mean you can't do other things.

I mean, but its, that's a wrenching transition.

It's, and, I guess ,the hopeful
thing would be to imagine, and, boy,

if I was a presidential candidate, I
would be killing myself at this moment,

but you think about Massachusetts, which had an
old industrial base that went away much sooner

than all those did here and
eventually reconstructed itself as a,

as an economy based on, it's a little bit
hard to know exactly what it's based on,

but appears to be [laughter] no, one of the
things -- people talk about in the geography,

when people talk about amorphous specialization
now, because it's really hard to figure

out sometimes what clusters are doing
even though there's clearly some kind

of cluster there.

But anyway, but has rebuilt and
has become a reasonably strong,

vital economy in spite of, of all that.

The other thing, of course, is that, this
is the United States and people move.

I mean, there is a, there is this,
Massachusetts is now a state that tends

to have unemployment rates that are comparable
to the national average that does pretty well,

but its share of the American
population has dropped a lot.

And that, that happens as well.

So, I don't think you can imagine Michigan
rolling back the clock to, to, to 1980.

It's not going to, it's not
going to work that way.

Same thing could be, you know, the,
there's, there's a, a, probably,

I think there are a multiple
of Bruce Springsteen songs

about the industrial decline
in New Jersey, right?

So where I live and the industry, that
industry has never come back, but there are,

are other things, and so
there's a, the state has,

has done reasonably well economically except
right now, where everyone is suffering.

So the, the short answer is, I don't
think you can just turn that back.

You can probably try to hold on to some of
it longer, you can try to find other things

that will spring off from it, but
it's, what can I say, that, that,

that's an awfully downbeat way to end
this, discussion [laughter] yeah, we,

has to be something good to say
here [applause] This is, Ann Arbor,

Ann Arbor must have all kinds
of knowledge resources;

maybe this can be the hub of the new Michigan.

Thank you all.

[ Applause ]

[ Music ]