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Welcome to our meeting of the Commonwealth Club. I am Ralph Baxter and it is my pleasure to welcome that all of you to tonight's program. This is the first in a series of programs that we and Orrick are sponsoring with the Commonwealth Club. As series we call the Aha speaker series in which we will bring our speakers here to the Commonwealth Club from all over the world with different perspectives from this different disciplines to share with us their thoughts about developments and events in the world events and developments that are shaping out future and we will shape and are shaping our present. Tonight we are delighted to have as our first speaker in the series Paul Krugman. Paul does not require much introduction, but let me say a few things before I turn the podium over to him. Paul Krugman was educated at Yale as an undergraduate and got his PhD from MIT and he is now the Professor of Economics in International Affairs at Princeton. Of course he perhaps better known for his Op-Ed columns in the New York Times, but he writes much more broadly than that. Paul Krugman has written twenty books. He has authored more than 200 papers in professional journals and of course now has his most recent in "The Conscience of a Liberal" in Publication. And tonight Paul will talk about the book and his views of Economic Inequality and Political Change in America. Paul. Hi all, good evening and I may cough at some point during here, I think allergic to these times we live in I think something anyway so even hear some of that sorry, but that was not stays that was real. Okay - okay as I am really going to talk about the book "The Conscience of a Liberal", and it's a it's a book that's newly out, its I was last time I was on book tour it was a book that was the most part a collection of columns and they were reactions of the time we were in, this time I have try to figure out how we got to where we are and is there a way out? I guess it's the way to put it, I have actually had some I know there is some disappointment in in reviews or comments by relatively conservative people saying there isn't a whole lot of Bush bashing in this book, I guess the answer is saying when they have done that and I am trying to figure out where we go next. And so let me let me tell the at the core of of what is on my mind and that is in my book. There are I would say two from my point of view two great puzzles about America. Now I am I am a baby boomer grew up in the society of you know, the 50s and 60s. And it was we thought that society was in many ways that sort of end state, we are we are a mature country god, it was a broadly middle class society, it was a poverty problem that which which actually getting a great deal of attention but they weren't are a lot of very rich people and there was a broad equality of economic conditions among very among most of the population. It was also a society which had a relative despite all the term of the 60s and into as a politics there was a there was a - a strong center. There was a lot of agreement about basic principles about what what our government was for. What the shapes of society are to be? And there was a real possibility of bipartisan action, so if you look at the major legalization of the time, something like Medicare was created with a lot of votes from both parties next with some oppositions from both parties but it was really a there was a there was an ability to co-operate to get things done, and it all went away. And there are from my point of view these two great puzzles one of them is economic, what happened to middle class America, the other is political, why have the politics gone the way they have and let me just talk for a second about the the economic puzzle first and then which then least to the political puzzle. So the economic puzzle is this, there is a debate among economists about whether the typical family, the median family has experienced again in a standard of living in income since the since the early 1970s where you can you can cut it back in four various ways. Median income is up but that's entirely because more spouses are working, and you can go back and forth and we are measuring prices right, they didn't have DVD players you know, so on the out come of that debate is not important. What's stunting is the fact that it's even debatable. Go back and we are talking about 35 years. The the end of the great Post-War Boom is usually dated to 1973. In 1973 there were no personal computers, no internet, fax machines were extremely expensive things that basically only major news organizations had. There were the ships were unloaded by guys toting big bags of stuff, no free containerization, no barcode scanner, they were vastly richer, more productive society we were then we were in a in the early 70s and yet we are not sure its within the realm of argument, where the typical family has has gained any thing. How is that possible? The answer of course is that there were huge, huge gains at the top of the income distribution. A few people got much, much richer and that took all or almost all of the gains. We talk about second Gilded age referring back to the era of the Robber Barons, and that is not a metaphor, its not hyperbole, its not exaggeration by the numbers the distribution of income in the United States in 2005 almost exactly matched what it was in the 1920s. So it may be not quite the the age of J.P Morgan although but but certainly the great Gaspi we are certainly fully back to levels of inequality that was not been seen since since the the 1920s, it's a it's an extraordinary thing. So first question is how does that happen? How was it possible for inequality to grow that much? And I will talk about that in a moment. Second question is why hasn't the political system had a bad clash against that? If you if you have told somebody just in the abstract look we are going to see a tremendous concentration of income at the top of the of the spectrum, stagnation of wages from most workers over a period of several decades obvious explosion of great wealth. You might have expected in fact standard political theories which lead you to think that that there would be a demand for you know, there would be a pressure to raise taxes on the rich and provide stronger social safety net, that you know, that might even have expected to see here we long make a second coming you know, soak the rich but at least you would have expected some kind of political back clash against that. In fact on the contrary, the trend of our politics at least until very, very recently has been towards in the opposite direction that the Republican Party has become increasingly a party of lower taxes lower tax rates on on the people with high income, deregulation, privatization of parts of the of the social insurance system and has by and large one more election than it has lost, so the political trend is actually went to the right when you might have thought that growing inequality would post to the left so, how did that happen? Okay when I argue in "The Conscience of a Liberal" is first of all that a lot of the increase inequality is in fact a political at its root the politics drives economics. Now this is not the way economist run I am a card carrying economist may be the revoke going to license here. But this is not the way economist are supposed to think except that most economists will looked hard at the long term developments in inequality are driven in this direction. And let me give you a few things that people may not be aware of. The first is the middle class society I grew up in did not evolve gradually. You might think that there was a - you know, there was the era of the Robber Barons and then gradually America turned into the America of Ozzy & Harriet what ever. That it gradually evolved into this middle class society. That is not what the data or you know the available story tell us. What they tell us is in fact that far as we can tell the Gilded Age lasted right through the 1920s. America on the eve of the new deal was very nearly as unequal as it had been in the 1890s. And that the middle class relatively egalitarian society was created in a very short period of time between the late 1930s and the end of World War II. The economic historians call that the great compression as the income difference got compressed. And its its as important a story about 20th century America is the great depression if we all know that, that was much less told and you look at what happened and it was the Roosevelt Administration to the whole set of policies but all of them equalizing, much higher tax rates on the wealthy higher corporate tax rates approve union organizing environment who had a explosion in union membership tripling of of the share of the work force, the minimum wage, social security, unemployment insurance. All of these things and then the process accelerated because during the World War II, there were extensive government controls on the economy which were used in a way tended to equalize incomes. All this created a middle class society in a period of not more than about seven or eight years. Now you might have thought well okay but you know, this all artificial especially the stuff during the war so you know, we go away as soon as peace time return, but it didn't turn out that once you create institutions, norms expectations are relatively equal society that tends to persist. So the income distribution is relatively middle class society that was created by the new deal persisted for more than a generation after World War II. Then it started to come apart, and you see this dramatic increase inequality not quite as fast as the great compression but its just dramatic increase starting around 1980 which in itself is kind of an interesting date because that's Regan come to the White House and it turns out, that the well the increase in inequality in the United States is unique to the United States. So other advanced countries have not seen anything like it. The closest thing you can seen to the US to this un-equalization that has taken place in the United States is in Britain during the Thatcher years which again it's self a little bit revealing. And nothing remotely, just look at the charts and we are you know, we are off the charts in terms of the languish in equality and many of the things that we take for granted as well this is the way the things work in the modern the late 20th early 21st century economy, turn out to be special to the US. So one example I would like to use is the decline of the union movement. We all know that unions are out molded and you cant you know, it's a global competition and all that, except well here is a comparison people don't know, in the 1960s Canada that's about the country there they we tend to they almost speak the same language, but anyway they in the 1960s Canada and the United States had roughly the same percentage of their workers in Union by 30 percent in both countries today Canada still has almost 30 percent of it workers in Unions. In the United States its sound to by eleven percent and much less than that its in the private sectors its heavily and public sector thing left so the de-unionization was not something that happened because the global economy because Canada faces the same global economy we do was same that happened here, and how did they happened? Well when you look into it closely discover that it was political basically Ronald Reagan above all though it started before him to clear to open season for union investors, if you during the during the 1980s about one in every 20 workers who voted for union was illegally fired. And the reason sure we are less of an industrial society but there is no one know the reason why giant service sector companies, you know, the iconic corporation of the 60s was General Motors, the iconic corporation of today is Wal-mart, there is inherent reason why this company should not be unionized in fact similar enterprises are in the rest of the world but because the shift was service economy took place in a environment in which politicians the dominant political forces said it was okay to bust unions in the way that we had in people had in the 1920s, we have we have the dramatic decline in unionization in the united states so it is not and you know, and intern has all kind of ramifications for the income distribution. So I can talk about it and some link but but there is a lot of reason to believe the politics has driven this dramatic increase in inequality. Sure technology is there, globalization is there but its it is very largely political. I should say one more thing there is a view on inequality that you hear all the time, which is what's all about the increase demand for skills for education in the modern world economy. You know, and there is no doubt something to that but if you actually look at the numbers the huge growth in depravities has not been between the college educated and the non-college educated. Yes people with college these have done better than people without, but most of the increase is among people with a lot of education, so that most dramatic statistic high school teachers tend to have post graduate degrees and so do H fund managers. And thus we all know the highest last year the highest paid H-fund manager in the United States made an amount equal to salaries of all 80,000 New York City School teachers for the next three years. So this is its not education that is driving this its not it's not that simple. Politics, why haven't we had a back clash, well or part of this way how was it been that people how was it been that that during this period of rapid increase inequality we have seen the top tax rates for in a back when that socialist Dwight Eisenhower was president the the top tax marginal tax rate was 91 percent and it was 70 percent too much of the of the 60s and 70s as now 35. Our capital gains tax rate is being cut from 28 to 15, and so in down the line. That the tax rates that apply most heavily to the people who have been been the big beneficiaries who are going inequality have been cut, social programs have been eroded where was possible although social security and Medicare are there. How is that possible - but why has politics moved to the right? Well that is a two part story. The first is the change in the Republican Party, you can actually measure positions, democrats are not or have not be until the recently significantly to the left where they have been to start. Was Bill Clinton to the left of John F Kennedy not not that not in a visible way. And Republican Party has moved a long way to the portrait as because it was in effect captured by something that I call movement conservatism was not actually my name - it was the movement conservatism themselves call it. You know, there is a conservative yes Virginia there is a vast right wing conspiracy, but but its not its not hidden it's not secret. It's a just a overlapping set of institutions that create a lot of incentives to follow what announced to a party line. So what that's institution in the whole range from the Heritage Foundation to Fox News you can various see - you are very clearly sees what cohesive, you look at a lot these institutions you asking where does the funding come from. And in the same five or six large right wing foundations come up again and again, it's really you know, there it is cohesive movement. They wont really tell you otherwise, but although I I have always thought that the obsession with George Soros on the right comes partly from the fact that they think there must be a sinister billionaire organizing things because after all that the way things work on their side, but the okay- the how does it take over well a lot of it you know that the personal incentives are quite strong. So you look at a what - look at the tale of two republican senators who lost their seats last year. Lincoln Chafee I believe got a one year teaching appointment at Brown and he would you know Lincoln Chafee was an old was a an Eisenhower republican essentially. Go back Eisenhower Eisenhower said if to people who are he have wrote a famous letter to his brother revealed after his death that talking about people who fought to roll back to new deal, people would thought that you can get rid of social security and unemployment, insurance in all that and he said they have a tiny minority and they are stupid. But in fact today we have a republican party most or the the key institutions movement conservatism actually believe and try to do exactly that so had fund raising letters from the Heritage Foundation will say that you know, you will never forget connect the dots. The the our goal is to undo the new deal on the great society in other words its basically self security and Medicare that these these are these are early and these are bad institutions like they want to roll this back. The so if you are not a - if you are republic isn't in the movement conservative well there is much there if you are so the other one is Rick Santorum and merely there was a program created for him to head at a right wing Think Tank the New America's enemies program and so there you are with you know, this is the - some of my progressive friends called "wing-nut welfare" but anyway the you know, this is a whole set of incentives very strong, Now its none the less. This would not this kind of hard line right position seized the republican nomination for Barry Goldwater but then went down to terrible defeat and and when the republicans dig at the White House under Richard Nixon Nixon was not actually in many ways good Nixon governed as a liberal. Its not clear Nixon didn't seen to had much of any ideology except that he should be running things and then it was a it wasn't until but what Nixon did what made it possible of this to who to change America it was the ability to win elections and so the question it has to be if you have what is essentially an anti-populist a elitist economy philosophy that is taken over one of America's two great parties during time of rising inequality, how it that can win elections? And the answer actually is that it has never done so by running on the economic ideology. Economics is what it's about, you actually ask what this Heritage Foundation care about, what do the - what does management really want? It is about economics is about trying to roll things back. It is a Grover Norquist do people know the Grover Norquist, Americans for Tax Action the the we like him in a way he is the great anti tax cut enforcer somebody pointed out that that Grover Norquist is sort of like a James Bond villain who explains that length in evil plans so we could like to quote him the quote everyone uses the one about getting the government down to the side where you can drown it in a bath tub but the one I was liked as he one asks what he wants he said he wants to get America back to the way it was before Teddy Roosevelt and socialist came in so undue the 21st okay but this is and this you know this is this is but we are not talking about some crank we are talking about somebody who actually until - until last November was part of the republican process of debting people got lobbyist appointments you know where a central part of the whole mechanism. Okay, how does this win elections? The answer is by running other other things? So in some ways the 2004 election was a perfect illustration, Bush wins the election by being America's defender against gay-married terrorists. And then you know, barely have the networks called the elections and he says and now our first priority is to privatize social security, which came as kind of shock to lot of people who have voted for him, but that's fairly typical. All right and when I looked in some detail at the political history it turns out that although there are chapters telling weapons of mass destruction, but the but it turns out that the core of it although national security clearly swung the 2002 and 2004 elections, and actually the tough much less important. The enduring source the ability of a move in conservatism to win elections has in fact not been that it has been raised. The centrality of race to the American political story was not something I expected to find when I began working on this book but it just becomes overwhelmingly clear once you start to do the do the work so let me give you a story on a statistic and then we will talk about it bit more the story is as when Lyndon Johnson signed the Civil Rights Act he turned to his Bill Morris who was then his young of the age and he said we just give in the south to the GOP for my lifetime and yours and that appears to actually had been right that a sort if you look to an extraordinary extend on what is happened in American politics can be see as the success of Richard Nixon southern strategy amazing amount that once you take account of just five words southern white started voting republican there isn't much left over to explain. So here is my statistic, from Larry Bartels in the in the politics department, the we all another white males have turned on the democratic party have left a democratic party and there is whole list of reasons given for that but its not exactly true unless you add a additional word which is its really just southern white males who have left the democratic party. In 1952 of non southern white males 40 percent voted democratic in 2004 39 percent they are all I have heard about alienated work in class borders and in the country once you take it account great southern switch there is nothing left to explain nothing much happened to destroys you seen about evangelicals are very large they are not entire but they alert the just about the southern switch. Because there are lot more evangelicals in the south almost everything else boils away. Now I said southern wise switch might not be might not be about race, thank you. Yeah, this is - I am sorry that the you may never get the end of the story, we will whether I can get there. One of the reasons for thinking that it is aside from sort of the the obvious timing, and the answer actually of course is to the politicians very clearly sought to use race as a way to win elections. So that when in some ways Nixon famously had the southern strategy and it is a lot of in it they hadn't the legacy of the Nixon Administration in our politics remains very strong often in in terms of the individuals, so Dick Cheney gets started in Nixon administration. People forget that Roger Ailes head of Fox News was Richard Nixon's media guru, so this is direct line to send that that Carl Rove was Lee Atwaters disciple that the Lee Atwater had the famous late in life interview where he said talked about using race in politics, and where we said there is something along lines up you used to say nigger nigger nigger, now we say taxes and welfare, but - it's the same message. But more specifically one of the key figures in "The Conscience of a Liberal" is Ronald Reagan who is a you know really I think probably we haven't figure in that changed America but not in the way that the hagiography, you have seen Ronald has made. The real Ronald Reagan was a - certainly there was a harshness to it. If you read the famous 1964 speech that made Ronald Reagan a national figure and that extraordinary thing to read partly because of the sheer means spiritedness of it so he makes fun of John F Kennedy having said millions of Americans go to bed hungry every night and saying they were probably holding a diet. But what he found what Reagan found was the way without being explicit to play to these racial divisions and fears. So he didn't talk about race, he talked about welfare cheats, he talked about welfare queen driving her cadillac that never existed but that became a central story in his campaign. And in 1980 when he began the Presidential campaign, he did not begin the campaign with the speech on tax cuts. He did not can begin the campaign with the speech on communism he began the campaign by going to Philadelphia Mississippi where the three civil rights workers have been murdered and giving a speech on states rights and it was you you know it was a shot out to to as clear as could be. And now if continued to you will think think about really wrote in 1988 campaign. This this strategy continued to work people have asked me do I think that Ronald Reagan was a racist do I think that George H W Bush was racist and the answer is no not at all there I think what they were about is economics where its about is lowering tax rates at the top and privatizing social security but race has been the way that elections had been won. Okay, so this is the happy book "The Conscience of a Liberal" is actually a happy book because I think that this is very nearly over. That the that this whole process is in its last throw I guess that I would say and there are a couple of reasons one is that if you look broadly at how Americans think about about issues there is actually been the pronounced liberal trend in American public opinion over the past decade you can see that in all kinds of issues but it was one of interesting things I used to - I shouldn't use the word liberal in the title of every book because people are not liberal and true. If you ask people are you liberal, not very many people say they are, but if you ask people do you think that the US government should guarantee health insurance to everybody? Overwhelmingly they say yes. You say would you be willing to pay somewhat higher taxes for that. And you only lose a few percentage points even there. So people actually are quite in favor of strong, safety in that, strong government taking care of people that the divisions that have exploited so well. I think on losing there I have more in that I think I think you can document that they are losing their effectiveness not gone but those in their effectiveness. For one thing on race we are becoming a more diverse country quite simply the Latino and to some extent the Asian vote are just transforming the demographics of the electorate in the way then that means that you can play racial politics the way it used to, but that there is a more fundamental I think more uplifting reason we are just a better country, racism has much diminished. You look I like to look at some of the hot button issues calls they are not really about politics may direct sense but give you a sense of how people think, so what do you think of inter-racial marriage? And in 1978 more than 50 percent of the public said no, it's unacceptable and not more than 36 percent said it was okay. Today 77 percent think its fine. So we've changed in that respect. I thought the defining moment of the 2006 campaign the - the real tell-tell movement was the Macaque incident. George Allan actually California yuppie but reinvented himself as a as a southern good ol' boy burst into a a you know, a racial, an obscure racial slur against a young American man of south Asian decent, so there you get the increase diversity who was you know, trailing him with a video camera for the for the web campaign. That the racial insult that's nothing new in American politics. What is new is that Americans won't stand for it, Virginians won't stand for it, we are not that country anymore. So that's a a transformation in the kind of country we are which suggest that there is a huge opening now for a big change in direction. Where does that change in direction start? Well health care. Health care is the health care is the is the great unfinished business of social insurance the Welfare State in United States, in no other advanced country do citizens worry that they may not be able to afford necessary medical care. And no other advanced country do they worry that they might be bankrupted, destroy financially by expensive medical needs. And so we can afford that but then there is this amazing fact that United States measures to spend far more on health care than in any other advanced country and yet and yet not cover people and all of the things that you have heard about how terrible find health care systems are are almost entirely fabrications and particularly there were couple of foreign systems that that are slightly more generously funded ones, French system, the German system that are terrific, the quality is every bit as good as the best you can get here and and they cover everybody and they do it at less cost. How is that possible our system is wildly inefficient. The system of you know, our goal almost everybody at least says that they think everyone should have health insurance. And yet we have a private insurance system that spends a great deal of money trying to find people was I put it you know, its not its an archive trying to find people who really need health insurance so as to deny them that insurance it's a trying to you know, its business. You have to find the height you don't want to cover the high risk cases, which is why Medicare has over head of about three percent of its budget, and private health insurance companies have over head that's about 14 percent of their budget. The truth is we are actually a little known fact. In the United States the Medicare and Medicaid already pay more medical bills than private insurance companies do. The reason you might say more the most people have private insurance yes but think about who Medicare and Medicaid cover. The elderly who are much more expensive, so the fact is we are already in terms of the dollars and cents, more than half way to having a National Health Care System but the trouble is we leave large numbers of people uninsured and and it doesn't work. So we can if we can get the health care reform that in itself is a big plus for the for the American public, and it also has political implications. So one of the funny things I found is I am I am actually in total agreement with on one thing with William Kristol the Weekly Standard. It during the failure of the Clinton health care initiative in the early 90s Kristol wrote a famous memo to republicans saying our goal is not to improve this plan it is to kill it. And the reason was that if Universal Health Care plan of any form was passed that it would reinvigorate liberalism. They would reinvigorate that the the notion of Welfare State and he was right, and if we can get it then it will change it change the whole translation, makes a lot of other things possible. And and amazingly optimistic state of mind these days because I look at the political scene and I see these possibilities. I will I will give you a dose of pessimism in a minute, but you know, just that just you know, I haven't completely lost my mind. And you look at the political scene and certainly the possibilities there is a much more progressive mood in the electrode than we are seeing for I become big on on political size measure some of the the electrode appears to be more liberal than it has been since early in the 1960s. And the the democratic on health care which I think the issue number one, the democratic candidates have all more or less converged on a an approach that I think will work, which is not a immediate jump to Medicare for all, but is in fact a compromise of transition that is pretty good that would allow with a moderate amount of additional revenue revenue can get not by a massive tax increase but simply by allowing some of the Bush taxes to expire would allow you to produce a system that would cover everybody and would put private insurance companies in competition with a public plan that that would in fact go a long way. It's not the perfect system but good enough. So we actually I would sometimes I would have pinch myself because remember its less than three years ago we probably going to lose social security seen like a desperate uphill fight to stop the privatization of of the core of the new deal. At this point the all of the leading democratic candidates present were actually pushing for a are at least advocating a possible serious well designed plan for universal health insurance, which you could imagine actually happening in the first term of the next president that's an amazing transition. Now it is a big there are also many big ifs, first of all you know, elections who know what will happen in the election. Anyone who is absolutely certain you know, it hasn't it shouldn't be, in a bigger issue that I do worry about beyond that or or and certainly another issue is is we will if we do have a president a democratic president will he or she actually follow through. During the Gilded age and we are living in a second Gilded Age, the democrats who are living near the white house tended to be what we were called at the time Bourbon Democrats which was democrats who were very nearly as much in the pocket of the Robber Barons as the as the republicans of the time, not quite but very nearly so I sometimes I say I actually wrote this some time in a time is that we hope we are about to elect another FDR. We might be about to elect another Grover Cleveland, which we would be deeply disappointing if that's what happens. But it's a amazing turn we are we are not I think the last time I spoke to this group would have been probably four years ago and it was for someone of my views I think for for everyone it was a really grim time and it was terrible feeling that the things have gone wrong and of course many things have gone wrong but the but things are better and the the trends are going in what I see as the right direction, the things we feared, the terrible wrong term we feared America might take didn't happen, this has in fact turned out to be the country that I I hoped it was and I am feeling so optimistic that's probably I probably should see a doctor. Thank you.