Paul Krugman - on the current economic crisis

Continuing with the series of New York Times Columnists - it was Nobel Prize winner Paul Krugman's turn. The lecture was rewarding. Like the other speakers before him, he too relied in part on humor to get his talk going. But the substance was serious. He spent most of his time on the current economic crisis. And, in the process, he strongly supported his fellow Princeton Professor - Ben Bernanke - multiple times.



His theory is that this current crisis is as bad as the Great Depression, but that we were able to stem it in a short time (1 year), because we knew how to deal with it.



He started off with a lot of pessimism, but then went into positive items.

1. For now, at least, we have avoided the apocalypse; earlier this year it wasn't so obvious that we will be able to.


2. The Great Depression was much more than an economic crisis. Without the great depression, we would not have had Hitler or the Second World War.


3. The Great Depression was a malfunctioning of the economic system. Once that was over, analysts analyzed it endlessly, and put measures in place to convince themselves that it can't happen again.


4. And, as of 15 years ago, people belived it - that a crisis like the Great Depression cannot happen again.


5. But, in 1990's, troubleing signs started appearing. There were a series of economic events across many Asian countries. And, a group at Princeton University worried about whether this could happen to us. They called themselves "the worriers."


6. And, it did happen to us, with a vengeance.


7. How does the current crisis compare with the Great Depression? It was just as bad for the first 12 months. After May, however, we diverged from the Great Depression.


8. Earlier this year, we feared that we would fall apart, but now that worry is not there. Instead we worry that we might be stuck in a depressed economy.

So, things sound pretty bad. What precipitated the crisis?

1. It was primarily a banking crisis. We thought that banks could not collapse, but we were wrong.


2. This was partly because there are a lot of banks that do not fit in the traditional definition of banks, and hence they did not have the safety net that traditional banks do.


3. While such institutions always existed, they have become much larger in the last few years.


4. The mother of all bubbles was partially responsible for this banking crisis - Coastal Florida, Southern California and other Real Estate. By the way, this was not limited just to the US - places outside the US, e.g. Spain, Ireland etc. suffered too.


5. This Real Estate bubble combined with low interest rates and weak bank regulations precipitated the crisis.


6. The net effect of the crisis is that we are about 10 million jobs less than where we should be (we lost 8 million jobs, plus in this time, in normal economy, 2 million jobs would have been created.)

So much, for the pessimism. We did some things right too.

1. We had wisdom from the Great Depression. So, we did not make the mistakes that our pre-decessors did. (E.g. we cut interest rates, as opposed to increasing them, as was done during the Great Depression.)


2. Govt. and quasi govt agencies have been stepping to take the place of banks.


3. Budget deficits are not good, but sometimes better than alternatives. In this process, the govt. ends up being a big stabilizing force.

But, the problem is that this is not enough. For every one job that is open today, there are six people unemployed. Average duration of unemployment is six months.

The Clinton period was among the longest periods of economic growth. The economy grew at 3.75%. Unemplyment went down by .5%.

While we are growing at 3.5%, it is temporary, because it is based on two short-term factors:

1. Inventory reduction, and


2. Government stimulus.

So what is the solution? A number of them - unfortunately, Congress won't pass any of them:

1. More stimulus
2. Employ more people directly, without middlemen
3. Give banks more money from tax payers

France and Germany mostly avoided this through carrots and sticks to employers.

He served severe criticism for the Bush administration. He criticized Obama too, but gently.

1. It is good to talk to people at the whitehouse who are not evil or stupid. But the current administration is not doing enough.
2. Everything Bush was doing was wrong. While Obama is doing the right things, he is not doing enough.

Regarding Bank bonuses, he said that the money could be used by the banks themselves. Besides, giving such bonuses breeds the kind of culture that got us into trouble.

Here are answers he gave in the Q&A session.

On health reform, he set the following goals:

1. We should have universal care. Every other advanced country in the world has it.
2. Then, we should make it affordable to the economy.

He pointed out that we are already paying for healthcare of the most expensive people (elderly and chronic).

On taxes, he said that an additional 2 to 4 % of the GDP is affordable.

Things driving more globalization is not the Internet - it is container shipping.

Green can help jobs, as businesses will invest in advance.

Can ethics be taught in business schools? He doubted it.

Overall, a great presentation.