Kudos To Krugman. He Saw This Coming. And He Sees a Way Out.

A BUZZFLASH NEWS ANALYSIS
by Christine Bowman

Paul Krugman, bless his heart, calls them like he sees them. He gets it, and he invariably helps regular folks "get it." That's pretty good since most investors, spenders, earners, and borrowers are just plain scared of money and the topic of economics. Nobody likes to think about it, which is what gets so many people into a mess of trouble. It's easier to say, "Let somebody us deal with it." Trouble is, guys like Bernard Madoff are happy to oblige.

When the first round of bailouts and bankruptcies hit this fall -- before the world at large had come to recognize just how bad things were -- the tv networks all pulled Paul Krugman in as their economic mess pundit. The Princeton professor showed up obligingly to comment, but he looked rumpled as hell and more than a little stressed. He had long been a lonely economic Cassandra, forecasting doom and gloom before it arrived and before others believed in it. He had warned of bad Bush economic policy for years, pouring his knowledge and heart into reams of NYT columns, books, and commentaries. When it all came crashing down, Krugman knew what it meant.

Clearly, there was no joy in having been proven right. With the news anchors and audiences looking to him to explain why the sky had fallen, and to imagine for the more thick-headed what might come next, the wise man basically apologized for the way things were turning out.

A couple of months have passed since the first economic gloom arrived, and Krugman appears to be getting more sleep now. The new Nobel Prize winner in Economics spoke at a National Press Club luncheon on December 18, and he offered a forecast with both good and bad news. On the gloomy side, he anticipated unemployment rates in the 9 to 10 percent range by the end of this year. (The San Francisco Chronicle has the numbers confirming that here.)

Krugman, December 2008

Here's a summary of Krugman's overall explanation of the situation: 

The economist noted that the Fed’s situation is termed a “liquidity trap,” meaning that the interest rate controlled by a central bank is essentially zero, and banks have money to lend, but risk-adverse investors are still not willing to undertake projects. Krugman further noted that such situations emerged in the 1930s, in Japan in the 1990s and now. In addition, the current situation, he said, is “like everything we’ve seen before, only all at once,” meaning impotence of central bank policy, deflating “bubbles” in assets such as real estate, currency crises and widespread bank failures.

http://www.press.org/article.cfm?id=465

Frank James helpfully provides excerpts of Krugman's remarks at the Tribune's political blog, The Swamp. Krugman seems almost upbeat and confident that a large stimulus package is forthcoming, and that it will turn things around. Until that kicks in, though, things look downright grim. 

Here's a lengthy excerpt of Krugman's remarks which starts with his discussion of economic stimulus:

Size: How big should this all be? ...

... we think that a dollar of federal spending probably creates only something like a dollar and a half of GDP, more than the amount you spend but not vastly larger. That means that if you do 200 billion (dollars) of spending, that's probably 300 billion (dollars) of GDP, which is 2 percent, and it takes about a 2 percent rise in GDP to shave 1 percent off the unemployment rate.

So ... Basically, 200 billion (dollars) for a year to reduce the unemployment rate in that year by one percentage point. That's a rough number.

We're probably on a track, absent policy intervention, to have an unemployment rate of between 9 and 10 percent by the end of this year. So you start to think about that, you see that 850 billion (dollars) over two years is not a lot of money. It's actually well short of what we would probably need ...

Why not just go ahead and do more? Key problem right now is time and speed. Infrastructure spending ... Takes time. Takes time to get stuff going.

So the question is ... How much shovel-ready stuff do we have? And shovel-ready actually doesn't mean you can start next week. Shovel-ready generally means you can start within six months. And even so, there are limits.

... But the immediate problem is actually going to be, how can you get enough stuff going in time to slow this economy's nosedive?

I will be shocked if despite everything that the Obama people are trying to do, if they can stop the unemployment rate before 8 percent. In fact, my guess is, it will hit 9 percent, before they finally are getting enough traction to turn it around, late this year. ...

... If you can't start spending quickly, you can avert cuts in spending fairly quickly, so aid to state and local governments, all of that we're hearing about. But it's going to be really, really hard.

How does this all end? I think I'm quite optimistic. I'm scared to death of next year. I'm quite optimistic about the year after that, because then the stimulus will be coming online. And we will be getting a lot of boost. And the team coming into the White House does understand that. They understand the economy; they -- you know, at least as well as anyone does. They understand the needs.

I start to get concerned again, once you look further out, because I take a look and say, well, okay, we do know how to boost the economy. If we do a lot of federal spending, that will boost the economy. ...

What I don't know is what the endgame looks like. Eventually you want the private economy to step back in. You want to withdraw this. Eventually we have to start worrying about servicing the debt we've run up in the course of the stimulus program. But I don't have a clear story about which part of the private sector takes up the slack, after the federal government, after the stimulus is done.

Hopefully we'll get a better read on that a little bit further out. But that is going to be a big issue. I mean, we look at -- you know, the Great Depression was ended by a large public works program known as World War II.

What we really still don't understand very well is why, when the war was over, the Depression didn't come back.

We actually don't know that very well. And that's a question that I think we're going to want to think about quite a lot, in its modern guise, as we look forward.

Scary times. You know, professionally there is a part of me that says, you know, this is the crisis I always wanted to live through, because this is what, you know, economists have studied. But of course, as a(n) actual human being, it's horrific. (Laughter.) It's -- it is awesomely dangerous.

I don't think -- although I think we clearly are back in depression economics, I don't think we're actually talking about another Depression. But there's only ... one reason for that. It's not that the things that made the Great Depression happen are impossible in the modern world; in fact, exactly those things, in a 21st-century version, are happening right now.

The only thing that means -- that will prevent us from having another Great Depression is that I think we learned something from the last time we had this experience, and that we have some idea of how to avert the worst. So everything, right now, hinges on whether we've got -- whether we understand this stuff even as well as I think we do, and whether the tools that are at hand are enough to pull us back from the brink. I think so. I'm not quite as confident of that as I would have -- even I would have been a year ago.

Scary times. Let's wish us -- let's wish ourselves the best of luck.

Paul Krugman's horror story (The Swamp)

Thank you, Professor Krugman. Best of luck to you, too. 

Paul Krugman's "The Conscience of a Liberal" (Hardcover)

The Return of Depression Economics and the Crisis of 2008 (Hardcover)

Krugman, 9/10/06

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