October 9th found Paul Krugman in Albany, New York via the efforts of the New York State Writers Institute of SUNY Albany. Krugman is a world-renowned economist whose work in international trade theory first propelled him to prominence. Further elevating his influence is his work as a columnist for the New York Times where he also blogs on a regular basis.
Krugman has won numerous awards, including a 2008 Nobel Prize in Economics. His work is frequently cited by other economists in their own publications. His column at the Times began roughly with the Bush era; he quickly found himself moving beyond the focus of just economics to commentary on the larger issues of the day. He has become one of the few identifiably liberal voices getting regular media exposure.
Krugman was invited to speak about his latest book The Return of Depression Economics and the Crisis of 2008. It was an evening well spent. (Summary below the fold)
The talk was held in SUNY Albany's Page Hall on the downtown campus. Despite a damp evening, the hall quickly filled to capacity. Author William Kennedy was among those in the audience. It was a mix of SUNY students and people from the community. If there were any reporters present from the local media, they were not apparent; a rather surprising lack given the current state of the economy.
Writers Institute Director Don Faulkner gave some brief remarks about the 25 year history of the institute and some additional comments. Within a few days they hope to post video clips from Krugman's talk on the Institute's website. They should be well worth watching. (David?) Smith gave the introduction for Krugman, mentioning that a database of economics papers shows that Krugman's work comes in at number 8 on the list of most-referenced papers. He also revealed a little known fact - Paul Krugman is actually a local, having been born when his was family living in Colonie, NY. (They moved away when he was 3-4) Then Krugman took the stage, standing at a lectern where he held forth for over an hour. He spoke first about his latest book and then took questions from the audience.
In person Krugman comes across as a confident, affable speaker who speaks engagingly and with occasional flashes of sharp humor. He can present complex subjects in a form that gets the essentials across to an audience of the general public while still remaining in good standing professionally. As he puts it in the forward to the latest edition of The Return of Depression Economics and the Crisis of 2008,
As an economist in good standing, I am quite capable of writing things nobody can read. Indeed, unreadable writing - my own and others - played a key role in helping me arrive at the views presented here. But what the world needs now is informed action; and to get that kind of action, ideas must be presented in a way that is accessible to concerned people at large, not just those with economics Ph.D's. Anyway, the equations and diagrams of formal economics are, more often than not, no more than a scaffolding used to help construct an intellectual edifice. Once that edifice has been built to a certain point, the scaffolding can be stripped away, leaving only plain English behind.
What follows here is based on my quickly scribbled notes and recollections; I can't promise to have gotten everything down verbatim, but I'm doing my best to summarize. Any misstatements or errors should be taken as evidence of my own limitations, not those of the speakers. I will be looking forward to seeing the promised videos from Krugman's talk.
Opening with "It's great to be back" which drew chuckles, Krugman began explaining how the U.S. has landed in its current situation by describing what happened with the Capitol Hill Baby Sitters Co-Op. This was a group of people who dealt with the need for baby sitters by forming a co-op; new members would get 20 chits good for so much time baby sitting by other members of the co-op; they in turn could earn additional chits by baby sitting for other members. Upon leaving the co-op they were expected to return the same number of chits they started with - except there was a problem as it developed.
People wanted to build up a reserve of chits before they'd spend them; there were more people looking to baby sit than there were people who wanted baby sitters. This is roughly analogous to where the U.S. economy is today. Skills/resources are out there - but the economy is stalled as no one wants to spend their 'chits' until they can feel confident they'll be able to replace them. Japan ended up in this trap in the 1990's and it took them years to recover. What the baby sitting co-op did is much like the Federal Government did with the stimulus - they gave everyone more chits to get things moving.
The problem is, no one - with the exception of Krugman and a few others - had thought this situation could happen again, because this isn't the first time the economy has collapsed. What happened in the Great Depression of the 1920s was a huge bubble in the stock market. When it broke, the conventional remedies of the time just could not halt the slide. Trying to balance the Federal budget in the face of the slump, defending the gold standard at the expense of the economy, not rushing to prop up banks or employment; all of this led to a self-perpetuating decline.
It wasn't until FDR launched the New Deal with lots of Federal Spending and other reforms that the economy began to recover. The banking system was rebuilt. World War II called for a massive economic effort that further revived things. An international system of financial agreements and institutions was erected to stabilize the world economy and create mechanisms for responding to developing financial crises.
(I'm synthesizing the above from my recollections of the talk, the little I've been able to get from the book so far - which I've just begun working through - and additional material from background knowledge I've been soaking up. If this doesn't quite match up with what Krugman was trying to get across, blame me, not him.)
In any case, economists, bankers, politicians, etc. were pretty confident that another melt down like the Great Depression could not happen because measures were in place to prevent it and there was a better understanding of what happened and how to deal with it. And, in fact they were almost right.
The 2008 economy contracted at the same rate as the Great Depression - but the government responded far more aggressively by going into deficits to keep the system afloat. But, while the conventional banking system was thought to be under control, it had not been realized how huge the shadow banking system had become - all of the new financial institutions that had arisen - and when that started to collapse, there were no mechanisms in place to address it.
Which leaves us where we are today. Krugman referred to it as "Apocalypse Not Now" - we've pulled back from the brink. but we're not really moving yet. The GDP is starting to grow which technically means the recession is beginning to end, but jobs are NOT picking up. Krugman noted we should apologize to Japan for all the critical things that were said during their crisis in the 1990s because we're essentially doing the same things today, with much the same results.
There are two things worrying Krugman at this point: 1) This current economy will persist a long time much as it is. Historically exports lead to recovery - but that can't happen in a global recession when there is no one to export to. 2) Economic leaders responded aggressively to the crisis - but with the urgency of the moment fading they are losing focus and are beginning to - well the word that hits me is - dither. Trying to balance the budget is the wrong answer; fears of inflation are not born out by what's happening. Krugman noted that economists who know their history start muttering "1937" when such fears are raised. That was the year when FDR backed off on recovery efforts because of those who thought it was time to start worrying more about budget deficits than the recovery. The economy went right back into a slide until recovery efforts resumed.
Normally the Federal Reserve tries to gin up the economy when it slumps by cutting the rate it charges banks to borrow money to build up their reserves. Lowering the cost of that money is supposed to stimulate the economy and in normal times it would. The problem is, the formulas that are supposed to indicate what rate the Fed should set now yield an interest rate of negative 5%. They've run out of room to maneuver. (Krugman has been writing this up on his blog for those who want more detail.)
At this point, the proceedings were opened up to questions from the audience. Krugman took them all graciously, with occasional flashes of humor and a few sharp barbs. (At one point he jokingly mentioned the demotion of Ben Bernanke, from head of the Princeton Economics Department to ruler of the world.)
(It's obvious that Krugman would not enjoy an official role in the administration - he's having too much fun being able to speak freely. That's one big reason Villager approval has not been granted to him in the same degree bestowed upon those who helped create the mess. They observe the proprieties!)
• The first question was, (as best I may summarize), if more stimulus is needed from the Federal government, what are the risks the government runs of defaulting on the debt?
Krugman responded by recalling an old Reuters headline about Argentina and one of its perennial problems with international finance: "Argentina to Creditors: So Sue Us." More seriously, Krugman pointed out that $500 billion in stimulus spending can result in $700 billion in GDP growth - which among other effects means tax revenues start to pick up again. Also, the decline in long term investment by the government has serious consequences for future economic health; his 10/09/09 column in the New York Times looks at the devastation of the educational system in California and how it will do lifetime damage to the prospects of many students.
Krugman contends that stimulus spending may not all be recovered - in the short term at least - but the cost is not as big as it appears. While the debt numbers both now and projected in the future may appear massive - so is the size of the economy. Both Italy and Belgium were able to manage debt that was greater than 100% of GDP and recover successfully. It can be handled - but the unanswered question is: is it politically possible? There is a very real danger that a coalition of crazy people can block what's needed to be done and really screw things up. Ireland currently has hit the limits of what it can do and is in dire straits economically.
• Another question asked if it mattered just how the stimulus money was spent, between infrastructure, shoring up the auto industry and the banks, and so forth?
Krugman responded that there were really two issues here: stimulus and bailouts. It looks like the bailout money will mostly come back to the government over time. The taxpayers got almost nothing from the banks at the time of the bailouts, which would have been the time to really push reforms of their behavior. With the passing of the immediate crisis, that ship has sailed. As for stimulus money, while infrastructure spending is necessary in any case, it takes a long time to get started and a long time for effects to be felt.
One of the serious deficiencies of the stimulus bill is that money for states and localities was largely stripped out to win the support of moderate Republican senators. All three of them - as Krugman acerbically noted, including one who is no longer a Republican and the other two are from Maine. He added, this is why we'll probably get health care reform that is lousy but better than nothing - at the price of lobster subsidies. Krugman also made the point that providing the states and localities with aid would have had an immediate effect: it would have prevented the layoff of thousands of teachers and firefighters. He hopes a second stimulus will not make that mistake and will get those people back to work ASAP.
• A mortgage question was asked: Is there a problem with people defaulting instead trying to refinance their mortgages, or is it that the banks just aren't lending?
Krugman got some laughter when he observed that the mortgage situation is being helped by the fact that currently policy makers are neither crazy or stupid - which is a big improvement. That being said, he noted that 20 million homes being underwater is still a problem. Deliberate defaults in which homeowners walk away is probably not that big a part of the picture. The really big problem is now showing up in commercial real estate.
• A local question was brought up, asking Krugman to opinionate on New York State's fiscal crisis.
His first reaction was to quip he'd really been paying more attention to New Jersey's fiscal difficulties, but he went on in a more serious vein. Almost every state is having a fiscal crisis; it's an impossible situation with no easy answers. (States can't just print money after all.) New York is in better shape than California - but almost every state is. There are some things Krugman feels states should not really be on the hook for, Medicaid for one.
• One questioner first wanted to know if it was really a good thing that so many of Obama's economic advisors were part of the problem they're now trying to fix, but then went on to ask if Krugman would be willing to share a little dirt from the White House confidential dinner meeting of economists a few months back?
Krugman demurred, saying it's still off the record - but he did go so far as to say that they were talking about much of the same things that were being brought up here tonight. He also got a big burst of laughter from the audience when he allowed as to how he looked around the dinner at one point and asked himself "Couldn't they find one Gentile economist?"
• The next question isn't quite clear from my notes; it seems to have been about if the spending for World War II got us out of the depression, couldn't taking over state debts have the same effect?
Krugman replied the stimulus bill should have done just that. Avoiding layoffs of teachers and firefighters can happen immediately - it doesn't have to be ramped up over time. It's crazy not to have done that. He'd include several hundred billion in a stimulus package just for that, and make it a bigger package too. Arlen Specter and Maine's Senators were responsible for taking it out. They missed a real opportunity to keep people on the job. Some state governments are problematic - California's troubles are largely self-inflicted. Then there are things like Medicaid and Education which are left to the states when they should really be a national responsibility.
• An audience member noted that Krugman will be traveling to South America soon and wanted his take on Chile's economy. He was wondering why Krugman hasn't been writing more about South America's economy.
In a humorous vein, Krugman admitted he couldn't really talk about South America - he's been too busy trying to save his own damn republic to pay attention to theirs lately! Also, he really hasn't gotten around to studying up for his trip yet, which he intends to do. He also noted the finance minister of Chile is one of his former students, so he's not too worried about that country. He'll also be visiting Argentina.
• Trade came up, when someone asked about importing less and exporting more.
Krugman replied by noting that the current weakness of the dollar is actually helping there. It's making American exports more attractive to overseas markets. He also referred to a Wall Street Journal editorial complaining about the weak dollar - which is a sure indication that it is actually a good thing.
• What about the financial sector? Is it better?
Krugman's take was interesting: not much has changed. The financial sector seems to have no long term memory - a lot of decisions are being made by hopped-up twenty year olds. Strong regulations came out of the depression, but the lessons have been forgotten. We need good reform now, but the chances of that are fading. Too many in DC want to join up with the money guys once they move on from public service. Lessons are not being learned. If previous patterns hold up, the next big financial crisis should arrive in 2018.
• The next question got a strong response of approval from the audience: could Krugman make an economic argument for Single Payer?
This stopped Krugman in his tracks for a moment as he said we could go the rest of the night on this. He then let fly a one-liner that got cheers from the audience: "Medicare for all." Krugman then went on to describe briefly all the different ways other countries have found to provide universal health care to their citizens without going broke. He noted we currently have huge administrative costs in the system. "Insurance companies are not in business for our health."
* * * * * * * * * * * * * * * *
At this point I'll have to leave off as I missed the last 2 or 3 questions and Krugman's responses - I and many others were making our way to the back of the hall at this point to buy a copy of Krugman's book and form a line to get it signed by him afterwards.
All in all it was a remarkable performance; it was an evening well spent. The New York State Writers Institute promises to be making video clips of it available here within the next few weeks. In the meantime I'll be reading through The Return of Depression Economics and perhaps a few more Krugman books as well. Highly recommended!
UPDATE (Before posting): The winners of the 2009 Nobel in Economics have been announced.
STOCKHOLM - Americans Elinor Ostrom and Oliver Williamson won the Nobel economics prize on Monday for their analyses of economic governance - the way authority is exercised in companies and economic systems.
SNIP
Issues of governance, or the rules by which authority is exercised in companies and economies, have been at the heart of the ongoing world economic crisis. The failure by boards of directors, for instance, to police excessive compensation, or prevent bonuses that reward excessive risk taking, can be considered a corporate governance issue.
The news today is not good on the economic front, for either the Democrats or the country.
Job losses are expected to continue at least into the middle of next year, likely driving the unemployment rate above 10 percent from 9.8 percent last month. It could take three or four more years for it to fall to normal levels.
The longest and deepest downturn since the Great Depression has claimed 7.2 million American jobs since it began in December 2007. Analysts figure 750,000 more jobs could disappear over the next six months.
If you add in people who have stopped looking for work, or who are working part time when they want a full-time job, the unemployment rate is a whopping 17 percent, according to the Labor Department.
emphasis added
Krugman's column today expands on some of the themes he raised Friday night.
One lesson from the Great Depression is that you should never underestimate the destructive power of bad ideas. And some of the bad ideas that helped cause the Depression have, alas, proved all too durable: in modified form, they continue to influence economic debate today.
What ideas am I talking about? The economic historian Peter Temin has argued that a key cause of the Depression was what he calls the “gold-standard mentality.” By this he means not just belief in the sacred importance of maintaining the gold value of one’s currency, but a set of associated attitudes: obsessive fear of inflation even in the face of deflation; opposition to easy credit, even when the economy desperately needs it, on the grounds that it would be somehow corrupting; assertions that even if the government can create jobs it shouldn’t, because this would only be an “artificial” recovery.
In the early 1930s this mentality led governments to raise interest rates and slash spending, despite mass unemployment, in an attempt to defend their gold reserves. And even when countries went off gold, the prevailing mentality made them reluctant to cut rates and create jobs.
But we’re past all that now. Or are we?
emphasis added
Now would be a really good time to pick up a copy of The Return of Depression Economics - and maybe send a copy to your Congress Critter. Financial reform is supposedly coming down the pipe - and it may well be harder than trying to get real health care reform. Krugman may not have all the answers, but he has a disturbing record of being right more times than the prevailing wisdom has been lately.
UPDATE (again!): Krugman comments on this year's Nobel in economics on his blog here.
Oliver Williamson’s work underlies a tremendous amount of modern economic thinking; I know it because of the attempts to model multinational corporations, almost all of which rely to some degree on his ideas. I wasn’t familiar with Ostrom’s work, but even a quick scan shows why she shared the prize: if the goal is to understand the creation of economic institutions, it’s crucial to be aware that there is more variety in institutions, a wider range of strategies that work, than simply the binary divide between individuals and firms.