Paul Krugman, Nobel Prize Laureate; Columnist, The New York Times; and Professor, Economics and International Affairs, Princeton University

 Summary by Richard C. Longworth

“I think,” Paul Krugman told The Chicago Council, “that people like me are slowly winning the argument.” 

What he meant, Krugman said, is that public policy on the economy is shifting from an emphasis on the deficit and austerity, “which is all wrong,” to the need for more stimulus and government spending to pull the United States out of a continuing depression that is condemning millions of Americans to long-term unemployment.   

“This is a tale of people’s lives being destroyed,” he said. ”It’s not as bad as the Great Depression (of the 1930s), but it’s still terrible.” 

Krugman, the Nobel Prize-winning Princeton economist and twice-weekly columnist for The New York Times, spoke to a sold-out Chicago Council crowd of 2,000 Thursday evening. He came to promote the paperback version of his book, End This Depression Now!,  and to press his argument that, in lingering hard times, deficits are less important than government spending to reignite the economy. 

“This is hard stuff to get across,” Krugman conceded, but he said he may be winning the argument, with policymakers if not the public. Especially, he said, he was “heartened” by what President Obama said about the deficit in his second inaugural speech, “which was nothing, which was what he should have said.” 

For four years, he said, the public debate has focused on the deficit, not jobs, but that’s turning around. 

“We’re on the right path – far too slowly,” he said. “Let’s try to pick up the pace.”

Krugman made it clear that the slight shrinking of the economy in the fourth quarter of 2012 was an unimportant blip, not an omen of a double-dip recession. But it’s worse than that, he said, because we’re in a period similar to the mid-Great Depression. “The worst is behind us, but it’s not OK.”

Long-term unemployment “scares me the most,” he said. After a normal recession, such as the dot-com dip of the early 2000s, the economy recovers quickly and so does employment. But there are still 3.3 million Americans stuck in long-term unemployment, plus young graduates with student loan debts and no jobs. 

“People are exhausting their savings,” he said. “People are running out of hope.” 

How did we get here? Mostly, he said, it was what economists call a “Minsky moment,” named after the late economist Hyman Minsky who argued that economic memories are short,  and that past bubbles and recessions are forgotten, especially by bankers and traders, who rush to commit the same excesses that created the last crisis.

“The market is 28-year-old guys who don’t know history,” Krugman said. In the past decade, he said, risk-taking expanded and regulation became lax. The result was a combination of factors – the housing bubble, household debt, a fragile financial system – that produced the worst crisis since the Depression. 

Normally, the Federal Reserve Bank can correct downtowns, as it did after the dot-com bubble. But because this recession was so deep, normal remedies didn’t work. The Fed reduced interest rates to zero and still private spending collapsed. In this scenario, Krugman said, somebody has to spend and that’s the government. 

“You want deficit spending in times like this, until balance sheets are repaired,” he said. “This means larger deficits but that’s OK. It’s what is supposed to happen.”

The $800 billion stimulus “was never remotely on the scale it should have been, given the scale of the problem,” he said – a small fraction of the overall national economy. But politicians opposed more spending, arguing that government like households should tighten its belt, and that deficits are “immoral.”  

“That’s all wrong,” Krugman said. In times like this, he said, the government can spend and run deficits without endangering its ability to borrow or risking inflation. 
“Most times are not like this,” he said, “but that’s the situation we’re in.” 

Krugman urged the government to reverse austerity and resume infrastructure spending, fixing potholes as much as starting major projects. He urged hiring of public employees like teachers to get unemployment down to 6 percent.

The good news, he said, is that the economy is healing. The bad news is the financial sector wasn’t made accountable for its earlier sins. Now, he said, there’s a new generation of 28-year-old traders making the same mistakes that Minsky predicted, so “the chances of this happening again are larger than I’d like.”

For all our problems, Krugman said, Europe is worse – especially politically. Austerity programs there aren’t working. Youth unemployment is high in countries like Spain and a neo-Nazi party is growing in Greece.

“I’m not sure that Europe is on the road to turning this around,” he said. “There’s a clock ticking (there). To think you can have a catastrophic situation for so many people and not pay a political price – that’s wrong.”

The Chicago Council on Global Affairs seeks to foster civil and informed discussion of foreign policy and global issues. Views expressed in event summaries are solely those of the author, not The Chicago Council, which takes no institutional positions.


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