An Interview With Paul Krugman

Ten years ago in his book The Return of Depression Economics, Paul Krugman* warned of the problems that would lead to the current crisis. Last year the professor and trenchant columnist was awarded the Nobel Prize for Economics. In the interview below with Daniel Huber, Credit Suisse’s Head of Publications, he talks of the reasons for the crisis, the lessons to be learned, and life as a winner of the Nobel Prize.

Daniel Huber: There are very few winners emerging from this crisis, but you seem to be one of them, because foreseeing this crisis a decade ago probably won you the Nobel Prize for Economics.
Paul Krugman: Well, I think I’m enough of a humanitarian to wish things hadn’t turned out this way.

Would you consider yourself a pessimist or a realist?
In my view, it seems they’re the same thing right now. But over the course of my career I have become focused on crises, as they have always interested me. I look at the current situation through this lens too. In other words, I’m more interested in a potential problem than the possible upside. I think I’m a realist, but with a pessimistic streak in the things I focus on.

Why did nobody listen when you first warned of an emerging global economic crisis 10 years ago?
First of all, the housing bubble helped to make things look good for quite a while. People were very reluctant to question that bubble for a variety of reasons. Part of it was just a general tendency to assume that the market must be right, while some of it was an unwillingness to quarrel with what looked like a successful model. When people are making lots of money, to tell them that their success is based on unsound foundations is not a popular thing. When you get through a crisis, as we did in the late nineties, the natural inclination is to pat yourself on the back and persuade yourself that it was your own wisdom and foresight that got you through it. But privately you say to yourself: Oh my God, that was a close miss.

Looking back, where do you see the major cause of the current economic crisis?
For me this is quite clearly the steady expansion of debt, particularly in the United States. But this is actually a trend that dates back around 25 years. The indicator I use most often is household debt relative to income, which had been stable for a generation until the beginning of the 1980s, when it began rising inexorably and eventually reached 100% of GDP on the eve of the crisis. However, this alarming development was even welcomed by many people, who saw it as a confirmation of markets functioning properly. But in retrospect you have to say that people were taking on much more than they could handle. It is worth nonetheless recalling some of the excesses of recent years in particular: The limitless granting of credit, the excesses in Eastern Europe, and other developments that have now come home to roost with a vengeance.

Have we already passed the nadir of the crisis?
Short-term economic forecasting is a bit like staring into a crystal ball. But nonetheless it appears that the pace of decline has now slowed, and that the worst of the crisis is over. You no longer have to brace yourself for yet more horrible news when you turn on your computer in the morning. There are still negative surprises, of course, but there are also now positive ones.

Overall, it still does look like things are getting worse, but at a slower pace than before. That’s an important step forward, but it doesn’t mean that we can now say we’re on the road to recovery. We have a long way to go before we reach that stage. The falling-off-the-cliff stage may have been stopped for now, but that doesn’t mean that normal times are just around the corner. The current economic situation can be compared to a patient who has been rushed to the emergency room in critical condition and only just saved. Sure, we may have succeeded in warding off the Great Depression version 2.0, but that doesn’t mean the patient is ready to leave the hospital. Quite the opposite: He’s still very sick and we have no idea when he will recover.

Are they any examples from the past that could point a way out of the current crisis for us?
The answer to that is rather depressing, as there are no good historical role models for recovering from this kind of slump. The only appropriate example is Japan, which experienced a lost decade of economic stagnation, and then had a quite convincing recovery from 2003 onward on the back of a strong surge in exports. However, this recovery was almost exclusively driven by a growing trade surplus thanks to exports to China and the United States. This time the whole world is caught in a slump, so unless we can find another planet to absorb our global trade surplus, that’s not a route out. Going back further, you have the historical precedent of the Great Depression, which was ended by a very large job creation program better known as World War II. Two observations can be made here with respect to the current crisis: First, that any program of any comparable size in the modern era would be impossible, except in the event of another major military conflict. Second, governments came into the last world war in relatively good economic shape in terms of their debt levels. So they had more leeway to pursue an expansive economic policy.

Click here for the full article.

Source: Credit Suisse - In Focus, July 21, 2009.

* Paul Krugman was born in New York on February 28, 1953. He is Professor of Economics at the University of Princeton, a highly respected columnist for the New York Times (on Mondays and Fridays), and the author of various works on economics. Last year he was awarded the Nobel Prize for Economics on the basis of his “analysis of trading structures and centers of economic activity,” according to the official wording of the Royal Swedish Academy of Sciences. In addition to his academic work, Krugman has continually been in demand as a consultant, including in 1982 on Ronald Reagan’s Council of Economic Advisers, as well as a decade later during the presidential candidacy of Bill Clinton. He is believed to have declined an appointment to the White House following Clinton’s victory, however.

Comments

[User 449634:]

Professor Krugman didn't predict the current crisis. He actually advocated for the policies that led to its formation though. His documented quotes from various sources during the early 2000s clearly demonstrate this. He called for low rates and an expansion of credit in order to facilitate a housing bubble that could offset the dotcom collapse and 9/11 shock. Additionally- the underlying Keynesian principles he subscribes to are not only the wrong policies, but even worse, they are the exact OPPOSITE of the right policies.

Jul 30 08:50 AM

[John Galt:]

Predicted the crisis? It's funny how many people predicted the crisis now. User 449634 is exactly correct, Krugman helped CAUSE the crisis.

"Well, I think I’m enough of a humanitarian "
- And he lets his political views get into the way of economics.

Don't they teach Austrian Economics over there at Princeton? Too much debt huh? And why would we have too much debt? Could it be because of artificially low interest rates set by the government?

Krugman is a LOOTER. Who is John Galt?

Jul 30 09:15 AM

[Glen L.:]

Kudos to my fellow commenters! Krugman is one of a number of winners of the politicized Nobel Prize, such as Al Gore, Ho Chi Minh, and Henry Kissinger, who were essentially awarded a prize for achieving exactly the _opposite_ of the thing the award was given for -- sound economics, peace, the advancement of science.

Krugman is also an unabashed Keynesian and cheerleader for the biggest spending programs of the Democrats. The fact of the continued dominance of Keynesian economics and tax-and-spend governments the world over, coupled with what will turn out to be the worst economic downturn in history, should make people stop and think: Gee, maybe there's a cause-and-effect relationship here! I see the evidence of a few people doing just that, here on Seeking Alpha. Let's help each other spread the word.

Jul 30 11:07 AM

[User 449634:]

Interesting how Krugman advocates green technology as the next bubble to rescue us. Old (and economically devastating) habbits die hard.

Jul 30 12:03 PM

[Genesis:]

"Going back further, you have the historical precedent of the Great Depression, which was ended by a very large job creation program better known as World War II."

By Krugman's perverse reasoning, World War III will be, in economic terms, just another "jobs creation program."

Jul 30 12:38 PM

[LKofEnglish:]

actually i like mr "bomb them back to the negotiation table" kissinger winning the nobel prize for peace. there's a certain honesty there.

Jul 30 12:39 PM

[Tony Petroski:]

Humanitarian Krugman. What is your prescription for our current woes?

Humanitarian Krugman: "The answer to that is rather depressing, as there are no good historical role models for recovering from this kind of slump."

Krugman reminds me of my old economics profession, Dr. Walter Heller (also a humanitarian). Heller taught us in the late '70's and early '80's and his standard fare was that there was no way out of stagflation and all we could hope for was higher levels of government spending to help spur aggregate demand.

I agree with an earlier commenter: The Nobel Prize should be renamed the Lenin Prize.

Jul 30 12:46 PM

[conceptwizard:]

I dont agree that the crises has been averted. Stuffing the banks full of worthless fiat currency and changing the mark to market rules to allow them to ignore the toxic asetts did not help or repair anything. The Fed is having trouble rolling debt and we still have the same 500 trillion derivative exposure backed by 9 trillion of real dollars as before.

The comment that we have averted a GD2 and are still falling but slowing are misleading. The stimulus is having some effect sure, and this is causing us to slow down, the Government throwing 24 trillion to date to plug holes in a riddled economy does not repair what caused the holes in the first place.

Propaganda and false earnings reporting of markets due to high speed trading on low trade volume is alluring but highly suspicious.
six people looking for every one job is detrimental for consumer confidence and the 6.9% savings/ debt reduction rate is having a drastic effect on imports and retail sales and I dont see that improving anytime soon.

Overall, the situation is grim, we are generationally indebted to the rest of the world, housing cannot recover under these circumstances and neither will employment.

The attitude of the Obama administration is to keep people in their homes and prop the systems up under false pretenses in the hope of kicking the problems down the road, until the next election. This has been the mandate of every President for many terms. This is an irresponsible/irrepreh... approach and will only serve to bury us further in the mire.
In my opinion we have to let the system cleanse itself normally and rebuild from the remains now or forever have the noose tightened and have to deal with it eventually in a more severe manner.

Jul 30 01:11 PM

[Leftfield:]

Agreed with all above comments; Krugman is just another pimp for the status quo. He sees no solution. That means, he doesn't see a distinction between present gargantuan oppressive government we can't afford, and a sustainable economy based on, remember this?, free enterprise.
There is no easy way out but there is the distinction of having only the government we can support with taxes (MUCH smaller) and having a safety net in place during the adjustment to greater freedom and future prosperity.
These mainstream sellouts can't see past their patrons and live high while the rest of us await real representation.

Jul 30 01:39 PM

[anarchist:]

I wonder what the reactions here would have been had krugman been a conservative?

Jul 30 09:32 PM

[Steve in Gr...:]

Have a look at the following: Krugman goes all empirical in his quest for truth and justice and socialized medicine.

www.eyeblast.tv/public...

Remember, Mr. Enron-consultant. A REAL Leftist, never, never looks at the actual data.

Jul 30 10:00 PM

[RoadtoSerfdom:]

Facing a huge recession after the realization that the dotcom bubble was, in fact, just a bubble; and knowing that mandatory obligations far exceeded government revenues, George W Bush turned to famed Nobel Prize winning Keynesian economist Paul Krugman who advised “To fight this recession the Fed needs … soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” Further adding “to be honest, a new bubble now would help us out a lot even if we paid for it later. This is a really good time for a bubble…” Last week, Krugman got around to offering his defense of this policy stating on his blog “Guys, read it again. It wasn't a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that's just what happened.”

Krugman quotes are from the New York Times and his own personal blog.

When will Keynes' animal spirits ensnare Mr. Krugman in a liquidity trap?

Jul 31 12:03 AM