Nobelist Krugman Favors Massive Stimulus, Forecasts Higher Joblessness
December 21, 2008 | By Lorna Aldrich
Paul Krugman, 2008 economics Nobel laureate, Princeton professor and New York Times columnist, intertwined economic and history lessons with prediction and analysis at a Dec. 18 Club Luncheon.
He said the Federal Reserve’s tools to contain the current economic crisis had reached their limit without stemming the economy’s downward slide and that massive federal spending was the remaining policy tool to check that slide. He foresaw unemployment rates in the 9 to 10 percent range by the end of this year because spending projects won’t start immediately.
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.
The bank failures, he said, were not confined to conventional banking institutions regulated by state and federal agencies but included a much larger “parallel” or “shadow” system of hedge funds and similar entities that perform the same functions as banks. This unregulated system, he said, had grown larger than the regulated banking system and its collapse is the 21st century equivalent of depositors’ runs on traditional banks, such as occurred in the 1930s.
Looking to the immediate future, Krugman was pessimistic about next year but voiced optimism for 2010, when the stimulus package could take effect. He said the incoming administration understands economics.
Looking beyond the immediate future, he expressed concern about the “end game” after so much government intervention in the economy. “The private economy needs to step back in,” he said.
Hrugman ended his prepared comments with “Let’s wish ourselves the best of luck.”
In response to questions, he emphasized that the quality of oversight would be important in the stimulus package. Krugman drew a distinction between pure economic analysis of spending projects and social and political considerations.
“Economics is not a morality story,” he quipped, tacitly suggesting that policies need to go beyond mechanical economic analysis. In response to questions that veered away from his areas of knowledge, he uttered that rarest of comments from the podium, “I don’t know,”