“Economic recovery will be aided by recent advances in economic understanding.”
“This is not your fathers’ recession, this is your grandfathers’ recession, and we need to remember what our grandfathers knew.”
Paul Krugman spoke at a symposium for three of the five 2008 American Nobel Laureates hosted by the Swedish embassy. He was joined by Martin Chalfie and Roger Tsien, co-winners of the Nobel Prize in Chemistry with Osamu Shimomura for their research on green fluorescent protein. Shimomura and the other American laureate, Yoichiro Nambu, a co-winner of the Nobel Prize in physics, were absent Monday.
All five Americans will be presented with their prizes in Stockholm on December 10.
Mr. Krugman, who won the Nobel Prize in economics for “his analysis of trade patterns and location of economic activity,” said some of his research required him to be “kind of an ambulance chaser” and travel around the world to investigate economic crises.
“Life is easy these days because I can get to the crisis on New Jersey Transit,” Mr. Krugman said, referring to the state’s rail and bus system.
The current banking crisis, he said, is “functionally similar” to that of the Great Depression, and many of symptoms were the same, including the “impotence” of monetary policy to remedy financial troubles. Traditional monetary policies like interest rate cuts, Mr. Krugman said, have not been a successful strategy in avoiding the current financial downturn.
U.S. income inequality levels, Mr. Krugman said, are also similar to those recorded during the 1920s, just before the Great Depression.
Emerging from the current financial crisis will entail “relearning lessons” from that historical crisis, particularly the lesson that the financial system cannot be left completely to the whims of the market, he said. That sort of approach, Mr. Krugman said, encourages financial risks that make sense for the individuals behind them but not for the market as a whole.
“This is a lot of rediscovery, in a new souped-up Internet form, of things that we used to know and forgot,” Mr. Krugman said.
Economic recovery will be aided by recent advances in economic understanding and further research, Mr. Krugman said, particularly in economic behaviour, a field that will need to see extensive exploration.
“The difference, we think, is that we know more about the economy than we did in 1931,” he said, pointing to governmental actions like the rescue of financial institutions, which Mr. Krugman said have prevented a “complete financial meltdown.”
These rescues, as well as the prospect of a large stimulus package, are “reasons for thinking that it will not be another Great Depression,” Mr. Krugman said.
Despite these positive steps, however, Krugman said the U.S. economic situation has been ``pretty scary,” and policy solutions have often been “behind the curve.”
“More or less every month the news comes in worse, not only than you might have hoped, but worse than anyone might have expected,” he said, adding that unemployment could hit 9 per cent in coming months.
Referring to Sunday’s government rescue efforts for Citigroup, Mr. Krugman said he wished that the government had demanded further concessions from the company in return for the aid. Any action to help the nation’s auto industry, he said, will have to be accompanied by “enforcement of the public interest.”
Mr. Krugman’s comments came on the same day that President-elect Barack Obama unveiled his new economic team and pushed Congress to pass a stimulus package designed to create jobs. In his comments, Mr. Obama warned that the economy is “likely to get worse before it gets better.”