Paul Krugman on Our National "Wile E. Coyote Moment"
Economist, New York Times columnist, and Nobel Laureate Paul Krugman doesn't want you to miss any of the intricacies of his thought, which is why he bothers to explain how Wile E. Coyote generally flies off a cliff, pedals the air for a bit, and then plummets like a stone to the canyon floor below--all for the benefit of those of us "not familiar with the classics." He's ruddy, glowing with the good health of a man whom circumstances have put in the right, and facing a sold-out house at a World Affairs Council talk at Town Hall, 850 people hanging on his every word.
The words are gloomy: irrational exuberance has led us into the midst of a "truly awesome economic crisis" whose "global nature has come as a surprise," and "at best" we can look forward to "a very ugly next several years." We will be lucky to top out at nine percent unemployment, to see ten million people slide below the poverty line, to see millions more lose health insurance. Though the crisis is global, Krugman predicts the U.S. will see the most suffering among the Western economies because "of our imperfect safety net." Though things are not as bad as the 1982 U.S. recession, yet, this crisis is more alarming because our knowledge of how to free ourselves from this liquidity trap is mostly theoretical.
On the other hand, Krugman is light on his toes and slinging bon mots with a practiced hand--he riffs on an Onion headline (Recession-Plagued Nation Demands New Bubble To Invest In), asks, "What made the Great Depression so great?" and remarks on Barack Obama seeking support for the stimulus bill by "reaching out to moderate Republicans in the Senate--both of them." Mentioning the Fed's improvisatory lending practices of late reminds him of his wife's joke that by next year their Visa card will have the Fed logo on it.
What he doesn't have is "the answer," and when he concludes by saying that we all need to turn to each other and assure ourselves we'll get through this, it begins to feel like the set of a disaster movie--specifically just after the bolt-from-the-blue cataclysm and just before we notice the escape pod's been turned into smoking rubble.
Krugman is one of the "nest of Japan-worriers" at Princeton (including its former economics department chair Ben Bernanke), who were disturbed by the late '90s recession in Japan and its intransigence even after the usual economic levers were moved to shift it. That situation features in his recently revised book, The Return of Depression Economics and the Crisis of 2008.
In contrast, the '82 recession in the U.S. was more or less self-imposed by then-Fed Chair Paul Volcker--in response to inflation (exacerbated by OPEC-induced oil shock), Volcker raised interest rates. It wasn't pleasant, but it did the trick; inflation dropped and when interest rates were relaxed the U.S. enjoyed a mini-boom of pent-up demand that created a new "morning in America."
Today is unlike 1982...and more like the 1930s in at least one instance. In the 1930s, short-term Treasury Bills were delivering 0.14 percent interest. Now take a look at the one-month rate for today. The Fed has relaxed rates as low as it can, to the zero lower bound, and yet credit remains more Icee than Slushee. Krugman says Goldman Sachs models applying the tried and true Taylor Rule suggest an infeasible minus-six-percent interest rate would be needed to unstick us from our liquidity trap.
A liquidity trap is a through the looking glass experience, says Krugman; the paradox of thrift means that everyone's prudence stalls the economy, creating a deflationary spiral. And a newfound corporate prudence ordering the deleveraging of risky assets has created a world in which everyone's selling and no one's buying.
He argues in his book that the primary culprit was "shadow" banking institutions--they can take your money and invest it, but they are not regulated as closely as banks. They are supposed to be allowed to fail. They are hedge funds, investment houses, asset-backed funds. Thanks to light or nonexistent regulation, they all made larger and larger bets backed by less and less actual collateral. And while the U.S. economy could handle the failure of one, their bets were so entangled and over-leveraged that the failure of Lehman Brothers rocked the markets to their core.
So there is only one thing to do, and that's to have the government step in to try to repair the hole in the economy with spending of its own. The House passed an $818 billion stimulus bill, but Krugman worries that it isn't enough by half, and that it's been weakened by tax cuts. He wishes that it included a step toward universal health care, and doubts that much will come of green energy stimulus because the market is so immature. The bill is simply a stopgap, and nationalization of "our major financial institutions" may be required before this is all over.
Is there no good news? Nothing? He waves off questions about where to invest. "We came out of the Great Depression a better, fairer, more democratic country," he says instead. Then he says that thing about turning to each other to reassure ourselves we'll get through this.
