Debate with the great Paul Krugman in Louvain-La-Neuve (with sound and vision!)
In terms of disagreements or comments , just some short thoughts:
- I am a bit surprised that "trend growth" is defined as a growth level of approximately 2,5%, starting (!) from the level of end 2007, which was clearly debt-driven, unsustainable, after a huge real estate bubble. In my calculations, with a starting point some 10 years ago, the current crisis would bring the US almost at a pre-bubble level. But it should not be an ambition of the US to use debt, to reach asap the level of Q4 2007, and bridge a 8%-GDP-gap.
* Solutions: monetary policy cannot go further, ZIRP boundary. According to Taylor rule we should be a -6,5% interest rates (Fed fund), clearly impossible, so other solutions necessary.
Also here, I have a different opinion. We are repeating the 2003-2005 by thinking that cutting rates to absurd levels, will be net positive. It comes at a cost of bubbles, a catastrophy for long term savers (mension funds, insurance companies etc), and problems to normalise monetary policy (much) later. It is incredible, that we would make the same mistakes of 2003, that have been one of the root causes of the credit bubble and the subprime problems (due to an excessive quest for yield).
* In absence of monetary policy margins, we should go for more debt creation. Italy, Belgium and Japan have shown that this is possible, without dramatic consequences.
No surprise that I strongly disagree.
- I had never thought that an economist would ever use Belgium as an example to follow ! All Belgians know better from experience.
- It is completely wrong only to look at public debt ! US total debt is higher already than Belgian or Italian today.
- Italy, Belgium and Japan have been blessed by high savings rates. Krugman has argued to this remark that internal/external savings don't matter, but again I disagree.
- the current level of total debt to GDP in the US is today HIGHER than at the END of the Great Depression. This means that the starting point of debt today, is worse than at the end of the great depression.
Conclusion: it was truly a great debate, and I was honoured to have to opportunity to debate with Krugman. He is a nice person, a great economist, a courageous man, and also a very good debater and speecher. I would add that he has a great sense of humour.
Two quotes: 'Unemployment rates will remain high and will not completely recover until Sarah Palin's second term in the White House'
'An export-led recovery is unlikely, unless we export to another planet'.
However, it is not wrong to disagree with a Nobel Price winner. Where I like most part of the analysis, I disagree with the solutions. We should have time to discuss this in more depth. As I have argued already in the book Econoshock (written before the Great Recession), I believe a Green New Deal would be the best solution for the US. Reducing imports, current account deficits, tensions and wars with oil exporting regions, creating know how and products, exports , wealth, less polution etc.
Debt could be part of that plan, but not debt without a cause, rather investments that woiuld greatly benefit the next generation.
All in all, a fantastic experience, and a great organisation by the UCL, assisted by more than 1,000 persons, of which a lot where students.
(Lees ookhet artikelen het videointerview in de Tijd.)
Paul Krugman has won the Nobel Prize in 2008, and is probably the first blogger to have received this price. When I told him that, he laughed, which is always a good start of a first encounter. Krugman is a modern economist, travelling around the globe with his laptop, with a world-wide wireless access (Verizon), to connect with new information (Vox.eu , roubini, economists views, and other blogs, not yet Econoshock).
(The quality of the picture above is rather poor, but it has been taken (illegally?) by an anonimous amateur photographer (paparazzi ?). Nevertheless I am very happy to have a picture of the moment).
Krugman gave a bright and clear analysis of the crisis. Where we differ in opinion is on small things, but especially on the solutions, in particular for the US.
So let's go first through the presentation of Mr. Krugman:
* We have decoupled from a depression scenario
* We are 8% below trend growth in the US and Europe
* LT unemployment (defined as > 6 months) is very bad : almost 4%-points of the 10% unemployment rate