- Your history
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.
Listen
to the recorded speech, and the part on debt stimulus here
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
24 Comments
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Geert
On 19 Nov, 2009
sorry for possible typing errors, bad and short writing etc, I will correct them after catching some sleep
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Jan L
On 19 Nov, 2009
Geert,
After your speech yesterday I was wondering about the lower sustainable growth trend you mentioned. Is it calculated as the growth that we would have seen the past few years if credit expansion had been on more normal levels? Or is there another explanation? -
Jan Holvoet
On 19 Nov, 2009
So, was China's growth rate artificially low the last decade because they saved too much ?
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Geert
On 19 Nov, 2009
@Jan: that could well be the case. But on the other hand, high savings have helped them to generate huge investment growth !
So it is not a linear story. -
Pieter
On 19 Nov, 2009
There's hope...It looks like Obama is leaning more towards Geert's views than to Mr Krugman's... :)
http://www.tijd.be/nieuws/buitenland/Obama_waarschuwt_voor_dubbele_dip_economie.8261319-439.art -
Frank
On 19 Nov, 2009
Krugman is heavily infected with KMV (keynsian madness virus). Bring him to an Austrian doctor please.
1. We have decoupled from a depression scenario Have we? You can easily find a dozen economists who said the very same thing in the spring of 1930 at the top of the bear market rally.
2. We are 8% below trend growth in the US and Europe No we're not. We are moving towards the new normal. The trend growth you propose Mr Krugman is based on a credit binge that is gone for many years to come. The growth you are refering to was not real, it was borrowed from the future.
3. 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. Jesus Christ. Did we give this guy a nobel prize??? We are in trouble because of too much debt and too much spending. How can you possibly solve that with more debt and more spending. You cannot borrow and spend yourself out of a recession Mr Krugman. We tried that already in 2003. The result was a credit and housing boom of epic proportion. And now you want to solve the credit and housing bust with the very same thing that caused it??? Please explain me how that works ...
Mr Krugman is a Keynsian madman. He wants to heal a drug addict with more dope. A debt problem cannot be solved by borrowing even more. Even I understand that. He should too. The global economy was on rising growth because it was riding the wave of increasing debt. 2007 marked the year where the debt burden finally grew too big for the econompy to repay. We all know the rest. Debt is not coming back, no matter how hard Krugman, central banks or governments are going to try. The artificial credit boom created huge malinvestments (overcapacity) in shopping centers, housing, restaurants, commercial real estate, trucking, cars, etc, etc. The liquidation of those malinvestments is going to create rising unemployment for months to come. In the meantime banks are strugling to hide their losses. There is no way they are going to provide easy credit in this environment. There is no way consumers and bussinesses are going to lend in this environment. There is no way we escape this one without a serious deflation. But hey, we intelligently avoided a depression right? -
Nick Doms
On 19 Nov, 2009
@ Frank and Geert
I am not a proponenet of a pure Keynesian theory either, certainly not in the current circumstances.
What are your thoughts on a hybrid solution, i.e. one where for an initial period of time during recession the Gov't stimulates the liquidity in the markets and implements a realistic exit plan so that their "artificial" capital and credit can be replaced with existing PE capital to positively affect the solvency problems that arose from over-extended cedit and lack of liquidity.
What are your thoughts?
Sincerely, -
Frank
On 19 Nov, 2009
@Nick, my humble opinion
Credit has only a chance of getting paid back when invested in productive capacity. Chances of a government investing in productive capacity are close to zero. Only a free market economy is good at that. That said, our problems now are even bigger. Because of the huge private debt burden even investments in productive capacity are highly questionable. We have excess cappacity in nearly every sector in nearly every country. Productive capacity worldwide is dimensioned on consumer credit growth. We all know what happened to consumer credit growth.
Government can only stimulate by borrowing or taxing. They do both in the hope the private sector picks up and returns to the pre 2007 status quo of private sector credit growth. It's not going to happen. Consumers are broke unwilling to borrow, bussinesses are afraid to expand and banks are scared to death because they know assets are overvalued and they know what they have on their balance sheets. The credit market as we knew it is dead. As long as governments are not able to restore credit markets (won't happen) and as long central banks operate in a credit based money system they cannot create inflation without destroying the currency. Everybody thinks central banks are going to print the debt away, but as far as I can see they are not prepared (not yet anyway) to destroy the currencies and destroy their power with it. What they are trying (desperately ) to do is restore the credit system. They extend credit just like commercial banks did before 2008. As long as they are trying to do just that I expect a severe deflation. You cannot create inflation in a credit based fiat money system without consumers borrowing and banks lending. Sure central banks have printed some new money. But compared to the ocean of debt out there it's just a drop in the bucket. -
blue-coat
On 19 Nov, 2009
@ Frank,
Ik sta er echt van te kijken hoe een aanhanger van de theorie van de Oostenrijkse School met enkele eenvoudige vraagjes een nobelprijswinnaar kan reduceren tot een econo-kleuter.
Het is niet alleen verbazingwekkend, het heeft ook iets beangstigends. -
Yannick Verdyck
On 20 Nov, 2009
Op mises.org doen ze het heel de tijd, het is heel simpel. Iedereen kan het, alle Oostenrijkers ergeren zich non-stop aan de columns die hij in de NY-Times schrijft, ze zijn aan mekaar geschreven met denkfouten. Krugman heeft totaal geen analytisch vermogen, hij kan blijkbaar geen normale oorzaak-gevolg conclusies maken. Redelijk triest, maar die trend hebben we al sinds de wereld zich heeft bekeerd tot Keynes.
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Bart
On 20 Nov, 2009
@ blue-coat, have no fear, the truth (KISS) shall set you free ;-)
I don't believe Krugman et al. don't see this. I think they're more in a state of constant denial and indeed in some sort of Keynesian-engineereing trance, denying economic gravity (too bad to think about). (Roubini also jumped the shark in my opinion)
I have to admit that half a year ago I feared hyperinflation more than deflation, the last few months that changed in favor of deflation, I'm a little slower then some around here. Unfortunately also way ahead of OESO...
Winter's coming,can you feel it?
Just went on a WE-trip with a friend of mine. He runs a company in a sector that truly sits on top of the list of economic indicators (as far as I'm concerned). All the companys he services (big "household" names) ask to renegotiate, scrutinize contracts, start to dig etc... No problem thus far, but he states it's a u-turn from the arrogance these companys displayed only a year ago. The sting really gets deeper...
But hey, there'(wa)s(?) money to be made in the markets, how's that for an indicator? I believe Rosenstock was a good play ;-) -
Jan L
On 20 Nov, 2009
Krugman's solution might not be good, that doesn't make his analysis of the situation wrong. You can disagree on his cure for the problem but calling him dumb might be a little strong. :-)
As I see it, the Austrian remedy for government would be getting your hands of the economy, but I'm not a specialist in the Austrian school. If my assumption is correct, I understand why no political leader wants to adopt this remedy. Leaving the economy as it is just doesn't get you good points from the voters. Even if it saves the economy in the long run. -
steven
On 20 Nov, 2009
@Frank: The new normal ? ... or The Newest Abnormal ?
http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10303 -
paul vreymans
On 20 Nov, 2009
@ Yannick
Krugman is behalve voortreffelijk economist ook overtuigd en zelfverklaard “liberal” . Het grote probleem is mijn inziens dat je nooit weet welk van de twee petjes hij op heeft, en dus zijn status als nobelprijswinnaar constant misbruikt voor zijn socialistisch politieke agenda. -
Yannick Verdyck
On 20 Nov, 2009
@ Paul Vreymans
Nee, dat is Paul Krugman niet, hij is geen voortreffelijk econoom, helemaal niet. Hij valt steeds uit de lucht als er iets "onverwacht" gebeurd, waarna hij vaak claimt dat economen niet in staat zijn crisissen te voorspellen. Hij maakt foute analyses, gelooft dat geld alles kan oplossen. Hij begrijpt niet hoe een economie werkt en hij begrijpt meer bepaald niet hoe welvaart tot stand komt(en wat daar voor nodig is). -
Yannick Verdyck
On 20 Nov, 2009
Ik maak mij zelf zorgen, zijn visie op de juiste FED-politiek bijvoorbeeld, is mijn inziens heel gevaarlijk, an sich zou dat niet zo bijzonder zijn, ware het niet om de enorme invloed hij uitoefent op het mainstream establishment. Dat is een heel belangrijk element wanneer je mijn kritiek in beschouwing gaat nemen, als het om een minder gelauwerd en hoog aangeschreven econoom zou gaan - die dezelfde visies en denkbeelden zou verspreiden - dan zou ik mij minder ergeren aan zijn uitspraken en zou het mij - en vele anderen - minder storen, maar hij doet wel uitspraken die een invloed hebben op economisch over gans de wereld. Niet dat ik denk dat hij het met kwaad opzet doet.
Goede oplossingen op lange termijn Krugman nog niet echt horen aanbrengen. Soit, ik kan uren over die dingen argumenteren en praten, maar het zou ons waarschijnlijk te ver wegleiden. Trouwens er zijn nog veel meer talloze mainstream economen die er deeltelijks afwijkende, maar evengoed verkeerde opvattingen op na houden. Het is tenslotte maar een persoonlijke mening he. Ik ben nog altijd geen "echte" econoom, ik kan enkel maar proberen ze te onderbouwen met goed gekozen argumenten. -
blue-coat
On 20 Nov, 2009
@Jan L.
Krugman’s solution might not be good, that doesn’t make his analysis of the situation wrong You can disagree on his cure for the problem but calling him dumb might be a little strong
Dom zal die man niet zijn, maar als je als oplossing van een crisis die veroorzaakt werd door teveel schulden , met nog meer schulden als oplossing voor die crisis aankomt, hoe moet ik zo iemand dan voorstellen ?
Als econo-kleuter of als nobelprijswinnaar in de economie ?
Aan u de keuze.
- -
Yannick Verdyck
On 20 Nov, 2009
*
-2e alinea, 1ste zin:
"...lange termijn Krugman nog..." moet natuurlijk "...lange termijn heb ik Krugman nog..." zijn.
-2e alinea laatste zin:
"ze" moet "mijn standpunt(en)" zijn -
Yannick Verdyck
On 20 Nov, 2009
@ Ivan Van De Cloot
"Het kan heel goed zijn dat Krugman achteraf bekeken in het verleden renteverlagingen heeft verdedigd die betwistbaar zijn. Ik wil echter wel opmerken dat hij bij mijn kennis nooit bewust een zeepbel in vastgoed heeft nagestreefd. “Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble” was “tongue in cheek” wat bij hem vaker het geval is."
-Over uw reactie (hierboven integraal overgenomen en dat mijn inziens hier beter thuishoort) in het andere "Krugman"-topic.
Bedoelt u daarmee dat het voor economen geen probleem is om catastrofale inschattingsfouten te maken, zolang ze er maar geen kwaad opzet mee gemoeid is? En is zo'n houding niet wat al te gemakkelijk en goedkoop? -
steven
On 20 Nov, 2009
Aanvulling op Yannick uit Krugman's Intellectual Waterloo:
Those who look up to him like the second coming of Adam Smith should realize that the neo-Keynesian principles that lead him to advocate aggressive interest-rate cuts and mammoth public spending now, are the very same principles that led him to advocate inducing a housing bubble then. He would himself affirm that his economic principles haven't fundamentally changed since then. So the conclusions and policy prescriptions he infers from them are just as wildly wrong now as they were then. -
Yannick Verdyck
On 20 Nov, 2009
Aangaande de "Zaak Krugman":
"Clearly the defendant is guilty. I rest my case."
