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Nobel-winning economist speaks at UC
By James Pilcher • firstname.lastname@example.org • April 24, 2009
UNIVERSITY HEIGHTS - The country may experience some economic growth in the latter half of this year, but don't expect the rate of job losses to abate anytime soon, noted economist and recent Nobel Prize laureate Paul Krugman told an audience of economists and area business leaders Friday at the University of Cincinnati.
"I'm here to give a feel-good talk," Krugman joked as he opened his speech. He later said that he believes some theories that in economic circumstances such as these "unemployment rises typically by 7 percentage points, which would put us at about 12 percent, which does not look unreasonable the way things are going. And it's about five years before unemployment starts to come down again, definitely something that is really worrisome."
He also pointed out that with the exception of the Great Depression, all of the previous financial crises of the previous century have taken place in just a few countries at a time - until now.
"There are two kinds of recessions that are bad - those that take place because of financial crises, and those that are synchronized around the world," he said. "In both cases, the recessions tend to last longer and be deeper. Right now, we've got both going on."
Krugman, who won the most recent Nobel Prize for economics for his work on international trade, was at UC to conduct a seminar on his textbook "Economics," and is being honored tonight for national commentary by the Scripps Howard Foundation.
In a separate interview with the Enquirer, Krugman (also an economics columnist for the New York Times) addressed subjects ranging from the Obama administration's stimulus plan and its possible effectiveness; the role of China in the recovery; and what it will take to pull the U.S. and the world out of the recession:
What affect do you expect the Obama stimulus to have on the economy?
The policy is a mitigating policy, it's not about promoting recovery, despite the name. It is about diminishing the depth of the slump, and since there still will be a slump, how do you judge how it's working? But you probably will see ... visible growth that turns positive for a few quarters. But there really are no safe havens now, except maybe in the repo business.
Given that you think this is now a global recession, what role does the rest of the world, especially China, play in recovery?
Except for China, everybody else is doing less than we are. China is the economy of the future, but still, but if you measure them at market prices, they are a relatively small segment of the world. We don't get a whole lot out of this (from the rest of the world); the global support is not very big. But it is more pressing now, because of the global synchronization of this. Everyone came down at once - and if you look at the U.S. right now, this recession is not out of line with what we had in '82. But if you add up the fact that the recession is everywhere deeper, globally it's the worst since the Great Depression.
What will it take to pull out of this crisis?
I'm in the camp that really worries about the L-shaped recession. We level off but we don't get the recovery. We hope it isn't, but it has all the markings of it. This looks like the kind of slump that has all the markings of where normal recovery forces are very, very weak.
It's hard to see where recovery comes from. Almost always the way a country recovers from a financial crisis is with an export boom. The problem is that we have a global crisis this time. So who are we going to export to, unless we find another planet to take our stuff?
Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.