Paul Krugman is a professor of Economics and International Affairs at Princeton University, and the author or editor of 20 books and more than 200 papers in professional journals and edited volumes. His field of expertise is in international trade and finance, with his current academic research focused on economic and currency crises. Mr. Krugman also writes for a broader public audience, including his Op-Ed columns for the New York Times, Foreign Affairs, and Scientific American. Professor Krugman received the 2008 Nobel Prize in Economics.
We interviewed professor Krugman on July 25, 2009.
Will we be ultimately better or worse off as a result of the government’s massive stimulus spending?
It’s helpful to think about this question from a national point of view. The money funding our deficit spending will come from eventual increased economic output. It’s not coming at the expense of private investment. By making the economy stronger, it’s actually promoting private investment. So the stimulus doesn’t make us poorer, but richer as a nation in the long run.
No question the government is taking on an extra liability, which has to be covered through higher revenues. Higher taxes are a real cost to the economy. But I believe our country’s systemic fiscal problem is primarily due to rising health care costs. Our current deficit spending is only marginal in effect compared to this issue.
Ultimately, the question comes down to whether there is a real alternative to large government stimulus. Without deficit spending, would our long-run prospects be better or worse? I can’t come up with any analysis that suggests we would be better off without the deficit spending, both in the short- and long-run.
Are you concerned about the potential inflationary effects?
Is it possible? Yes. Likely? No, because I don’t think inflation is that hard to contain.
I don’t believe under the present circumstances a big increase in the monetary base necessarily implies future inflation. Remember, the Fed has not been printing vast quantities of money. We’ve had the Fed lending large amounts of money to the banks, which has led to a surge in bank reserves. The Fed is acting as a financial intermediary of last resort, doing what the banks don’t want or can’t do. So when banks start to lend again, all the Fed needs to do is to stop providing monetary support and start reeling in what they already allotted to banks. The Fed just needs to stop increasing the size of its lending facilities, and it has already been doing this to some degree.
However, if banks start to shift these reserves out of the deposits of the Fed and into the economy, then the Fed would need to soak up the money either through borrowing or by selling off some of the bank assets it has acquired. Either way, it’s just a matter of unwinding positions the Fed already holds.
How do you determine what stimulus spending is growth producing?
I believe in old fashioned-Keynesian thinking. Any spending in the short-run will produce short-run growth and jobs. Of course ideally you’d rather get the most out of every dollar spent. But in terms of what spending will stimulate GDP in the third and fourth quarters--there isn’t good spending or bad spending. Anything that will lead to an increase in effective demand will restart the economy.
It’s important to remember that the stimulus package has barely kicked in, a point that is lost in the 24/7 reporting on the economy. According to a recent Goldman Sachs report, only $2 billion, or less than two percent of funds allocated to infrastructure, has actually been spent. So there’s a lot more stimulus to come. And this is just a small part of the President’s overall recovery plan. Most of the package involves tax cuts and aid to state and local governments.
What type of stimulus approach do you think is most effective?
Aid to state and local governments probably has more significant impact on growth over the long run than most people can imagine because it helps avert spending cuts that will be very bad for the long term. If you’re cutting things like education and transportation infrastructure projects, that will crimp potential GDP growth far into the future. And I think expanding health care access would be a good thing as a way of making people’s lives a little less miserable and getting money into the economy. Research and education are also important long-term public investments.
But can additional health care and educational spending be efficient stimuli?
I didn’t say these were necessarily efficient investments. But these systems aren’t systemically broken either, and much good can come from expanding their reach. Lower-income Americans have an undeniable need for improved health care access. Additional spending on health care would be good for the economy as well, while also freeing up the spending power of individuals and families whose resources would otherwise be swallowed up by health care costs.
On the educational front, preventing the firing of large numbers of teachers and making necessary infrastructure repairs to school buildings would help sustain educational levels. This would promote spending directly and indirectly, through monies spent by teachers and workers who may otherwise be laid off. And all of this will help preserve our future prospects in both health care and education.
Larger picture: we’re seeing savage cuts in state and local government involving education, health care, fire-prevention, and infrastructure. And that makes no sense from any point of view.
When will we see the major impact of the stimulus package?
By the end of the second half of the year, I expect we’ll see positive growth over the next few quarters. And that wouldn’t be happening without the stimulus package. But it’s not at all clear at this moment if the stimulus is large enough to keep unemployment from continuing to rise. Despite that metric being a lagging indicator, fear of higher unemployment is just one part of the reason I still don’t think the existing stimulus package is big enough.
You don’t believe that a portion of projected second-half growth is related to the economy having made some major corrections, which may now be abetting reinvestment and growth?
I don’t think there has been any fundamental correction. Yes, we will have a big inventory bounce in response to manufacturers having slashed production. As their inventories get depleted, they will need to gear up production to sustain supply levels. However, without additional government involvement, second-half growth would still be flat or negative. A reasonable guess is that with the stimulus, we will be seeing 2 percent GDP growth over the next several quarters. So I think whatever positive growth we see this year will be largely the result of government spending.
Should we reprioritize our national budget to reallocate resources to better propel recovery?
Reallocating budgetary priorities does nothing to generate more demand. Whether you spend a billion dollars on a jet fighter that doesn’t work in the rain or preserve elementary education—either way, it’s a billion dollars spent.
There’s always this temptation to mix macro- and microeconomics. There is a clear distinction between what will help sustain spending and employment now and what will help sustain long-term growth. These are not the same issues. The Great Depression was only broken by totally destructive spending.
So you don’t want to think that doing the right thing in terms of long-run budgetary priorities has much to do with whether we get a recovery right now. That said, we do need to cut useless and unproductive spending so that we have a better chance of achieving long-term goals given our limited resources.
Is the stock market responding to the potential second half growth?
God knows. I think Nouriel Roubini’s variation of the Paul Samuelson’s line has it about right: - the stock market has forecast six out of the last zero recoveries. The stock market is right where it was in January, when we were already in a severe economic crisis. All that’s happened is that “end-of-the-world” scenario has given way to a bit more realistic but still fairly negative view.
Are valuations then excessive?
By historical valuation standards, stock prices don’t look wildly undervalued, nor do they look overvalued either.
....
This is only half of the interview, Kruman answered many more questions from stimulus packge, financial sector regulation, and future projections, click to complete reading the article.
Eric Uhlfelder
http://www.advisorperspectives.com/
We interviewed professor Krugman on July 25, 2009.
Will we be ultimately better or worse off as a result of the government’s massive stimulus spending?
It’s helpful to think about this question from a national point of view. The money funding our deficit spending will come from eventual increased economic output. It’s not coming at the expense of private investment. By making the economy stronger, it’s actually promoting private investment. So the stimulus doesn’t make us poorer, but richer as a nation in the long run.
No question the government is taking on an extra liability, which has to be covered through higher revenues. Higher taxes are a real cost to the economy. But I believe our country’s systemic fiscal problem is primarily due to rising health care costs. Our current deficit spending is only marginal in effect compared to this issue.
Ultimately, the question comes down to whether there is a real alternative to large government stimulus. Without deficit spending, would our long-run prospects be better or worse? I can’t come up with any analysis that suggests we would be better off without the deficit spending, both in the short- and long-run.
Are you concerned about the potential inflationary effects?
Is it possible? Yes. Likely? No, because I don’t think inflation is that hard to contain.
I don’t believe under the present circumstances a big increase in the monetary base necessarily implies future inflation. Remember, the Fed has not been printing vast quantities of money. We’ve had the Fed lending large amounts of money to the banks, which has led to a surge in bank reserves. The Fed is acting as a financial intermediary of last resort, doing what the banks don’t want or can’t do. So when banks start to lend again, all the Fed needs to do is to stop providing monetary support and start reeling in what they already allotted to banks. The Fed just needs to stop increasing the size of its lending facilities, and it has already been doing this to some degree.
However, if banks start to shift these reserves out of the deposits of the Fed and into the economy, then the Fed would need to soak up the money either through borrowing or by selling off some of the bank assets it has acquired. Either way, it’s just a matter of unwinding positions the Fed already holds.
How do you determine what stimulus spending is growth producing?
I believe in old fashioned-Keynesian thinking. Any spending in the short-run will produce short-run growth and jobs. Of course ideally you’d rather get the most out of every dollar spent. But in terms of what spending will stimulate GDP in the third and fourth quarters--there isn’t good spending or bad spending. Anything that will lead to an increase in effective demand will restart the economy.
It’s important to remember that the stimulus package has barely kicked in, a point that is lost in the 24/7 reporting on the economy. According to a recent Goldman Sachs report, only $2 billion, or less than two percent of funds allocated to infrastructure, has actually been spent. So there’s a lot more stimulus to come. And this is just a small part of the President’s overall recovery plan. Most of the package involves tax cuts and aid to state and local governments.
What type of stimulus approach do you think is most effective?
Aid to state and local governments probably has more significant impact on growth over the long run than most people can imagine because it helps avert spending cuts that will be very bad for the long term. If you’re cutting things like education and transportation infrastructure projects, that will crimp potential GDP growth far into the future. And I think expanding health care access would be a good thing as a way of making people’s lives a little less miserable and getting money into the economy. Research and education are also important long-term public investments.
But can additional health care and educational spending be efficient stimuli?
I didn’t say these were necessarily efficient investments. But these systems aren’t systemically broken either, and much good can come from expanding their reach. Lower-income Americans have an undeniable need for improved health care access. Additional spending on health care would be good for the economy as well, while also freeing up the spending power of individuals and families whose resources would otherwise be swallowed up by health care costs.
On the educational front, preventing the firing of large numbers of teachers and making necessary infrastructure repairs to school buildings would help sustain educational levels. This would promote spending directly and indirectly, through monies spent by teachers and workers who may otherwise be laid off. And all of this will help preserve our future prospects in both health care and education.
Larger picture: we’re seeing savage cuts in state and local government involving education, health care, fire-prevention, and infrastructure. And that makes no sense from any point of view.
When will we see the major impact of the stimulus package?
By the end of the second half of the year, I expect we’ll see positive growth over the next few quarters. And that wouldn’t be happening without the stimulus package. But it’s not at all clear at this moment if the stimulus is large enough to keep unemployment from continuing to rise. Despite that metric being a lagging indicator, fear of higher unemployment is just one part of the reason I still don’t think the existing stimulus package is big enough.
You don’t believe that a portion of projected second-half growth is related to the economy having made some major corrections, which may now be abetting reinvestment and growth?
I don’t think there has been any fundamental correction. Yes, we will have a big inventory bounce in response to manufacturers having slashed production. As their inventories get depleted, they will need to gear up production to sustain supply levels. However, without additional government involvement, second-half growth would still be flat or negative. A reasonable guess is that with the stimulus, we will be seeing 2 percent GDP growth over the next several quarters. So I think whatever positive growth we see this year will be largely the result of government spending.
Should we reprioritize our national budget to reallocate resources to better propel recovery?
Reallocating budgetary priorities does nothing to generate more demand. Whether you spend a billion dollars on a jet fighter that doesn’t work in the rain or preserve elementary education—either way, it’s a billion dollars spent.
There’s always this temptation to mix macro- and microeconomics. There is a clear distinction between what will help sustain spending and employment now and what will help sustain long-term growth. These are not the same issues. The Great Depression was only broken by totally destructive spending.
So you don’t want to think that doing the right thing in terms of long-run budgetary priorities has much to do with whether we get a recovery right now. That said, we do need to cut useless and unproductive spending so that we have a better chance of achieving long-term goals given our limited resources.
Is the stock market responding to the potential second half growth?
God knows. I think Nouriel Roubini’s variation of the Paul Samuelson’s line has it about right: - the stock market has forecast six out of the last zero recoveries. The stock market is right where it was in January, when we were already in a severe economic crisis. All that’s happened is that “end-of-the-world” scenario has given way to a bit more realistic but still fairly negative view.
Are valuations then excessive?
By historical valuation standards, stock prices don’t look wildly undervalued, nor do they look overvalued either.
....
This is only half of the interview, Kruman answered many more questions from stimulus packge, financial sector regulation, and future projections, click to complete reading the article.
Eric Uhlfelder
http://www.advisorperspectives.com/
