Don’t worry about the national debt, said Paul Krugman, speaking at an April 18 Princeton Colloquium on Public and International Affairs. “Wealthy countries have been able to run up to 100 percent debt vs GDP without going into crisis. We did run at 100 percent after WWII. We come into this with debt at 60 percent of GDP and 100 percent is $6 trillion. It’s not a blank check but does give you running room.”
For my transcript of Krugman’s notes, click here.
Krugman didn’t have much else cheerful to say. He talked about “astonishing times” that he never expected to see in his lifetime, and that whether or not we spiral into a Great Depression, we are in depression economics. “The extent to which it is happening, is not supposed to happen. It is like some disease we thought was controlled has emerged in an antibiotic resistant form.”
“So far we are on track to having a slump as bad as the Great Depression, plunging just as fast. In world trade, we are plunging faster.”
“Where we are now is the fall of 1930, which by no means was the worst it got. What followed was the worst — the bank failures in the US, a corresponding wave in Europe. Destructive policies like raising interest rates to attract gold in 1931. Our best hope is that we have learned from our grandfathers.”
“Believe it or not, the disruption in our financial markets is worse than it was then.”
“The forecast is based on the federal budget returning in five years, but it is not at all clear where recovery comes from.”
“The striking thing is how hard it turns out to be to do anything forceful about the banks.
This morning, banks are being subjected to a stress test. But they don’t know what to do with the results.”
“Another of the shocks is Europe’s inability to act as a unit in this crisis, one of the major disappointments of this whole story.”
Still, Krugman tried to put a good spin on the current state of affairs.
“There was about 4 months when every single piece of news came in, it was worse than you expected. Yet for the last six weeks or so, things are not getting worse quite as fast as they were the previous six weeks. Even that is positive news.”
“But there was kind of a pause in the late 1930 before ‘It’ broke loose. We are hoping that doesn’t happen.”
“Even if it does stabilize, this will be very prolonged and very nasty.”
Past recoveries have been fueled by exports. “But this is a global slump. We can’t all export our way out of it unless we can find a planet to sell to.”
“At a fundamental level, this is a malfunction. It is not a case where the planet has run out of resources, or that we don’t have the ability to recover. It is a snafu. We ought to be able to fix it and get it moving again.”
“But we don’t know as much about it as we thought we did. And we need the political will to do things that are controversial but are essential. The policy response in the U.S. was much better than nothing, but is not enough. We needed $1.3 trillion not $8 billion, and more revenue to state and local governments. “
“Meanwhile, all I can say, is, Oh boy. This time is intellectually interesting, and personally terrifying. The scariest thing I ever thought I would witness in my years as an economist.”.