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Paul Krugman's Nobel Prize lecture
You'll find it here. And here is his current forecast (with which I agree):
Paul Krugman, winner of this year's Nobel economics prize, said on Monday that the world could face a Japan-style, decade-long slump...
"A scenario I fear is that we'll see, for the whole world, an equivalent of Japan's lost decade, the 1990s -- that we'll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period," he told a news conference.
"And that's unfortunately very easy to see happen."
If it is any (minor) consolation, growth is usually understated during such downturns, because it is more likely to take the form of hard-to-measure quality improvements rather than big expenditure-intensive projects.
Posted by Tyler Cowen on December 10, 2008 at 07:31 AM in Economics | Permalink
Comments
Don't the climate models assume trend global growth? May we have unintentionally solved global warming?
Posted by: Jay at Dec 10, 2008 8:35:35 AM
Isn't the whole point of the bank preferred stock acquisitions by governments to do what Japan did to finally get out of the slump?
Posted by: MW at Dec 10, 2008 8:51:52 AM
Krugman has an agenda (big government spending) and is using scare tactics to forward his arguments. Growing the role of government in the economy is likely to increase frictions that keep resources from moving out of shrinking sectors into growth sectors (read Auto bailout). Krugman is a smart guy, but his politics tend to get in the way of his economics.
Posted by: bastiat at Dec 10, 2008 9:07:01 AM
I was unimpressed by this lecture. Macro-types such as Krugman insist on viewing the world through very opaque lenses (aggregate variables) and then seem surprised when the world does not behave the way their models predict. I wonder what impact this type of research will have over the long-run, as opposed to ,say, Hayek's deep philosophical insights:
http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html
Posted by: Unit at Dec 10, 2008 9:07:41 AM
"Krugman is a smart guy, but his politics tend to get in the way of his economics."
Indeed. I'm impressed by his body of work, but Krugman (and Siglitz for that matter) are examples anti-Austrians. Austrians consider government the source of the problem just about everywhere, even though there's no credible case that government alone caused our current crisis. Krugman considers government the source of the solution just about everywhere, although the case for things like full-blown socialized health care and high capital gains taxes are cloudy at best.
Posted by: MW at Dec 10, 2008 9:32:56 AM
Lisetning to the lecture when he talks about specialization in the auto industry I think about how stupid CAFE is. CAFE makes it difficult for any company to specialize in large cars!
The Division of Labour is Limited by the Extent of the Market.
Posted by: floccina at Dec 10, 2008 9:35:35 AM
“Nobel winner Krugman's worst case: a lost decade”
Wow!
Is it possible that interest rates fell so far so fast (in economics it seems that it is always the delta that gets you) that so many loans were made that the current situation was brought about by falling demand for loans, which unfortunately tends to contraction in money supply.
BTW from my point of view unused assets like labor and capital is problem to be avoided so maybe this a point in time were we should replacing minimum wage and other welfare with an hour wage subsidy.
Posted by: floccina at Dec 10, 2008 9:54:59 AM
Aren't Japan's economy and the U.S. economy very different animals. It seems to me that Japan's economy was for more rigid and therefore less capable of responding/adjusting to downturns. That's not so much the case in the U.S., unless, of course, the Obama administration overreaches and the government becomes an even heavier yolk on the economy that it already is.
Posted by: Paul at Dec 10, 2008 10:27:12 AM
I understand that the effective Federal Funds Rate has been well below the official rate for quite some time. I further understand that this is so because of a high demand for treasuries as they are the only asset people are accepting as collateral. Presumably, this explains a large part of the spread between treasuries and corporate paper.
If true, why can't the Fed simply start buying corporate paper?
Posted by: Marcus at Dec 10, 2008 10:33:55 AM
Everybody, open your books to the "The Black Swan" and read Mr. Taleb's injunctions against economists
claiming to have crystal balls.
Posted by: Superheater at Dec 10, 2008 11:03:19 AM
For the purposes of posterity it should be noted that Austrian investor Jim Rogers predicts the same thing and the reasons as to why it will be so. Krugman (and Cowen) provide no reason as to why this should be the case.
http://www.youtube.com/watch?v=xlwkNDj_YqM#t=0m40s
And, while I'm shilling for the Austrians, I should note that Peter Schiff predicted the crisis in the face of ridicule by Tyler Cowen's "respectable mainstream" buddies Arthur Laffer and Ben Stein. A must watch simply for the entertainment value. http://www.youtube.com/watch?v=2I0QN-FYkpw
Enjoy.
Posted by: Bill at Dec 10, 2008 11:27:32 AM
Jim Rogers pwns Tyler Cowan, Krugman and their silly counterfeit machine worshipping religion. Just admit you are not scientist and are instead tools of those wishing to enslave the masses.
Posted by: Gabe at Dec 10, 2008 11:56:57 AM
Superheater,
Ah yes, it does not surprise me that you are another sucker for
the nostrums of Taleb. The argument that one cannot use a
probability distribution to model risk and that we face fundamental
uncertainty was posited simultaneously in 1921 by both Frank Knight
and John Maynard Keynes, both of them (hack, cough) economists.
Now, Taleb does give them credit, if ever so briefly, but then
proceeds to denounce economists for supposedly foisting Gaussian
distributions on everybody, when it was a damned physicists, M.F.M.
Osborne, who did so in a paper in 1959 in Operations Research that
got picked up by Burton Malkiel a few years later who popularized
it ("Random Walk Down Wall Street").
As it is, although the textbooks still enshrine the random walk,
practitioners have known better since the stock market crash of
1987 and moved on to a variety of non-Gaussian approaches for
their methods. Taleb calls these approaches "grey swans," and
seems to dismiss them, although that is ultimately what his most
revered thinker, Benoit Mandelbrot (for whom I also have the
greatest respect) is ultimately a fan of. The main difference
is that he prefers different distributions, multi-fractal ones,
to those used by most current practitioners (often Weibull or
student's t).
For that matter, while he displays his philosophical side that
says we must all learn to accept the losses in life that come
with those fundamentally uncertain black swan events (and he
invites to cry over his family's lost estates in Lebanon, where
his uncle, or some such relative, used to run the finger factory),
he then also puts on a hat of telling people how his hedge fund
can make you money with their own fancy barbells for sale, whose
money-making capabilities depend also on grey swan calculations
ultimately. This year they happen to be making money with all the
crashes, and Taleb has been all over the TV proclaiming himself
a prophet (profit?), while in most years the only people making
profit off the barbells he describes in his book would be somebody
selling them to suckers.
As for Krugman, it remains unfortunate that he continues to fail
to cite those who originated the theory for which he received the
prize. And as for his explanation of what is happening in Detroit,
in the end he comes down to that wages and medical costs are too
high compared to the Deep South (somehow he leaves out the legacy
pension costs), although in his lecture he also suggests that
somehow this also arises from undescribed endings of all the
economies of scale that once existed that his model was supposed
to explain, even as it does not explain how those came to an end.
I do hope that in the written version of his talk he gives more
credit to certain individuals than he has in the past or that he
did in his generally engaging lecture.
Posted by: Barkley Rosser at Dec 10, 2008 12:38:18 PM
Oh, that should have read, "fingernail factory"
rather than "finger factory," aka, the Ministry
of the Interior of Lebanon. So, we should all cry
boo hoo hoo over the loss of estates by the Taleb
family in the civil war. Boo hoo hoo.
Posted by: Barkley Rosser at Dec 10, 2008 2:46:11 PM
Two words: Peter Schiff. All you other 'economists' are tools.
Posted by: Marcus at Dec 10, 2008 2:54:37 PM
"Aren't Japan's economy and the U.S. economy very different animals. It seems to me that Japan's economy was for more rigid and therefore less capable of responding/adjusting to downturns. That's not so much the case in the U.S., unless, of course, the Obama administration overreaches and the government becomes an even heavier yolk on the economy that it already is." --- Paul
............
1) The first part of your statement --- about Japan's economy: more rigid and less adaptable to downturns than the US's --- seems accurate, both during the 1990s and now.
>• Far more market inefficiencies, a huge hillock of them, marked that country's economy then and now . . . not least because the fabled industrial policies (whatever good they might have done in the first two or three decades after WWII) switched in the 1980s to propping up several key industries of low-productivity and peripheral to Japan's major export-oriented industries in consumer electronics, ICT technologies, and autos.
.
>• As a result, by the late 1980s, Japan was a curious mix of very advanced export-industries dominated by 7 or 8 giant multinational firms like Sony and Toyota on one side, and on the other by backward and inflexible industries in both manufacturing and services that served the domestic market. And strong import-protection, formal and informal --- together with an undervalued currency for most of the post-war period --- aggravated the rigidities. Essentially, for decades and even now, Japanese big business, banks, and the government have structured an economy of neo-mercantilist tendencies: structured in a variety of formal and informal ways to depend on export-driven growth and importing demand from the US and others to offset excessive savings as opposed to focusing on domestic-led growth.
.
>• The plunge into stagnant growth and deflation in the 1991 following a huge bust in the housing, banking, and stock markets --- with no sustainable recovery until late 2003 and into 2004 (Japan now in recession again) --- was further aggravated by terrible fiscal and monetary policies until toward the end of the decade.
...................
In particular, to get down to specifics:
.... i. Major fiscal stimuli were blunted in Japan by two things: way too much of the public works spending went to favorite business groups that were tied to the dominant Liberal Democratic Party (construction above all) and by money-hoarding by a public in the face of deflation and marked uncertainties about the future.
.... ii. As if that weren’t bad enough, in 1997 --- as GDP growth looked like recovering --- the Japanese government increased consumption taxes, leading to a big slump in consumption spending that send the economy into recession.
.... iii. Monetary policy was equally tardy and ineffectual for most of the 1990s. Specifically, the government thought the credit-crunch and toxic balance sheets of the banking system could be corrected by the banks themselves. Wrong. Only in 1999 and 2000 did the government start to recapitalize the banks while forcing big write-offs of non-performing loans and subjecting banks to more rigorous regulation.
.... iv. Then, in 1999 as well --- with Japan back in recession again --- the Central Bank introduced for the first time a zero interest-rate policy, but with little impact on changing deflationary expectations or boosting either consumption or investment. A year later, then, the Central Bank --- 8 years into the crisis --- shifted to Quantitative Easing and seeking that way to alter deflationary expectations.
.... v. By late 2003, what seems to have been a sustained recovery finally ensued --- at about 2.1% per annum growth until last spring. Even now, though, scholars and policymakers aren’t sure whether the end of deflation and the recovery in GDP was due to QE or to continued public works or some miracle. See, for instance, Masaru Yoshitomi . . . the author a very good Japanese economist with close ties to the Japanese government..
……...............
2) Hardly any of these problems --- domestic structures, institutions, way tardy and ineffectual monetary policies, fiscal stimuli (in the offing), and excessive dependence on export-led growth for a giant economy (Japan has 120 million people, with a per capita income in PPP terms equal to Germany’s: around $34,000 vs. ours at $45,000) --- mark the US economy right now except for a similar system-wide financial crisis and credit-crunch and a recession.
……....
No need to detail the vast contrasts in our monetary policies since September of this year.
What the current Federal Reserve chief knows --- something that contrasts markedly with Japanese monetary policymakers in the 1990s --- is that the combination of deflation and near nominal zero interest-rates can be very harmful to an economy. Just as the Federal Reserve and the US Treasury have been busy --- so far, without the desired effect --- in trying to deal with the toxic-assets on banking balance-sheets, and to recapitalize the banks (took the Japanese 9 years to do this), and to unfreeze credit, and to find ways to refinance bankrupt householders while concentrating on new policies to lower long-term interest rates as well.
Just today, the Wall Street Journal announced that the Fed has decided to start selling its own debt to expand the money supply, instead of just doing this with Treasury bills . . . all in an effort to unfreeze credit-markets and offset the fall in the money multiplier --- symbolized by banks sitting on their excess reserves so far --- as part of the wider policy of quantitative money-easing.
……
3) As for the latter part of your statement, Paul, I’ll just say one thing: every time Obama talks about fiscal stimuli, the stock market here and abroad reacts positively . . . just as they have when Obama announced his economic team.
So far, in the past two weeks --- since the first announcements by the president-elect --- the stock market in the US has been on a strong upswing, with volatility far more limited. No one but a fraud or a fool, of course, would predict what the stock market will do in the short-term. What is clear is that private investors and sovereign funds --- no doubt foreign governments doing other things more covertly in investments --- have, world-wide, been reacting positively to what seems to leave orthodox libertarians flurried by the heebie-jeebies.
.............
Michael Gordon, AKA, the buggy professor
Posted by: the buggy professor at Dec 10, 2008 5:12:25 PM
marcus
(and the rest of you ignorami who declare that
Peter Schiff is the one with all the answers),
Pretty obviously you guys have not been reading
very much. There is a long list of people who
called it, or at least large parts of it. You
just show your ignorance by making such statements.
For the record, I checked, and according to Wikipedia,
Peter Schiff is "bearish on the dollar." Does that mean
that he erred along with a number of us in not foreseeing
that the outbreak of the really serious crisis would lead
to the dollar rising as people rushed to it in a frenzy
for the "safe haven," even to the point, as happened again
yesterday, that T-bill yields actually went negative?
If he did not call this, then he is fallible, just like
the rest of us.
Posted by: Barkley Rosser at Dec 10, 2008 5:17:17 PM
"Superheater,
Ah yes, it does not surprise me that you are another sucker for
the nostrums of Taleb."
And why exactly does it not surprise you that I am "another sucker for
the nostrums of Taleb"?
I'm curious as to what data you have used to form such expectations. Of course if you really
want to impress us with your expectations-show us some public forecast of $43/gallon oil
made publicly on July 3, 2008.
In any case, I still think multiyear forecasts are crap. I have a hard drive full
of the writings of economists and pseudo-economists predicting ever-increasing oil
prices, prices permanently fixed above $100 (or more) per barrel from why just July 2008.
S
Taleb has indeed turned unpredictability into a cottage industry, but only because
so money others have made cottage industries of long range predictions. Krugman is also the
proprietor of a cottage industry, e.g., providing intellectual cover to the most
miserable policy prescriptions (national healthcare)
By the way, no physicist foisted the overmathematicization of economics on any one. You act
as though economists are unable to act as rational free agents and reject the intrusions of
unrelated physical science techniques on their craft.
Posted by: Superheater at Dec 10, 2008 5:35:37 PM
Lisetning to the lecture when he talks about specialization in the auto industry I think about how stupid
CAFE is. CAFE makes it difficult for any company to specialize in large cars!
CAFE standards have also reduced reliability. I'd love to see how many people
have had to require the pressed-on brake rotors that replaced solid steel a while back
when the engineers reaslized that CAFE was "job one" and pressed-on rotors were lighter,
so the hell with the solid steel that resisted warping by dispersing heat better.
Posted by: Phil at Dec 10, 2008 5:40:30 PM
Super H.,
Based on past comments by you on this blog, not worth
reminiscing over. You have a public track record here.
Regarding my own record, well, I am a fan of the fundamental
uncertainty that was posited by the 2 K's, and which Taleb
wishes to get credit for pushing, even though his peddling
of his products is not really what he claims it is. As I
said, it is strictly grey swan modeling, which works sometimes,
but often (mostly) does not, unless one is selling the products
to the suckers who will lose money, as I suspect his outfit was
doing during some recent years.
As for my own forecasting regarding oil prices, I was on local
TV a bit before the peak warning that there was a lot of speculative
pressure in oil prices and that they were likely to fall, although
I did not forecast a fall all the way to their current levels. When
they were at about $130 I said they could easily go to $90 or even lower
rather quickly. Can you name anybody who did forecast the fall we have
seen, especially someone who also called the housing bubble and that its
fall would collapse the global derivatives markets and lead to a recession
as I did (although I did not forecast the rise of the dollar that would
happen as a result of that)?
Posted by: Barkley Rosser at Dec 10, 2008 5:47:47 PM
the stock market here and abroad reacts positively . . .
just as they have when Obama announced his economic team.
The question is, is it an endorsement or
a sigh of relief?
In any case-here's the S&P 500 from Yahoo finance-still off more than 11%
since November 4. The POTUS-Elect better keep huffing and puffing....
4-Nov-08 1,005.75
5-Nov-08 952.77
6-Nov-08 904.88
7-Nov-08 930.99
10-Nov-08 919.21
11-Nov-08 898.95
12-Nov-08 852.3
13-Nov-08 911.29
14-Nov-08 873.29
17-Nov-08 850.75
18-Nov-08 859.12
19-Nov-08 806.58
20-Nov-08 752.44
21-Nov-08 800.03
24-Nov-08 851.81
25-Nov-08 857.39
26-Nov-08 887.68
28-Nov-08 896.24
1-Dec-08 816.21
2-Dec-08 848.81
3-Dec-08 870.74
4-Dec-08 845.22
5-Dec-08 876.07
8-Dec-08 909.7
9-Dec-08 888.67
Posted by: Superheater at Dec 10, 2008 5:49:23 PM
Can you name anybody who did forecast the fall we have
seen, especially someone who also called the housing bubble and that its
fall would collapse the global derivatives markets and lead to a recession
as I did (although I did not forecast the rise of the dollar that would
happen as a result of that)?
Not really and that's the point.
However, I remember one prediction of sub $50.00 oil. The individual was
a bit of a celebrity, but I can't remember. Natch, I thought it was
attention-getting and disregarded it. Now of course the real
test was he in a short position.
As for my own limited oil market activity? I passed on my home heating
oil provider's "pre-buy" of $4.70 a gallon.
Posted by: Superheater at Dec 10, 2008 5:54:48 PM
Based on past comments by you on this blog, not worth
reminiscing over.
But not one that you might be able to dispute, other than with
a snarky summary dismissal.
You have a public track record here.
As do you. Also "not worth reminiscing over".
Posted by: Superheater at Dec 10, 2008 5:57:44 PM
S-H,
Well, you made a wise move on your passing on that pre-buy.
As for the stock market, I suspect it has more to do with the
collapse of employment in November, which it is a bit hard to
blame on Obama. After all, GWB is still the president, and this
recession has been a long time building. Obama has said it will
get worse before it gets better, so he is not a fool. But anybody
who would be president would have their hands full with this one,
which is, please keep in mind, fully global at this point in time,
another realization that the markets have made that have not
exactly inspired them to go up recently.
As for the rest of our snarking back and forth, I see little point,
and much annoyance on the part of other readers, in revisiting past
debates you and I have engaged in here, in which neither of us much
impressed the other.
Posted by: Barkley Rosserr at Dec 10, 2008 6:41:54 PM
If businesses can't think of places to invest their money when the real cost of capital is 2%, then an economy has no business "growing".
Where are all the singularity psychos now? - I thought productivity was growing exponentially, oops, looks like we'll have to abandon that theory...
Posted by: Paul N at Dec 10, 2008 8:19:36 PM
