Paul Krugman’s Nobel Prize lecture

by on December 10, 2008 at 7:31 am in Economics | Permalink

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. 

1 Jay December 10, 2008 at 8:35 am

Don’t the climate models assume trend global growth? May we have unintentionally solved global warming?

2 bastiat December 10, 2008 at 9:07 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.

3 MW December 10, 2008 at 9:32 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.

4 floccina December 10, 2008 at 9:54 am

“Nobel winner Krugman’s worst case: a lost decade†


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.

5 Marcus December 10, 2008 at 10:33 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?

6 Bill December 10, 2008 at 11:27 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.

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.


7 Barkley Rosser December 10, 2008 at 12:38 pm


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.

8 Marcus December 10, 2008 at 2:54 pm

Two words: Peter Schiff. All you other ‘economists’ are tools.

9 Barkley Rosser December 10, 2008 at 5:17 pm

(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.

10 Phil December 10, 2008 at 5:40 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.

11 Superheater December 10, 2008 at 5:49 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

12 Superheater December 10, 2008 at 5:57 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”.

13 Paul N December 10, 2008 at 8:19 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…

14 the buggy professor December 10, 2008 at 9:09 pm

To the various rigidities and market-inefficiencies that characterize the Japanese domestic-oriented economy — in contrast to the export-oriented side — add:

* Huge protection and subsidies for agriculture . . . yes, far beyond what even the EU and the US do (bad as that might be for overall economic efficiency). One study put out in 2006 found that subsidies alone added up to double the cash-value of the entire agricultural sector’s contribution to Japan’s GDP.

* And — despite some noticeable relaxation of regulatory protection since the late-1990s — the retail and wholesale markets were, until then, noticeably inefficient and full of small stores and multiple layers of distribution, all of which amounted to a kind of labor-subsidy for what would otherwise be the unemployed owners and employees of those retail and wholesale businesses. (The 2008 OECD survey of Japan does shows, only fair to add quickly, a noticeable reduction in barriers to entrey and price-controls in the retail sectors. Still, those barriers and high price-controls marked the Japanese economy right down until 1999; and so they cover the period that Krugman and others compare to the US current situation with today.)

Michael Gordon, AKA, the buggy professor

15 Superheater December 11, 2008 at 10:27 am

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.

Sorry Barkley, I generally don’t keep an enemies list of people I’ve had
exhanges with on the internet and I don’t expend the energy remembering people
in order to be snarky in the future, unless they are really irrepressible and they
make themselves unforgettable. You might be at that threshold now.

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