Paul Krugman wants you to know that the current economic downturn is not your father’s recession.

It’s more like your grandfather’s.

As he explained to a packed Irvine Auditorium on Feb. 18, this is a slump unlike any we’ve seen for several generations.

“This is not like a recession caused by the [Federal Reserve] raising interest rates,” the Nobel Prize-winning economist and New York Times columnist told a Penn audience at the 2009 Goldstone Forum of the Philosophy, Politics and Economics Program. “This is much harder to correct.”

If interest rates were high, he explained, the Fed could simply cut rates and the economy would potentially spring back, much like the downturn in the early 1980’s. The problem is, the Fed has already tried this. Rates are the lowest they’ve ever been. And nothing has changed. “That’s certainly what the Fed has done,” Krugman said. “Clearly it’s not enough.”

Some politicians and commentators have compared the current crisis to the Great Depression and Krugman acknowledged some similarities: Both then and now, he said, segments of the banking industry collapsed even as interest rates hovered around zero. But Krugman said, in reality, the current economic situation is nowhere near as bad as the Great Depression. In fact, so far it’s not even as bad as the recession of 1982.

But that’s not to say it’s not serious.

As professor of economics and international affairs at Princeton, Krugman was part of a group he called “Depression economic worriers”—economists who began to have doubts about the sustainability of the U.S. housing bubble during the 1990’s. Economic crises in Argentina, Indonesia and especially Japan, where a real estate and stock bubble led to that country’s “Lost Decade,” were “disturbing omens” for the group of thinkers, Krugman said.

So last year’s banking collapse and subsequent sluggish economy were not “a complete surprise.” Even still, “the scale of the crisis has been much greater than anyone imagined,” he said.

Krugman said people underestimated how helpful it actually was to have an economy with a persistent inflation problem, which the Fed, by cutting interest rates, could help to turn around. “When inflation doesn’t bring an end to your booms,” he said, “something else does.”

Compounding the current situation is a reduced demand for goods as people rediscover “the joy of saving,” and a sharp downturn in exports. Krugman noted exports have been falling at an annual rate of 20 percent.
To stabilize the economy, Krugman and many others have suggested big, bold government spending. Even still, when discussing the $789 billion stimulus package signed into law last month by President Obama, Krugman had lukewarm praise.

“It’s not a bad bill,” he said. “What it is, is not big enough.”

According to the Congressional Budget Office, there is a $2.9 trillion hole in the economy. The stimulus will help fill that hole. But it won’t fill it completely.

Krugman, an unapologetic liberal who has authored or edited 20 books and more than 200 professional journal articles, acknowledges that deep political and ideological divisions in Congress may have compromised the stimulus package. He noted an alternative package, proposed by South Carolina Republican Senator Jim DeMint, called for scrapping all spending in favor of billions of dollars in tax cuts. That bill, Krugman said, “is completely in a different universe than anything I’ve said today.”

Krugman also debunked what he termed a “common talking point” from conservatives who claim that government spending is unwise because it crowds out private spending.

“I’m having trouble understanding the other side’s logic,” he said, adding that this theory is a “total fallacy.”

Krugman notes that public spending and the beginning of World War II pulled the U.S. out of the Great Depression, and that a boom in exports helped Japan recover from the recession of the 1990’s—something that is unlikely to happen today. There could be spontaneous recovery, he said, but the problem is, that recovery could take years to arrive.

The answer, Krugman said, is a really big stimulus plan.

“We are a huge economy and we’re in one hell of a slump.”

Originally published March 5, 2009