Paul Krugman: Recovery Will Last Long Time

Paul Krugman is a brilliant man with thought-provoking approaches to economic questions; he wouldn’t be a leading New York Times columnist (or Princeton University professor) if he wasn’t. On Wednesday at the World Business Forum, he discussed world trade. Not the sexiest topic, but for a winner of the Nobel Prize in Economics, not a problem either. Some of his more poignant points included comparisons to the Great Depression and predictions on economic recovery:

Great Depression vs. Now. Much has been made of today's economic crisis relative to the Great Depression. Krugman appears to agree with the emerging consensus - that the Great Depression was worse - but that didn't stop him from making comparisons ... or even calling out what was worse about today's crisis vs. Roosevelt's.

1. Run on banks in 2008. What happened during the economic crisis of 2008 was the same as the run on banks in the 1930’s. While mobs didn’t gather outside banks in 2008, they did gather online in the electronic marketplace (to pull their money out of the system) – and with much greater fervor.

2. World trade (or not). World trade has declined more precipitously in this economic crisis than it did at this stage of the Great Depression. Enough said.

Recovery to last long time. Forecasts generally assume economies recover in 5 years – there’s no reason to believe that will be the case this time around. We could be in recovery for much longer. “This looks to be a long siege” for three reasons:

1. No trade surplus. When countries suffer recession from financial crisis, they come out of it by moving into a trade surplus with other countries. The effects of this economic crisis are so widespread and profound that the whole world is in deficit – if the world is in deficit, then it’s that much more difficult for individual countries to get to a surplus.

2. No transportation technology. Steam-engine boats. Containerization of shipping. Airplanes. They all revolutionized transportation, significantly reducing time and cost. Now, there does not appear to be anything like that on the horizon.

3. Higher transportation costs. The cost to transport goods between countries – whether by land or sea or air – will increase as (a) oil prices rise and (b) green policies take effect, taxing emissions of transportation even further.

This last point, we found tremendously telling. Here is a leading Liberal economist making a practical argument against green policies. It became even clearer to us that the depth and intensity of our current economic crisis has affected much more than just world trade.