Krugman cautious about the seriousness of the current recession

Noah Smith interviewed Paul Krugman for Bloomberg Opinion on the state of the economy and how severe the recession is likely to be. Krugman is somewhat surprisingly upbeat, though the title of the piece overstates his comments in the interview, Paul Krugman Is Pretty Upbeat About the Economy 05/27/2020.

Krugman is a serious academic economist as well as a public intellectual. And I assume he is giving us his actual views as a professional economist here.

The optimism part comes at the end: "right now I don’t see the case for a multiyear depression. People expecting this slump to look like the last one seem to me to be fighting the last war."

But he actually describes some major risks whose actual seriousness depends to a very large degree on whether or not there are sensible public policies to deal with them:

I’ve been trying to get a handle on this by looking at recessions over the past 40 years. Until now we’ve had two kinds: 1979-82-type slumps basically caused by tight money and the 2007-09 type caused by private-sector overreach. The first kind was followed by V-shaped “morning in America” recoveries; the second by sluggish recoveries that took a long time to restore full employment.

My take is that the Covid slump is more like 1979-82 than 2007-09: it wasn’t caused by imbalances that will take years to correct. So that would suggest fast recovery once the virus is contained. But some big caveats.

One is that we don’t know how long the pandemic will last. Right now, we’re probably opening too soon, which will actually extend the period of economic weakness.

Another is that even if we didn’t have big imbalances before, the slump may be creating them now. Think of business closures, which will require time to reverse.

And I also wonder how much long-term change we’ll experience as a result of the virus. If we have a permanent shift to more telecommuting and less in-person retail, then we’ll have to shift workers to new sectors, which will take time. That was an argument lots of people made, wrongly, in 2009, but it could be true now. [my emphasis]

When Krugman talks about "1979-82-type" slumps, that phrase actually refers to two different recessions, officially designated by the National Bureau of Economic Research (NBER) as January-July 1980 and July 1981-November 1982. The hard-money policy was intiated by Federal Reserve Chairman Paul Volcker, appointed to the position by Democratic President Jimmy Carter in 1979, reappointed by St. Reagan in 1983.

As a glance at the NBER table shows, the previous recession ended in June 2009, which means the expansion lasted almost eleven years, making it one of the longest expansions on record. Based on the average duration of previous expansions, we might say that the economy was "overdue" for a recession. So that makes me wonder how far the induced-recession comparison of today with 1979-82 applies. Krugman uses the term "Covid slump" here for the current recession. (The NBER hasn't yet officially a new recession as having begun in the US. Normally that doesn't come until after two successive quarters of falling GDP is experienced, although that is not itself the NBER's formal definition of recession.)

I am also highly confident that the Trump Administration will not do a good job of promoting policies that will stimulate the real economy. They will continue to concentrate on ways to juice the stock market - which does not directly stimulate the economy - and to give great attention on schemes to enrich the Trump family's business income and spreading around crony-capitalist deals and grift.

And, sadly, the Democratic Party is showing itself unable to do much effective during this election year to force Republicans to adopt more genuinely stimulative measures.