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.

Jamie Galbraith and Yanis Varoufakis on the Coronavirus Recession

James K. Galbraith and Yanis Varoufakis: Another Now #7 DiEM25 TV 05/26/20020:

This is a discussion between my two favorite living economists, Jamie Galbraith and former Greek Finance Minister Yanis Varoufakis. They talk some about Jamie's father, John Kenneth Galbraith, at the start. But it's mainly about the COVID crisis and the economic fallout; how it has been handled in various places including China, the US, and Europe; and some about the US Presidential election.

(Trigger warning for conservative Democrats! They say nice things about NATIONAL HEALTH INSURANCE!!!)

Varoufakis asks Galbraith if he's going to vote for Joe Biden. Jamie responds, "I am a religious Democrat. Which is to say, it's the type of a relationship that many people feel toward their church. However ambivalent about it, it's exceedingly hard to leave. So the answer to that is yes, I will vote for Biden. Of course I will."

And he proceeds to say:

I'm not the sort to think that these problems and the kind of crisis that we're facing is the work of a late arriving individual. ... [T]he reason the US economy has crumbled under the impact of the coronavirus is not simply that it had a federal government in the hands of this particular *gang*. It really has to do with the way in which the economy has been engineered over the last 40 years, and in particular in the return from the financial crisis of 13 years ago.

Varoufakis mentions that for him a choice between Angela Merkel and Trump would be a "no-brainer" in choosing Merkel. Given his clashes with Merkel during the last euro crisis, that's a real "jumping the shark" comment for him!

Both of them are careful about excess optimism, it's safe to say. Galbraith quotes here a comment he attributes to William of Orange, "It is not necessary to hope in order to persevere." There's also this very Galbraithian comment relating to the flexibility of free-market dogma when big corporations are threatened with going under: "The US is sustained by its willingness to suspend all pretence of principle in an emergency."

His father took a similar cautious note in the final paragraph of his The Culture of Contentment (1992):

In the past, writers, on taking pen, have assumed that from the power of their talented prose must proceed the remedial action. No one would be more delighted than I were there similar hope from the present offering. Alas, however, there is not. Perhaps as a slight, not wholly inconsequential service, it can be said that we have here had the chance to see and in some small measure to understand the present discontent and dissonance and the not inconsiderable likelihood of an eventual shock to the contentment that is the cause.

That was in 1992, at a relatively early stage of the 40-year stretch of bad economic engineering that Jamie mentions in the video. The political and economic system of the US has had some serious disturbances of contentment in the decades since: Muslim terrorism including 9/11; the Iraq War; the Great Recession that begin in the US in 2007; the Afghanistan War: Hurricane Katrina's devastation of New Orleans in 2005; Hurricane Maria in Puerto Rico in 2017; increasingly obvious manifestations of the climate crisis like the California wildfires; and, now, the COVID-19 crisis.

The more chronic disturbances to public contentment include the decreasing trend on wages and reduced opportunities for retirement pensions that have been an integral part of the neoliberal order that we now conventionally date from St. Reagan's first administration. The state of both major political parties in the US in their state of asymmetric partisan polarization that has produced a Trumpified Republican Party and a quasi-paralyzed Democratic Party is also a serious crisis, although the extent to which it so far as disturbed the "culture of contentment" that J.K. Galbraith described in 1992 is rather hard to say.

Austerity economics, of course, was already well established as the norm for both parties in the Reagan and Bush 1 Administrations. As the senior Galbraith noted:

In a time of economic recession such as that of the early 1990s, there is a strong case not only for low interest rates but also for increased public expenditure, especially on roads, bridges, airports and other civic needs, and on unemployment compensation and welfare payments, all to employ or protect the unemployed and those otherwise adversely affected.

But there is here a conflict with the tenets of the age of contentment: it is not the comfortable who would thus be aided. And lurking also is the eventual tax effect. During the 1980s, the burgeoning years of contentment, there was the large continuing deficit in the federal budget. Though a topic for voluble discourse, it was less of a threat to the contented than the taxes that would have reduced it. In the ensuing recession a deliberate addition to the deficit, a benefit primarily for those outside the community of contentment and one which might later renew the call for higher levies on those inside, was strongly resisted.

This chronic (and bipartisan) under-investment in public goods has continued until this day. I was a little surprised in the video discussion to hear Jamie Galbraith suggested that not only the European Union but the United States might be confronted in the foreseeable future with a Yugoslavia scenario, i.e., the disintegration of the current political entities. We have seen a concrete example of that with Brexit. It seems less obvious for the United States. And the Yugoslavia scenario to which Jamie refers doesn't necessarily imply some replay of the Balkan Wars of the 1990s. But he's actually framing that in the historical context of how the Chernobyl disaster of 1986 was a major inflection point in the Soviet political system.

But is could be a useful metaphor. If Republicans want to claim that basic social-insurance measures will turn the US into Venezuela, we can respond that Ronald Reagan economics is actually turning us into Yugoslavia!

165 years of recession history in the United States

The National Bureau of Economic Research (NBER) is the agency that keeps the official records on when recessions occurred in the US. Essentially all economists accept their dating. Although since we're talking about economists, we could never expect 100% agreement. I do recall seeing the NBER dating questioned once or twice.

Here is the current list of US Business Cycle Expansions and Contractions (accessed 03/16/2020):

The current expension has gone on longer than most. Notice that the list starts in the decades of the 1850s and every decade since has had a recession going on during it.