AFP/Getty Images
Nobel laureate Paul Krugman joined by growing chorus of economy watchers warning global turnaround fuelled by heavy government spending is sputtering
Brian Milner and Kevin Carmichael
Globe and Mail Update Last updated on Monday, Oct. 05, 2009 06:14AM EDT
Paul Krugman sheepishly admits that he missed the strong stock market rebound of that past six months. But it's understandable, given the celebrated Princeton economic professor's bearish views on the economy and the precarious nature of the current recovery.
“Yes, I didn't see that coming,” the Nobel laureate said before a speech Saturday evening to the annual conference of the Centre for International Governance Innovation in Waterloo, Ont. “I probably should have, because a lot of it was just sort of ‘The end of the world' discount. On the other hand, I missed the stock market crash too. And I also avoided the housing bubble.”
Prof. Krugman has long been one of the leaders of the bear clan when it comes to assessing the state of the economy. But he is being joined onstage by a growing chorus of economy watchers, policy makers and other voices, amid signs that the global turnaround fuelled by heavy government spending is sputtering.
A slew of warning flags have recently been posted along the recovery highway. And Prof. Krugman and others are wondering where the economic growth will come from once governments turn off the spending taps. Prof. Krugman said he has “a bad feeling” about the nature of this recovery and that governments should be pushing more stimulus into the economy, rather than worrying about how to cut back.
“In most of the things that matter, things are still getting worse,” he said.
To get out of the current crisis, “we need a source of demand, we need a driver,” he said, noting it has to come from business spending.
We need somebody to invent the equivalent of the railroad or Internet to get that happening again, he said.
His current views have been coloured by research showing that recessions triggered by financial crises persist longer, and the recovery depends heavily on the crisis-hit country scoring big export gains and large trade surpluses.
“Since this is a global financial crisis, we've got a problem. We can't all do that at the same time. So I'm worried that this could go on for a very long time.”
That will mean stubbornly high jobless rates and stagnant growth in the industrial economies for a prolonged period.
In the previous two milder economic slumps, in 1990 and 2001, it took about 18 months for the job picture to brighten again. The latest recession probably ended technically during the summer, which would mean worsening unemployment at least through the end of next year.
“That's kind of scary,” Prof. Krugman said. “And it could be worse than that.”
Earlier, another prominent U.S. economist, Harvard University's Kenneth Rogoff, told the international gathering that it's too early to declare victory over the crisis. “If you're looking for a job, it sure doesn't look like the recession is over.”
The latest grim U.S. jobs report last week underscored their concerns. Official unemployment hit a 26-year high of close to 10 per cent. But that doesn't take into account those who are underemployed or who have dropped out of the labour market. The true level may be as high as 17 per cent, economy watchers say.
In Canada, which has fared comparatively better, Finance Minister Jim Flaherty said he expects uncomfortably high levels of unemployment to persist well into next year, and that he is prepared to do more to help the jobless if the problem becomes worse than he currently foresees.
“I think we have to keep watching and if there are persisting challenges with respect to employment, it might be necessary to do more,” Mr. Flaherty said in an interview yesterday in Istanbul.
He and other finance ministers and central bankers attending a meeting of the Group of Seven countries said in a statement that there is “no room for complacency” despite evidence that the world economy is recuperating, because “prospects for growth remain fragile and labour market conditions are not yet improving.”
The International Monetary Fund last week raised its projection for global economic growth next year to 3.1 per cent from an earlier estimate of 2.5 per cent, citing increased factory output, more consumer confidence and newly stabilized financial markets. But Olivier Blanchard, the fund's chief economist, warned the risks to his forecast were to the downside because unemployment rates in the U.S. and Europe were on track to top 10 per cent.
“The end of the world has been … put on hold,” Prof. Krugman said. But policy makers need to focus on the fact that avoiding another depression is not good enough and that they can't afford to ease back on the throttle. “This is not over.”
Posts
