Princeton Economics Professor and Nobel Laureate Paul R. Krugman compared the Obama administration’s fiscal policies to the government’s policies during the Great Depression in a speech at MIT on Friday, predicting a prolonged recession with high unemployment for years to come.
Krugman faulted the Obama administration for declaring a freeze on non-security discretionary spending and making a second stimulus package politically impossible, drawing parallels to former President Franklin D. Roosevelt’s decision to reduce government funding in 1937, which resulted in another “severe recession.”
“To the extent that there was fiscal policy, it was halfhearted, it was pulled back,” he said of the government’s policies in the 1930s. “There was the famous mistake of 1937, when FDR was convinced that the recovery was solid and no longer needed all that support from the government.”
Krugman similarly described the Obama administration’s stimulus as “halfhearted,” explaining that the mere existence of a large government and the move to rescue the financial sector each had more of a stabilizing effect on the economy than the stimulus itself.
In a brief interview with The Crimson after his speech, Krugman said that he wishes there were “more heterodox voices” in Obama’s economic team. But he reserved praise for Christina D. Romer, chair of the Council of Economic Advisers, saying, “As far as I know, she wanted a bigger stimulus.”
Krugman, who had advocated for a larger stimulus in his columns for the New York Times last spring, said in his speech that politicians did not realize that “doing what you think of as a more careful, cautious policy is actually extremely risky because you really have one shot at this—no more.”
He said that the fading effects of the stimulus—which will reach its peak impact over the summer—and the Obama administration’s impending budget cutbacks add up to “a pretty significant turn towards contractionary policy taking place over the next year or so in the face of a deeply depressed economy.”
Krugman noted that the unemployment rate in the average financial crisis rises for almost five years before starting to decline.
“Policy is acting as if the problem has been just about solved, whereas the reality is that mass unemployment is a likely feature of the economy for quite some time to come,” he explained.
He added that statistical estimates show that students who graduate into a bad job market now will be worse off “even 20 years later.”
In response to a question from the audience, Krugman critiqued President Barack Obama’s recent proposal to break up large banks for not addressing “the essence of the financial crisis.”
While he criticized the government during much of his speech, he also faulted economists for forgetting or misinterpreting the past.
“I’ve used the phrase that we’re living in the dark age of macroeconomics,” Krugman said. “Barbarism was they never knew better. [The] Dark Age is people forgot what the Greeks and Romans knew, and to some extent that’s where we are in economics now.”
—Staff writer Bonnie J. Kavoussi can be reached at firstname.lastname@example.org.