They are the two most influential economists of their generation, and for a brief time they were united in Washington, D.C., putting their renowned intellects to work on behalf of the American people.
In 1982, a young Paul Krugman was the senior international staffer at the Council of Economic Advisers. The senior domestic staffer was a slightly younger man, Lawrence Summers. The two lasted only a year, however, before heading to academia.
On Monday night in Toronto, two distinct paths to economics stardom will cross on stage at the 2011 Munk Debate. Prof. Krugman will argue in favour of the resolution that “North America faces a Japan-style era of high unemployment and slow growth.” Prof. Summers will argue against.
There are many things on which the two Democrats agree. The major point on which they diverge is the same one that sent them on different paths almost 30 years ago: the ability of politicians and their advisers to make a difference.
The recipient of the 2008 Nobel Prize in economics isn’t one to pull punches. Ask him about the state of the North American economy, and he responds with a wallop.
“We’re stuck in what amounts to a smaller version of the Great Depression,” he said in an interview at his office at Princeton University last month. “It’s hard to see where the exit comes.”
Uttering the D-word these days is a bit like dropping the F-bomb at the dinner table: it’s not the kind of thing you say in polite company.
When U.S. Treasury Secretary Timothy Geithner and Canadian Finance Minister Jim Flaherty talk about economy, they prefer an R-word: recovery. Both acknowledge that the events in Europe and elevated unemployment at home are making a moderately paced recovery from the 2008 recession a slower one. But a depression? No way. No one is talking about a depression.
No one except Prof. Krugman, whose twice-weekly columns in The New York Times arguably make him the most widely read economist in the world.
“I actually think the world ‘depression’ is useful here,” he said. “I’ve taken to calling it a Lesser Depression. It’s obviously not as bad as the Great Depression or a variety of reasons. [But]it’s clearly also part of the same species.”
Prof. Krugman knows a bit about economic stagnation. He was among a clutch of Princeton economists who took a hard at Japan’s experience in the 1990’s – the “lost decade” that for so long seemed a uniquely Japanese phenomenon, but suddenly is being entertained as a possible future for the U.S. and Europe.
“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand,” International Monetary Fund head Christine Lagarde said in Beijing last week. “Ultimately, we could face a lost decade of low growth and high unemployment.”
Prof. Krugman couldn’t have said it better. All the signs are there, he says: A big overhang of debt, a troubled financial industry, weak consumer spending and a political system on the verge of paralysis. Just like Japan. “The nightmare has turned real and now the question is, what on earth can we do to change the political reality to get out of it?”
A clean sweep by the Democratic Party in 2012 might do it, although Prof. Krugman concedes that’s unlikely. A meltdown in Europe might also focus the minds in Washington, a dramatic price for political action.
The policies needed are straightforward enough. Prof. Krugman says the issue is demand, and the government should create some with a massive fiscal program. The Federal Reserve could play a big role too by allowing inflation to creep up a little, which would erode the debt burden. The latter sounds heretical, but as Prof. Krugman says, that’s basically how countries have done it in the past.
“The point is you need an aggressive response, and that is what we are not getting.”
Mr. Summers, economics prodigy and adviser to two Democratic presidents, is sympathetic to the argument that the $787-billion (U.S.) stimulus he and the rest of President Barack Obama’s economic team put together in 2008 was too small.
In fact, he agrees.
“A reasonable reading of the evidence is much more that Keynesian policies haven’t been tried on a large scale than that they have been unsuccessful when implemented,” Prof. Summers, who returned to Harvard University’s economics faculty at the end of Mr. Obama’s second year in office, said in an interview last week.
“I am very sympathetic to the arguments that the United States faces a protracted slowdown unless it takes steps to significantly increase demand.”
Maybe it’s an old trick from Prof. Summers’s days on the Harvard debate team? Soften up your opponents by granting them a point off the top, and then hammer them later? Because while he shares the concern that too little is being done to reduce sky-high unemployment, Prof. Summers dislikes all the comparisons to Japan in the 1990s and all the talk of a lost decade.
Prof. Summers secured tenure at Harvard in 1983 at age 28, and over the following decade published more than 100 research papers. His academic work was lauded for its use of empirical analysis. Prof. Summers’s commitment to data endures, which is why he thinks the comparisons between North America today and Japan in the 1990’s are overdone.
Japanese asset prices have been fluctuating below a quarter of their previous peak, which is nothing like what’s happening on U.S. and Canadian stock equity markets. Japan’s gross domestic product, he reckons, is about 40 per cent below what it was projected to be at the start of the 1990’s. The U.S. economy is not in danger of sinking that low. And for all the pain that comes with an unemployment rate above 9 per cent, Americans remain a wealthy people, with living standards that still are dramatically better than those in fast-growing economies such as China and India.
There is no American economist alive who can match Prof. Summers’s mix of academic accomplishment and high-level government experience. That affects his analysis of the current situation. While he can agree that optimally more should be done, he also knows that the business of policy making rarely ends in optimal results. Prof. Summers subscribes to the popular Washington adage that the perfect shouldn’t be made the enemy of good.
For the better part of two years, Prof. Summers worked day and night in the White House to keep the Great Recession from turning into a repeat of the Great Depression. He believes they successfully avoided the worst, which is more than can be said for Japan’s politicians in the 1990’s. And he seems to believe the White House and Congress will eventually do enough to avoid the worst.
“I believe in U.S. institutions,” he said. “Change doesn’t typically come like turning on a light switch. There is growing awareness of the gravity of the situation and what needs to be done.”