The United States won't likely have a double-dip recession -- but the world's largest economy will stagnate, and that has sobering consequences for Canada, a prominent U.S. economist said Wednesday.
"I don't think we're going to have an actual double dip, though it's certainly not outside the realm of possibility...the U.S. economy will continue to stagnate," Nobel Prize winner in economics and New York Times columnist Paul Krugman told a Toronto audience of 600 people.
U.S. growth will likely be below potential, which means the jobless rate will rise, not fall, he added. And that's "got to be bad for Canada," whose economy is so closely intertwined with its southern neighbour.
This year, the U.S. economy will seem a lot like 2010, he said. "We'll start the year with 'we've turned the corner, recovery's on the way,' and end the year with 'if this is a recovery, it sure doesn't feel like a recovery.'"
Canada has a much better balance sheet sheet than the U.S., though its liabilities look remarkably like its neighbour. "Household debt has risen at rates comparable to those in the U.S., but housing prices have not plunged. Dot, dot, dot (yet)," he said, to laughter. "So there's a real question of whether Canada is actually just a delayed version of the same story."
His wide-ranging talk touched upon everything from Greek's woes to Wall Street and Wile E. Coyote. One re-occurring theme: these are complicated times, which call for bold policy responses.
His chief worry about the IMF's new head, Christine Lagarde, named to the post Tuesday, is that she is "sensible and judicious." But, as he blogged this week, "we're living in an era in which conventional prudence is folly, conventional virtue is vice."
Washington hasn't stood up to Wall Street as much as it should have, and top bankers are now back to lecturing politicians on policy direction, he said. And government stimulus programs haven't been aggressive enough to help hoist the United States out of its economic malaise.
Mr. Krugman, who calls himself a liberal, has critics on both the right and left side of the spectrum. But he also has a huge following, and his observations on the U.S. economy have, largely, been prescient.
He was speaking at a breakfast event organized by the Economic Club of Canada.