Econ 101

The Nobel Prize winning economist Paul Krugman is growing increasingly pessimistic about the chances for recovery from the current recession. In her March 1st New Yorker profile Larissa MacFarquhar states that Krugman “pulled out of the stock market ten years ago never went back.”

Krugman believes that stocks at their current price earnings ratios are currently overpriced. “They were a good deal when the average price earnings ratio …was thirteen or fourteen, but now, except at the very bottoms of recent swings, its been over twenty.”

The stock market is a fairly reliable, although imperfect, predictor of future economic conditions. So any investor might want to take his views seriously. The same holds for anyone planning a major expenditure based on their current financial condition or that of the economy.

Should I buy a house now? Will interests rates continue to be so low? Are we about to see another bust in the housing market? Krugman also believes that being a highly developed industrial country is no guarantee against the forces that give rise to major economic downturns. “Finland and Sweden…suffered slumps as long as Indonesia’s.” So did Japan the long recession of the 90s.

Yet he is the first to admit he doesn’t always get it right. “The extent of corporate fraud, the financial malfeasance, the sheer viciousness of the political scene—those are all things that, ten years ago, I didn’t see.”

As Krugman has noted over and over again in his column in the New York Times, the Obama administration bailout plan does not go far enough. He believes much more needs to be injected into the economy to produce a sustained, stable return to better economic times and avoid a much more serious recession with the potential to develop into major depression-like crisis. (Reflecting an increasingly heard concern, David Leonhardt, in yesterday’s Times, asks, “Could the economy be at risk of a double-dip?)

Krugman is a busy man. He writes for the Times, teaches at Princeton, has conducted several landmark research studies, and written a good many books, and in collaboration with his wife, Robin Wells, also an economist, an introductory economic textbook.

Krugman also faults Obama for not being as forceful in moving forward on his agenda, particularly on health care. (Perhaps he would think otherwise in light of Obama’s latest proposals.) He believes given the current political makeup of Congress, it is hopeless to expect there will ever be any consensus on the difficult issues that the nation confronts today. Anyone who expects he can “…achieve real change without bitter confrontation is living in a fantasy world.”

It has been many years since he has been able to do the kind of serious research that led to his Nobel Prize. Yet he worries that “I guess doing the really creative academic work does require a state of mind that’s hard to maintain throughout your whole life. When I was younger, when I figured something out there was this sense of the heavens parting and the choirs singing that I don’t get now. And that’s life.”

The increase in financial inequality in the US is one of the problems Krugman would like to look more deeply into now. “…he believes that the increase in inequality in the U.S. since the sixties is a product less of economic factors—the development of technology, say, leading to the greater importance of skills and education—than of political decisions about taxation and unions.”

He is also interested in problems associated with economic geography, why for instance “…were cars produced in Detroit, carpets in Dalton, Georgia, jewelry in Providence, and chips in Silicon Valley.” Chance, history, geography, or something else?

MacFarquhar concludes her profile with a sentence that I think would characterize most, if not all scholars who devote themselves to a life of research and study. “If there is a sadness in him at all, I think it is a tiny core of profound sadness of the kind that the Buddha understood—that we probably can’t use human rationality to make the world all better and it would be really nice if we were able to.”