Paul Krugman: “The Future of the Global Economy”

Paul Krugman took the WBF stage Wednesday to speak on “The Future of the Global Economy.”  He explained that while the past year has been a significant struggle, more challenges lay ahead.

America has passed through the eye of the ’08-’09 economic storm.  The risk of a 2nd Great Depression has effectively faded, but in order for the global economy to recover countries must manufacture and move goods.  Unfortunately, international trade likely will be slow to recover.  Krugman outlined three reasons why:

• The risk of collapse has receded, but who knows about full recovery?  When countries suffer a recession as a result of financial crisis, their recovery has almost always relied on moving to a trade surplus.  But now we have a global crisis – the world as whole cannot move to exports.
• The technologies that led to globalization have pretty much been exploited. 
• As recently as early 2008, the big story was not the recession – it was the spike in oil and food prices.  It is striking that now, even with the world deeply depressed, oil prices are still higher than they were a few years ago.  This may put a serious brake on trade. 

Highlights from the Q&A: 

Krugman on FINANCIAL INNOVATION:  Other than ATMs, name a financial innovation that really was a good thing.  How many were about making markets more efficient?  How many were about regulatory arbitrage or evasion?  Keynes said, “We have bundled in the handling of a complex machine, the workings of which we do not understand.” 

The burden of proof really should remain on the financial innovator.  You don’t ban stuff, but you can increase transparency.  The fight is on in the USA for a consumer financial production agency.  This would require plain vanilla products, and the industry is worried that this is what people will choose.  They’re also concerned about the enforcement of increased capital for financial institutions.  Simply, the rewards are diminished. 

Krugman on FUTURE REGULATION: There are extremely smart people on Wall Street, so the Treasury’s perspective of principles-based rules is conceptually right.  Here are two problems:

• There is a sneaking suspicion that what made the pre-1980s system so sound was restricted competition, and we cannot replicate this.  It’s quite hard to sell this politically (less competition in banking so that bankers can be more lazy);
• Politics.  We may have stepped back from the abyss too soon, and may not fully appreciate the need for reform. 

Krugman on PROTECTIONISM: Most governments think very, very hard about making trade adjustments.  They realize that it took 50 years to get us there.  If we are going to have taxpayers backstopping financial institutions, it is then difficult to do that if the benefits of those rescues are going to citizens of other countries.  Globalization of goods has been an unambiguous, major evolution – a good thing.  But it is hard to make the case that globalization of finance is good thing.