Global Economy Facing Prolonged Recession: Paul Krugman

The global economy may have to suffer through a prolonged recession lasting up to 10 years before the demand stimulated by new technologies sparks renewed prosperity, said 2008 Nobel laureate in economics Paul Krugman during a speech in Taipei on May 14.

The speech, entitled "The Effect of Global Financial Crisis on Free Trade and Globalization," was delivered at an international economic and financial forum organized jointly by the Chinese-language Economic Daily News (EDN), a sister publication of Taiwan Economic News (TEN), and Taiwan Financial Holdings and held at the Taipei International Convention Center.

The size and nature of cause of the current global recession, Krugman remarked, makes it particularly difficult to resolve.

This is the third major recession that the world has suffered since the Second World War, the first one being in 1973-75 and the second in 1979-82. The current decline has been steeper than the previous two, with global trade plunging by 20 percent, and its magnitude has been greater, affecting the whole world.

The current recession is the economists` worst nightmare, Krugman said, and its scale is even worse than they had feared. The world in fact is facing the possibility of a "lost decade" like that which afflicted Japan in the 1990s; and, since the troubles this time are global in their reach, the Japanese method of climbing out of the slump by boosting exports cannot be used unless "there is another planet for the world to trade with."

Today`s mess was caused by internal problems: excesses in financial leverage, consumption, housing prices, and construction, leading to the inflation of a bubble and its ultimate bursting. The previous two recessions, by contrast, were caused by external factors: the first by the outbreak of war in the Middle East, and the second by turmoil in Iran, leading to soaring oil prices.

In the previous two recessions, central banks raised interest rates to fight inflation and then reversed course to pave the way to recovery. Governments are attacking today`s problems by adopting easy-money policies and aggressive fiscal policies, but the effects of these efforts seem to be limited. Nevertheless, Krugman stressed, they have managed to ease the problems somewhat.

In addition to the conventional monetary measures-cutting interest rates, maintaining ample liquidity-the United States government has also embraced the unconventional policy of buying short-term government debt and mortgage-backed securities. With real interest rates effectively at the zero level, Krugman noted, the U.S. government has limited room for more monetary moves.

The vigorous fiscal moves which governments are undertaking are greatly boosting their debt, bringing into question the sustainability of this policy. This has prompted the Irish government, for example, recently decided to raise taxes.

While the global economy is no longer in free-fall, Krugman said, the situation is still very grave: "The chance for the recession to develop into a full repeat of the depression of the 1930s has dropped to 5 percent, from 20 percent previously."

Eventually, the Nobel laureate said, the world economy will return to prosperity as technological breakthroughs stimulate new demand. In addition, he concluded, "Government creativity and wisdom will help the global economy get out of the recession."

Source: CENS