Nobel economist Krugman warns that road to economic recovery will be long and slow

print this

The global economy will recover ”slowly and painfully”, predicted professor of economics Paul Krugman in Helsinki on Monday.
      The Nobel Prize laureate was speaking at an economic forum organised by the Finnish Innovation Fund (Sitra). He also met with Prime Minister Matti Vanhanen (Centre).
      Krugman noted that the dawning economic growth could still turn into another recession, and all states should continue their revival measures, in other words to boost demand with fiscal stimulus.
      These measures will increase the public debt considerably but ”we must not even talk” about discontinuing the recovery measures, Krugman warned.
     
When it comes to ordinary people, the economic downturn is expected to continue for a long time, Krugman estimated.
      When compared with the USA, the Europeans have coped with the recession rather better, thanks to their stronger social security system.
      However, Krugman predicted that even the Europeans are now facing worse times.
      In the period of growth preceding the recession, the common European currency the Euro became overvalued, which is why European export goods are expensive.
      The weak competitiveness of the European export industry is to slow down the improvement of employment, creating pressures to reduce salaries, Krugman predicted.
      Krugman said that he does not know the Finnish economy, which is why he discussed Finland only at the general level.
     
On the whole, Krugman analysed the world economy in a pessimistic way.
      Prior to the global recession, the growth of the world economy was based on private consumption in the USA and on the general growth in China. At present, neither of these countries are able to act as locomotives of global economic growth.
      Krugman said that he hopes that the investments in new technology required to prevent climate change could serve as a new locomotive for future growth.
      If all nations participating in the United Nations Climate Change Conference in Copenhagen in December 2009 could agree on measures to prevent climate change, ”it would not only be good for this planet, it could also benefit the economic recovery”, Krugman concluded.
     
In the coming years, it is fairly obvious that an increasing proportion of the take-home pay of people resident in industrial countries will be used for electricity, fuel, and food bills.
      At the same time, the wages and salaries in the western countries will remain the same or even be reduced, as the number of jobless people is high and the pay level is lower in the developing countries that are competing with the western economic area.
     
Whether or not the current recession will be followed by a period when the living standards in the western countries will decline permanently, Krugman was unable to predict.
      Basically, the economic growth is based on two factors: on the amount and productivity of work done. Krugman expects that one of these factors, namely productivity, will grow at a relatively good pace even in the future, as it did in the past decades.
      ”We have not transferred to a Malthusian world”, Krugman said. Thomas Robert Malthus (1766-1834) was a British scholar, influential in political economy and demography. To put it simply, the Malthusian idea is that population growth will sooner or later set a limit for the standard of living.
     
Paul Robin Krugman is an American economist, liberal columnist and author who is Professor of Economics and International affairs at Princeton University, the USA.
      In 2008, Krugman won the Nobel Memorial Prize in Economics for his contributions to New Trade Theory and New Economic Geography.


Links:
  Paul Krugman (Wikipedia)
  United Nations Climate Change Conference Dec 7 - Dec 18 2009
  The Finnish Innovation Fund (Sitra)
  Thomas Robert Malthus (Wikipedia)

Helsingin Sanomat