The first thing I noticed when Paul walked in was the few extra pounds and silvery tinge to his hair he acquired since I saw him last. He’s clearly spending too much time behind a computer writing those acidic columns for the New York Times. We’re all short dated options in the end, I thought.
We met at my favorite San Francisco restaurant, Gary Danko’s (click here for their site at http://www.garydanko.com/), where one can get a once in a lifetime, bucket list type meal for about $300 for two, but only if you get the cheaper wine. Ideally located near Fisherman’s Wharf, they are one of only a tiny handful of Bay area restaurants to boast a coveted Michelin star. Good luck getting a reservation if you’re not having dinner with Bill Clinton.
Paul went for the lobster salad with hearts of palm and the soft shell crab with bacon. I settled for the Dungeness crab salad with quinoa and quail stuffed with foie gras. We washed it down with an excellent 2008 Duckhorn cabernet called “The Discussion”. I kidded him about recent articles in the press that described him as the “Mick Jagger of economics”.
These days, Paul is not about pulling any punches. He argued that the US is really in another Great Depression that started in 2007. Only narrow segments of the economy are doing well, like the fracking driven boom in the Dakotas, which has a population smaller than Brooklyn.
In terms of chronic unemployment, human suffering, and hopelessness, this Depression is every bit as soul crushing as the one the country experienced during the 1930’s. Long term unemployment over 4 million is unprecedented in the postwar period. The jobless rate of recent college grads is even worse.
The only thing preventing Depression era breadlines and soup kitchens is the Food Stamp program that is feeding 45 million people, including many active duty military. The original Great Depression lasted ten years and included two mini recoveries like the one we just saw. The current one will last just as long if we continue the current policies.
The great misconception is that these problems are long term and structural. Adopt the right policies, and the economy would rebound “faster than you can possibly imagine”. Vicious austerity at the state and local level is the main culprit, squeezing the life out of the economy and cancelling out any stimulus efforts by the federal government.
Austerity is not the answer. It doesn’t work when everyone is trying to reduce their debt at the same time. One man’s debt is another’s income. It’s all about the teachers. The Great Recession has prompted the firing of 1.2 million and prevented the hiring of another 800,000. Hire 2 million teachers, and the unemployment rate drops from 8.1% to 6.5%, and the consumer spending and the multiplier effects they bring with them will return the economy from a 2% to a more normal and sustainable 3% growth rate.
The answer is to spend more money, and a lot of it. If you need proof before proceeding, look no further than the 1939-41 period. Then it was massive government spending in the buildup to WWII that caused the unemployment rate to plummet from 20% to near zero.
If Paul were king of the world, he would immediately allocate $300 billion to the states to rehire teachers, and maintain the infusion annually until we are out of the crisis. The one time only injection we saw in 2009 was inadequate. He would change FHA rules to allow underwater homeowners to refinance at current rock bottom interest rates. That will keep their homes off the market and allow some recovery there, one of the largest sectors of the economy. He would keep monetary policy easy. A modest level of subsidies for alternative energy so we can quit financing sellers of oil in the Middle East who are trying to kill us is also justified.
The origins of the current malaise aren’t hard to fathom and are an exact repetition of what occurred in the 1920’s. A long period of complacency led to a relaxed attitude towards debt and risk. The flames were fanned by deregulation. Gatekeepers of the public interest were lavishly paid to look the other way. Then the Wiley E. Coyote moment came when he only plummets after looking down, that particular physics unique to cartoon characters.
Today, the waters are being deliberately muddied by a dozen billionaires funding hundreds of PAC’s and countless bogus research institutes. Their sole interest is to minimize their own tax bills, at whatever cost.
Krugman spits out ideas with machine gun rapidity and is a gold mine of insightful economic data. Eye opening observations are regularly interlaced with biting humor. I’m sure that in a past life he was a standup comedian, or in vaudeville.
I only touched on Europe with him, as my own predictions there have already come true. He said that the US and Europe are in a contest to see who has the worst managed economy, and that right now, Europe is winning. He observed that maintaining a single currency without a single government is untenable. It doesn’t help that in the German language the same word is used for debt and guilt. A work out will take years, if not decades.
Paul used to work for Fed Chairman Ben Bernanke as a Princeton economics professor before Ben was demoted to the job of saving the world. When he recently met him he handed him a well-known academic paper written in the 1990’s on the monetary policy mistakes that led to the post bubble collapse of the Japanese economy, and admonished him for repeating the mistakes. The author of the paper? Ben Bernanke.
Krugman argued that the tax system was long overdue for a major overhaul, which now has the lowest tax burden of any developed country in terms of GDP. He said the maximum rate should rise from the current 43%, including state and local taxes, to 70%, possibly for earners over $1 million.
That is still well below the 90% peak rates during the Roosevelt era. Money is concentrating at the top at an unprecedented rate and stagnating in the bond market instead of being invested to create jobs. As for health care, we may have to implement a European style VAT tax to pay for it, however regressive that may be.
I asked, with the national debt now over 100% of GDP, how much more could the US borrow without crashing the bond market, he answered “a lot more.” Japan is able to borrow 240% of GDP at only 0.9% interest rates with far worse fundamentals than our own. There is a global savings glut and bond shortage, and investors are crying out for a safe haven.
Runaway government borrowing is a problem, but not now. Falling bridges and failing infrastructure are causing much more long-term damage to the economy than additional debt. Kids today are infinitely more concerned about getting a job tomorrow than the amount of money the government will owe in 30 years.
Paul is a naturally shy fellow who avoids the limelight whenever possible. He once had a thin skin, but after the attacks from the right that erupted after he started writing for the New York Times, “a rhinoceros has nothing on me”.
As divine as they are at Gary Danko’s, I skipped the desert, as I know I will be packing on the pounds during my upcoming cruise across the Atlantic on the Queen Mary 2. Paul went for the warm Louisiana butter cake with apples, huckleberry sauce and vanilla bean ice cream. Well, that explains the weight gain.
Before he left, Paul handed me an autographed copy of his latest book, End This Depression Now!, the second tome he penned since the 2008. There was one condition. I had to give him an autographed copy of my next book.
I pointed out that by grinding out 10,000 words a week with my blog, trade alerts, and webinars, I was effectively knocking out a new book every two months. That was no excuse he said, with the impatience of a university professor admonishing a grad student who was late with a dissertation. With that, he was out the door like a whirlwind.
I don’t get to meet with Nobel Prize winners very often, not more than once a month, so I thought I would give you the full blast. Believe it or not, I left out some of his more incendiary opinions. After all, this is a family oriented, PG website. So take from it what you may.
To buy Paul’s book at Amazon, End This Depression Now!, please click here.