Dae Whan Chang, Executive Chairman, World Knowledge Forum, and Publisher, Maeil Business Newspaper & TV
A heated debate between Princeton University economist Paul Krugman and Harvard economic historian Niall Ferguson was a highlight of the 11th World Knowledge Forum*-held in Seoul, Korea from 12-14 October-and among the conference's most attended sessions.
Stimulus or austerity? The two globally renowned scholars vigorously continued their ongoing debate on whether the United States government should try to spend its way out of the economic crisis or pursue fiscal austerity.
Krugman and Ferguson's war of words stems from their divergent opinions on the seriousness of current US economic problems. Krugman likened the current situation to the Great Depression of the 1930s while Ferguson downplayed the comparison. “There's a great danger in bad analogy”.
Ferguson said, warning against any risky overreaction to the current problems. “The rest of the world, particularly Asia and Latin America, is very far from a Great Depression,” he argued. He pointed out that the US economy is actually growing and warned about the dangers of excessive government stimulation. Ferguson also remarked that the US has already taken strong fiscal measures and should avoid the mistakes of European nations such as Portugal, Greece and Ireland, whose governments took on excessive debt and risked losing investor confidence.
But Krugman painted a gloomier picture of the US economy. “Fundamentally, we are in a situation where the economy is depressed,” he said. Citing US inflation and unemployment figures, he said the current crisis shares characteristics with both the Great Depression and the 1990s crisis in Japan. He cautioned that conventional monetary policy has exhausted its options in this crisis, and that there is a need for a stronger response from governments. Krugman downplayed the dangers of stimulus spending: “Fiscal austerity or not […] has very little impact on long-term fiscal sustainability,” he said.
Ferguson said that governments must create conditions which will make their bonds attractive to potential investors. Excessive stimulation, he said, can cause governments to lose credibility and consequently drive away investment.
Ferguson and Krugman agreed that, in the long term, the size of US debt is problematic, yet each proposed very different solutions.
Krugman identified US healthcare costs as the main source of the long-term deficit. “It comes down to healthcare reform; without healthcare reform, nothing works,” he said, adding that the US healthcare system is still in need of reform despite the recent and unprecedented changes
Ferguson, however, placed US fiscal issues in a more global context. He claimed that US policy decisions have serious implications for the rest of the world and pointed out that China, the large holder of US debt, regards the US's course as “inflationary and dangerous.”
Ferguson added that there was a high chance that surplus stimulus funds would leak into foreign markets and not go directly into the US economy. He also pointed out that the US healthcare reform was very difficult to pass and had little impact on economic recovery, but a high cost in terms of political capital. “The result was fiscally zero,” he said.
The two scholars then turned to the role of international monetary policy, where they also held sharply different views. Krugman blasted China for intentionally keeping its currency weak. “There is an enormous difference between pursuing an expansionary monetary policy because you have a depressed economy […] and pursuing a deliberately undervalued exchange rate,” Krugman said.
He downplayed concerns that China could sell its large holdings of US debt. “China has an empty water pistol pointed at America's head,” Krugman said. But Ferguson cautioned against blaming economic problems on China's currency policy, saying it could spark “a currency war which [would] disrupt globalisation itself.”
The pair debated inflation further. Krugman that policymakers had the “tools” to deal with inflation at their disposal, but have chosen to not pursue these solutions out of fear. Ferguson disagreed, arguing that “inflation is not a gradual process,” but one that is subject to “radical events.”
“If Keynes were here, he would disagree with you,” Ferguson said. Krugman countered that many economists needed to go back to “simple Keynesian analysis. The problem is that people have forgotten what they used to know.”
* The World Knowledge Forum www.wkforum.org is hosted each year by Maeil Business Newspaper & TV, the largest business media Group in Korea. www.mk.co.kr