Krugman Examines Lessons of European Economic Crisis

“Nobody actually successfully predicted this crisis,” Paul Krugman said in an Oct. 6 campus lecture about Europe’s recent economic crisis. “There were a few people who did predict it, but they also predicted 10 other crises that didn’t happen.”

Krugman, a Nobel laureate in economics and New York Times columnist, opened this year’s Walter E. Edge Lecture Series, drawing a full house at McCosh 50 and two additional rooms, where the audience watched on closed-circuit TV. The renowned economist will be retiring from Princeton and joining the faculty of the City University of New York at the end of the academic year.

Krugman shared “three real lessons” to learn from Europe. Lesson number one: “Not having a currency of your own is a very dangerous thing.” He explained the benefits of having a national currency by comparing Spain and Florida. Comparing the two real-estate busts, Krugman pointed out that “without anyone saying let’s bail out Florida, Florida received what amounted to insurance against the downturn,” thanks to federal safety nets. Spain had none of those and its large budget deficits engendered concerns about the country running out of money. In contrast, the United States cannot run out of money, “at least in the normal stage of events,” since it has its own currency.

Lesson number two: John Maynard Keynes was right. The crisis in Europe has provided “a wonderful clear illustration of the effects of fiscal contraction in a depression,” Krugman said. Increased government spending is helpful in a highly depressed economy because it puts people to work, while cutting government spending will deepen the depression.

Krugman’s third lesson emphasized that policy should reflect what we have learned, not ignore it: “Against stupidity, the gods themselves contend in vain,” he said, referencing the philosophy of Friedrich Schiller. Policymakers have not just ignored much of what should have been learned from the last 80 years, Krugman said — they’ve ignored lessons from the past five years as well.

Throughout the lecture Krugman dispelled theories that proposed Europe’s crisis had to do with the size of European governments, and the fact that they were welfare states. The data, he said, does not support that view.