Before sitting down with “Viewpoint” host Eliot Spitzer, Paul Krugman answered a few questions on the economy, referencing Iceland as an example of what to do when faced with a depression and noting that the U.S. needs to get over its deficit obsession.
Q: Given the economic instability here in the U.S. and all the talk of Europe, in your opinion, is there any place that’s getting it right? Any shining beacons?
Krugman: Oh gosh, there are small examples. Israel did a good policy, Poland is actually OK, Sweden is kind of OK. Iceland is not OK, but a whole lot better than you would have expected. But they’re small countries, there’s no large — Germany is OK, but that’s temporary because they’re going to be dragged down by the rest of the European crisis, so it’s a pretty big mess. Asia is OK.
Q: Is there a reason why?
Krugman: Iceland is actually my favorite example, because they should be a total disaster: they were ground zero for the financial crisis. [But] they’re not, they have an employment rate that’s lower than ours. And the reason is that they were so deep in the hole that they were sort of empowered to chuck away the rule book, to go ahead and repudiate the debts that their bankers ran up — so basically not bail out the banks. [They were also able] to depreciate their currency, to get their export industry competitive — a little bit of temporary controls on capital movements so that they could curb the speculative runaway stuff. So, basically, Iceland, they were so deep in the hole that they had to be heterodox and it turns out that orthodoxy has not been working and heterodoxy works a lot better.
Q: You mention chucking away the rulebook: How might the U.S. implement that strategy?
Krugman: Well, what we need to do is not obsess about deficits now, not obsess about the threat of inflation now. These are times when the things that would normally be virtuous are actually deeply destructive.
So, saying, ‘Oh well, we’re really worried about those deficits, we need to cut government spending’ — and what’s actually happened is we’ve laid off lots of government workers at the state and local level — that might be something that would have a case for it in a future situation but not now, not with the economy depressed.
So what people have failed to understand is that basically the economics of a depression — and we are in a depression — the economics of a depression are very different from normal times. What we’ve been doing is trying to do orthodoxy, basically business as usual, at a time when all of the things that might normally make sense are actually big downers for the economy.
Watch Paul Krugman on “Viewpoint with Eliot Spitzer.”