Has America entered an era of persistent economic weakness like the two decades of stagnation Japan has faced since the collapse of its bubble economy in 1991? That is the question that two eminent Keynesian economists, Nobel Prize laureate and New York Times columnist Paul Krugman (left)and former Clinton administration Treasury Secretary Lawrence Summers debated Monday night in Toronto.
Krugman, paired with Canadian economist David Rosenberg of Gluskin Sheff, affirmed the motion that America won’t escape a Japan-style lost decade while Summers, paired with the founder of the Eurasia Group consultancy Ian Bremmer (right), denied the motion.
Krugman, a long-time bear said, “It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery.” The liberal economist has long argued that the politically acceptable level of stimulus promoted by the Obama administration has been insufficient to jump-start the economy. He pointed out that an economy could remain stalled for a very long time, noting that Japan is in year 19 of its "lost decade."
Krugman’s debate partner Rosenberg, an uberbear who does not share Krugman’s Keynesian outlook despite agreeing on his conclusion, recently predicted the S&P 500 may drop back to 600. He painted a picture of a U.S. economy that has accomplished little despite unprecedented stimulus, and suggested the economy will crater when taken off steroids. The Distressed Volatility blog quotes Rosenberg at length:
"Despite the fact that we have had 3 years of unprecedented and radical stimulus in the economy. I mean, as you've already heard we've had policy rates in the U.S. at zero. Zero percent policy rates for three years ... We have had the Fed take it's balance sheet into the stratosphere. Which was once an $800 billion stable balance sheet is now $2.5 trillion. And we've had at the same time three years of government deficits in the U.S at the Federal level of over 10% of GDP. I mean, FDR never ran the deficit above 6% of GDP ... And yet what did we get out of it?... Real GDP growth of barely more than 2% at an average annual rate. Historically, what is normal in the context of a post World War II post-recession recovery nine quarters in … is 5.5%."
While a majority of the audience favored Krugman’s and Rosenberg’s view both before and after the debate, it was Summers (left) and Bremmer who shifted the opinion meter the most, bringing support for their position from 26% to 45% support, thus achieving a technical debate victory.
Summers’ most persuasive point might have been the strong contrast he drew between severity of U.S. and Japanese economic woes. “In Japan, house prices fell to a level not two-thirds of previous levels, but a level 15 percent of previous levels,” Businessweek quotes him as saying. His debate partner Bremer also drew contrasts, saying the relatively greater problems of Japan and Europe do not automatically spell economic decline in North America.