Paul Krugman: “We’ll Only Feel Prosperous During Bubble Periods”

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Nobel prize winner in Keynesianomics, Paul Krugman speak thinks that bubble periods are needed for a strong economy.

By Tyler Durden @ Zero Hedge

While hardly able to match the wit, sophistry or, allegedly, satire of yesterday’s MarketWatch grandslam in market insight “Why This Stock Market Will Never Go Down“, we are confident readers will enjoy the following interview from none other than the Nobel prize winner in Keynesianomics, Paul Krugman, who in this interview with Princeton Magazine, had some comments on bubbles, inflation,  student loans, minimum wages, artificially low rates, the Fed’s dual mandate, and, of all things, Bitcoin.

Are bubbles good or bad and do we need them to create strong economic growth and reach higher levels of employment?

Bubbles are bad if you have an economy near full employment, where they divert resources from their proper use and set the stage for financial instability. In a depressed economy, even ill-conceived spending can help create jobs, so bubbles aren’t necessarily bad. There are reasons to believe that we’re facing an era of persistent economic weakness, which means that we’ll only feel prosperous during bubble periods.

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New York’s minimum wage is currently $8 per hour.  Germany is introducing a national minimum wage next year of 8.50 euros, equivalent to $15 an hour. Swiss voters recently rejected increasing their minimum wage to 22 Swiss francs or nearly $25 per hour. What would you like to see the minimum wage be in the US?

I’m for raising the minimum to something over $10 nationally, which would bring it back in real terms and as a share of average non-managerial wages to its level in the 1960s. High-productivity centers, like New York, could justify going higher.

How has studying economics at a Ph.D. level changed since you were a student?

I’m actually struck by how little it has changed. The basic structure of course-work that lays a foundation, followed by dissertation, is the same; the math and statistical level has risen, but it was already pretty high in 1975! The content of some fields has changed, of course, mostly though not everywhere for the better. On the whole, though, the structure both of education and of the career track for young economists has been remarkably stable. I think that’s starting to change now, as the web and the proliferation of think tanks shake up the sources of career success. But that’s just happening, after decades of stability.

Do you have any concern that mounting student loan debt will eventually impact the economy and housing market?

It’s already happening. Household formation is very low, and debt has to be part of the explanation.

How much inflation is appropriate and why has the inflation rate remained low despite the expansion in the money supply?

Inflation is a tradeoff—higher inflation raises some costs of doing business, but low inflation or deflation have the effect of prolonging slumps. In the ’90s there was a sort of consensus that 2 percent made the most of that tradeoff, but subsequent experience shows that the costs of low inflation are much bigger than we thought. So I’d advocate something like 4. As for why inflation hasn’t picked up—both theory and historical experience told us that in a depressed economy with near-zero interest rates increases in the quantity of money would just sit there. Some of us were saying that over and over back in 2009 and 2010; what will it take for people to admit that we were right?

Please comment on how artificially low interest rates have impacted the current value of baby boomers’ retirement portfolios and should this be a consideration of the Federal Reserve?

Oh, boy. What do you mean “artificially low”? Compared to what? The appropriate level of the interest rate, most economists would say, is the rate that gives us full employment without inflation; since we don’t have full employment, that says that rates are too high.

And no, the Fed’s job is to stabilize the economy, not to protect incomes of some groups at the expense of that mandate.

Do you think Bitcoin will gain momentum and become a viable currency?

No. I could be wrong, but Bitcoin is harder to use than other forms of electronic payment, and lacks any fundamental source of value (unlike dollars, which can be used to pay taxes). It’s possible that Bitcoin will somehow become self-supporting, but for now my guess is that it’s largely a fad that will collapse one of these days.

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That said, should anyone take these musings and observations seriously? We leave that up to the reader. But here is what Krugman said about the internet and technology in 1998.

The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.… As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.

So probably not.

This article originally appeared at Zero Hedge