A Krug awakening

 
 

After receiving his James Joyce Award, Nobel Laureate Paul Krugman talks to Kevin Beirne about the Irish economy and being recognised by his peers

“A blur.” This is how Paul Krugman feels he can best describe the moment that changed his life. For an academic, there is arguably no higher validation than to be award the Nobel Memorial Prize in your field of study.

Talking to Paul Krugman, it is clear that he is a man who takes his work very seriously and takes great pride in what he does, but he is cautious to buy into the hype. In fact, he readily admits that what one might think is one of his fondest memories is actually a time in which he cannot recall. “That whole period, from getting that call to arriving home after the ceremony, I hardly remember a damn thing.”

In his own words, the Nobel Prize itself gives him “instant credentials,” although in the same breath he argues that “it doesn’t actually change anything about my work or anything but everyone knows what that means and so it opens doors and makes life easier.”

Krugman was awarded the Nobel Prize in Economic Sciences back in 2008 for his contributions to New Trade Theory and New Economic Geography. In the most simple terms, his work sought to explain international trade and the distribution of wealth around the world.

He is probably best-known in by the general public for his op-ed columns in The New York Times, where he is somewhat of an authority on fincancial crises and often talks about currency volatility.

He is often framed as the man who can break down complicated economic processes for public consumption. As far as the average person goes, there are many misconeptions about economics out there. Large parts of economic study are counter-intuitive.

When asked about the most common misconception the average person has about economics, Krugman is quick in his response.  “I would say that the main thing is that people imagine that running an economy is like running a business.

“They even think that corporate chieftans are the people you should turn to for advice on how to run the economy and it’s completely different. Among other things, a business sells to other people and an economy mostly sells to itself, and that changes everything. So, you constantly have the misapplication of business-y ideas… that lead to terrible mistakes like belt-tightening in the midst of recession.”

Ireland is certainly no stranger to this way of thinking. Since the economic collapse of 2007, the Irish government was forced to go to the International Monetary Fund (IMF), European Commission (EC) and the European Central Bank (ECB) in search of funding to keep the country going.

The so-called troika agreed to provide Ireland with money, so long as the government implemeneted severe cuts across the board. As Ireland exits the bailout in 2014, it is often held up as the poster-child for troika-backed austerity measures, but Krugman believes that such harsh cuts are bad for the economy in both the short and long term.

“Ireland has paid a huge price for the unconditional full bailout of the banks, which it didn’t have to do… Of course, if Ireland hadn’t been on the euro, it could have done an Iceland; they have unemployment below 5% now.”

Iceland famously decided to let its three major banks fail instead of making a guarantee like Ireland did. At the time, it was seen as an incredibly risky and dangerous move. Since then, Iceland has restructured their banking system and even arrested many of those responsible for the crisis.

Relative to the size of its economy, the Icelandic banking collapse was the largest of its kind by any country throughout history. Ireland, on the other hand, guaranteed the banks completely and now, more than five years on, the Irish unemployment rate sits at around 12.4%.

This figure for Ireland, however, is somewhat misleading due to high levels of emigration. According to the Central Statistics Office (CSO), for the 12 months between April 2012 and April 2013, 89,000 people emigrated from Ireland, an increase on the 87,100 that left the year before. That works out at around one person leaving the country to live somewhere else every six minutes.

Krugman knows that figures like the unemployment rate don’t give the full picture. “I like  to first look at employment [levels],” he says, “and Ireland has had some gains, but not much off the bottom. It’s only recovered a small fraction of the losses.”

Speaking directly about the emigration rate, Krugman believes that “It’s not necessarily a bad thing to cope through emigration. US states do it a lot. Florida’s unemployment is way down, and a lot of that is because workers have left Florida.”

In Ireland’s case, however, Krugman sees the difficulty. “It’s okay for a US state, it’s not quite as okay for a European country… That [the Irish unemployment rate] is that bad despite all of the emigration, especially among the young, is a bad sign.”

But finding a job isn’t the only issue on young people’s minds. There have been talks over the last few years of reintroducing full fees for third-level education, a move which Krugman harshly criticises.

“I do know that in the United States, one of the very worrisome things that’s happened is that we used to have quite a good system of quite inexpensive, mostly state-run universities and students with limited financial means could get a very good education.

And that’s been steadily eroded with reduced funding. The fees have risen, which is very, very bad. It means that, increasingly, unless you come from a family with sufficient resources you cannot actually get a good education, which is both leading to a lot of wasted human potential and perpetuating inequality. So, I’d hate to see Ireland go down that road.”

Education, he argues, is paramount to a healthy economy. It is no surprise that he would prefer a cheaper system of education, given his opposition to the austerity budgets Ireland have been forced to implement over the last few years.

If Ireland were not a part of the Eurozone, Krugman believes that the last few years would have been a lot different, as we could allow our currency to devalue and therefore increase the competitiveness of our exports.

“Ireland, even with all its openess, if Ireland had not joined the euro it would be in better shape today than it is. Okay, that’s a very different thing to leave once you’re in. There is actually no country not on the euro that I would recommend to join, even the Estonias and Latvias. I hear that there’s a serious movement for Poland to join, and they’re out of their minds.”

Still, Ireland has an advantage globally that few other countries seem to have. Thanks to a diaspora that spans seemingly the entire western world, Ireland has received arguably more praise on an international level than its actualy situation warrants.

“This is the third time by my count since 2008 that Ireland has been pronounced really on the road to recovery, and this one is a little more convincing than the last two. There’s never been a time when Ireland gets less positive press than it deserves.” Explains Krugman.

“On the contrary, it’s consistently gotten more positive press than it deserves. If you read the newspaper articles, for the most part, in the United States, you would think that Ireland is really clearly on the mend, not this kind of ambiguous ‘things are a little bit better but still terrible’ situation that you see for real.”

It’s not all doom and gloom though. Although things are still bad, and have been bad for a few years now, there are signs that the ECB has reevaluated and changed its policies.

An organisation that was once obsessed with controlling European inflation, often while ignoring other much larger problems, has become more receptive to new ideas. Krugman is hopeful that Europe has learned from the previous six and a half years, although he also notes that these lessons could have been learned just by looking to the east at Japan and its so-called ‘lost decade’ in the 90s.

“We know that [the ECB] have been historically too obsessed [with controlling inflation rates]. We know that they have repeatedly have a history of raising [interest] rates at the first whiff of inflation, and then having to back down later on after discovering it was a mistake.

“I don’t think current management is the same. The ECB has changed a lot since [Mario] Draghi arrived [as ECB President], and it’s not just him. One of the things I’ve learned, as best I can make out, the institutional culture at the ECB is now substantially more open-minded than it used to be.”

Krugman says that of the infamous troika, the ECB is moving towards the thinking of the IMF moreso than the thinking of the EC, a switch he describes as “a good thing for Europe.”

As for what these means for the future of Ireland, is a likely decrease in the emphasis on controlling inflation. This means that there will hopefully be lower interest rates, allowing greater investment in the Irish economy.

While Ireland has a long ways to go before the prosperity of the Celtic Tiger will be experienced again, there are certainly signs that things are improving. As for Krugman, the present seems to be a good place to be.

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