As is probably common knowledge by now, Calpundit Kevin has been talking to Krugman. We don't have the full transcript yet, but what he said was enough to make Kevin pretty depressed.
Brad has picked this up with a post I'm not too happy with. He seems to be saying that the US is too big to fail. Well this I don't buy. But that doesn't mean Krugman has to be right. The thing is, Paul is a clever guy. On one reading he shouldn't be saying this, since saying it begins to make it thinkable, which begins to make it happen. (I have the same problem about saying the euro may not work). Normally he wouldn't do this. But then, his opponents, in order to criticise have to allow that he is an intelligent and important economist, something they aren't going to do. So, you see, he has them.
Here's an excerpt from my interview, where he talks about what he thinks is going to happen to the U.S. economy:
We’re headed for some kind of collision, and there are three things that can happen. Just by the arithmetic, you can either have
big tax increases, roll back the whole Bush program plus,
or you can sharply cut Medicare and Social Security, because that’s where the money is,
or the U.S. just tootles along until we actually have a financial crisis....and we turn into Argentina.
Which one of those is most likely? What’s your best guess?
I think financial crisis....
Really? A financial crisis in the United States? Like in Argentina? Krugman admits that conventional wisdom says this is impossible, so I ask him again:
And do you think that’s a serious possibility for the United States?
Yeah, I mean, you just take the numbers as they now look, and that’s where it heads....I think we have to take seriously the possibility that things won’t work out this time.
But as with all these things, there'll be an internal and an external reading. Bush is a lot less popular outside the US than he is inside. This means that these declarations, which are really for US internal consumption, may well help shape the international consensus.
What was it they said: a country divided against itself....
I think Krugman is being sensationalist here, and intentionally so. His statement has to be read against the background of his dog-fight with the White House. This is unfortunate, since this makes it really difficult to evaluate the scientific basis of his arguments. Given how clever and talented he is, I think he would have done a lot better to stay out of the street fight, and send in his arguments with more precision, and possibly, more effect.
I mean it's very easy to talk about Argentina. I've been saying it myself about Spain and Italy in the debate about the euro and ageing. Curiously enough I have never used this argument in connection with Germany, or with Japan. This is not because I think these countries are too big to have crises, far from it, but because we have little recent experience of what such 'big' crises might be like. So with Germany, with Japan, with the US, I think it's better to take things a day at a time. Look at the emerging reality, and then draw conclusions. I don't even like Paul's use of numbers. Oh, I'm sure he's right that the Federal finances are off the rails, but there are too many unknown variables to make hard-and-fast calculations. We don't know, for starters, what is going to happen to the value of the dollar. We don't know as a consequence of that what is going to happen to the living standards of US consumers, we don't know whether the US will hit deflation, and if so how much, and we don't know what kind of growth (positive or negative) impact all this will have on US GDP. So as far as 2010 goes, your guess is as good as mine, or Krugman's. That's what 'fundamental uncertainty' means.