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Monday, July 20, 2009

Krugman Speaks to His Concerns About the Recession

I have been wondering what is happening with the Canadian and Alberta economy in particular. There is lots of commentary on the recession, what caused it, where we are in the cycle, what will it take to get out of it. Since it is a global recession what one country does can impact another very dramatically. Protectionism and currency devaluations can bring short term advantages but be devastating long term.

I recently read a June 2009 interview by the UK newspaper The Observer and Nobel Prize winning Economist Paul Krugman that had some interesting observations I think are worth sharing. I also wonder if anything Krugman is saying has anything to do with the economic realities in Canada and Alberta?

Krugman had been warning about the possibility of an all out depression or a "lost decade" flat economy like Japan experienced. He said the first year of this crisis was "far worse that anything Japan went through" and suggested that "risk for long stagnation is really high." He also so emphasized that he thinks this recession is different and while fiscal tools like lowing interest rates and increasing government capital spending are happening,"...everything after that is speculation." That is a very clear signal that we live in interesting and uncertain time.

The Krugman response to the economic "green shoots" emerging like improving business confidence indicators and housing market bottoming in the US justifies optimism is that all this "...points to a levelling off, rather than actual recovery." He goes on saying "I hope I'm wrong but the question you always have to ask is: where do we think that this recovery's going to come from? It's not an easy story to tell."

Krugman postulate that we are into a 36 month downturn and we are a year into it and the rate of the downward trend is slowing. He notes not all countries and not all economies are the same. There are a range of government policy responses being tried in different countries. Some will come out sooner than others and the recovery will not be the same for each economy and rate of recovery will not be the same either.

Krugman thinks that USA stimulus program was not large enough and says there are discussion going on for an second round of American stimulus spending. He says "There is a possibility that we get some perk-up as the stimulus dollars start to flow and an almost mechanical bounce back in industrial production as inventories are built up. But then we slide down again. The idea that we sort of bounce along the bottom is all too easy to imagine."

He advocates more financial regulation for the American economy. He says what he wants coming out of this economic crisis is "...a stronger welfare state and a little more social democracy." He suggests the time is ripe for Obama to be pushing for serious health care reform and a better US social safety net.

I wonder what the aspiration for a better Canada and a better Alberta are coming out of this recession. I have said before that we better not squander this recession. It is an ideal time to make some fundamental changes. We have good financial regulation and a good heath care/social safety net. While improvements can always be made we are in good shape in Canada and especially in Alberta.

What I would like to see for Alberta, coming out of the recession, is a greater focus on investment in productivity. that is everything from enhancing our electronic connectivity all the way to a full range of literacy upgrading. I see a real need for a serious focus on economic diversification policies with emphasis resource based value added and new industry sectors enabled. We need to upgrade our faltering education system from top to bottom. I would like to see some serious stimulation of research and development programs focused in new green technologies. I think we need to get serious about natural capital by encouraging conservation efforts from energy use to wildlife habitat protection.

Alberta has a start in all these areas but we seem to be going through the motions instead of pursuing a passion. We need a real focus and some serious political, investor, industry and community support. We need to get some serious and committed champions who will get behind these efforts if we are to emerge from this recession better and stronger and more sustainable.

The time is right, and there is a fundamental realization that tomorrow is not a mere extension of yesterday in Alberta. I wonder who, if anyone in Alberta, will be stepping up to the plate and start making a difference in these areas.