Scottish historian Niall Ferguson opens up his old feud with his econo-enemy Paul Krugman by taking a few potshots at the economist in his Newsweek cover story this week (example: Federal debt hitting 91 percent of the GDP? “Nothing to worry about, retort deficit-loving economists like Paul Krugman”). So far, it seems Krugman hasn’t taken the bait and hit back on his blog. Or maybe he is just giving up, since, according to Krugman’s column today, while the pair may differ on policy, they agree on one crucial point: Things are still very, very bad.
Krugman: “Historically, financial crises have typically been followed not just by severe recessions but by anemic recoveries; it’s usually years before unemployment declines to anything like normal levels. And all indications are that the aftermath of the latest financial crisis is following the usual script. The Federal Reserve, for example, expects unemployment, currently 10.2 percent, to stay above 8 percent — a number that would have been considered disastrous not long ago — until sometime in 2012. And the damage from sustained high unemployment will last much longer. The long-term unemployed can lose their skills, and even when the economy recovers they tend to have difficulty finding a job, because they’re regarded as poor risks by potential employers. Meanwhile, students who graduate into a poor labor market start their careers at a huge disadvantage — and pay a price in lower earnings for their whole working lives.”
Ferguson: “History strongly supports the proposition that major financial crises are followed by major fiscal crises. ‘On average,’ write Carmen Reinhart and Kenneth Rogoff in their new book, This Time Is Different, ‘government debt rises by 86 percent during the three years following a banking crisis.’ In the wake of these debt explosions, one of two things can happen: either a default, usually when the debt is in a foreign currency, or a bout of high inflation that catches the creditors out. The history of all the great European empires is replete with such episodes. Indeed, serial default and high inflation have tended to be the surest symptoms of imperial decline.”
We declare a truce, then, with the winner being nobody. Thanks for ruining Christmas, Grinches.