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article imageOp-Ed: Summers and Krugman debate in Toronto

By Ken Wightman     Nov 15, 2011 in Politics
Toronto - I watched the live feed of the Munk Debates last night. It was a brilliant pairing: Paul Krugman vs. Larry Summers. Krugman was assisted by David Rosenberg and Summers found back-up in Ian Bremmer.
Krugman is a Nobel prize winning economist, writing for The New York Times, Summers is the former president of Harvard University, Secretary of the Treasury under Clinton and until recently director of the White House National Economic Council for President Obama.
David Rosenberg is a chief economist and strategist with an influential Canadian independent wealth management firm. Ian Bremmer, looking every bit the academic, the only one on stage without a tie, is the American political scientist who created Wall Street’s first global political risk index
The topic of the night: Will the foundering global economy usher in a dismal era for North America similar to Japan's lost decade of high unemployment and slow economic growth?
At least, that is how the Globe and Mail saw the debate. Paul Krugman begged to differ. He said, "Canada has not messed up enough to be interesting." This debate will be centred on the United States and not North America.
The Nobel winner saw the States not as entering a lost decade but of already being deep in one. He described the economy as sour, but with a sourness even in excess of that that stalled the Japanese economy. He defended his position by falling back on the PPE approach: The Proof of the Pudding is in the Eating. For him, the United States clearly is now eating sour, perhaps even humble, pie.
Both Krugman and Summers agreed on a number of things, one being that the U.S. stimulus program was too little and too brief. It was inadequate.
An interesting twist to the Monday evening debate was that both Krugman and Summers come from the left wing of the political spectrum in the U.S. They both agree on a great deal. For instance, they both agreed that the engine driving the American economy is broken; Both made reference to John Maynard Keynes "magneto trouble" metaphor.
In Keynes day, engines had a magneto powering the spark plugs. Keynes famously said, "We have magneto trouble," as he compared the stalled economy of the Great Depression to a broken generator in an automobile engine. According to Keynes, repair the economy's magneto and the economic engine will purr once again.
Krugman sees the American political system as completely dysfunctional and this leaves him feeling deeply pessimistic for the States. If he does start to feel a little upbeat, he said, he watches another GOP debate and changes his mind immediately. America's economic magneto is not going to get fixed any time soon.
Krugman made it very clear that he sees "no reason to believe the U.S. will do better than Japan."
Summers, on the other hand, said that the Japanese problems were far different than those affecting the United States today. For instance, in Japan housing prices tumbled to 15 percent of their previous value. This has not occurred in the States - yet.
Summers pointed out that the U.S. is still "the place where everyone wants to come, where everyone wants to put their money." The world's biggest and most dynamic economy will not be brought to its knees for an indefinite period, according to Summers. The States is simply too economically resilient for that.
Quoting Churchill, Summers said, “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.” The magneto will get fixed despite of, or in spite of, the present political gridlock in Washington.
Summers argued, "things are never as bad as you think they are," and added optimistically that in politics, “the transition from inconceivable to inevitable can be very rapid."
The panel touched briefly on the Occupy Wall Street movement. I believe it was David Rosenberg who said the movement was partially powered by the strong backlash against excessive CEO pay and the golden parachutes protecting them from falling into the financial abyss like so many others in today's economy.
Summers pointed out that there are brilliant business leaders, like Steve Jobs, who earned their great wealth. He argued that some economic inequality is not only to be expected but it is good. We need "to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage."
Krugman brushed this argument aside: Almost none of the wealthy CEOs under attack are like Jobs. Almost none.
So, what did I take away from the debate. One: it's good to be living in Canada. Canada was mentioned a number of times as a country that has dodged the worst of the present economic malaise affecting the globe. Investing in Canada and Australia, as I am doing, is not a bad idea. One might even add Sweden to the list of countries safely at the head of the pack.
Political scientist Ian Bremmer said he would advise the Canadian government to hedge their bets when it comes to trade. Looking east to China and the rest of Asia is a good plan. He made it clear he was not thinking of closely linking Canada's economy to China's in the same way that Australia has done. Canada is positioned right next to the States and an ocean away from Asia. Still, hedging one's bets is often an excellent plan.
I believe Prime Minister Harper and Finance Minister Flaherty are already taking that tack.
Will the Americans suffer through a lost decade? They might. Will Canadians be pulled down with them? Maybe, but maybe not. Maybe Canada will motor along a little above the worst of the economic storm. I'm going to keep buying on the dips and praying on the dives. I guess I'm a Larry Summers optimist tainted by Paul Krugman negativity.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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