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Economist Paul Krugman on being surprised by the spread of the downturn
A Conversation with Economist Paul Krugman by Sarah Cliffe
Paul Krugman, a professor at Princeton and the most recent winnerof the Nobel economics prize, says his real talent is his ability to create simple models that represent complex economic phenomena. That’s in his academic work. In his other career, as a blogger andNew York Times columnist, he shows a similar talent for getting to the essence of complicated questions.
Watch video of Paul Krugman talking about the economy in the HBR Editors' Blog.
Whatsurprised you as the meltdown unfolded?
The strength of the international transmission mechanism was shocking. I don’t think anyone would have predicted as coordinated a world slump as it turned out to be.Every country out there took a serious hit. I used to think the idea of financial contagion—the idea that Brazil could get a financial flu from Russia because a failed hedge fund, say, had investedin both—was far-fetched. But such rapid transmission turned out to be at the core of the problem. I didn’t take it as seriously as I should have.
The lack of a unified government in Europe turned outto be a real problem, too. European leaders couldn’t figure out how to coordinate with each other. We kept finding bursting bubbles where we weren’t paying attention: Spain and Ireland on one hand andthe Eastern European countries on the other. That was a huge, further downdraft on the world economy that we weren’t expecting. Some people thought that the United States had too much entrepreneurialand innovative energy to go into a deep, persistent stagnation. Being innovative, hard driving, and creative is good for long-term economic growth, but it doesn’t insulate you from nasty businesscycles. It may actually make you more exposed. America in the 1920s was the most innovative, productive place on the planet. That didn’t protect us against a financial collapse and a very nasty...
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