When Federal Reserve officials sit down today for their first policy-making meeting of the year they should consider continuing easy monetary policy well into 2015, says Nobel prize-winning economist Paul Krugman.
“If the Fed can convince people that it‘s going to keep the pedal to the metal…that still has some leverage on the economy,” Krugman tells The Daily Ticker.
The Fed had been saying it would maintain near-zero low rates until mid-2015, and then until unemployment falls to 6.5% or below, but recently some Fed officials have suggested that the Fed may consider slowing or ending its asset purchases (quantitative easing) sooner than later.
The economy now needs all the help it can get, says Krugman, author of End This Depression Now! whose paperback edition has just been released with a new preface.
“The U.S. economy is recovering but slowly,” and still experiencing “depression conditions,” says Krugman. “Almost four million workers have been out of work for more than a year…we haven’t had anything like that since the ‘30s” [and]… there’s lots of unused capacity…a lot of savings that have nowhere to go.”
Krugman’s solution: More government spending, not less, in order to grow the economy. “A growing economy is the best solution to all our problems,” says Krugman, also an economics professor at Princeton University.
Krugman is not concerned that more government spending will lead to bigger deficits. “There is no good reason dealing with debt should be a priority today,” says Krugman, and “the 10-year outlook for debt [in the U.S.] is not too bad.”
Even a little more inflation in the U.S.--say 3 or 4%-- could be helpful, Krugman says,
For starters, he suggests that the federal government reverse state and local budget cuts in infrastructure and education. “Just undoing that would lead a long way back to full employment. It is in fact that easy,” says Krugman.
Critics disagree and argue that this is not the time to add to a budget deficit, when the debt-to-GDP ratio currently tops 100% of GDP.
Krugman’s response: Japan is much more in debt than the U.S. (its debt-to-GDP ratio near 200%) but has now instituted an expansion of fiscal and monetary policy.
“Markets are not punishing [Japan],” says Krugman. "Markets are rewarding them."
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