Krugman Calls for Spending, Inflation, Experimentation

Krugman Calls for Spending, Inflation, Experimentation

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Paul Krugman continued his assault on the deficit hawks yesterday at a panel with fellow economists Jeff Madrick and Robin Wells (Krugman’s wife). The three teamed up at the Brooklyn Book Festival to discuss “The Economic Crisis and What to Do about It” – a daunting topic to fit into an hour-long time slot.

The triumvirate was of one mind philosophically, sharing a Keynesian view on stimulus spending, regulation, and what it’s going to take to get the country back on the right course. Their prescription included controlled inflation and experimenting with new ideas in monetary policy.

“We warned in advance that this wasn’t going to be good enough,” Krugman said of the government’s$787 billion fiscal stimulus. “It was about a third as big as it should have been.” With this amount, “you’re going to mitigate it, but you’re not going to solve it,” he said. On the bailout of the financial industry, Krugman said:  “Without TARP, we would be in Great Depression 2.0.”

He says that while more stimulus is not now politically feasible, Obama should be continuing to fight for it nonetheless, in order to argue the point that it was not his actions that prolonged the downturn, but his inability to pass more stimulus in the face of Republican opposition.

On the causes of the Great Recession: Krugman went to town on the failure of policymakers and economists to anticipate the growing housing crisis. “We were all fairly aware there was a bubble out there,” he said, adding that even so, few economists predicted that this bubble would burst and lead to the deep and lingering recession we are now stuck with. Wells called the housing bubble a “cataclysm” that led consumers to stop spending, which subsequently caused the economy to tank, since 70 percent of U.S. economic activity is driven by consumer spending.

On the impact of the Stimulus:  “It was clear it [the stimulus] was going to have its peak impact in late 2009, early 2010,” Krugman explained. And now, “the growth is fading out as the stimulus is fading out.” At the same time, Wells added, “The crisis on the state and local levels is hitting,” negating the progress made by the federal stimulus.

On stimulus alternatives: Monetary policy is another part of the potential solution, and all agreed that higher inflation can mitigate some of the problems facing consumers.  Wells put further emphasis on inflation, explaining, “Who hates inflation? The stock market … Who likes inflation? People who have debts.”

Who are precisely the people that need to start spending again in order to get this economy rolling.