Krugman says Fed 'reckless' to allow high jobless rate

Nobel Prize-winning economist Paul Krugman suggested Federal Reserve policy makers led by Ben S Bernanke are “reckless” for refusing to pursue higher inflation, which he said could lower US unemployment.

“The reckless thing is to allow mass unemployment to continue,” Krugman, a Princeton University professor, said on Bloomberg Television’s Street Smart yesterday. “We have had a massive failure of our political system that has come to accept that eight per cent unemployment is the new normal and there is nothing that can be done. We’re in a low-key version of the Great Depression.”

Krugman, whom Bernanke hired at Princeton in 2000 when he was chairman of the economics department, has said the Fed should tolerate inflation of three per cent to four per cent to boost the economy and put Americans back to work. He was responding yesterday to Bernanke’s comments last week that pursuing such a policy would be “reckless.”

 

Representative Ron Paul of Texas, appearing on the same show, rejected Krugman’s argument for higher inflation. Paul, who has written a book, End the Fed, blamed governments for “debasing” their currencies.

“Inflation is theft,” said Paul, a Republican presidential candidate who said he will stay in the race until his party’s convention in August. “You’re stealing value from people who save money. It really destroys an important feature of the economy — and that is saving.”

The Bernanke-Krugman debate started with Krugman’s April 24 article in the New York Times Magazine, titled “Earth to Bernanke.” In it, Krugman argued that allowing a more rapid increase in consumer prices would align with Bernanke’s comment in 2000 that the Bank of Japan should pursue faster inflation to escape deflation.

“What we really want from the Fed now is that kind of resolve to do whatever it takes, which is what Ben Bernanke thought Japan should have been doing in the year 2000,” Krugman said yesterday.

“This notion that wages are fixed and any inflation comes at the expense of workers is wrong. Wages tend to rise in an economy that’s doing well.”

Bernanke responded to Krugman’s criticism in a press conference last week following a meeting of the Federal Open Market Committee, which repeated that interest rates are likely to stay “exceptionally low” at least through late 2014.

“So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies,” Bernanke said in response to a reporter’s question.

“That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.”

Bernanke rejected Krugman’s policy recommendations.

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said last week. “The view of the committee is that that would be very reckless.”

Krugman said yesterday that the Fed should keep its benchmark interest rate low until “well past” late 2014. “We could be better off at four per cent inflation,” he said.

The jobless rate has exceeded eight per cent since February 2009 and is projected to hold at 8.2 per cent in April, according to the median estimate of economists surveyed by Bloomberg News ahead of a May 4 report from the Labour Department.

Krugman also said the US can withstand more fiscal stimulus.

“There’s no reason to panic over our debt now,” Krugman said. “If you cut spending now, what it does is depress the economy. It’s a self-defeating policy.”