Krugman Says Forget Debt, Help the Unemployed

Paul Solman’s interview with Paul Krugman on “The Great Deformation” will air on the PBS NewsHour soon.

We recently sat down with former politician and businessman David Stockman to discuss his controversial book, “The Great Deformation,” in which he argues our economic system is busted. In the previous Making Sen$e Business Desk post Stockman explains how to fix it. We also asked Nobel economist and New York Times columnist Paul Krugman what he would do. That exchange is below.

Paul Solman: So I asked David Stockman for his prescriptions, economic prescriptions for what ails us. Yours?

Paul Krugman: More spending right now. But if you want operational, I think the first and easiest thing we can do is [give] aid to state and local governments. We had some of that in the first year of the stimulus, but go back to it, 300 billion [dollars] a year of grants to state and local governments for necessary spending. Rehire school teachers, fill potholes, resume infrastructure projects that have been put on hold. That right there is probably enough to bring the unemployment rate down by about a point and a half. So just there you get quite a lot of traction on the economy.

Then there are other things. There are, in fact, some worthy government spending, federal projects. There’s a lot we can be doing on the rail system, not grandiose stuff. I’m not gonna say, “let’s build a vacuum tunnel from the East to the West Coast,” but there are a lot of, you know, just sort of bad stretches of track that need to be fixed that would accelerate stuff quite a lot.

Maybe resume that payroll tax cut that expired at the beginning of the year, and meanwhile, have the Fed do more of what it has done recently, announce that it is actually going to raise its inflation target some, maybe. I mean, I say let’s make it 3 percent not 2 percent. That may be more than they’re willing to do, but that’s what I would do. I think all of those things would bring us a long way. I think if we did all of that we’d be well under 6 percent unemployment within 18 months, and it’s not that hard.

Paul Solman: But that’s more government spending!

Paul Krugman: Well yeah, and the point is the aid to state and local governments is time-limited. It expires once the economy is, you know, back in the zone where we no longer need to use that kind of support. Most of the rest is some government spending. I mean, the notion that government spending is per se evil is a big mistake. We actually need quite a lot of it, and I think if you ask, “What would it do to the U.S. debt outlook?” I think it would actually improve it because we would improve the prospect of the currently long-term unemployed. People finally do eventually get back into the work force.

Paul Solman: But there’s got to be a point at which we simply are taking on too much debt, no?

Paul Krugman: It’s a long way off, and it’s not a problem. I mean, the government is a long way from having a debt problem. The household sector has too much debt — that’s clear. We see that’s what’s driving our depressed economy. So, it’s not that debt is never a problem. The question is, is government debt a problem right now and is it enough of a problem even in the future to mean that you shouldn’t be doing whatever it takes to get full employment now.

Check back here tomorrow for more from David Stockman and Paul Krugman.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions

Follow @paulsolman