Krugman Says Prices Subdued, Labor Market Struggling (Update1)
By Timothy R. Homan
June 22 (Bloomberg) -- Nobel Prize-winning economist Paul Krugman said inflation isn’t a threat and the global economy needs more stimulus at a time when governments are concerned about mounting debt.
“The crisis is not behind us if we look at what matters most -- jobs,” Krugman said at an economic conference today in Tel Aviv. “Inflation is subdued to say the least. Inflation tends to decline when you have higher unemployment.”
Krugman said that a period of deflation, or a general decline in prices, is possible within the next few years.
Federal Reserve policy makers meeting today and tomorrow are projected to commit to keeping interest rates near zero in coming months to help wean the world’s largest economy off government stimulus. The hazard posed by the European debt crisis, joblessness near a 26-year high and a lack of inflation add to the reasons why central bankers will focus on sustaining the economic rebound.
“To short-change stimulus now for the sake of the long-run budget just doesn’t add up,” Krugman said in response to a question from the audience. “Now is the time when we really need the government support. Unfortunately, pulling back is what seems to be happening,” he said.
Governments across the 16-nation euro region are cutting spending after Greece’s near default sparked investor concern that budget deficits are spiraling out of control. While tighter fiscal policy may slow economic growth, the crisis has also pushed the euro down 13 percent against the dollar this year, boosting some European exports.
Europe’s Exports
“The risks are more on the downside for the euro,” Krugman said. Even at the current exchange rate, he said, euro region exporters including Germany are “extremely competitive.”
Germany’s cabinet this month backed budget cuts worth more than 80 billion euros through 2014. Chancellor Angela Merkel said she expects to have a “hard time” at the Group of 20 summit in Toronto on June 26-27 as other leaders press her to focus on economic growth. They will tell her “Germany saves too much,” she said June 11, adding she’ll respond that “there is no alternative” to cutting the deficit.
“On the inflation side, the Germans do worry a lot about inflation and basically that’s because they’re crazy,” Krugman said during the question-and-answer period. “It’s just not going to happen with a massively depressed economy.”
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