Krugman: Fed Should Allow Inflation Above 2% Target

Monday, 30 Apr 2012 05:33 PM

 

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Nobel Prize-winning economist Paul Krugman said the Federal Reserve should accept an inflation rate of 3 percent to 4 percent to boost the U.S. economy.

Speaking Monday on Bloomberg Television’s “Street Smart,” the Princeton University professor said that the Fed should keep its benchmark interest rate low until “well past” late 2014. “We could be better off at 4” percent inflation, he said. He also criticized Fed chairman Ben S. Bernanke and other policy makers for their handling of the economy.

“We have had a massive failure of our political system that has come to accept that 8 percent unemployment is the new normal and there is nothing that can be done,” Krugman said. “We’re in a low-key version of the Great Depression. It is a persistently depressed economy.”

Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, has argued that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke’s comment in 2000 that the Bank of Japan should pursue faster inflation to escape deflation, he said.

“What we really want from the Fed now is the resolve to do whatever it takes, which is what Ben Bernanke thought Japan should do in the 1990s,” Krugman said Monday. “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.”

Krugman also said the U.S. can withstand more fiscal stimulus.

‘No Panic’

“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.”

Representative Ron Paul of Texas, appearing on the same show, rejected Krugman’s argument for higher inflation.

“Inflation is theft,” said Paul, who is also a Republican presidential candidate. “You’re stealing value from people who save money. It really destroys an important feature of the economy -- and that is saving.”

© Copyright 2014 Bloomberg News. All rights reserved.

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