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Krugman Says Stimulus Needed as Budget Cuts Harmful for Growth

Paul Krugman, a Princeton University economist and Nobel laureate, said tighter fiscal policy risks leading to “substantially increased unemployment” and called for higher government spending to sustain the U.S. economic expansion.

“The crucial issue right now is, are we going to keep on cutting spending and derailing this recovery, or are we going to at least try to spend” the money “that this economy needs,” he said on the “Charlie Rose” show, according to a transcript of an interview scheduled to air today on PBS and tomorrow on Bloomberg Television. He spoke in a joint interview with Joe Scarborough, a former congressman and host of MSNBC television’s “Morning Joe.”

Congress and President Barack Obama failed to agree on a deal to delay spending cuts that started taking effect this month. The Congressional Budget Office has estimated the spending contraction may reduce growth by 0.6 percentage point by year-end.

“We’d be set for a pretty solid” recovery if it weren’t for the fiscal tightening, Krugman said. “We have an economy which is suffering from that inadequate demand. And that means that any kind of spending cut is going to be harmful right now.”

Scarborough agreed that now isn’t the time to slash deficits, saying he would prefer to wait until the Federal Reserve begins to raise interest rates currently near zero. Still, he said he’s worried that a failure to address the U.S. debt burden over the long run risked causing a bond-market crisis.

“I’m not worried about the markets,” Krugman said in response. Even cuts in “wasteful defense spending” or reforms to Medicare that are needed in the future are “going to be a problem for the economy” today, he said.

Krugman, 60, won the 2008 Nobel Prize in Economics for his analysis of “trade patterns and location of economic activity,” according to the Royal Swedish Academy of Sciences, which selects the winners. His work showed how economies of scale influence trade and urbanization.

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