Krugman, Niall Ferguson Renew Debate Over U.S. Stimulus
Krugman, 57, a Princeton University professor, is urging the Obama administration to undertake a second round of fiscal stimulus, while Harvard University historian Ferguson, 46, warns such a course may trigger a “debt spiral” in the world’s biggest economy.
“The risk is that at some point your fiscal policy loses credibility in the eyes of investors,” Ferguson said at the World Knowledge Forum in Seoul. “Then, very quickly, you will find yourself in a debt spiral of rising rates, widening deficits, crumbling credibility and yet more rising rates.”
The debate comes as minutes of the Federal Reserve policy makers’ meeting on Sept. 21 show they were prepared to ease monetary policy “before long” as growth slows and the jobless rate remains near a 26-year high.
“We actually never did significant fiscal expansion,” Krugman said at today’s forum, appearing beside Ferguson. “What does a trillion dollars of borrowing do to the U.S. long-run fiscal position? The stimulus right now makes almost no difference.”
The administration’s two-year $814 billion stimulus program ends Dec. 31, and Krugman said two months ago another $800 billion is necessary. While the National Bureau of Economic Research said in September that the worst U.S. recession since the Great Depression ended in June 2009, the unemployment rate held at 9.6 percent last month.
Ferguson said the U.S. risks losing investors’ confidence as more spending exacerbates its weak fiscal position, adding the U.S. debt situation is worse than that of Greece. Krugman dismissed the comments, saying there is no evidence in the markets that bondholders will flee.
“The markets are fine until they are not fine,” Ferguson countered.
“For more than a year since our debate began, it’s the Chinese who’ve been consistently agreeing with me, saying that they regard the course of U.S. fiscal and monetary policy as dangerous,” the Harvard professor said. “So it’s not just me you are arguing with, Paul, actually, it’s the Chinese government.”
China in July held almost $847 billion in U.S. Treasuries, more than double the amount it held four years earlier.
U.S. economic growth slowed to an annual rate of 1.7 percent in the second quarter from 3.7 percent in the first period. The growth figures are adjusted for changes in prices; nominal gross domestic product doesn’t adjust for inflation.
The economy probably expanded at a 1.9 percent pace in the quarter ended Sept. 30, according to the median estimate of 62 economists surveyed by Bloomberg News.
Krugman, a New York Times columnist, wrote last year during a previous clash that Ferguson “hasn’t bothered to understand the basics” of economics. Ferguson has said Krugman’s economic assumptions are based on a “flawed” reading of John Maynard Keynes’ model.