Stiglitz Says Too Soon to Cut U.S. Stimulus as Growth Not Normal

Nobel Prize-winning economist Joseph Stiglitz said it would be premature for the U.S. Federal Reserve to reduce monetary stimulus even if there’s little evidence it helped the world’s largest economy.

“It’s the only stimulus,” the Columbia University professor said in an interview at the World Economic Forum in Jordan May 25. “Clearly the economy is not back to normal, and to accept this as the new normal would be really wrong.”

U.S. stocks dropped and Treasuries fell for a fourth week, the longest slide since August, after Chairman Ben S. Bernanke said the Fed may cut the pace of asset purchases if policy makers see indications of sustained growth. Orders for durable goods increased more than forecast in April, signaling the economy will get a lift in the second half of the year.

The U.S. economy “is still in the recovery phase, so maintaining the momentum of the growth is still a main issue” even after strong growth in the past few months, International Monetary Fund Deputy Managing Director Zhu Min said in an interview on the same day in Jordan.

Growth may slow this year to 2 percent from 2.2 percent in 2012 before expanding 2.7 percent in 2014, the fastest pace since 2006, according to the median estimate of 83 economists on Bloomberg.

Federal Reserve Bank of New York President William C. Dudley said last week policy makers will know in three to four months whether the economy is healthy enough to overcome federal budget cuts and allow the central bank to begin reducing record stimulus.

Weak Evidence

What makes the debate over the Fed’s stimulus difficult is that “the evidence that it provided much stimulus to the economy is very weak,” Stiglitz, a former chief economist at the World Bank, said. “It may have contributed to asset price bubbles, it may have contributed a little bit to the weaker dollar, which actually helps U.S. exports.”

Speculation about the pace of U.S. recovery comes amid a slowdown in China, the world’s second-biggest economy, as authorities seek to emphasize the quality of expansion and urbanization to boost domestic demand. Gross domestic product grew 7.8 percent last year compared with 9.3 percent in 2011.

China’s President Xi Jinping signaled a tolerance for slower expansion to avoid environmental degradation as policy makers outlined plans for the private sector to take a bigger role in boosting growth.

“A slowdown in China’s economy is not necessarily bad news,” Zhu, a former deputy governor of the People’s Bank of China, said. “You need to move the growth model from more investments in exports into internal consumption. It’s very good that the government is not overly emphasizing on the growth rates.”

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