NEW YORK (Reuters) - Paul Krugman has a simple message for U.S. policymakers: Forget about the country’s huge budget deficit. It can be fixed over the next decade. Focus instead on the much more immediate problem of mass unemployment.
“It’s not true we’re going over a cliff on fiscal problems,” the Nobel Prize-winning economist said in an interview with Reuters TV. “We are already over a cliff on the unemployment problem, and that is the thing to worry about.”
Krugman, whose new book, “End This Depression Now!,” chastises officials on both sides of the Atlantic for trying to get fragile economies back on track through austerity, said arguing over how to fix the U.S. budget deficit is a waste of political energy in a time of crisis.
“Every attempt to deal with the deficit turns into an enormous battle,” he said. “Meanwhile, 3.9 million Americans have been out of work for more than a year. That should be, overwhelmingly, our priority. We should be focusing on the clear and present danger.”
Data last week showed U.S. hiring slowed in April for a third month and the jobless rate stood at 8.1 percent. The participation rate, a measure of how many working-age Americans are either in work or actively looking for a job, fell to a 30-year low.
Worries are rising about a new U.S. summer slump. Also of concern is the severe hit the economy would take from a raft of spending cuts and tax hikes set to take effect in January - dubbed the “fiscal cliff” - unless politicians in Washington agree on ways to postpone at least some of them.
Asked what he would do if given tsar-like powers over the U.S. economy, Krugman, who has long argued in favor of aggressive government spending to tackle economic downturns, endorsed a “big slug” of aid to state and local governments of roughly $600 billion over two years.
He also said U.S. home financing agencies Fannie Mae and Freddie Mac should refinance under-water mortgages, which could ease the debt burden of millions of Americans.
Such policies would face near-insurmountable political hurdles, he acknowledged, saying he felt it was his duty to raise his voice against the focus on spending cuts.
“All you can do is make your case,” he said.
U.S. deficits surged when the financial crisis cut tax revenue and the government ramped up spending to stave off the risk of a depression. In the fiscal year that ended last September, the U.S. shortfall stood at $1.3 trillion, one of the highest since the years immediately following World War Two.
Krugman, a Princeton University economics professor, said the United States does face a long-term fiscal crunch but warned against strangling an economy that can barely breathe on its own.
The same goes for Europe, where countries are trying to tighten their belts even as they fall into recession. “All this austerity is actually self-defeating. We’re seeing countries slash spending and drive their economies into a ditch.”
Krugman was speaking on Friday, before French Socialist Francois Hollande, a critic of austerity, won France’s presidential election on Sunday.
“We’re very much like medieval doctors who thought the treatment for illness was to bleed you, and when the patients got sicker, to bleed them even more,” he said.
Deficit hawks in Congress worry that the size of the U.S. shortfall means creditors will eventually require much higher interest rates to lend money to the United States.
Krugman said there’s no sign of that happening.
“Advanced countries that borrow in their own currency have amazing resilience,” he said. “People have been calling for an imminent Japanese debt crisis for a dozen years at least, and anyone who invested on that basis has lost scads of money because the Japanese, despite debt levels around 200 percent of GDP, continue to borrow at very low interest rates.”
Krugman reserves some of his criticism for the Federal Reserve and his one-time Princeton colleague, Fed Chairman Ben Bernanke, for not living up to the bold ideas he espoused as an academic.
In his new book, Krugman recalls how Bernanke in 2000 urged the Bank of Japan to target a higher inflation rate to climb out of a similar economic crisis.
“There have been no loud voices saying, ‘Hey, what happened to all those activist measures you yourself advocated 12 years ago?’” Krugman said.
Raising the Fed’s inflation target to 4 percent from its current 2 percent, a taboo for many policymakers, would encourage households to spend and businesses to invest, generating more hiring and economic activity, Krugman said, adding he was only trying to help his former colleague by countering the criticism of the Fed’s measures to date.
“I’m doing him a service... The next time ... he’s being confronted by someone saying ‘inflation, inflation, you’re going to turn us into Zimbabwe,’ he can say that people like Paul Krugman say I’m not doing enough to promote the economy.”
Editing by William Schomberg and Padraic Cassidy