U.S. Economy Showdown: Krugman vs. Bernanke

Nobel Prize winning economist Paul Krugman has some critical words for how Team Bernanke is handling the U.S. economy.

The Princeton University professor suggested on Bloomberg Television's "Street Smart" program Monday that U.S. Federal Reserve policy makers, under the guidance of Chairman Ben Bernanke, are "reckless" for refusing to pursue inflation.

Krugman argues that higher inflation could lower the staggering U.S. employment rate that has lingered for more than four years.

"The reckless thing is to allow mass unemployment to continue," Krugman said Monday. "We have had a massive failure of our political system that has come to accept that 8% unemployment is the new normal and there is nothing that can be done. We're in a low-key version of the Great Depression."

Krugman vs. Bernanke

Krugman maintains that the Fed should bear inflation of 3% to 4% to boost the ailing economy and put the millions of long-term unemployed Americans back to work. His retort was to comments Bernanke made during the past week in which he stated that such a policy would be "reckless."

On the Bloomberg TV show Monday, Krugman alleged that the Fed should hold its benchmark interest rate low until "well past" late 2014. The Nobel Prize winner also said the U.S. can handle more fiscal stimulus.

"There is no reason to panic over our debt now. If you cut spending now, what it does is depress the economy. It's a self-defeating policy."

Krugman and Bernanke have crossed paths before. The Fed chairman hired Krugman at Princeton in 2000, when he was chairman of the economics department.

An April 24 article in The New York Times Magazine titled "Earth to Bernanke" started the volley of words between Bernanke and Krugman. In the piece, Krugman avows that permitting a more rapid increase in consumer prices parallels Bernanke's words in 2000, in which he commented that the Bank of Japan should pursue faster inflation to escape deflation.

"What we really want from the Fed now is that kind of resolve to do whatever it takes, which is what Ben Bernanke thought Japan should have been doing in the year 2000," 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."

In a press conference last week following the FOMC meeting, Bernanke reiterated that key interest rates will remain at extremely low levels, through at least 2014. The Fed chairman also addressed Krugman's denigration.

"So there's this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies," said Bernanke. "That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time."

Bernanke adamantly rebuffed Krugman's policy recommendation, saying "The question is, does it make sense to actively seek a higher inflation rate in order to achieve" a slightly faster reduction in the unemployment rate.

"The view of the committee is that would be very reckless," Bernanke said.

Presidential candidate Rep. Ron Paul, R-TX, often goes against Fed policies, but totally dismissed Krugman's argument for higher inflation.

"Inflation is theft," said Paul, author of the book "End the Fed." "You are stealing value from people who save money. It really destroys an important feature of the economy-and that is saving."

U.S. Economy and Jobs

Krugman's comments imply that current policies and current leaders have led the U.S. into a recession. Those are not welcome words at anytime, but especially during an election year.

Since February 2009, under the Obama administration, the unemployment rate has topped and persists above 8%. Forecasts are for the jobless rate to remain at 8.2% in April, according to a Bloomberg News survey prior to a May 4 report from the Labor Department.

In the period preceding the Great Recession, which first reared its ugly head in 2008, the U.S. unemployment rate was considered to be at a healthy level of 5%.

Economists have continued to warn that we may have to settle for a new higher than normal level. To get to that level we need to create some 12 million jobs - and that number may be prudent.

Currently we are adding just 100,000 jobs a month, and in addition to putting the unemployed back to work, new individuals are also entering the workforce.

While it is hard to refute the notions of a Nobel Prize winner, it is also hard to willingly accept inflation, which slowly chips away at an individual's wealth.

As iconic Milton Freeman said, "Inflation is taxation without legislation."

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