In a wide-ranging interview with Advisor Perspectives, Nobel Laureate, Princeton Professor, and New York Times columnist Paul Krugman says not to quit on the government’s current stimulus package, that he’s not too afraid of inflation, and that stocks don’t appear to be significantly over- or undervalued right now.
Regarding the stimulus, Krugman says, “It’s important to remember that the stimulus package has barely kicked in, a point that is lost in the 24/7 reporting on the economy. According to a recent Goldman Sachs report, only $2 billion, or less than two percent of funds allocated to infrastructure, has actually been spent. … By the end of the second half of the year, I expect we’ll see positive growth over the next few quarters. And that wouldn’t be happening without the stimulus package.”
Krugman — who still says he thinks even more stimulus is needed to help with unemployment — adds that the controversial stimulus spending issue comes down to this: “Without deficit spending, would our long-run prospects be better or worse? I can’t come up with any analysis that suggests we would be better off without the deficit spending, both in the short- and long-run.”
In addition, Krugman says the stimulus spending won’t hamper private investment. “The money funding our deficit spending will come from eventual increased economic output,” he says. “It’s not coming at the expense of private investment. By making the economy stronger, it’s actually promoting private investment.” The country’s real fiscal problem is rising healthcare costs, he says. “Our current deficit spending is only marginal in effect compared to this [healthcare] issue.”
All of this spending could lead to inflation, but it’s not likely, Krugman says. “I don’t think inflation is that hard to contain,” he said. “Remember, the Fed has not been printing vast quantities of money. We’ve had the Fed lending large amounts of money to the banks, which has led to a surge in bank reserves. … So when banks start to lend again, all the Fed needs to do is to stop providing monetary support and start reeling in what they already allotted to banks.” If banks start to shift their reserves out of Fed deposits and into the economy, the Fed would need to soak up the money by borrowing, or by sell off some of the bank assets it’s acquired, he said. “Either way, it’s just a matter of unwinding positions the Fed already holds.”
As for the stock market, Krugman says “stock prices don’t look wildly undervalued, nor do they look overvalued either. … The stock market is right where it was in January, when we were already in a severe economic crisis. All that’s happened is that ‘end-of-the-world’ scenario has given way to a bit more realistic but still fairly negative view.”
Sign up for The Guru Investor’s Free Weekly Email Summary