Krugman says Obama not doing enough, US needs stimulus II

Excerpts from Your World at 10 on CNBC-TV18 Watch the full show » RELATED NEWS World recovering from financial crisis: Paul Krugman Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Q: The theme of this conference that we are at is the way forward out of this crisis. What is the way?

A: We did do a reasonably good job of putting up a fire break, keeping this thing from going to a complete meltdown of world economy but right now the world as a whole kind of looks like Japan in the early 90s. Not a catastrophe, but we really don't know how we get serious growth going, possibility of years and years of sluggish growth, major excess capacity and high unemployment is very large.

Q: How similar are the parallels to that last decade in Japan where we were nowhere for 10 years?

A: The slump globally has been much worse than anything Japan had during that last decade, the first phase has actually been worse and the rest probably had tremendous destruction of wealth, the collapse of housing prices, equity prices, a lot of people in the world had decided they need to save more businesses, they are lacking any real driver for large scale investment. It is hard to see. This is scary stuff and we really don't know how you get a real comeback.

Q: Is that the worst case scenario, ten years of going nowhere like Japan if we don't do something and so what is that if and what would we be doing?

A: There are a couple of things. One is that we should be doing something that gives each of the major economies a more of a jolt. And we have had these stimulus packages but they were all inadequate, in the US it was clear from day one that this wasn't going to be big enough, and so if we really should have a second stimulus, we should have more stuff. It is nice to have some inflation targeting, some higher reeds that people are now building in, that would help. Mostly like we would like to have some driver for investment, and I actually think that environmental policies, a clear cut target for emissions reduction would actually lead to a lot of business investment to change things. But we really don't have a role model. Even Japan when it did come out of this last decade, it was export growth, and unfortunately, we cannot do that when it's the whole world. So we have to try a lot of things and we need to try them forcefully.

Q: You have been seeing quoting many times about a second stimulus package in the US. You also talked about inflation targeting but you put them both together, that's the worry isn't it, more stimulus, more deficit spending, it is going to jack-up inflation.

A: That's an old line from the great depression. We have no sign of inflation on the rise, there is nothing in there that would be inflationary, you have to understand that right now putting money in the system, it mostly just sits there and its quite easy to pull it out again if inflation starts to boom. So the real challenge is that you announce an inflation target and you fail to achieve it.

Q: What about the role of China in all this? You have been quoted talking about many times, you have been a bit skeptical about China and its role in the recovery saying it is rather simple as--save China, save the world--it would be fair that they are doing a pretty good job saving themselves, things have stabilized, things have recovered a lot sooner and faster than anybody thought?

A: China has poured in stimulus at a speed that nobody has been able to match. They were able to do that because they don't worry about corruption and misuse of funds, whether that is sustainable on their part is not completely true but the main thing is that China will be the world's dominant economy a generation from now. It is not yet and it is not big enough to service the local motive.