US desperately needs another big stimulus: Paul Krugman

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In the last few weeks, the recovery in the US economy has slowed considerably, after encouraging signs earlier in the year. While most economists and policymakers have called for austerity measures for most economies, Nobel Prize winning economist Paul Krugman says the US economy desperately needs another big stimulus. Krugman spoke to CNBC's Trish Regan.

Below is a verbatim transcript. Also watch the accompanying video.

Q: Overall what would you say is the bottomline here, has the stimulus now worked in the way you would have hoped?

A: The stimulus has worked just about the way I had expected, which is to say that it's been a help, but it's pretty modest thing. USD 800 billion sounds like a lot of money, but this is spread over a period of more than two years, gross domestic product (GDP) over that period is more than USD 30 trillion. There was an undersized packaged given depth of the crisis, which some of us said from the beginning. So, it's helped, but it wasn't enough.

Q: I remember you telling me that right about the same time that it was rolled out you were concerned that it wasn't enough and now when you look at the situation today, what do you think needs to be done? Do you think we are taking about more spending to try and get this economy back on track?

A: Sure, I mean let's wave aside the problems of politics for a moment, everything is pointing to need for more spending. The economy remains depressed, the stimulus is fading out, the maximum impact on growth on last quarter of 2009 is going negative at this point as some of the spending ramps down. The economy has not gotten over this crisis, the bond market is telling us that not to worry about current deficits, they are happy to learn the Federal government money at very low rates. But the bond market is telling us that there is deflation of a weak economy for a very long time. So, all the economic data make a case for a stimulus.

Q: How much though?

A: As big as the first one. The economic situation is worse now in terms of unemployment and inflation.

Q: Would you include a payroll tax cut? Would you look at extending the Bush tax cuts, would you look at corporate tax cut as part of that stimulus?

A: On the last two definitely not because what is a temporary tax cut because we had a four depriment tax cuts. If you give a temporary tax cut to wealthy people who are likely be highly liquid, they are not going to spend very much of it at all. Give a temporary tax cut to corporation, which are sitting on positive cash, they are not going to spend any of it. So that's just ineffective stimulus.

A payroll tax cut is not bad, it's putting money in hands of people who might well spend it, government spending is a good thing is probably the best thing, we have enormous infrastructure need in this country, which are not being met. Even aside for the need to stimulate the economy when the Federal government can borrow very cheaply that is a good idea to get some projects started. But basically I would take whatever we can and accept that those high end tax cuts, corporate tax cuts are sort of going where the problem isn't and that just a waste of money.