Bloomberg News

Krugman Says Fed Low Rates Key to Housing Rebound: Tom Keene

February 15, 2013

Nobel Prize-winning economist Paul Krugman said the Federal Reserve must keep interest rates low to sustain the U.S. housing recovery.

“We have the beginnings of a housing recovery, it’s just starting to kick in,” the Princeton University economics professor said in an interview today on “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “If the Fed were to raise rates, they would kill that.”

Central bank policy makers have said they will keep their benchmark lending rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. U.S. unemployment rose to 7.9 percent in January, even as the economy added 157,000 jobs.

The housing market has been a bright spot in the economy, with housing starts rising 12.1 percent in December to cap the industry’s best year since 2008.

Krugman called the housing recovery the “best chance” the U.S. economy has to expand. The U.S. should have learned from Japan, which “repeatedly aborted its recovery by tightening too soon” during that nation’s own crisis.

The U.S. is already five years into a crisis that mirrors the Asian nation’s so-called “lost decade,” Krugman said. The period in the 1990s saw Japan’s economy slip in and out of recession and grow at an average rate of about 1 percent a year after the collapse of a real-estate bubble.

Like Japan

“We already are Japan-like, we’re worse than Japan ever was,” he said. “The human misery here is much worse than Japan has ever suffered.”

He said the U.S. needs to build infrastructure and that it is acceptable to pump money into the economy to jumpstart growth.

“At times like this, the usual rules don’t apply,” he said.

America’s problem now is unemployment, he said, and, while the nation should worry about its long-term debt, it first needs to get joblessness in check.

“There is no debt crisis,” he said. “The state of our budget in the year 2030 is an issue, but that issue should not get in the way of creating jobs right now.”

Americans are “asking too much” of the central bank, Krugman said, as fiscal policies that slash spending threaten to undermine the recovery.

“To have fiscal austerity, be cutting back on the U.S. government, and then expecting the Fed to make up for that when interest rates are already zero, that’s placing too much on the Fed,” Krugman said.

Krugman said he supports President Barack Obama’s proposal to raise the U.S. minimum wage to $9 an hour.

“It is going to help some vulnerable people,” he said.

Speaking about the economic crisis in Europe, Krugman said he is surprised Greece hasn’t left the euro yet, though he still thinks a Greek exit is “more likely than not.”

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

To contact the editor responsible for this story: Kevin Costelloe at kcostelloe@bloomberg.net


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