Krugman Calls for Second Stimulus, Suggests 'Environmental Policies' to 'Change Things'

August 10th, 2009 5:11 PM

Only $120.4 billion, or 15 percent of the gigantic $787-billion stimulus has been spent and some on the left, including Nobel Prize-winning economist and New York Times columnist Paul Krugman, are already calling for Stimulus, Part II.

In an interview with CNBC Asia from the World Capital Market Symposium on the Aug. 10 broadcast of "Squawk Malaysia" Krugman said the stimulus that passed earlier this year was inadequate.

"We should be doing something to give the world, well give each of the major economies more of a jolt," Krugman said. "I mean, we've had these stimulus packages, but they were all inadequate. The United States, it was clear from day one that this wasn't going to be big enough."

One of these "jolt"-producing government actions would come in the form of cap-and-trade according to Krugman, although even some in the news media admit that cap-and-trade would result in cost increases. Other critics say it will be like a tax on American people and hurt the economy.

"I actually think that environmental policies - the, uh a clear-cut target for emissions reduction would actually lead to a lot of business investment to change things," Krugman said.

The Times columnist said it would be appropriate to "forcefully" experiment with "a lot of things."

"We have to I think, try a lot of things, but we need to try them forcefully," Krugman added.

A second stimulus could mean higher taxes or hyperinflation according to Jerry Bowyer. Bowyer wrote that, "Ben Bernanke has managed to make inflation hawks of us all. An unprecedented explosion of the monetary base has driven the federal-funds interest rate from 5.25 percent all the way down to 0 percent. So much money is sloshing around the system that banks are now lending to one another for free." Bowyer cited others worried about inflation including Larry Kudlow and Forbes publisher Rich Karlgaard.

However, Krugman disagreed claiming the government could take the unprecedented measure of reversing such a large spending program.

"I think that's the old line from the Great Depression - crying ‘fire, fire amid Noah's flood,'" Krugman said. "I mean we have no sign of inflation on the horizon. There's nothing in there that would be inflationary. You have to understand that right now putting money into the system, it just sits there. And, it's quite easy to pull it out again if inflation starts to loom. So I think the real challenge is that you announce an inflation target and you fail to achieve it."