Tags: Krugman | Fed | taper | err

Krugman: Please Don't Taper

By Michael Kling   |   Tuesday, 17 Sep 2013 08:26 AM

Nobel Prize-winning economist Paul Krugman is sending a desperate plea to the Federal Reserve as it considers shrinking its quantitative easing stimulus:

"Please don't do it," Krugman writes in his New York Times column.

The risks of tapering its stimulus too soon far outweigh the risks of continuing them, he contends.

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Tapering too quickly, he warns, "could damage an already weak recovery, causing hundreds of billions if not trillions of dollars in economic damage, leaving hundreds of thousands if not millions of additional workers without jobs and inflicting long-term damage as more and more of the unemployed are perceived as unemployable."

Now is not a good time to be even talking about monetary tightening, he argues.

Proponents of ending quantitative easing argue that it has little positive impact. Yet short-term as well as long-term rates, particularly mortgage rates, have jumped in response to speculation about the Fed's plans.

"In effect, by talking about tapering, the Fed has already tightened monetary policy quite a lot," Krugman explains.

Some, pointing to the unemployment rate that's fallen to 7.3 percent, say the economy has improved and may begin to overheat. But that 7.3 percent rate is misleading, Krugman cautions, saying it's due mainly to workers dropping out of the labor market. Many will return to the work force as the economy improves, "which means that we have more ground to make up than that unemployment number suggests."

Inflation is the least of our worries. It's now below the Fed's 2 percent target, and many economists have argued for a higher target, he notes, counting himself in that group.

The Fed must not fall into the trap of fretting about hypothetical future risks, like a fiscal crisis that never came, at the expense economic damage happening now.

"To err is human; to err on the side of growth is wise," he urges.

"Don’t taper, don’t tighten, until you can see the whites of inflation’s eyes. Give jobs a chance."

Just talking about tapering has caused tighter fiscal conditions, agrees The Economist magazine.

"The shock waves have been felt across the globe, raising bond yields in Europe and sending emerging-market currencies plunging. And at home the economy, though perking up, is still less robust than it should be."

The Fed must taper slowly, say cutting monthly bond purchases from $85 billion to $75 billion a month, and err on the side of loose monetary policy, the magazine argues.

"Premature and forceful monetary tightening could choke off a still-fragile recovery."

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