2010-07-08 10:56

WASHINGTON - Nobel Prize-winning economist Paul Krugman said the US should have a "kitchen-sink strategy" that uses all fiscal and monetary policies possible to prevent the economy from sliding back into a recession.

"We are looking at what could be a very long siege here," Krugman said in an interview. "We really are at a stage where we should have a kitchen-sink strategy. We should be throwing everything we can get at this."

At a time when European countries such as Germany are calling for austerity measures to rein in budget deficits, Krugman is calling for more stimulus to prevent a repeat in the US of Japan's decade of economic malaise in the 1990s.

"The most effective things you can do, in terms of actual bang for the buck, is actually having the federal government go out and hire people," he said. "We are deep in the hole here, and you need to be unconventional to get out of it."

He said too many policymakers and commentators are overly concerned that the ballooning US deficit would set off a crisis of confidence similar to Europe's sovereign debt crisis. Krugman said he's concerned US policymakers would be unable to agree to short-term stimulus for the economy along with long-term measures to curtail the deficit.

"I worry about the politics," he said. "I worry about our ability to get a consensus to do the pretty straight-forward things we need to do to balance our budget in the long run."

The projected US budget gap in 10 years can be brought under control with a "combination of modest tax increases and reasonable spending cuts", particularly on health care, Krugman said, adding it's "extremely unlikely" the US would ever default on its debt.

"I'm not aware of any example of a country that got into fiscal difficulty because it began a stimulus program and couldn't take away the stimulus program," he said. "If you're serious about fiscal responsibility, you should not be saying, 'let's skimp on aid to the economy in the middle of a financial crisis'."

Krugman forecast the economy will grow at about a 1 percent pace or slightly faster within six months, and that job growth would be less than the rate of growth of the population. He said in six months, the US would be facing a "labor market that's getting worse not better".

The US Labor Department reported last week that employment fell by 125,000 workers in June, the first jobs decline this year, because of layoffs of temporary census workers. Private companies added 83,000 people, a smaller-than-forecast gain that capped a month of data indicating weakness in industries from housing to manufacturing.

Other reports last month showed a plunge in home sales, a slump in consumer confidence, cooler manufacturing and less growth in the first quarter.

The lack of jobs will curtail consumer spending, which accounts for about 70 percent of the world's largest economy, and restrain sales at retailers including Barnes & Noble Inc. The rebound from the worst recession since the 1930s faces risks from the European debt crisis and slower growth in China at the same time that fiscal stimulus measures fade.

"We are, I think, sliding into a situation where we're likely to see several bad years ahead," Krugman said. "Given what I see in the political process, the odds are against us avoiding a really prolonged bad period."

Bloomberg News