"It sounds too extreme, but game it out," Krugman said.
Krugman, a Princeton University professor, New York Times columnist and winner of the 2008 Nobel Memorial Prize for economics, spoke to a full house at the library as part of a tour promoting his book, "End This Depression Now!" For about an hour, he fielded questions from Moody's Analytics chief economist Mark Zandi, then took several from the audience.
Though malfeasance helped cause the 2008-09 financial crisis, its severity was due primarily to the buildup of debt during the previous two-and-a-half decades of stability, which lulled businesses, consumers and regulators into a dangerous state of complacency, he said.
It's clear Fannie Mae and Freddie Mac did not cause the crisis, he said. They entered the subprime market only after private lenders did and to a much smaller extent. Besides, he said, American government-sponsored mortgage lenders hardly could have created the real estate bubbles in Ireland and Spain.
He praised the Federal Reserve and the Bush and Obama administrations for their handling of the acute phase of the 2008-09 financial crisis, but reiterated his criticism that subsequent action was inadequate and the shift in focus to deficits was unnecessary and misguided.
Once you subtract state and local budget cuts from the federal increase in spending, there was essentially no net stimulus, Krugman said. Far better would have been a stimulus of $1.4 trillion, roughly twice the size of the one enacted, with fewer tax cuts and more support to states and municipalities for retaining teachers, police and firefighters, he argued.
As for deficits, though the U.S. must rein in health care costs at some point, the rate on 10-year Treasury notes is less than 2 percent, hardly the rate of a country deemed a credit risk, he said.
Krugman argued for much stronger action by the Federal Reserve to stimulate demand and fight unemployment. The Fed should credibly commit to a higher inflation target, around 4 percent, to make holding cash less attractive and spur economic activity, he said.
Increasing income inequality is leading to more polarized domestic politics, and that has harmed the nation's policies toward the crisis, he said. Wealthy interests have bankrolled think tanks devoted to undermining serious economic scholarship, creating "carefully financed learned ignorance," he said.
Asked about means testing for Social Security and Medicare, he offered several arguments against means testing in general. It adds administrative costs but doesn't save much money, and it makes programs more intrusive in people's affairs, he said. Most importantly, it risks perverting the incentives for low-income people, effectively imposing a heavy tax by withdrawing important benefits as their incomes rise.
"Means testing is anti-market," he said.