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Depression, double-dip and deficits: Economists speak out

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Heading for depression?
  • Nobel laureates Paul Krugman and Joseph Stiglitz say stimulus still needed
  • Ferguson: "U.S. treasuries are a safe haven the way Pearl Harbor was a safe haven"
  • Rogoff: "Spending and spending until you're blue in the face ... I think that's crazy"

(CNN) -- Economist Paul Krugman recently launched a powerful volley in the debate over the best path to growth following the Great Recession -- and dropped the "d" word to do it.

"We are now, I fear, in the early stages of a third depression," the Nobel Prize winner wrote in his June 27 New York Times column, referring to previous U.S. depressions that started in 1873 and 1929. "And this third depression will be primarily a failure of policy."

This week, CNN spoke with Krugman and a "who's who" list of some of the world's top business thinkers and asked, "What is the best way forward: More government stimulus cash, or cuts in government spending?"

Krugman told CNN that the crisis that began in 2007 and escalated in 2008 is only the third global financial crisis the world has seen since 1873 . "And we're responding to it in ways that almost guarantee, unless we do a U-turn on policy, that this is going to be another period like that," he said.

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Krugman argues that more stimulus cash is needed to jumpstart employment before the global economy, led by the United States, gets caught in a vortex of high unemployment and steady deflation -- which stagnates the economy as consumers, anticipating further price drops, wait to buy goods and services.

"If a worker's been out of the workforce for three, four years, it's going to be very hard for that person to get back in," Krugman said. "Each year we go on like this, we're drifting closer to deflation.

"We've basically dropped any discussion about doing further things to bring down unemployment, and instead it's all about budget austerity and we've got to bring those deficits down without any context and at a time when this really ... should not be our first priority," Krugman said.

Backing Krugman's concerns is fellow Nobel Prize laureate Joseph Stiglitz of Columbia University. "It is premature to remove the support for fiscal policies, and it's almost surely premature to remove the support for the banking system," he told CNN.

"We are not yet on the basis of a robust recovery. And particularly as the fiscal policies undermine the recovery, there is a serious risk of a double dip. And it is not a surprise to me that there is a high level of anxiety on the part of the banks.

Stiglitz believes the world is in danger of repeating U.S. President Herbert Hoover's mistakes in 1929 of slashing spending. "There is ample evidence on this," Stiglitz said. "We call these Hooverite policies (government austerity measures) in honor of Herbert Hoover."

Stiglitz said the U.S. should slash spending on military and invest more cash at home to encourage more business and stimulate tax revenues. "The result of that is that the long-term national debt will be lower," he said.

But Niall Ferguson, Harvard University historian and business school professor, argues that national debts need to be brought down in order for other developed countries to avoid the path of Greece, which saw investors turn away from buying its government bonds, sparking a crisis that enveloped the entire Euro zone.

"Are we going to try and play that Keynesian card again and have another fiscal stimulus, or are we going to just come to terms with the reality that there probably have to be tax increases and spending cuts pretty soon if the United States is to retain some kind of fiscal credibility in the international bond market," Ferguson told CNN.

"So in some ways, if you think of a financial crisis as a chain reaction, as something that goes from one phase to another without ending happily and quickly, we're entering a new and really quite scary phase. Europe is already in this phase," Ferguson said.

We're entering a new and really quite scary phase
--Niall Ferguson, author and Harvard historian

"The fiscal crisis, which is the next big phase of the crisis, is happening there now. The worry is that at some point in the next two years something similar is going to happen here and the U.S. is not going to have a Keynesian stimulus option anymore," he said.

"I would say the U.S. has a kind of stay of execution while the European crisis unfolds, but at some point the nasty fiscal arithmetic will get any country, even the United States, which is seen as, of course, the most attractive, the most safe haven country to invest in," he said. "I've been saying for a while that U.S. treasuries are a safe haven the way Pearl Harbor was a safe haven in early 1941."

Olivier Blanchard, chief economist for the International Monetary Fund, told CNN that right now the economy appears to be avoiding a 'double-dip' recession, but that could change depending on factors like the debt crisis in Europe. Still, government debts must be brought down, he said.

"There has to be fiscal consolidation -- we cannot continue with the deficits we have. But it should be done in a credible, medium term plan ... a plan that takes many years to establish a stable debt to GDP ratio."

Echoing those thoughts is Kenneth Rogoff, professor of public policy at Harvard and former chief economist for the IMF.

"You can't move quickly. I wouldn't advocate that. But the idea that you just keep spending and spending until you're blue in the face just because maybe we'll have a Great Depression? I think that's crazy," Rogoff said.

Richard Quest, Adrian Finighan, Andrew Stevens and Fareed Zakaria contributed to this report