The great controversy over inflation

eThere was now a dramatic exchange of blows on inflation on the Internet, organized by Markus Brunnermeier, a German-born professor of economics from Princeton University in the US: American economics star Paul Krugman and Lawrence (“Larry”) Summers met with a discussion of inflation. That was about a year after the topic was previously discussed in the same place, but before US inflation reached historic levels. The organizers called the astonishing meeting the “Super Bowl of Economics”.

Inflation risk? One warned, one “was relieved”

Both economists have things in common, but there are also strong differences: Politically, in a divided America, both are more likely to be attributed to Democrats. Both argue economically in the broadest sense of ‘New Keynesian’, as the broker Brunnermeier put it. However, Krugman, the Alfred Nobel Memorial Prize winner in economics, always enjoyed making fun of people who constantly warned about inflation in the columns of his sect in the New York Times. “Inflation is coming” he called those worried who fear inflation at every opportunity and therefore prefer to invest their money in gold.

In the previous discussion a year ago, Krugman was still very “comfortable” about inflation expectations, he now recalls. Summers, on the other hand, although for a long time was a proponent of a more expansionary budget policy to stimulate the economy, he already warned at the time: the so-called “Biden plan” of an additional $1.9 trillion in government spending would hurt an already congested economy. In the United States – and thus will inevitably lead to inflation.

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The debate begins with a confession: A year ago, says Krugman, he was wrong: “I was comfortable, and I was wrong.” Previously, when the US Federal Reserve started, large-scale bond buying would have warned many of inflation. At the time, he was correct in his position that this would not happen. But inflation is now back much more than he had imagined. A year ago, he basically argued that Biden’s package wouldn’t have as strong an impact on inflation as others thought. Krugman admits that, among other things, he underestimated the difficulties in supply chains and other consequences of reopening the economy. “We all had to learn more about logistics than we wanted to.”