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.
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.”
Moderator Brunnermeier said Paul Krugman didn’t lean much out the window last time. “But I think he also took the view that stimulating the economy is important in order to reunite the country and win over some Trump supporters in the midterm elections.”
On the other hand, Summers, the Harvard economist, savored his victory moderately. “Paul and I are now closer to an agreement than we were a year ago,” a diplomat said. Summers also stresses the importance of demand over inflation, while Krugman mainly emphasizes unexpected developments on the supply side due to his miscalculation.
‘Ending prosperity is always hard’
And how things go now, broker Brunnermeier wants to know: Does Krugman belong to the “#TeamTransitory”, those economists who predict inflation will drop soon, while Summers belong to the “#TeamPersistent”, those scholars who think inflation is here to stay?
This appears to be the trend. In any case, Summer says he thinks the Fed’s assessment that some inflation will go away on its own is too optimistic. In addition to rising demand with supply bottlenecks, there are now also new upward risks to inflation, for example due to geopolitical tensions having consequences for energy prices.
Krugman noted that inflation expectations in particular played an important role. It is important here to look at people’s behavior patterns. “In the inflation years of the 1970s, everyone acted as if there was always inflation, and that led to inflation.” Now the behavior is not what it was in the seventies. But it can happen: “You have to be careful out there.” However, the US economy does not need more stimulus: “If I were from the Fed, I would advocate raising interest rates.” The question is to what extent and at what speed.
It is clear that stellar economists do not have much use to worry about “financial dominance”, that is, monetary policy of central banks is dominated by the interests of heavily indebted countries with low interest rates. Brunnermeier wrote a book about it. This may be a theoretical risk, but as long as post-inflation interest rates remain negative, pressure on sovereign debt sustainability is low, Summers said. Krugman said the sentence: “The United States is not the Weimar Republic.” Concerns about the development of emerging countries that are now heavily indebted “is not a good reason to be a monetary policy dove,” that is, to advocate for somewhat loose monetary policy, Summers said.
In any case, both economists expect the US central bank to raise interest rates several times this year. However, Summers emphasized that this method of fighting inflation would not be easy and convenient for the Fed. It is not possible for the Fed to gently take its foot off the gas, and it must slow down: “Ending the boom is always difficult.”
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