Inflation dove Paul Krugman, hawk Larry Summers unite ahead of Fed meeting

As the calendar turns to 2023, marking a new phase in the months-long fight against record inflation, America’s two leading left-of-center economists—Paul Krugman and Larry Summers—continue to debate the best way forward. Over the past two years (like most of the past two decades), they have not agreed on much, but as Nobel laureate Krugman told Bloomberg TV on Monday, “It really bothers me to say this, but I think I agree with Larry.”

The comments are surprising in the sense that Krugman has been targeting the post inflation dove for the past two years, first insisting it was “transitory” and later admitting that he false, but generally breaks with Summers’ hawkish stance. Krugman argues that US inflation is cooler than official data suggests, helping to give markets hope that the Federal Reserve will stop tightening monetary policy and raising interest rates. Summers, the Harvard professor and former Clinton and Obama administration official, has actually been sounding Krugman for several weeks, heating up the idea for the US to achieve the expected “soft landing.” What is clear is that the two longtime acquaintances agree that the US economy is in a difficult place to understand right now.

“I’m a little concerned that the markets might get ahead of themselves,” Krugman told Bloomberg TV on Monday. The Princeton economist and New York Times The columnist says that markets and financial writers now largely agree that “inflation is behind us.”

“That’s what makes me nervous, every time I see people in such great agreement,” he said.

Krugman was also asked about comments Summers made on Bloomberg TV last Friday.

In that interview, Summers suggested the US central bank would not reveal its next steps after its interest rate decision on February 1. The Fed should “maintain maximum flexibility in an economy where things can go either way,” he said—and should avoid explaining that the fight against inflation has been ended by the public commitment to stop the interest rate. hiking.

Summers describes the US economy as a car, with the Fed in the driver’s seat. “They were driving the car on a very foggy night,” said the economist.

Krugman used the same comparison on Monday when he spoke of his feelings of agreement with Summers. “We’re trying to operate the controls on some pretty sensitive machinery, in the dark, wearing gloves.”

He added that he agreed with Summers that the governor is as likely to overestimate inflation as to underestimate it. “We can get it wrong, one way or another, and there’s a reasonable chance in either direction,” Krugman said.

Pigeons and pigeons meet

Summers and Krugman have a long history. The two joined the staff of the Council of Economic Advisers under US President Ronald Reagan in 1982, each serving for one year. Summers went on to positions at the World Bank, followed by the Clinton and Obama administrations, while Krugman became a widely read commentator on economics and politics, and both held influential posts as professors at the Ivy League, plus in their frequent appearances in the media and opinion. columns.

The two take different positions on left-of-center US economic policy, with Summers favoring more moderate and market-oriented policies, and Krugman supporting big government stimulus and looser monetary policy. .

There may be a personal aspect to the debate, as Krugman is a prominent critic during the Great Financial Crisis on a stimulus program that he viewed as too little. The architect of that stimulus was none other than Larry Summers. The shoe is on the other foot during the pandemic, it seems Krugman advocates for “large, deficit-financed public investment on an ongoing basis” and then welcomed the Biden stimulus which is almost twice the size of Obama’s. This time, Summers criticized it is hotly termed as the “most irresponsible” economic policy in 40 years (before inflation hit levels not seen in… exactly four decades).

Yet Summers and Krugman have changed their tone on inflation with new economic data showing that price increases are slowing. The US reported a 0.1% month-on-month decline in the overall consumer price index for December, the first decline in more than two years, mostly driven by a drop in gas prices. Although core inflation, which excludes volatile energy and food prices, rose 0.3% from last month.

Summers spent most of 2021 and 2022 as a inflation hawkfirst arguing that the massive US fiscal stimulus will cause price increases throughout the economy, then claiming that a tight labor market raises wage costs, and thus prices.

The former US Treasury Secretary cast doubt on the possibility of a “soft landing,” where the Fed brings inflation under control without causing an economic downturn. Instead, Summers thinks inflation risks getting so bad that the U.S. has to slow down the economy—and cause unemployment. up 6%—to control inflation.

Krugman, on the other hand, argues that the high inflation numbers in the US are distorted by short-term distortions, especially in housing and rents. The Nobel Prize winning economist is more optimistic of the possibility of a “soft landing” as the impact of these shocks begins to fade.

Summer’s look has softened in recent weeks. At the World Economic Forum earlier this month, Summers appointed on cooling inflation data and the reopening of China as “reasons why we should feel better than we did a few months ago.”

The Fed will announce its decision on interest rates on February 1. Economists hope that the US Federal Reserve increasing rates by a quarter of a percentage point, but will vary if the central bank announces that more rate hikes are on the way.

Yet Summers and Krugman seem to agree that the war against inflation is far from over. “Markets are pricing in that inflation is over. That may be a self-defeating prophecy,” Krugman said. SAYS on Monday.

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