A Brief Comment on the Economy – Krugman and Summers

Paul Krugman said yesterday (April 10, 2022) on his twitter feed that he is worried about inflation due to wage pressures, even though inflation may decline somewhat in the near future because of the “bullwhip effect,” which can cause some freight and wholesale prices to decrease in the short-term. 

Krugman is now beginning to agree with Larry Summers and has quit what had been called “team transitory.” Both now agree that the Fed needs to increase interest rates; Summers has called for, among other things, an increase in immigration to alleviate wage pressures.        

However, there may be some differences in view. Summers has criticized the Fed for keeping monetary policy loose for too long and the Administration and Congress for too much spending to counteract the effects of the pandemic. Krugman has not as of now been critical of these government actions and has praised the good job growth in the economy which he says the media has underplayed. The data, though, compel him to recognize the inflation risk. 

Both Krugman and Summers are old enough to remember the stagflation of the 1970s and what Paul Volcker felt compelled to put the economy through to end a dangerous inflation cycle. Out of control inflation can be deeply corrosive to both the economy and the political system. Krugman and Summers do not want to relive any part of that again. For now, they are both correct; the Fed has to keep inflation in check even if that means some economic pain in the next couple of years. 

What is missing, though, is an explicit long-range model of the economy. Do they both really believe that the labor must be constantly subdued to keep inflation in check? Both are Democrats and should have some progressive ideas of how to deal with income inequality and not just at the margin (taxing a few billionaires more is probably justified but does not address the problem of growing income inequality). As far as their politics are concerned, I mention in passing that Krugman is the more progressive of the two, but Summers has been more active politically. 

Krugman is currently the more modest in his predictions, given that he felt compelled to leave team transitory. Also, to those who know him or follow him, it is no surprise that Summers is less than modest when giving his opinions, but he is almost always worth listening too, even if one does not fully agree. 

No one fully understands the economy, not even these two, and unpredictable events (there are those among us who thought Putin was bluffing to destabilize the west and get some concessions) can have an enormous effect. For example, Europe, too, is struggling with inflation under very different institutional setups than the U.S., different government policies, and dependence on Russian fossil fuels. Europe’s struggles undoubtedly will affect the U.S. both politically and economically.