As the calendar turns to 2023, marking a new phase in the months-long battle against inflation, two of America’s center-left economists – Paul Krugman and Larry Summers – continue to debate the best course of action. For the past two years (as in the last two decades), he has disagreed with many, but Nobel laureate Krugman. told Bloomberg TV was, “It really bothers me to say this, but I agree with Larry.”
The statement came as a surprise given that Krugman has been dovish on inflation for the past two years, first insisting it would be “transitory” and later admitting he was wrong, but mostly flouting Summers’ hawkish stance. Krugman has argued that US inflation is cooler than official data, helping to give markets hope that the Federal Reserve will stop tightening monetary policy and raising interest rates. Summers, a Harvard professor and former Clinton and Obama administration official, has for weeks, like Krugman, warmed to the idea that the US could get the “soft landing” it wants. Clearly, two long-time acquaintances agree that the US economy is difficult to understand right now.
“I’m a little worried that the market could go forward,” Krugman told Bloomberg TV on Monday. Princeton Economist and New York Times columnist says that markets and financial writers now agree that “inflation is behind us.”
“That makes me nervous, every time I see people in a lot of agreement,” he said.
Krugman was also asked about comments made by Summers on Bloomberg TV earlier Friday.
In the interview, Summers suggested the US central bank would not reveal its next steps after the interest rate decision on February 1. The Fed should “maintain as much flexibility in the economy as possible in any way possible,” he said—and should avoid it. shows that the fight against inflation is over with a public commitment to stop raising interest rates.
Summers characterized the US economy as a car, with the Fed in the driver’s seat. “They drive their vehicles at night too much,” said the economist.
Krugman used the same analogy when he spoke in agreement with Summers. “We’re trying to operate the controls on some pretty sensitive machines, in the dark, with gloves on.”
He added that he agreed with Summers that the Fed could only treat inflation as an understatement. “We’re going to be wrong, one way or the other, and there’s a fair chance in either direction,” Krugman said.
Hawks and doves converging
Summers and Krugman have a long history. Both joined the staff of US President Ronald Reagan’s Council of Economic Advisers in 1982, serving one year each. Summers moved to a position at the World Bank, followed by the Clinton and Obama administrations, while Krugman became a widely read economic and political commentator, and both had influential posts in Ivy League professorships, in addition to frequent appearances in the media and opinion. column.
Both sides have staked different positions on the left-of-center US economic policy, with Summers choosing more moderate and market-oriented policies, and Krugman supports large government stimulus and loose monetary policy.
There may be a personal aspect to the debate, as Krugman was a prominent critic during the Great Financial Crisis of a stimulus program he considered too small. The architect of that stimulus was none other than Larry Summers. The shoe was on the other foot during the pandemic, as Krugman advocated “sustained deficit-financed public investment” and then accepted Biden’s stimulus that was roughly twice as large as Obama’s. This time, Summers criticized it as the “most irresponsible” economic policy in 40 years (before inflation reached levels not seen in … exactly forty years).
However, Summers and Krugman changed their tone on inflation with recent 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 lower gas prices. Although core inflation, which excludes more volatile energy and food prices, rose 0.3% from the previous month.
Summers spent most of 2021 and 2022 as an inflation hawk, first arguing that the large US fiscal stimulus will cause price increases throughout the economy, then claiming that a tight labor market increases the cost of wages, and thus prices.
The former US Treasury Secretary is skeptical about the possibility of a “soft landing,” where the Fed brings inflation under control without triggering a recession. However, Summers thinks that inflation risks getting so bad that the U.S. has to slow the economy – and cause unemployment to rise to 6% – to control inflation.
Krugman, on the other hand, argues that the high US inflation figures are distorted by short-term distortions, especially in housing and rents. Nobel Prize winning economists are more optimistic of the possibility of “soft landing” as the effect of this shock begins to fade.
Summers’ outlook has softened in recent weeks. At the World Economic Forum earlier this month, Summers pointed to cold inflation data and China’s reopening 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 generally expect the US Federal Reserve to raise rates by a quarter of a percentage point, but they differ on whether the central bank will signal more rate hikes.
However, Summers and Krugman seem to agree that the fight against inflation is far from over. “The market is pricing in that inflation is over. This can be a self-fulfilling prophecy,” said Krugman on Monday.
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