Paul Krugman on the economy
I’m off giving various talks in Europe, and doing some homework. It seems to me that there’s a widespread (among wonks) narrative here that doesn’t actually look right, as suggested by this chart from Eurostat
The narrative is that inflation in the US and the euro area are quite different. The US is overheated, with additional inflation from supply chain+Ukraine. Europe, the story goes, is all supply chain etc, bc it didn’t have as much fiscal stimulus
But European unemployment — which is structurally higher than US — is below pre pandemic. Core inflation was 1 percent in the last month.
So actually the European story looks much more similar to the US than I thought. In both cases no reason to panic: no sign of inflation getting embedded, so what’s needed is cooling-off, not a punishing recession. But it’s really more or less the same story.
Originally tweeted by Paul Krugman (@paulkrugman) on May 30, 2022.
Here’s Krugman’s latest on this subject:
…[T]he economy is probably cooling off as the Federal Reserve’s monetary tightening gains traction. And the news flow on inflation has changed character. For most of the past year, just about every report on prices surprised on the upside. These days many, though not all, reports are surprising on the downside. Measures that attempt to gauge underlying inflation, like the “core” consumption deflator released this morning, are mostly, although not all, drifting down.
Furthermore, there is no hint in the data that inflation is becoming entrenched. Consumers expect a lot of inflation in the short run, but much less in the medium term:
Workers expect to see raises of only about 3 percent over the next year, barely above historical norms:
Markets have noticed the relatively good news on inflation. We can more or less directly calculate market expectations of inflation by looking at the “breakeven rate,” the interest rate spread between ordinary United States bonds and bonds that are indexed to protect investors against inflation. And breakeven rates have come down a lot over the past month or two:
Officials at the Federal Reserve have also noticed. They’re a long way from declaring victory and going home, however: Interest rate hikes are still very much on the agenda. But some officials are talking about a possible pause a few months from now, depending on what the data are showing at that point.
Monetary hawks are enraged. A few days ago the billionaire investor Bill Ackman attracted a lot of attention with a tweet declaring that markets are crashing because investors don’t believe the Fed will do its job:
While we don’t know for sure whether inflation itself is getting under control or not, Ackman’s claim that “inflation expectations are getting out of control” was clearly false given both market and survey data. But many others are echoing his furious attack on the central bank, as you can see just by searching “Fed behind the curve.”
So what’s going on here? To understand current inflation discourse, you need to be aware that there is a substantial group of economic commentators who always believe the Fed is printing too much money. They believed this during the depths of the Great Depression; they believed this in the aftermath of the 2008 global financial crisis.
At root, I’d argue, monetary permahawks are motivated by politics — by the fear that flexible use of the printing press will give too much room for big government, and also perhaps by a sense that printing money expropriates their hard-earned wealth. And hey, motivated reasoning can happen to anyone; it has certainly happened to me, although I try to fight it and admit it when I was wrong.
So how have the permahawks reacted to the inflationary surge of 2021-22? With stern expressions of concern, of course. But you didn’t have to do much reading between the lines to detect a fair bit of underlying glee that this time their proclamations of doom were finally coming true.
And some of them are clearly furious at any hint that the extent of the doom might be limited. They’ve spent years, even decades, preparing to celebrate — I mean deplore — stagflation. And though, as I wrote last week, we may well be in for a brief period of high(ish) inflation and rising unemployment, this probably won’t be the stagflation they were looking for.
So let me make a conditional prediction. If inflation does come down, as, for example, the Congressional Budget Office expects, the volume of dire warnings about runaway inflation will actually increase, at least for a while. The good news is that this wave of doomsaying will probably be, um, transitory.
If Krugman is right, this will probably not help the Democrats much in November. In my experience it usually takes at least a year for the general understanding of economic conditions to change. And right now, people think we are in a hellscape of unprecedented proportions, despite the incredibly low unemployment and wage gains. Inflation has people freaked out. It’s been many decades since we experienced anything like it and it’s immediate and easy to see in your everyday life. It will take a while even after it goes down for people to feel it.
I hope he’s right about all this. The feeling that life is hurtling out of control is exactly the environment that will most easily usher in a new era of authoritarianism. People reach for simple solutions when they feel that everything is chaotic and unpredictable and we have some authoritarians champing at the bit to give them some.