New York Times columnist Paul Krugman authored a column on Wednesday titled “I Was Wrong About Inflation,” in which he outlined his grave miscalculation of the issue from last year.
Krugman, a professor in the Graduate Center Economics Ph.D. program, said he did not expect the $1.9 trillion American Rescue Plan to contribute so extensively to inflationary problems.
“Some warned that the package would be dangerously inflationary; others were fairly relaxed,” he explained. “I was Team Relaxed. As it turned out, of course, that was a very bad call.”
Krugman argued both sides of the debate writing “Team Inflation” and “Team Relaxed” thought some level of inflation was coming but were unsure as to the extent.
“Everyone in the debate agreed that deficit spending would stimulate demand; everyone agreed that a stronger economy with a lower unemployment rate would, other things equal, have a higher inflation rate,” he added.
Krugman and others on “Team Relaxed” argued, based on past recessions like 2008, “if there were a temporary overshoot on GDP and employment it wouldn’t sharply increase inflation.”
While Krugman was able to admit he was wrong about the impact of the American Rescue Plan on the economy, he also managed to find other reasons for rising inflation.
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“People spent less money on services and more on goods, leading to shortages of shipping containers, overstressed port capacity, and so on,” he argued. “These disruptions help explain why inflation rose in many countries, not just in the United States.”
He also posited that domestically — the economy ran hotter because of lower immigration, early retirements, and a lack of child care, lowering production capacity.
Krugman pushed the theory about multiple external factors affecting inflation domestically such as the disruptions brought by the pandemic to world markets. As well as, “both Russia’s invasion of Ukraine and China’s lockdown of major cities have added a whole new level of disruption.”
With inflation now reportedly at a four-decade high of 9.1 percent, some liberal commentators are beginning to see the error of their ways and starting to reckon with their mistakes.
“In any case, the whole experience has been a lesson in humility,” Krugman concluded. “Nobody will believe this, but in the aftermath of the 2008 crisis standard economic models performed pretty well, and I felt comfortable applying those models in 2021. But in retrospect I should have realized that, in the face of the new world created by Covid-19, that kind of extrapolation wasn’t a safe bet.”
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