If you’ve been reading this blog long enough, one recurring theme is that Nobel-prize winning leftwing economist and pundit Paul Krugman is always wrong. Back in the day, Larry Kudlow made a career pointing out Krugman’s errors, and you may remember such Krugman howlers as “the Internet is no more important than a fax machine” and “markets will never recover from Trump.”
Lately he’s been in the news for dismissing the idea that inflation is a problem.
Paul Krugman, May 7: “[Treasury secretary] Janet Yellen and I believe that the Fed can contain any inflationary risks.”
Paul Krugman, June 21: “For those paying closer attention to the flow of new information, inflation panic is, you know, so last week.”
Paul Krugman, July 23: “Overheating is still possible, and the Fed should keep its eye on that possibility. But the big numbers aren’t as scary as they seem.”
Paul Krugman, August 12: “Anxiety about the inflationary impact of public investment just doesn’t make sense if you work through the numbers.”
Paul Krugman, September 10: “Companies aren’t acting as if they expect lots of future inflation, where they can hike wages without losing competitive advantage. They’re acting, instead, as if they see current inflation as a blip.”
Paul Krugman, November 11: “So yes, that was an ugly inflation report, and we hope that future reports will look better. But people making knee-jerk comparisons with the 1970s and screaming about stagflation are looking at the wrong history. When you look at the right history, it tells you not to panic.”
The New York Times, this morning:
Inflation jumped to the highest level in nearly 40 years, fresh data released on Friday showed, as supply chain disruptions, rapid consumer demand and rising housing costs combined to fuel the strongest inflationary burst in a generation (emphasis added).
The rising costs spell trouble for officials at the Federal Reserve and the White House, who are trying to calibrate policy at a moment when the labor market has yet to completely heal from the pandemic, but the risk that price increases could become more lasting is increasing.
The Consumer Price Index climbed by 6.8 percent in the year through November, the data showed, the fastest pace since 1982.
One of the reasons inflation is such a serious problem right now is that we have an administration, a Fed, and a lot of ideologically or politically aligned economic elites who are wedded to the belief that inflation is not a serious problem.
Proving that some of the most basic facts of economic life for ordinary people elude some Nobel-prize winning economists, Krugman dismisses the idea that inflation hurts the poor worse than the rich.
Inflation redistributes from creditors to debtors — not exactly a burden on the bottom half of the income distribution 2/
— Paul Krugman (@paulkrugman) December 11, 2021
"Inflation especially hurts the poor" has truthiness — it sounds like it should be true. But I don't see either evidence or a mechanism 4/
— Paul Krugman (@paulkrugman) December 11, 2021
Hey, Mr. Super-Genius: A family of four just getting by on $1,500 is hurt a lot more when the price of milk rises by 80 cents a gallon and gasoline rises a dollar a gallon.
Here Louis Rossmann (who does something like two videos a day) expounds upon that theme:
Some of his complaints are more acute for New York City than the rest of the country, but he’s far more in touch with reality than Krugman seems to be.
So what does the Biden Administration plan to do about inflation? Easy. They’re going to redefine it away by removing commodity prices from the CPI.
Yes, I’m sure that will fool people…
Tags: CPI, Democrats, Economics, inflation, Louis Rossmann, Paul Krugman, video
[…] No more. […]
Krugman’s problem here is word-thinking. He is correct that inflation is (generally) good for debtors. But that is inflation in the strict economic sense of monetary inflation. And that is not what ordinary people are experiencing.
What we are seeing now is a broad supply shock across much of the economy. Partly due to shortages within the country, but also due to import constraints we are seeing less actual goods available. Gas prices aren’t up 50% because of monetary inflation but because there isn’t enough gas. The same is true for food. And underlying all of it is a serious lack of transportation which creates all sorts of shortages across the entire supply chain.
I recently retired from the chemical industry, and what I was seeing and am still hearing about our business is that we are getting price increases and running as hard as we can to fill orders. But we are producing LESS product today than we were 3 years ago. Partly because we idled capacity in 2018, but also because we can’t get everything we need when it comes to raw materials. All sorts of chemicals are in tight supply, and we are constantly juggling products to try and keep lines running based on what we can make, and that results in inefficiencies that mean less production overall. And everything I read suggests this is happening throughout the economy.
This is what people are feeling – there is more demand for goods than industry can supply, and that means real prices (not inflation-adjusted prices) have to rise to destroy some of that demand. And those who end up going without are perfectly aware of what is happening. Elites like Krugman, not so much.
I’d also add that (IMHO) what we are experiencing is a lingering consequence of last year’s COVID shutdowns, aggravated by long-term cost pressure reducing surge capacity in much of the economy, and further aggravated by reckless government spending. The economy is just not capable of stopping for 3 months and then making it up by running faster for a year, or even 2. Unless your business is highly seasonal, you are unlikely to have more than 10% or so surge capacity, so it takes almost a year to recover from a month’s downtime. Assuming you can get everything you need to run flat out, which is just not going to happen when large chunks of the broader economy have also been shutdown. At that point any disruption, such as the polar vortex freeze or the port crisis, drags you even further behind.
Even worse, businesses are certainly aware that most of this demand is temporary. Once we finally get caught up with everything, then things will swing to whatever the new normal is. This discourages capital investment in capacity, which would help end the current crunch, because in all likelihood you’ll have to idle it in a year.
The government (Trump as well as Biden, but Biden has less of an excuse) has been treating what is fundamentally a SUPPLY crisis with stimulus tools that were developed to control DEMAND shocks. By pushing money into the economy and investing in pet projects they are further aggravating shortages without doing anything to actually address the underlying supply gaps. Indeed, they are making the current supply situation worse by starving key sectors of capital (oil for example) in favor of more costly, longer lead time speculations in politically favored, trendy alternatives.
What we need now is for the government to back off, and let the millions of people who work every day to make the goods and provide the services to sort this mess out.
He’s a PhD economist who never learned “economics happens on the margins”?
Krugton the Invincible: the gift that keeps on giving.
Like herpes.