As the calendar ticks over to 2023, signaling a new phase in the monthslong fight against record inflation, America’s two leading left-of-center economists—Paul Krugman and Larry Summers—continue to debate the best way forward. For the past two years (as with much of the past two decades), they haven’t agreed on much, but as Nobel laureate Krugman told Bloomberg TV on Monday, “It really disturbs me to say this, but I think I agree with Larry.”
The remarks are surprising in the sense that Krugman has staked out the inflation dove post over the past two years, first insisting it would be “transitory” and later admitting he was wrong, but still usually breaking with Summers’ hawkish stance. Krugman has argued that U.S. inflation is cooler than official data suggest, helping give markets hope that the Federal Reserve will stop tightening monetary policy and raising interest rates. Summers, the Harvard professor and former Clinton and Obama administration official, has actually been sounding Krugman-like for a few weeks, warming to the idea that the U.S. might achieve its hoped-for “soft landing.” What’s clear is that the two longtime acquaintances increasingly agree that the U.S. economy is in a hard-to-understand place right now.
“I’m a little worried that the markets may be getting ahead of themselves,” Krugman told Bloomberg TV on Monday. The Princeton economist and New York Times columnist said that markets and financial writers were now largely in agreement that “inflation is behind us.”
“That makes me nervous, whenever I see people in that much agreement,” he said.
Krugman was also asked about comments made by Summers on Bloomberg TV the previous Friday.
In that interview, Summers suggested the U.S. central bank not reveal its next steps after its interest rate decision on Feb. 1. The Fed needs to “maintain maximum flexibility in an economy where things could go either way,” he said—and should avoid implying that the fight against inflation was over by publicly committing to stopping interest rate hikes.
Summers characterized the U.S. economy as a car, with the Fed in the driver’s seat. “They’re driving the vehicle on a very, very foggy night,” said the economist.
Krugman used the same analogy on Monday when he remarked on his sense of agreement with Summers. “We’re trying to operate the controls on some fairly sensitive machinery, in the dark, wearing mittens.”
He added that he agreed with Summers that the Fed was just as likely to overestimate inflation as underestimate it. “We will get it wrong, one way or the other, and there’s a reasonable chance in either direction,” Krugman said.
Hawks and doves converging
Summers and Krugman share a long history. Both joined the staff of the Council of Economic Advisers under then-U.S. President Ronald Reagan in 1982, each serving for a year. Summers went on to positions at the World Bank, followed by the Clinton and Obama administrations, while Krugman became a widely read economic and political commentator, and they both have influential Ivy League professorships, in addition to making frequent media appearances and writing opinion columns.
The two have staked different positions in left-of-center U.S. economic policy, with Summers favoring more moderate and market-oriented policies, and Krugman supporting large government stimulus and looser 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 that he viewed as 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 for “large, deficit-financed public investment on a continuing basis” and then welcomed the Biden stimulus that was roughly twice as large as Obama’s. This time, Summers was criticizing it in heated terms as the “least responsible” economic policy in 40 years (shortly before inflation hit levels unseen in…exactly four decades).
Yet both Summers and Krugman are changing their tone on inflation with new economic data showing that price increases are slowing. The U.S. reported a 0.1% month-on-month drop in the overall consumer price index for December, the first decline in more than two years, mostly driven by dropping 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 U.S.’s large fiscal stimulus would cause price increases throughout the economy, then claiming that a tight labor market was increasing wage costs, and thus prices.
The former U.S. Treasury secretary was skeptical of the possibility of a “soft landing,” where the Fed brings inflation under control without causing a recession. Instead, Summers thought inflation risked getting so bad that the U.S. would have to significantly slow the economy—and cause unemployment to spike to 6%—to bring inflation under control.
Krugman, on the other hand, has argued that high U.S. inflation figures were distorted by short-term distortions, particularly in housing and rents. The Nobel Prize–winning economist was more optimistic about the possibility of a “soft landing” as the effect of these shocks began to fade.
Summers’ view has softened in recent weeks. At the World Economic Forum earlier this month, Summers pointed to cooling inflation data and China’s reopening as “reasons why we should feel better than we felt a few months ago.”
The Fed will announce its decision on interest rates on Feb. 1. Economists largely expect the U.S. Federal Reserve to increase rates by a quarter of a percentage point, yet differ on whether the central bank will signal that more rate hikes are on the way.
Yet both Summers and Krugman seem to agree that the battle against inflation isn’t over. “The markets are pricing in that inflation is over. That could be a self-denying prophecy,” Krugman said on Monday.
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