The New York Times opinion columnist Paul Krugman published a mea culpa in column form on Thursday, flat out admitting he was wrong for thinking inflation wouldn’t be that bad.
In his piece, titled, “I Was Wrong About Inflation,” the economics professor noted that he was on “Team Relaxed” when it came to fears of inflation and acknowledged that was a “very bad call.”
Krugman began by recounting the “intense debate among economists about the likely consequences of the American Rescue Plan, the $1.9 trillion package enacted by a new Democratic president and a (barely) Democratic Congress.” He mentioned how he originally didn’t see the massive government spending bill as that dangerous for the economy.
“Some warned that the package would be dangerously inflationary; others were fairly relaxed. I was Team Relaxed. As it turned out, of course, that was a very bad call,” he confessed.
Of course the columnist, who once insisted that President Biden would oversee a “soaring, ‘morning in America’-type recovery,” claimed that he couldn’t see how bad inflation would be because the “debate and the way things have played out were more complicated than I suspect more people realize.”
Krugman stated that people on both sides of the debate knew inflation was coming, even him, though both sides disagreed on how much inflation would occur. “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.“
“What we had instead was an argument about magnitudes. The rescue plan was huge in dollar terms, and as Team Inflation warned, if it had a normal-size ‘multiplier’ (the increase in gross domestic product caused by a dollar of additional government spending) it would lead to a highly overheated economy,” he explained.
However, the way he and Team Relaxed saw it, “the structure of the plan would lead to a much smaller surge in G.D.P. than the headline number would suggest… We also argued that if there were a temporary overshoot on G.D.P. and employment it wouldn’t sharply increase inflation.”
Krugman defended this perspective, writing it is what “historical experience” would suggest.
Krugman maintained “that the multiplier on the rescue plan does, in fact, seem to have been relatively low” but “inflation soared anyway.” Admitting his predictions failed him, he asked, “Why?”
Of course, he claimed that “disruptions associated with the pandemic” caused “much” of the inflation surge. “People spent less money on services and more on goods, leading to shortages of shipping containers, overstressed port capacity, and so on. These disruptions help explain why inflation rose in many countries, not just in the United States.”
Still, he admitted that doesn’t account for how inflation has spread. “But while inflation was confined mainly to a relatively narrow part of the economy at first, consistent with the disruption story, it has gotten broader,” he wrote, adding that “historical experience wouldn’t have led us to expect this much inflation from overheating.”
Again he claimed, perhaps “disruptions associated with adjusting to the pandemic” are still “playing a large role” and he also theorized that “Russia’s invasion of Ukraine and China’s lockdown of major cities” have added to inflation.
Either way, Krugman closed out his column with the remark that “the whole experience has been a lesson in humility.” He then offered one final rationalization for his error, claiming, “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,” he concluded.