Friday, May 29, 2009

What Krugman Said

Over the last few months I've seen quite a few people ringing the inflation alarm bells, claiming inflation is on its way, and it will be the end of the world as we know it (some examples).

Paul Krugman has evidently heard similar alarms, and addresses them in yesterday's column for what they are, wrong.

First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.
He also has a theory of what's behind the inflation alarm.
All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?

Well, as you may have noticed, economists sometimes disagree. And big disagreements are especially likely in weird times like the present, when many of the normal rules no longer apply.

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.

Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.
Go figure, the reasoning behind the inflation fear could be because some on the right have ideological differences of opinion with the Obama administrations actions and plans to get out of a recession. I suppose we couldn't expect them to just voice their opinions and let the public decide for themselves. They chose rather to try and scare votes their way. I can't say that I blame them, they won quite a few elections that way.

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