Summers: Inflation Isn’t Overstated and Fed Isn’t Overdoing It

Harvard’s Prof. Summers rebuts Nobel laureate Paul Krugman, who questions whether the Fed needs to raise interest rates further.

For the past year, economists Larry Summers, the star Harvard professor, and Paul Krugman, a Nobel Prize winner, have been at odds about how bad inflation is.

Summers has seen it as a bigger problem than Krugman does. He has called for tighter monetary policy from the Federal Reserve than Krugman has.

The dispute came up again after Krugman argued in a column last week that it might be time for the Fed to slow down its interestrate hikes. Then Summers took to Twitter to rebut the argument.

It was a wonkish dispute, with Krugman arguing that government data may be overstating inflation, and Summers disputing Krugman’s evidence. Here are excerpts from their commentary:

Krugman, in The New York Times: “I’m reasonably sure that the economy is indeed running too hot, so the Fed was right to raise [interest] rates,” he wrote. 

Obviously he’s not completely at odds with Summers. The Fed has lifted rates by 3 percentage points since March.

Fed May be Going too Far

But “I’m much less clear about whether the Fed needs to keep raising rates, given that much of the effect of past rate hikes has yet to be felt,” Krugman said.

As for inflation data, “the reason the Consumer Price Index affects expectations about policy is that it’s supposed to be an indicator of how overheated the economy actually is,” Krugman said.

“We’ve long known that the raw inflation numbers are poorly suited for this purpose.”

Summers says Krugman is wrong. “I am disappointed by the tendentious & selective analysis of team transitory acolytes who keep finding new arguments for their conclusion that inflation is [about] to subside & policy should be dovish,” Summers said.

“I focus on @paulkrugman because he is so clear & smart.”

Summers goes on to debate Krugman’s conclusions that housing and wage inflation have been overstated. 

Recession Risk

We’ll save you from the arcane economic reasoning Summers and Krugman used to make their points.

But here’s one interesting point Summers made in relatively plain English. “Given dismal productivity growth, likely caused by quiet quitting, wage inflation will have to come down significantly if sustained [overall] inflation near 2% is to be attained,” he said.

Quiet quitting refers to employees confining their full-time work to limited hours. The 2% refers to the Fed’s inflation target.

In any case, “I do not understand the basis for believing this [2% inflation] is likely without a meaningful recession,” Summers said.

Some experts say recession is a sure thing in coming months. A new Bloomberg Economics model projects a 100% probability of recession by October 2023. That compares to a 65% probability in Bloomberg’s prior forecast.

The increased probability stems from a worsening of the economic and financial indicators that Bloomberg Economics considers.

The Bloomberg model goes further than outside experts. A Bloomberg survey of 42 economists puts the probability of a recession over the next 12 months at 60%, up from 50% in September.

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