Was Dr Krugman ever a great economist in the sense that Hayek, Smith, or Pareto were great economists? He received a Nobel prize for his work on technical advancements in trade theory, but I wonder whether that necessarily puts his work on the same level as the truly great thinkers of previous eras.
Whether or not that is the case, it seems to have been many years since he has been anything but a partisan hack. As Bruce Charlton points out, the situation today is so bad that the problem is no longer even that public intellectuals today are not oriented towards discovering what is true; it is not merely that they are only pretending to discover what is true, but it is that they are not even bothering to pretend these days. Charlton was writing about scientists, but the situation is surely much worse in the domain of commentary on current economic affairs.
Dr Krugman in his latest NYT blog piece mentions “warnings… that the ‘floodgates’ of inflation may be about to open”, without naming the opponents he has in mind. Of course a true intellectual would attack not just the case made by his strongest opponents, but the strongest version of that case that it would be possible to make. Clearly, that is not Dr Krugman’s style – he prefers to erect an Aunt Sally, to knock it down triumphantly and to crow to his followers about the immensity of his achievement.
We all know that there are lags between monetary policy and its final effects. The reason for being concerned about the Fed’s expansionary monetary policy is not that inflation next quarter may exceed its target; it is that policy today may start us down a path that will lead inexorably towards higher inflation, and that once we have started down that path it may become very difficult to bring inflation back under control without great sacrifices in terms of foregone output and employment. It was the easy monetary policy of the 60s that set the stage for subsequent unhinged inflation in the 1970s, and I suspect current monetary policy may be doing the same. Dr Bernanke says he is certain that he will be able to bring inflation back under control, but the track record of his beliefs vs outturns does not encourage great confidence in his words.
Thirty year breakeven inflation implied expectations are trading at around 2.50%, and according to Dr Krugman and his activist friends the economy still has supposedly such a great degree of slack that further dramatic easing in both fiscal and monetary policy is required. One wonders how high inflation expectations will rise once such slack is eliminated.
I am not in the very near term concerned about breakeven expectations and headline inflation becoming unhinged since I expect crude and related energy prices to come down sharply, pushing down headline inflation. Although this will impact shorter-dated breakevens most heavily, it will tend to weigh on the back end of the curve too.
Longer-term though I rather think that the inflation hawks will turn out to be right. I shall make a note in my diary for April 2015 and we shall see whether Dr Krugman’s dismissal of inflationary concerns turns out as well as his cheering-on of the inflation of a bubble in housing.