No. of Recommendations: 3
https://www.nytimes.com/interactive/2023/05/18/opi...Krugman wrote a nuanced take on the current situation with inflation in the US and the difficulty of managing a soft landing, published in the NY Times in the last couple days.
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At first, Covid-19 dealt a hammer blow to the U.S. economy. America lost 22 million jobs between February and April of 2020. And many analysts worried that the pandemic might leave 'lasting scars' in the form of reduced employment, lower output and more.
At this point, however, both total employment and the share of adults in the labor force are right in line with projections made before the pandemic struck...
But inflation, which had been quiescent for decades, surged in 2021-22 to levels not seen since the 1980s. It has come down from its peak, but it's still higher than we've come to expect. And trying to get inflation back down has become a priority for policymakers.
The question is, how hard will disinflation be?
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One of the things he talks about is whether or not the current inflation target of 2% is advisable. He says there's not a lot of evidence to support it, but he does mention that low inflation gives a sense of security and ability to plan for the future that is beneficial. Still, he mentions that back when Reagan got a ton of credit for the economy at the end of his Presidency, unemployment was two percentage points higher than it is now, and inflation was about the same as recent readings. Back then the inflation target was 4%, and people were thrilled that it was 4% at that time.
Over the last 15 years Krugman at times has opined that 3% might be a better target than 2%, as it leaves more room for the Fed to maneuver in times of slack demand. I.e. they maybe wouldn't have had to take extraordinary measures such as quantitative easing at times if they had another 1% of interest rate to cut before hitting the zero bound.
In the current article he talks about the difficulty of sticking a soft landing: the Fed is working with numbers that are generally a month or two out of date, and frequently revised after the initial estimate comes out, and the tools they have to modulate the economy have a serious lag time before showing results.
He writes:
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Imagine a plane that is physically capable of making a smooth descent and touching down gently. But the pilot is trying to navigate through heavy fog with minimal visibility, and the instrument panel gives only an unreliable estimate of the plane's altitude five minutes ago.
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He closes the essay by celebrating the government's success at preventing widespread financial hardship during and after Covid, and says, "unless we have a really, really hard landing, the overall story of the postpandemic economy will be one of remarkable resilience."
