Summers: Inflation is not overstated and the Fed is not overdoing it


Over the past year, economists Larry Summers, the star Harvard professor, and Paul Krugman, the Nobel laureate, have disagreed on how serious inflation is.

Summers saw this as a bigger problem than Krugman. He called for tighter monetary policy from the Federal Reserve than Krugman.

The dispute arose again after Krugman claimed in a column last week that it might be time for the Fed to slow its interest rate hikes. Then the summers caught on Twitter to refute the argument.

It was a silly argument, with Krugman arguing that government data may be overstating inflation, and Summers challenging Krugman’s evidence. Here are excerpts from their comment:

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

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

The Fed may be going too far

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

Regarding inflation data, “the reason the consumer price index affects policy expectations is that it is supposed to be an indicator of the real overheating of the economy”, Krugman said.

“We’ve known for a long time that raw inflation numbers are ill-suited for this purpose.”

Summers says Krugman is wrong. “I am disappointed with the biased & selective analysis of the team’s transient acolytes who keep finding new arguments for their conclusion that inflation is [about] calm down and politics should be accommodating,” Summers said.

“I’m focusing on @paulkrugman because he’s so clear and smart.”

Summers goes on to discuss Krugman’s findings that housing and wage inflation have been exaggerated.

Recession risk

We’ll spare you the arcane economic reasoning that Summers and Krugman used to make their case.

But here’s an interesting point that Summers made in relatively plain English. “Given dismal productivity growth, likely caused by silent quits, wage inflation will have to come down significantly if it continues. [overall] inflation close to 2% must be achieved,” he said.

Silent resignation refers to employees who limit their full-time work to limited hours. The 2% refers to the Fed’s inflation target.

In any case, “I don’t understand the basis for believing this [2% inflation] is likely without a significant recession,” Summers said.

Some experts say recession is a sure thing in the coming months. A new model from Bloomberg Economics predicts a 100% probability of a recession by October 2023. This compares to a 65% probability in previous Bloomberg forecasts.

The increased likelihood stems from worsening economic and financial indicators captured by Bloomberg Economics.

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


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