We've included some paragraph breaks because the transcript doesn't have many.
From Princeton University's Bendheim Center for Finance:
Webinar Transcript:
Markus Brunnermeier: So welcome back everybody to another webinar organized by Princeton, hosted for everybody worldwide. We're very happy to have Paul Krugman with us from CUNY and Larry Summers from Harvard. We will talk about inflation. It's part two of an earlier debate we had about 12 months ago and we're very grateful that both could make it and can outline their views on inflation and how we will go forward. Some people call this now the Super Bowl for Economics or economists, so we will see the outline, so we will proceed with the following. Paul and Larry will give some opening remarks, and then we will go and see how the discussion leads us to various topics. In particular we're interested in soft landing, how we can have soft landing for the financial side and also for soft landing for the real economy, what are the implications for emerging market economies and other aspects. So, Paul, the floor is yours, I think, outline your views on how the last year went and how the outlooks look forward.
Paul R. Krugman: Okay, great risk of running way long, but let me try to hit just a few main points. The first thing I want to say, I think most of our audience here, at least the economists, remember the big debates over QE early in the last decade, and all of the economists who predicted dangerous inflation and then refuse to admit that they've been wrong. And I don't want to be one of those guys, so I need to start out by saying that when we had our last discussion I was relaxed about the inflationary outlook and I was wrong, it turns out that inflation is coming way higher than I expected and I think the important thing on stuff like that is to try and figure out why you were wrong and learn from it. It's when you get to the why I was wrong, what's odd is it's not the simple script that I might have expected.
For those who remember our earlier debate, that was centered mostly on fiscal policy, which I think is not going to be the case now and it was centered around the American rescue plan, which was a very big slug of money. And Larry was arguing, like a lot of people, that it was just way too big, that it was too much stimulus and that the economy would massively overheat. I was, I agreed that it was a lot of money, but argued that it wasn't designed as stimulus and, in fact, you know that had other purposes, and that it was likely to have low multipliers, so that there wouldn't be that much overheating. And the funny thing is that, the multipliers actually do seem, and we can maybe discuss this, or maybe not, to have been relatively low, that if you look at real GDP, it appears to be still slightly below pre-pandemic CBO estimates of potential output, we look at prime age employment ratio, it's still significantly below the pre-pandemic level, and if you had told me in the spring of 2021 that that's what the GDP and employment numbers would look like I would have said “okay that's going to be an environment that relatively benign inflation,” I wouldn’t have expected a big inflationary surge, given that. But obviously I would have been completely wrong. In fact we've had a huge inflationary surge given the level of economic activity. We kind of know what's going on.
There are two pieces, which I think are very distinct and distinct in their implications for the future. One, of course, is the supply chain stuff. And the demand (overall demand) has been strong, but what has really happened is there's been a skew of demand, because of fear, fear of face to face activities skewed towards goods, especially durable goods, which has overstressed supply chains, plus a few random events like the semiconductor shortage so we've seen a big rise in some prices. Let me say that that's the larger part of the elevated inflation, but in many ways, I would say the least worrisome part because the private sector has a huge financial incentive to get stuff moving again and although fixing the supply chains is turning out to be much more prolonged and hard process than one might have imagined, I think we've all learned far more than we ever wanted to about logistics.
That is still the old adage that the cure for high prices as high prices, probably still applies, and so that part is probably not a–it's huge, it dominates people's perceptions– but I think it's the less important. The other thing is something's happened in the Labor market and you can really see that, although measures of you know, employment, we were all kind of devotees of the prime age employment ratio as the barometer of the Labor market, but that is really not working now. I just been doing, if you do your quits or another barometer of the Labor market and there was a very nice, very close relationship between the employment ratio and the quits rate up through the up to the beginning of 2000 and now it's way off. Now we have vastly higher quits than we did before for any given level of employment, wages are rising rapidly. We, because of compositional effects, it's tricky to assess, but there clearly has been a substantial wage acceleration, so that it looks as if despite a sort of the raw employment numbers, this is in fact a very tight Labor market, possibly– probably– somewhat above sustainable full employment.
The issue in a way has been supply rather than demand, but the supply issues are big enough so that where we are right now is clearly an economy that does not need more stimulus and in fact needs to cool off a bit. The big questions –well there are multiple questions that will come up– but I think I would find that if I were at the Fed now, I would be arguing for a series of interest rate hikes, no question, data dependent, we want to keep an eye on what's happening, but clearly, you want to be taking your foot off the gas now. There's a big question about how much? Is it simply let up on the gas? Maybe tap the brakes? Or is it slam on the brakes, and really try to bring the economy to a sharp slowdown to revert further inflation and then there's a prediction question: is this – we've retired the word transitory but they're still a live argument and I’ll be willing to make a case as we go along that that we will –by the time 2023 rolls along, we'll be looking at a situation where what we're, in retrospect, it looks more like the ‘46-’48 inflation, which was very high for a little while, but did not leave an underlying inflationary environment than like the ‘70s, but that's what you know there’s lots to get into there, and life comes at you fast, as I say, I mean, I don't know what the opposite of instant gratification is, but I've had instant antigratification in the sense that that I made an inflation call and it went it went wrong pretty fast, and I think we all have to try to understand what the hell has been going on.
8:00 Markus Brunnermeier: Thanks a lot, Paul, so let's pass the microphone to Larry, and you know Larry was not in the team transitory, he was more on the team persistent. I don't know whether he thinks that inflation is coming back down or not., but perhaps learning can, you know... how do you see that now? Do you see inflation coming down again, or what are the right steps or the right diagnosis of what's going on? And to what extent you know, for example, pricing power might play a role as well and it came up in the discussion over Twitter and other places.
Lawrence H. Summers: Paul and I are much closer to being in agreement now than we were when we had this conversation, a year ago, on the subject of inflation. I think I would put substantially more emphasis still on demand than Paul would. Imagine that potential GDP is fixed and can't be exceeded, because the people aren't there, and you stimulate demand substantially. And you'll see substantial inflation, but you won't see output ahead of potential GDP. So using what happens to output as a measure of supply vs demand can easily be misleading in a context where there are supply constraints.I don't think a year ago I was enamored of the employment ratio as a measure. The advocates of measures like PPP and all of that emphasized how there will be consequences for aggregate supply of the ordeal the economy went through in 2020 so I don't think it's reasonable to be so surprised that Labor force participation is depressed, and in the context of a shortfall of aggregate supply it's the job of those who control aggregate demand to balance aggregate demand with available supply. I think that fiscal policy and monetary policy both operate to affect aggregate demand and either can be used to restrain or accelerate aggregate demand without the combination of hugely stimulative fiscal policy and hugely accommodating monetary policy, we wouldn't be where we are today.....
....MUCH MORE (14 page PDF)
If interested here is the video hosted at Princeton.
Here is the video for Part I, "Will the Biden Stimulus lead to Inflation? A Conversation with Paul R. Krugman and Lawrence H. Summers", February 12, 2021, no transcript (it was via Zoom) but we do have Bloomberg's "Summers and Krugman Debate Stimulus. Here’s a Blow-by-Blow Account"
If interested see also yesterday's Paul Krugman Says: "I Was Wrong About Inflation" on the New York Times' "I was wrong" project.
