For the fact is that America desperately needs to invest in its future — both in hard assets like roads and bridges and in its people, especially its children. And there are no good economic reasons not to make those investments. By Paul Krugman. Report an error Policies and Standards Contact Us. Is demand really all that high?
Real final sales purchases for consumption or investment in the United States hit a record high but are roughly back to the prepandemic trend. However, the composition of demand has changed. During the worst of the pandemic, people were unable or unwilling to consume services like restaurant meals, and they compensated by buying more stuff — consumer durables like cars, household appliances and electronics.
Something similar seems to have happened around the world. Meanwhile, supply has been constrained not just by clogged ports and chip shortages but also by the Great Resignation, the apparent reluctance of many workers to return to their old jobs.
Like inflation and shortages of goods, this is an international phenomenon. Reports from Britain, in particular, sound remarkably like those from the United States: Large numbers of workers, especially older workers, appear to have chosen to stay at home and perhaps retire early after having been forced off their jobs by COVID But what could or should U. A few months ago, there were widespread claims that enhanced unemployment benefits were discouraging workers from accepting jobs.
Many states rushed to cancel these benefits even before they expired at a national level in early September. But there has been no visible positive effect on labor supply.
Should current shortages inspire caution about Democratic spending plans? At this point, the Build Back Better agenda, if it happens at all, will amount to only about 0. Insider: The Fed has said it's going to look at headline inflation when it shows up, and that it's not going to look at forecasts or expectations. What are you watching for that first glimpse of broad inflation?
Krugman: I'm going to be tracking this like everyone else. In the past, just the Fed's core inflation was good enough. I don't think that that will work this time, because we're gonna have special bottlenecks that will affect core prices as well. I'm going to be looking at things like a couple of the Atlanta Fed indices.
I'm going to be looking at sticky-price inflation. I'm going to be looking at trimmed-mean inflation, which would purge the bottleneck effects. And to the extent that we can get information, wage contracts.
It's going to be much harder than it used to be. A long time ago, long before you were born, we could do union contracts. There basically are no unions now, so that doesn't work anymore. But we'll be wanting to see if companies are building in the expectation of higher inflation into wage settlements. The whole question is whether prices that are not changing all the time are being set with the expectation of inflation in the future. Whether we get this kind of leapfrogging process, which is what makes inflation — once embedded in the economy — hard to get rid of.
Things like sticky-price inflation indices and trimmed-mean inflation indices are probably our best bet. And, you know, talk to people. I'm going to be forcing myself to read the Beige Book these days, because I think, in some ways, it's going to be a better guide than the statistics are. Insider: As far as the Fed's updated inflation target, what do you think it means for the future of not just economic policy, but what we consider to be a strong economic recovery? Krugman: The tricky thing here is, the Fed has basically accepted that they kind of screwed up.
That we have an economy with a low neutral real interest rate, which means, in order to have room to fight recessions when they happen, you actually want to have more inflation in the system.
Nobody can believe that now. But I don't know if they're ready to go there, and it's not clear that there's any contemplation of an inflation target high enough that we can consider ourselves immune to the kinds of crises we've had. Insider: This is the question that is on everyone's mind, but I'd be remiss if I didn't ask.
Do you have any timeline in mind for when tapering would begin or if any rate hikes are going to arrive before ? Krugman: The probability is pretty high, that we'll hit the wall before then. Not hit the wall, because that's the wrong way to put it, but that you'll want to have some lift-off on interest rates. Probably by the end of this year, we'll have a very hot economy.
Now, the thing that I would be that makes it confusing is that the stimulus is time-limited and we're getting this big slug of fiscal expansion.
But it will be in the rearview mirror by sometime next year. I think we're likely to have an economy that's looking hotter than is sustainable by early next year.
It seems likely that we'll have an economy that is overheated but in a very mild sense. Not in a scary sense, but nonetheless overheated by early next year. But we'll also be looking at a looming fiscal contraction because the American Rescue Plan will have done its thing already. Whether the Fed will actually feel that it needs to raise rates is unclear for that reason.
I think we're going to recover really fast. But the question is, are we going to be in a situation where the Fed feels that it needs to slam on the brakes over and above the deceleration that will come from the fact that the rescue plan is fading into the past. Insider: Both the Fed's interest rate plans and Biden's spending proposals have been referred to as "experiments.
Krugman: We've learned two lessons from the past dozen years. The US economy can in fact run a lot hotter than we thought. It is, in fact, okay to have nice things. We can have full employment and it doesn't mean that that hyperinflation is around the corner. And the debt doesn't seem to be a problem at anything near current levels. So there's basically not much of a downside to having a very rapid economic recovery.
If you're an ordinary American, you can say, "look, the odds are that by this time next year, jobs will be plentiful, things will be looking pretty good. Inflation might be a bit higher, but your income will be more than keeping up with it. We're getting this big slug of money, a lot of which is still going out. Special props to Biden for ending the tyranny of cute acronyms. The first American, well, most of that money has already gone out, and the economic effects will take some time to play out.
With the second two — the infrastructure plan and the family plan — I'm worried that they're excessively paid for. In principle, they're supposed to be fully paid for. But take what we knew about the economy in We were really kind of in secular-stagnation land with low neutral real rates.
We had full employment then, it was only thanks to extremely low interest rates and persistent deficit spending. What the doctor ordered is some sustained moderate deficit spending. So public investment — both in stuff and in people — was paid for in part by issuing debt. I'm a little worried that the Biden team seems to want to do these things with full pay-fors.
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