Paul Krugman has now responded to my response to his response to my column about the risk of inflation. Interesting comments also have come from Gregory Mankiw at Harvard, Felix Salmon at Reuters, Ryan Avent at the Economist and Catherine Rampell at the New York Times, among others.
I complained of feeling “bullied” by Paul’s assertion that my errors were a matter of “textbook economics” and pointed out that Greg Mankiw’s Introductory Economics text—the leading one—makes no reference to a “real distinction” between inflation and hyperinflation. Paul replied that he was referring to a different Intro text—his own. I guess that an economics textbook author’s opinion about what is and is not “textbook economics” is self-validating. And it hadn’t occurred to me that Paul might be pushing a book. In writerly solidarity, I retract my objection. (And here’s a link to Krugman on Amazon. Here’s one to Mankiw as well.)
A reader of Mankiw’s blog has dug up an enjoyable column Krugman wrote in 2003, in which he said he was “terrified about what will happen…once financial markets wake up to the implications of skyrocketing budget deficits.” The implication that concerned him most was high interest rates. But in making his case he says, “my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.” (In that last phrase, the first purpose covers his definition of hyperinflation and the second purpose covers mine.)
On-the-ball readers may be thinking, “Wait a minute. Krugman was wrong in 2003. Inflation and interest rates remained low. Would Kinsley rather score cheap points against Krugman than get the story right?" The answer to that is too embarrassing to get into. But in any event the deficit is now higher than anyone could have imagined back in 2003, so Krugman’s 2003 logic should hold today even if it didn’t at the time.
Ryan Avent says there’s a big difference between the American inflation of the 1970s, which peaked at 13 percent, and recent hyperinflation in Zimbabwe of “nearly 90 sextillion percent.” Who can argue with that? I should have made clearer in my original piece that, at least to me, 13 percent inflation would be a catastrophe (just ask Jimmy Carter) even if it didn’t spiral even further. The cost of climbing down from 13 percent was the worst recession since the Great Depression until the current one. So imagine having the double-dip 1980-82 recession on top of the 2008 – 2010 (?) recession, with a federal deficit running far higher than Paul or almost anyone else could have imagined back in 2003. Some day I will look up the Economist leaders of the time and see if they shrugged off 13 percent inflation with a “File under things not to worry about” (Avent’s headline).
Catherine Rampell, in her Times blog and in a private email exchange, makes the excellent point that inflation will be hard to arrange this time since so many of the government’s obligations are either short-term or officially (TIPs, Social Security) or unofficially (Medicare) indexed. Others have made the obvious point that our central bank, the Fed, is supposed to be independent. But entitlement promises can be broken and the Fed’s independence is statutory, not constitutional or immutable. All of which is to agree with Ryan Avent that inflation at any serious level will require and become a political catastrophe as well as an economic one. Felix, who usually shares my fondness for disaster scenerios, is disappointingly complacent about this one.
Meanwhile I (along with others of his fans) am still waiting for Paul’s inflation-free recipe for getting us out of this mess.