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Paul Krugman: ‘I don’t think we’re headed for 1970s stagflation’

The economist talks to EL PAÍS about the impact of interest rate hikes, when inflation will come down and why reducing inequality is a political decision

Paul Krugman
Paul Krugman at a conference in Valencia, Spain.Josele Bort

Paul Krugman talks to EL PAÍS before taking out his laptop to write his weekly column for The New York Times. He has just opened the International Congress of Cooperativism, Social Economy and Public Economy (CIRIEC) in the Spanish city of Valencia, where spoke about the problem of social inequality.

Question. The 2008 financial crisis in Spain left the country with a legacy of social inequality. Can inflation worsen it?

Answer. It’s doubtful. In the US, we’ve actually had much better wage growth at the bottom than at the top, we’ve actually had reduced wage inequality. We have had some issues with the large profits at oil companies, but this is not really an issue in Spain. It’s just people are seeing a reduction in their real income. But that’s what happens when the price of imported food and energy goes way up.

Q. The latest World Inequality Report states that measures introduced due to the Covid-19 pandemic also helped reduce poverty in the US...

A. Unfortunately, many of those programs have expired.

Q. But doesn’t that show that reducing inequality or poverty is a political decision?

A. Very much. In the middle of a pandemic with mass unemployment, we were able to greatly reduce poverty. And with no visible adverse economic impact, which tells you it’s a political decision. We don’t have to have all of this suffering. Unfortunately, for the moment at least, the political decision has been made to allow poverty to rise again.

Q. We thought the economy was on track to bounce back, but the Russian invasion of Ukraine and rising inflation have dimmed those hopes. Are we heading towards stagflation?

A. We will likely have something that people will call stagflation, but I don’t think we’re headed for anything like 1970s stagflation. There is no sign at all of a wage-price spiral. The US economy appears to be overheated, we probably have an underlying inflation rate of around 4%, and it needs to cool down. That means raising rates. But that’s not necessarily I don’t think, a severe recession. And I think that inflation will come down relatively quickly.

Q. When?

A. I think within one year, it might be 3%, not 2%.

Q. In the meantime, people are going to the supermarket and finding that some products are 40% more expensive. What can be done?

A. The US needs to raise interest rates, which the Federal Reserve is doing. I’m a little bit more puzzled about Europe. I’m not quite sure what the ECB [European Central Bank] is doing. Because the European underlying inflation looks lower than it does in the US. In Europe, it is almost purely a supply shock. It’s not clear to me why rates need to rise. And yet the markets believed the ECB will raise rates as much as the Fed is expected to raise them.

Q. The ECB has already announced interest rate hikes for July and September. And it’s just the beginning.

A. But people are betting on something like 300 basis points on both sides of the Atlantic. I understand what [ECB president Christine] Lagarde is afraid of, but I think maybe the ECB may be overdoing it.

Biden is going to pay a political price for Vladimir Putin’s actions

Q. The ECB is calling for wage increases to be controlled to avoid an inflationary spiral. What do you think?

A. The problem is not that wages will start to reflect the prices. The problem is that people will start to base wage and price decisions on the expectation that inflation will continue.

Q. The rise in interest rates has led to a rise in risk premiums in southern Europe. Are fears that Europe will see a repeat of the 2010 European debt crisis justified?

A. I don’t see that. The actual burden of debt service in Spain is not high. Spain should not be distrusted by the markets. Maybe the markets are fearing another liquidity crisis. The last one, Mario Draghi ended with three words: ‘whatever it takes.’ Maybe they’re afraid that this time the ECB won’t say those words again. But in a peculiar way, these widening spreads are more of a political crisis than they are about economics. They’re a question about the willingness of Europe to take the necessary steps to maintain the stability of the euro.

Q. The United States will hold midterm elections in November. Do you think that inflation is going to hurt support for the Democrats?

A. It’s conceivable that social issues, such as abortion, will rescue the Democrats. But they will certainly pay a price for inflation. It’s extremely unfair. You can say that Biden over spent too much money, but what people are really upset about is the price of gasoline, which is the one thing over which he has no control whatsoever

Q. But Janet Yellen, the secretary of the Treasury, said that inflation was not going to get out of control.

A. We didn’t know that Russia was going to invade Ukraine. Oil and food prices are being driven by events that are completely external to the US government. Unfortunately, voters are going to say: ‘Look how much it cost me to fill up my tank. I blame Biden.’ but it’s unclear. Biden is going to pay a political price for Vladimir Putin’s actions.


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