Economist Paul Krugman: Why the 'prophets of inflation doom' were wrong to predict 'stagflation'

07 February 2023

Among economists, the term “stagflation” is used to describe a painful combination of high unemployment, low growth and persistent inflation — in other words, the worst of all worlds economically. Right-wing critics of President Joe Biden’s economic policies have been predicting a period of “stagflation” for the United States, but liberal economist Paul Krugman, in an opinion column published by the New York Times on February 6, emphasizes that Biden-era inflation is nothing like the “stagflation” of the past.

It’s true that the U.S., in the Biden era, has had some of its highest inflation in over 40 years. But 2022 was also a year of low unemployment in the U.S., and low unemployment is definitely not an ingredient of stagflation.

“At this point,” Krugman explains, “Joe Biden’s presidency was supposed to be effectively over — his political clout destroyed by a devastating red wave in the midterms, his policy credibility eviscerated by a recession and high inflation. Well, the red wave was more of a ripple. And recent economic numbers have been astonishingly favorable.”

The economist continues, “Half a million jobs were added last month, bringing total job creation under Biden to 12 million so far, with the unemployment rate dropping to 3.4 percent, its lowest level since 1969. Inflation was high in 2021 and part of 2022, but it has plunged since; over the past six months, consumer prices have risen at an annual rate of less than 2 percent.”

The unemployment figures that Krugman cites come from the Bureau of Labor Statistics (BLS). And they are much different from the unemployment figures of the late 1970s and early 1980s — a period in U.S. history associated with stagflation.

From 1979-1983, Paul Volcker (who chaired the U.S. Federal Reserve at the time) carried out a series of aggressive interest rate hikes in order to slow down inflation — first under President Jimmy Carter, then under President Ronald Reagan. Economically, those were rough times, as Americans were suffering from both inflation and unemployment.

Krugman describes economists who have been predicting a return to stagflation as “Team Stagflation,” and he disagrees with them vehemently.

“Not everyone on Team Stagflation used the same approach,” Krugman observes. “But much, if not all, of the pessimism rested on the assumption that the inflation of 2021-22 was just like the inflation of the 1970s, which was indeed contained only via an extended period of very high unemployment. The thing is, there were always good reasons to believe that this was a bad analogy.… I and others pointed out that disinflation was difficult in the 1980s largely because expectations of persistent inflation had become entrenched, which they clearly hadn’t this time around…. So, will the prophets of inflation doom acknowledge that they got it wrong?”

Krugman adds, “More important, will policymakers, especially at the Fed, who understated inflation risks in 2021, be flexible enough to accept that they overcompensated in 2022? Because if they don’t, the policy response to imaginary stagflation may yet produce an unnecessary recession.”

Read Paul Krugman’s full New York Times column at this link (subscription required).

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