Economist Paul Krugman: Now is not the time to 'panic' over inflation fears

As the United States' federal deficit continues to increase, some conservative economists are worried about possible inflation. But liberal economist Paul Krugman, in a March 22 column for the New York Times, emphasizes that now is not the time to "panic" — and that the lesson of the Obama years is that government needs to provide more stimulus during an economic crisis, not less.

"After the 2008 financial crisis plunged America into a deep recession," Krugman recalls, "both the new Obama Administration and the Federal Reserve tried to stimulate the economy — spending hundreds of billions on a variety of programs while buying trillions in bonds. There is now consensus among economists that these efforts were helpful, but it's also widely believed that they were inadequate, as some of us strenuously argued at the time."

Krugman adds, "On the right, however, it's an article of faith that activist government is always bad, even in a crisis. So, there were many dire warnings that these efforts to rescue the economy would cause runaway inflation. By mid-2010, there was a palpable sense of frustration among some conservatives that the predicted inflation had failed to materialize."

The Times columnist, who is very much a proponent of New Deal/Great Society economics, goes on to say that the American Rescue Plan Act of 2021 — recently signed into law by President Joe Biden — "will, without question, deliver a lot of economic stimulus" in the United States. But conservative economists, Krugman warns, will promote "panic" over fears of "runaway inflation."

Krugman notes that ordinary run-of-the-mill inflation is not the same as "stagflation," which he describes as "inflation despite high unemployment."

"Short-term fluctuations in volatile prices tell us little about whether stagflation is becoming a risk," Krugman explains. "That's why Fed policy generally ignores the headline inflation rate and instead focuses on a measure that excludes food and energy prices."

Krugman concludes his article by stressing that while stagflation needs to be avoided, ordinary price fluctuations should not discourage government from providing aggressive stimulus.

"Are businesses actually starting to set prices and wages based on the expectation of high future inflation?," Krugman writes. "If they aren't — and my bet is that they won't be — then the lesson of 2010-2011 will remain: Don't panic. Now, as then, there are people eager to denounce government attempts to help the economy. And it's certainly possible that the American Rescue Plan will turn out, in retrospect, to have been too much of a good thing. But don't let the usual suspects seize on a few months' inflation data as evidence of looming disaster."