Trish Regan: Paul Krugman Is Wrong Again

Princeton economist and New York Times columnist Paul Krugman is hitting the airwaves touting the virtues of the Biden stimulus plan. Krugman says the only danger in the $1.9 trillion stimulus is not going big enough.

“If the balance of risks turns out to be too big, well, the Fed can reign it in,” he says in a new interview with CNN. “If it turns out to be too small, then we’re really in big trouble.”


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There are serious risks with the Biden stimulus plan being too big. You cannot just throw money at a problem and hope it results in growth. If the stimulus is too big, as I believe this plan is, then our economy will be met with the challenge of massive inflation.

Given the recent strength we’ve already seen in our economic data points, Biden’s package is going to be both too big — and, too late.

Recent data suggests our economy is on the mend, so why is our government hoisting a wartime stimulus effort on an economy that has already begun to repair itself?

Recent Data Suggests Inflation is Lurking

Already, wholesale inflation is ticking higher. The producer price index (a measurement of what producers pay for goods before they sell them to consumers) recently posted its biggest surge since 2009.

The recent uptick in energy prices and other asset-class prices (everything from the stock market to bitcoin) also suggests evidence of inflation. Since when does the market trade at a multiple of 30 times earnings? (Historically, we’ve been closer to 14-15 times earnings.)

Meanwhile, consumers are showing strong signs of a rebound. Consumer spending jumped 2.4% in January, the sharpest increase in seven months. In addition, retails sales increased more than twice as much as had been predicted to upwards of 5% last month.

All this suggests that inflation concerns should not be ignored.

Inflation is the last thing our economy needs. While a little inflation is considered healthy, significant inflation–the kind we do need to worry about despite what economists like Krugman say– causes the value of our money to deteriorate.

Consider this: your money will not go as far in an inflationary environment when everything costs more. Good luck keeping your dollars when a cup of coffee at your local diner costs you 30 of your hard-earned greenbacks.

As such, inflation has the effect of eroding an individual’s purchasing power.

The other danger with inflation is that it causes the interest on our debt to increase to totally unsustainable levels.

Former Clinton Treasury Secretary Larry Summers recently sounded the alarm on the potential for inflation thanks to the Biden stimulus, writing in an oped for the Washington Post that, “there is a chance that macroeconomic stimulus on a scale closer to World War II leveled than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”

He’s right. But, Krugman says Summers is wrong and he (Krugman) himself, the IMF, Goldman Sachs, and Janet Yellen are all right.

That’s because, if we do see any inflation, Krugman thinks the Fed can simply just “reign it in.”

Wrong again.

Consider the negative effect a succession of higher rates from the Fed would have on our economy right now. Remember the “Taper Tantrum” of the Obama years that investors would often throw? That tantrum was a reaction to any suggestion that the Fed might scale back on its quantitative easing measures.

In other words, Wall Street LIKES an aggressive and accommodative Federal Reserve. And, higher rates could quite seriously trigger a whole new set of unintended consequences and even, a massive market downturn.

Krugman insists that, “the idea that we’re going to break out into a runaway wage price cycle just doesn’t make a lot of sense.” As an economist, Krugman ought to know… there is such a thing as the law of unintended consequences.

Meanwhile, the Princeton professor also insists that the failure of the Obama-Biden $800 billion stimulus plan was attributable to its lack of size, telling CNN that,

“The lesson we learned from 2009 is that if this thing isn’t a clear success right out of the gate, then we will not get a second chance.”

Again, this is wrong.

The failure of the Obama-Biden $800 billion “stimulus plan to no-where” was not its size, but the Obama administration’s constant threat of additional regulation and higher taxes.

Negative rhetoric from the Obama administration resulted in fewer companies wanting to expand and thereby left the Obama team with annualized GDP growth of less than 2%.

You couple that with some record low interest rates (for a record amount of time) and a slew of quantitative easing measures from the Federal Reserve and suddenly, we were left with an environment of low growth yet, serious stock market inflation.

As a result, we witnessed a growing gap between the haves and have nots. Unintentionally, the Fed created an environment in which,

The rich got richer. The poor stayed poor. And, the middle class increasingly felt the squeeze.

In other words, the real economy felt the pinch and size had nothing to do with it. Rhetoric, taxes, and policy did. 

It’s time the Biden administration focus on the things that can really move the needle for our economy. Forget about handouts – please open up our businesses, open up our schools, and encourage mass vaccinations.

America will get back to normal not through stimulus, but by getting back to business.




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