At a time when it is fashionable to trash the Fed on everything from the Bear Stearns bailout to high inflation, Paul Krugman comes to Ben Bernanke’s rescue. While everyone is worried about the return of stagflation, Krugman thinks Bernanke is right to make sure this decade isn’t the 1930s, not the 1970s.
Specifically, Krugman doesn’t see inflation as the [main] problem:
…this time around there’s no wage-price spiral in sight.
The inflation hawks point out that consumers are, for the first time in decades, telling pollsters that they expect a sharp rise in prices over the next year. Fair enough.
But where are the unions demanding 11-per cent-a-year wage increases? (Where are the unions, period?) [Exactly–maybe they’re not strong enough to demand 11% wage increases anymore, especially with corporations struggling]. Consumers are worried about inflation, but you have to search far and wide to find workers demanding compensation in the form of higher wages, let alone employers willing to accept those demands. In fact, wage growth actually seems to be slowing, thanks to the weakness of the job market.
Krugman therefore thinks a rate hike would only serve to kill the fragile economy:
The bottom line is that while expensive gas and food are inflicting real harm on American families, they aren’t setting off a ’70s-type inflationary spiral. The only thing we have to fear on that front is inflation fear itself, which could lead to policies that make a bad economic situation worse.
No question a rate hike would threaten the “recovery,” such as it is. On the other hand, presumably the 70s inflation spiral didn’t begin as a “spiral,” either. Don’t prices have to go up for a while before unions demand 11% wage increases? We have huge respect for Krugman’s economic views, but we’d like to hear more on exactly how these wage-price spirals get started, if the current situation won’t lead to one.