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Monday, March 09, 2015

Paul Krugman: Partying Like It’s 1995

Patience!:

Partying Like It’s 1995, by Paul Krugman, Commentary, NY Times: Six years ago, Paul Ryan,... the G.O.P.’s leading voice on matters economic,... warned that the efforts of the Obama administration and the Federal Reserve to fight the effects of financial crisis would bring back the woes of the 1970s, with both inflation and unemployment high.
True, not all Republicans agreed with his assessment. Many asserted that we were heading for Weimar-style hyperinflation instead.
Needless to say, those warnings proved totally wrong. ... Far from seeing a rerun of that ’70s show, what we’re now looking at is an economy that in important respects resembles that of the 1990s. ... The Fed currently estimates the Nairu at between 5.2 percent and 5.5 percent, and the latest report puts the actual unemployment rate at 5.5 percent. So we’re there — time to raise interest rates!
Or maybe not. The Nairu is supposed to be the unemployment rate at which ... an inflationary spiral starts to kick in. But there is no sign of inflationary pressure. ...
The thing is, we’ve been here before. In the early-to-mid 1990s, the Fed generally estimated the Nairu as being between 5.5 percent and 6 percent, and by 1995, unemployment had already fallen to that level. But inflation wasn’t actually rising. So Fed officials ... held their fire... And it turned out that the ... economy was capable of generating millions more jobs, without inflation...
Are we in a similar situation now? Actually, I don’t know — but neither does the Fed. The question, then, is what to do in the face of that uncertainty...
To me, as to a number of economists ... the answer seems painfully obvious: Don’t ... pull that rate-hike trigger until you see the whites of inflation’s eyes. If it turns out that the Fed has waited a bit too long, inflation might overshoot 2 percent for a while, but that wouldn’t be a great tragedy. But if the Fed moves too soon, we might end up losing millions of jobs we could have had — and in the worst case, we might end up sliding into a Japanese-style deflationary trap...
What’s worrisome is that it’s not clear whether Fed officials see it that way. They need to heed the lessons of history — and the relevant history here is the 1990s, not the 1970s. Let’s party like it’s 1995; let the good, or at least better, times keep rolling, and hold off on those rate hikes.

    Posted by on Monday, March 9, 2015 at 09:04 AM in Economics, Monetary Policy | Permalink  Comments (51)


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