Paul Krugman admits that he underestimated the current rate of inflation when assessing the impact of the $1.9-billion “American Rescue Plan” early in 2021. On the other hand, Lawrence Summers warned in February 2021 that inflation might rise too high for comfort. Krugman notes that they both he and Summers used essentially the same model but “had… an argument about magnitudes.” Moreover, Krugman explains,
The multiplier on the rescue plan does, in fact, seem to have been relatively low. A lot of consumers saved those checks; state and local government spending rose by less than one percent of G.D.P. Employment is still below its prepandemic level, and real G.D.P., while it has recovered to roughly its prepandemic trend, hasn’t shot above it.
Yet inflation soared anyway.
Krugman then suggests other possible culprits. First, the economy running “hot,” rather than “cold” as in previous cycles, – close to production capacity, if I understand him correctly. Second, disruptions “associated with adjusting to the pandemic and its aftermath,” Russia’s invasion of Ukraine, and Chinese lockdowns.
On a recent MSNBC show with Mica Brzezinski, Krugman even said, “Nobody saw Putin invading Ukraine. I think nobody thought about logistic supply chains…”
Everything sounds like a hyperbole on TV but even toned down, this claim is difficult to accept. Especially the part about supply chains and China. In February 2021, a year into the pandemic, there was enough concern about both supply disruptions and China’s zero-tolerance anti-virus policy.
On Russia and Ukraine, the high likelihood of a Russian assault was a minority view until it actually happened but there were warning sings already in the spring of 2021. Note, for instance, this discussion at the Wilson Center in April 2021. Also, a post on this blog from April 3, 2021.
It was probably a case of not paying enough attention to developments in the wider world.