The self-reflection of Paul Krugman

Paul Krugman, professor of economics at the Graduate Center of the City University of New York, admitted that he had underestimated the inflationary impact of the stimulus package of the Biden administration in his New York Times opinion column, “I Was Wrong About Inflation.” Professor Krugman is one of the distinguished American economists with progressive ideas who received the Nobel Memorial Prize in Economic Sciences.

Early last year, President Joe Biden signed the $1.9 trillion coronavirus relief package

bill. Some warned that the package would be dangerously inflationary, but Mr. Krugman argued that it wouldn’t sharply increase inflation. However, as U.S. inflation climbs to a new 41-year high of 9.1 percent, the economics professor admitted that he had been wrong about it. In addition, U.S. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell confessed that they had underrated the risk of inflation.

In the U.S., at a time when economist and highest officials in the Fed and U.S. Treasury acknowledged their faults for excessive fiscal spending and the failure of predicting inflation, Korean politicians aren’t showing any signs of remorse for their unprecedented spending in the wake of the Covid-19 pandemic. The former Moon Jae-in administration and the Democratic Party of Korea decided to provide cash handouts to every household right before the April 15 general elections of 2020. It also passed the supplementary budgets ahead of the by-election on April 7 of 2021 and the presidential election in March this year. President Yoon Suk-yeol also passed the supplementary budget of 62 trillion won including 39 trillion won for general expenditure, ahead of the June 1 local elections, whose election pledge was to set aside 50 trillion won in the extra budget to subsidize the self-employed and small and medium business owners.

The government claims that the highest inflation since the Asian Financial Crisis took place because of supply chain disruption caused by external factors such as the Russian invasion of Ukraine, the Covid-19 pandemic, and new cold war between the U.S. and China. However, we cannot deny the impact of the populist pledges of politicians which increased national debts. Too much liquidity has also caused skyrocketing housing prices, young Koreans fully taking out loans and using the money to invest in stocks, and the cryptocurrency bubble with the Kimchi Premium.

The government’s plan to cut 13. 1trillion won in taxes this year would also negatively impact inflation. Although it claims the plan is to normalize the tax system and activate mid-to-long term investment, it will increase liquidity to have the same effect of the Bank of Korea raising policy rates. When income decreases, without efforts to reduce spending, the rising national debt could eventually threaten the fiscal health of the country. The government and politicians who should be held accountable for the high inflation rates should stop big money pledges and make drastic cuts to public spending.