Paul Krugman (Albany, 69 years old) tends to EL PAÍS before pulling out his laptop to start writing his column New York Times. He has just opened the International Congress of Cooperatives, Social Economy and Public Economy (CIRIEC) that took place in Valencia, where he highlighted social inequalities in particular.
Questions. Inequality is one of the major legacies of the financial crisis in Spain. Can inflation make it worse?
answer. It is unclear. In the United States, we’ve had much better salary growth on the lower earners than on the higher earners. In fact, we have reduced wage inequality. There is a problem with the big profits of the oil companies, but that is not the case in Spain. The problem will not be that, it will be that people will see a reduction in their real income.
P The latest World Inequality Report points out that measures against the pandemic even made it possible to reduce poverty in the US…
R. Unfortunately, many of these programs have already expired.
P But doesn’t that reassure us that reducing inequality or poverty is clearly a political choice?
He knows all sides of the coin in detail.
R A lot of. In the midst of the pandemic, we were able to reduce poverty amidst massive unemployment. And without negative economic effects. This tells us that it is a political decision, that it is not necessary to suffer all this. Unfortunately, at least for the time being, the political decision has been made to allow poverty to rise again.
P We expected a strong economic recovery, but the invasion of Ukraine and inflation spoiled the party. Are we going into stagflation?
R We’ll probably have something like stagflation, but I don’t think we’ll go back to the 1970s, there’s no sign of a price-wage spiral. The US economy appears to be overheating, with core inflation at 4%, and we need to cool it down. That means rising interest rates. But I don’t think there will be a serious recession and inflation will come down relatively quickly.
R Within a year it could be 3%.
P But citizens now go to the supermarket and see that olive oil has become 40% more expensive. what can be done
R The Federal Reserve is already raising interest rates. I’m a bit more confused about Europe. I’m not entirely sure what the ECB is doing as core inflation in Europe looks lower than in the US. In Europe it is practically one shock pure offer. I don’t see why interest rates should go up. And yet markets believe the ECB will hike it as much as they expect the Federal Reserve to hike it.
P. The ECB has already announced a rate hike for July and another for September. And that is just the beginning.
R But they are betting on a 300 basis point rise on both sides of the Atlantic. I understand Lagarde’s concerns, but I think the ECB may be exaggerating.
P The ECB calls for wage increases to be controlled in order to avoid an inflationary spiral. What do you think?
R The problem is not that wages are starting to reflect prices, but that people are starting to base their decisions about prices and wages on the expectation that inflation will remain high.
P The interest rate hike has already triggered risk premiums in southern Europe. Are fears of another debt crisis like the one in 2010 justified?
R I do not see it. I don’t think the actual debt service burden in Spain is high. Markets should not distrust Spain. Markets may fear another liquidity crisis. Last time, Mario Draghi ended it with three words: whatever is necessary [’cuanto sea necesario’]. Perhaps they are afraid that the ECB will not repeat them again. But in reality these differences reflect a political rather than an economic crisis, namely Europe’s will to take the necessary steps to preserve the stability of the euro.
P. Midterm elections are taking place in the United States this year. Do you think inflation will punish Democrats?
R Social issues like abortion could lead to the Democrats being bailed out. But they’re probably paying a price for inflation. And it’s extremely unfair. Biden arguably spent too much. But people are upset about the price of gas. And he has no control over that.
P But Treasury Secretary Janet Yellen said inflation will not spiral out of control.
R. We didn’t know that Russia would invade Ukraine. Oil and food prices have risen on events entirely outside the US government, but voters will ponder how much it’s costing them to fill their tanks and they could blame the president. Biden will pay a political price for Vladimir Putin’s actions.
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