Krugman's lame defense of Bernanke's pro-inflation policy

Posted Jun 2nd 2008 9:57AM by Peter Cohan
Filed under: Eastman Kodak (EK), Dow Chemical (DOW), Commodities, Oil, Federal Reserve

Paul Krugman's New York Times op-ed tries to defend his Princeton colleague, Federal Reserve Chairman Ben Bernanke. Krugman suggests that inflation is not a problem because he can't find any long-term labor contracts with 11% annual pay increases as in 1981's United Mine Workers contract.

Krugman gets himself into a weak position and he does not disclose his fealty to Bernanke whom he evidently does not believe can defend himself. It seems absurd to pretend that inflation is not a problem. Food prices have tripled and oil prices have doubled as Bernanke cut the Fed funds rate from 5.25% to 2%. Last week Dow Chemical (NYSE: DOW) announced a 20% price increase as did Eastman Kodak (NYSE: EK) in response to rising oil and other commodity prices. Huntsman Chemical (NYSE: HUN) announced a 25% price increase. And consumers -- who account for 70% of GDP growth -- expect inflation to rise at a rate of 7.7%.

Strapped consumers may demand wage increases. So Krugman has a point that it's worth looking at labor contracts. Unfortunately for his position, there are plenty of inflationary labor contracts being negotiated now if he cared to look. The San Francisco Chronicle reports that Silicon Valley janitors contracted for a 22% four-year wage increase. Bloomberg News reports a three-year 3.5% annual wage increase for the 70,000-member American Federation of Television and Radio Artists (AFTRA). The Seattle Post-Intelligencer reports on a local police contract for 36% wage increases by 2010 for rookie officers and a 25% increase for veterans.

Granted, this is not a comprehensive survey but it suggests that Professor Krugman has locked himself into a position of pretending inflation is not a problem and in so doing is ignoring all sorts of evidence to the contrary.

Let's hope the Fed will stop ignoring this evidence and raise rates before inflationary expectations get even more baked into the economy.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

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