President Joe Biden's $1.9 trillion pandemic-relief bill poses no danger of inflation spiralling out of control, as it did in the 1970s, according to Nobel Laureate economist Paul Krugman.
Regarding the inflation crisis of the 1970s and early 1980s, Krugman said: "It took really more than a decade of screwing things up -- year after year -- to get to that pass, and I don't think we're going to do that again," reports Bloomberg.
He spoke with David Westin for Bloomberg Television's "Wall Street Week," which will air on Friday.
According to Krugman, who is currently a professor at the City University of New York, the Federal Reserve has "easy" resources to counter market rises if necessary, and is unlikely to return to the 1970s' "seriously, seriously reckless monetary policy."
The worst-case outcome from the fiscal stimulus plan, according to Krugman, will be a temporary increase in consumer prices close to what happened early in the Korean War. He described the relief bill as "definitely significant stimulus but not wildly inflationary stimulus."
The liberal economist also predicted that Fed policymakers would not be deterred from acting because of fears of a backlash in the bond market, where yields have already risen, causing ripple effects into equities.
Fed tightening spurred a shock rout in Treasuries in 1994, but "nothing really terrible happened" ultimately, and policy makers will keep that in mind, Krugman said. "No one at the Fed wants to be the people responsible for bringing back the 1970s, so I don't think they're that much constrained."
It was a combination of excessive expansionary fiscal policy under President Lyndon B. Johnson, two oil shocks, and irresponsible monetary policy under the Fed Chair Arthur Burns that combined to create the double-digit inflation of the 1970s that peaked in 1980, Krugman said.
The risk is that policy makers are "fighting the last war" -- countering the undershooting of the 2% inflation target and limited fiscal measures taken after the 2007-09 financial crisis, the economists said.
Even so, he argued that "redistributionist" aspects of the pandemic-relief package will reduce the need for the Fed to keep monetary stimulus too strong for too long in order to address pockets of high unemployment.
Fed Chair Jerome Powell has repeatedly said the central bank wants to see very broad strengthening in the labor market, not just a drop in the national jobless rate.
"It's not silly to think that there might be some inflationary pressure" from the fiscal package, Krugman said. But it was designed less as stimulus than as a relief plan, he said.