Bhagwati: The U.S. is underestimating inflation risk
I have highlighted comments by famed Columbia University economist Jagdish Bhagwati before (see “Jagdish Bhagwati: Obama is a protectionist”). Bhagwati has since gotten with the program and sees Obama in a much more favourable light. However, he is sceptical because Obama has not said boo about free trade.
Now Bhagwati is turning his attention away from trade, his specialty and talking inflation. He’s not saying he’s 100% sure the U.S. will go into hyperinflation like some pundits. But, in talks with the Financial Times Deutschland, he did make clear that he is worried about inflation. Nevertheless, he too warns of a 1937-style Armageddon if stimulus is withdrawn too quickly. He goes into a lot of other topics as well, including the cozy relationship between Wall Street and Washington (singling out Tim Geithner in particular) and the lack of regulatory reform.
My translation of the German-language article is below.
The world renowned Economist Jagdish Bhagwati is not worried about financial markets – but he is worried about the risk of inflation.
The world renowned economist Jagdish Bhagwati has warned the governments in Germany and the United States about an erroneous assessment of inflation risks in their respective countries. Angela Merkel’s fears are "excessive", while the Americans have been reckless regarding the future risk of rising prices, said the Columbia University professor and Globalisation guru to FTD. "In the U.S., they underestimate the inflation threat: There are enormous amounts of money in circulation, but there have been no announcements for a clear exit strategy."
The Indian is world renowned for his defence of free trade and globalisation. Following the crisis, he argued that globalization in trade was a success, but, in the financial markets, it had failed.
Germany tends to be too cautious when it comes to supporting the economy, said Bhagwati. It is certainly "too early, now or in the next few months," to roll back stimulative measures just because medium inflation risks are present. A premature withdrawal would have disastrous consequences, according to Bhagwati, as we have seen in the past. "For a reversal, 18 to 24 months seems an appropriate time frame."
Bhagwati classified it as basically correct that Merkel is reacting to the fears of the population. "In the U.S., a concrete plan of how the stimulus will be taken back is completely lacking," the economics professor criticised. Even if the date for the withdrawal cannot yet be set, the government should demonstrate how they will proceed "as concretely as possible.”
The macro-economist showed scepticism about a third stimulus package. Laura Tyson, a key adviser to U.S. President Barack Obama, among others, has called for such a program. "As yet, not even all the money from the first package has been spent," said Bhagwati. Thus, spending more makes little sense. "The next delayed instalment of the first package will act like a third stimulus." The discussion underscored the lack of sensitivity to inflation risks. Much of the spending would be appropriated wrongly anyway, and corruption would creep in, the Columbia economist criticized. "The bulk of the money will be wasted."
The U.S. economic measure are less reason for hope for the world economy, according to estimates given by Bhagwati, than the recent signals from Asia: "In China and India huge bottlenecks in the infrastructure provide for substantial additional demand," said Bhagwati. That would help the rest of the world out of the crisis, including the United States. "In this respect I am optimistic that the crisis will no longer last for years."
In regards to the financial markets, the economist now has no more worries: "I would not step onto an aircraft carrier and declare that the war was over like George W. Bush once did – but I think we are on the right track."
Nothing has changed, in Bhagwati’s view, regarding the close link between Wall Street and politics. There is a lack of critical distance, which was one of the main causes of the financial crisis. "The reform of rating agencies is, thus, an urgent need," said Bhagwati. Moreover, he again called for the establishment of a financial market supervisory body of independent experts. Possible candidates [to head the body] would be Harvard economist Kenneth Rogoff, Fed Chairman Ben Bernanke and Deutsche Bank Chief Economist Norbert Walter.
Therefore, Bhagwati was critical about the new U.S. Treasury Secretary Timothy Geithner. He is considered closely allied with Wall Street. "I was not too excited about this staff selection," said the economist.