Krugman: Don’t Yank away that Punch Bowl

To me, as to a number of economists — perhaps most notably Lawrence Summers, the former Treasury secretary — the answer seems painfully obvious: Don’t yank away that punch bowl, don’t pull that rate-hike trigger, until you see the whites of inflation’s eyes. If it turns out that the Fed has waited a bit too long, inflation might overshoot 2 percent for a while, but that wouldn’t be a great tragedy. But if the Fed moves too soon, we might end up losing millions of jobs we could have had — and in the worst case, we might end up sliding into a Japanese-style deflationary trap, which has already happened in Sweden and possibly in the eurozone.

What’s worrisome is that it’s not clear whether Fed officials see it that way. They need to heed the lessons of history — and the relevant history here is the 1990s, not the 1970s. Let’s party like it’s 1995; let the good, or at least better, times keep rolling, and hold off on those rate hikes.

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