Becoming a technology strategist for a Fortune 100 firm wasn’t something that was black and white as if one day I was server support and the next I was helping plan the 5 year window for business technology evolution. It is something that I grew into overtime and was partially mentored into being from the project management aspect. One of the essential skills is being able to see the bigger picture of the effects of contemplated changes to various technologies in the singular. When it comes to billions of dollars in revenue in a global enterprise, maintaining the correct recipe of technological functionality matters or any evolutionary steps become worthless; almost nothing can happen in a vacuum without serious risks to the technological ecosystem no matter how well intentioned a change might be.
My point, as I didn’t intend to bore you, is that economic policy for the largest economy in the world is really no different than the correct recipe of technology functionality for a global enterprise. Very low inflation, for example, might be something that most people want. But what does that mean in the context of other goings on in the economy? What does it mean for fiscal policy? What does getting there via monetary policy mean for existing debt and the financial system at large? Is monetary policy even the appropriate principle tool to achieve that end, or is there a better way? Monetary policy is only one cog in the machinery of commerce; and changing the size of the teeth in that cog without coordination can cause serious problems in the works.
For another analogy, perhaps tightening monetary policy under the conditions of a negative supply shock results in something similar to changing the gauge of the railroad tracks over night – forcing changes to other policies established by the political system (and other private concerns that are similarly based on expectations) to accommodate the new reality. In my previous line of work, that would be a huge no-no.
I decided on this topic today upon reading some, from my point of view, rather ridiculous claims about what people expect out of the central bank when prices start to rise quickly that were combined with claims that NGDP targeting might preclude expansion in the face of a positive supply shock. What this person was saying is that he wants big boom and big bust cycles to happen all of the time – because the big bust is what happens when we reason from a price change. It is amazing to me that when it comes to discussing inflation of any kind people seem to lose their sanity and regain it when talking about advantages of positive productivity shocks.
If we were to suppose that an inflation policy similar to the one followed by the Fed in 2006-12 and one being dreamed about on the part of the inflation nutters should be the hard and fast policy of the Fed always and everywhere there would be other things that have to change in the peripheral in order to have even a chance to make it workable and avoid happenings like the Great Recession and all its consequences.
One of the changes that would be required is that public policymakers would have to get serious about securing and protecting the supply of energy, which, in my opinion, is contrary to what is desired in the areas of foreign policy and environmental preservation. If we expect the Fed to target headline inflation, we will need to have more wars for and over oil, and exert as much pressure as possible to break up OPEC. We need to solve problems in Nigeria, for example; because any disturbance in energy prices will have an effect on the stability of the economy and wreak havoc on the lives of ordinary people. An alternative would be to use our own sources of oil. Alternative energy would be out of the question until it is cheaper than oil or natural gas because the point is to keep prices low and prevent spiking – to keep the Fed from tightening and changing the world as we expected to be when we made borrowing and spending choices. We have to get nominal stability from somewhere, and if we want the Fed to tighten policy in an oil shock, we have to keep the shocks from happening in the first place.
This particular point is why I don’t agree with folks who acknowledge that the Fed made a mistake but insist that we can just let the markets adjust to the new monetary reality over time without changing anything. Unless we want more great recessions in the future, we do indeed need to change something. The question is, what should we change? Are all these people who rail at the thought of monetary easing really gung ho for foreign interventions of all kinds? If not, they are suggesting that having the economy blown about by every wind is preferable to either. I don’t believe our political cohesion could withstand that kind of economic masochism. And of course, this requirement would be even more imperative under a gold standard.
The bottom line is, if we like big, intrusive government, tight money via targeting headline inflation is the way to go. We can get to Argentina status real quick.
Really, I think it is the least bad alternative to just ensure nominal stability within monetary policy itself and let the supply side take care of itself.