I want to start off with repeating a reply George Selgin made to Scott Sumner about Miles Kimball because I have only touched on the point that I can find nothing rational in the idea that inflation, regardless of its source, must be controlled by monetary authorities at all costs very vaguely before. So here’s George:
Kimball’s technology argument is precisely the argument for zero (or constant) inflation in the face of changes in the growth rate of TFP that I have sought to refute in _Less Than Zero_. There is, in fact, nothing to it, save the belief–itself nothing more than an article of faith–that changes in the rate of inflation are “bad,” even if they reflect changes in the extent of factor output.
It cannot be repeated often enough: stability of NGDP growth is NOT properly regarded as a means toward the higher end of stabilizing the rate of inflation. It is itself a policy desideratum, because it serves better than inflation stabilization does to avoid “unnatural” changes in real economic variables.
And here’s what Mishkin had to say in a 2007 speech about headline inflation targeting:
As I discussed in a recent speech, both inflation measures are important: Core inflation is a useful indicator of the underlying near-term trend of inflation, and overall inflation is what households and businesses ultimately care about (Mishkin, 2007c). Therefore, a significant aspect of the enhanced communication strategy is that the FOMC has added the overall inflation rate to its announced projections.
And here is what Bernanke said in 2005 about inflation targeting:
He thinks that a more “transparent” Federal Reserve policy would promote stable, noninflationary economic growth by giving businesses and consumers more certainty about the future course of interest rates and inflation.
Does Bernanke admit that inflation targeting would decrease the Fed’s flexibility? No. He says that in a crisis the Fed would do whatever it takes to stabilize the economy. Frederic Mishkin, a Columbia University economist and longtime Bernanke collaborator, says that establishing credibility with the financial markets as an inflation hawk gives an inflation-targeting central bank more, not less, flexibility to tackle recessions.
There are plenty papers and books written about IT to be dug up with an internet search, including two such works written by Bernanke with others that I have stumbled upon while looking into it. None of them, however, take the time to explain one simple aspect that we should all understand: what we are supposed to get from it – what is the trade off?
Working in a large corporation in technology architecture, it is a routine question that needs to be answered because the company has no time and no extra resources to go chasing dreamland technology for technology’s sake. If questions like how much does it cost, what do we get, and how do we fit it in don’t get answered satisfactorily coming out of the shoot, the project dies before it even hits the planning stage.
But all we got before Bernanke and Miskin’s adventure with explicit inflation targeting was mere vagaries as justification. Everyone wants stable prices, right? Umm… well… I don’t know. At what expense? Really, I think we need some honesty about what it means; and I don’t mean the kind of honesty we can pick out of the statistics for things like income expectations and NGDP growth.
Looking at those statistics over the last decade or so, one can see correlation between the time Bernanke and Mishkin lead the FOMC down that path and odd things starting to happen. Perhaps it is just a coincidence that the recession that became the Great Recession started at near the precise time that the FOMC added headline inflation to its communication strategy. Why? Because the expectation was that the FOMC would be tightening in the face of an oil shock.
And according to Mishkin, all that is needed was to establish credibility for being an inflation-hawk to be able to deal with recessions. Perhaps when Mishkin got the “talk” about the facts of life, birds and bees, the point that supply shocks happen as a fact of life was left out. Oh but when you’re targeting headline inflation, you don’t care about whether you’re forcing reallocation on the broad economy or what the law says – just as long as prices are stable. What kind of inflation-o-phobic maniac would do that? Now everyone is so concerned with inflation, even at epic low levels, when I hear it I feel like I’m back in 1979.
And where did the 2% inflation number come from, anyway? Why not 2.5% or 3%? Can’t there be other things going on in the economy, having to with productivity and supply/demand imbalances that having a higher or lower target would make more sense? While I’m at this, perhaps it really isn’t such a bad idea, if any inflation at all is such a terrible thing – why not -1% or -5%? We would all love to go to the store and pay less instead of more – right Mr. Bernanke? People would really love him if he could do that. They don’t do that because they understand the epic monstrosity and sado-economics of monetary deflation . But I wonder how much thought was put toward the wrongheadedness of targeting headline inflation which is nearly as bad. Perhaps to them, the difference between too low inflation and deflation is simply a matter of degrees. But then again so is economic damage. Basic marco seems easy enough for me to understand; perhaps Bernanke and Mishkin thought that they could defeat MV=PY and the AS/AD model with credibility and make the 2% headline target not hurt so bad. It’s just a guess.
That brand of IT has no basis in reality and no value. Just compare the costs of bailouts and debt crises, the explosion in social spending needed because of price and wage stickiness, all with associated tax issues, plus the opportunity cost of laying waste to an entire generation and it likely outweighs any real or imagined costs of more mild inflation. It isn’t rocket science.
Even worse, the inflation boogieman has provided fuel for the leaders in the developed economies to take intellectual advantage of their constituencies. There is so much demagogic inflation rhetoric flying around over a possible cut in nominal interest rates by the ECB with most of the eurozone facing the reality of deflation, it seems entirely irrational to be so concerned about any rise in prices at all when the unemployment rates in Spain and Greece are over 25%, and most of the rest of the currency block hovering around 10%. It’s much ado about nothing anyway – cutting the nominal interest rate will do nothing for them.
So there it is – a theory born out of fear that can’t be defended takes precedence over rational thought and sensible governance – and millions of people are being “crucified on a cross of gold” in the name of price stability. I hope for the sake of humanity that we snap out of the utter madness very soon.
PS: Reuters app for iPad is great for Fed watchers
I just wanted to let my fellow Fed watchers know that the Reuters app for iPad is great for Fed-watching. It has a category in the Business/Markets section for central banking. It took some stumbling around to find it, though. I was reading a story about Ben Bernanke in the Markets section and at the bottom it gave the option to view more stories in “Central Banking.” I clicked on the button and there was a listing of about 25 stories about various Fed officials and those from other central banks around the world that I had never seen before, most of them very recent.