I always find postings by Britmouse refreshingly eloquent and informative. In a new post today, however, he’s upped the ante by pulling the disagreement between market monetarists and mainstream inflation nutter econ up a level, out of the realm of the technical and putting it bluntly that low inflation, low employment, and low output is quite simply a policy choice.
It is – or should be – astonishing that unelected technocrats get away with this madness without being immediately ejected from office….
Low inflation, low output, low employment – it’s simply a policy choice. They know it is a policy choice. They think low inflation, output and employment are the right policy choice, because rising household debt leads to, well, um, maybe low inflation, output and employment.
Actually, I’ve been wanting to do a post like this one for a little while and stumbled around with exactly how to go about it after dropping a straight forward comment on a post by Macus Nunes a few days ago:
The question of our time these people avoid like the plague and bury under a bunch of technical mumbo-jumbo is whether or not we should manage price fluctuation issues, regardless of source, with a sustained output (employment) gap. Of course I thought we had settled that argument with the spirit of the full employment and balanced growth act, but people like Taylor believe they have the right to overturn that political consensus and do their own thing. When will the supposed part[y] of the people that controls the senate and the presidency decide intervention in this disaster is required? If it hasn’t gone on long enough, I think they owe us an explanation.
That question, whether we should manage price fluctuation issues with an employment gap, is at the heart of the of the objection market monetarists have with the current inflation nutter monetary regime. Instead, we’d prefer a nominal gross domestic product target to stabilize income expectations so that rational choices about personal finance can be made and generally relied upon, with unexpected and temporary rises in headline inflation taking a bite out of the standard of living rather than causing unemployment to spike, intensifying disinflationary pressures and destroying the financial lives of multitudes of average people.
For me, the choice is easy as I prefer not to put millions of people out of work so those who are lucky enough to be still employed can pay less at the gas pump. The supply side issues that cause a spike in prices will have to be addressed on the supply side – not by monetary policy.
I wonder what the politicians have to say about this, because as you may or may not know, the Fed only started down the path of targeting headline inflation since the beginning of Bernanke’s tenure. If they were individually asked the question, which policy choice is your preference, I bet they would say that they prefer for the central bank to not knowingly put people out of work if there is an alternative. No sane person would choose the hardcore depression era inflationopobic treatment of average Joe; and certainly no sane politician (something less than a person?) would ever publicly admit to doing so. Yet, this is exactly the choice they are making when they neglect responsibility for what the central bank does and refuse to show the central bankers who is ultimately in charge of policy choices that dramatically affect the General Welfare.
As in my comment above, here in the US we had a political consensus circa 1979 that added full employment to the mandates, indicating that a balance between inflation, output/employment, and moderate interest rates is required. I might be wrong, but there is nothing it that could be construed into meaning all price fluctuations will be managed with an employment gap. In fact, the name of the amendment to the Federal Reserve Act is The Full Employment and Balanced Growth Act; and price stability appears as an afterthought, not a forethought. Of course the Federal Reserve Chairman appears before and testifies to a select subset of those almost persons on a quarterly basis; and though I try to watch the hearings, I haven’t seen them all. But it’s a really strange thing that Bernanke was never asked in any of the ones I saw what the Full Employment and Balanced Growth Act means to him, or if it’s appropriate to focus like a laser beam on inflation, come what may for output and employment. An even better question that hasn’t been asked is why, if there’s alternative that would likely have results that are more consistent with the mandates, it hasn’t been tried.
Then, from another practical point of view, we were told by the central bankers themselves that the most important and best thing the central banks can do is control inflation to provide more certainty in financial planning and stability in financial dealings – and I assume they did that given that prior to, during, and for years after the financial crisis they kept repeating how necessary it is to maintain credibility on inflation as unemployment persisted in the 10% range, inflation has been persistently ~50% below target over the last 5 years and is still trending downward, and we have the lowest LFPR in 35 years! Truthfully, we’ve had all of the opposite of that which was promised since the Fed started tightening in 2006 that carried on through 2007, and was very reluctant undo the overdoing in 2008 through late 2012. It’s well past time to declare it a failure of epic proportions and try something else – and our politicians should be demanding it.