When I read Scott Sumner’s latest post, used to respond to some points made by Michael Hatcher about NGDP targeting, I picked up on a premise in the quoted Hatcher points that, for lack of a better phrase, I would describe as an unjustified high level assumption that keeping inflation low and stable is what monetary policy should be all about.
And the following questions went through my mind:
- What inflation measure are we keeping “low and stable,” and does it really matter?
- Why is it imperative, above all else, to keep inflation low and stable rather than inflation being allowed to reasonably drift with supply side conditions?
- What does it mean in an economic atmospheric sense to not allow headline inflation to drift with supply side conditions versus allowing it?
- If headline inflation is nearly always a supply side phenomenon, what affect does it have to effectively cap pricing pressures as a matter of policy? Don’t those pressures have to go somewhere?
- If the pricing pressures do have to go somewhere, where do they go, who bears that burden?
- Lastly, do the ultimate effects of headline IT on an economy amount to the spirit and meaning of the Fed’s mandates contained in the Full Employment and Balanced Growth Act? Does it produce and maintain full employment and balanced growth?
I think I already have an idea of what the answers to these questions are, as the crisis of 2008-9 is a pretty good real world example of the kind of economic stability attempting to contain supply side inflation with monetary policy produces. And if I am right about that… or rather, I should say, if Scott, Lars, and Marcus are right about this being a good real world example of the kind of economic stability headline IT produces, then I am at a loss as to why smart and well intentioned people cannot seem to let go of the concept; because of the nature of nominal control, IT produces inflation stability while every other nominal measure of economic wellbeing, such as income, is left to drift, sometimes wildly, as supply side pricing pressures are spread throughout the economy (it’s even worse than this in practice as the Fed offset the oil crash which equals all of the pain with zero upside).
I truly believe that many intellectuals such as Mr. Hatcher do not understand what stabilizing inflation really means. Part of this misunderstanding comes with the complexity inherent in IT, with so many measures and methodologies of measuring to choose from, some that may be worthwhile for monetary purposes, while other simply are not. But some of it, I suppose, comes from a mistaken impression of what inflation is and that it has only one cause. As Nick Rowe has pointed out on his blog, probably on more than one occasion, inflation exists even in barter economies, and cannot be purely a monetary phenomenon.
My opinion is that, for the good of mankind, in our discourse, a lot more emphasis should be placed on the moral hazards involved in IT that NGDPLT would mitigate.