I have been working on the 357th post about the logical problems with inflation targeting. This particular post has been through probably as many revisions, and still has not made it to my front page because it is somewhat of a complex problem to break down into generality while avoiding unconnected points.
For a rational and concise post on along the same line, Scott Sumner’s post on the topic is a great starting point. To summarize it, IT is not a superior monetary policy regime for ensuring economic stability or general welfare. And this is the exact point I had been trying to tease out of my sort of rant-laced critique of the IT regime, while questioning the rationality behind blind adherence to a policy practice that may have had some relevance in days past, but probably is no longer applicable to today’s needs. In simple terms, one cannot make a silk purse out of a sow’s ear. We have silk purse expectations, but policymakers just can’t seem to let go of the sow’s ear regardless of the opportunity cost to society as a whole.
I made a post earlier on the great public responsibility that comes with the power of monetary policy making. In it, I raised the issue of the many discussions in the macro econ blogosphere of various policy tweaks and some more major retrofitting ideas that could be implemented into monetary policy formulation that reached the level of discussion at the Federal Reserve. The consensus on many of these, like raising the inflation target or level targeting the price level, was that they are better than doing nothing. Yet, it appears that doing nothing is what was decided upon by the people with the power to make the choice.
I feel the need to apologize in advance because with the financial crisis and Great Recession still in full view in the rear view mirror, I fail to understand what redeeming qualities there are that make IT desirable to cling to, and nobody from within the marble halls of the Fed has been able to explain the stubborn adherence in a way that makes sense.
My position is that there is no convincing common good to the delivered results of IT in practice, or to the notion that keeping inflation in check is the only thing that matters for public welfare. We’ve seen just the opposite; there is simply no rational argument to be made that everyone was better off to have the nominal shock that caused the financial crisis and adherence to the inflation ceiling that turned an ordinary recession into the Great Recession as opposed to riding out the peril of a negative oil supply shock. Yet we are still stubbornly stuck on a broken policy regime as wage earners across the dollar block suffer for it twice initially for each negative supply shock, thrice if counting the stigma attached to participation in public safety nets, and again when robbed of the relief that should come with positive supply shocks.
The use of IT as monetary policy given the inability to disentangle price changes related to monetary issues from those that are not at the macro level amounts to a regressive tax incidence on wage earners that profoundly devastates those with no other means of survival. In my view, the effects of IT in practice are profoundly abhorrent and morally unacceptable. And the reasoning behind why it is still with us, persistently dressed up with wig-and-lipstick propaganda is entirely baffling because we really should not be designing policy that inherently hurts the people the people at the bottom.
I’ve heard it said that these people don’t understand what they are doing. That may be true, I haven’t yet made up my mind on that point. But perhaps the people who don’t understand are in the wrong job because if we are to rely on technocrats for policy matters, one would think that understanding the results of a given policy is a necessary qualification. If the cream of the IT crop rises to the highest levels of monetary policy making, and we get what we got with the excuse that the cream doesn’t understand the policy result, and the policy is still with us, there is at least one indication that the quality of technocrats is not what it used to be. Perhaps what we need is to replace the current ones with people who have different ideas and a different view of public service.