In his column in the NYT yesterday, Paul Krugman ripped Marvin Goodfriend as unresponsive when asked by some members of the Senate a question about his prediction of much higher post-crisis inflation.
OK, so some economists got it wrong. That happens to everyone, unless you’re too cowardly to make any testable predictions at all. But what you’re supposed to do when things don’t play out as you predicted is (a) acknowledge the mistake (b) try to understand what went wrong (c) revise your framework in an attempt to avoid making the same mistake again. I think I can fairly claim to have followed these rules.
What’s striking about the economists who predicted runaway inflation in 2009-2011 is that as far as I can tell none of them has even gotten to step (a), acknowledging their mistake. They kept saying the same wrong thing year after year (which is what makes it derp), and even those who eventually stopped saying the same thing never admitted past mistakes…
And so today we have Marvin Goodfriend, nominated to the Fed board, simply refusing to answer questions about why he thought inflation was about to explode and reducing unemployment was impossible:
“After the crisis, Mr. Goodfriend repeatedly criticized the Fed’s stimulus campaign as likely to generate inflation rather than economic revival. He told Bloomberg in 2012 it was “really doubtful” the Fed could reduce unemployment, which was then hovering above 8 percent, to 7 percent. Furthermore, he said, even if the Fed succeeded in doing so, “it would give rise to rising inflation in the next few years, which would be disastrous for the economy.”
I am wondering if anyone else caught the specific timeframe highlighted in this column for when the predicted inflation was supposed to occur, and I am assuming that Krugman was assigning the mistake of missing the inflation forecast to Goodfriend as well. I’m no good friend of Goodfriend, but I think Krugman should be a little more forthcoming about the mistake he came to terms with so that it’s clear in our minds which mistake that was because it looks to me like he might just be mixing apples and oranges here.
If those at the Fed were doing their job, at least as they described it, inflation *should have* risen in 2009 and perhaps beyond. So anyone who predicted rising inflation between 2009 and 2011 were predicting that those at the Fed would do their job. Those predictions proved to be incorrect because, to what I think was everyone’s surprise, the Fed did not do the job that was expected, PCE sunk to an average of 1.2% post-crisis and was stuck there, and we got very little in the way of recovery after the massive devastation of the debt deflation in 2008.
In late 2012, which is included in the Goodfriend quote provided by Krugman, the Fed was finally “trying” to get the job done with QE3. With regard to QE3, there was discussion at the Fed about at what point the open-ended QE program would have served its purpose which was ultimately described as 2.5% PCE inflation or 5% unemployment. And I think there were plenty of people who kept waiting on the inflation spark after the unemployment milestone was reached and the program tapered. If Goodfriend could answer why the inflation he predicted in 2012 has not happened, he would be well ahead of his peers who are still scratching their heads about why we have a seemingly stubborn low-flation problem.
Do I think that putting Goodfriend on the Board of Governors is a good idea? No, I don’t because I think he does know why his prediction was incorrect or should know, and he’s not talking about it as he should. But I think that if he’s going to be accused of inflation-nutterism, it should be done far more transparently than is done here.