In his latest post on the NGDP Advisers site, Marcus Nunes discusses Brad DeLong’s proposal for a higher inflation target and compares to Fed President Barkin’s claim of a tight labor market. It’s an excellent post for which there isn’t anything more that I could add. But I won’t being going into detail on the post itself today. Rather what I wanted to focus on is a very profound statement I found within about the dynamic AS-AD model:
After the 2001 recession, RGDP growth weakens. That is the result of the succession of oil shocks during the period. According to the dynamic AS-AD model, a negative supply (real) shock reduces real growth and increases inflation.
The inflation part appears later. Going forward in the picture above, note that following the “Great Recession”, real growth seldom rises above the 2.8% “benchmark”. Observe also, that during the significant oil price drop (a positive supply shock), real growth “blossoms”, subsiding again when the shock dissipates.
Then, I compare this statement to a statement like the one below from a different author on a different econ blog and it makes the hair on the back of my neck stand up straight:
I use scare quotes in the title of this post because losing a currency war might actually be good for the US. It’s a currency war victory (such as in the early 1970s with Nixon and Burns) that we should fear.
I realize that I probably have a somewhat jaded point of view after having been just one of scores of millions who experienced the brunt of the fallout from the tight money inspired Great Recession, but I cannot seem to find any sort of moral superiority in the former over the latter. And misleading statements like the second example are all over the place, as if the monetarily induced human tragedies of the Great Depression and the lesser Great Recession have all been wiped from memory to naturally arrive at the assumption that monetary policy conduct in the 1970’s was the worst thing ever to be foisted upon mankind. It was not.
The notion about inflation in the second example I think nearly everyone now struggles with like feeling around an elephant in the dark even though a rational, meaningful and actionable view of inflation like the one put forward by Marcus that has a profound implication toward identification of the sorts of policies that we should rationally fear has been hiding in plain sight the entire time.
While any kind of inflation targeting is harmful as it does not allow price signals to effect market evolution of all kinds (think being stuck with gasoline) and adds unnecessary cyclical drama to periods of reallocation, I do not feel like DeLong’s suggestion is worth parsing in detail because it is less harmful than the current regime that is generally biased toward tight, has some component of doing nothing to avoid the already identified and inevitable hazards of such bias, and is nearly impossible to get rid of even though it produces more quantifiable damage than it is supposed qualitatively to prevent.
If forced to pick the policy “poison,” I’d choose Burns’s poison over Bernanke’s any day of the week and twice on Sunday. DeLong’s is really just a compromise between the two that would be more tolerable as far as stability is concerned as it addresses the hazards posed by the tight bias and allows more room for natural reallocation to take place before the cyclical drama would start.