On its face, this is an absurd statement. The double-digit inflation of the early 1980s was crushed by a deep recession engineered by then-Federal Reserve Chair Paul A. Volcker, with the crucial backing of newly elected President Ronald Reagan. Peak monthly unemployment reached almost 11 percent. Today, inflation is an afterthought. The crying need now is to reduce the huge pool of jobless workers receiving unemployment benefits — about 14.5 million, or roughly a 10 percent unemployment rate.
We believe we’ve won the battle against high inflation. It’s one economic problem not worth worrying about. The staggering number of unemployed people will keep wages from exploding. Federal Reserve Chair Jerome H. Powell and others have argued that the Phillips curve, which describes the relationship between wages and inflation, has flattened. Wage gains have a much weaker impact. Popular expectations of annual inflation over the next decade average a mere 1.34 percent, reports the Federal Reserve Bank of Cleveland.
All that is true — and it’s wildly misleading.
The Fed last week announced new guidelines for policing inflation and unemployment. The old policy established an inflation target of 2 percent. If inflation exceeded this level, the Fed would presumably raise interest rates to relieve upward pressures on wages and prices. Under the new policy, the Fed would tolerate slightly higher inflation levels temporarily rather than risk triggering a recession or economic slowdown.
Superficially, this seems a pragmatic response to balancing the risks of inflation and unemployment. But history — such as the previous run-up of inflation — sounds an alarm.
No one favored the inflation breakout; no one wanted it. The increases occurred in short and powerful bursts that fed on each other. What people did want was “full employment,” defined in the early 1960s as about a 4 percent unemployment rate. People were willing to suffer slightly higher inflation to keep wages high and unemployment low.
What seems remarkable now is that many, possibly most, economists blessed this arrangement. Their argument was that just a little bit more inflation was a small price to pay for sustaining “full employment.” The trouble was that “just a little more inflation” was repeated countless times until it was a lot more inflation — and, as a practical matter, was out of control. Only the harsh Volcker-Reagan recession convinced companies and workers that high inflation would no longer be accommodated.
The Fed’s new inflation policy bears a striking resemblance to the flawed approach of the past. The Fed would tolerate breaking the 2 percent inflation barrier to the extent that actual inflation had been below the 2 percent target for some specified period. But would the Fed then automatically raise interest rates to quell inflation? How would periods of undesirably low inflation be calculated? Would the Fed wait too long before raising rates and, thereby, worsen inflation?
Even before the coronavirus pandemic, Powell had been eager to promote a tight labor market that would provide jobs for many low-skilled and low-paid workers, who traditionally have struggled to find employment. That goal was (and is) commendable, but for the time being, it’s unrealistic.
We ought to remember that high inflation, when it raged in the 1970s and 1980s, was enormously unpopular. People didn’t know whether wages and salaries would keep up or fall behind rising prices. High inflation made planning for retirement harder for the same reason. In general, the future seemed more unpredictable and precarious. Sadly, the Fed has made many errors in forecasting inflation and interest rates.
We don’t want to revisit this failure, which was political and social, as well as economic. None of this detracts from the Fed’s constructive role in stabilizing the economy after the global financial crisis of 2008-2009 and the pandemic. Since mid-March, the Fed has pumped $3 trillion into the economy, arguably preventing crippling insolvencies.
But the Fed is not all powerful. The whole exercise of hitting a rate of inflation of 2 percent assumes the Fed can control inflation and job creation with an exactitude that doesn’t exist. The best the Fed can do is to aim at a range of inflation — say, zero to 2 percent — and, when prices are moving undesirably in one direction or the other, respond vigorously to reverse course. It’s unheroic but feasible.
Read more:
August 31, 2020 at 03:14AM
https://www.washingtonpost.com/opinions/dont-forget-about-inflation/2020/08/30/febaf202-e96c-11ea-97e0-94d2e46e759b_story.html
Don’t forget about inflation - The Washington Post
https://news.google.com/search?q=forget&hl=en-US&gl=US&ceid=US:en
No comments:
Post a Comment