I’ve returned from my hike across the beautiful Crawford Path. Sunday night, slightly sore and groggy, I read Paul Volcker’s warning in the New York Times to not pursue an inflationary monetary policy to solve our employment crisis.
My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.
What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost.
Reading his op-ed left me slightly more sore and groggy. It is important to notice that Volcker implies that inflation would be stimulating in the short-run. I can’t for the life of me understand why he doesn’t consider 9% unemployment a “real problem,” but let’s move on. Volcker never explains why keeping inflation at 1 or 2 percent is optimal policy – he only worries that 3 or 4 percent will lead policymakers to try higher and higher rates. I guess once the Fed gets a little hit of that inflation soon they’ll be desperate for more only to keep up with those expectations. It’s only a matter of time, I suppose, that the abuser will be stagflating on the treasury room floor.
But is this gateway drug theory of inflation accurate?
I can’t be the only one that notices that inflation goes up and down. Every time we hit 3% inflation, we didn’t get hooked and ruin our longterm economy, right? Every person that takes a painkiller doesn’t become an oxycontin addict. Even though Volcker knows some junkie from the ’70s we shouldn’t conclude that sick people shouldn’t take medicine.
Here’s some other commentary on Volcker’s column:
Off to hike the Whites in New Hampshire for the weekend.
The fashion dictators demanded that a man’s beard be longer than the grip of his hand. Violators went to jail until they were sufficiently bushy. A man with “Beatle-ly” hair would have his head shaved. Should a woman leave her home without her veil, “her home will be marked and her husband punished,” the Taliban penal code decreed. The animals in the zoo-those that had not been stolen in previous administrations-were slain or left to starve. One zealous, perhaps mad, Taliban jumped into a bear’s cage and cut off his nose, reputedly because the animal’s “beard” was not long enough. Another fighter, intoxicated by events and his own power, leaped into the lion’s den and cried out, “I am the lion now!” The lion killed him. Another Taliban solider threw a grenade into the den, blinding the animal. These two, the noseless bear and the blind lion, together with two wolves, were the only animals that survived Taliban rule. -Lawrence Wright, The Looming Tower: Al-Qaeda and the Road to 9/11
Our thinking has survived and changed a decade after 9/11. My roundup from around the web:
During the Republican presidential debate Newt Gingrich made one of the more absurdly anti-factual statements of the night, which is saying something. Asked about Fed Chairman Ben Bernanke, Gingrich said,
I’d fire him tomorrow. I think he’s been the most inflationary, dangerous and power-centered chairman of the Fed in the history of the Fed.
Calling Ben Bernanke the most inflationary chairman in Federal Reserve history was especially curious given the debate’s location at the Reagan Library.
What sort of bizarro history is Gingrich championing where high is low and low is high?
Events like these should just remind Chairman Bernanke that he shouldn’t worry about what inflationistas think because they’re just going to make up their own version of events anyway.
In my Quixotic quest to find evidence for “policy uncertainty” holding back our recovery, the closest thing I’ve heard to a reasonable and measurable indicator is low “US fixed capital investment.” Alan Greenspan has been trumpeting this metric for at least over a year now. He also uses this example to question the wisdom of the stimulus package. But looking at fixed investment, it’s not apparent that it’s being held back by any change in regulation or fear of future taxes as Greenspan argues.
It’s obvious that investment levels aren’t back to pre-recession heights, yet the trend is clearly recovering from the depths of the recession. In contrast, we have this chart from Jared Bernstein that shows that the stimulus package certainly wasn’t inconsistent with economic growth.
Notice that as fiscal and monetary stimulus begin to run down close to the present we see weaker growth. This correlation isn’t proof, but I’m still waiting on a believable counter-explanation for this data.
In a new post, Joel Marks responds to the criticisms of his defense of amorality. He prefers that we replace morality-based language by communicating our preferences.
But why do I care so much that people are using a misleading language of morality? Especially since I have also argued that morality is often just window-dressing for our nonmoral desires. My answer is that invoking the god of morality, like invoking the God of religion, serves to add a hefty dose of imprimatur, authority and self-assurance to the pre-existing strength of our desires, thereby bumping up the level of damage that is likely to ensue from trying to get our way in the face of opposition. The most horrific acts of humanity have been done not in spite of morality but because of it.
It’s possible his strategic choice would lead to better ethics generally. If we had some convincing reason to believe that, I’ll be with Marks advocating universalists give up moral-Esperanto in favor of more personalized language. But as a matter of whether morality is objectively real, Marks makes his case by defining it as a “metaphysical conception as a truth or command that comes to us from “on high.”” If morality must come from “on high,” I agree with Marks. Unfortunately, he doesn’t respond to why he’s so restrictive. I guess he just prefers it.