No, I’m not referring to Krugman’s latest, that’s a dog bites man story. I’m referring to this post, which relentlessly nitpicks a Tyler Cowen argument with which I sort of agree.
It’s not very glorious or motivational, but here goes: the costs of inflation, within reasonable ranges, are not very high.
There are no costs of inflation. What is widely believed to be the costs of inflation is actually the cost of excessive NGDP growth. (Otherwise I agree.)
I am more agnostic about the gains from monetary expansion than are many of its advocates. I think we do not know where the point of “potential output” lies, I think sticky nominal wages (especially for new labor market entrants and the unemployed) are overrated as a problem, I doubt the ability of the Fed to make credible commitments at this point, and often I view “hiring” as more of an multi-dimensional investment and longer-term commitment, which requires various variables to be set at the right places, not just the short-run real wage in spot markets.
I agree that we don’t know where potential output is, but I don’t think that has any bearing on monetary policy, which should promote 5% NGDP growth regardless of potential output. I also agree that sticky wages for the unemployed and new market entrants are not much of a problem (although as Paul Krugman showed with his $160,000 lawyer example a few days ago, they are a bit of a problem even for new entrants.) But even if there was zero wage stickiness for the unemployed, aggregate wage stickiness would be a huge problem. It’s a game of musical chairs, and given the current level of NGDP all the chairs are currently occupied by “insiders.” As far as credibility, no fiat money central bank has ever tried to inflate and fail. Given the massive market responses to trivial Fed and ECB signals, imagine how markets would react if they did something bold.
A bit more personally or perhaps psychologically, the contrarian in me gets nervous when I read the ongoing ritual excoriation of Ben Bernanke in the blogosphere, every time the Fed decides to take no further major action.
I get very nervous when I read the ongoing ritual excoriation of Ben Bernanke in the stock market, every time the Fed decides to take no further major action. That’s because I believe the stock market is much smarter than me, and even a bit smarter than the wisest economist in the blogosphere.
Still, at the end of the day if we try further monetary expansion and it fails to stimulate employment, I don’t see a huge social cost to having a three or four percent rather than a two percent inflation rate.
If we’d had 2% inflation over the past 4 years, I believe the recession would have been far milder. I don’t favor a 2% target, but we aren’t failing because the Fed is targeting inflation at 2%, we are failing because they are running 1.1% inflation at a time when the dual mandate and the Taylor Principle suggest they should be temporarily overshooting their 2% flexible inflation target.
How’s that for ingratitude! Seriously, I believe that nitpicking over even small points is a good way of advancing the discussion.
Off topic: Tyler complained about the following:
Let’s put it this way. Paul Krugman is a great economist. But of all the people in my RSS feed, in terms of his quality and skill as a reader, he is not in the top 90 percent.
It seems to me that Krugman is sort of sitting up on Mt. Olympus, occasionally throwing clever barbs at the rest of us. The usual pattern is that we say something and then he misinterprets what we say and mocks what he thinks we said. Then we have a rejoinder and essentially win the debate. And then he ignores the rejoinder. I’m not quite sure why he operates this way. He’s a very talented debater and would win most debates. It would be interesting to see him get off Mt. Olympus and actually engage with the blogosphere, instead of taking potshots at caricatures of the argument actually being presented. But that’s for him to decide.
PS. Arnold Kling has the following to say:
It would be much better if the Fed were buying less debt. But the inflationary threat, in my view, is the amount of debt being issued. What worries me is not the debt that the Fed buys today, but the debt that the Fed will be forced to buy in the future, even if inflation picks up. Eventually, the government is going to find a way to default, and high inflation is one way to do it.
I would add that if the Fed bought much more debt, then the Treasury would be issuing much less debt. So easier money today greatly reduces the long term risk of high inflation generated by monetizing the excessive Treasury debt.
PPS. Ryan Avent has a great post on the central importance of NGDP. Ed Dolan also chimes in. It seems to me that NGDP is gradually becoming more widely accepted as a useful indicator of Fed policy. As I noted in my previous post, even Krugman is now using NGDP as a way of explaining the problem. Maybe I was unfair when suggesting he doesn’t read my blog carefully.
PPPS. I didn’t realize until now that today would have been the 100th birthday of my favorite economist. So I don’t have a post prepared. My favorite Friedman comment was in response to someone asking him what sort of schools would be provided under a voucher system. I believe he replied something to the effect; “If I knew the answer, I wouldn’t favor vouchers, I’d just instruct the public schools to operate that way.” Sometimes people ask me what sort of QE would be necessary to hit my NGDP target. My response is that if I knew the answer I wouldn’t favor NGDP futures targeting, I’d just instruct the central bank to set the base at that level.