You’re probably getting sick of me arguing that the Fed should be talking about how it’s trying to raise national income, not the cost of living. Here’s Jim Hamilton making the same point:
The strength of this opposition [to QE2] may puzzle some within the FOMC. Traditionally, the Fed faced a trade-off between the goals of trying to keep both unemployment and inflation low. But at the moment, unemployment is painfully high by anybody’s standards, even as inflation is lower than the Fed feels is consistent with its goal of long-term price stability. Why is the Fed finding that persuading the public that inflation is too low is such a hard sell?
As Ben McCallum recently noted, regular Americans will tell you, of course inflation is still too high, because the price of X has gone up over the last year. Somehow the ability to process numbers that way fits naturally into our cerebral wiring, whereas averaging over all our purchases does not. There is also a deep-seated distrust of the official government measures of inflation. More fundamentally, many Americans think of inflation as an increase in the price of things they buy (which of course sounds bad), as opposed to an increase in the price of the things that they sell (which by itself is not that unpleasant). Perhaps the Fed should consider referring more to its desire to see wages and incomes growing more solidly, rather than its desire to see inflation higher.
In late 2008 when everyone was wringing their hands saying there’s nothing the Fed can do, Hamilton said something to the effect that; “If they can’t create inflation, let me have a shot at it. I’ll show them how.” (Not his exact words.) He was right then and he’s right now.
PS. Don’t say it would be deceptive advertising to switch from inflation to income. The Fed isn’t trying to boost inflation, they are trying to boost national income. For any given increase in NGDP they’d prefer to have less inflation and more real income growth. I’d be like a anorexic sumo wrestler saying he was targeting a higher fat level by eating big meals. No he’d be targeting more weight, and hoping that any weight gain is mostly muscle and only a little fat.
I’d love to see the looks on the faces of ad execs on Madison Avenue if Bernanke explained that he was trying to raise nominal spending and income, and thought the best way to communicate this fact to the public was by announcing the Fed was trying to raise the cost of living. A future satirist will have lots of fun picking over the wreckage of this crisis.
Update: Leigh Caldwell sent me the following from Time:
And that’s what those two little cute Bernanke bashing bears don’t seem to get. It’s not that the Fed is trying to prevent falling prices, or at least that’s not what they are most worried about when it comes to deflation. The price of iPhones, flat screens and other gadgets fall all the time, and that’s not a problem. The real thing that the Fed is worried about is wage deflation. When we all make less money we spend less, and it becomes even harder to pay back our debts. That’s an economic spiral that is very hard to get out of. And rising commodity prices make that spiral more likely, not less.
That’s slightly better than inflation, but still not really correct. The Fed doesn’t want higher wages, they want higher incomes. It is true that higher wages would be an indication that stimulus is working, but for any given increase in national income, higher wages mean fewer jobs. What we really need is more income.
It’s ironic that having to respond to those two little bears is making the intelligentsia come over to my side. My God! (pundit whacks hand on forehead) . . . it’s not inflation, it’s higher income that the Fed has actually wanted all along.
Tags: QE 2