The New York Times
March 2, 2014
Paul Krugman
Recently the Federal Reserve released transcripts of its monetary policy meetings during the fateful year of 2008. And, boy, are they discouraging reading.
Partly
that’s because Fed officials come across as essentially clueless about
the gathering economic storm. But we knew that already. What’s really
striking is the extent to which they were obsessed with the wrong thing.
The economy was plunging, yet all many people at the Fed wanted to talk
about was inflation.
Matthew O’Brien at The Atlantic has done the math.
In August 2008 there were 322 mentions of inflation, versus only 28 of
unemployment and 19 of systemic risks or crises. In the meeting on Sept.
16, 2008 — the day after Lehman fell! — there were 129 mentions of
inflation versus 26 mentions of unemployment and only four of systemic
risks or crises.
Historians
of the Great Depression have long marveled at the folly of policy
discussion at the time. For example, the Bank of England, faced with a
devastating deflationary spiral, kept obsessing over the imagined threat
of inflation. As the economist Ralph Hawtrey famously observed, “That
was to cry ‘Fire, fire!’ in Noah’s flood.” But it turns out that modern
monetary officials facing financial crisis were just as obsessed with
the wrong thing as their predecessors three generations before.
And
it wasn’t just a bad call in 2008. Much supposedly informed opinion has
remained fixated on the supposed threat of rising prices despite being
wrong again and again. If you spent the last five years watching CNBC,
or reading the Wall Street Journal opinion pages, or for that matter
listening to prominent conservative economists, you lived in a constant
state of alarm over runaway inflation, which was coming any day now. It
never did.
What
accounts for inflation obsession? One answer is that obsessives failed
to distinguish between underlying inflation and short-term fluctuations
in the headline number, which are mainly driven by volatile energy and
food prices. Gasoline prices,
in particular, strongly influence inflation in any given year, and dire
warnings are heard whenever prices rise at the pump; yet such blips say
nothing at all about future inflation.
They also failed to understand that printing money in a depressed economy isn’t inflationary. I could have told them that, and in fact I did. But maybe there was some excuse for not grasping this point in 2008 or early 2009.
The
point, however, is that inflation obsession has persisted, year after
year, even as events have refuted its supposed justifications. And this
tells us that something more than bad analysis is at work. At a
fundamental level, it’s political.
This is fairly obvious if you look at who the inflation obsessives are. While a few conservatives
believe that the Fed should be doing more, not less, they have little
if any real influence. The overall picture is that most conservatives
are inflation obsessives, and nearly all inflation obsessives are
conservative.
Why
is this the case? In part it reflects the belief that the government
should never seek to mitigate economic pain, because the private sector
always knows best. Back in the 1930s, Austrian economists like Friedrich
Hayek and Joseph Schumpeter inveighed against any effort to fight the
depression with easy money; to do so, warned Schumpeter, would be to
leave “the work of depressions undone.” Modern conservatives are generally less open about the harshness of their view, but it’s pretty much the same.
The flip side of this anti-government attitude is the conviction that any attempt to boost the economy, whether fiscal or monetary, must produce disastrous results — Zimbabwe, here we come! And this conviction is so strong that it persists no matter how wrong it has been, year after year.
Finally,
all this ties in with a predilection for acting tough and inflicting
punishment whatever the economic conditions. The British journalist
William Keegan once described this as “sado-monetarism,” and it’s very much alive today.
Does
any of this matter? It’s true that the Fed hasn’t surrendered to the
sado-monetarists. Notably, it didn’t panic in 2011, when another blip in
gasoline prices briefly raised the headline rate of inflation, and
Republicans began inveighing against the “debasement” of the dollar.
But
I’d argue that the clamor from inflation obsessives has intimidated the
Fed, which might otherwise have done more. And it has also been part of
a general climate of opposition to anything that might address our
continuing jobs crisis.
As
I suggested, we used to marvel at the wrongheadedness of policy makers
during the Great Depression. But when the Great Recession struck, and we
were given a chance to do better, we ended up repeating all the same
mistakes.
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