The Monetary Hawks

Paul Krugman writes an excellent column about the monetary hawks whose excessive fear of inflation could condemn us to years of unnecessarily high unemployment rates:

What’s even more extraordinary, however, is the idea that raising rates would make sense any time soon. After all, the unemployment rate is a horrifying 9.8 percent and still rising, while inflation is running well below the Fed’s long-term target. This suggests that the Fed should be in no hurry to tighten — in fact, standard policy rules of thumb suggest that interest rates should be left on hold for the next two years or more, or until the unemployment rate has fallen to around 7 percent.

Yet some Fed officials want to pull the trigger on rates much sooner. To avoid a “Great Inflation,” says Charles Plosser of the Philadelphia Fed, “we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels.” Jeffrey Lacker of the Richmond Fed says that rates may need to rise even if “the unemployment rate hasn’t started falling yet.”

I don’t know what analysis lies behind these itchy trigger fingers. But it probably isn’t about analysis, anyway — it’s about mentality, the sense that central banks are supposed to act tough, not provide easy credit.

A couple of observations. First, insofar as anything is really about analysis I bet this is about analysis. On the plane back from Copenhagen I listened to Brad DeLong’s “The Great Depression: Part I” lecture and it’s noteworthy the extent to which you hear things today that strongly echo the Schumpeter/Hayek/Mellon/Hoover “do nothing” approach to the Depression from back then. Their arguments are basically the same as what libertarian economists have taken to calling a “recalculation” approach to the current crisis.

Second, I would suggest that divergent analysis is in part driven by things that have relatively little to do with analysis. If deflation really gets so out of hand that it plunges us into Depression-like circumstances, that’ll be bad for everyone. But if we have four or five years of near-zero inflation and 9-10 percent unemployment that will be fine for prosperous middle aged people and devastating to the interests of the poor and the young. Conversely, if we have four or five years of modest unemployment with four or five percent inflation, that will be fine for young people and poor people but potentially detrimental to the interests of wealthy people sitting on large piles of savings. Ultimately, I don’t think it helps the progressive cause to ignore the class/ideological elements to this dispute and just pretend to be engaging in a neutral technocratic dispute about the correct application of the Taylor Rule. What we’re talking about, after all, is decision-making under conditions of moderate uncertainty. What the hawks are proposing to do is to implement a policy that’s extremely attentive to minimizing downside risk to the currently wealthy whereas Krugman is proposing a policy that’s attention to minimizing downside risk for people with below-average labor market prospects.