Wednesday, March 30, 2011

Institutional inflation-mongering: bogus hysterics in service of special interests & the economic elite

                                   David Leonhardt @ NYTimes' Biz Day writes: 
(Y)ou might think Fed officials would now be doing everything possible to ensure a solid recovery. But they’re not. 
Once again, many of them are worried that the Fed is doing too much. And once again, the odds are rising that it’s doing too little. 
Higher oil prices, government layoffs, Japan’s devastation and Europe’s debt woes are all working against the recovery. Already, a prominent research firm founded by a former Fed governor, Macroeconomic Advisers, has downgraded its estimate of economic growth in the current quarter to a paltry 2.3 percent, from 4 percent. The Fed’s own forecasts, notes that former governor, Laurence Meyer, “have been incredibly optimistic.” 
Why is this happening? Above all, blame our unbalanced approach to monetary policy.One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment. There is no equivalent group — at least not one as influential — that obsesses over unemployment. 
Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment.The result is a bias that can distort the Fed’s decision-making. 
Just look at the last 18 months. Again and again, the inflation worriers, who are known as hawks, warned of an overheated economy. In one speech, a regional Fed president even raised the specter of Weimar Germany. These warnings helped bring an end early last year to the Fed’s attempts to reduce long-term interest rates — even though the Fed’s own economic models said that it should be doing much more. We now know, of course, that the models were right and the hawks were wrong. 
Recoveries from financial crises are usually slow and uneven. Yet the hawks show no sign of grappling with their failed predictions. It is true that the situation has become more complicated in the last couple of months. Some of the economic data has been encouraging, and inflation has picked up.In particular, core inflation, which excludes volatile oil and food prices, has increased somewhat. (Overall inflation obviously matters more for household budgets, but core inflation matters more to the Fed, because it’s a better predictor of future inflation than inflation itself.) 
Over the last three months, the Fed’s preferred measure of core inflation has risen at annual rate of 1.4 percent, up from less than 1 percent last year.Still, 1.4 percent remains low — considerably lower than the past decade’s average of 1.9 percent, the 1990s average of 2.2 percent or the 1980s average of 4.6 percent. 
Unemployment, on the other hand, remains high. By any standard, joblessness is a bigger problem than inflation.There is also reason to think that inflation will fall in coming months. Rising oil prices alone aren’t enough to create an inflationary spiral. Workers also need to have enough leverage to demand substantial raises — which then forces companies to increase prices and, in turn, gives workers further reason to demand raises. In today’s economy, this chain of events is pretty hard to fathom.
Update: More from Leonhardt on why "core inflation" - not price hikes generated by events like increase in oil prices or food commodities - is the figure that matters for determining the most effective monetary and fiscal policies.  HERE.

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