Worrying about inflation
The main argument of Bruce Bartlett's book “The New American Economy” is that economic policies that work for one set of conditions don't work for another, but that people aren't very good at changing their ideology when the circumstances demand it. Supply-side economics, he argues, was a pretty good response to a period of inflation, like the 70s, but would be a terrible response to a deflationary moment, which is what we're in. But the economy changes a lot faster than minds do.
You're seeing some of this in the rampant fears of inflation. Worrying about inflation right now is tantamount to worrying that we're going to have an economic recovery. Unemployment is in the double digits, and it's rising. Credit markets remain sluggish. Output remains low. For inflation to pick up -- particularly in the absence of a major price shock, like oil skyrocketing -- we'd likely need those factors to reverse: Output would have to increase fast enough that employment and wages increased fast enough that prices began rising. That bring its own problems, but problems that we would prefer.
But the central banks don't really see it that way, and nor do some economic commentators. Part of the reason, I'd argue, is that there's still a hangover from the last serious economic crisis, which was driven by inflation. Back then, inflation was the problem. Right now, it isn't. A solution that risks some inflation but has a better chance of ending deflation and kick-starting the economy is a good solution. But that cuts sharply against the instincts of a lot of very smart people who became very smart at a time when inflation was to be feared.
Graph credit: US inflation calculator
November 16, 2009; 11:58 AM ET
Categories: Economic Policy
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