Today on Bloomberg.com I saw this article – “Unemployment Hurts More than Inflation" David G. Blanchflower, former member of the Bank of England’s Monetary Policy Committee.
Blanchflower’s main contention is that we should not worry about inflation now, instead focusing on the need for more policy stimulus. He actually says, “…inflation is a bygone era.” And then he adds, “Inflation is the only show in town right now. Monetary stimulus needs to continue and if that means more inflation, that would be fine, certainly for now.”
Here are a few more Blanchflower quotes…· Inflation does redistribute wealth from savers to borrowers – but that’s okay.
· Unemployment hurts twice as bad as inflation
· There is little evidence from any developed country that inflation at today’s level ever turns into anything catastrophic.
His main point is pretty clear – don’t worry about inflation – it is actually a good thing. Unemployment is the real worry. As for that last bullet, I wonder how inflation got to 100% or more in some countries if it didn't start from a low level....
I could say a lot of things but today I want to focus on one point – that there is plenty of evidence from the US and other countries that suggest that expansionary aggregate demand policies aimed at reviving spending during recessions often turn into cycles of higher inflation. We have had such a cycle after every recession of the last 40 years. The reflations did not necessarily follow immediately but the urge to keep stimulus going longer than necessary inevitably contributed to economic growth that was faster than normal and rising inflation. Have these bouts of reflation turned into hyperinflation? No, they haven’t. Because policymakers were worried enough that inflation would become a major problem that they changed policy directions and made inflation public enemy #1. And what happened after that? The growth of the economy slowed and unemployment began to rise again.A short-hand way of summarizing this post is that policies designed to reduce unemployment tend to raise unemployment. If people like Blanchflower explained things that way maybe we wouldn’t be so anxious for the next bout of stimulus. Instead they divert our attention to unemployment being more painful than inflation. That’s not the point. The real question is is how do you keep the rate of unemployment the lowest in the long-run? How do you keep it stable and predictable enough that we don’t have to experience these severe swings in unemployment? In times like these, a little less stimulus aimed at rising unemployment and a little more worry about eventually rising inflation could go a long way to keep the unemployment rate lower and more stable over time.
Dear LSD. Stimulus, at least in the U.S., has not shown a corresponding increase in enduring private-sector jobs, in spite of spin-meisters’ protestations in the ‘bama ‘ministration. Blanchflower’s contention that additional stimulus would reduce unemployment seems sympathetic with their fantasies and runs counter to reports on unemployment and the growing deficit. Didn’t Einstein say something like “Insanity is doing the same thing over and over and expecting different results.”? Further, his flaccid offering that inflation would mitigate public and private debt begs the question, “How much inflation would be needed to reduce to this debt to acceptable levels?” Seems like only hyper-inflation at warp speed would suffice. Hm-m-m-m, the implicit lesson is easier to swallow than adopting prudent fiscal policy: It’s OK to amass a lot of debt because inflation will take care of it rather than implementing unpopular measures like reducing govomit spending and not lending when future cash flows cannot service the debt.
ReplyDeleteI think he’s got his cart leading his horse. Rather than prioritizing stimulus the ‘bama ‘ministration should prioritize creating enduring private-sector jobs. Given his message last night, however, he’s still in gaga land thinking the ephemeral and elusive green jobs will save the economy. Forget about previously closed factories now producing turbines and small businesses producing solar panels – get govomit out of the private sector and let it do its thing. Small biz is the spawning marshland of the economy – let it create jobs with less regulation/compliance and Blanchflower can have his modicum of inflation and eat it, too.
Well said Charlie! Nevertheless there seems to be even more momentum for the pro-stimulus crowd. This morning the Financial Times featured another Martin Wolf article asking that stimulus not be withdrawn. Read the article -- there is really very little analysis. He is usually a pretty good writer but this one is empty of any real support. http://www.ft.com/cms/s/0/fc8d1dd4-78b6-11df-a312-00144feabdc0,s01=1.html
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