October 24, 2005

All Hail Our New Chairman?

This isn't really the place to come for Federal Reserve commentary, but maybe I can provide a few knee-jerk lefty complaints about the new Fed chief, Ben Bernanke. He's undoubtedly a smart guy, and all the center-left blogs like him, but this just looks like more of the same. He's a fan of "formal inflation targeting," eh? As best I can tell from his 1999 spat with James K. Galbraith, Bernanke doesn't take this to mean that the Fed should sacrifice everything else under the sun—including employment growth—at the altar of Always Low Prices, but Gerald Epstein argues here that that's what inflation targeting tends to mean in practice. That inflation-obsessed monetary theorists in the U.S. wrongly insisted that the rate of unemployment could never go below 6.5 percent during the 1980s, letting wages stagnate and poverty rise, makes Scooter Libby's high crimes and misdemeanors look rather flimsy in comparison.

Moreover, Epstein argues, moderate rates of inflation, up to about 20 percent, "have no predictable negative consequences on the real economy," so perhaps the Fed obsession is misguided after all. As far as I can tell, no one seems to know for sure whether or not inflation would hurt the poor, but that's probably not to question to ask, instead let's debate: what sort of monetary policy would be better for the least well-off, and the rest of us? Or rather: Why not have the Fed stop fretting about inflation—within limits—and instead focus on promoting full employment, investment, and GDP growth? Good question. The answer is to follow the money:
One likely explanation is that a focus on fighting inflation and keeping it low and stable is in the interest of the rentier groups in these counties. Epstein and Power (2003) present new calculations of rentier incomes in the OECD countries supporting the view that in many countries, higher real interest rates and lower inflation increase the rentier shares of income.
Ah, rentiers. The argument against Epstein, I take it, is that theoretically a central banker just can't use inflation to boost employment because people aren't dumb, they'll soon catch on to what the bank's doing and plan accordingly, nothing will change when inflation strikes, and soon we're on the path towards stagflation. Hence the virtues of a hawk like Greenspan—or Bernanke. In reply, the dying herd of old Keynesians might say eh, this isn't really a concern, since the real inflationary dangers come not from full employment, which is usually a good thing, but from stagnant growth, since during a slowdown monopolistic enterprises will start raising prices to recoup their fixed costs. Certainly Big Pharma and Big Insurance have been doing just that recently, so score one for the dying herd.

I'm not even fractionally smart enough to know who's right in all of this, so I'll just leave it at that and admit that my bias is towards Epstein. His suggestion for "real targeting" makes sense on the surface, although for the Fed to be truly democratic, the whole institution itself will probably have to be rejiggered so that ordinary citizens get actual input into central bank decision-making. That obviously won't happen in my lifetime, but surely the least we can do is be bitter about it, no?
-- Brad Plumer 9:23 PM || ||