JONATHAN CHAIT JUNE 20, 2011
I've seen some bad arguments that we must fear inflation, but possibly nothing as unpersuasive as the one Amity Shlaes mounts today:
Is our economy headed back into a recession? A look at a past double-dip, the recessions of 1980 and of 1981-1982, suggests we are due. That double-dip also suggests the Federal Reserve should raise interest rates earlier and faster than you might think.
In fact, the 1980s experience points to something horrible: We need a recession to get a true recovery....
Inflation hasn't dominated our headlines yet. But this moment resembles the old days because the Fed has made clear it's willing to tolerate inflation out of concern over a recession. No one today can imagine Fed Chairman Ben Bernanke raising rates to even the levels of the Burns era.
The first takeaway message from the early 1980s is that creeping inflation gallops before experts catch it. The second takeaway is that postponing the commitment to tighten hard ensures yet higher interest rates later.
A monetary recession lurks ahead. How high will the rates be? Higher than you think.
I've quoted the beginning and the end of Shlaes' column, which is also the only part that contains anything approximating an argument. In between is a recollection of how the Federal Reserve raised interest rates in 1979, crushed inflation, and everybody lived happily ever after. is the current moment like 1979, where we're looking at a cycle of workers demanding higher wages to keep up with rising prices, causing an inflationary cycle that spins out of control? I would have to say no:
The peak you see on the left of the chart is what we were looking at when Paul Volcker raised rates. You kind of understand why he was concerned about inflation, which was over 13%. The part on the right, with core inflation well under 2%, not so much.
Why should we worry? Because, Shlaes argues, the fed is demonstrating that it will "tolerate" inflation. How is it demonstrating that? Because "No one today can imagine Fed Chairman Ben Bernanke raising rates to even the levels of the Burns era." But isn't that because inflation is so low? Why would he need to raise rates to 1979 levels?
Because, Shlaes instructs, "creeping inflation gallops before experts catch it." But, first of all, "creeping" inflation (she's referring to 1975-1979) was a five year period in which core inflation began in the double digits and never fell below 6%. We'd have to triple the current rate before we could be "creeping," which in turn could become galloping.
Shlaes argument here is kind of like Niall Ferguson's fear of a resurgent Ottomann Empire. If Ferguson wanted to make his same argument less persuasively, he could tell the story of the rise of the Ottomann Empire, and then conclude that the first step to the Turks controlling a huge empire is for them to control Turkey, so we need to stop them now before they reach Vienna. After all, no one today can imagine President Obama going to war to stop Turkish militarism. (I certainly don't envision this.) That's the kind of weakness the Turks have been waiting for.