Thomas Jefferson on George Washington: Weekend Reading

Given the magnitude of the shocks that have hit the world economy since 2005, Alan Greenspan's decision in the mid-1990s to set the Federal Reserve's inflation target at 2% per year rather than 3% or 4% per year looks like a bad mistake. Given what they learned and what we are still learning since 2005, Ben Bernanke, Janet Yellen, and now Jay Powell's refusal to revisit Greenspan's decision is more likely than not to prove a worse mistake. So I go further out on this limb than does the very sharp Karl Smith: Karl Smith: Hey Fed, Don’t Be Scared of a Little More Inflation: "Even if the economy is at full employment, there’s benefit to letting it run hot for a while...

...I think that there is still substantial evidence that there are more employable Americans who want jobs. One suggestive indicator is the much higher rate of employment in other advanced nations among people in their prime working years. There just seems to be no reason that the fundamental U.S. employment situation has diverged so much from that of its peers.... I could be wrong, of course. The data is ambiguous and the recession was deeper than any since the Great Depression. The aging population presents demographic changes that have never been seen before. Maybe the economy has changed in ways that no one fully understands....

Conventional wisdom is that [the Fed] will aggressively hike rates if it thinks that the economy is already at full employment.... This conventional wisdom has been under attack for some time by economists who worry that it would keep inflation too low to allow the economic growth needed for a full recovery. I agree. What the economy needs is a period of intense growth even if that growth happens to be mildly inflationary.... Periods in which inflation runs too low—beneath the Fed's 2-percent target rate—should be matched by periods in which inflation runs too fast....

This flexible view of the inflation threat would mean that if the economy slips into recession again and inflation falls, markets should expect the Fed to loosen policy and keep it loose long enough for inflation to make up lost ground. That expectation would lead to swift falls in long-term rates that would help the economy snap back faster. The possibility of the economy falling into a slow, painful recovery would be greatly reduced...


#shouldread

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