Paul Krugman Exposes the Real Ulterior Motives of 'Inflation Hawks'
Paul Krugman, the ultimate rational man, tackles the topic of obsession in today's New York Times column—particularly the obsession with inflation. It's on his mind because of the reported dissent at the Fed about whether the Central Bank should retreat from "easy-money policies," which critics argue could cause inflation. According to a recent report in The Times, this topic is big at an important economic symposium in Jackson Hole, Wyoming at the moment.
Trouble is, these critics—these inflation hawks—have been wrong time and time again. Worse still is that being wrong has absolutely no effect on their thinking. That's why inflation phobia (hawkism?) qualifies as an obsession. Krugman gives a brief history of this obviously unhealthy mindset:
The Times article singles out for special mention Charles Plosser of the Philadelphia Fed, who is, indeed, warning about inflation risks. But you should know that he warned about the danger of rising inflation in 2008. He warned about it in 2009. He did the same in 2010, 2011, 2012 and 2013. He was wrong each time, but, undaunted, he’s now doing it again.
And this record isn’t unusual. With very few exceptions, officials and economists who issued dire warnings about inflation years ago are still issuing more or less identical warnings today. Narayana Kocherlakota, president of the Minneapolis Fed, is the only prominent counterexample I can think of.
Now, everyone who has been in the economics business any length of time,myself very much included, has made some incorrect predictions. If you haven’t, you’re playing it too safe. The inflation hawks, however, show no sign of learning from their mistakes. Where is the soul-searching, the attempt to understand how they could have been so wrong?
So, what makes people cling to a world view that keeps getting proven wrong, Krugman wonders? He suspects ulterior motives, which we all should. Once again, those motives lie beyond the realm of economics. And though the politics of fanning inflation fears are slightly more complicated than the Republican refusal to raise taxes on the wealthy, Krugman explains why both are class issues:
There is not a shred of evidence that cutting tax rates on the wealthy boosts the economy, but there’s no mystery about why leading Republicans like Representative Paul Ryan keep claiming that lower taxes on the rich are the secret to growth. Claims that we face an imminent fiscal crisis, that America will turn into Greece any day now, similarly serve a useful purpose for those seeking to dismantle social programs.
At first sight, claims that easy money will cause disaster even in a depressed economy seem different, because the class interests are far less clear. Yes, low interest rates mean low long-term returns for bondholders (who are generally wealthy), but they also mean short-term capital gains for those same bondholders.
But while easy money may in principle have mixed effects on the fortunes (literally) of the wealthy, in practice demands for tighter money despite high unemployment always come from the right. Eight decades ago, Friedrich Hayek warned against any attempt to mitigate the Great Depression via “the creation of artificial demand”; three years ago, Mr. Ryan all but accused Ben Bernanke, the Fed chairman at the time, of seeking to “debase” the dollar. Inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.
Here is Krugman's advice for Yellen:
The last people you want to ask about appropriate policy are people who have been warning about inflation year after year. Not only have they been consistently wrong, they’ve staked out a position that, whether they know it or not, is essentially political rather than based on analysis. They should be listened to politely — good manners are always a virtue — then ignored.