One of the more irritating tropes in economic journalism is the “knife-edge” metaphor. A reporter will write a news-analysis piece that breathlessly explains that the Federal Reserve is on a knife edge, with recession on one side and inflation on the other.
It seems as though the New York Times editorial writers have read too many such potboilers. Now, after exactly one month of positive news following three years of declines in payroll employment, they are ready to cry panic about inflation.
The Bank of England last week became the first major central bank in three years to raise interest rates, and Mr. Greenspan will have to do the same soon, unless he wants to begin flirting with inflation.
Back in June, Robert Solow predicted,
If the economy recovers next year of its own accord, it is a fair bet inflation will soon be the panic of the month.
And so it has come to pass. My view of the economy is that there is no knife-edge, and that the recovery has a long way to go before inflation becomes a legitimate worry.
For Discussion. Could the remarkable productivity growth that the economy has experienced in recent months provide a significant cushion against inflation?