Hummel on Central Banking
Here are my three reasons, given somewhat sporadically in my lecture, for the better performance of central banks in developed countries since the 1980s:
1. Highly developed financial systems with widespread fractional reserve banking have reduced government seigniorage, even at double-digit inflation rates, to a trivial source of revenue…
2. Globalization and international competition have approximated Hayek’s world of competing private banks issuing fiat money…
3. Central banks are freer to respond sensibly to this growing international competition and market discipline because of their political independence.
All fine points. My main quibble with Jeff:
Economists only consider inflation’s deadweight loss, ignoring inflation’s transfer, which bothers the public just as much and just as reasonably as the transfer from the income tax. Does it really make sense to say that the public hates taxes too much because most of the extracted revenue is just a transfer?
Since most inflation is anticipated, I don’t see that it does transfer much; instead, it’s built into raises and interest rates. But many members of the public have a different – and crazy – model. They imagine that if inflation were 0%, their nominal income would continue to rise at its current rate.
Furthermore, when inflation is unanticipated, many people ignore all of the transfers they receive. If you have a fixed rate mortgage, double-digit inflation is probably great for you. But how many home-owners who lived through the inflation of the 70s even stopped to think about how much inflation had done for them?
To repeat, I think it’s good that people overestimate the damage of inflation. It’s one of the main things that makes modern central banks so well-behaved. But in purely factual terms, the public’s beliefs about inflation are sorely mistaken.
P.S. Check out Jeff’s piece on inflation aversion in Econ Journal Watch; it looks quite good.