Is pilot error a possibility?
When an airliner crashes into the ocean, investigators generally consider the possibility of pilot error. But what about inflation? When inflation is too high, should we consider the possibility that the inflation-targeting pilot screwed up?
Pat Horan recently pointed out that the NYT omitted the Fed as a possible cause of high inflation in its recent public opinion poll:
We should not write this oversight off as the NYT being a “dumb” newspaper. They are certainly biased to the left, and they often misinterpret economic stories. But the NYT isn’t dumb. At the bottom of this post I have a google screenshot showing many recent stories that indicate the Times does understand that the Fed is responsible for controlling inflation.
Furthermore, if you polled professional economists on the cause of the current high inflation, I am confident that many of them would not name monetary policy. (I suspect that excessive fiscal stimulus and supply shocks would be the most often cited causes.)
During the long slow recovery from the Great Recession, I used the fireman/arsonist analogy to illustrate why policy was so far off course. Both the media and the economics profession tend to view the Fed as a sort of fireman, which comes in to solve economic problems that pop up spontaneously. People don’t generally blame fireman for causing fires. Fed critics like myself view the Fed as more like an arsonist that creates unstable NGDP growth.
Ideally, the Fed would be viewed like an airline pilot, except the goal would be to keep NGDP growing along a steady path. When pilot error does occur, as on Air France flight 447 from Rio to Paris, it’s often in response to some sort of external shock. In that case ice crystals interfered with instrument readings. Nonetheless, the cause of the plane crash was judged to be pilot error. Similarly, Fed inflation targeting mistakes don’t generally happen in a vacuum, rather they tend to occur during periods when the economy is also being disturbed by non-monetary shocks. Nonetheless, if NGDP is too low (as in 2008), or too high (as it is today), then the Fed should be viewed as the cause of the problem.
Perhaps if there were widespread recognition bad inflation outcomes are caused by bad Fed policy, then bad Fed policy would occur less often. Even better, imagine if we could all agree on a simple and unambiguous metric for whether policy is too easy or too tight. What might that policy indictor look like?
How many times must we live through policy errors that could have been avoided if the Fed had focused like a laser on the level of NGDP?