Whip ambiguity now!
By Scott Sumner
This post was inspired by a recent Tyler Cowen post, entitled “I’m not so worried about inflation”. The post itself is fine and I’m not going to comment on it. Instead, it was the title that sparked my interest. What might a person mean when they say they are not so worried about inflation? I can think of at least 5 distinct meanings:
1. The speaker might be saying that they simply don’t view 4% or 5% inflation as a problem, even if were to occur. Some economists hold this view, as higher prices feed back into higher nominal incomes. They might believe that this would get us out of a liquidity trap.
2. Or they might mean that while high inflation is often indicative of a policy failure, other measures like NGDP growth are more informative. (That’s my view, and also the view of economists like George Selgin and David Beckworth.)
3. Or they might mean that while high inflation is usually a problem, they currently don’t expect it to occur. (That’s what Tyler meant.)
4. Or they might mean that they are becoming less concerned about inflation being too low, coming in below the Fed’s 2% target. An economist might be likely to look at things this way, as within the economics profession there is a tacit assumption that excessively low inflation has been the bigger problem in recent years. You’d be more likely to see this interpretation in the Financial Times than in USA Today.
5. Or they might view below 2% inflation and above 2% inflation as being equally bad, and this statement might be expressing confidence that inflation will average right around 2%. A Fed chair might be expressing this view.
In one sense this post is merely about the ambiguity of language. But there’s more at stake than just terminology. Some of these differences reflect different worldviews, with important causal implications. Back in 2010, Ben Bernanke expressed frustration that below 2% inflation is not widely viewed as a problem. His comments gave the impression that confusion about the purpose of inflation targeting made the Fed’s job more difficult.
Inflation is not like crime, pollution, epidemics, and other societal problems. In those cases, the reasons why the public worries about the problem are almost exactly the same as the reasons why policymakers worry about the problem.
That’s not at all the case with inflation. The public thinks inflation is bad because as shoppers they don’t like paying higher prices for goods and services. Policymakers believe that view is wrong; higher prices do not directly reduce aggregate living standards. One person’s expenditure is another person’s income. Rather, excessively high inflation, excessively low inflation, and/or excessively unstable inflation may reduce living standards in all sorts of indirect ways, such as discouraging saving and investment, creating financial market instability, or interacting with sticky wages to create unemployment.
During WWII, the public was almost completely supportive of the US military as it tried to defeat Germany and Japan. The Fed does not have such strong support from the public or Congress, and thus its job is more difficult.
In the mid-1970s, Gerald Ford said, “Whip inflation now“. That’s a much more accessible slogan than, “Maintain a symmetrical 2% core PCE inflation target, averaged out over a decade”. As an analogy, in 1942, “Beat the Huns” was a more accessible slogan than is, “Maintain the appropriate balance of power in the Middle East” or “Find the right mix of engagement and conflict with China” in the year 2020. As the straightforward problems get solved, we are left with the more complex problems.
PS. Isn’t that sort of like life? The simple “Find a boyfriend” of age 17 gets replaced by, “Balance the needs of children, husband, parents and in-laws at age 43. Sigh . . .