You’re mostly right. But I have some important caveats.
The Fed acted for several decades as if it was subject to political pressure to reduce inflation. Economists mostly agree that the optimal inflation rate is around 2%. Yet from 2008 to about 2019 the Fed acted as if that were an upper bound, not a target.
But that doesn’t mean that we always need more political pressure for inflation. In the 1960s and 1970s, there was a fair amount of political pressure to increase monetary stimulus by whatever it took to reduce unemployment. That worked well when inflation was creeping up around 2 or 3%, but as it got higher it reduced economic stability without doing much for unemployment. So I don’t want EAs to support unconditional increases in inflation. To the extent that we can do something valuable, it should be to focus more attention on achieving a goal such as 2% inflation or 4% NGDP growth.
I don’t see signs that the pressure to keep inflation below 2% came from the rich. Rich people and companies mostly know how to do well in an inflationary environment. The pressure seems to be coming from fairly average voters who are focused on the prices of gas and meat, and from people who live on fixed pensions.
Economic theory doesn’t lend much support to the idea that it’s risky to have unusually large increases in the money supply. Most of the concern seems to come from people who assume the velocity of money is pretty stable. That assumption has often worked okay, but has been pretty far off in 2008 and 2020.
It’s not clear why there would be much risk, as long as the Fed adjusts the money supply to maintain an inflation or NGDP target. You’re correct to worry that the inflation of 2021 provides some reasons for concern about whether the Fed will do that. My impression is that the main problem was that the Fed committed in 2020 to a particular path of interest rates over the next few years, when its commitments ought to be focused on a target such as inflation or NGDP. This is an area where economists still have some important disagreements.
It’s pretty clear that both unusually high and unusually low inflation cause important damage. Yet too many people worry about only one of these risks.
For more on this subject, read Sumner’s book The Money Illusion (which I reviewed here).
These caveats are helpful, thank you. I appreciate the elaboration on changing plans for interest rates and inflation by the Fed board and changing influences by non-high income employees and people with pension plans.
I was wondering about whether I had misinterpreted OpenPhil staff’s opinion being that rich people have been indirectly influencing the Fed towards a more hawkish stance (I recalled hearing something like this in another interview with Holden, but haven’t been able to find that interview back). Either way, OpenPhil’s analysis around this is probably much more ‘clustery’ and nuanced. I would agree with you though that high net-worth individuals who have most of their capital put into ownership stakes of companies that hold relatively little cash or bonds on their balance sheets and can flexibly hike up pricing of their products/services won’t be impacted much by rising inflation.
Edit:
Economic theory doesn’t lend much support to the idea that it’s risky to have unusually large increases in the money supply. Most of the concern seems to come from people who assume the velocity of money is pretty stable. That assumption has often worked okay, but has been pretty far off in 2008 and 2020.
Good nuance re: not assuming a constant velocity of money (how fast money passes hands from transaction to transaction). What you wrote doesn’t seem to refute the argument I made concerning model error in current macroeconomic theories.
As again a complete amateur, I don’t have any comment on what range of inflation to target or what the trade-offs are, except that all else equal a 2% inflation rate seems pretty benign.
Overall, your points makes me more uncertain about my understanding of what current stakeholder groups particularly can and tend to influence Fed monetary policy decisions, and how they are motivated to act. Will read your review.
remmelt …I was wondering about whether I had misinterpreted OpenPhil staff’s opinion being that rich people have been indirectly influencing the Fed towards a more hawkish stance
Yes, at least what I wrote was too simplistic. Just found a claim on advocacy they made in their 2014 write-up:
A number of people who we spoke with noted that most advocacy on monetary policy tends to come from people who are skeptical of the Federal Reserve and want to focus on limiting inflation or return to the gold standard
Ah, and I assume NGDP means ‘nominal gross domestic product’. Why should the Fed use nominal GDP instead of real (inflation-adjusted) GDP as a measure for setting targets?
Very complicated question that I’m not at all qualified to speak on, but if you’re interested google Scott Sumner NGDP Targeting. Basically, rather than the current “dual mandate” of maintaining both low unemployment and a little inflation, targeting a fixed rate of NGDP growth would balance the mandate between unemployment and inflation. The idea became very popular in the blogosphere and in real economics literature in the aftermath of the 2008 crisis, where many believe the Fed was too slow to drop interest rates and should’ve been more concern about unemployment than inflation.
You’re mostly right. But I have some important caveats.
The Fed acted for several decades as if it was subject to political pressure to reduce inflation. Economists mostly agree that the optimal inflation rate is around 2%. Yet from 2008 to about 2019 the Fed acted as if that were an upper bound, not a target.
But that doesn’t mean that we always need more political pressure for inflation. In the 1960s and 1970s, there was a fair amount of political pressure to increase monetary stimulus by whatever it took to reduce unemployment. That worked well when inflation was creeping up around 2 or 3%, but as it got higher it reduced economic stability without doing much for unemployment. So I don’t want EAs to support unconditional increases in inflation. To the extent that we can do something valuable, it should be to focus more attention on achieving a goal such as 2% inflation or 4% NGDP growth.
I don’t see signs that the pressure to keep inflation below 2% came from the rich. Rich people and companies mostly know how to do well in an inflationary environment. The pressure seems to be coming from fairly average voters who are focused on the prices of gas and meat, and from people who live on fixed pensions.
Economic theory doesn’t lend much support to the idea that it’s risky to have unusually large increases in the money supply. Most of the concern seems to come from people who assume the velocity of money is pretty stable. That assumption has often worked okay, but has been pretty far off in 2008 and 2020.
It’s not clear why there would be much risk, as long as the Fed adjusts the money supply to maintain an inflation or NGDP target. You’re correct to worry that the inflation of 2021 provides some reasons for concern about whether the Fed will do that. My impression is that the main problem was that the Fed committed in 2020 to a particular path of interest rates over the next few years, when its commitments ought to be focused on a target such as inflation or NGDP. This is an area where economists still have some important disagreements.
It’s pretty clear that both unusually high and unusually low inflation cause important damage. Yet too many people worry about only one of these risks.
For more on this subject, read Sumner’s book The Money Illusion (which I reviewed here).
These caveats are helpful, thank you. I appreciate the elaboration on changing plans for interest rates and inflation by the Fed board and changing influences by non-high income employees and people with pension plans.
I was wondering about whether I had misinterpreted OpenPhil staff’s opinion being that rich people have been indirectly influencing the Fed towards a more hawkish stance (I recalled hearing something like this in another interview with Holden, but haven’t been able to find that interview back). Either way, OpenPhil’s analysis around this is probably much more ‘clustery’ and nuanced. I would agree with you though that high net-worth individuals who have most of their capital put into ownership stakes of companies that hold relatively little cash or bonds on their balance sheets and can flexibly hike up pricing of their products/services won’t be impacted much by rising inflation.
Edit:
Good nuance re: not assuming a constant velocity of money (how fast money passes hands from transaction to transaction). What you wrote doesn’t seem to refute the argument I made concerning model error in current macroeconomic theories.
As again a complete amateur, I don’t have any comment on what range of inflation to target or what the trade-offs are, except that all else equal a 2% inflation rate seems pretty benign.
Overall, your points makes me more uncertain about my understanding of what current stakeholder groups particularly can and tend to influence Fed monetary policy decisions, and how they are motivated to act. Will read your review.
Yes, at least what I wrote was too simplistic. Just found a claim on advocacy they made in their 2014 write-up:
Ah, and I assume NGDP means ‘nominal gross domestic product’. Why should the Fed use nominal GDP instead of real (inflation-adjusted) GDP as a measure for setting targets?
Very complicated question that I’m not at all qualified to speak on, but if you’re interested google Scott Sumner NGDP Targeting. Basically, rather than the current “dual mandate” of maintaining both low unemployment and a little inflation, targeting a fixed rate of NGDP growth would balance the mandate between unemployment and inflation. The idea became very popular in the blogosphere and in real economics literature in the aftermath of the 2008 crisis, where many believe the Fed was too slow to drop interest rates and should’ve been more concern about unemployment than inflation.
Thanks, this is clarifying