Are we back to the time when unemployment and inflation were conflicting objectives?

In the 1960s the Phillips Curve reigned supreme, courtesy of Nobel recipients Paul Samuelson and Robert Solow. As late as 1971 James Tobin was suggesting we better learn “Living with Inflation” since it was “cheaper” than to try to reduce it at the cost of higher unemployment.

Suddenly it was “discovered” that low inflation acquired through explicit or implicit “Inflation Targets” was the greatest ‘elixir’ that monetary economists had ever discovered. Keeping inflation on target was the passport to “Great Moderations”. But then people started to question the wisdom behind the unrelenting pursuit of price stability when inflation was already “low”. There were lots of papers published about and conferences organized to discuss the general question of “Monetary Policy in a Low Inflation Environment”.

Bernanke was an early participant. His 1999 paper on “Japanese induced paralysis” has become a blogosphere classic. Bernanke also spearheaded the IT movement in the US. In addition to being an editor and contributor to the literature on IT, Bernanke is co-author (with Mishkin and Posen) of what must be one of the most ironically titled economics op-ed ever published. I´m referring to the January 5, 2000 WSJ article entitled “What happens when Greenspan is gone”? Note the date. More than two years before Bernanke is appointed Fed governor and six years before he becomes Fed Chairman.

What Bernanke et al propose is that the Chairman´s “personality” be replaced by a rule, the rule obviously being a numerically explicit “inflation target”.

It seems we´re better off with “personality-rich” Chairmen, for good or ill. During the 27 year period that preceded Bernanke´s appointment, the two Chairmen, Volcker and Greenspan made “positive” history. Before them Arthur Burns got “burned” by the flames of the “Great Inflation” while William Martin was coopted by Kennedy´s “new economy” team headed initially by Walter Heller that put monetary policy to “underwrite” fiscal policy actions geared to reduce unemployment, the group´s “obsession”; a “duty” that inexorably prodded the economy towards the inflation that in the end consumed Arthur Burns,  turned Volcker into a “hero” and made an “oracle” of Greenspan.

While Martin surrendered to a stronger personality, Bernanke succumbed to a conceptual obsession, IT. That´s the only reason I can think for the person who´s perceived as the foremost authority on The “Great Depression” to let the economy slide into a “Lesser Depression”.

That´s also why I´m skeptical about what transpired following the two day FOMC meeting, statement and Press Conference. The seed of Bernanke´s obsession is there, “policing” the possible outcomes so as not to let “the context of price stability” be violated.

 

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