A guest post by Benjamin Cole
Like a fresh breeze though the charnel-houses of modern-day central banking, Minneapolis Fed President Narayana Kocherlakota made headlines in Helena, Montana two days ago for his straightforward assertion that the U.S. Federal Reserve should be more expansionist.
Kocherlakota pointed at sickly U.S. employment figures and said what was plain: “There are many people in this country who want to work more hours, and our society is deprived of their production.”
Not to mention what it does to the work-habits or self-image of the unemployed. The U.S. still sags under a 6.2 percent unemployment rate, much too high.
Sadly, Kocherlakota is something of an outlier. Many economists throw hissy fits if inflation approaches the 2 percent mark, but change the topic when unemployment is mentioned. The profession has forgotten that prosperity is the goal.
But, unfortunately, our new hero Kocherlakota also gave ammo to the right-tighties, who already have their wingtips on the economy’s monetary windpipe. Kocherlakota mentioned “more inflation” as a goal.
“Right now, this nation needs more inflation,” Dr. K told the folks in Montana.
Never Say Inflation is the Goal
Kocherlakota did clarify his statement; the U.S. needs higher inflation so as to have lower real interest rates. At zero inflation and zero lower bound or close thereto, interest rates cannot get low enough to be simulative.
That’s fine; save it for academics. Most of the public and righty-tighties cannot accept a goal of higher inflation.
The goal should be a robust and expanding economy, and sometimes, as a byproduct, one must accept moderate inflation as officially measured—that is the talking point that Kocherlakota and Market Monetarists need to adopt.
A robust economy engenders some bottlenecks, as new sectors and regions encounter healthy demand. Those bottlenecks can only be resolved by the price signal.
Additionally, there is the manner in which real estate appreciation—a positive—figures into the official measurements of prices. As the U.S. urbanizes even more, and as incomes rise, we will see land and property values in urban areas inevitably rise—is this really inflation? Or urbanization and a higher cost of living?
Finally, it could be pointed out that no modern developed major economy has thrived at zero inflation, although we have a lengthy track record of Japan slumping at zero inflation, and now Europe doing much the same.
A central bank can bring about zero inflation, as measured—but that level of monetary tightness compels near zero growth too. Ideology doesn’t matter here; this is just a pragmatic observation. What is utopia for central banks is not prosperity for workers and businesses.
But Still, Great Dr. K
But still, we hail Dr. K., and his mysterious last name, which has provoked ethnographers to cast him as Lakota Sioux, that is an American Indian, and as also hailing from the great subcontinent, that is an Indian American. Either way, we champion the valor of Dr. K.
We know what rigid central banks can do to an economy—see Japan and Europe—and Dr. K is now part of a thin line preventing such a catastrophe.
Onward, Dr. K!