A Benjamin Cole post
An important chart ran in University of Chicago scholar John Cochrane’s blog recently, and it revealed that at any point in time Wall Street economists predict interest rates will go higher, almost certainly a reflection of inflation fears.
I suspect this chart could be fitted out back to the 1970s, and would look the same. I can recall no period in recent U.S. history in which many prominent economists were not warning that higher inflation, often accelerating or galloping, was pending, unless it was when some shrieked above the chorus that hyperinflation was imminent.
Let us add another favorite chart of mine, showing that if you want to cut inflation by 1%, then hike the unemployment rate by 5%.
That’s the “Phillips Curve,” which in modern times needs to be renamed the “Phillips Phlat-line.”
With the two above charts, an inescapable conclusion is reached: U.S. economists overestimate inflation possibilities continuously, and wildly overestimate the effect that a robust economy will have on inflation.
Why? The answer is not in economics, but in sociology or politics. Surely no thinking profession could be so relentlessly wrong for so long.
What These Huge And Basic Errors Mean
True, the first chart is of Wall Street economists, but few would argue that U.S. Federal Reserve Board economists, or FOMC board members such as Richard Fisher, Dallas Fed President, are anything but obsessed with inflation, and some have even called for a “single mandate,” that is official central bank monomania with inflation.
When I look at these two charts I can think only of the millions of workers and businesses that have for years endured weak total demand—and less employment possibilities and smaller profits—due to the chronic upward bias of U.S. economists in forecasting inflation, or the unfounded fear for what a robust and growing economy—and healthy job markets—would mean for inflation. Fed economists and policymakers, in general reflecting professional predilections, have been no different from Wall Street economists.
As if another percentage point or two in inflation would mean anything anyway.
Perhaps no two other charts capture so much human cost and disappointment, and not for gain, but for nothing.
Has the profession forgotten that the purpose of macroeconomics is to promote prosperity?