A Benjamin Cole post
In the last few decades, the globe’s major central banks have collected under various exalted “fighting inflation” banners, while seeking independence from democratic control which, we are told, would lead to hyperinflationary holocausts.
To be sure, inflation has receded from double digits in the early 1980s, to zero (long ago in Japan, btw).
Today, one major central bank targets no inflation and explicitly disclaims responsibility for robust economic growth, as in the case of the European Central Bank. Another major central bank, the U.S. Federal Reserve Board, has set a ceiling of 2% on inflation (perhaps really 1.5%), regardless of other outcomes.
Central banks want a simple one-dimensional mission—like old flyboys, more on that later.
The results of central bank tunnel vision are a disaster for Western economic growth and employment, as Japan found out long ago.
We Have One Job Only
Today’s bloodless central banker staffers, divorced from economies (they live on sinecures) and free of democratic control, have chosen to define their performance by an easily accomplished mission: price control. Central banks know they can kill inflation, and rather handily. See Japan, see Europe, and even see the United States. This is a fool’s game: Tighten enough, and inflation dies. Mission success, self-defined.
This reminds me of 1960s U.S. astronauts, those brave media darlings of the pioneering Mercury and Gemini missions. Early on, each mission had a number of experiments for astronauts to perform, and if the tests were not performed, or botched under time pressures, the mission was chided, or even said to “fail” on some points.
The astronauts rebelled. “We will do one test per flight,” they said. Assured success. The flyboys were better at self-preservation and PR than NASA officials. Besides astronauts were old test pilots—they had been through this drill before, with earthbound engineers asking for complicated tests while they piloted temperamental new aircraft. But the flyboys knew they were in the pilot’s seat.
Central bankers, like flyboys, know they are in the pilot’s seat (limited democratic oversight) and have chosen their one mission, that of price control.
Prosperity? That is somebody else’s concern.
Unfortunately for millions of businesses, citizens and employees, central banks do play a role in demand and prosperity, in modern developed nations. Yes, every modern nation has structural impediments, and every nation should cut back structural impediments.
But central banks should make monetary policy for the facts on the ground, not in utopia. Modern nations have militaries and social welfare, and corrupt tax codes and endless fat in government. They always will.
Recent history strongly suggests a modern economy needs moderate inflation to prosper. See Japan 1992-2012 (deflation, very slow growth), or the U.S. in the boomy 1990s, with average 3% inflation.
Central banks should not be allowed to pull an old flyboy trick. They need to take responsibility for economic growth as well as keeping inflation moderate.
Yes, a complicated mission, but necessary.