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Wednesday, October 26, 2005

Robert Samuelson: Ben Bernanke is a Dedicated Inflation Fighter

Robert Samuelson supports to the view that Ben Bernanke will fight inflation with the same intensity as Greenspan:

The New Fed Chief Will Protect Us From Inflation By Robet J. Samuelson, The Washington Post (WSJ version used here): We have all the telltale signs of an inflation breakout: a big jump in oil and energy prices ... a low unemployment rate ... To anyone old enough to remember, the situation seems eerily reminiscent of the 1970s, when ... inflation reached peaks of 12.3% in 1974 and 13.3% in 1979. Well, folks, it ain't gonna happen this time. Here are three reasons: (1) The Federal Reserve won't let it happen -- and the nomination of Ben Bernanke to succeed Alan Greenspan as Fed chairman won't change that. The Fed would tolerate a recession before again permitting inflation to go bonkers. (2) The U.S. economy has become vastly more competitive since the 1970s. It's harder for companies to raise prices, because they face imports or low-cost domestic rivals. (3) Productivity has also improved since the 1970s, helping companies absorb some cost increases without raising their prices...

It's true that ... recent inflation news ... has been abysmal. .... But the overwhelming cause was the explosion of energy prices, not a general rise of most prices. Economist James Hamilton of the University of California at San Diego cites this revealing fact: even if no prices outside energy had increased, the CPI would still have risen 2.7%. ... "People make a mistake when they attribute inflation (mainly) to oil prices," says Mr. Hamilton. "It was what the Federal Reserve was doing before the oil shocks that made for inflation." What the Fed was doing was following easy money and credit policies. Countless economists, left and right, have concluded that oil prices were not the principal inflation culprit. The great continuity between Messrs. Greenspan and Bernanke is that both accept this basic analysis. ... The Fed's first job ... is to restrain inflation, because almost everything else depends on it. Probably most economists now believe this, but much of the public still clings to the myth that high oil prices caused high inflation. It's apparently indestructible. The truth is that the high inflation of the 1970s was mostly self-inflicted: the consequence of bad economic ideas. What prompted the Fed to follow easy-money policies was the belief -- then dominant among economists -- that there is a stable "trade off" between inflation and unemployment. In effect, you could juice the economy, and you'd get a big drop in unemployment and a slight rise in inflation. It seemed like a good deal. But the theoretical bargain didn't work in practice. ... Under Mr. Greenspan, the Fed buttressed its credibility by raising interest rates when necessary to suppress inflation, even at the risk of a short-term recession. The last thing Mr. Bernanke wants is to squander this hard-won reputation.

    Posted by on Wednesday, October 26, 2005 at 12:12 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (0)


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