Paul Krugman: The Inflation Obsession

Why has the Fed been so concerned about inflation?

The Inflation Obsession, by Paul Krugman, Commentary, NY Times: Recently the Federal Reserve released transcripts of its monetary policy meetings during the fateful year of 2008. And boy, are they discouraging reading. ... The economy was plunging, yet all many people at the Fed wanted to talk about was inflation. ...

Historians of the Great Depression have long marveled at the folly of policy discussion at the time. For example, the Bank of England, faced with a devastating deflationary spiral, kept obsessing over the imagined threat of inflation. ... But it turns out that modern monetary officials facing financial crisis were just as obsessed with the wrong thing as their predecessors three generations before.

And it wasn’t just a bad call in 2008..., inflation obsession has persisted, year after year, even as events have refuted its supposed justifications. And this tells us that something more than bad analysis is at work. At a fundamental level, it’s political.

This is fairly obvious... The overall picture is that most conservatives are inflation obsessives, and nearly all inflation obsessives are conservative.

Why...? In part it reflects the belief that the government should never seek to mitigate economic pain, because the private sector always knows best. ...

The flip side of this antigovernment attitude is the conviction that any attempt to boost the economy, whether fiscal or monetary, must produce disastrous results — Zimbabwe, here we come! And this conviction is so strong that it persists no matter how wrong it has been, year after year.

Finally, all this ties in with a predilection for acting tough and inflicting punishment whatever the economic conditions. ...William Keegan once described this as “sado-monetarism,” and it’s very much alive today.

Does any of this matter? It’s true that the Fed hasn’t surrendered to the sado-monetarists. Notably, it didn’t panic in 2011, when another blip in gasoline prices briefly raised the headline rate of inflation, and Republicans began inveighing against the “debasement” of the dollar.

But I’d argue that the clamor from inflation obsessives has intimidated the Fed, which might otherwise have done more. And it has also been part of a general climate of opposition to anything that might address our continuing jobs crisis.

As I suggested, we used to marvel at the wrongheadedness of policy makers during the Great Depression. But when the Great Recession struck, and we were given a chance to do better, we ended up repeating all the same mistakes.