There goes Paul Krugman again. Still beholden to chimerical Phillips Curve absurdities, the professor proposes inflation to stimulate stagnant labor markets. The Phillips Curve insists that rising inflation lowers unemployment. The theory presumes businesses increase prices faster than workers’ wages raise effectively making labor cost less. When real salaries shrink, hiring accelerates.
As Krugman details, the Fed’s focus is dual: stable prices and full employment. So he seeks to overcome persistent unemployment through purposeful failure on the price front, lamenting that “Fed officials . . . are feeling intimidated . . . and that American workers are paying the price for their timidity.” Krugman thus urges Ben Bernanke to ignore Republicans and imbibe in another quantitative easing binge pushing “inflation to 3 percent or even 4 percent.”
Inflation surely conjures euphoria at the New York Times, but such havoc will whack workers. As diagrammed, every play scores a touchdown, but economic dials are not so delicately tuned as Krugman suggests. Once an inflation genie escapes his bottle nothing guarantees he’ll stay satiated at 4 percent. Many an inflation prescription meant ostensibly to usher affluence went haywire as skyrocketing prices eluded the monetary minders’ grasp.
Americans have lived this nightmare. Back in the ‘70s, when the Phillips Curve still curried widespread credibility, we suffered three recessions. As markets developed tolerance for monetary narcotics, inflation induced highs faded and withdrawal initiated painful downturns. When Washington sought to restore a stubborn inflation genie to his bottle, unemployment sped higher.
Successive administrations from both parties debased the dollar propelling this stagflating spiral downward through a decade of decline; conveniently scapegoating “greedy” businessmen. The Phillips Curve spawned Jimmy Carter’s “malaise” and the Misery Index. Amid recurring recessions, both inflation and unemployment catapulted to double digits. Inflation peaked at 13.5% in 1980 and unemployment at 10.2% in 1982, an impossible circumstance were Phillips Curve logic sound.
Ronald Reagan finally righted matters, but it took another nasty dip to cleanse an economy unwound by government intrusion. If unemployment and inflation are inversely correlated in any lasting way, why did both burst higher in alternating bounds throughout the Seventies? Each metric then subsided in the Eighties and Nineties after Reagan and Volcker stabilized the dollar, launching twenty-five years of unprecedented prosperity.
This vibrant tide ebbed precisely because Ben Bernanke and George W. Bush unleashed monetary mischief similar to what Krugman demands anew. Inflation appeals to left-wing professors and power hungry politicians, particularly as it abets brazenly wastrel government, but severe repercussions inevitably result: eroding real income, higher taxes, swindled savings and perverted incentives.
The dollar represents a measuring stick simplifying the arrangements incident to commerce. Its purchasing power melds consumers’ memory of what was afforded yesterday against what it might acquire tomorrow. Any fleeting wisp of exhilaration spurred by a corrupted currency assuredly expires as expectations reset.
As economic elixir inflation pokes a pendulum. Aggressive monetary policy fools consumers into feeling artificially wealthy. Dollar denominated assets surge. We spend frivolously erecting a financial scaffold authored by faulty affluence. Once consumers factor in rising prices, habits adjust. Reality soon snatches hysteria from behind like gravity as the pendulum slams into the fickle structure like a wrecking ball.
Such market turbulence, a la the ‘70s, will elicit alibis from macro-economists that we just need more. Like any narcotic, instilling a high requires that inflation quickens, but an economy based on such chicanery must collapse once the illusion becomes exposed. Worthless money offers no substitute for capital.
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