When the Bank of England raises interest rates in normal times to reduce inflation it is, in effect, imposing big costs upon a minority - loss of business and jobs - in order that the majority can gain from lower inflation. The Bank of England has argued that the benefits of this outweigh the costs, so inflation targeting is justified in utilitarian terms.
But a recession has very similar effects. A minority lose their jobs, but the majority will gain from lower inflation.
How, then, can a government which supported inflation targeting worry so much about recession?
Some obvious answers won’t do, for example.
1. This recession threatens to cause deflation, which might in turn lead to a severe depression.
I’m not convinced. For one thing, deflation needn’t cause depression and even if it does, the Bank of England can stop it simply by printing money.
What’s more, the welfare benefits of lower inflation - savings on shoe leather costs and on tax distortions - don’t stop at zero inflation. Friedman, remember, thought the optimal inflation rate was negative.
2. The cost of recession isn’t just unemployment hitting a few hundred thousand, but the fear of unemployment hitting millions.
But this fear exists even in normal times, because the job destruction rate is so high. The 25,000 jobs that’ll be lost when Woolies closes represents just half of one average week of job losses between 1997 and 2005.
No-one in government gave a damn about those losses. So why get so panicky when the rate of job destruction increases slightly?
I fear there’s an analogy here with transport deaths. If a plane crashes killing 250 people it’s headline news for days. But the same number die on the roads each month without anyone much noticing.
3. Recessions bear disproportionately upon the poor.
It is the case that workers who lack power (the "unskilled") are more likely to get the heave-ho. But this is true under inflation targeting as much as in recession.
And in one way, this recession might actually help the poor. The worst-off, remember, don’t have jobs at all. And if prices fall, they’ll gain because the real value of their benefits will rise.
4. The jobs lost in recession are permanent, whereas those lost under inflation targeting are only temporary.
To argue this, however, requires one to argue that recessions reduce long-run growth rates. But Alistair Darling rejected this. His estimate of trend growth is the same now as it was in March, before the recession.
So, the puzzle remains. How can you both support inflation targeting in normal times and worry much about recession? Am I missing something here? Is this another example of sloppy thinking about the ethics of economic policy? Or are there non-moral reasons to care so much about recession?