Here’s a puzzle. Morally speaking, does it make sense to worry so much about recession whilst having supported the policy of inflation targeting for the last 16 years?
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?
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?
Does inflation targeting entail the same sort of welfare costs as a recession? If inflation targeting was abandoned, what would happen? A short run increase in employment followed by some sort of nasty correction? I'm not exactly sure what the consequences would be, but inflation targeting, painful consequences and all, can potentially be justified as a sort of long-run welfare optimising, least-bad approach to economic policy.
Whereas a recession (arguably) isn't like that - it's more like an avoidable miserable episode that we ought to do something about because we can - with output below potential, you can use inflationary policy levers etc.
So perhaps the answer to your question is that despite the (temporary) loss of jobs and misery raising interest rates entails, the alternatives to inflation targeting are worse, whereas with recessions the situation is reversed - the alternatives to the (temporary) loss of jobs and misery are all better. In policy terms, it makes sense to 'care' more about things you can do something about.
And in moral terms too; alleviating a recession seems to be a pretty straightforward 'good' act, but I don't see that allowing inflation to spiral is 'good' in the same sense, even if it does mean avoiding the pain of interest rate hikes. Isn't there an obvious moral difference between pain suffered to prevent greater pain in the future, and pain suffered to no good end?
Posted by: Luis Enrique | November 27, 2008 at 05:20 PM
"Or are there non-moral reasons to care so much about recession?"
Getting re-elected.
Posted by: Kit | November 27, 2008 at 06:01 PM
I suspect that point 2, fear of unemployment, has a lot to do with it. Not unemployment in general but unemployment for Members of Parliament specifically since it is harder for a government to win a general election soon after a recession.
Posted by: chris strange | November 27, 2008 at 06:17 PM
Nope. You are muddling two questions:
1. Should we try to keep inflation at some fixed target?
2. If so, what should that target be?
Question (1) is where you argue about whether keeping inflation at some fixed target reduces or increases fluctuations in unemployment.
Question (2) is where you argue shoe-leather costs etc. vs risks of going into a deflationary spiral (and no, Bernanke was not saying it was simple to escape from and nothing to worry about).
Your basic mistake is in asking "should he pick up the football and run with it?", rather than asking "is rugger a better game than soccer?". Expected inflation, not just actual inflation, matters for unemployment. The rules of the game determine expectations and therefore matter. Think rule-, not act-utilitarian.
Posted by: Nick Rowe | November 27, 2008 at 10:14 PM
As for stopping deflation by printing money people keep forgetting something. You need to spread it around as well, merely printing the stuff isn't enough. This is not merely a trite issue as fights about distribution really can stop effective action.
Posted by: reason | November 28, 2008 at 11:30 AM
You assume that there is a trade-off between inflation and unemployment, but often there is not. Sargent's "The Ends of Four Big Inflations" shows that the European hyperinflations of the 1920's were ended without increasing unemployment. They ended inflation, not by restricting money growth, but by restoring adequate backing to the money that they did issue.
The best way to avoid recession is to issue more money. The best way to avoid inflation is to assure that the new money is adequately backed. Those two things are not mutually exclusive.
Posted by: Mike Sproul | November 28, 2008 at 06:01 PM
"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?"
Because, unlike in the good times, it's going to be bloody tough for many of those 25,000 to get another job anytime soon.
Posted by: Lost Leader | December 01, 2008 at 06:49 PM
Much of life, and good governance, lies in finding the right balance between opposing goals.
Think of it like speed limits on a road. Too much liquidity is dangerous, too little is needlessly limiting, medium is workable.
Posted by: jay | December 03, 2008 at 10:38 PM
hairy mature pussy [url=http://it4yi-wiki.skn.wsinf.edu.pl/80?action=AttachFile&do=get&target=13]asian doggie style[/url] sara stone big tits round asses female fingering squirting [url=http://it4yi-wiki.skn.wsinf.edu.pl/80?action=AttachFile&do=get&target=40]friends hot moms[/url] free gay porn lanas big boobs [url=http://it4yi-wiki.skn.wsinf.edu.pl/80?action=AttachFile&do=get&target=2]forced analingus analingus[/url] boys peei
Posted by: Ribultabeawfumetuege | January 09, 2009 at 04:42 PM
I think inflation is inevitable. How can you print countless billions of dollars and still have a strong dollar. The current rallies vs the european currencies is just temporary, all of these bailout will soon catch up with the US and the dollar will fall.
Posted by: Recession 2009 Victim | February 19, 2009 at 07:02 PM
aargf aaaaaatg aaaaag
[URL=http://air-dryer-dessicant-bed.blogspot.com/2008/04/air-dryer-dessicant-bed.html]air drying desiccant[/URL]
[URL=http://housenew-houstontx.blogspot.com/2008/08/house-new-houston-tx.html]new houston house [/URL][URL=http://houstontxnewhomes.blogspot.com/2008/08/house-new-houston-tx.html]houston house tx [/URL][URL=http://clothes-dyestains-removing.blogspot.com/2008/08/removing-clothes-dye-stains.html]stains removal dye [/URL]
Posted by: jj | August 06, 2009 at 09:56 PM
Excellent posts, I'm going to give it a great review. Check back later, Thanks!!!
http://www.losersweightloss.com/
Posted by: Fast Weight Loss Diet | August 08, 2009 at 03:46 AM