The View From 1776
Friday, January 23, 2009
Phillips Curve Myth
Steve Forbes, in the current issue of Forbes Magazine, debunks an unfounded liberal-progressive economic hypothesis.
Earth to Bernanke
By Steve Forbes
Another bad idea that continues to hurt us is the federal Reserve’s belief in the Phillips curve, which posits that there’s a tradeoff between inflation and unemployment. If you want more prosperity, you have to accept higher inflation; if you want less inflation, you have to accept a less robust economy. Experience has repeatedly shown this theory to be hokum. In both the 1980s and 1990s inflation came down—and we had one heck of a run of prosperity as well.
Yet Ben Bernanke and his fellow Fedsters cling to the idea like King Kong to Fay Wray. The latest example: The Fed let it be known at its December meeting that it was considering establishing an inflation target rate. In Bernanke’s strange world the big bugaboo is that a deflationary mind-set might take hold in the U.S. as the recession deepens. Setting a target for inflation “might help forestall the development of expectations that inflation would decline below desired levels.”
What planet are these people on? Most folks know that the current price-cutting frenzy of retailers and other producers is intended to move inventory. Deflation comes about when the real value of the dollar goes up sizably and permanently. There’s no danger of that happening right now. And as for a “desired level” of inflation—if the Fed did its job correctly and kept the dollar strong and stable, it wouldn’t have to worry about inflation or deflation. The Fed’s target should be “flation.” Period.