Crucifying Mankind Upon a Cross of 2 Percent Inflation Targeting

Moneybox
A blog about business and economics.
June 10 2012 10:08 AM

Crucifying Mankind Upon a Cross of 2 Percent Inflation Targeting

Excellent column from Christina Romer: "More fundamentally, the Fed’s dual mandate doesn’t say it should care about unemployment only so long as inflation is at or below the target. It’s supposed to care about both equally. If inflation is at the target and unemployment is way above, it’s sensible to risk a little inflation to bring down unemployment."

I think the right way to think about this is that inflation and employment aren't two separate levers that the Federal Reserve addresses separately. Rather, the Fed impacts both inflation and employment by influencing aggregate demand. A years-long span of 8+% unemployment helps keep prices low. People who are broke or unemployed curtail their own consumption and thus alleviate scarcity. A tradeoff needs to be made in the short-term. If gas prices spike, people will be upset and many families' bottom lines will suffer. But is keeping the labor market weak in order to keep millions of people unemployed rather than commuting really a sound way of coping with the moderate scarcity of oil? I say no. Ben Bernanke seems to say yes. But he's getting away with not putting the issue squarely before the public.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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