Back in 1990, a Congressman from South Carolina (Stephen Neal) introduced a bill that would require the Fed (our Central Bank) to make a zero rate of inflation its primary goal. I was able to publish my response in the economic journal Challenge under the title, “Zero Inflation: prescription for recession.” (Challenge 1990) At the time I noted that Fed Chairman Alan Greenspan had expressed support for that goal. What I did not know was that later in the decade, Chairman Greenspan would attempt to persuade the entire Federal Reserve Board of his view. IN 1996, he engaged in a spirited Debate with Economist Janet Yellen, then a member of the Fed Board of Governers.
Dr. Yellen marshaled all the evidence necessary to dissuade Greenspan from committing the Fed to a zero inflation policy. She was able to demonstrate that an inflation rate in the 2-4 percent range actually was better for economic growth than the goal of zero. (She might have also noted that a Fed commitment to zero inflation would have been against the law – The 1978 amendments to the Employment Act had specified goals of 4 percent unemployment. The stringent restraint needed to force the inflation rate down to zero would have significantly raised unemployment.)
(For the FOMC minutes see http://www.federalreserve.gov/monetarypolicy/files/FOMC19960703meeting.pdf pp. 41-51)
All of this information came out when the New York Times published a profile of Dr. Yellen on April 25. Dr. Yellen is Vice-Chair of the Federal Reserve Board – second in command behind Ben Bernanke. She has been a very strong supporter of Bernanke’s efforts to use expansionary monetary policy to cushion the deep recession of 2007-2009 and sustain the recovery since. This policy has been hotly criticized by the “austerity first” crowd, even leading Governor Rick Perry of Texas to accuse Bernanke of treason for expanding the money supply too much.
Bernanke’s critics claim the Fed is inflating away the value of the dollar. It is true the nation’s money supply has expanded dramatically since 2008. However, the rate of inflation briefly rose above 3.5 percent in the middle of 2011 as has been much lower ever since. Not to worry, even Alan Greenspan whose support for the housing bubble should have left him a bit more humble, continues to warn that high budget deficits today run the risk of turning the US into Greece tomorrow.
Despite the fact that the high deficit spending in the US has had no impact on the rate of inflation, the austerity crowd stands ready to throw a real fit should President Obama nominate Dr. Yellen to succeed Bernanke when his term is up. Already there are rumblings that she is not as concerned about inflation as she should be – This at a time when the unemployment rate remains an outrageous 7.5% percent and the inflation rate is nestled well below the Fed’s mandated target of 3 percent.
It is appalling that politicians can talk about how horrible it is that unemployment is so high but when policy makers use the few tools left to them (monetary expansion) to try to remedy that situation, these same politicians accuse them of destroying stability because inflation is about to explode. The fact that they’ve been saying this since 2008 and that nothing of the kind has happened continues to leave them unfazed.
So here’s my hope and a recommendation. My hope is that President Obama will appoint Dr. Yellen and that at her hearings she gives the Senators a good lesson in why inflation -- which has not occurred -- is nowhere near as dangerous for an economy as the persistence of high and long term employment --- which actually HAS occurred -- and which -- unconscionably -- still remains much too high, three years into an official recovery from the great recession.
Michael Meeropol is visiting professor of Economics at John Jay College of Criminal Justice of the City University of New York. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution.
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