Wednesday, 15 October 2014

Inflation Hawks’ Views Are Independent of Actual Monetary Outcomes


The first rule of predicting high inflation is “Never admit you were wrong.”
In 2010, 23 reasonably prominent economists, fund managers, academics and journalists signed a coalition letter opposed to quantitative easing, the Federal Reserve’s practice of buying long-term debt to push down long-term interest rates. The letter warned that it would “risk currency debasement and inflation” and fail to create jobs; as such, they argued, quantitative easing should be “reconsidered and discontinued.”
Four years later, inflation is still low (lower even than the 2 percent the Federal Reserve is supposed to be aiming for), unemployment has fallen, economic and job growth has been modest but present, and the stock market has soared. Despite the authors’ insistence that quantitative easing faced “broad opposition from other central banks,” the Bank of England and the Bank of Japan have undertaken similar programs.

So the Bloomberg reporters Caleb Melby, Laura Marcinek and Danielle Burger went back to the letter’s signers with a simple question: Have you changed your mind? And pretty uniformly, the signatories said they had: Faced with empirical evidence that went contrary to their expectations, including low inflation and relatively good economic performance, they have revisited their monetary policy views and promised to stop scaremongering about inflation.

The historian Niall Ferguson during a speech in  2009. In 2010, he and 22 others signed a letter opposing a Fed policy they feared would stoke inflation.  Credit Jonathan Ernst/Reuters

Ha-ha, I’m just kidding. People who obsess over inflation don’t change their minds.
Of the 23 signatories, 14 had the good sense not to comment. The other nine told Bloomberg their views were unchanged since 2010. Real world events notwithstanding, they’re just as worried about inflation now as they ever were.
Their explanations are pretty creative. Jim Grant, for example, told Bloomberg we have had inflation — it just hasn’t shown up in consumer prices.
Doug Holtz-Eakin, once John McCain’s top economic adviser, explained that the letter was correct because it didn’t set a date on its inflation prediction. He noted that inflation would surely someday exceed 2 percent.

Several other signatories similarly rested their arguments on the lack of a date in the letter, and warned that high inflation could still come. Among them is Niall Ferguson, the Harvard history professor, who wrote a 2011 op-ed for Newsweek proclaiming that “double-digit inflation is back.” (It wasn’t.)
Mr. Ferguson later admitted he erred in relying on the bogus “Shadowstats” inflation index for his Newsweek op-ed. But another signatory who still says the letter was right, the journalist Amity Shlaes, wrote a July column citing Shadowstats data to argue that “official numbers err” and that inflation really is much higher than the Bureau of Labor Statistics claims. (It’s not.)

Finally, many of the signatories pointed to the fact that economic performance of the last four years has been anemic as evidence that quantitative easing has failed. And of course, this recovery hasn’t been great. But the important matter is the counterfactual: How would the recovery have differed if, as these authors wanted, the Federal Reserve had stopped quantitative easing and pursued a tighter monetary policy?
There is a good case study to look at: the eurozone. The European Central Bank has been the most inflation-phobic of the big four central banks, and until this year it has stayed away from quantitative easing. If the signatories are right, the eurozone’s economy should have outperformed America’s (and Britain’s and Japan’s) since 2010.

Unfortunately for the signatories (and for hundreds of millions of people who live in Europe) the eurozone is in a deeper depression than it experienced in the 1930s. Womp womp.
Still, I am not surprised that none of the letter signers admitted they were wrong. That’s because I follow Brendan Nyhan, a Dartmouth political scientist (and Upshot contributor) whose research focuses on how partisans do not change their views even in the face of new data. “People frequently resist information that contradicts their views,” he wrote for us in June, about a finding about how vaccine skeptics become less willing to vaccinate their children when presented with evidence that vaccines are safe.
It’s hard to admit you are wrong — whether you’re Niall Ferguson or Jenny McCarthy.

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