Central bankers need new strategies to tame inflation. When they speak about fighting inflation and avoiding a recession, they project confidence and precision. But their models use premises that do not fit today’s peculiar conditions. Employment, consumer and government spending, and small businesses, underwent major changes during the pandemic. Low interest rates and extravagant government spending got us where we are today. Higher interest rates as a primary tool won’t curb inflation, which is cooling already. This action is late and will, maybe has caused the feared recession. In this March 2021 article in Forbes, evidence showed inflation was an immense problem earlier.
Economy Has Unique Challenges Affecting Employment & Supply Chain
The pandemic created supply chain issues, disrupted employment and small businesses while housing prices stayed high with insane, low interest rates. Besides, the Ukraine war contributed to higher gas and food prices. These events turned classic macro economic metrics upside down, but bankers seem to ignore them. Still, let’s not follow asinine and naïve advice of Canada’s career politician, now opposition leader, Pierre Poilievre. He advocates political control of the central bank and crypto currency to fight inflation. Hopefully, his staff will educate him before he develops his economic policy.
Unionization At Major Corporations Rising
Unemployment is low and vacancies high. People reclaimed their right to focus on their lives and not work in ruthless, toxic workplaces. Workers at Starbucks, Amazon, Apple and elsewhere are unionizing, want respect, more pay, and more leisure time. These events are driving wages higher but that hasn’t deterred the Fed and other central bankers from jacking up interest rates. If we aren’t in a recession, these guys have guaranteed we will enter one soon. Still, the Feds might surprise us in a few months when better data exists, by announcing we have been in a recession since June or earlier.
Central Bankers Need New Inflation Fighting Strategies
Current tools miss today’s realities. For instance, the usual Consumer Price Index (CPI) measure is out of step today because the pandemic shutdowns and business closures changed consumers’ behavior. Though government printed and pumped money to boost spending during the pandemic, consumers couldn’t go to restaurants, hair salons, cinemas. They adjusted buying habits, moved to online shopping, and built savings. Besides, interest rates stayed low too long, which caused outsized housing prices.
Is The GDP Still A Relevant Economic Measure
Interest rates as a key economic tool is one area needing attention, but the Gross Domestic Product (GDP) as the vital economy’s performance metrics is another. Is it relevant as the sole measure of economic progress? Simon Kuznets, an economist at the National Bureau of Economic Research, developed the GDP after the Great Depression and World War II. His goal was to capture economic production by individuals, companies, and the government in a single measure. He expected it to rise in good times and fall in bad. However, in 1934, in his report (page seven) to the U.S. Congress, on the National Income, 1929-35, Kuznets warned, “The welfare of a nation can scarcely be inferred from a measurement of national income.”
The late senator Robert Kennedy showed skepticism of this single measure too, in a speech at the University of Kansas on March 18, 1968:
“It [GDP] measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile.”
Harvard University’s Karen Dynan, and The Brookings Institution’s Louise Sheiner’s paper, GDP as a Measure of Economic Well-being is insightful:
“We argue that the exclusion of non-market activities that bear on economic well-being merits more attention, particularly given the potential for changes in the importance of such activities over time to change the degree to which changes in GDP capture changes in well-being.”
Let’s use this uncertain economic period to rethink how we gauge society’s progress. But we must do this outside rigid left-right, liberal-conservative dogmas. Neither side has a monopoly on knowledge. Liberals and conservatives have distinct ideas, but each should agree the prime goal is the people’s wellbeing, set aside ideology, and decide the best path to improve our lives. That’s easy to achieve when we remove egos, ideology, listen, hear, reflect, and treat each person as we want them to treat us. I am optimistic!
© 2022, Michel A. Bell
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2 thoughts to “Central Bankers Need New Strategies To Tame Inflation”
Thanks Howard. I will be in touch.
Insightful Mike. The Feds only use increasing interest rates to curb inflation. It seldom works.
BTW I have tried several times to hook up with you without success.