Monetary policy: The wisdom of Scott Sumner

Posted: February 12, 2013 in economy
Tags: , ,

BACK in December, Scott Sumner mused:People form their views of politics and economics when they are young, and are given the reins of power when in their late fifties. Any thoughtful person in the 1930s could have easily predicted what would go wrong in the 1960s. The generation that grew up in the Great Depression would have a single-minded obsession with boosting [aggregate demand] to prevent mass unemployment. They would see everything as a demand issue, and ignore the supply side. Thus the “Liberal Hour” of 1961 turned into the Great Inflation.Any thoughtful person in the 1970s could have easily predicted the policy mistakes of the 2000s. The generation that came of age during the 1970s would be obsessed with the threat of inflation—seeing it just around the corner whenever there was a spike in the money supply, a dip in interest rates, or a blip in the CPI from commodity prices. The 1970s generation (including me) would overreact until NGDP growth was driven so low that interest rates fell to zero, making conventional monetary policy impotent. The inflation targeting consensus turned into the Great Recession.The young people today have grown up in a world dominated by two giant bubbles…Any thoughtful person today can predict that the macroeconomics policy failures of 2040 will be produced by a generation of late middle-aged policymakers obsessed with preventing …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/02/monetary-policy-0?fsrc=rss

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