“The Federal Reserve is setting out to do something it has never accomplished before: reduce inflation a lot [four percentage points] without significantly raising unemployment [thereby creating a recession].” So wrote veteran economics reporters Jon Hilsenrath and Nick Timiraos in The Wall Street Journal last week,
They backed up their story with concise narratives of four episodes of monetary policy to subdue rising prices undertaken since 1948, selected from studies of seven undertaken since 1942. The varieties of experience they represent are illustrated by charts showing the results of the measures taken – unemployment rates (three-month average) plotted against changes in economic activity (GDP change from the year before).
Depicted were a “bumpy landing,” 1948-1955 (short-lived episodes of rising prices followed by mild recessions); an “aborted landing,” 1970-1979 (moderate inflation which fell for a time and then lurched higher); a “hard landing,” 1980-1986 (surging inflation which fell after a deep recession and did not resume); and a “soft landing,” 1993-1998 (interest rates increased sharply but unemployment declined). You can read their article yourself, thanks to this free link.
The mechanics were said to be simple: the Fed “sought to raise interest rates to slow demand just enough to take steam out of an overheated economy….If the Fed is to land the plane safely, the labor market will be key… ‘No one expects that bringing about a soft landing will be straightforward in the current context – very little is straightforward in the current context,’ Fed Chairman Jerome Powell said last month. The central bank, he added, faces a ‘challenging task’.”
Economic Principals can’t compete with this kind of top-tier newspaper journalism: expert reporters, well–versed in their subject, talking frequently to policy-makers and analysts of diverse points of view, all of whom in turn carefully read what journalists have written. On the other hand, EP may have something to add about the phenomenon that policy-makers are seeking to measure and control, and the various theories that guide them.
For instance, nothing was said about the “take-offs” of those four episodes; that is, the putative causes of those bouts of inflation occurring over forty years: the beginnings of the Cold War; America’s guns-and-butter Great Society buildup and its Vietnam War; the breakdown of the Bretton Woods international currency system; oil price gyrations in the Seventies; maladroit monetary policy; the end of the Cold War. Then, too, there were the unmentioned events that came after: 9/11/01; the Panic of 2008; the 2019 influenza pandemic; supply-chain problems arising from strains on globalization; and the 2022 Russian invasion of Ukraine.
Events like these are routinely described by economists as “shocks” to a system that otherwise would be expected to display smooth equilibrium, or, statistically speaking, stationarity. They are understood to be beyond the ability of monetary authorities to foresee, considered to be exogenous, or beyond the bounds of what existing theory seeks to explain. Monetary theorists often dismiss shocks as “ad hoc” explanations, by dint of their lack of generality. Instead, inflation is explained as arising from mismatches of supply and demand, or, more often, described as a consequence of “too much money chasing too few goods.”
Concealed by formulations like these is a tacit assumption about the constituents of our world, as old as Plato: the existence of a world of “fullness,” already containing all possible manner of people and things.