Monday, February 4, 2008

Out of control?

I suppose, in good blogosphere fashion, I should congratulate Greg Mankiw for saying what I did already. On the other hand, he has actual data to back him up, and so has some claim to actually know what he's talking about. So instead I'll just make the standard "Yeah, what he said!" post:

A rise in expected inflation is not consistent with the conventional wisdom that the economy is on the verge of a serious slump driven by inadequate aggregate demand. It is, however, consistent with the hypothesis that policymakers are overreacting to some bad economic news with excessive monetary and fiscal stimulus.
If the problem with the economy is that we're coming off an asset bubble caused by too much easy money (i.e., too low interest rates) for too long, lowering interest rates isn't going to fix it. We can have a mild recession now, or a much worse recession later, possibly combined with inflation. Yes, recessions are uncomfortable. Runaway inflation is worse. (Recessions make it difficult to accumulate more capital, due to sluggish economic activity; inflation takes away capital you've already accumulated, via erosion of purchasing power.) Of course, the inflation won't hit until after the election. Could that be it? Naw, I'm just being cynical.... not.

Memo to new president: do what you have to, to get the economy under control early in your term. If you have the recession early, the voters will forgive you by the time you're up for re-election.

[h/t: Andrew Sullivan]

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