Marc Goldwein of the Committee for a Responsible Federal Budget has tweeted a helpful image to frame the inflation debate:
Will high inflation persist? pic.twitter.com/kaXuUBvGmB
— Marc Goldwein (@MarcGoldwein) May 10, 2022
It helps because it grounds the debate in actual economic phenomena that we can observe. He does a good job of presenting the strongest arguments on both sides in a way that isn’t Republican vs. Democrat. Inflation and monetary policy in general aren’t partisan issues in the way that abortion, guns, or taxes are. Plenty of Democrats and Republicans have opinions about monetary policy, of course, but there isn’t really a clear Democratic or Republican position on those questions.
For example, on the right, just to name a few positions, there are people who want better inflation targeting, people who want NGDP targeting instead of inflation targeting, people who want rules-based monetary policy instead of targeting anything, and people who want to eliminate the central bank entirely in favor of a commodity standard. Which of those views is the most conservative? That question doesn’t really make sense. It makes even less sense to ask which is the most Republican.
Each of those views has empirical evidence and theoretical background that it can cite to support its major claims. What monetary policy ultimately boils down to is how one weighs competing facts against competing theories in a world of tremendous uncertainty.
That doesn’t mean that anything goes or that there are no wrong answers. We can be sure that modern monetary theory is wrong, for example. But within the bounds of macroeconomics, there are many different defensible ways of interpreting the same set of facts.
A good way to think about inflation currently is to go through Goldwein’s list on both sides. First, for each item, ask, “Is this happening?” If the answer is no, ask whether that item is likely to happen in the future, and if so, how far off in the future. Then, based on what’s happening and what isn’t, weight each item by how important it could be in determining the inflation rate.
The first step of that process is one where many economists and economic observers will agree a lot. We have data on excess savings, inflation by sector, labor markets, consumer spending, bond markets, etc. We can read the Fed’s projections and the explanations it gives for its decisions.
The disagreement comes in the second step. Weighting the phenomena we observe is much more dependent on opinion and isn’t as easily answerable with real-time data. One of the key disputes currently in monetary policy is whether the Fed is paying too much attention to labor markets and too little attention to the price level. But one of the key disputes in monetary policy before the pandemic was whether the Fed was paying too much attention to the price level and too little attention to labor markets.
How are these disputes adjudicated? With theory and data. Wait, weren’t theory and data the stuff that economists are supposed to agree on? Yes, which is why economists appeal to them to make their arguments. But the question of weighting comes back again, and the whole process restarts.
On Goldwein’s list, I lean toward the “Yes” column. Of the items that haven’t happened yet, I believe that more of the ones in the “Yes” column are likely to occur than in the “No” column. I weight the Fed’s decisions very highly, and as I argued on Friday, I don’t think the Fed’s interest-rate hike was sufficient to tighten monetary policy enough to constrain inflation. I also weight expectations very highly, and there is beginning to be evidence that they are becoming unanchored.
Other people weight other things highly, though. They make some good points, too. Give them a read, and see if the stories they tell make sense. Nobody has macroeconomics totally figured out, so it’s worth a shot.
People like to think that taking a purely objective look at theory and data will lead to the best opinions. They see an arrow of causation pointing one way. That’s not really how it works, though. Theory and data inform opinions, but opinions also inform how we look at theory and data. There’s nothing wrong with that; in fact, that’s how knowledge is formed.
On a specific policy question such as inflation, let’s start with what we can observe, and go from there. That’s why Goldwein’s list is a helpful way to think about the problem. It won’t lead everyone to agree on everything, but it will frame the debate in a way so that people can at least understand where others are coming from and argue over which approaches make more sense using economic reasoning.