The Washington PostDemocracy Dies in Darkness

Why can’t conservatives just admit they were wrong about inflation?

Marvin Goodfriend, nominated to the Federal Reserve by President Trump, sat for a Senate Banking Committee hearing this week.  (Jacquelyn Martin/AP)
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We know that economist Marvin Goodfriend, one of President Trump's picks for the Federal Reserve, would have been terrible at the job over the past 10 years. What we don't know is whether he'll be any better at it now.

The early signs, though, are not encouraging.

Now, the easiest way to think about the Fed's job is that it's trying to keep the economy in the Goldilocks zone — where it's not growing so fast that inflation gets out of control but not so slowly that unemployment shoots up, either. Which is to say that it's about deciding which of them — inflation or unemployment — is a bigger threat to economic stability at any given moment.

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This isn't always as simple as it sounds . . . but sometimes it is. Like when a once-in-three-generations financial crisis sends unemployment into the double digits and inflation well below the central bank's 2 percent target. In that case, everybody can agree that the Fed should be doing everything it can to help the economy.

Well, everybody but people like Goodfriend.

It might be hard to believe that somebody who's been a professor at Carnegie Mellon University and a longtime economist at the Richmond Fed couldn't tell if high inflation or high unemployment was more of a problem when inflation was low and unemployment was high, but, well, that's the world we live in. For years, you see, Goodfriend has insisted that hypothetical inflation is a bigger concern than actual unemployment and that the best thing the Fed can do to promote job growth in the long run is to keep inflation in check. So, his argument goes, the Fed should focus on that, and only that, since trying to create jobs in the short run would only risk pushing up prices, which would actually be self-defeating.

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It's an ideology of inaction in the face of mass unemployment. And in this, Goodfriend has never wavered.

In 2010, when unemployment was at 9.4 percent, Goodfriend said it was “premature” for the Fed to do more to encourage job growth because markets didn't think inflation was going to fall that much the next five years. In 2011, when unemployment was at 9 percent, he worried that the “high unemployment rate” would make “it hard for the Fed to move preemptively against inflation,” which it needed to do “fairly soon.” And in 2012, when unemployment was at 8.2 percent, Goodfriend argued that it was “really doubtful” that the Fed's stimulus efforts would even be able to decrease joblessness to 7 percent, although that was almost just as well. If the stimulus did succeed in reducing unemployment, he said, it might only “give rise to a rising inflation rate in the next few years, which would just be disastrous for the economy.”

Goodfriend is like a firefighter who think it's better not to use the hose on your burning house so that things don't get water damaged.

To be fair, though, to err is to be an economic forecaster. The real question is whether you learn from your mistakes. Goodfriend, unfortunately, hasn't. Indeed, when Sen. Sherrod Brown (D-Ohio) asked him during his confirmation hearing this week why he had been so “wrong so many times,” Goodfriend said only that low inflation is important. This isn't exactly the level of self-reflection we would hope for after empirical reality had spent the last 10 years refuting his ideas.

A better answer would go something like this:

The first mistake Goodfriend made was the same one made by a lot of conservatives: He didn't realize the 1970s were over. That decade was too formative an experience for him to let go of. He worried that 9 percent unemployment might lull the Fed into taking its eye off inflation long enough for us to get into a situation where higher prices caused higher wages and higher wages caused even higher prices, like what happened back when disco was still a thing.

But what this mind-set missed is that, like musical tastes, the world has changed since then. Workers don't have the bargaining power they used to. That means, for example, that a big increase in oil prices won't translate into a big increase in wages. Which is why the oil shocks of 2008 and 2011 didn't turn into inflation shocks like the ones in 1973 and 1979 did. Now, that's not to say that inflation could never come back, just that it's harder for it to do so.

The second mistake he made was the same one made by many of the worst central bankers in American history: He didn't think the Fed should try to make things better because he didn't think it could. This kind of abdication of responsibility, University of California at Berkeley economists David and Christina Romer argue, has been behind the two biggest U.S. monetary policy debacles of the past century. We know them better as the Great Depression and the Great Inflation. In both cases, central bankers convinced themselves that the economy was being buffeted by forces beyond their control — falling prices in the 1930s and rapidly rising ones in the 1970s — because they didn't like the implications of doing what they should have done.

It's a faux world-weary philosophy in which not doing enough to stimulate the economy becomes an excuse to do even less of it. They tell themselves that the fact that they haven't been able to get things back to normal so far must mean that it's simply be impossible to do. Something big must have transformed the economy—right? Because it can't be their fault. Maybe robots are taking all the jobs, or young men are too addicted to video games to work, or people just don't have the right skills, or whatever other interesting — but wrong — story line that people come up with to distract themselves from the boring truth: that unemployment is high because demand is too low.

We were lucky the Fed didn't believe this during the last economic crisis. Now we'll just have to hope there isn't another one.