That’s a quote from Jamie Galbraith in his article, Mainstream Economics’ Medieval Inflation Medicine. Now that inflation is approaching the Fed’s 2% target, the Fed and other supporters of raising interest rates to fight inflation are taking an undeserved victory lap because the Fed raised rates. The past two years have shown that inflation has decreased
"Mainstream economists believe raising interest rates will curb inflation because it will create unemployment, which will decrease demand, leading to lower prices. So the underlying theory is you have to cause pain among workers to control inflation." I don't think that's exactly the operative theory right now--it's more that raising interest rates will create *expectations* of unemployment. The "soft landing" approach has been based on the idea that actual unemployment isn't needed, which is (a) why Summers kept saying, wrongly, that it was inadequate, (b) why it has in fact worked so well.
As Summers reveals in a recent interview with the Financial Times, his diagnostic tools have not evolved much since his adolescence. Though he concedes that “it certainly hasn’t been a glorious period for the Phillips curve,” he then hastens to add: “But I’m not sure we have a satisfactory alternative theory.”
Assuming that “we” refers to mainstream economists, Summers is correct. He relegates Milton Friedman’s monetarism to “extreme” cases like Argentina, and he is ambivalent about expectations. Under the expectations theory, he notes, “inflation is set by inflation expectations, and inflation expectations are set by the people who form inflation expectations.” Given this circular reasoning, Summers concludes, “inflation theory is in very substantial disarray.”
Except that it’s not. There was, and is, a competing view, dismissed at the time as “team transitory.” Summers acknowledges our existence, and he even concedes that we have prevailed for now. But he cannot bring himself to confront our arguments.
"Mainstream economists believe raising interest rates will curb inflation because it will create unemployment, which will decrease demand, leading to lower prices. So the underlying theory is you have to cause pain among workers to control inflation." I don't think that's exactly the operative theory right now--it's more that raising interest rates will create *expectations* of unemployment. The "soft landing" approach has been based on the idea that actual unemployment isn't needed, which is (a) why Summers kept saying, wrongly, that it was inadequate, (b) why it has in fact worked so well.
Galbraith deals with this:
As Summers reveals in a recent interview with the Financial Times, his diagnostic tools have not evolved much since his adolescence. Though he concedes that “it certainly hasn’t been a glorious period for the Phillips curve,” he then hastens to add: “But I’m not sure we have a satisfactory alternative theory.”
Assuming that “we” refers to mainstream economists, Summers is correct. He relegates Milton Friedman’s monetarism to “extreme” cases like Argentina, and he is ambivalent about expectations. Under the expectations theory, he notes, “inflation is set by inflation expectations, and inflation expectations are set by the people who form inflation expectations.” Given this circular reasoning, Summers concludes, “inflation theory is in very substantial disarray.”
Except that it’s not. There was, and is, a competing view, dismissed at the time as “team transitory.” Summers acknowledges our existence, and he even concedes that we have prevailed for now. But he cannot bring himself to confront our arguments.