Today’s Must-Must-Read: Alice Rivlin: Thoughts about Monetary and Fiscal Policy in a Post-Inflation World
…When politicians and financial journalists ask me earnestly, as they do, whether the Federal Reserve isn’t risking devastating ‘run-away’ inflation by buying all those bonds, I suspect cultural lag. What Inflation? We should be so lucky! Central banks have amply proved that they know how to stop inflation—Paul Volcker showed that. They have been much less successful in getting little inflation going…. The last time the core PCE hit 3.0 percent was 1992….
Yet many economists worry about that elusive animal, the NAIRU. The rhetoric of many politicians and much the financial press implies that we face a dangerous inflation-prone world…. In this new world the top-of the-list threats to prosperity in large advance economies are financial instability, slow growth with tendencies to deflation, and the concentration of income, wealth and political power in the hands of a small number of people….
I see four major challenges to current thinking: (1) We have to recognize that the main job of central banks is avoiding financial crisis. (2) We will have to get used to central banks operating at quite low interest rates much of the time and managing big balance sheets without apologies. (3) We have to rehabilitate [expansionary] budget policy to make it useable again and move to a sustainable debt track at the same time. (4) We have to find constitutional ways of reducing the power of big money in politics and economic policy—or change the Constitution…