Pippa Malmgreen’s lecture at the LSE this evening was an interesting foray into geopolitical speculation, and a compelling reminder of the international nature of ‘domestic’ monetary and economic policy – but this is the goddamn internet and we aren’t here to be complementary and nice – this is where we register objections to things. And I object. I object to a combination of things, it’s the combination that bothers be, not the things themselves.
Thing one is some fairly standard inflationist stuff. At various points in her talk Pippa alluded to the notion that QE increased the money supply, and that this has caused inflationary pressure, in the US and abroad. The first part of that is kind of true. Base money increased
But it barely moved the needle on M3
And inflation, well, as we can see, not so much:
Pippa said that QE bought inflation to emerging markets, but cited the recent inflation in Belarus and Ukraine which has occurred as QE is withdrawn and probably has more to do with insane Russian adventurism than US monetary policy. Anyway, this thing on its own is pretty inoccous. It’s pretty easy to debunk and as soon as someone heard that and engaged with economics on the internet a bit they’d find out.
It’s the interaction with thing 2 that does the damage. Thing 2 is actually a fair point on it’s own, that people involved in policy should seek to engage in simple, clear and relevant ways with people that chime with their personal experience. She gave the example of cream eggs being made smaller. People know their cream eggs are being made smaller. They know they’re paying more money for less chocolate! That’s inflation! We should engage with them about that! Yes we should.
Thing 1 combined with thing 2 however is a dangerous cocktail of inflationary paranoia! People are always experiencing inflation selectively, we really don’t like paying more for the same stuff so it jumps out at us and we tend to mentally weight it heavily. It’s the same issue as loss aversion. Also if you must engage people about inflation, for goodness sake don’t go around telling them QE did it when it clearly didn’t. If you want to explain why house prices and rents are going up, talk about money creation for the purpose of financial speculation and asset price buying by banks. If you want to talk about global trends in commodity prices, talk about the change in oil markets that were an oligopoly and are now pretty competitive. In other words, if you’re going to be clear and simple in your communication with people, you have to have things clear yourself – and it was clear to me that Pippa did not have a good working model for why increasing the monetary base need not cause inflation – especially when I asked her to explain this fact. Her answer, that Japanese QE was stopped in its tracks by intransigent Japanese institutions and cultural norms was not a good one. It also wasn’t what I was asking – which was specifically the US case. She should clarify this as she promotes her no doubt excellent book!
It’s definitely true that we can empower individuals to be part of the conversation about economic policy by using simple and clear language, and engaging with their experience. It’s also true that in so doing we, and by we I mean those with a familiarity with the state of contemporary economic thought, have a responsibility not to play on peoples biases and propagate falsehoods about how things work. Inflation hawkishness based on incorrect notions of monetary policy is not a smart or responsible way to talk to people about policy.