Paul Samuelson famously quipped that the stock market correctly predicted nine of the last five recessions. The same could be said of inflation hawks like Robert Samuelson and bouts of inflation.
The Fed?s new guidelines could repeat mistakes of the past.
“Certainly, the possibility of severe inflation should be taken into account.” But beyond that, Samuelson’s column was rather odd. The underlying problem of the era he talked about was that Keynes’ theory said that if you can tolerate a steady amount of inflation, you can have a permanently lower unemployment rate. It turns out that isn’t true; the experimental proof was the 60s and 70s. The improvement in the theory was how Milton Friedman got a Nobel: People anticipate and compensate for future inflation in a way that exactly cancels the effect Keynes predicted. Instead, to keep the unemployment rate below its equilibrium, you have to have continuously increasing inflation. All of this is ancient enough history in economics that even I know it, and surely Samuelson does too. But because we now know this, if we start down the inflationary path, any economist can point out what is happening … and how to stop it. And despite that low unemployment is popular, high inflation is more unpopular. So there’s not much political risk that this would get out of hand. Indeed, if the Fed started printing money like crazy, it’s almost required as a precondition for serious inflation to have a low unemployment rate … at which point, there would be no pressure for the Fed to print more money.