More from the “when will we learn” file:
Federal Reserve Chairman Ben Bernanke recently indicated in Congressional testimony that the Fed won’t be entirely convinced that the risk of inflation is behind us until it sees a rise in unemployment and a reduction in business activity. This kind of commentary, along with business headlines like “Years of Global Growth Raise Inflation Worries”, perpetuate the theory of the Phillips Curve, which is the discredited notion that there is a necessary inverse relation and tradeoff between the rate of unemployment and business activity and the rate of inflation in a growth economy. Memo to Bernanke—economic growth is not the cause of inflation. Whatever credibility the Phillips Curve might have had thirty or more years ago should have been finally eliminated by our experience since Ronald Reagan’s election in 1980, during which we have had unprecedented economic expansion while inflation almost disappeared. Meanwhile, the late Milton Friedman’s pioneering work finally convinced central bankers that inflation is a monetary phenomenon, the result of excess creation of money. Most economists who learned Friedman’s lessons well now realize that our escalation of commercial real estate and commodity prices properly reflect the depreciation of the dollar relative to gold. Alas, it seems we must continue to re-educate so as to avoid costly mistakes, such as fixing the wrong problem with protectionism and higher taxes.