Wednesday, September 10, 2014

The Tortured Logic of an Elite Economist

Kenneth Rogoff is a Professor of Economics at Harvard University, who has served as a chief economist at the International Monetary Fund (IMF), and at the Board of Governors of the Federal Reserve System. He is one of the elite mainstream U.S. economists, with degrees from Yale and MIT. With that in mind, it's interesting to look at a recent column he wrote which puts the incoherence of his economic worldview on display.

The column is entitled, The Exaggerated Death of Inflation and is published in The Guardian, He seems to be responding to Paul Krugman and other liberal economists who argue that inflation is not a concern at the present time in the developed nations.  The point is not unreasonable, but the supporting logic is tortured.

Rogoff's main point is that central banks are powerless to control inflation; it is a political choice (presumably related to fiscal policy which is beyond the control of central banks, although Rogoff doesn't acknowledge this).  Here are Rogoff's exact words:
a country's long-term inflation rate is still the outcome of political choices not technocratic decisions ... No matter how much central banks may wish to present the level of inflation as a mere technocratic decision, it is ultimately a social choice.
Thus, his fundamental point is that central banks can't control inflation.  However, he repeatedly talks about the tremendous progress and powerful tools that central banks now possess.  Quotes:
massive institutional improvements concerning central banks have created formidable barriers to high inflation 
back then, monetary authorities were working with old-fashioned Keynesian macroeconomic models, which encouraged the delusion that monetary policy could indefinitely boost the economy with low inflation and low interest rates. Central bankers today are no longer so naive 
Modern central banking has worked wonders to bring down inflation.
Inflation has been subdued in recent decades by technological and political changes accelerating the pace of globalization, and thus lowering wages in developed countries as more stuff is made in competing low wage developing countries. Rogoff acknowledges this with the following contorted logic:
increasing globalisation and technological advances made it much easier for central banks to deliver both solid growth and low inflation 
He seems to live in a world of economists who all agree that central banks are tremendously powerful and enlightened, so he ends up with this tortured and incoherent piece on how central banks don't really have all that much power.