Arnold Kling  

Knife-edge Macroeconomics

Peak-load Pricing... Austrian Economics...

One of the more irritating tropes in economic journalism is the "knife-edge" metaphor. A reporter will write a news-analysis piece that breathlessly explains that the Federal Reserve is on a knife edge, with recession on one side and inflation on the other.

It seems as though the New York Times editorial writers have read too many such potboilers. Now, after exactly one month of positive news following three years of declines in payroll employment, they are ready to cry panic about inflation.

The Bank of England last week became the first major central bank in three years to raise interest rates, and Mr. Greenspan will have to do the same soon, unless he wants to begin flirting with inflation.

Back in June, Robert Solow predicted,

If the economy recovers next year of its own accord, it is a fair bet inflation will soon be the panic of the month.

And so it has come to pass. My view of the economy is that there is no knife-edge, and that the recovery has a long way to go before inflation becomes a legitimate worry.
For Discussion. Could the remarkable productivity growth that the economy has experienced in recent months provide a significant cushion against inflation?

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CATEGORIES: Macroeconomics

COMMENTS (5 to date)
Mcwop writes:

Aside from commodity prices, there are just too many goods competing for everyone's dollars. Furthermore, this past recession was in good part caused by excess inventory (which still exists to a degree - look at all the things you can buy used on ebay).

RE: Crying panic about inflation. Everyone not for Clinton did the same thing when he took office. No matter how things change so much stays the same.

The Usurer writes:

Just a thought - isn't the Reserve Bank of Australia a 'major central bank'? Rates were increased here a few days before they were in the UK.


Eric Krieg writes:

Good commentary on this issue at

I especially like the analysis using the Fair model, which is predicting higher but still modest inflation through 2007.

Is 3% inflation anyting to worry about?

The point that Greenspan needs to be sacked is when he starts listening to the New York Times editorial page, which has given us Maureen Dowd, Paul Krugman, and Jayson Blair.

Lawrance George Lux writes:

The fact of the matter is that the Federal government put too much on it's plate with the Tax Cuts, establishment of Homeland Security, and the Afghani and Iraqi situations. Economic upscale performance could only come with signifcant Inflation. It is my hope it can be held to ten percent. lgl

Steve writes:

We're still going to contend with disinflation for quite a while unless the Chinese float the Yuan. Even with the proverbial monitary floodgates opened, we still have so much competition in EVERYTHING due to China, India, and Japan that prices will not rise outside of housing, equities, healthcare, college, and movie tickets (none of which are yet finding any competition from abroad) probably in our lifetimes.

What matters, however, is the EXPECTATION of inflation, not inflation itself. The expectation causes bond yeilds to rise, and that is what we are seeing now (since we are still not seeing actual inflation).

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