Austan Goolsbee, former chair of President Obama’s Council of Economic Advisers, makes a contradictory argument for loose monetary policy in a WSJ column on January 10th, 2014. Goolsbee claims that it’s time for “critics of quantitative easing” who “condemned the expansion of the balance sheet at the Federal Reserve as risking a hyperinflation…to admit they were wrong” because there has been no inflation.
Price inflation requires both loose monetary policy and tight capacity utilization. So the risk of inflation comes after the economy recovers, not before. Allowing the Fed to quadruple the monetary base gives it the ability to tax savers with price inflation after the economy recovers.
The increased risk of the Fed either allowing or being unable to prevent inflation after the economy recovers slows growth today. The economy’s growth is constrained by its willingness to take risk, so it dials back risk-taking elsewhere to compensate for this increased risk. At the same time, monetary expansion does little to accelerate growth today because the money sits unused (as it has) for want of equity to underwrite the additional risk of putting it to work. Monetary inflation doesn’t produce price inflation because it doesn’t produce growth.
Goolsbee admits that, “research indicates that these Fed policies have helped the economy [only] modestly…lowering long-term Treasury rates by [only] about 30 basis.” And he admits that, “Yes, you would get inflation if the system went back to normal and the Fed just kept its foot on the gas” (or failed to contract the money supply, which Goolsbee leave unstated). But then he waves off this risk because “the Fed has promised all along that it was only doing this as a temporary measure until economic conditions improved” [emphasis mine]. In other words, Goolsbee argues that mere promises from Janet Yellen and President Obama that they won’t raise taxes via inflation when the economy recovers mitigates the risk of handing the Fed the wherewithal to do so if it chooses.
If he had a more serious argument than that, surely he would have made it.